CERPLEX GROUP INC, 10-K, 1998-03-03

CERPLEX GROUP INC
10-K, 1998-03-03
COMPUTER PROGRAMMING, DATA PROCESSING, ETC.

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-23602

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THE CERPLEX GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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<S> <C>
DELAWARE 33-0411354
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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1382 BELL AVENUE, TUSTIN, CALIFORNIA 92780
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 258-5600

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE

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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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of voting stock held by non-affiliates of the
registrant on February 25, 1998 based on the closing price of the Common Stock
on the Over-The-Counter Bulletin Board was approximately $12,000,807.

Indicated below is the number of shares outstanding of each class of the
registrant's Common Stock as of February 25, 1998.

<TABLE>
<S> <C>
Title of Each Class of Common Stock Number of Outstanding
Common Stock, $.001 par value 36,366,084
</TABLE>

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THE CERPLEX GROUP, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997

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PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11

PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 12
Item 6. Selected Consolidated Financial Data........................ 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 8. Financial Statements and Supplementary Data................. 22
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 22

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 23
Item 11. Executive Compensation...................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 32
Item 13. Certain Relationships and Related Transactions.............. 33

PART IV
Item 14. Exhibits, Financial Statement Schedule and reports on Form
8-K......................................................... 34
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PART I

ITEM 1. BUSINESS

GENERAL

The Cerplex Group, Inc., a Delaware corporation ("Cerplex" or the
"Company") provides repair services, spare parts sourcing and service management
for manufacturers of computer, communications and electronic office equipment.
In the computer marketplace, Cerplex primarily services display terminals,
printed circuit boards, laptops, internetworking equipment and workstations. In
the telecommunication marketplace, Cerplex primarily services switching systems,
payphones, video conferencing products, multiplexers, mobile communications,
transmission equipment, hubs and modems. In the office automation marketplace,
Cerplex services printers, scanners, fax machines, and high value products such
as copiers, automatic transfer machines (ATMs) and other paper-handling
equipment. Based in Tustin, California, Cerplex has locations across the United
States, in France, and in the United Kingdom.

Cerplex was founded in 1990 to service high technology companies in the
electronics repair industry. From 1990 to 1993, Cerplex's growth was based
primarily on repair depot acquisitions and on IBM end-of-life acquisitions. From
1994 through 1996, several events materially adversely impacted Cerplex's
business. IBM significantly decreased its orders from Cerplex and SpectraVision,
another large customer of Cerplex, filed for protection under Chapter 11 of the
United States Bankruptcy Code. These and other events caused Cerplex to change
its business and operational strategy. In September 1995, Cerplex discontinued
its end-of-life programs, developed a direct sales force, terminated the
majority of its outside sales representatives, reduced its emphasis on inventory
acquisitions and focused on targeted customers in specific industries. Beginning
in 1996, Cerplex implemented a cost reduction program which reduced its
inventory exposure and reduced overhead and other expenses. In 1996 and 1997,
Cerplex sold several of its business units, including Modcomp (a value-added
reseller with process control software technology), PCS (a disk drive repair
business) and InCirT (a contract printed circuit board manufacturing business).

SERVICES PROVIDED

Cerplex has extensive capabilities in servicing products throughout the
process of life cycle management for Cerplex's targeted industries. All of
Cerplex's services are focused on reducing its customers' costs while
maintaining high quality services for enhanced end-user satisfaction. Based on
an infrastructure of transportation hubs and dedicated facilities, Cerplex can
provide one-stop shopping with fast turn around times at affordable rates.
Cerplex's primary services include:

Depot Repair Services. Through an infrastructure of transportation hubs and
specialized depot repair facilities, Cerplex provides manufacturers and service
providers a complete process for product repair, remanufacturing, conversion and
upgrades. Large manufacturers and multivendor service organizations historically
have maintained in-house repair centers dedicated to servicing specific
proprietary products or product lines. Frequently, these repair centers are cost
centers with dedicated resources. Cerplex provides an outsourced solution for
some or all of an OEM's repair requirements.

Spare Parts Business. Cerplex provides repaired, new and reclaimed parts to
OEM and TPMs as a complement to its depot repair services. Cerplex makes
available for the marketplace components, sub-systems and full systems for sale,
lease or for use as spares in repair programs. Cerplex provides full outsourcing
solutions in this area giving customers the benefit of reduced overhead, and the
ability to reallocate internal resources toward their core capabilities. Cerplex
has three main spare parts programs:

Parts Sales. Parts Sales provides multivendor parts sourcing on
industry commodity items. Upon receiving an order from a customer, Cerplex
will access parts and provide for delivery through a nation-wide network of
parts brokers.

Guaranteed Availability. Guaranteed Availability provides OEMs and
TPMs with restock of field replacement units. Using new and refurbished
products, Cerplex can source and deliver parts within 24 to 48 hours on
high-valued products which are either in-warranty or out-of-warranty.

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Advanced Exchange. Advanced Exchange offers OEMs and TPMs fixed rate
or lease programs on swaps for new and refurbished parts. Cerplex provides
same or next day shipping on these products, which are exchanged with field
replaceable units that are processed in Cerplex's depot repair programs for
repair, remanufacturing, conversion or upgrade.

Value Added Logistics Services. Logistics involves the management and
coordination of a variety of activities to ensure the customer has the necessary
parts and products at the right place at the right time. Logistics management is
critical in ensuring the availability of spare parts and repaired products to
meet the OEM's customer demands. This is especially true in the global
marketplace as the inability of an OEM to provide an international customer with
timely repair services in that market can adversely affect an OEM's sales
efforts. Cerplex integrates parts, repair, transportation and product management
to provide its customers with a comprehensive logistics solution.

Other Services. Cerplex offers a variety of ancillary services to support
and complement its key service offerings. These ancillary services include
product-related help desk services, product return processing, and
remanufacturing and remarketing. Cerplex's help desk services include hardware
and software support and order processing. Cerplex's remanufacturing and
remarketing services offer an OEM turnkey solution for the repair, refurbishment
and remarketing of products returned to an OEM.

EUROPEAN OPERATIONS

Cerplex serves the European market through Cerplex Ltd., a United Kingdom
subsidiary, and through Cerplex SAS, a French subsidiary. Through Cerplex Ltd.
and Cerplex SAS, Cerplex offers its European customers an array of repair
services similar to those that it offers in the U.S. Cerplex's European
operations also offer calibration services supporting the telecommunications and
service industries in the United Kingdom and in Western Europe. Remanufacturing
and contract assembly is provided by Cerplex SAS.

CUSTOMERS, SALES AND MARKETING

Cerplex markets primarily to large manufacturers and service providers in
the computer and peripheral, office automation and telecommunications
industries. Cerplex's direct sales teams are geographically located in the
United States, United Kingdom and France. Cerplex's major customers include
Xerox Ltd., BT (British Telecommunications plc), Gateway 2000, Cisco Systems,
Inc., Digital Equipment Corporation, Hewlett-Packard Company, IBM, Siemens
Nixdorf and Unisys.

COMPETITION

Cerplex competes with the in-house repair centers of OEMs and TPMs for
repair services. In certain instances, these entities compete directly with
Cerplex for the services of unrelated OEMs and TPMs. In addition to competing
with OEMs and TPMs, Cerplex also competes for depot repair business with a small
number of independent organizations similar in size to Cerplex and a large
number of smaller companies. Many of the companies with which Cerplex competes
have significantly greater financial resources than Cerplex.

REGULATION

Cerplex is subject to laws and regulations which relate to business
corporations in general, including antitrust laws, occupational health and
safety laws and environmental laws. None of these laws and regulations has had,
and Cerplex does not believe that these laws will have, a material adverse
effect on Cerplex's business or competitive position or required, or will
require, material capital expenditures on the part of Cerplex.

EMPLOYEES

As of February 6, 1998, Cerplex had a work force of approximately 1,350
employees. The approximately 930 employees of Cerplex Ltd. and Cerplex SAS,
Cerplex's wholly-owned subsidiaries in Europe, are currently covered by
collective bargaining agreements. Almost all recruitment activity is focused
locally in the

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surrounding communities, representing all skill levels and positions ranging
from entry-level trainee to skilled professional and senior-level management.

MERGER WITH AURORA

On January 30, 1998, Cerplex, Aurora Electronics, Inc., a Delaware
corporation ("Aurora") and Holly Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of Aurora ("Sub"), entered into a merger agreement (the
"Merger Agreement") in which the parties set forth the terms and conditions of
the merger of Sub with and into Cerplex, whereby Cerplex would become a
wholly-owned subsidiary of Aurora (the "Merger"). Consummation of the Merger is
subject to the satisfaction or waiver of certain conditions, including, without
limitation, that the holders of the requisite number of shares of Cerplex Common
Stock approve and adopt the Merger Agreement and the Merger and that Aurora
obtain a new loan in a minimum principal amount of $17 million (the "New Senior
Loan"). The holders of more than the requisite number of Cerplex securities have
either agreed to vote or granted proxies to vote in favor of these actions.

At the effective time of the Merger (the "Effective Time"), by virtue of
the Merger and without any action on the part of Cerplex stockholders, (i) each
share of Cerplex Common Stock issued and outstanding immediately prior to the
Effective Time (other than shares to be canceled in accordance with (ii) below
and shares of Cerplex Common Stock for which appraisal rights have been
perfected in accordance with Section 262 of the Delaware General Corporation
Law) shall be converted into the right to receive 1.076368 shares of Common
Stock, subject to adjustment as described below (the "Exchange Ratio"), payable
upon the surrender of the certificates formerly representing such shares of
Cerplex Common Stock; (ii) all shares of Cerplex Common Stock shall be canceled
and retired and cease to exist, and no securities of Aurora or other
consideration shall be delivered in exchange therefor, and (iii) each share of
common stock of Sub issued and outstanding immediately prior to the Effective
Time shall be converted into and become one fully paid nonassessable share of
Common Stock, par value $.01 per share, of the entity surviving the merger of
Sub with and into Cerplex.

The parties intend for the Exchange Ratio to result in a capital structure
for Aurora in which the holders of all equity securities on a fully-diluted
basis of Cerplex issued and outstanding at the Effective Time shall receive in
the Merger equity securities of Aurora constituting 25% of the Aurora Common
Stock on a fully-diluted basis after giving effect to the Merger and the
consummation of all transactions to be consummated concurrently with the Merger,
not including, for purposes of such calculation, (i) 50% of the shares of Aurora
Common Stock subject to then outstanding Aurora stock options and (ii) 50% of
the then outstanding (a) warrants to purchase Aurora Common Stock and (b) debt
securities convertible into Aurora Common Stock, each with an exercise price or
conversion price greater than $2.50. Accordingly, the parties agree to make such
adjustments to the Exchange Ratio as may be appropriate to give effect to the
intent of the parties set forth herein; provided that such adjustments may be
made no later than five business days prior to the Effective Time. If the Merger
does not close by April 30, 1998, the warrants held by Citibank, N.A., Cerplex's
senior lender ("Citibank"), to purchase an aggregate of 2,137,188 shares of
Cerplex Common Stock (the "Bank Warrants") will remain outstanding, resulting in
a change in the Exchange Ratio from 1.076368 to 1.019861. No other material
adjustments to the Exchange Ratio, including those resulting from changes in the
market value of Aurora Common Stock or Cerplex Common Stock prior to the
Effective Time, will be made.

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
such differences include, but are not limited to, those discussed below.

Losses and Accumulated Deficit. For the three month period ended December
27, 1997, Cerplex reported a net loss of $3.2 million and operating income of
$0.1 million. For the year ended December 27, 1997, Cerplex reported a net loss
of $16.5 million, including an operating loss of $11.0 million. As of December
27, 1997, Cerplex had an accumulated deficit of $90.9 million. There can be no
assurance that

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Cerplex will operate profitably in the future. Continued losses could materially
and adversely affect Cerplex's business and the value of, and the market for,
Cerplex's equity securities.

Future Capital Needs; Uncertainty of Additional Financing. During portions
of 1996 and 1997, Cerplex was in default under that certain Credit Agreement
dated October 12, 1994, as amended, with Cerplex's senior lender (the "Credit
Agreement") and those certain Note Purchase Agreements dated November 19, 1993,
as amended, with Cerplex's subordinated note holders (the "Note Purchase
Agreements"). Cerplex has renegotiated amendments to its Credit Agreement and to
its Note Purchase Agreements. The terms of the Credit Agreement, as amended,
provide for a limited borrowing base. Cerplex is required to use a portion of
cash generated from operations and from sales of assets to further reduce its
borrowing base under the Credit Agreement. The interest rate payable by Cerplex
has increased significantly. The terms of the Note Purchase Agreements have been
amended to provide for an increase in the applicable interest rate from 9.5% to
15%. Cerplex is required to maintain or fulfill certain covenants and
obligations in order to maintain its Credit Agreement and to be in compliance
under its Note Purchase Agreements. The loans under the Credit Agreement are due
and payable on May 1, 1998 and, without additional funding, the Company does not
have the resources to make such payments. In addition, the covenants under the
Note Purchase Agreements as currently cast will be significantly more
restrictive as of June 1998. Therefore, Cerplex believes that it will be in
default again under such agreements unless it is able to successfully
renegotiate such agreements. These matters raise substantial doubt about the
Company's ability to continue as a going concern. See Note 20 to the
Consolidated Financial Statements

If the Merger is not consummated, Cerplex does not believe it will have the
capital resources necessary to fulfill its existing obligations to creditors or
to maintain its existing operations. Cerplex does not believe it will be able to
restructure its obligations under the Credit Agreement and the subordinated
notes issued pursuant to the Note Purchase Agreements (the "Notes" or the
"Subordinated Notes") on acceptable terms without a significant capital
infusion. If the Merger and the concurrent financing (the "WCAS Financing") by
Welsh, Carson, Anderson & Stowe VII ("WCAS") do not occur as anticipated,
Cerplex and its operations will be materially and adversely affected. On January
30, 1998 and February 24, 1998, Aurora provided Cerplex with unsecured loans in
the amount of $2 million and $1.5 million, respectively (the "Aurora Loan"). The
Aurora Loan bears interest at the rate of 10% and becomes due and payable on
June 30, 1998. Cerplex used the funds for working capital purposes. Cerplex also
believes it will need additional funds to maintain its existing operations prior
to the consummation of the Merger. Citibank has agreed to permit Cerplex to
borrow an additional $6.5 million from Aurora. No assurance can be given that
additional funds will be available from Aurora or that the Merger and related
WCAS Financing will occur as anticipated.

Risk of Excess and Unusable Inventory; Decreased Value of Assets. At
December 27, 1997, inventory constituted approximately 9.3% of Cerplex's assets.
Any decrease in the demand for Cerplex's repair services could result in an
additional portion of Cerplex's inventory becoming excess, obsolete or otherwise
unusable. During the last few years, Cerplex wrote down a significant amount of
inventory and a significant amount of other assets, including receivables,
securities and goodwill. Changes in Cerplex's business, as well as the business
of third parties, could adversely affect the value of assets remaining, possibly
resulting in additional 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.

Dependence on Key Customers. For the year ended December 28, 1996, Rank
Xerox, IBM, BT and Digital Equipment Corporation accounted for approximately
17%, 12%, 11%, and 4% of revenues, respectively. For the year ended December 27,
1997, these customers accounted for approximately 32%, 6%, 12%, and 11% of
revenues, respectively. During 1995 and 1996, IBM significantly decreased orders
for certain programs which materially and adversely affected Cerplex and its
results of operations. A significant portion of Cerplex's net sales attributable
to IBM in 1995 were from discontinued operations, and, as such, Cerplex expects
net sales attributable to IBM to continue to account for a decreasing percentage
of Cerplex's net sales. For the year ended December 27, 1997, sales to IBM
decreased 67.2% from the corresponding period in 1996. Sales to BT significantly
decreased during 1997 to approximately $17.3 million, representing a 19.5%
decrease from 1996. There can be no assurance that major customers of Cerplex
will not terminate any or all of their

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arrangements with Cerplex; significantly change, reduce or delay the amount of
services ordered from Cerplex; or significantly change the terms upon which
Cerplex and these customers do business. Any such termination, change, reduction
or delay could have a material adverse effect on Cerplex's business.

Dependence on Customers in the Electronics Industry. Cerplex 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 Cerplex's
original equipment manufacturers ("OEMs") customers in particular, could have an
adverse effect on Cerplex's business. During 1995 and 1996, several of Cerplex's
customers experienced severe financial difficulty resulting in significant
losses to Cerplex 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
Cerplex's business.

Reliance on Short-Term Purchase Orders. Cerplex'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 Cerplex's business.

Competition. Cerplex competes with the in-house repair centers of OEMs and
third party maintainers ("TPMs") 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 Cerplex for the services of
unrelated OEMs and TPMs. In addition to competing with OEMs and TPMs, Cerplex
also competes for depot repair business with a small number of independent
organizations similar in size to Cerplex and a large number of smaller
companies. Many of the companies with which Cerplex competes have significantly
greater financial resources than Cerplex. There can be no assurance that Cerplex
will be able to compete effectively in its target markets.

Expansion of International Sales. During the year ended December 27, 1997,
approximately 59.1% of Cerplex's sales were international. For the year ended
December 28, 1996, approximately 41% of Cerplex's sales were international.
There can be no assurance that Cerplex will be able to successfully market, sell
and deliver its products and services in these markets. In addition to the
uncertainty as to Cerplex's ability to maintain or expand its international
presence, there are certain risks inherent in doing business on an international
level, such as unexpected changes in regulatory requirements, export
restrictions, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, longer payment cycles, problems in collecting
accounts receivable, political instability, fluctuations in currency exchange
rates and potentially adverse tax consequences, which could adversely impact the
success of Cerplex's international operations. There can be no assurance that
one or more of such factors will not have a material adverse effect on Cerplex's
international operations and, consequently, on Cerplex's business, operating
results and financial condition.

Dependence on Acquisition Strategy. Certain of Cerplex'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 Cerplex'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. Cerplex's ability to effect
any transactions requiring capital will be limited by Cerplex's lack of working
capital and by the terms of Cerplex's Credit Agreement and Note Purchase
Agreements. Cerplex is no longer permitted under the terms of its Credit
Agreement to engage in acquisitions. There can be no assurance that Cerplex 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 Cerplex'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,
Cerplex changed certain elements of its business strategy and underwent changes
in management and operations. Cerplex developed a direct sales force and
terminated the majority of its outside sales

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representatives, reduced its emphasis on inventory acquisitions and focused on
targeted customers in specific industries. There can be no assurance that such
changes will positively impact Cerplex'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 December 27, 1997, the officers, directors, principal
stockholders and their affiliates owned greater than a majority of the
outstanding common stock. Acting in concert, they would be able to elect a
majority of Cerplex's directors, determine the outcome of most corporate actions
requiring stockholder approval and otherwise control the business affairs of
Cerplex. Officers, directors and other stockholders representing a majority of
Cerplex's Common Stock have agreed to vote their shares in favor of the Merger
and have executed proxies in connection therewith. The Board of Directors of
Cerplex has the authority under Cerplex's Restated Certificate of Incorporation
to issue shares of Cerplex'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 Cerplex.

Dependence on Key Personnel. Cerplex'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 Cerplex's
business. During the last two years, Cerplex has lost the services of several of
its key executive officers and members of management. Effective March 4, 1998,
Cerplex's Chief Executive Officer, Stephen J. Hopkins will resign pursuant to
the terms of the Interim Management Agreement, as amended, and Larry McTavish
will be appointed as Chief Executive Officer of Cerplex. However, if the Merger
is not consummated, Cerplex will need to find a new Chief Executive Officer.

No Assurance of Public Market for Common Stock; Possible Volatility of
Stock Price. Prior to Cerplex's initial public offering, there was no public
market for Cerplex Common Stock. On February 20, 1997, Cerplex was removed from
the NASDAQ National Market System and commenced trading on the Over-The-Counter
Bulletin Board (the "OTC Bulletin Board"). There can be no assurance of an
active trading market for Cerplex 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 Cerplex 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 Cerplex Common Stock.

Implementation of Business Strategy. The success of the Merger will depend,
to a large extent, upon whether the integration of Aurora's and Cerplex's
businesses is accomplished in an efficient and effective manner. As such, Aurora
and Cerplex will be subject to the risks normally involved in the development
and implementation of a new business strategy, which will involve the
integration of each company's operating, administrative, finance, sales and
marketing organizations, as well as each company's communication technologies
and the coordination of sales efforts and streamlining of facilities and
backoffice operations. In addition, both companies' customers will need to be
reassured that their services will continue uninterrupted. Moreover, the
combined businesses of Aurora and Cerplex, after giving effect to the Merger
("New Cerplex"), will be dependent upon a new management group to effectuate and
administer the new business plan successfully. Execution of this strategy will
place significant demands on New Cerplex's financial and management resources,
and there can be no assurance that such demands will not adversely affect New
Cerplex's future financial performance or that New Cerplex will be successful in
fully implementing its estimated cost savings, responding to ongoing changes in
its markets which may require adjustments to its strategy, or in identifying,
acquiring, managing or integrating additional operations. The diversion of
management attention and any difficulties encountered in the transition process
could have an adverse impact on the revenue and operating results of New
Cerplex. Implementation of New Cerplex's strategy could also be

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affected by a number of factors beyond New Cerplex's control, such as loss of
personnel, the response of competitors and regulatory developments. There can be
no assurance that New Cerplex will be able to implement successfully the
strategies that it intends to pursue and achieve profitable operations in the
near and long term.

New Management. New Cerplex's future success depends, to a large extent, on
the efforts and abilities of the members of its management team. At the
Effective Time, the executive management team of New Cerplex will include
several members who are new to the companies and, in certain cases, including
George L. McTavish, currently the Chief Executive Officer of Aurora (who will be
the Chief Executive Officer of Cerplex), new to the business that will be
operated by New Cerplex. While each of these executives has extensive business
experience, they are still in the process of familiarizing themselves with the
specific operations of Aurora and Cerplex. Mr. McTavish has been employed by
Aurora since January 30, 1998 and by Cerplex since February 25, 1998 and has
been significantly involved both in the day to day operations of Aurora and in
the pre-Merger process of learning about the business of Cerplex and planning
the business strategy with respect to the integration of the two companies.
Nevertheless, after consummation of the Merger, it is anticipated that Mr.
McTavish, along with the other new members of New Cerplex's management, will
require some period of time to acquaint themselves more fully with the
operations of New Cerplex. The need for New Cerplex's management team to further
acquaint itself with the business and operations of New Cerplex, particularly
when coupled with the risks associated with implementing the business strategy,
may have an adverse impact on the profitability, at least in the short term, of
New Cerplex.

High Degree of Leverage. Following consummation of the Merger, New Cerplex
will be highly leveraged. With the 10% Senior Subordinated Notes of Aurora due
2004 (the "Aurora Senior Subordinated Notes"), the New Senior Loan and the
currently outstanding loan by Chase to Aurora pursuant to Aurora's Credit
Agreement with The Chase Manhattan Bank, N.A. (the "Chase Credit Agreement"),
New Cerplex will have approximately $48 million in principal amount of debt
outstanding, which will result in a long-term debt to total capitalization ratio
of 1.24 to 1.00, on a pro forma basis. As a result of this leverage, there is no
assurance New Cerplex will be able to meet its debt service requirements. Also,
the degree to which New Cerplex will be leveraged could adversely affect New
Cerplex's ability to obtain additional financing for working capital,
acquisitions or other purposes and could make it more vulnerable to economic
downturns and competitive pressures. New Cerplex's future capital requirements
and the sufficiency of available funds will depend on numerous factors which are
difficult to predict, including results of operations, the timing and cost of
acquisitions, and efforts to expand existing operations. If funds available from
the Aurora Senior Subordinated Notes, the New Senior Loan and the Chase Credit
Agreement and cash flows from operations are insufficient to meet current or
planned operating requirements, New Cerplex will be required to obtain
additional funds through equity or debt financings or from other sources. The
terms of any equity financings may be dilutive to Aurora stockholders and the
terms of any debt financings may contain restrictive covenants which limit New
Cerplex's ability to pursue certain courses of action. In addition, the New
Senior Loan, the Aurora Senior Subordinated Notes and the Chase Credit Agreement
will limit Aurora's ability to incur debt other than pursuant to the existing
facilities. There can be no assurance that additional funding will be available
on acceptable terms, if at all. If adequate funds are not available, New Cerplex
may be required to forego strategic decisions or delay, scale back or eliminate
certain aspects of its operations, which could have a material adverse effect on
New Cerplex's business, financial condition, and results of operations.

Issuance of New Preferred Stock; Dilution. Concurrently with the closing of
the Merger, Aurora will issue and sell an aggregate of 213,000 shares of 7%
Senior Convertible Preferred Stock, $.01 par value per share, of Aurora (the
"New Aurora Preferred Stock") at a price of $100 per share. These shares are
initially convertible at $0.25 per share into an aggregate of 85,200,000 shares
of Aurora Common Stock. The New Aurora Preferred Stock bears cumulative
dividends at the rate of $7.00 per share per annum and accrued but unpaid
dividends may, in certain circumstances, be converted into Aurora Common Stock
at the then effective conversion rate. In addition, the conversion price of the
New Aurora Preferred Stock is subject to adjustment in order to afford the
holders price-based antidilution protection in the event of certain issuances of
Aurora Common Stock or common stock equivalents below the $0.25 conversion
price. Holders of New Aurora Preferred Stock are also entitled to a liquidation
preference of $100 per share, plus all accrued but unpaid

9
<PAGE> 10

dividends to which such holders are then entitled, in the event of any voluntary
or involuntary liquidation, dissolution or winding up of Aurora. The New Aurora
Preferred Stock, along with accrued but unpaid dividends, is redeemable at the
option of the holder in certain circumstances, including upon a change in
control of Aurora. As a result of the issuance of the New Aurora Preferred
Stock, holders of common stock in Aurora will be subject to immediate and
substantial dilution and may be subject to additional dilution in the future.

Failure to Obtain New Senior Loan. The parties' obligation to consummate
the Merger is subject to, among other things, the receipt of at least $17
million of proceeds from the New Senior Loan on terms reasonably acceptable to
Aurora and to WCAS. There can be no assurance that the New Senior Loan will be
obtained. Aurora's failure to obtain the New Senior Loan would prevent
consummation of the Merger unless such condition precedent is waived by all
parties to the Merger Agreement, in which case the failure to obtain such
financing would have a material adverse effect on New Cerplex's business and
ability to implement its business strategy.

Control by WCAS. WCAS currently owns approximately 79% of Aurora's voting
stock. Upon consummation of the Merger and the WCAS Financing, WCAS will, in the
aggregate, beneficially own approximately 70% of the voting stock of Aurora on
an as converted basis. Since WCAS will be able to elect the entire Board of
Directors of Aurora, WCAS will be able to control all matters requiring approval
by the stockholders of Aurora. In addition, the Board of Directors of Aurora
(the "Aurora Board") will have authority under the Amended and Restated
Certificate of Incorporation of Aurora to issue shares of New Aurora Preferred
Stock in one or more series and 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 voting and dividend rights,
rights upon liquidation and other rights of holders of Aurora Common Stock and
may result in immediate and substantial dilution to the stockholders of Aurora
Common Stock. The issuance of New Aurora Preferred Stock and the control by WCAS
of Aurora may also have the effect of delaying, deferring or preventing a change
of control of Aurora.

Exchange Ratio. The Exchange Ratio is expressed in the Merger Agreement as
a fixed ratio, subject to certain adjustment, of 1.076368 shares of Aurora
Common Stock for each share of Cerplex Common Stock. Accordingly, the Exchange
Ratio will not be adjusted in the event of an increase or decrease in the price
of either Aurora Common Stock or Cerplex Common Stock. The price of Aurora
Common Stock at the Effective Time may vary from its price at the date the
Exchange Ratio was fixed and/or from its price at the date of the special
meeting of Cerplex stockholders to approve the Merger Agreement and the Merger
(the "Cerplex Special Meeting"). These latter variations may be the result of
changes in the business, operations or prospects of Aurora or Cerplex, market
assessments of the likelihood that the Merger will be consummated and the timing
thereof, general market and economic conditions and other factors. Because the
Effective Time may occur at a date later than the Cerplex Special Meeting, there
can be no assurance that the price of Aurora Common Stock on the date of the
Cerplex Special Meeting will be indicative of its price at the Effective Time.
The stockholders of Cerplex are urged to obtain current market quotations for
Aurora Common Stock.

The Exchange Ratio is subject to adjustment based on various factors. It is
anticipated that the adjustments will be de minimus. However, if the Merger does
not close by April 30, 1998, the Bank Warrants will remain outstanding,
resulting in a change in the Exchange Ratio from 1.076368 to 1.019861.

10
<PAGE> 11

ITEM 2. PROPERTIES

Cerplex leases certain office and warehouse facilities under operating
leases and subleases which expire at various dates during the next eight years.
Cerplex believes that its existing facilities are adequate for its current
business. Cerplex's executive offices are located at the Tustin, California
facility listed below. A description of the facilities leased and subleased by
Cerplex as of February 13, 1998 is as follows:

<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE LEASE EXPIRATION
-------- ------- ----------------
<S> <C> <C>
Jeffersontown, Kentucky.................................. 77,000 December 2001
Lawrence, Massachusetts.................................. 200,000 July 2000
Livermore, California.................................... 51,840 May 1998
Livermore, California.................................... 38,880 May 2000
Livermore, California.................................... 18,000 October 1998
Milpitas, California..................................... 23,371 March 1998
Newburgh, New York....................................... 57,300 Month to month
Rancho Cucamonga, California............................. 68,900 June 2003
Tustin, California....................................... 120,300 December 2000
Middleton, Leeds, England................................ 22,000 June 2000
</TABLE>

In addition, Cerplex's European subsidiaries own land and buildings in
Enfield, England and Lille, France.

ITEM 3. LEGAL PROCEEDINGS

Cerplex is a party to legal proceedings relating to routine matters
incidental to its business. While Cerplex does not believe that any of these
proceedings, individually or in the aggregate, will have a material adverse
effect on Cerplex's business or its results of operations, there can be no
assurance that such proceedings, individually or in the aggregate, will not have
a material adverse effect on Cerplex's financial position, results of operations
or liquidity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

11
<PAGE> 12

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

As of February 20, 1997, Cerplex's Common Stock began trading on the OTC
under the symbol "CPLX." Prior to February 20, 1997, the Company's Common Stock
traded on the NASDAQ National Market System. The following table sets forth the
range of high and low sale prices for the Company's Common Stock for the fiscal
quarters indicated:

<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1998
- -----------------------------------
First quarter (through February 20, 1998)................... $0.49 $0.33

YEAR ENDED DECEMBER 31, 1997 HIGH LOW
- ---------------------------- ----- -----
First quarter............................................... $1.44 $0.22
Second quarter.............................................. 0.93 0.35
Third quarter............................................... 0.64 0.30
Fourth quarter.............................................. 0.50 0.22

YEAR ENDED DECEMBER 31, 1996 HIGH LOW
- ---------------------------- ----- -----
First quarter............................................... $7.75 $5.03
Second quarter.............................................. 7.13 5.75
Third quarter............................................... 7.25 4.88
Fourth quarter.............................................. 5.13 0.66
</TABLE>

HOLDERS OF RECORD

At December 31, 1997, Cerplex had approximately 143 stockholders of record
of the Company's Common Stock.

DIVIDENDS

Cerplex has not paid dividends on its capital stock since incorporating in
Delaware. Cerplex presently intends to retain earnings for use in its business
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future. In addition, the terms of Cerplex's senior credit facility and the
Subordinated Notes restrict the ability of Cerplex to pay cash dividends. Also,
the Stock Purchase Agreement dated May 24, 1996 for the purchase by Cerplex of
Cerplex SAS, a subsidiary of Cerplex, limits the amount of dividends that may be
paid by Cerplex SAS to Cerplex.

12
<PAGE> 13

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data regarding the
Company's results of operations. This information should be read in conjunction
with Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's Consolidated Financial Statements and
related notes included elsewhere herein.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Net sales................................ $141,408 $191,493 $144,328 $ 94,006 $22,945
Gross profit............................. 20,533 26,245 16,511 17,039 4,678
Income (loss) from continuing operations
before extraordinary items............. (16,487) (27,388) (22,047) 1,195 (8,432)
Income (loss) from discontinued
operations............................. -- -- (17,347) 1,500 13,998
Net income (loss)........................ $(16,487) $(27,388) $(39,394) $ 684 $ 5,566
======== ======== ======== ======== =======
Basic and diluted net income (loss) per
share(4):
Continuing operations.................. $ (0.56) $ (2.24) $ (1.68) $ 0.09 $ 0.16
Discontinued operations(1)............. -- -- (1.33) 0.11 --
Extraordinary item(2).................. -- -- -- (0.15) --
-------- -------- -------- -------- -------
Basic and diluted net income (loss) per
share(3)............................ $ (0.56) $ (2.24) $ (3.01) $ 0.05 $ 0.16
======== ======== ======== ======== =======
Weighted average common shares used in
the calculation of income (loss) per
share(4)............................... 29,610 13,419 13,091 13,446 11,363
======== ======== ======== ======== =======
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficiency)............. $(47,308) $ 12,874 $ 33,219 $ 54,768 $17,774
Total assets............................. 59,238 105,494 101,893 120,707 70,544
Long-term obligations (less current
maturities)............................ 2,960 56,817 68,382 60,720 34,205
Preferred stock.......................... -- 7,197 -- -- 2
Stockholders' equity (deficiency)........ (32,537) (15,137) 168 39,485 12,470
</TABLE>

- ---------------

(1) In September 1995, Cerplex discontinued its end-of-life programs, a segment
of its business, through a liquidation of the remaining operations. Prior
period financial statements have been restated to reflect discontinuance of
this segment of the business. See Note 3 to Consolidated Financial
Statements.

(2) In May 1994, Cerplex extinguished early its Series B Subordinated Notes. As
a result, $3.5 million ($2.0 million net of tax) of the original issue
discount was recognized as an extraordinary item.

(3) For 1993, net income per share is presented on a pro forma basis to reflect
the provision for income taxes that would have been recorded had Cerplex's
predecessor affiliated corporations been taxed as C Corporations under the
Code.

(4) Effective December 31, 1997, Cerplex adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share" ("SFAS No. 128"). All per
share data has been restated to reflect the adoption of SFAS No. 128.

13
<PAGE> 14

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

OVERVIEW

Cerplex is an independent provider of electronic parts repair, spare parts
sales and management, and logistics. Cerplex's net sales have fluctuated
substantially over the last few years, primarily as a result of acquisitions and
divestitures as well as Cerplex's ongoing liquidity problems. Cerplex is no
longer permitted under the terms of the Cerplex Senior Credit Facility to engage
in acquisitions. Cerplex's results of operations have been adversely affected
over the last three years due to a variety of factors discussed below.

During the second quarter of 1997, the Cerplex Board authorized and
committed management to implement a consolidation and cost reduction plan to
reduce North America staffing. As part of the restructuring, Cerplex closed
several facilities, and relocated these businesses to its remaining facilities.
During the first half of 1997, Cerplex sold its PCS subsidiary and the
subsidiaries of Cerplex's MODCOMP/ Cerplex subsidiary. Also during 1997, Cerplex
was in default under the Cerplex Senior Credit Agreement resulting in numerous
waivers and amendments. On January 30, 1998, Aurora signed the Merger Agreement
with Cerplex. As a result of the Merger, Cerplex would become a wholly-owned
subsidiary of Aurora, and the current equity holders of Cerplex would be
entitled to receive in a tax-free exchange approximately 25% of the post-merger,
fully-diluted common stock of Aurora, after giving effect to the WCAS Financing.
Under the terms of the Merger Agreement, each share of Cerplex Common Stock
would convert into shares of Aurora Common Stock at the Exchange Ratio. The
Merger is subject to regulatory approvals and the satisfaction of certain other
conditions precedent, including securing the New Senior Loan. The Merger is
expected to be completed by the end of April 1998. Cerplex's results of
operations and liquidity for 1997 were not significantly impacted as a result of
severe financial difficulties of major customers and Cerplex is not aware of
significant financial difficulties being encountered by any of its current major
customers.

The results of operations for 1996 reflect, to a large degree, the
resolution of several matters that have been adversely impacting Cerplex.
Specifically, Cerplex 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 business, resulting
in restructuring charges and asset write-downs; and, due to changes in Cerplex's
business or the business of third parties, Cerplex recorded charges for
inventory write-downs, uncollectable receivables and other assets.

During the third quarter of 1995, the Cerplex Board approved a liquidation
plan to discontinue its end-of-life programs, a segment of Cerplex, through
liquidation of these operations. In its end-of-life programs, Cerplex assumed
all responsibilities for the support and repair of products which are no longer
manufactured or are being phased out of manufacturing. Generally, when Cerplex
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 Cerplex 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. Cerplex no longer undertakes these programs. The
liquidation of end-of-life programs has been accounted for as discontinued
operations, and prior period financial statements have been restated to reflect
the discontinuance of this segment of the business.

14
<PAGE> 15

RESULTS OF OPERATIONS

Results of Continuing Operations

The following table sets forth items from Cerplex's Consolidated Statement
of Operations as a percentage of net sales.

<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 85.4% 86.3% 88.6%
----- ----- -----
Gross profit................................................ 14.5% 13.7% 11.4%
Selling, general and administrative expenses................ 19.3% 20.6% 23.4%
Restructuring charges....................................... 3.0% 1.1% --
Operating income (loss)..................................... (7.8)% (8.0)% (12.0)%
</TABLE>

Net Sales

Net sales for the year ended December 31, 1997 decreased 26.2% to $141.4
million from $191.5 million in 1996. The decrease was due, in large part, to the
fact that Cerplex sold PCS in April 1997 and MODCOMP/Cerplex effective June 30,
1997. In addition, net sales of Cerplex's spare parts business decreased $14.1
million while its repair business decreased $15.6 million. Cerplex's liquidity
problems also contributed to the decreases in Cerplex's spare parts business and
repair business. Many of Cerplex's parts suppliers reduced the amount of credit
and/or refused to ship parts other than on a C.O.D. basis, thus hampering
Cerplex's ability to fill customer orders. These decreases were offset by an
increase of approximately $13.6 million from Cerplex's European operations.

Net sales for the year ended December 31, 1996 increased $47.2 million or
32.7% to $191.5 million from $144.3 million in 1995. The increase was due
primarily to the acquisitions of Cerplex SAS in June 1996 and the remaining 51%
interest in MODCOMP/Cerplex in April 1996, along with a full year of sales
generated by PCS which was acquired in June 1995. The approximately $60 million
year-to-year revenue increase from these acquisitions was partially offset by
approximately $10 million decrease in net sales from the sale, in early 1996 of
Cerplex's InCirT division, and from lower sales due to (i) the shutdown in
September 1996 of Cerplex's Texas contract manufacturing facility and Washington
computer training facility; (ii) reduced sales to BT; and (iii) decreased sales
in the North American spare parts business.

Net sales during 1995 increased $50.3 million or 53.5% to $144.3 million
from $94.0 million in 1994. The increase in net sales was due primarily to the
acquisition of a repair depot of BT and the acquisition of Apex in the second
half of 1994, the acquisition of PCS in June 1995 and, to a lesser extent,
increased sales from new customers using existing facilities.

Gross Profit

Gross profit for 1997, as a percentage of net sales increased to 14.5%
compared to 13.7% in 1996. The slight improvement is primarily the result of the
full year of operations of Cerplex SAS and the six months of operations from
MODCOMP/Cerplex at higher gross profit margins. The higher gross profit of each
of Cerplex SAS and MODCOMP/Cerplex was offset by low profit margins in Cerplex's
North America parts and repair business. Gross profit from North America
operations was negatively impacted by a $2.5 million inventory write-off at June
30, 1997. The June 30, 1997 inventory write-off was partially offset by a net
$1.8 million reversal of a valuation reserve in September 30, 1997 related to
trade credits. A $1.8 million valuation reserve has been recorded in 1996 and
another $1.0 million recorded in the second quarter of 1997. In addition, as a
result of Cerplex's liquidity problems Cerplex was forced to use alternative
sources for parts procurement resulting in a higher cost for materials.

Gross profit for 1996, as a percentage of net sales, increased to 13.7%,
compared with 11.4% for the prior year. The improvement in the gross profit
percentage is primarily attributable to the 1996 acquisitions of Cerplex SAS and
the remaining 51% interest in MODCOMP/Cerplex, together with a full year of
operations from the 1995 acquisition of PCS. This gross profit improvement,
however, was adversely affected by a variety

15
<PAGE> 16

of factors primarily relating to Cerplex's North American operations including
but not limited to the impact of unprofitable contracts or operations within
Cerplex's Texas contract manufacturing and Washington computer training
facilities which were closed during the third quarter and completion of certain
other unprofitable contracts which Cerplex was winding down. The effect of these
factors included approximately $2.5 million in inventory write-downs, and $4.9
million in charges related to the contract manufacturing operations in Texas,
computer training operations in Washington and telephones purchased from Lucent.

Gross profit as a percentage of net sales during 1995 decreased to 11.4%
from 18.1% in 1994. The decrease in gross profit percentage from 1994 was
primarily due to losses incurred on contracts Cerplex was renegotiating or
winding down, a reduction in new orders from SpectraVision which filed for
protection under Chapter 11 of the U.S. Bankruptcy Code in May 1995, and other
miscellaneous inventory adjustments.

Selling, General and Administrative

Selling, general and administrative expenses ("SG&A") decreased $12.8
million or 32.3% in 1997 compared to 1996. SG&A as a percentage of net sales
decreased to 19.3% compared to 20.6% in 1996. The decrease in spending is due to
the sale of PCS and MODCOMP/Cerplex in the first half of 1997 offset by the
inclusion of a full year of operations of Cerplex SAS. The slight improvement in
SG&A as a percentage of net sales is attributable to Cerplex's consolidation and
cost reduction plan which was initiated in June 1997 and which reduced North
America staffing by 44 employees in Cerplex's marketing, selling, finance and
management information systems functions.

During 1996, SG&A expenses increased by $5.7 million to $39.5 million,
while as a percentage of net sales decreased to 20.8% compared with 23.4% in
1995. The increase in dollar spending is primarily due to the addition of the
Cerplex SAS and MODCOMP/Cerplex acquisitions in 1996 and a full year of expenses
from PCS, which was acquired in 1995. Increased SG&A spending was partially
offset by a $2.5 million decrease in bad debt provision to $4.8 million in 1996
compared with $7.3 million in 1995.

SG&A expenses as a percentage of net sales in 1995 increased to 23.4% from
12.6% in 1994. SG&A expenses included a $9.8 million provision representing
losses on receivables from three customers, two of which were operating under
Chapter 11 of the U.S. Bankruptcy Code, and losses on an investment in a stock
purchase warrant. SG&A expenses were also up due to additional headcount, higher
insurance expenses, and increased sales commissions.

Restructuring Expenses

During 1997, Cerplex closed its Poughkeepsie, New York and Redmond,
Washington spare parts business and relocated them to Lawrence, Massachusetts
resulting in a reduction of 63 employees. Cerplex also closed the Tustin,
California operation and consolidated this operation with Cerplex's hub-based
operations in northern and southern California, Kentucky and Massachusetts.
Additionally, Cerplex had a reduction in force resulting in the termination of
73 employees in Cerplex's selling, marketing, production, finance and management
information systems departments. In conjunction with the closures and reduction
in force, Cerplex recorded a restructuring charge of $4.3 million. Of the $4.3
million in restructuring charges, approximately $0.8 million was related to
severance payments for terminated employees, approximately $2.0 million was due
to the write-off of leasehold improvements and approximately $1.5 million was
due to rent and settlements for terminated leases. During the remainder of 1997,
Cerplex paid approximately $1.0 million of severance and termination benefits
and lease payments on vacated facilities. The remaining balance of $1.2 million
at December 31, 1997 mainly consists of lease obligations for excess facilities
and remaining severance and termination benefits and is expected to be paid in
1998.

During the third quarter of 1996, Cerplex closed its contract manufacturing
operations in Texas and its computer training operations in Redmond, Washington.
In connection with the closure of these operations, Cerplex recorded
restructuring charges of $2.1 million. The restructuring charges related to
write-downs of property and equipment and other assets to net realizable value,
accruals for lease commitments, severance pay for approximately 180 employees,
and other costs needed to complete closure of the facilities.

16
<PAGE> 17

Other Income and Expenses

During 1997, Cerplex sold all of its shares of Pen Interconnect common
stock, resulting in a loss of $0.4 million which is reported as other expense.

In April 1996, Cerplex sold its contract manufacturing division, InCirT, in
Tustin, California to Pen Interconnect for $3.5 million in cash and restricted
common stock of Pen Interconnect, which was valued at approximately $2 million
at the time of the acquisition. The gain on the sale of InCirT was $0.5 million.
Later in fiscal 1996, Cerplex determined that the value of the restricted common
stock had been permanently impaired due to subsequent declines in market value
and, reduced the value of these investments to the fair market value at December
31, 1996. The related loss of $1.1 million on the impairment of these
investments was included in other expense.

Equity in earnings from joint venture decreased by $2.0 million to $0.4
million in 1996 compared with $2.4 million in 1995 primarily due to Cerplex
acquiring the remaining 51% in MODCOMP/Cerplex in April 1996 and consolidating
the results of the operations and financial condition after that date. These
earnings were attributed to Cerplex's 49% ownership in MODCOMP/Cerplex which was
formed in December 1994.

Interest Expense

Interest expense fluctuated very little in 1997 despite the reduction of
approximately $12.6 million in debt. The comparable interest expense, in light
of reduced borrowing, is attributable to a higher weighted average interest rate
and amortization of restructuring fees and the expense charge related to
issuance of warrants associated with the numerous waivers and amendments Cerplex
negotiated with its senior lenders. Additionally, effective August 19, 1997 the
interest rate on Cerplex's senior subordinated debt was raised from 9.5% to
15.0%. Average borrowings outstanding were $53.3 million during 1997 compared to
$63.6 million during 1996. The effective interest rate on the Cerplex Senior
Credit Agreement increased 16.3% in 1997 from 10.0% in 1996. Amortization of
loan fees and other related costs were approximately $2.4 million during 1997 as
compared to $2.3 million during 1996.

Interest expense for 1996 increased $3.2 million to $8.3 million from $5.1
million in 1995 as a result of increased average borrowings under the Cerplex
Senior Credit Facility, a higher weighted average interest rate and amortization
of loan discount and commitment fees. Average borrowings outstanding were $63.6
million during 1996 compared with $60.1 million during 1995. The effective
interest rate on credit facilities increased to 10.0% in 1996 from 8.5% in 1995.
Loan amortization costs were approximately $2.3 million during 1996.

Interest expense for 1995 increased to $5.1 million from $4.1 million in
1994. The increase in interest expense is attributed to higher weighted average
borrowings outstanding incurred to finance acquisitions, increased working
capital requirements and the capital contribution to MODCOMP/Cerplex. Average
borrowings outstanding were $60.1 million during 1995 compared with $37.6
million during 1994. Interest expense during 1994 included $0.5 million of
amortization of original issue discount related to Cerplex's Series B
Subordinated Notes which were repaid in May 1994. The effective interest rate on
long-term credit facilities decreased to 8.5% in 1995 from 9.8% in 1994.

Income Taxes

Total income tax expense for 1997, 1996, and 1995 was allocated as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loss from continuing operations............................ $2,648 $1,718 $2,089
Discontinued operations.................................... -- -- 42
------ ------ ------
$2,648 $1,718 $2,131
====== ====== ======
</TABLE>

17
<PAGE> 18

Income tax expense during 1997, 1996 and 1995 was related primarily to
income taxes on earnings of Cerplex's operations in Europe. The effective tax
rate differs from the statutory rate primarily as a result of the impact of not
recording an income benefit related to operating losses in the United States.
SFAS No. 109, "Accounting for Income Taxes," provides for the recognition of
deferred tax assets if realization of such assets is more likely than not.
Cerplex's valuation allowance reduces the deferred tax asset to the amount
realizable. Cerplex has provided a full valuation allowance against net federal
and state deferred tax assets due to uncertainties surrounding their
realization. Cerplex will evaluate the realizability of the deferred tax assets
on a quarterly basis.

Discontinued Operations

In September 1995, Cerplex decided to discontinue its end-of-life programs
segment through a liquidation of remaining operations. In connection with the
decision to discontinue its end-of-life programs, Cerplex provided $15.4 million
for the estimated loss from liquidation of these operations, primarily related
to the disposition of inventory, fixed assets and other related assets. The
liquidation of non-contract operations was completed during 1996 and the
remaining contractual obligations with a final customer was completed in 1997.

A summary of operating results for discontinued operations is shown below:

<TABLE>
<CAPTION>
1995
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Net Sales................................................... $ 19,815
========
Income (loss) from operations
Income (loss) before taxes................................ (1,924)
Provision for taxes....................................... 42
--------
Net loss from discontinued operations............. (1,966)
Estimated loss from liquidation of
Discontinued operations, no tax benefit recognized........ (15,381)
--------
Net loss from discontinued operations............. $(17,347)
========
</TABLE>

Year 2000 Compliance

Many existing software programs use only two digits to identify the year in
the date field. If such programs are not corrected, date data concerning the
Year 2000 could cause many computer applications to fail, lock-up or generate
erroneous results.

Cerplex has committed personnel and resources to resolve potential Year
2000 issues. Cerplex is in the process of identifying and assessing its
mission-critical systems related to the Year 2000. Although Cerplex plans to
address Year 2000 issues with respect to Cerplex's mission-critical internal
systems in sufficient time prior to the century rollover, there can be no
assurance that there will not be interruption of operations or other limitations
of system functionality, or that Cerplex will not incur substantial costs to
avoid such occurrences.

Cerplex is currently assessing the cost to remediate its Year 2000 issues.
Although the actual cost to remediate these issues is not yet fully known, based
upon information to date, it is not expected that the remediation will have a
material impact on Cerplex's financial condition or operating results.

New Accounting Pronouncements

18
<PAGE> 19

statements and selected segment information in interim financial reports.
Reclassification or restatement of comparative financial statements or financial
information for earlier periods is required upon adoption of SFAS 130 and SFAS
131, respectively. Application of the Statements' requirements is not expected
to have a material impact on Cerplex's consolidated financial position, results
of operations or loss per share data as currently reported.

LIQUIDITY AND CAPITAL RESOURCES

Senior Credit Facility

Summary. The Credit Agreement contains a variety of restrictions, including
prohibitions on dividends and the incurrence of additional debt. During portions
of 1996 and 1997 Cerplex was in default of various covenants in the Credit
Agreement, which resulted in a series of waivers and amendments over the course
of the two years. As described below, the amendments resulted in a decreased
borrowing base from the initial $60 million to $30 million and in significantly
increased interest rates. The amendments also resulted in the issuance of the
Bank Warrants. As of January 30, 1998, $25,320,620 in principal was outstanding
under the term loan at an interest rate of prime plus 7.125% (15.625%) and
$4,886,984 was outstanding under the revolver at an interest rate of 19%. The
loans under the Credit Agreement become due and payable May 1, 1998.

Cerplex and Citibank entered into a Forbearance Agreement on January 30,
1998, which provides for the forbearance of certain defaults through the earlier
of April 30, 1998 or the date the Merger Agreement is terminated. In addition,
Citibank agreed to accept the sum of (i) 98.5% of the outstanding principal
amount of the amounts outstanding under the Credit Agreement, plus (ii) all
accrued and unpaid fees, expenses and other amounts payable under the Credit
Agreement as of April 30, 1998 (the "Repayment Amount") as full payment for the
loans under the Credit Facility and to terminate all of the Bank Warrants if the
Credit Facility is paid in full on or prior to April 30, 1998 in connection with
the Merger.

Terms of Amendments. In April 1997, the Credit Agreement was 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, Cerplex
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. Cerplex 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 April 1997 amendment to the Credit Agreement amendment included revised
covenants for profitability, current ratio, minimum tangible net worth, leverage
and working capital.

In June 1997 and August 1997, the Credit Agreement was again amended to
reduce the maximum amount available under the term loan and the revolver to
$31.4 million and $4.9 million, respectively. The interest rate on revolving
loans was changed to the prime lending rate plus 2.00% for all non-revolving
loans outstanding on August 6, 1997 and 15% for all revolving loans made
thereafter. The interest rate on the term loan was increased to the prime
lending rate plus 3.125%. The interest rates under the term loan and revolver
were required to increase by 1% per month, effective September 1, 1997, for each
month in which such obligations were not paid in full, up to a maximum increase
of 4%. As a result, at December 31, 1997, the interest rate on each of the loans
had increased by an additional 4%. In addition, the mandatory pay down of the
term loans and/or the revolving loans with the proceeds of any equity offering
was reduced from 25% to 20%, although the first $1.5 million of any equity
offerings must be used to permanently reduce the term loan and/or the revolver.
Under the August 1997 amendment, approximately $6.1 million of the net proceeds
from the sale of MODCOMP/Cerplex were used to pay down the term loan, and $2.0
million of the proceeds were used to pay down the revolver. Cerplex reborrowed
$2.0 million of the proceeds from the sale of MODCOMP/Cerplex that were used to
pay down the revolver.

On January 30, 1998 the Credit Agreement was again amended by the Seventh
Amendment to Credit Agreement to add a minimum consolidated adjusted EBITDA
requirement, further restrict Cerplex's ability

19
<PAGE> 20

\to pay dividends on shares and make other junior payments and add as an event
of default under the Credit Agreement the parties' termination of the Merger
Agreement and the failure to take certain steps necessary to consummate the
Merger by certain deadlines prescribed by the Credit Agreement. In addition,
under the January 1998 amendment agreement Citibank agreed to waive compliance
with certain requirements of the Credit Agreement, including permitting up to
$10 million to be loaned by Aurora to Cerplex, permitting execution of the
Merger Agreement and consummation of the Merger and waiving certain financial
covenants for Cerplex's fiscal quarter ended December 31, 1997 and for the
period from and including December 31, 1997 to and excluding April 30, 1998.

Subordinated Notes.

In November 1993, Cerplex sold $17.3 million in principal amount of its
Cerplex 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
Cerplex Common Stock. The Series B 9.0% Senior Subordinated Notes were repaid
out of the proceeds of Cerplex's initial public offering in 1994. 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 Cerplex 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. Cerplex 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.

During part of 1996, Cerplex was in default of various covenants under the
Subordinated Note Purchase Agreements, which resulted in an amendment in April
1996 and a subsequent amendment in November 1996. As consideration for the April
1996 amendment to the Subordinated Note Purchase Agreements, Cerplex was
required to provide the senior subordinated note holders 1,000,000 warrants to
purchase common stock at $6.00 per share. As compensation for the November 1996
amendment, Cerplex repriced the warrants issued in April 1996 from $6.00 per
share to $2.50 per share.

In 1997, Cerplex was again in default under the Subordinated Note Purchase
Agreements. In April 1997, the Subordinated Note Purchase Agreements were
amended and restated, revising certain covenants and making interest payable
semi-annually instead of quarterly. In consideration for the amendment, Cerplex
repriced the warrants issued in April 1996 to the April 4, 1997 market price of
$0.60 per share.

On June 30, 1997, Cerplex received waivers with respect to various
provisions of the Amended and Restated Subordinated Note Purchase Agreement. On
August 20, 1997, Cerplex completed negotiations with the subordinated note
holders to further amend the Amended and Restated Subordinated Note Purchase
Agreement resulting in the First Amendment Agreement to the Amended and Restated
Subordinated Note Purchase Agreement. The First Amendment Agreement increased
the interest rate to 15%. The interest payment of $819,375 that was due on
August 19, 1997 was added to the principal balance, which increased the
principal outstanding under the Amended and Restated Subordinated Note Purchase
Agreement to $18,069,375. Cerplex was also required to issue warrants for
500,096 shares of Common Stock at $0.59 per share. The First Amendment Agreement
provides that beginning in March 1998 interest is payable monthly, however,
Cerplex may elect to add the portion of interest representing the difference
between 9.5% and 15% to the outstanding principal balance. In addition, the
covenants under the Amended and Restated Subordinated Note Purchase Agreement as
currently cast will be significantly more restrictive as of June 1998.
Therefore, Cerplex believes that it will be in default again under such
agreement at that time unless it is able to successfully renegotiate the
covenants. If Cerplex repays the balance outstanding under the Amended and
Restated Subordinated Note Purchase Agreement on or before August 19, 1998, the
portion of interest expense representing the difference between 9.5% and 15%
will be forgiven and the warrants for 500,096 shares will be canceled.

On January 30, 1998, WCAS and the holders of Cerplex Subordinated Notes
entered into the Note and Warrant Assignment and Transfer Agreement, pursuant to
which WCAS purchased the Cerplex Subordinated Notes and warrants to purchase an
aggregate of 1,500,096 shares of Cerplex Common Stock (the "Cerplex Warrants")
held by such holders. The original Subordinated Note holders retained warrants
to

20
<PAGE> 21

purchase an aggregate of 855,000 shares of Cerplex Common Stock. WCAS agreed to
defer the February 19, 1998 scheduled interest payment and to add such amount to
the outstanding principal balance of the Subordinated Notes. WCAS agreed that
the Cerplex Warrants it acquired will be terminated and will not be considered
outstanding in determining the consideration to be received by the Cerplex
stockholders in the Merger. It is contemplated that WCAS will exchange the
Subordinated Notes and the Cerplex Warrants it acquired for Aurora Senior
Subordinated Notes as partial payment for the units to be purchased by WCAS as
part of the WCAS Financing at an exchange rate equal to the amount paid by WCAS
for such Cerplex securities. If the Merger is not consummated, WCAS has granted
Cerplex the option for a period of 30 days following termination of the Merger
Agreement to acquire the Subordinated Notes and the Cerplex Warrants from WCAS
for an amount equal to the purchase price paid by WCAS for such Cerplex
securities.

Miscellaneous

Effective April 1, 1996, Cerplex sold its InCirT Division in Tustin,
California for $3.5 million in cash and restricted Cerplex Common Stock valued
at approximately $2.0 million at the time of the acquisition. Cerplex was
required to use $2.0 million of the proceeds from this sale to repay a portion
of the borrowings under the Cerplex Senior Credit Agreement.

In April 1996, Cerplex 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, Cerplex 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 agreement, Cerplex 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 to Cerplex; 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 of $14.6 million at December 31, 1997 is generally not available
to Cerplex for financing operations outside of Cerplex SAS.

In June 1996, Cerplex issued 8,000 shares of Series B Preferred Stock at
$1,000 per share in a private placement. As of December 31, 1997, all 8,000
shares of the Series B Preferred Stock had been converted into 22,887,823 shares
of Cerplex Common Stock.

On April 11, 1997, Cerplex sold PCS, for $14.5 million in cash and the
cancellation of $0.5 million of indebtedness. Of such amount, $8.3 million was
used to pay down bank debt, $0.5 million was placed into escrow, and
approximately $0.8 million was used to pay expenses associated with the
transaction.

On August 27, 1997, Cerplex sold MODCOMP/Cerplex for $8.5 million in cash.
Of such amount, approximately $6.1 million was used to pay down bank debt and
approximately $0.6 million was used to pay expenses associated with the
transaction. The loss on the sale of MODCOMP/Cerplex was $0.4 million.

Cerplex and its subsidiaries are required to pay BT L1.8 million in 1999
(or earlier if certain sales volumes are reached) in connection with the
purchase of BT's plant in Enfield, England.

Cerplex acquired inventory consisting of used telephones from Lucent
Technologies, Inc. ("Lucent"). At December 31, 1996, Cerplex had $5.9 million of
inventory, production cost commitments and assets related to the telephones
acquired from Lucent. In June 1996, Cerplex executed that certain promissory
note in favor of Lucent bearing interest at 9.75% in the amount of $4.6 million
(the "Lucent Note") reflecting a portion of the amount invoiced to Cerplex by
Lucent. Lucent invoiced Cerplex for an additional $0.6 million. Due to the
quality of the inventory and the lack of availability of spare parts to effect
repairs, Cerplex believes it had claims against Lucent. On October 7, 1996,
Cerplex 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. In October 1997, Cerplex executed a settlement
agreement, which had been substantially completed in September 1997. The
agreement provided

21
<PAGE> 22

for the payment to Lucent of $150,000 in cash and Lucent also received the trade
credits that Cerplex had received when it transferred the telephones to a third
party. Cerplex also agreed to pay Lucent an additional $350,000 by April 10,
1998 or, if earlier, upon receipt of any proceeds from the future sale of phones
or proceeds from any insurance claims related to the phone remarketing program.

Cerplex's European operations are largely dependent on existing
relationships with Rank Xerox and BT. Cerplex's contract with Rank Xerox calls
for sequentially declining unit volumes over the next four years. In addition,
unit volumes from BT have been declining and are expected to continue to decline
due to, among other things, product technical evolution. The future success of
these European operations are dependent upon replacing these declining volumes
with new revenue from either these or new customers. There can be no assurance
that Cerplex will be able to replace these declining volumes with sales to
either these or new customers.

On January 30 and February 24, 1998, Aurora provided Cerplex with unsecured
loans in the amount of $2 million and $1.5 million, respectively, each of which
bears interest at the rate of 10% and becomes due and payable on June 30, 1998.
Cerplex used the funds for working capital purposes.

If the Merger is not consummated, Cerplex does not believe it will have the
capital resources necessary to fulfill its existing obligations to creditors or
to maintain its existing operations. Cerplex does not believe it will be able to
restructure its obligations under the Credit Agreement and Subordinated Notes on
acceptable terms without a significant capital infusion. If the Merger and the
WCAS Financing do not occur as anticipated, Cerplex and its operations will be
materially and adversely affected. Cerplex also believes it will need additional
funds to maintain its existing operations prior to the consummation of the
Merger. Citibank has agreed to permit Cerplex to borrow up to an aggregate
additional $6.5 million from Aurora. However, Aurora is not obligated under the
terms of the Merger Agreement or the existing Aurora Loan to advance any
additional funds to Cerplex. No assurance can be given that additional funds
will be available from Aurora or that the Merger and related WCAS Financing will
occur as anticipated. These matters raise substantial doubt about the Company's
ability to continue as a going concern. See Note 20 to the Consolidated
Financial Statements. If Cerplex is unsuccessful in completing the Merger, it is
possible that Cerplex's secured creditors will foreclose upon all of the assets
of Cerplex and pursue the dissolution of Cerplex.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's Consolidated Financial Statements and schedule appear in a
separate section of this Annual Report on Form 10-K beginning on pages F-1 and
S-1, respectively.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURES

None

22
<PAGE> 23

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is certain information regarding the directors and
executive officers of Cerplex as of February 1, 1998.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William A. Klein 57 Chairman of the Board of Directors
Stephen J. Hopkins 64 President and Chief Executive Officer
Richard C. Davis 48 President of International Operations, Director
Philip E. Pietrowski 53 President of Cerplex North America Operations
Robert W. Hughes 45 Senior Vice President and Chief Financial Officer
Jerome Jacobson(1) 76 Director
Robert Finzi(1)(2) 44 Director
Patrick S. Jones(1) 53 Director
Myron Kunin(1)(2) 69 Director
</TABLE>

- ---------------

(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

William A. Klein. William Klein has been the Chairman of the Board of
Directors of Cerplex since its inception in May 1990. Mr. Klein also served as
Cerplex's President and Chief Executive Officer from August 1993 until October
1995 and from October 1996 until July 1997. Mr. Klein was Chairman of InCirT
Technology Incorporated from 1990 until September 1993 at which time such
entities were consolidated with Cerplex. Mr. Klein was previously President and
Chief Executive Officer of Century Data, Inc. from 1986 until 1990. Mr. Klein
was the founder and Chief Executive Officer of Cybernex from October 1981 until
its merger with Read-Rite in 1986. Prior to October 1981, Mr. Klein held various
positions over a 19-year period with IBM in engineering, manufacturing and
management. Mr. Klein serves as a director of Smartflex Systems Inc. and on the
boards of several private companies.

Stephen J. Hopkins. Mr. Hopkins has served as the President and Chief
Executive Officer of Cerplex since July 1997. Mr. Hopkins is a principal of
Nightingale & Associates, LLC, a financial and business advisory management firm
serving financial and business institutions with core capabilities in operations
transitions and restructuring. As a principal of Nightingale, Mr. Hopkins has
held numerous interim management CEO and CFO positions in restructuring,
reorganization and other turnaround situations. Mr. Hopkins serves on the boards
of several private companies.

Richard C. Davis. Richard Davis has served as a member of the Board of
Directors of Cerplex since May 1990 and as the President of International
Operations of Cerplex since October 1995. Between May 1990 and October 1995, Mr.
Davis served as the President of Cerplex and in various other executive
positions. Mr. Davis was the Chief Financial Officer of each of EMServe, Inc.,
Diversified Manufacturing Services, Inc. and InCirT Technology Incorporated from
July 1991, June 1991 and February 1990, respectively, until September 1993, at
which time such entities were consolidated with Cerplex. Mr. Davis was Vice
President and Chief Financial Officer of Century Data, Inc. from 1986 until
1990. Prior to 1986, Mr. Davis held various financial, accounting and managerial
positions within Xerox Corporation.

Philip E. Pietrowski. Mr. Pietrowski was promoted to President of Cerplex's
North American Operations in January 1997. He joined Cerplex in October 1995 as
Vice President of Logistics and was promoted to Senior Vice President of North
American Operations in January 1996. Mr. Pietrowski spent twenty-four years at
Digital Equipment Corporation in Massachusetts, holding various senior level
positions. The last position he held with Digital Equipment was Corporate
Multivendor Services Business Manager, where Mr. Pietrowski was responsible for
worldwide service logistics, repair of information systems and administration.

23
<PAGE> 24

Robert W. Hughes. Mr. Hughes was appointed to the position of Senior Vice
President and Chief Financial Officer in March 1997. Prior to joining Cerplex,
Mr. Hughes served as Vice President, Chief Financial Officer and Treasurer of
Financial World Partners from November 1995 to May 1996. Mr. Hughes was Chief
Financial Officer, International Operations at MAI Systems Corporation from
February 1993 to November 1994. From May 1989 to August 1992, Mr. Hughes was
Chief Financial Officer and Corporate Secretary of Focus Technologies, Inc.
Prior to 1989, Mr. Hughes served as Senior Audit Manager of KPMG Peat Marwick
LLP for seven years.

Jerome Jacobson. Mr. Jacobson has served as a member of the Board of
Directors of Cerplex since August 1993. Mr. Jacobson has also served as a
director of Datawatch Corporation and as an individual general partner of ML
Ventures II, L.P. since 1987. Mr. Jacobson is President of Economic Studies,
Inc. and an independent financial advisor and economic consultant. Mr. Jacobson
was Executive Vice President of Bendix Corporation from 1974 to 1980 and was
Vice Chairman of Burroughs Corporation from 1981 to 1984.

Robert Finzi. Mr. Finzi has served as a member of the Board of Directors of
Cerplex since December 1993. Mr. Finzi has been a Vice President of the Sprout
Group, a division of DLJ Capital Corporation, which is the managing general
partner of Sprout Growth II, L.P. and an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation since May 1991. Mr. Finzi is also a general
partner of the general partner of a series of investment funds managed by the
Sprout Group and a limited partner of the general partner of ML Ventures II,
L.P. From 1984 to 1991, Mr. Finzi was a Vice President of Merrill Lynch Venture
Capital. Mr. Finzi also serves as a director of Gentle Dental Service
Corporation and a number of private companies.

Patrick S. Jones. Mr. Jones has served as a member of the Board of
Directors of Cerplex since July 1996. Mr. Jones has served as Vice
President/Corporate Controller for Intel Corporation since 1992. As such, he is
responsible for worldwide accounting, international finance and administration
at Intel's overseas locations, accounting services, external reporting, and all
financial systems applications. Prior to 1992, Mr. Jones served as Vice
President and Chief Financial Officer of LSI Logic Corporation.

Myron Kunin. Mr. Kunin has served as a member of the Board of Directors of
Cerplex since May 1995. Mr. Kunin has served as Chairman of the Board of Regis
Corporation since 1983. Mr. Kunin also served as the Chief Executive Officer
until July 1995. From 1967 to 1987 he was President of Regis Corporation, and
from 1954 to 1965 he served as its Vice President. Mr. Kunin has been a director
of Regis Corporation since 1954. Mr. Kunin has been a director and major
stockholder of Nortech Systems, Inc. since 1990. Mr. Kunin serves on the Board
of Directors of Smartflex Systems Corporation and serves on the boards of
several private companies.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

The following summarizes all known filing delinquencies or failure to file
with respect to reports on Forms 3, 4 and 5, which were required to be filed
pursuant to the reporting requirements of Section 16(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") by members of the Cerplex
Board and executive officers of Cerplex and the beneficial owners of more than
ten percent of the outstanding shares of Cerplex Common Stock: (i) Philip E.
Pietrowski, an executive officer of Cerplex, filed on February 10, 1998 a
required report on Form 5 disclosing the acquisition of an option to purchase
50,000 shares of Cerplex Common Stock at an exercise price of $1.75 per share,
which acquisition should have been disclosed on a Form 5 for the 1996 fiscal
year end and (ii) Stephen J. Hopkins, the Chief Executive Officer of Cerplex,
filed on February 10, 1998 a required report on Form 5 disclosing no securities
owned, which should have been reported on a Form 3 when Mr. Hopkins first became
a "reporting person" as Chief Executive Officer of Cerplex in July 1997.

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<PAGE> 25

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during the 1997,
1996, and 1995 fiscal years by (i) the Company's Chief Executive Officers during
fiscal 1997 and (ii) the Company's four other most highly compensated executive
officers who were serving as executive officers at the end of fiscal 1996
(together, the "Named Executive Officers"). No executive officer who would have
otherwise been includable in such table on the basis of salary and bonus earned
for the 1997 fiscal year resigned or terminated employment during the fiscal
year.

SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION

<TABLE>
<CAPTION>
COMPENSATION
ANNUAL COMPENSATION SECURITIES
NAME AND ------------------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OTHER($) (OPTIONS)(#) COMPENSATION($)(1)
------------------ ---- --------- -------- -------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
William A. Klein(2)............. 1997 340,732 -- -- -- 741
Chairman of the Board 1996 400,036 -- -- -- 2,979
1995 415,442 -- -- -- 791
Stephen J. Hopkins(3)........... 1997 243,000 -- -- -- --
President and Chief 1996 -- -- -- -- --
Executive Officer 1995 -- -- -- -- --
Richard C. Davis................ 1997 255,984 -- -- -- 561
President of International 1996 217,624 -- -- -- 2,979
Operations 1995 202,356 -- -- -- 791
Philip E. Pietrowski............ 1997 212,941 -- -- 190,000(4) 466
President of North 1996 170,155 -- -- 70,000(5) 2,979
American Operations 1995 89,250 20,000 -- 20,000(5) 66
Robert W. Hughes(6)............. 1997 165,614 20,000 -- 100,000 342
Senior Vice President 1996 -- -- -- -- --
and Chief Financial Officer 1995 -- -- -- -- --
</TABLE>

- ---------------

(1) Reflects payment of term life insurance premiums for each Named Executive
Officer.

(2) Mr. Klein served as the Company's Chief Executive Officer from October 1996
to July 1997.

(3) Mr. Hopkins has served as the Company's Chief Executive Officer since July
1997. Under and in accordance with the terms of the Interim Management
Agreement, Mr. Hopkins will resign from the offices of President and Chief
Executive Officer effective March 3, 1998 and, on that same date, Mr. George
L. McTavish will be appointed to such offices.

(4) Includes regrant of 90,000 option shares on March 21, 1997 in connection
with Cerplex's option cancellation/regrant program.

(5) These option shares were cancelled on March 21, 1997 in connection with
Cerplex's option cancellation/regrant program.

(6) Mr. Hughes served as Senior Vice President and Chief Financial Officer of
Cerplex since March 1997. Had Mr. Hughes served in such capacity for the
entire 1997 fiscal year, Mr. Hughes' base salary would have been $200,000.

25
<PAGE> 26

STOCK OPTIONS

The following table sets forth, for the year ended December 27, 1997,
information concerning the grant of options to purchase shares of Common Stock
under the Company's 1993 Restated and Amended Stock Option Plan (the "1993
Plan") to the Named Executive Officers. No stock appreciation rights have been
granted to any of the Named Executive Officers.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUALIZED RATES OF
NUMBER OF PERCENT OF STOCK PRICE APPRECIATION FOR
SECURITIES TOTAL OPTIONS OPTION TERM($)(3)
UNDERLYING GRANTED TO EXERCISE OF ------------------------------
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR(1) ($/SH)(2) DATE
---- ---------- -------------- ----------- ---------- 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Philip E. Pietrowski..... 20,000 2.3% $0.30 10/02/05 3,773 9,562
20,000 2.3% $0.30 01/22/06 3,773 9,562
50,000 5.8% $0.30 11/03/06 9,433 23,906
100,000 11.6% $0.30 03/20/07 18,867 47,812
Robert W. Hughes......... 100,000 11.6% $0.30 03/20/07 18,867 47,812
</TABLE>

- ---------------

(1) Based on option grants for an aggregate of 861,250 shares granted to
employees in 1997, including the options granted to the Named Executive
Officers.

(2) The exercise price per share of the options granted represents the fair
market value of the underlying shares of Common Stock on the date the
options were granted, as determined by the Company's Compensation Committee.
The exercise price may be paid in cash or in shares of the Company's Common
Stock valued at fair market value on the exercise date or through a cashless
exercise procedure involving a same-day sale of the purchased shares. The
Company may also finance the option exercise by loaning the optionee
sufficient funds to pay the exercise price for the purchased shares and the
federal and state income or employment tax liability incurred by the
optionee in connection with such exercise. The optionee may be permitted,
subject to the approval of the Compensation Committee, to apply a portion of
the shares purchased under the option (or to deliver existing shares of
Common Stock) in satisfaction of such tax liability.

(3) Potential realizable value is based on the assumption that the price per
share of Common Stock appreciates at the assumed annual rate of stock
appreciation for the option term. There is no assurance that the assumed 5%
and 10% annual rates of appreciation (compounded annually) will actually be
realized over the term of the option. The assumed 5% and 10% annual rates
are set forth in accordance with the rules and regulations adopted by the
Securities and Exchange Commission and do not represent the Company's
estimate of stock price appreciation.

Cerplex implemented an option cancellation/regrant program for one
executive officer and other employees holding stock options with an exercise
price per share in excess of the market price of Cerplex Common Stock at the
time the cancellation/regrant occurred. The cancellation/regrant was effected on
March 21, 1997, and a number of outstanding options with an exercise price in
excess of $0.30 per share were canceled and new options for the same aggregate
number of shares were granted with an exercise price of $0.30 per share. Philip
E. Pietrowski elected to have all 90,000 of his stock options repriced.
Optionees who accepted the repricing forfeited all vesting of their options
unless they remain in Cerplex's employ through March 21, 1998.

26
<PAGE> 27

The following table sets forth information regarding option repricings for
all executive officers with respect to each of the Company's executive officers
who participated in the option cancellation/regrant program effective March 21,
1998.

10-YEAR OPTION REPRICINGS

<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF MARKET ORIGINAL
SECURITIES PRICE OF EXERCISE OPTION TERM
UNDERLYING STOCK AT PRICE AT NEW REMAINING AT
OPTIONS TIME OF TIME OF EXERCISE DATE OF
NAME DATE REPRICED (#) REPRICING ($) REPRICING ($) PRICE ($) REPRICING
- ------------------------------ ------- ------------ ------------- ------------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Philip E. Pietrowski.......... 3/21/97 20,000 $0.30 $6.75 $0.30 8 years 7 months
Philip E. Pietrowski.......... 3/21/97 20,000 0.30 6.62 0.30 8 years 10 months
Philip E. Pietrowski.......... 3/21/97 50,000 0.30 1.75 0.30 9 years 9 months
</TABLE>

OPTION EXERCISES AND HOLDINGS

The table below sets forth information concerning unexercised options held
as of the end of such year by the Named Executive Officers. No stock options or
stock appreciation rights were exercised during such fiscal year and no stock
appreciation rights were outstanding at the end of such fiscal year.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT FY-END MONEY OPTIONS AT FY-END(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William A. Klein........................... -- -- -- --
Steven J. Hopkins.......................... -- -- -- --
Richard C. Davis........................... -- -- -- --
Philip E. Pietrowski....................... -- 190,000 -- $30,400
Robert W. Hughes........................... 30,667 69,333 $4,907 $11,093
</TABLE>

- ---------------

(1) Based upon the market price of $0.46 per share, which was the closing
selling price per share of Common Stock on the OTC Bulletin Board on
December 26, 1997, the last business day of the 1997 fiscal year, less the
option exercise price payable per share.

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS

The Company entered into a consulting agreement dated June 30, 1997 (the
"Consulting Agreement") with Nightingale & Associates, LLC ("Nightingale"), a
partnership of which Mr. Hopkins is a partner, pursuant to which Mr. Hopkins was
appointed Cerplex's Chief Executive Officer. In consideration for such services,
the Consulting Agreement provides that Nightingale shall receive (i) $150,000
cash payment, (ii) an option to purchase 363,901 shares of the Company's Common
Stock at an exercise price of $0.43 upon consummation of the Merger and (iii)
professional time fees and expenses.

The Compensation Committee has the discretionary authority as administrator
of the Company's 1993 Plan to provide for the accelerated vesting of the shares
of Common Stock subject to outstanding options upon the happening of certain
events, including, without limitation, a change in control of the Company
whether by successful tender offer for more than 50% of the outstanding voting
stock or by proxy contest for the election of Board members. In addition, all
outstanding options to purchase shares of Common Stock of Cerplex will vest and
become immediately exercisable in the event of (i)(A) a merger (including the
Merger) or consolidation in which securities possessing more than 50% of the
total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from the persons holding

27
<PAGE> 28

those securities immediately prior to such transaction or (B) the sale, transfer
or other disposition of all or substantially all of the Company's assets in
complete liquidation or dissolution of the Company (each, a "Corporate
Transaction") or (ii) if earlier, upon the optionee's involuntary dismissal or
discharge by the Company (for reason other than misconduct) following the
execution of the definitive acquisition agreement executed in connection with a
Corporate Transaction. In addition, certain of the Company's executive officers
will be entitled to receive a payment equal to the base salary for one year in
the event of a change in control of the Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Messrs. Robert Finzi and Myron Kunin served as members of the Company's
Compensation Committee during the 1997 fiscal year.

COMPENSATION OF DIRECTORS

Each non-employee director has received $6,000 per quarter as a retainer
fee, $1,000 per Board meeting attended and $1,000 per committee meeting attended
since January 1, 1994. In addition, each non-employee Board member is eligible
to receive automatic option grants under the Company's 1993 Plan as follows: (i)
each individual who is first elected or appointed a non-employee Board member at
or after the 1997 Annual Stockholders Meeting will automatically be granted, on
the date of such initial election or appointment, an option to purchase 40,000
shares of Common Stock and (ii) on the date of each Annual stockholders Meeting,
each individual who is reelected to serve as a non-employee Board member will
automatically be granted an option to purchase 20,000 shares of Common Stock,
provided such individual has served as a non-employee Board member for at least
six months prior to the date of the Annual Meeting. The following directors were
granted an option to purchase 20,000 shares of Common Stock at the 1997 Annual
Meeting: Robert Finzi, Jerome Jacobson, Myron Kunin and Patrick Jones.

COMPENSATION COMMITTEE REPORT

It is the responsibility of the Compensation Committee of the Company's
Board to make recommendations to the Board with respect to the base salary and
bonuses to be paid to the Company's executive officers each fiscal year. The
Compensation Committee also administers the 1993 Plan. The following is a
summary of the policies of the Compensation Committee which affected the
compensation paid to executive officers for the last fiscal year, as reflected
in the tables and text set forth elsewhere in this Proxy Statement.

GENERAL COMPENSATION POLICY. Under the supervision of the Compensation
Committee, Cerplex has developed a compensation policy which is designed to
attract and retain qualified key executives critical to the Company's success
and to provide such executives with performance-based incentives tied to the
financial performance of the Company. One of the Compensation Committee's
primary objectives is to have a substantial portion of each officer's
compensation contingent upon the Company's performance as well as upon the
individual's contribution to the success of the Company as measured by his
personal performance. Accordingly, each executive officer's compensation package
is fundamentally comprised of three elements: (i) base salary which reflects
individual experience, expertise and responsibility and is designed to be
competitive with salary levels in the industry; (ii) annual incentive
compensation which reflects individual and Company performance for the year; and
(iii) long-term stock-based incentive awards which strengthen the mutuality of
interests between the executive officers and the Company's stockholders.

FACTORS. Several of the more important factors which were considered in
establishing the components of each executive officer's compensation package for
the 1997 fiscal year are summarized below. Additional factors were also taken
into account, and the Compensation Committee may in its discretion apply
entirely different factors, particularly different measures of financial
performance, in setting executive compensation for future fiscal years.

- BASE SALARY. The base salary levels for the executive officers were
established for the 1997 fiscal year on the basis of the following factors:
experience, expertise, responsibility, personal performance, the estimated
salary levels in effect for similar positions at a select group of companies
with which the Company competes

28
<PAGE> 29

for executive talent, and internal comparability considerations. The
Compensation Committee, however, did not rely upon any specific compensation
surveys for comparative data. Instead, the Compensation Committee made its
decisions as to the appropriate market level of base salary for each executive
officer on the basis of its understanding of the salary levels in effect for
similar positions at those companies with which the Company competes for
executive talent. Base salaries will be reviewed on an annual basis, and
adjustments will be made in accordance with the factors indicated above.

- ANNUAL INCENTIVE COMPENSATION. The Board has discretionary authority to
award cash bonuses to executive officers and employees in accordance with
recommendations made by the Compensation Committee based upon the extent to
which certain financial and performance targets established annually by the
Compensation Committee are met and the contribution of each such officer and
employee to the attainment of such targets. For fiscal year 1997, the
performance targets for each of the Named Executive Officers (as defined under
the caption "Compensation of Directors and Executive Officers -- Summary of Cash
and Certain Other Compensation") included net sales and pre-tax profit. The
weight given to each factor varied from individual to individual. With the
exception of Robert Hughes, no bonuses were awarded in fiscal year 1997 to the
Named Executive Officers due to the Company's failure to meet the performance
targets established by the Compensation Committee. The bonus paid to Mr. Hughes
was a non-discretionary component of his compensation package.

- LONG-TERM INCENTIVE COMPENSATION. Cerplex has also adopted the 1993 Plan.
Each grant under the 1993 Plan is designed to align the interests of the
executive officers with those of the stockholders and provide each individual
with a significant incentive to manage the Company from the perspective of an
owner with an equity stake in the business and to remain in the service of the
Company. The Company has established certain general guidelines in making option
grants to the executive officers in an attempt to target a fixed number of
vested option shares based upon the individual's position with the Company and
his or her existing holdings of vested options. The number of shares subject to
each option grant is based upon the officer's tenure, level of responsibility
and relative position in Cerplex. However, the Company does not adhere strictly
to these guidelines and will vary the size of the option grant made to each
executive officer as it feels the circumstances warrant. Each grant allows the
officer to acquire shares of Cerplex Common Stock at a fixed price per share
(the market price on the grant date) over a specified period of time (up to 10
years). The option vests over time subject to the executive officer's continued
employment with the Company. Accordingly, the option will provide a return to
the executive officer only if he or she remains in the Company's employ and the
market price of the Company's Common Stock appreciates over the option term.

- SPECIAL OPTION REGRANT PROGRAM. During the 1997 fiscal year, the
Compensation Committee felt that circumstances had made it necessary for the
Company to implement an option cancellation/regrant program pursuant to which a
number of outstanding options held by Philip Pietrowski, an executive officer of
the Company, and other employees under the Option Plan were canceled, and new
options for the same number of shares were granted with a lower exercise price
per share equal to the market price of the Company's Common Stock on the regrant
date.

The Compensation Committee determined that this program was necessary
because equity incentives are a significant component of the total compensation
package of the Company's employees and play a substantial role in the Company's
ability to retain the services of individuals essential to the Company's
long-term financial success. Prior to the implementation of the program, the
market price of the Company's Common Stock had fallen as a result of the factors
discussed under "Management's Discussion and Analysis of Results of Operations
and Financial Condition" herein. The Compensation Committee felt that the
Company's ability to retain key employees would be significantly impaired,
unless value was restored to their options in the form of regranted options at
the current market price of the Company's Common Stock.

Accordingly, on March 21, 1997, a number of outstanding options held by
Philip Pietrowski and other employees of the Company with an exercise price in
excess of $0.30 per share were cancelled, and new options for the same number of
shares were granted with an exercise price of $0.30 per share, the market price
of the Common Stock on that date. Pursuant to the new lower-priced options, no
shares will vest during the one-year period of the optionee's service measured
from the March 21, 1997 grant date. However, following such one-

29
<PAGE> 30

year period the optionee will receive credit for any vesting accrued in
accordance with the vesting schedule established for the cancelled,
higher-priced option and the new option will become exercisable in accordance
with such schedule.

As a result of the new vesting schedule imposed on the regranted options,
the Compensation Committee believes that the program strikes an appropriate
balance between the interests of the option holders and those of the
stockholders. The lower exercise prices in effect under the regranted options
make those options valuable once again to the executive officers and key
employees critical to the Company's financial performance. However, those
individuals will enjoy the benefits of the regranted options only if they in
fact remain in the Company's employ through March 21, 1998 and contribute to the
Company's financial success.

- CEO COMPENSATION. The base salary established for the 1997 fiscal year
for Mr. William Klein, the Company's Chief Executive Officer until July 1997,
reflected the Compensation Committee's policy to maintain a level of stability
and certainty with respect to the Chief Executive Officer's base salary from
year to year, and there was no intent to have this particular component of
compensation affected to any significant degree by the Company's performance
factors. In setting the Chief Executive Officer's base salary at $300,000, the
Compensation Committee sought to provide a level of base salary competitive to
that paid with other chief executive officers in the industry and to maintain
internal comparability. No bonuses were paid to Mr. Klein during 1997. Mr. Klein
voluntarily reduced his base salary for the 1997 fiscal year from $400,000 to
$300,000 due to the Company's cash flow issues. The salary for Mr. Stephen
Hopkins, the Company's Chief Executive Officer since July 1997, was determined
through an arms-length negotiation between the Company and Nightingale in
connection with the Consulting Agreement. (See "Employment Contracts,
Termination of Employment and Change-In-Control Agreements" herein.) Mr.
Hopkins' appointment to the office of Chief Executive Officer was mandated by
Cerplex's senior lenders under the terms of the Credit Agreement.

TAX LIMITATION. As a result of federal tax legislation enacted in 1993, a
publicly-held company such as Cerplex will not be allowed a federal income tax
deduction for compensation paid to certain executive officers, to the extent
that compensation exceeds $1 million per officer in any year. This limitation
was in effect for the 1997 fiscal year, but the compensation paid to the
Company's executive officers for the 1997 fiscal year did not exceed the $1
million limit per officer. This limitation will apply to all compensation paid
to the covered executive officers which is not considered to be performance
based. Compensation which does qualify as performance-based compensation will
not have to be taken into account for purposes of this limitation. At the 1996
Annual Meeting, the stockholders approved certain amendments to the 1993 Plan
intended to assure that any compensation deemed paid in connection with the
exercise of stock options granted under that plan with an exercise price equal
to the market price of the option shares on the grant date will qualify as
performance-based compensation. Because it is very unlikely that the cash
compensation payable to any of the Company's executive officers in the
foreseeable future will approach the $1 million limit, the Compensation
Committee has decided at this time not to take any other action to limit or
restructure the elements of cash compensation payable to the Company's executive
officers. The Compensation Committee will reconsider this decision should the
individual compensation of any executive officer ever approach the $1 million
level.

Dated: March 2, 1998 Compensation Committee

Robert Finzi
Myron Kunin

30
<PAGE> 31

PERFORMANCE GRAPH

The graph depicted below shows Cerplex's stock price as an index for the
period commencing April, 1994 to December 27, 1997 assuming $100 invested on
April 8, 1994 (the date of Cerplex's initial public offering) and reinvestment
of dividends, along with the composite prices of companies listed on the
University of Chicago's Center for Research on Security Prices ("CRSP"), Total
Return Index for National Association of Securities Dealers Automated Quotation
Stock Market ("Nasdaq") and Computer and Data Processing Index ("C&DP").

<TABLE>
<CAPTION>
MEASUREMENT COMPUTER AND DATA NASDAQ
PERIOD CERPLEX PROCESSING STOCK MARKET
- ----------- ------- ----------------- ------------
<S> <C> <C> <C>
APR-94 100 100 100
DEC-94 98 120 104
DEC-95 70 183 146
DEC-96 9 225 180
DEC-97 4 273 216
</TABLE>

Notwithstanding anything to the contrary set forth in any of Cerplex's
previous filings under the Securities Act of 1933, as amended (the "Securities
Act"), or the Exchange Act, which might incorporate future filings, including
this Proxy Statement, the following Compensation Committee Report and the
Company's Stock Performance Graph will not be incorporated by reference into any
of those prior filings with the SEC, nor will such report or graph be
incorporated by reference into any future filings with the Securities and
Exchange Commission (the "SEC") made by Cerplex under these statutes or the
rules and regulations thereunder.

31
<PAGE> 32

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information known to Cerplex
regarding the ownership of Cerplex Common Stock as of March 20, 1998 by (i) each
named executive officer of Cerplex, (ii) each director, (iii) all current
directors and executive officers of Cerplex as a group and (iv) each stockholder
known to Cerplex to be a beneficial owner of more than five percent (5%) of
Cerplex's Common Stock.

<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP(#) CLASS
------------------------ ----------------- ----------
<S> <C> <C>
William A. Klein(1)......................................... 8,604,281 23.64%
Myron Kunin(2).............................................. 1,002,642 2.75
Richard C. Davis............................................ 845,871 2.32
Philip E. Pietrowski(3)..................................... 190,000 *
Robert W. Hughes(4)......................................... 100,000 *
Jerome Jacobson(5).......................................... 77,605 *
Robert Finzi(6)............................................. 63,500 *
Patrick S. Jones(7)......................................... 40,000 *
Stephen J. Hopkins(8)....................................... 0 0
All current directors and executive officers as a group (9
persons)(9)............................................... 10,943,899 29.66
DLJ Capital Corporation(10)................................. 9,443,659 25.87
277 Park Avenue
New York, NY 10172
Sprout Growth II, L.P. ..................................... 8,410,398 23.11
277 Park Avenue
New York, NY 10172
Whitman Partners, L.P. ..................................... 2,978,773 8.19
525 University Avenue, Suite 701
Palo Alto, CA 94301
Citibank, N.A.(11).......................................... 2,137,188 5.55
599 Lexington Avenue
New York, New York 10043
</TABLE>

- ---------------

* Less than 1% as of March 20, 1998.

(#) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of Cerplex Common Stock subject to options and
warrants which are currently exercisable or convertible or which will
become exercisable or convertible 60 days after March 20, 1998 are deemed
outstanding for computing the beneficial ownership of the person holding
such option or warrant, but are not outstanding for computing the
beneficial ownership of any other person or entity. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power
with respect to all shares of Cerplex Common Stock shown as beneficially
owned by them.

(1) Includes 2,442,599 shares of Cerplex Common Stock held by the Klein
Investments Family Limited Partnership, 1,271,299 shares of Cerplex Common
Stock held by the Klein 1994 Charitable Remainder Unitrust, and 180,000
held by the Klein Family Foundation. Mr. Klein disclaims beneficial
ownership of these shares except to the extent of his indirect interest in
the shares held by the Klein Investments Family Limited Partnership and the
Klein 1994 Charitable Remainder Unitrust.

(2) Includes 50,000 shares of Cerplex Common Stock issuable upon the exercise
of immediately exercisable options.

32
<PAGE> 33

(3) Includes 190,000 shares of Cerplex Common Stock issuable upon the exercise
of immediately exercisable options.

(4) Includes 100,000 shares of Cerplex Common Stock issuable upon the exercise
of immediately exercisable options.

(5) Includes 60,000 shares of Cerplex Common Stock issuable upon the exercise
of immediately exercisable options.

(6) Includes 60,000 shares issuable upon the exercise of immediately
exercisable options held by Mr. Finzi for the beneficial ownership of DLJ
Capital Corporation. Mr. Finzi disclaims beneficial ownership of these
shares. Mr. Finzi serves as a Vice President of Sprout Group, a division of
DLJ Capital Corporation, and is a general partner of one of the general
partners of Sprout Growth II, L.P. As such, Mr. Finzi may be deemed the
beneficial owner of the shares of Cerplex Common Stock held by Sprout
Growth II, L.P. Mr. Finzi disclaims such beneficial ownership except to the
extent of his indirect partnership interest in Sprout Growth II, L.P.

(7) Includes 40,000 shares of Cerplex Common Stock issuable upon the exercise
of immediately exercisable options.

(8) Does not include 363,901 shares of Cerplex Common Stock issuable upon the
exercise of immediately exercisable options to be granted immediately
preceding the closing of the Merger.

(9) This number reflects the stock ownership of Cerplex's executive officers
and directors as of February , 1998 (which are named in "Directors and
Executive Officers of Cerplex" herein), which incorporates the shares and
options referenced in footnotes (1) through (8) above.

(10) Includes 8,410,398 shares beneficially owned by Sprout Growth II, L.P. DLJ
Capital Corporation, as the managing general partner of Sprout Growth II,
L.P., may be deemed to share voting and dispositive power with respect to
these shares. DLJ Capital Corporation disclaims beneficial ownership of
these shares except to the extent of its direct and indirect partnership
interests in Sprout Growth II, L.P. Also includes 53,826 and 3,167 shares
of Cerplex Common Stock issuable upon the exercise of immediately
exercisable warrants beneficially owned by DLJ Capital Corporation and DLJ
First ESC LLC, respectively, and 60,000 options held by Mr. Finzi for the
beneficial ownership of DLJ Capital Corporation. See footnote (6) above.

(11) Includes 2,137,188 shares of Cerplex Common Stock issuable upon the
exercise of warrants. All of such warrants shall be cancelled if the Merger
occurs prior to or on April 30, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Cerplex subleased certain real property for its operations in Newburgh, New
York from WC Cartwright. Messrs. Klein, Kunin and Davis and Ms. Carolyn J. Klein
(the spouse of Mr. Klein) are officers, directors and principal shareholders of
WC Cartwright. Cerplex currently owes WC Cartwright the sum of $99,425 for back
rent and building maintenance and repair fees pertaining to such leased
property.

In connection with a private placement of Series B Preferred Stock in June
1996, DLJ Capital Corporation purchased 231 shares of Series B Preferred Stock,
at a price of $1,000 per share, which was converted into 770,000 shares of
Cerplex Common Stock on April 11, 1997. In addition, Sprout Growth II, L.P.
purchased 2,269 shares of Series B Preferred Stock at a price of $1,000 per
share, which were converted into 7,563,333 shares of Cerplex Common Stock on
April 11, 1997. Each of DLJ Capital Corporation and Sprout Growth II, L.P. are
related to Robert Finzi (as more fully described in footnotes (6) and (10) to
the table set forth under the caption "Security Ownership of Certain Beneficial
Owners and Management of Cerplex"). On April 1, 1997 two entities affiliated
with William A. Klein purchased from an unaffiliated third party an aggregate of
750 shares of Series B Preferred Stock and converted such shares into 3,663,898
shares of Cerplex Common Stock on the same date. In addition, Richard C. Davis,
a director and the President of International Operations of Cerplex, purchased
from an unaffiliated third party 50 shares of Series B Preferred Stock, which
were converted into 166,667 shares of Cerplex Common Stock on April 9, 1997.

33
<PAGE> 34

In 1998, Cerplex rescinded an option exercise and related promissory note
in the principal amount of $80,000 payable by Mr. Jacobson, a director of
Cerplex. In addition, Cerplex leases a car for use by William A. Klein, with
monthly payments in the amount of $2,375, and has agreed to buy out the lease on
behalf of Mr. Klein (for an amount of approximately $100,000) upon termination
of Mr. Klein's employment. In addition, Cerplex has entered into indemnification
agreements with each of its directors.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents filed as part of this report:

(1) Financial Statements:

The Company's financial statements appear on the pages referenced
below:

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-1
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.......................... F-3
Consolidated Statements of Stockholders' Equity (Deficiency)
for the years ended December 31, 1997, 1996 and 1995...... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>

(2) Financial Statement Schedules:

The Company's financial statement schedules appears on the page
referenced below:

<TABLE>
<CAPTION>
SCHEDULES PAGE
--------- ----
<S> <C>
I -- Condensed Financial Information of Registrant.......... S-1
II -- Valuation and Qualifying Accounts..................... S-4
</TABLE>

(3) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE METHOD OF FILING
- ------- ----- ----------------
<C> <S> <C>
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 Registration
Manufacturing Services, Inc. ("DMS"), EMServe, Statement on Form S-1 (File No. 33-75004)
Inc. ("EMServe"), InCirT Technology Incorporated which was declared effective by the
("InCirT") and Testar, Inc. ("Testar"). 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 Registration
and Registrant (conformed copy to original). 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 Incorporated herein by reference to
Registrant with and into The Cerplex Group Exhibit 2.2 to the Company's Registration
Subsidiary, Inc. dated as of November 12, 1993. Statement on Form S-1 (File No. 33-75004)
which was declared effective by the
Commission on April 8, 1994.
</TABLE>

34
<PAGE> 35

<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE METHOD OF FILING
- ------- ----- ----------------
<C> <S> <C>
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 Registration
wholly-owned subsidiary of the Registrant Statement on Form S-1 (File No. 33-75004)
("Certech"), and Spectradyne, Inc. which was declared effective by the
("Spectradyne"). 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 29,
Cerplex Limited, BT Repair Services Limited and 1994.
BT.
2.6 Contract for repair, calibration and warehousing Incorporated herein by reference to
of certain items of BT Equipment dated as of Exhibit 10 to the Form 8-K filed July 29,
July 29, 1994, among The Cerplex Group and 1994.
Cerplex 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 Report
L.P., Modular Computer Systems, Inc., Cerplex on Form 10-K for the fiscal year ended
Subsidiary, Inc. and The Cerplex Group, Inc. January 1, 1995.
2.8 Contingent Promissory Note dated December 1, Incorporated herein by reference to
1994 issued by Modcomp/Cerplex L.P. to Modular Exhibit 2.8 to the Company's Annual Report
Computer Systems, Inc. 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.
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 Report
Cerplex Group, Inc., Modular Computer Systems, on Form 10-K for the fiscal year ended
Inc. and Modcomp Joint Venture Inc. January 1, 1995.
2.11 Stock Purchase Agreement dated as of June 29, Incorporated herein by reference to
1995 by and among The Cerplex Group, Inc., Tu Exhibit 2.11 to the Company's Quarterly
Nguyen and Phuc Le. Report on Form 10-Q for the quarter ended
October 1, 1995.
2.12 Letter Agreement dated April 5, 1996 by and Incorporated herein by reference to
among Modular Computer Systems, Inc., Modcomp Exhibit 2.12 to the Company's Annual
Joint Venture, Inc., AEG Aktiengesellschaft, the Report on Form 10-K for the fiscal year
Company, Cerplex Subsidiary, Inc. and 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 Current
Cerplex Limited, Rank Xerox -- The Document Report on Form 8-K dated May 24, 1996.
Company SA and Rank Xerox Limited (conformed
copy to original).
2.14 Contract of Warranty dated as of May 24, 1996, Incorporated herein by reference to
by and among The Cerplex Group, Inc., Cerplex Exhibit 2.14 to the Company's Current
Limited , Rank Xerox -- The Document Company SA Report on Form 8-K dated May 24, 1996.
and Rank Xerox Limited (conformed copy to the
original).
2.15 Supply and Services Agreement dated as of May Incorporated herein by reference to
24, 1996, by and among The Cerplex Group, Inc., Exhibit 2.15 to the Company's Current
Cerplex Limited, Rank Xerox -- The Document Report on Form 8-K dated May 24, 1996.
Company SA and Rank Xerox Limited (conformed
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 Exhibit 2.13 to the Company's Annual
Peripheral Computer Support, Inc. among the Report on Form 10-K for the fiscal year
Company, PCS Acquisition Co., Inc., and ended December 31, 1996.
Lincolnshire Equity Partners, L.P.
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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 Quarterly
Modcomp Joint Venture, Inc., Modcomp/Cerplex Report on Form 10-Q for the quarter ended
L.P. and CSP Inc. June 30, 1997.
2.18 Agreement and Plan of Merger dated as of January Incorporated herein by reference to
30, 1998 ("Merger Agreement") among Aurora Exhibit 2.18 to the Company's Current
Electronics, Inc., a Delaware corporation Report on Form 8-K dated January 30, 1998.
("Aurora"), Holly Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of
Aurora ("Aurora Sub") and the Company.
3.1 Restated Certificate of Incorporation of the Incorporated herein by reference to
Registrant. Exhibit 3.1 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.
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 Incorporated herein by reference to
Certificate of Incorporation of the Registrant Exhibit 3.3 to the Company's Quarterly
(filed June 16, 1997). Report on Form 1-Q for the quarter ended
June 30, 1997.
4.1 Stock Purchase Agreement dated as of November Incorporated herein by reference to
19, 1993 by and among the Registrant, the Exhibit 4.1 to the Company's Registration
stockholders of the Registrant identified in Statement on Form S-1 (File No. 33-75004)
Part A of Schedule 1 thereto and the purchasers which was declared effective by the
of shares of the Registrant's Series A Preferred Commission on April 8, 1994.
Stock identified in Schedule 1 thereto
(including the Schedules thereto; Exhibits
omitted).
4.2 Registration Rights Agreement dated as of Incorporated herein by reference to
November 19, 1993, by and among the Registrant, Exhibit 4.2 to the Company's Registration
the investors listed on Schedule A thereto and Statement on Form S-1 (File No. 33-75004)
the security holders of the Registrant listed on which was declared effective by the
Schedule B thereto, together with Amendment No. Commission on April 8, 1994.
1.
4.3 Co-Sale Agreement dated as of November 19, 1993, Incorporated herein by reference to
by and among the Registrant, the managers listed Exhibit 4.3 to the Company's Registration
on Schedule A thereto and the investors listed Statement on Form S-1 (File No. 33-75004)
on Schedule B thereto. 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 Registration
listed in Annex 1 thereto. 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 Registration
and Donaldson, Lufkin & Jenrette Securities Statement on Form S-1 (File No. 33-75004)
Corporation. which was declared effective by the
Commission on April 8, 1994.
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4.6 Observation Rights Agreement dated as of Incorporated herein by reference to
November 19, 1993, between the Registrant and Exhibit 4.6 to the Company's Registration
certain stock purchasers. Statement on Form S-1 (File No. 33-75004)
which was declared effective by the
Commission on April 8, 1994.
4.7 Observation Rights Agreement dated as of Incorporated herein by reference to
November 19, 1993, between the Registrant and Exhibit 4.7 to the Company's Registration
certain note purchasers. 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 Registration
Northwestern Mutual Life Insurance Company, John Statement on Form S-1 (File No. 33-75004)
Hancock Mutual Life Insurance, Registrant and which was declared effective by the
Bank of Scotland London Nominees Limited. 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 Registration
Registrant and certain of its Securities Statement on Form S-1 (File No. 33-75004)
holders. 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 Annual
Northwestern Mutual Life Insurance Company, John Report on Form 10-K for the fiscal year
Hancock Mutual Life Insurance Company and North 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 Annual
Mutual Life Insurance Company, John Hancock Report on Form 10-K for the fiscal year
Mutual Life Insurance Company and North Atlantic 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 Annual
Insurance Company, John Hancock Mutual Life Report on Form 10-K for the fiscal year
Insurance Company and North Atlantic Smaller 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 Annual
holders of warrants listed on Schedule A Report on Form 10-K for the fiscal year
thereto, with respect to that certain Warrant ended December 31, 1995.
Agreement dated 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 Annual
certain note purchasers. Report on Form 10-K for the fiscal year
ended December 31, 1995.
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 Annual
the investors of Company listed on Schedule A Report on Form 10-K for the fiscal year
thereto and the security holders of Company ended December 31, 1995.
listed on 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 Annual
Association, Sumitomo Bank of California, BHF Report on Form 10-K for the fiscal year
Bank Aktiengesellschaft and Comerica ended December 31, 1995.
Bank-California.
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4.17 Stock Purchase Agreement dated June 10, 1996 by Incorporated herein by reference to
and among the Company and the investors listed Exhibit 4.17 to the Company's Quarterly
on Schedule A thereto. Report on Form 10-Q filed August 14, 1996.
4.18 Fourth Amendment to Registration Rights Incorporated herein by reference to
Agreement dated June 10, 1996 by and among Exhibit 4.18 to the Company's Quarterly
Company, the investors listed on Schedule A Report on Form 10-Q filed August 14, 1996.
thereto, the security holders of Company listed
on Schedule B thereto, the banks listed on
Schedule C thereto and each of the parties
listed on Schedule D thereto.
4.19 Certificate of Designation of Preferences of Incorporated herein by reference to
Series B Preferred Stock of The Cerplex Group, Exhibit 3.3 to the Company's Quarterly
Inc. Report on Form 10-Q filed August 14, 1996.
4.20 Waiver and Amendment Agreement dated October 31, Incorporated herein by reference to
1996 by and among the company and the Exhibit 4.17 to the Company's Annual
Noteholders. Report on Form 10-K for the fiscal year
ended December 31, 1996.
4.21 Waiver and Amendment Agreement dated December 9, Incorporated herein by reference to
1996 by and among the company and the Exhibit 4.18 to the Company's Annual
Noteholders. Report on Form 10-K for the fiscal year
ended December 31, 1996.
4.22 Side Letter dated March 28, 1997 by and among Incorporated herein by reference to
the 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 Annual
the Noteholders. 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 Annual
of the holders of warrants listed on Schedule A Report on Form 10-K for the fiscal year
thereto, which Second Amendment amends the ended December 31, 1996.
Warrant Agreement dated November 19, 1993 as
amended by the First Amendment to Warrant
Agreement dated April 15, 1996.
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 Annual
of the holders of warrants listed on Schedule A Report on Form 10-K for the fiscal year
thereto, which Second Amendment amends the 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 Annual
Fargo Bank, National Association; BHF-Bank Report on Form 10-K for the fiscal year
Aktiengesellschaft; and Citibank, N.A. 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 Quarterly
Company, the investors listed on Schedule A Report on Form 10-Q for the quarter ended
thereto, the security holders of the Company June 30, 1997.
listed on Schedule B 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 Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1997.
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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 Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1997.
4.30 Side letter dated August 6, 1997 by and among Incorporated herein by reference to
the Company and the Noteholders. Exhibit 4.30 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1997.
4.31 Sixth Amendment to Registration Rights Agreement Incorporated herein by reference to
dated as of August 20, 1997 by and among the Exhibit 4.31 to the Company's Current
Company, the investors listed on Schedule A Report on Form 8-K dated August 27, 1997.
thereto, the security holders of the Company
listed on Schedule B thereto, the banks listed
on Schedule C thereto, and the parties listed on
Schedule D thereto.
4.32 First Amendment Agreement dated as of August 20, Incorporated herein by reference to
1997, by and among the Company, The Northwestern Exhibit 4.32 to the Company's Current
Mutual Life Insurance Company, John Hancock Report on Form 8-K dated August 27, 1997.
Mutual Life Insurance Company and North Atlantic
Smaller Companies Investment Trust PLC.
4.33 Warrant Agreement dated as of August 20, 1997 by Incorporated herein by reference to
and between the Company, The Northwestern Mutual Exhibit 4.33 to the Company's Current
Life Insurance Company, John Hancock Mutual Life Report on Form 8-K dated August 27, 1997.
Insurance Company and North Atlantic Smaller
Companies Investment Trust PLC.
4.34 Third Amendment to Warrant Agreement dated as of Incorporated herein by reference to
August 20, 1997, by and among the Company and Exhibit 4.34 to the Company's Current
the Noteholders with respect to that certain Report on Form 8-K dated August 27, 1997.
Warrant Agreement dated as of April 15, 1996 by
and among the Company and the Noteholders.
4.35 Third Amendment to Warrant Agreement dated as of Incorporated herein by reference to
August 20, 1997, by and among the Company and Exhibit 4.35 to the Company's Current
the Noteholders with respect to that certain Report on Form 8-K dated August 27, 1997.
Warrant Agreement dated as of November 19, 1993
by and among the Company and the Noteholders.
4.36 Warrant Agreement dated as of August 20, 1997 by Incorporated herein by reference to
and between the Company and Citibank, N.A. Exhibit 4.36 to the Company's Current
Report on Form 8-K dated August 27, 1997.
4.37 Second Amendment to Observation Rights Agreement Incorporated herein by reference to
dated August 20, 1997 by and among the Company, Exhibit 4.37 to the Company's Current
The Northwestern Mutual Life Insurance Company Report on Form 8-K dated August 27, 1997.
and John Hancock Mutual Life Insurance Company.
10.1 The Registrant's 1990 Stock Option Plan (the Incorporated herein by reference to
"1990 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.
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10.3 Form of Stock Purchase Agreement pertaining to Incorporated herein by reference to
the 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.
10.4 The Registrant's 1993 Stock Option Plan (the Incorporated herein by reference to
"1993 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 Incorporated herein by reference to
directors and certain officers) pertaining to Exhibit 10.6 to the Company's Registration
the 1993 Plan. 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, Registration Statement on Form S-1 (File
together with Amendment to Master Agreement and No. 33-75004) which was declared effective
Task Order. by the Commission on April 8, 1994.
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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 (File
California corporation and a predecessor of the No. 33-75004) which was declared effective
Registrant), together with Amendments Nos. 1 and by the Commission on April 8, 1994.
2.
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 Incorporated herein by reference to
by and between Bull HN Information Systems, Inc. Exhibit 10.24 to the Company's
and the Registrant. Registration Statement on Form S-1 (File
No. 33-75004) which was declared effective
by the Commission on April 8, 1994.
10.16 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 Incorporated herein by reference to
Bull 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 Incorporated herein by reference to
Lease - Net dated November 29, 1990 by and among Exhibit 10.18 to the Company's
Kilroy Building 73 Partnership, Cerplex Registration Statement on Form S-1 (File
Incorporated and InCirT, together with Amendment No. 33-75004) which was declared effective
No. 1. by the Commission on April 8, 1994.
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.
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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 (File
McDonnell Douglas Realty Company and Novadyne. 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 (File
("Cartwright"), together with Addendum and No. 33-75004) which was declared effective
Sublease dated September 6, 1991 by and between by the Commission on April 8, 1994.
Cartwright and the Registrant.
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 Incorporated herein by reference to
(the "Credit Agreement") among The Cerplex Exhibit 10.24 to the Company's Annual
Group, Inc., as Borrower; the lenders listed Report on Form 10-K for the fiscal year
therein, as Lenders; and Wells Fargo Bank, ended January 1, 1995.
National 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 Quarterly
(the "Company"), the financial institutions Report on Form 10-Q for the quarter ended
listed on the signature pages thereof October 1, 1995.
("Lenders"), and Wells 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 Incorporated herein by reference to
Option Plan (Restated and Amended as of January Exhibit 10.26 to the Company's Quarterly
13, 1995). Report on Form 10-Q for the quarter ended
October 1, 1995.
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 Annual
signatures appear on the signature pages Report on Form 10-K for the fiscal year
thereof, as Lenders; Wells Fargo Bank, National ended December 31, 1995.
Association, as 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.
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10.30 Limited Waiver dated as of October 31, 1996 by Incorporated herein by reference to
and among the Company, Lenders and Exhibit 10.29 to the Company's Quarterly
Administrative Agent, and for certain limited Report on Form 10-Q for the quarter ended
purposes, the Subsidiaries, Modcomp/Cerplex September 29, 1996.
L.P., Modcomp Joint Venture, Inc., Modular
Computer Services, 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 Annual
institutions listed on the signature pages Report on Form 10-K for the fiscal year
thereof and Wells Fargo Bank, National ended December 31, 1996.
Association.
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 Annual
and among the Company, the financial Report on Form 10-K for the fiscal year
institutions listed on the signature pages ended December 31, 1996.
thereof ("Lenders") and 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.
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 Annual
Company, the financial institutions listed on Report on Form 10-K for the fiscal year
the signature pages thereof ("Lenders") and 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 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 the
Waiver dated as of May 30, 1997 and entered into Company's Registration Statement on Form
by and among the Company, the financial S-2 (Registration No. 333-28425) filed
institutions listed on the signature pages with the Securities and Exchange
thereof ("Lenders") and Wells Fargo Bank, Commission on June 3, 1997.
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.
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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 Quarterly
Company, the financial institutions listed on Report on Form 10-Q for the quarter ended
the signature pages thereof ("Lenders") and June 30, 1997.
Wells Fargo 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 Quarterly
the financial institutions listed on the Report on Form 10-Q for the quarter ended
signature pages thereof ("Lenders") and Wells June 30, 1997.
Fargo Bank, National Association as
administrative agent for the Lenders as
administrative agent for the Lenders and, for
certain limited purposes, certain subsidiaries
of the Company.
10.37 Letter from Nightingale & Associates, LLC to the Incorporated herein by reference to
Company dated June 30, 1997, together with Exhibit 10.37 to the Company's Quarterly
Letter from Nightingale & Associates, LLC to the Report on Form 10-Q for the quarter ended
Company dated August 18, 1997, amending terms of September 30, 1997.
the June 30, 1997 letter.
10.38 Irrevocable Proxy and Option Agreement dated Incorporated herein by reference to
January 30, 1998 among the Company and the Exhibit 99.2 to the Company's Current
stockholders listed on the signature pages Report on Form 8-K dated January 30, 1998.
thereof (Exhibit A to Merger Agreement).
10.39 Form of Affiliates Letter (Exhibit B to Merger Incorporated herein by reference to
Agreement). Exhibit 99.3 to the Company's Current
Report on Form 8-K dated January 30, 1998.
10.40 Stockholders Agreement dated January 30, 1998 Incorporated herein by reference to
between Welsh, Carson, Anderson & Stowe VII, Exhibit 99.4 to the Company's Current
L.P., a Delaware limited partnership ("WCAS"), Report on Form 8-K dated January 30, 1998.
Aurora and the Company.
10.41 Interim Management Agreement dated January 30, Incorporated herein by reference to
1998 between the Company and Aurora. Exhibit 99.5 to the Company's Current
Report on Form 8-K dated January 30, 1998.
10.42 Cerplex Note Purchase Agreement dated January Incorporated herein by reference to
30, 1998 ("Note Purchase Agreement") between the Exhibit 99.13 to the Company's Current
Company and Aurora. Report on Form 8-K dated January 30, 1998.
10.43 10% Subordinated Note Due June 30, 1998 of The Incorporated herein by reference to
Cerplex Group, Inc. as payor (Exhibit A to Note Exhibit 99.14 to the Company's Current
Purchase Agreement). Report on Form 8-K dated January 30, 1998.
10.44 Forbearance and Repayment Agreement dated Janu- Incorporated herein by reference to
ary 30, 1998 by and among the Company, Aurora Exhibit 99.15 to the Company's Current
and Citibank, N.A. Report on Form 8-K dated January 30, 1998.
10.45 Seventh Amendment to Credit Agreement and Incorporated herein by reference to
Limited Waiver dated January 30, 1998 by and Exhibit 99.16 to the Company's Current
among the Company, the financial institution Report on Form 8-K dated January 30, 1998.
listed on the signature page thereof ("Lender")
and Citibank, N.A., as successor to Wells Fargo
Bank, National Association, as administrative
agent for Lender.
10.46 Executive Officer Severance Policy Filed herein.
10.47 Addendum to Stock Option Plan Filed herein.
</TABLE>

44
<PAGE> 45

<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE METHOD OF FILING
- ------- ----- ----------------
<C> <S> <C>
21.1 List of Subsidiaries Filed herein.
23.1 Consent of KPMG Peat Marwick LLP, Independent Filed herein.
Public Accountants
27.1 Financial Data Schedules Filed herein.
</TABLE>

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended December 27,
1997.

45
<PAGE> 46

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Dated: March 3, 1998 THE CERPLEX GROUP, INC.

By: /s/ STEPHEN J. HOPKINS
----------------------------------
Stephen J. Hopkins
Chief Executive Officer
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ WILLIAM A. KLEIN Chairman of the Board March 3, 1998
- ----------------------------------------------------- of Directors
William A. Klein

/s/ STEPHEN J.HOPKINS Chief Executive Officer March 3, 1998
- ----------------------------------------------------- (Principal Executive Officer)
Stephen J. Hopkins

/s/ ROBERT W. HUGHES Senior Vice President of Finance March 3, 1998
- ----------------------------------------------------- and Chief Financial Officer
Robert W. Hughes (Principal Accounting Officer)

/s/ RICHARD C. DAVIS Director and President of March 3, 1998
- ----------------------------------------------------- International Operations
Richard C. Davis

/s/ ROBERT FINZI Director March 3, 1998
- -----------------------------------------------------
Robert Finzi

/s/ JEROME JACOBSON Director March 3, 1998
- -----------------------------------------------------
Jerome Jacobson

/s/ PATRICK JONES Director March 3, 1998
- -----------------------------------------------------
Patrick Jones

/s/ MYRON KUNIN Director March 3, 1998
- -----------------------------------------------------
Myron Kunin
</TABLE>

46
<PAGE> 47

THE CERPLEX GROUP, INC.

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

<TABLE>
<S> <C>
Independent Auditors Report................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Stockholders' Equity (Deficiency)
for the years ended December 31, 1997, 1996 and 1995...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Schedule I -- Condensed Financial Information of Registrant
as of and for the year ended December 31, 1997............ S-1
Schedule II -- Valuation and Qualifying Accounts for the
years ended December 31, 1997, 1996 and 1995.............. S-4
</TABLE>

All other financial statement schedules are omitted as the required
information is presented in the financial statements or the notes thereto or is
not necessary.

F-1
<PAGE> 48

INDEPENDENT AUDITORS' REPORT

The Board of Directors
The Cerplex Group, Inc.:

We have audited the accompanying consolidated balance sheets of The Cerplex
Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for each of the years in the three-year period ended December 31,
1997, as listed in the accompanying index. In connection with our audits of the
consolidated financial statements, we also have audited the consolidated
financial statement schedules for each of the years in the three-year period
ended December 31, 1997, as listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility of
Cerplex's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Cerplex
Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.

The accompanying consolidated financial statements and financial statement
schedules have been prepared assuming that Cerplex will continue as a going
concern. As discussed in Note 20 to the consolidated financial statements,
Cerplex has suffered recurring losses from operations, has net stockholders' and
working capital deficiencies and does not have the necessary funds to pay its
secured and unsecured debt obligations. These factors raise substantial doubt
about Cerplex's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 20. The consolidated
financial statements and financial statement schedules do not include any
adjustments that might result from the outcome of this uncertainty.

KPMG Peat Marwick LLP

Orange County, California
February 25, 1998

F-2
<PAGE> 49

THE CERPLEX GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 16,184 $ 23,782
Accounts receivable, net of allowances of $7,701 in 1997
and $9,053 in 1996..................................... 9,710 19,539
Inventories............................................... 5,522 17,326
Net assets of discontinued operations..................... -- 1,681
Prepaid expenses and other current assets................. 3,877 8,146
-------- --------
Total current assets...................................... 35,293 70,474
Property, plant and equipment, net.......................... 22,974 28,039
Goodwill, less accumulated amortization of $2,941 in 1996... -- 4,953
Other long-term assets...................................... 971 2,028
-------- --------
Total assets...................................... $ 59,238 $105,494
======== ========

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt......................... $ 45,998 $ 6,000
Notes payable............................................. 338 5,026
Accounts payable.......................................... 8,892 19,498
Accrued and other current liabilities..................... 26,675 25,347
Income taxes payable...................................... 698 1,729
-------- --------
Total current liabilities......................... 82,601 57,600
-------- --------
Long-term debt, less current portion........................ 2,960 56,817
Long-term obligations....................................... 6,214 6,214
Commitments and contingencies
Subsequent events
Stockholders' deficiency:
Preferred Stock, par value $.001 per share; 3,066,340
shares authorized, none issued and outstanding; 8,000
shares designated Series B Convertible Preferred Stock
of which 7,197 are issued and outstanding in 1996...... -- 7,197
Common Stock, par value $.001 per share; 60,000,000 shares
authorized; 36,390,084 and 14,110,949 issued and
outstanding in 1997 and 1996, respectively............. 36 14
Additional paid-in capital................................ 59,718 51,648
Notes receivable from stockholders........................ -- (139)
Unearned compensation..................................... -- (73)
Accumulated deficit....................................... (90,901) (74,414)
Cumulative translation adjustment......................... (1,390) 630
-------- --------
Total stockholders' deficiency.................... (32,537) (15,137)
-------- --------
Total liabilities and stockholders' deficiency.... $ 59,238 $105,494
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 50

THE CERPLEX GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales.................................................. $141,408 $191,493 $144,328
Cost of sales.............................................. 120,875 165,248 127,817
-------- -------- --------
Gross profit............................................. 20,533 26,245 16,511
Selling, general & administrative expenses................. 27,269 39,488 33,805
Restructuring charges...................................... 4,307 2,084 --
-------- -------- --------
Operating loss........................................... (11,043) (15,327) (17,294)
Equity in earnings from joint venture...................... -- 357 2,425
Gain on sale of division and subsidiaries.................. 6,213 450 --
Other expense, net......................................... (786) (2,881) (14)
Interest expense, net...................................... (8,223) (8,269) (5,075)
-------- -------- --------
Loss from continuing operations before taxes............. (13,839) (25,670) (19,958)
Provision for income taxes................................. 2,648 1,718 2,089
-------- -------- --------
Loss from continuing operations before discontinued
operations............................................ (16,487) (27,388) (22,047)
-------- -------- --------
Discontinued operations, net of income taxes:
Loss from operations..................................... -- -- (1,966)
Estimated loss from liquidation of discontinued
operations............................................ -- -- (15,381)
-------- -------- --------
Loss from discontinued operations........................ -- -- (17,347)
-------- -------- --------
Net loss................................................... $(16,487) $(27,388) $(39,394)
======== ======== ========
Basic and diluted loss per share:
Continuing operations.................................... $ (0.56) $ (2.24) $ (1.68)
Discontinued operations.................................. -- -- (1.33)
-------- -------- --------
Basic and diluted loss per share........................... $ (0.56) $ (2.24) $ (3.01)
======== ======== ========
Weighted average common shares used in the calculation of
loss per share........................................... 29,610 13,419 13,091
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.
F-4
<PAGE> 51

THE CERPLEX GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
CONVERTIBLE TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDERS'
---------------- ------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL OTHER DEFICIT (DEFICIENCY)
------ ------- ---------- ------ ---------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994........ -- $ -- 13,056,997 $13 $47,483 $ (379) $ (7,632) $ 39,485
Stock options exercised........... -- -- 70,683 -- 45 -- -- 45
Notes receivable from
stockholders.................... -- -- -- -- -- 73 -- 73
Net loss.......................... -- -- -- -- -- -- (39,394) (39,394)
Amortization of unearned
compensation.................... -- -- -- -- -- 71 -- 71
Translation adjustment............ -- -- -- -- -- (112) -- (112)
------ ------- ---------- --- ------- ------- -------- --------
Balance at December 31, 1995........ -- -- 13,127,680 13 47,528 (347) (47,026) 168
------ ------- ---------- --- ------- ------- -------- --------
Stock options and warrants
exercised....................... -- -- 348,276 -- 3,459 -- -- 3,459
Notes receivable from
stockholders.................... -- -- -- -- -- 87 -- 87
Issuance of convertible preferred
stock........................... 8,000 8,000 -- -- -- -- -- 8,000
Conversion of preferred stock..... (803) (803) 634,993 1 661 -- -- (141)
Discount on issuance of Series B
Convertible Preferred Stock..... -- (2,651) -- -- 2,651 -- -- --
Amortization of discount of Series
B Convertible Preferred Stock... -- 2,651 -- -- (2,651) -- -- --
Net loss.......................... -- -- -- -- -- -- (27,388) (27,388)
Amortization of unearned
compensation.................... -- -- -- -- -- 70 -- 70
Translation adjustment............ -- -- -- -- -- 608 -- 608
------ ------- ---------- --- ------- ------- -------- --------
Balance at December 31, 1996........ 7,197 7,197 14,110,949 14 51,648 418 (74,414) (15,137)
------ ------- ---------- --- ------- ------- -------- --------
Stock options and warrants
exercised....................... -- -- 26,305 -- -- -- -- --
Reduction of notes receivable from
stockholders.................... -- -- -- -- -- 139 -- 139
Conversion of preferred stock..... (7,197) (7,197) 22,252,830 22 7,175 -- -- --
Net loss.......................... -- -- -- -- -- -- (16,487) (16,487)
Amortization of unearned
compensation.................... -- -- -- -- -- 73 -- 73
Issuance of warrants in connection
with notes payable.............. -- -- -- -- 895 -- -- 895
Translation adjustment............ -- -- -- -- -- (2,020) -- (2,020)
------ ------- ---------- --- ------- ------- -------- --------
Balance at December 31, 1997........ -- $ -- 36,390,084 $36 $59,718 $(1,390) $(90,901) $(32,537)
====== ======= ========== === ======= ======= ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.
F-5
<PAGE> 52

THE CERPLEX GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(16,487) $(27,388) $(39,394)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 9,557 9,815 8,315
Amortization and writedown of contract rights........... -- -- 562
Amortization of unearned compensation................... 73 70 71
Foreign currency transaction gain (loss)................ 41 (43) (44)
Non-cash charges related to end-of-life programs........ -- -- 14,639
Non-cash charges for accounts receivable................ -- -- 6,820
Non-cash charge for loss on long-term investment........ -- 1,921 3,000
Restructuring charges................................... 4,307 2,084 --
Equity in earnings from joint venture................... -- (357) (2,425)
Gain on sale of division and subsidiaries............... (6,213) (450) --
Gain on sale of fixed assets............................ (17) -- --
(Increase) decrease in:
Accounts receivable................................... 1,235 13,139 (5,817)
Inventories........................................... 5,138 10,548 (6,845)
Prepaid expenses and other............................ 3,275 3,274 5,143
Investment in other long-term assets.................. -- (62) (1,345)
Net assets of discontinued operations................. -- 916 3,620
Increase (decrease) in:
Accounts payable...................................... (12,422) 3,874 9,664
Accrued liabilities................................... 5,229 (10,656) 1,017
Income taxes payable.................................. (1,031) (557) 222
-------- -------- --------
Net cash provided by (used in) operating activities..... (7,315) 6,128 (2,797)
-------- -------- --------
Cash flows from investing activities:
Purchase of plant and equipment, net...................... (4,128) (2,381) (7,549)
Acquisition of business, net of cash acquired............. -- 5,147 (4,500)
Distribution of earnings in joint venture................. -- 3,090 --
Proceeds from sale of fixed assets........................ 70 -- --
Proceeds from sale of division and subsidiaries net of
cash divested........................................... 19,341 3,500 --
-------- -------- --------
Net cash provided by (used in) investing activities..... 15,283 9,356 (12,049)
-------- -------- --------
Cash flows from financing activities:
Net increase (decrease) in notes payable to bank.......... (4,222) (2,431) 10,700
Proceeds from long-term debt, net......................... 8,000 -- 45
Proceeds from issuance of common stock, net............... -- 107 --
Proceeds from issuance of preferred stock................. -- 7,859 --
Decrease in notes receivables from stockholders........... -- 87 73
Payments of long-term debt................................ (17,307) (700) (1,588)
-------- -------- --------
Net cash provided by (used in) financing activities..... (13,529) 4,922 9,230
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................. (2,037) (431) (19)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents.... (7,598) 19,975 (5,635)
Cash and cash equivalents at beginning of year............ 23,782 3,807 9,442
-------- -------- --------
Cash and cash equivalents at end of year.................. $ 16,184 $ 23,782 $ 3,807
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.............................................. $ 5,700 $ 6,875 $ 5,299
======== ======== ========
Income taxes.......................................... $ 3,524 $ 1,753 $ 1,122
======== ======== ========
Acquisition of businesses:
Amount paid........................................... $ -- $ (8,977) $ (4,500)
Cash acquired......................................... -- 14,124 --
-------- -------- --------
$ -- $ 5,147 $ (4,500)
======== ======== ========
Supplemental schedule of non-cash activities:
Conversion of Series B Convertible Preferred Stock to
Common Stock......................................... $ 7,197 $ 803 $ --
======== ======== ========
Accrued interest added to notes payable............... $ 819 $ -- $ --
======== ======== ========
Exchange of finished goods inventories for trade
credits.............................................. $ -- $ 6,239 $ --
======== ======== ========
Purchase of assets for short term debt................ $ -- $ 600 $ --
======== ======== ========
Discount on issuance of Series B Convertible Preferred
Stock................................................ $ -- $ 2,651 $ --
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.
F-6
<PAGE> 53

THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) ORGANIZATION AND PRINCIPLES OF CONSOLIDATION

The Cerplex Group, Inc. ("Cerplex") was incorporated in California in May
1990 and reincorporated in Delaware in November 1993. Cerplex is a leading
independent provider of electronic parts repair, spare parts sales and
management and logistics services. Cerplex has developed extensive capabilities
in the repair, refurbishment, and testing of a wide range of electronic
equipment for the computer and peripheral, telecommunications and office
automation markets. Cerplex's extensive network of domestic and European
facilities enables it to service the diverse needs of leading electronic
equipment manufacturers.

The consolidated financial statements include the accounts of Cerplex and
its wholly-owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated in consolidation.

(B) CASH AND CASH EQUIVALENTS

Cerplex considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.

In May 1996, Cerplex 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, Cerplex 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 December
31, 1997 was $14.6 million.

Inventories are stated at the lower of cost (determined by the weighted
average method which approximates first-in, first-out) or market.

(D) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Depreciation for the
plants in the United Kingdom and France 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) GOODWILL AND OTHER LONG-LIVED ASSETS

Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, was being amortized on a straight-line basis over the
expected periods to be benefited. Long-lived assets and certain identifiable
intangibles to be held and used by Cerplex are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. This
Statement also requires that any such assets that are to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell, except
for assets covered by Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
Cerplex has identified

F-7
<PAGE> 54
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

certain impairment losses with regards to goodwill (See Note 5) and certain
property, plant and equipment (See Note 7) and has accordingly written down the
related assets based on their fair market value. Cerplex recorded impairment
losses of approximately $4.2 million and $1.2 million in 1997 and 1996,
respectively, of which $2.0 and $2.2 are included in restructuring charges and
selling, general and administrative expense, respectively, for 1997 and $0.6
million and $0.6 million are included in cost of sales and selling, general and
administrative expenses for 1996, respectively, in the accompanying consolidated
statements of operations.

(F) OTHER ASSETS

Long-term investments are recorded at cost. Cerplex periodically assesses
whether there has been other than temporary decline in the market value below
cost of an 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.

Cerplex has adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Cerplex's reported other investments are classified
as available-for-sale under SFAS No. 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. At December 31, 1997
and 1996, there were no significant unrealized holding gains or losses. Realized
gains, realized losses and declines in value, judged to be other than temporary,
are included in other income.

(G) FOREIGN CURRENCY TRANSLATION

The functional currency for each of Cerplex's foreign subsidiaries is their
respective local currency. 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 loss and are recorded as a
separate component of stockholders' equity (deficiency). Gains and losses
resulting from foreign currency transactions are included in net loss.

(H) INCOME TAXES

Cerplex accounts for income taxes using the asset and liability method for
financial accounting and reporting for income taxes. Current and deferred tax
balances are determined based on the difference between the financial statement
and tax basis of assets and liabilities using tax rates in effect for the year
in which the differences are expected to reverse.

(I) FISCAL YEAR-END AND RECLASSIFICATIONS

Cerplex's fiscal year is the 52 or 53 week period ending on the Saturday
closest to December 31. Prior to 1997, Cerplex's fiscal year ended on the Sunday
closest to December 31. Cerplex's fiscal years ended on December 27, 1997 for
1997, December 29, 1996 for 1996, and December 31, 1995 for 1995. For purposes
of presentation, Cerplex has indicated its accounting year as ending on December
31. Certain reclassifications have been made to the 1996 and 1995 consolidated
financial statements to conform to the 1997 presentation.

(J) 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.

F-8
<PAGE> 55
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(K) NET LOSS PER SHARE

Effective December 31, 1997, Cerplex adopted SFAS No. 128, "Earnings Per
Share". This statement replaces the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All loss per share amounts for all
periods have been presented and restated to conform to the SFAS No. 128
requirements (see Note 21).

Basic net loss per share is computed using the weighted average number of
common shares outstanding during the period. Discounts on the issuance of
Preferred Stock decrease/increase the net income (loss), respectively, for
determining basic and diluted net loss per share of Common Stock. Diluted net
loss per share excludes the effect of common stock equivalents, because their
effect would be anti-dilutive.

(L) 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. Actual amounts could differ from those estimates.

(M) FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires all entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value. SFAS No. 107 defines fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. As of December 31,
1997 and 1996, the carrying value of all debt approximates fair value as the
related interest rates approximate rates currently available to Cerplex. The
carrying value of all other financial instruments approximates fair value due to
the short-term nature of such instruments.

(N) STOCK OPTION PLAN

The disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," were effective for transactions entered into in fiscal years that
begin after December 15, 1995. This statement encourages entities to account for
employee stock option or similar equity instruments using a fair value approach
for all such plans. However, it also allows an entity to continue to measure
compensation cost for those plans using the method prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees." Those entities which elect to
remain with the accounting in APB No. 25 are required to include pro forma
disclosures of net income (loss) and earnings (loss) per share as if the fair
value-based method of accounting had been applied. Cerplex has elected to
continue to account for such plans under the provisions of APB No. 25.

(O) DISCOUNT ON CONVERTIBLE PREFERRED STOCK

During the second quarter of 1996, Cerplex issued 8,000 shares of Series B
Convertible Preferred Stock at $1,000 per share. The shares were convertible
into common stock of Cerplex. (See Note 16.) The discount resulting from the
beneficial conversion feature inherent in the transaction of $2.7 million was
treated as a dividend and recognized as a return to the preferred stockholders.
This feature had no impact on Cerplex's net loss for the year ended December 31,
1996.

F-9
<PAGE> 56
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(P) NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued SFAS Nos. 130
and 131, "Reporting Comprehensive Income" ("SFAS 130") and "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), respectively
(collectively, the "Statements"). The Statements are effective for fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for reporting
of comprehensive income and its components in annual financial statements. SFAS
131 establishes standards for reporting financial and descriptive information
about an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively. Application of the Statements' requirements is not expected to
have a material impact on Cerplex's consolidated financial position, results of
operations or loss per share data as currently reported.

NOTE 2 -- ACQUISITIONS AND SALES TRANSACTIONS

During 1997, 1996 and 1995, Cerplex acquired and sold businesses as
described below. The business acquisitions were accounted for by the purchase
method of accounting. The results of operations of the acquired and sold
businesses are included in Cerplex's consolidated statement of operations for
the periods in which they were owned by Cerplex.

INCIRT DIVISION

Effective April 1, 1996, Cerplex 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 which was
valued at fair market value at the time of sale. The gain on the sale of the
InCirT Division was $0.5 million. During 1996, Cerplex recorded an impairment
charge of $1.1 million due to the permanent decline in the fair market value of
the restricted common stock. During 1997, Cerplex sold all of the common stock
of Pen Interconnect for $0.5 million, resulting in an additional loss of $0.4
million. The impairment charge and loss on sale of the restricted common stock
are included in other expense in the accompanying consolidated statements of
operations.

CERPLEX SAS

In May 1996, Cerplex acquired Rank Xerox Limited's subsidiary ("RXL"),
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 obligations for taxes and employment related matters) related to the
acquisition, Cerplex reduced other long-term assets by the amount of negative
goodwill ($1.5 million) in accordance with APB No. 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,
Cerplex 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's current ratio greater than
one; and restrictions on guarantees with respect to Cerplex and its subsidiaries
(excluding Cerplex SAS). Accordingly, $14.6 million cash of Cerplex SAS, at
December 31, 1997, is generally not available to Cerplex for financing
operations outside of Cerplex SAS. In addition, Cerplex SAS entered into a

F-10
<PAGE> 57
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

MODCOMP/CERPLEX, L.P.

In April 1996, Cerplex acquired the remaining 51% interest in
MODCOMP/Cerplex, L.P. ("MODCOMP/Cerplex") for $2.8 million. As a result of
acquiring the remaining interest in MODCOMP/Cerplex, Cerplex consolidated the
results of operations and financial position of this entity effective April
1996. Prior to April 1996, Cerplex recorded its 49% interest in MODCOMP/Cerplex
using 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 No. 16, Business
Combinations, Cerplex reduced other long-term assets to zero and recorded the
remaining amount as negative goodwill ($0.5 million) which was being amortized
into operations over a five year period. Effective June 30, 1997, Cerplex sold
this subsidiary for approximately $8.5 million in cash resulting in a loss of
approximately $0.4 million.

PERIPHERAL COMPUTER SUPPORT, INC.

In June 1995, Cerplex acquired 100% of the stock of Peripheral Computer
Support, Inc. ("PCS") for $4.5 million plus a contingent earnout up to an
additional $1 million depending on future performance. Half of the earnout was
paid in 1996 and the remaining half paid from proceeds of the subsequent sale in
April 1997. PCS provides disk drive repairs and services in the United States
and Europe. In connection with the acquisition, Cerplex recorded goodwill of
$3.1 million.

On April 11, 1997, Cerplex sold PCS for $14.5 million in cash and the
cancellation of $500,000 of indebtedness. Of such amount, $8.3 million was used
to pay down bank debt, $0.5 million was placed into escrow, and approximately
$0.8 million 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,
Cerplex 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
(excluding the proceeds in escrow).
******

Assuming the sales of MODCOMP/Cerplex, L.P. and PCS occurred at the
beginning of 1997, the pro forma results of operations of Cerplex for the year
ended December 31, 1997 would have been as follows:

<TABLE>
<CAPTION>
PRO FORMA
(UNAUDITED)
-------------------------
(IN THOUSANDS, EXCEPT FOR
PER SHARE DATA)
<S> <C>
Net sales............................................... $119,432
Net loss................................................ (22,869)
Basic and diluted net loss per share.................... (0.77)
</TABLE>

NOTE 3 -- DISCONTINUED OPERATIONS

In September 1995, Cerplex decided to discontinue its end-of-life programs
segment of the business through a liquidation of remaining operations. In
connection with the decision to discontinue its end-of-life programs, Cerplex
provided $15.4 million for the estimated loss from liquidation of these
operations, primarily related to estimated losses from disposition of inventory
and fixed assets and write-off of other related assets.

F-11
<PAGE> 58
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The net assets of the discontinued operations at the end of December 1996
were comprised of the following:

<TABLE>
<CAPTION>
1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Accounts receivable....................................... $ 821
Inventories............................................... 297
Other assets.............................................. 599
Accounts payable.......................................... (36)
------
$1,681
======
</TABLE>

During 1997, the above net assets of the discontinued operations were
substantially liquidated.

The estimated loss on liquidation of its end-of-life programs has been
accounted for as discontinued operations and prior period financial statements
were restated to reflect discontinuance of this segment of the business as shown
below:

<TABLE>
<CAPTION>
1995
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Net sales................................................. $ 19,815
Net loss before taxes..................................... (1,924)
Provision for taxes....................................... 42
--------
Net loss from discontinued operations..................... (1,966)
Estimated loss from liquidation of discontinued
operations.............................................. (15,381)
--------
Net loss from discontinued operations..................... $(17,347)
========
</TABLE>

NOTE 4 -- RESTRUCTURING CHARGES

During the second quarter of 1997, Cerplex'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, Cerplex closed its Poughkeepsie, New York operation,
relocating it to Lawrence, Massachusetts. In addition, Cerplex consolidated its
Redmond, Washington and Tustin, California operations, transferring their
service programs to Cerplex's hub-based operations in northern and southern
California, Kentucky and Massachusetts. As a result of these actions, Cerplex
recorded a restructuring charge of $4.3 million, primarily consisting of
approximately $0.8 million for severance and termination benefits, approximately
$1.5 million relating to lease termination costs and approximately $2.0 million
relating to the write-down of plant and equipment related to vacated facilities.
During the remainder of 1997, Cerplex paid approximately $1.1 million of
severance and termination benefits and lease payments on vacated facilities. The
remaining balance of $1.2 million at December 31, 1997 mainly consists of lease
obligations for excess facilities and remaining severance and termination
benefits, and is expected to be paid in 1998.

During the third quarter of 1996, Cerplex closed its contract manufacturing
operations in Texas and its computer training operations in Redmond, Washington.
In connection with the closure of these operations, Cerplex recorded
restructuring charges of $2.1 million. The restructuring charges were related
to: (1) write-downs of property and equipment and other assets to future net
cash flows expected to be generated by the assets; and (2) accruals for lease
commitments, severance pay for approximately 180 employees and costs to complete
closure of the facilities. During the fourth quarter of fiscal 1996, the
restructuring provision was fully utilized.

F-12
<PAGE> 59
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5 -- GOODWILL

During the second quarter of 1997, Cerplex 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. Cerplex also
wrote-down an additional $0.5 million in goodwill in the second quarter of 1997
as a result of facility closures. During the fourth quarter of 1996, Cerplex
wrote-off $0.6 million of goodwill relating to its Apex division as it was not
deemed recoverable.

NOTE 6 -- INVENTORIES

Net inventories consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1997 1996
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Spare and repair parts...................................... $4,914 $11,455
Work-in-process............................................. 387 2,107
Finished goods.............................................. 221 3,764
------ -------
$5,522 $17,326
====== =======
</TABLE>

NOTE 7 -- PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is comprised of:

<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 5,482 $ 3,358
Buildings................................................... 9,855 12,810
Office furniture and fixtures............................... 1,646 1,672
Leasehold improvements...................................... 2,308 3,784
Machinery and equipment..................................... 9,565 10,244
Test equipment and tooling.................................. 1,770 1,740
Computer equipment.......................................... 5,446 6,260
Other....................................................... 1,220 1,109
-------- --------
37,292 40,977
Less: accumulated depreciation and amortization............. (14,318) (12,938)
-------- --------
$ 22,974 $ 28,039
======== ========
</TABLE>

During the second quarter of 1997 and the and third quarter of 1996,
Cerplex recorded impairment charges of approximately $2.2 and $0.5 million,
respectively, relating to property, plant and equipment as a result of facility
closures and idle equipment.

NOTE 8 -- LUCENT LITIGATION AND OTHER

During 1996, Cerplex acquired inventory consisting of used telephones from
Lucent. At December 31, 1996, Cerplex had $5.9 million of inventory, production
cost commitments and assets, related to the telephones acquired from Lucent,
which were subsequently sold for an equal value of trade credits to a Company
that specializes in worldwide corporate bartering. Cerplex agreed to continue to
repair and refurbish the remaining telephones and deliver all of the finished
telephones to the barter company. In accordance with authoritative accounting
literature regarding barter credits, the trade credits were stated at the fair
market

F-13
<PAGE> 60
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

value of the inventory transferred, and were included in prepaid expenses and
other current assets in the accompanying consolidated balance sheet at December
31, 1996. In June 1996, Cerplex 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 Cerplex by Lucent. Lucent
had invoiced Cerplex for an additional $0.6 million. Due to the quality of the
inventory and the lack of availability of spare parts to effect repairs, Cerplex
believed it had claims against Lucent. On October 7, 1996, Cerplex 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.

On October 10, 1997, Cerplex executed a settlement agreement with Lucent
pursuant to which Cerplex paid Lucent $150,000 and assigned all of the trade
credits previously received by Cerplex in exchange for the phones. Cerplex also
agreed to pay Lucent an additional $350,000 in six months or from any future
sales of phones or proceeds from any insurance claims relating to the phone
remarketing program, whichever comes first. In connection with this settlement,
Cerplex agreed to a stipulation for entry of judgment in the amount of $350,000.
Lucent has agreed not to enforce the stipulated judgment and to dismiss the
action if Cerplex pays Lucent the additional $350,000 within six months. As a
result of the settlement, Cerplex reversed approximately $2.8 million in
valuation reserves during the third quarter of 1997. Cerplex determined that the
allowance was not necessary in light of the above mentioned settlement which was
substantially completed in September 1997.

Cerplex is involved in legal proceedings from time to time in the ordinary
course of its business. Management does not believe any existing claims would
have a material adverse effect upon the financial position, results of
operations or liquidity of Cerplex.

NOTE 9 -- ACCRUED AND OTHER CURRENT LIABILITIES

Accrued and other current liabilities are comprised of:

<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accrued payroll and benefits................................ $12,957 $11,063
Contractual obligations..................................... 4,799 2,359
Accrued interest............................................ 1,392 1,411
Deferred revenue............................................ 4,113 66
Other....................................................... 3,414 10,448
------- -------
$26,675 $25,347
======= =======
</TABLE>

F-14
<PAGE> 61
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- LONG-TERM DEBT

Long-term debt is comprised of:

<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1997 1996
-------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Senior Term Loan(a)......................................... $ 29,945 $44,741
Series A 9.5% Senior Subordinated Notes(b).................. 15,813 14,601
Secured note payable to customer(c)......................... 2,960 2,970
Other....................................................... 240 505
-------- -------
48,958 62,817
Less current portion........................................ 45,998 (6,000)
-------- -------
Long-term debt.............................................. $ 2,960 $56,817
======== =======
</TABLE>

(a) Cerplex'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 1997, Cerplex 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, Cerplex 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, Cerplex 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, Cerplex entered into amendments to the Credit Agreement.
As compensation for the amendments, Cerplex repriced the 125,000 warrants issued
in April 1996 from $6.00 per share to $2.50 per share (See Note 16).

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, Cerplex 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. Cerplex 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, Cerplex was required to provide the lenders
with warrants to purchase 750,000 shares of Cerplex'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 (See Note 16). The April 1997 amendment to the Credit
Agreement included revised covenants for profitability, current ratio, minimum
tangible net worth, leverage and working capital.

In June 1997, Cerplex and the Lenders entered into another amendment to the
Credit Agreement (the "Sixth Amendment") 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 is 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%. The interest rate payable under the Credit Agreement was increased
significantly and is subject to significant

F-15
<PAGE> 62
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

further increases because Cerplex did not repay the balance outstanding under
the Credit Agreement at September 1, 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%.
At December 31, 1997, the interest rates were 15.625% and 19% for the term loan
and revolver, respectively. 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
offerings must be used to permanently reduce the term loans and/or the revolver.
Under the new agreement, $6,051,000 of the net proceeds from the sale of Modcomp
was used to pay down the term loan, and $2,000,000 of proceeds were used to pay
down the revolver. Cerplex reborrowed $2,000,000 of the Modcomp proceeds that
was used to pay down the revolver. The Sixth Amendment also resulted in revised
financial covenants.

The Sixth Amendment required the issuance of warrants to the Lenders to
purchase 1,262,188 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 (See
Note 16).

On January 30, 1998, the Credit Agreement was again amended to add a
minimum consolidated adjusted Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA") requirement, further restrict Cerplex's ability to pay
dividends on shares and make other junior payments and add as an event of
default under the Credit Agreement the parties' termination of the Merger
Agreement (See Note 19) and the failure to take certain steps necessary to
consummate the merger by certain deadlines prescribed by the Credit Agreement.
In addition, under the January 1998 amendment agreement, Citibank agreed to
waive compliance with certain requirements of the Credit Agreement, including
permitting up to $10,000,000 to be loaned by Aurora to Cerplex, permitting
execution of the Merger Agreement and consummation of the merger (See Note 19)
and waiving all other financial covenants for Cerplex's fiscal quarter ended
December 31, 1997 and for the period from and including December 31, 1997 to and
excluding April 30, 1998.

(b) In November 1993, Cerplex sold $17.3 million in principal amount of its
Series A 9.0% (changed to 9.5% in October 1994) Senior Subordinated Notes
("Series A") and $5.7 million in principal amount of its Series B 9.0% Senior
Subordinated Notes ("Series B") with 920,000 detachable warrants to purchase
common stock under Note Purchase Agreements. The detachable warrants were issued
at the option price of $.01 per share, resulting in an original issue discount
of $3.6 million. In May 1994, Cerplex extinguished early its Series B at the
principal amount of $5.7 million. The unamortized balance of the original issue
discount relating to Series A was $1,876,000 and $2,381,000 at December 31, 1997
and 1996, respectively. 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. Cerplex 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.

During part of 1996, Cerplex was in default of various covenants under the
Note Purchase Agreements, which resulted in a series of waivers and amendments.
In April 1996, Cerplex 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, Cerplex was
required to provide the Lenders 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 debt. In November 1996, Cerplex entered into another amendment to
the Note Purchase Agreements which revised certain financial covenants. As
compensation for the amendment, Cerplex repriced the warrants issued in April
1996 from $6.00 per share to $2.50 per share (See Note 16).

In 1997, Cerplex was again in default under the Note Purchase Agreements.
In April 1997, the Note Purchase Agreements were again amended revising certain
covenants. Interest is now payable semi-annually
F-16
<PAGE> 63
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

instead of quarterly. The term of the Note Purchase Agreements are unchanged
from the prior agreement. In consideration for the amendment, Cerplex repriced
the warrants issued in April 1996 to the April 4, 1997 market price of $0.60 per
share.

On June 30, 1997, Cerplex received waivers with respect to various
provisions of the Amended and Restated Note Purchase Agreement. On August 20,
1997, Cerplex completed negotiations with the subordinated note holders to
further amend the Amended and Restated Note Purchase Agreement resulting in the
First Amendment Agreement to the Amended and Restated Note Purchase Agreement.
The First Amendment Agreement increased the interest rate to 15%. The interest
payment of $819,375 that was due on August 19, 1997 was added to the principal
balance, which increased the principal outstanding under the Amended and
Restated Note Purchase Agreement to $18,069,375. Cerplex was also required to
issue warrants for 500,096 of shares of Common Stock at $0.59 per share (See
Note 16). Beginning in March 1998, interest is payable monthly, however, Cerplex
may elect to add the portion of interest representing the difference between
9.5% and 15% to the outstanding principal balance. As of December 31, 1997,
Cerplex was not in compliance with the covenants under the Amended and Restated
Note Purchase Agreement. In addition, the covenants as currently cast will be
significantly more restrictive as of June 1998. Therefore, Cerplex believes that
it will be in default again under such agreement at that time unless it is able
to successfully renegotiate the covenants. Therefore, the outstanding balance of
this note has been classified as current in the accompanying December 31, 1997
consolidated balance sheet. If Cerplex repays the balance outstanding under the
Amended and Restated Note Purchase Agreement on or before August 19, 1998, the
portion of interest expense representing the difference between 9.5% and 15%
will be forgiven and the warrants for 500,096 shares will be canceled.

On January 30, 1998 Welsh, Carson, Anderson & Stowe VII, L.P. ("WCAS")
purchased from the existing holders the Series A and warrants to purchase an
aggregate of 1,500,096 shares of Cerplex Common Stock. The purchase price for
the Series A and warrants was equal to 30% of the outstanding principal and
accrued interest as of that date. The prior holders of the Series A retained the
original warrants. WCAS agreed to waive all covenants and defer the February 19,
1998 scheduled interest payment and to add such amount to the outstanding
principal balance of the Series A. WCAS agreed that, immediately preceding the
merger, the warrants it acquired will be terminated and will not be considered
outstanding in determining the consideration to be received by the Cerplex
stockholders in the merger. WCAS also agreed that the Series A will be exchanged
for Senior Subordinated Notes of Aurora at an exchange rate which will reduce
the principal outstanding to an amount equal to the amount paid by WCAS for the
Series A. If the merger is not consummated, Cerplex has the option for a thirty
(30) day period to acquire the Series A and related warrants from WCAS for an
amount equal to the purchase price paid by WCAS.

(c) In July 1994, Cerplex acquired the operating assets of BT Repair Services
for cash and a L2.5 million non-interest bearing note (approximately $3.9
million at December 31, 1994) secured by the land and buildings. The note is
payable at the earlier of the point when orders from the customers reach a
cumulative L78 million (approximately $122 million) or five years from the
acquisition date. Cerplex is committed to pay BT L1.8 million (approximately
$3.0 million as of December 31, 1997) in 1999 or earlier if certain sales
volumes are reached. As of December 31, 1997, required sales volumes had not yet
been met. Management currently estimates that the note will not be repaid until
1999.

F-17
<PAGE> 64
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11 -- INCOME TAXES

Components of income (loss) from continuing operations before taxes consist
of the following:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
North America........................................ $(19,239) $(30,557) $(40,185)
Europe............................................... 5,400 4,887 2,922
-------- -------- --------
$(13,839) $(25,670) $(37,263)
======== ======== ========
</TABLE>

The income tax expense (benefit) consists of the following:

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................ $ -- $ -- $ --
Foreign................................................ 3,428 1,451 1,911
State.................................................. -- 40 65
------ ------ ------
3,428 1,491 1,976
------ ------ ------
Deferred:
Federal................................................ -- 51 32
Foreign................................................ (780) 161 (4)
State.................................................. -- 15 127
------ ------ ------
(780) 227 155
------ ------ ------
$2,648 $1,718 $2,131
====== ====== ======
</TABLE>

The income tax expense was allocated as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income from continuing operations........................ $2,648 $1,718 $2,089
Discontinued operations.................................. -- -- 42
------ ------ ------
$2,648 $1,718 $2,131
====== ====== ======
</TABLE>

The tax rate reconciliation is comprised of the following:

<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Computed expected tax benefit.......................... $(4,590) $(8,727) $(12,684)
State income taxes, net of federal..................... -- (509) (3,909)
Goodwill amortization.................................. -- -- (129)
Investments............................................ -- -- 268
Passive foreign investment income...................... 1,861 782 --
Foreign tax rate differences........................... 720 -- --
California net of operating loss not eligible for
carryforward......................................... 120 347 824
Change in valuation allowance.......................... 4,459 9,421 17,703
Other.................................................. 78 404 58
------- ------- --------
$ 2,648 $ 1,718 $ 2,131
======= ======= ========
</TABLE>

F-18
<PAGE> 65
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................... $19,879 $16,396 $ 8,289
Bad debts........................................... 2,956 3,150 1,802
Foreign tax credits................................. 5,714 3,430 1,741
Inventories......................................... 1,011 991 1,712
Investments......................................... 1,195 1,200 1,402
Property, plant and equipment....................... 935 844 940
Accrued liabilities................................. 1,103 301 765
Discontinued operations............................. -- 620 677
Amortization of intangibles......................... -- 174 645
Minimum tax credit.................................. 35 157 157
Other............................................... -- -- 77
------- ------- -------
Total gross deferred tax assets..................... 32,828 27,263 18,207
Less valuation allowance............................ (31,684) (27,225) (17,804)
------- ------- -------
Net deferred tax asset.............................. 1,144 38 403
Deferred tax liabilities.............................. (364) (38) (176)
------- ------- -------
Net deferred tax assets............................... $ 780 $ -- $ 227
======= ======= =======
</TABLE>

SFAS No. 109, "Accounting For Income Taxes," provides for the recognition
of deferred tax assets if realization of such assets is more likely than not.
Cerplex's valuation allowance reduced the deferred tax asset to the amount
realizable. Cerplex has provided a valuation allowance against net federal and
state deferred tax assets due to uncertainties surrounding their realization.
The remaining net deferred tax asset relates to temporary differences from
Cerplex's foreign operations. Management believes that it is more likely than
not that the tax benefit will be realized from either profitable future foreign
operations or carryback to taxes previously paid.

At December 31, 1997, Cerplex had net operating loss carryforwards ("NOLs")
of approximately $57.0 million for federal income tax purposes. If not utilized
earlier, the federal NOLs will start expiring in the year 2009. At December 31,
1997, Cerplex had a NOL of approximately $5.7 million for California income tax
purposes. The California NOL carryforward is limited to 50% of the apportioned
California loss. If not utilized earlier, the California NOLs will start
expiring in the year 2000. Cerplex also has Foreign Tax Credit carryforwards for
federal income tax purposes of approximately $5.7 million which are available to
offset federal income tax through the year 2000.

Certain changes in stock ownership can result in a limitation on the amount
of net operating loss and tax credit carryovers that can be utilized each year.
Cerplex may undergo such an ownership change as a result of an upcoming merger
(See Note 19), pending shareholder and regulatory approval. Consequently,
utilization of the net operating loss carryforwards and the deduction equivalent
of tax credit carryforwards will be significantly limited in future years.

F-19
<PAGE> 66
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12 -- GEOGRAPHIC SEGMENTS

The following table reflects information with respect to Cerplex's North
America and International operations:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales:
North America.................................... $ 57,791 $112,594 $107,795
Europe........................................... 83,617 78,899 36,533
-------- -------- --------
$141,408 $191,493 $144,328
======== ======== ========
Net income (loss):
North America.................................... $(19,397) $(30,851) $(41,247)
Europe........................................... 2,910 3,463 1,853
-------- -------- --------
$(16,487) $(27,388) $(39,394)
======== ======== ========
Identifiable assets:
North America.................................... $ 12,006 $ 48,617 $ 83,630
Europe........................................... 47,250 59,927 21,058
Eliminations..................................... (18) (3,050) (2,795)
-------- -------- --------
$ 59,238 $105,494 $101,893
======== ======== ========
</TABLE>

NOTE 13 -- INVESTMENT AND RETIREMENT PLANS

During 1995, Cerplex established a 401(k) Retirement Savings Plan for its
U.S. employees ("U.S. Plan"). Each participant may contribute up to 15% of his
compensation into the U.S. Plan subject to maximum limitations based on
compensation and Internal Revenue Service regulations. Cerplex does not make any
matching contributions into the U.S. Plan. In the event of a plan termination,
all participants are entitled to receive a distribution equal to their account
balance at that date.

In October 1996, Cerplex established a defined contribution plan for the
employees of Cerplex Ltd., a wholly-owned subsidiary of Cerplex operating in the
United Kingdom ("U.K. Plan"), not covered by the U.K. Pension Plan (see below).
Participating employees are allowed to contribute either 3% or 6% of their
annual compensation subject to maximum limitations based on compensation and
Inland Revenue Service regulations. Cerplex contributes an amount equal to 100%
of the employee's contributions in connection with the U.K. Plan. Company
contributions vest immediately. In the event the U.K. Plan is terminated, all
participants are entitled to receive a distribution equal to their account
balance at that date. Contributions to the U.K. Plan were approximately $16,000
and $38,000 for 1997 and 1996, respectively.

During 1995, Cerplex also established a defined benefit pension plan for
certain employees of Cerplex Ltd. ("U.K. Pension Plan"). Company contribution
rates have been actuarially assessed and are being amortized over the estimated
employees' working lives with Cerplex. Benefits are determined based on
employee's final pensionable pay. Pension expense and contributions to the UK
Pension Plan during 1997 were $0.8 million and $0.8 million, respectively, and
for 1996 were $1.1 million and $1.0 million, respectively.

F-20
<PAGE> 67
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth the funded status and amounts recognized in
Cerplex's consolidated balance sheets as of December 31, 1997 and 1996 and the
consolidated statements of operations for the years then ended for the U.K.
Pension Plan (dollars in thousands):

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................. $(1,968) $(1,312)
Accumulated benefit obligation............................ (1,968) (1,312)
Projected benefit obligation for service rendered to date... (3,280) (2,132)
Plan assets at fair value, December 31 (unaudited).......... 4,100 2,788
------- -------
Excess of plan assets over the projected benefit
obligation................................................ 820 656
Unrecognized net gain from past experience different from
that assumed.............................................. (1,020) (823)
------- -------
Accrued pension expense..................................... $ (200) $ (167)
======= =======
Net pension cost for the years included the following
components:
Service Cost.............................................. $ 992 $ 1,230
Interest cost on projected benefit obligation............. 189 98
Expected return on Plan assets............................ (328) (230)
Net amortization of unrecognized gain..................... (33) --
------- -------
Net periodic pension cost................................. $ 820 $ 1,098
======= =======
</TABLE>

The discount rate used in determining the actuarial present value of
benefit obligations was 7.0%. The expected long term range of return on assets
was 8.5%. The net periodic pension cost was determined using a 7.0% discount
rate.

NOTE 14 -- COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS

Cerplex leases the majority of its office and warehousing facilities and
certain equipment under noncancellable operating leases which expire at various
dates during the next eight years.

Rental expense, net of sublease income, for the years ended 1997, 1996 and
1995 was approximately $2.7 million, $4.9 million and $4.3 million,
respectively. Future minimum lease payments as of December 31, 1997 are as
follows:

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
- ----------- (DOLLARS IN THOUSANDS)
<S> <C> <C>
1998....................................................... $2,192
1999....................................................... 1,956
2000....................................................... 1,608
2001....................................................... 1,187
2002....................................................... 347
Thereafter................................................. 596
------
$7,886
======
</TABLE>

Cerplex subleases two of its facilities from a company which is owned by
certain officers of Cerplex (See Note 17). One sublease is on a month-to-month
basis and the other expired in July 1997. Cerplex incurred rental expense of
$798,000, $785,000 and $774,000 in 1997, 1996 and 1995, respectively, on such
subleases.

F-21
<PAGE> 68
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 15 -- STOCK-BASED COMPENSATION PLANS

Cerplex has two stock option plans, the Restated 1993 Stock Option Plan
("The 1993 Plan") and the 1990 Stock Option Plan ("The 1990 Plan"). Cerplex
accounts for these plans under APB No. 25, under which no employee compensation
cost has been recognized in the statement of operations.

THE 1993 PLAN

The 1993 Plan was adopted in December 1993. A total of 2,000,000 shares of
Common Stock have been authorized for issuance under the 1993 Plan. Individuals
eligible to receive option grants are employees (including officers) and
consultants of Cerplex. The 1993 Plan is administered by a committee of two or
more non-employee members of the Board of Directors ("Committee"). Eligible
individuals may be granted Incentive Stock Options at 100% of fair market value
of such shares on the grant date or nonstatutory options at no less than 85% of
fair market value.

Two types of stock appreciation rights are authorized for issuance. As of
December 31, 1997, no stock appreciation rights were issued. Tandem rights
provide the holders with the election to surrender their outstanding options for
an appreciation distribution from Cerplex equal to the excess of (a) the fair
market value of the vested shares of Common Stock subject to the surrendered
option over (b) the aggregate exercise price payable for such shares. Limited
rights may be granted to one or more officers of Cerplex subject to the
short-swing profit restrictions of the federal securities laws which will become
exercisable upon the acquisition of more than 50% of Cerplex's outstanding
voting stock pursuant to a hostile tender offer. Each option with such a limited
right outstanding for at least six months at the time of such tender offer will
be canceled, to the extent such option is at the time exercisable for vested
shares, in return for a cash distribution from Cerplex based upon the tender
offer price. The maximum number of shares of Common Stock for which any one
participant may be granted stock options and separately exercisable stock
appreciation rights will not exceed 500,000 shares.

THE 1990 PLAN

In November 1990, Cerplex adopted the 1990 Plan which authorized the
granting of options to employees, non-employee members of Cerplex's Board of
Directors, consultants and independent contractors to purchase shares of
Cerplex's Common Stock. Under the terms of the 1990 Plan, 2,095,225 options have
been authorized. Options may have a maximum term of 10 years from the grant
date, and may be exercisable over a period determined by the Plan Administrator.

Under the 1990 Plan, two types of options may be granted: (a) Incentive
Stock Options, which may be granted only to employees at option prices per share
equal to the fair market value of a share of Common Stock as determined by the
Board of Directors on the date of grant; and (b) Non-statutory Stock Options,
which may be granted at option prices per share at not less than eighty-five
percent (85%) of the fair market value of a share of Common Stock as determined
by the Board of Directors on the date of the option grant.

F-22
<PAGE> 69
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMPENSATION AND OPTION DISCLOSURES

Had employee compensation expense for these plans been determined
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation,"
Cerplex's basic and diluted net loss and net loss per share would have been
increased to the following pro forma amounts:

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net Loss:
As Reported..................................... $(16,487) $(27,388) $(39,394)
Pro Forma....................................... (17,770) (28,363) (39,679)
Basic and diluted loss per share:
As Reported..................................... (0.56) (2.24) (3.01)
Pro Forma....................................... (0.60) (2.31) (3.03)
</TABLE>

For purposes of the above pro forma calculation, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes single
option pricing model using the following weighted-average assumptions for grants
in 1997, 1996 and 1995, respectively: (a) risk-free interest rates of 6.5, 6.6
and 5.5 percent, (b) expected lives of 5.0, 5.5 and 5.0 years, (c) expected
dividend yields of 0% for all three years, and (d) a volatility rate of .50, .93
and .84.

Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.

A summary of the status of Cerplex's two stock option plans at the end of
December 1997, 1996, and 1995, and changes during the years then ended is as
follows:

<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ----------------------- -----------------------
WTD. AVG. WTD. AVG. WTD. AVG.
SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE
---------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning...... 1,609,175 $ 5.12 1,232,659 $ 4.79 669,951 $ 2.63
Granted................... 861,250 .36 926,000 3.73 715,000 6.66
Exercised................. (26,305) -- (348,276) 0.27 (70,683) 0.67
Forfeited................. (1,513,140) 4.98 (201,208) 5.10 (81,609) 6.74
---------- ----------- --------- ----------- --------- -----------
Outstanding, ending......... 930,980 2.55 1,609,175 $ 5.12 1,232,659 $ 4.79
========== =========== ========= =========== ========= ===========
Exercisable at end of
year...................... 116,645 $ 4.22 340,147 $ 6.37 451,370 $ 1.66
Weighted average fair value
of options granted........ $ 0.13 $ 0.74 $ 0.39
Weighted average contractual
life...................... 8.64 Years 9.0 Years 8.2 Years
</TABLE>

At December 31, 1997, the range of exercise prices for options outstanding
and exercisable were $0.27 to $7.50 and $0.30 to $6.75, respectively.

NOTE 16 -- STOCKHOLDERS' EQUITY (DEFICIENCY)

CONVERTIBLE PREFERRED STOCK

In June 1996, Cerplex issued 8,000 shares of Series B Preferred Stock at
$1,000 per share in a private placement. The Series B Preferred Stock was
convertible into Common Stock of Cerplex 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. In connection with the
issuance of the Series B Stock, Cerplex recorded a discount of $2.65 million to
reflect the initial conversion discount feature. The discount was

F-23
<PAGE> 70
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amortized over the 90-day holding period and is reflected in the accompanying
consolidated statement of stockholders' deficiency in 1996. The Series B
Preferred Stock had certain rights, privileges and preferences, including a
$2,000 per share preference in the event of a sale of Cerplex. The Board of
Directors could not pay dividends to the holders of Cerplex's Common Stock
unless and until the Board 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 was convertible. All 8,000 shares of the
Series B Preferred Stock had been converted in 22,887,823 shares of Common Stock
as of December 31, 1997.

STOCK WARRANTS

In April 1996, Cerplex issued 1,000,000 detachable warrants in connection
with amendments to the Note Purchase Agreements related to its Senior
Subordinated Notes and issued 125,000 detachable warrants in connection with an
amendment to the Credit Agreement. The warrants were exercisable when issued.
The warrants provided the holders the right to purchase 1,125,000 shares of
common stock at $6.00 per share. As a result of the issuance of the warrants,
Cerplex discounted the book value of the debt outstanding and increased paid-in
capital by the fair market value of the warrants by $3.0 million based on an
intrinsic warrant value of $2.70 per share. In November 1996, Cerplex, as
consideration for amendments to the Note Purchase Agreements and Credit
Agreement, repriced the exercise price of the warrants from $6.00 to $2.50 per
share. The repricing of the warrants provided an additional $0.3 million of
intrinsic value to the warrant holders, and accordingly, Cerplex discounted the
book value of the debt outstanding and increased paid-in capital by $0.3
million. In April 1997, when the Credit Agreement and the Note Purchase
Agreement were again amended, warrants to purchase an additional 750,000 shares
of common stock were issued to the Senior Note Holder at the current market
value of $0.60 per share. Additionally, in connection with the April 1997
amendment, the warrants issued in April 1996 were repriced at the current market
value of $0.60 per share. The April 1997 warrant issuance was valued at $375,000
and the repricing under the Note Purchase Agreement and Credit Agreement were
valued at $90,000 and $13,000, respectively.

In consideration for the Sixth Amendment and the Amended and Restated Note
Purchase Agreement in August 1997, Cerplex issued warrants to purchase 1,262,188
and 500,096 shares of common stock at the current market value of $0.59 per
share, respectively. Cerplex recorded $299,000 and $118,000, respectively, for
the intrinsic value of the warrants issued.

The discounts associated with all warrant valuations are amortized as
additional interest expense over the period of the related debt using the
interest method. The unamortized balance of the discounts relating to the Senior
Term Loan and the Series A 9.5% Senior Subordinated Notes were $263,000 and
$380,000, respectively, at December 31, 1997 and $106,000 and $268,000,
respectively, at December 31, 1996.

At December 31, 1996, 855,000 warrants were outstanding to purchase an
equivalent number of shares of common stock at $0.01 per share. These warrants
were issued to the holders of the Series B Notes and expire in May 2002. When
the Series B Notes were issued in November 1993, they had 920,000 detachable
warrants which were valued at $3.93 per warrant at the date of issuance. In
connection with the issuance of the Series B Notes, Cerplex recorded an original
issue discount of $3.6 million for the difference between the fair value of the
warrants at the time of issuance and the exercise price, which was reflected as
a reduction in the face value of the Series B Notes. No warrants were exercised
in 1997.

At December 31, 1997, 56,993 warrants were outstanding and exercisable to
purchase an equivalent number of shares of common stock at $8.80 per share.
These warrants expire in November 2002. No warrants were exercised in 1997.

F-24
<PAGE> 71
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NONRECURRING COMPENSATION RELATED TO EXCHANGE OF COMMON STOCK

In November 1993, certain officers, directors and employees of Cerplex
exchanged 1,200,000 shares of Common Stock for 1,200,000 shares of Series A
Preferred Stock. Based upon the difference between the fair market value of the
Common Stock and the Series A Preferred Stock as of such date, Cerplex recorded
a non-recurring noncash compensation charge of $4.3 million which was amortized
through December 1997, on a straight line basis.

NOTE 17 -- RELATED PARTY TRANSACTIONS

In December 1993, Cerplex purchased for $3.0 million a preferred stock
warrant from an affiliate of Novadyne which was written off in 1995. In 1997,
Cerplex and Novadyne signed a settlement agreement which resulted in Cerplex
receiving 92,000 shares of Novadyne, representing approximately 15% of the
outstanding shares of Novadyne. During 1997, 1996 and 1995, sales of repaired
parts and services to Novadyne were $1.4 million, $3.8 million and $5.9 million,
respectively. Receivables as of December 1997, 1996, and 1995 were $3.9 million,
$1.3 million, and $2.2 million, respectively. As of December 31, 1996, because
of the uncertainty of collection of receivables due from Novadyne, Cerplex
provided an allowance for the balance of $3.9 million. In addition, in January
1994, Cerplex began earning a management fee of $83,000 per month for thirty six
months from Novadyne. In May 1994, Cerplex purchased for $2.7 million electronic
parts from a third party and leased such parts to Novadyne. Cerplex received
rental income of $62,000 per month through September 1997.

Cerplex subleased certain real property for its operations in Irvine,
California and in Newburgh, New York from WC Cartwright Corporation, a
California corporation ("WC Cartwright"). Messrs. Klein, Kunin and Davis and Ms.
Carolyn J. Klein (the spouse of Mr. Klein) are officers, directors and principal
shareholders of WC Cartwright.

In 1996, Cerplex paid to WC Cartwright an aggregate of $540,000 in rent for
use of the real property located in Irvine, California and in 1997 and 1996 paid
$155,000 and $258,000, respectively, in rent for use of the real property
located in Newburgh, New York. Under its subleases with WC Cartwright, Cerplex
was obligated to remit monthly lease payments to WC Cartwright in the amount of
$44,982 through January 1997 with respect to the Irvine, California property,
and $21,010 to $22,204 per month (on a graduated rent basis) through July 1997
with respect to the Newburgh, New York real property.

During 1997, Cerplex established $139,000 of reserves for potentially
uncollectible notes receivable from stockholders.

NOTE 18 -- CONCENTRATION OF CREDIT RISK

Cerplex's revenues are primarily with Original Equipment Manufacturers
("OEMs") or Third Party Maintainers ("TPMs") in the computer and peripheral,
telecommunications and office automation industries located principally in the
United States and Europe. Cerplex performs ongoing credit evaluations of its
customers' financial condition and, generally, requires no collateral from its
customers. Credit risk is affected by conditions or occurrences within the
economy and the computer and peripheral, telecommunications and office
automation markets.

F-25
<PAGE> 72
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A substantial portion of Cerplex's business, including activities of
discontinued operations, was conducted with four to five major customers during
1997, 1996 and 1995. Following are net sales and accounts receivable to/from
such customers as of and for the years ended December 31, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
ACCOUNTS
CUSTOMER NET SALES RECEIVABLE
-------- --------- ----------
<S> <C> <C>
1997
Rank Xerox................................................ $45,479 $ --
British Telecommunications................................ 17,259 2,138
Digital Equipment Corporation............................. 15,843 1,934
IBM....................................................... 7,763 1,144
Hewlett Packard........................................... 6,317 576
1996
Rank Xerox................................................ $33,400 $ --
IBM....................................................... 23,672 1,863
British Telecommunications................................ 21,447 1,692
SpectraVision............................................. 6,007 --
Wang (formerly Bull)...................................... 1,621 219
1995
British Telecommunications................................ $33,449 $6,406
IBM....................................................... 32,037 6,044
SpectraVision............................................. 9,863 1,235
Wang (formerly Bull)...................................... 7,030 634
</TABLE>

NOTE 19 -- SUBSEQUENT EVENTS (UNAUDITED)

On January 30, 1998, Aurora Electronics, Inc., a Delaware corporation
("Aurora") signed a Definitive Merger Agreement ("Merger Agreement") with
Cerplex. As a result of the merger, Cerplex would become a wholly-owned
subsidiary of Aurora, and the current equity holders of Cerplex would be
entitled to receive in a tax-free exchange approximately 25% of the postmerger,
fully-diluted common stock of Aurora, after giving effect to the WCAS financing
described below. Under the terms of the Merger Agreement, each share of Cerplex
common stock would convert into 1.076368 shares of Aurora common stock. The
merger is subject to regulatory approvals and the satisfaction of certain other
conditions precedent, including securing acceptable senior bank financing.

Subject to the merger, Aurora's principal stockholder, WCAS, has agreed to
provide additional financing to Aurora in the form of $18 million of new
preferred stock and $15 million of new subordinated debt, and to exchange
approximately $11 million of outstanding Aurora subordinated debt and accrued
interest for $3.3 million of new preferred stock. After giving effect to the
merger and the WCAS financing, WCAS would own approximately 69.2% of the fully
diluted common stock of Aurora. The proceeds of the WCAS financing and the
proposed new senior bank financing would be used to repay approximately $30
million of outstanding senior bank obligations of Cerplex. In addition, at the
effective time of the merger, approximately $18 million of outstanding
subordinated notes of Cerplex, which have been purchased by WCAS, would be
canceled and exchanged for $5.7 million of the new subordinated notes of Aurora.

On January 30 and February 25, 1998, Aurora provided Cerplex with unsecured
loans in the amounts of $2 million and $1.5 million, respectively (the "Aurora
Loans"). The Aurora Loans bear interest at the rate of 10% and become due and
payable on June 30, 1998. Cerplex used the funds for working capital purposes.
The Aurora Loans contain certain restrictive covenants, including covenants
restricting change-in-control transactions, limiting indebtedness, restricting
certain payments and limiting the incurrence of liens, in each case

F-26
<PAGE> 73
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

unless approved by the Aurora Board of Directors, including an affirmative vote
of the director designated by WCAS.

NOTE 20 -- GOING CONCERN

Cerplex incurred significant losses from operations during 1997, 1996 and
1995, and, as of December 31, 1997, Cerplex's net working capital deficiency was
$47,308 and its stockholders' deficiency was $32,537. Cerplex does not have the
necessary funds to pay its secured and unsecured debt obligations. Subject to
the Merger as described in Note 19, Aurora's principal stockholder has agreed to
provide additional financing to Aurora in the form of $18 million of new
preferred stock and $15 million new subordinated debt. The proceeds from the new
debt and equity financings would be used to repay Cerplex's senior bank
obligation. In addition, at the effective time of the Merger, approximately $19
million of Cerplex's subordinated debt, which was purchased by Aurora's
principal stockholder on January 30, 1998, would be canceled and exchanged for
approximately $5.7 million of new subordinated notes. However, there can be no
assurances that Cerplex will be able to successfully complete the Merger and
continue as a going concern. If Cerplex is unsuccessful in completing the
Merger, it is possible that Cerplex's secured creditors will foreclose upon all
of the assets of Cerplex and pursue the dissolution of Cerplex.

NOTE 21 -- LOSS PER SHARE

As discussed in Note 1, Cerplex adopted SFAS No. 128 effective December 31,
1997. The following table illustrates the computation of basic and diluted loss
per share under the provisions of SFAS No. 128.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Numerator for basic and diluted loss per share --
net loss......................................... $(16,487) $(27,388) $(39,394)
Amortization of discount on Series B Convertible
Preferred Stock.................................. -- (2,651) --
-------- -------- --------
Numerator for basic and diluted earnings per
share............................................ $(16,487) $(30,039) $(39,394)
======== ======== ========
Denominator for basic and diluted loss per share --
weighted average number of common shares
outstanding during the period.................... 29,610 13,419 13,091
======== ======== ========
Basic and diluted loss per share................... $ (0.56) $ (2.24) $ (3.01)
======== ======== ========
</TABLE>

The computation of diluted loss per share for each of the years in the
three-year period ended December 31, 1997 excluded the effect of incremental
common shares attributable to the exercise of outstanding common stock options
and warrants and conversions of the Series B Convertible Preferred Stock because
their effect would be antidilutive (see Notes 15 and 16).

F-27
<PAGE> 74
THE CERPLEX GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 22 -- QUARTERLY INFORMATION (UNAUDITED)

Unaudited quarterly information for the quarters ended March 31, June 30,
September 30 and December 31 are as follows:

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1997
Net sales.............................. $46,340 $ 39,266 $ 26,571 $ 29,231
Gross profit........................... 7,511 2,019 6,851 4,152
Operating income (loss)................ (1,459) (13,439) 3,722 133
Net income (loss)...................... (5,003) (9,357) 1,029 (3,156)
Basic and diluted income (loss) per
share............................... $ (0.32) $ (0.30) $ 0.03 $ (0.09)
1996
Net sales.............................. $40,846 $ 51,339 $ 50,636 $ 48,672
Gross profit........................... 6,931 10,969 3,751 4,594
Operating income (loss)................ 144 2,099 (10,102) (7,350)
Net income (loss)...................... (1,573) 702 (12,940) (13,577)
Basic and diluted income (loss) per
share............................... $ (0.12) $ 0.01 $ (1.12) $ (0.99)
</TABLE>

During the fourth quarter of 1996, Cerplex took charges to income totaling
$9.6 million which represented adjustments to net realizable value of long-term
assets, reserves for excess and obsolete inventory and accounts receivable,
impairment of goodwill and miscellaneous writeoffs of plant and equipment and
other assets.

F-28
<PAGE> 75

THE CERPLEX GROUP, INC. AND SUBSIDIARIES

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Current assets:
Accounts receivable, net.................................. $ 4,972
Inventories............................................... 1,768
Prepaid expenses and other current assets................. 657
-------
Total current assets.............................. 7,397
Investments in subsidiaries................................. 16,752
Property, plant and equipment, net.......................... 3,638
Other long-term assets...................................... 974
-------
Total assets...................................... $28,761
=======
LIABILITIES & STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long term debt......................... $46,336
Accounts payable.......................................... 6,240
Accrued and other current liabilities..................... 8,722
-------
Total current liabilities......................... 61,298
Stockholders' deficiency:
Common stock.............................................. 36
Paid in capital........................................... 59,718
Retained earnings......................................... (90,901)
Cumulative translation adjustment......................... (1,390)
-------
Total stockholder's deficiency.................... (32,537)
-------
Total liabilities and stockholders' deficiency.... $28,761
=======
</TABLE>

(continued)

S-1
<PAGE> 76

THE CERPLEX GROUP, INC. AND SUBSIDIARIES

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Net sales................................................... $ 48,387
Cost of sales............................................... 45,574
--------
Gross profit.............................................. 2,813
Selling, general and administrative expenses................ 14,830
Restructuring charges....................................... 4,082
--------
Operating loss............................................ (16,099)
Equity in earnings of subsidiaries.......................... 2,370
Gain on sale of subsidiaries................................ 6,213
Other expense, net.......................................... (243)
Interest expense, net....................................... (8,728)
--------
Loss before income taxes.................................... (16,487)
Provision for income taxes.................................. --
--------
Net loss.................................................... $(16,487)
========
Basic and diluted loss per share............................ $ (0.56)
========
Weighted average common shares used in the calculation of
loss per share............................................ 29,610
========
</TABLE>

(continued)

S-2
<PAGE> 77

THE CERPLEX GROUP, INC. AND SUBSIDIARIES

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Net cash used in operating activities....................... $ (2,898)
Cash flows from investing activities:
Purchase of plant and equipment, net...................... (947)
Proceeds from sale of fixed assets........................ 70
Proceeds from sale of subsidiaries........................ 19,341
--------
Net cash provided by investing activities......... 18,464
--------
Cash flows from financing activities:
Net decrease in notes payable to bank..................... (4,222)
Proceeds from long-term debt, net......................... 8,000
Payments of long-term debt................................ (17,307)
--------
Net cash used in financing activities............. (13,529)
--------
Effect of exchange rate changes on cash..................... (2,037)
--------
Net change in cash and cash equivalents........... --
Cash and cash equivalents at beginning of period............ --
--------
Cash and cash equivalents at end of period.................. $ --
========
</TABLE>

S-3
<PAGE> 78

THE CERPLEX GROUP, INC. AND SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
BALANCE AT CHARGED CHARGED BALANCE
ALLOWANCE FOR BEGINNING TO COSTS AND AGAINST AT END OF
DOUBTFUL ACCOUNTS OF PERIOD EXPENSES ACCOUNTS OTHER PERIOD
----------------- ---------- ------------ -------- ----- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995................ $ 265 $7,293 $ (89) $ 114 $7,583
====== ====== ======= ===== ======
Year ended December 31, 1996................ $7,583 $4,785 $(4,263) $ 948 $9,053
====== ====== ======= ===== ======
Year ended December 31, 1997................ $9,053 $ 836 $(1,189) $(999) $7,701
====== ====== ======= ===== ======
</TABLE>

S-4
<PAGE> 79

THE CERPLEX GROUP, INC.

EXHIBIT INDEX

FISCAL YEAR ENDED DECEMBER 27, 1997

<TABLE>
<CAPTION>
SEQUENTIAL
PAGE
EXHIBIT DESCRIPTION OF EXHIBITS NUMBER
- ------- ----------------------- ----------
<C> <S> <C>
10.46 Executive Officer Severance Policy
10.47 Addendum to Stock Option Plan
21.1 List of Subsidiaries
23.1 Consent of KPMG Peat Marwick LLP, Independent Public
Accountants
27.1 Financial Data Schedules
</TABLE>

<PAGE> 1
EXHIBIT 10.46

THE CERPLEX GROUP, INC.

EXECUTIVE OFFICER SEVERANCE POLICY

The Cerplex Group, Inc. (the "Company") believes that the key to its
success is the retention of its team of Executive Officers (as defined below).
In order to retain those Executive Officers, and to assure them of adequate
severance pay in the event of a Change of Control, as defined below, the Company
adopts the following policy, effective as of February 17, 1997.

EXECUTIVE OFFICERS TO WHICH THE POLICY IS APPLICABLE

This policy is applicable to each of the following persons: William A.
Klein, Richard C. Davis, Robert W. Hughes and Philip E. Pietrowski (each, an
"Executive Officer"). The Board shall not delete any of the foregoing persons
from the list of Executive Officers; provided, however, any Executive Officer
who voluntarily resigns (other than a voluntary resignation which otherwise
qualifies as an Involuntary Termination) from the Company shall be deleted from
the list of Executive Officers and any Executive Officer who is terminated for
cause may be removed from the list. Cause shall be defined as (i) the continued
failure, after receipt of detailed written notice, of an Executive Officer to
follow the good faith direction of the Board, (ii) the commission of an
unauthorized willful act by an Executive Officer which is materially and
demonstrably injurious to the Company or (iii) the commission of a felony that
adversely impacts the Company or the ability of an Executive Officer to perform
his duties. The Board may add additional persons to the list of Executive
Officers.

SEVERANCE BENEFITS

In the event that an Executive Officer is Involuntarily Terminated upon,
preceding and in connection with, or within twelve (12) months of a Change of
Control (as defined below), such Executive Officer shall be entitled to receive
from the Company, within two (2) weeks of such termination (or, if later, within
two (2) weeks following the consummation of such Change of Control), an amount
equal to such Executive Officer's annual base salary for the year in which the
effective date for the Change in Control occurs. As used herein, the term
"Involuntarily Terminated" shall mean the termination of an Executive Officer's
service by reason of:

a. involuntary dismissal or discharge by the Company, or

b. voluntary resignation following (A) a change in position
with the Company which reduces the level of responsibility, (B) a
reduction in the level of compensation, (C) a relocation of place of
employment by more

<PAGE> 2

than twenty (20) miles, or (D) the creation of a hostile or otherwise
adverse work environment in which it is unreasonable to expect such
Executive Officer to continue to perform.

CHANGE OF CONTROL

For the purposes of this severance policy, the term "Change in Control"
means any one or more of the following:

(i) the successful acquisition by a person or related group of
persons, (other than the Company or a person that directly or indirectly
controls, is controlled by or is under common control with, the Company) of
beneficial ownership (within the meaning of Rule 13d-3 of the Securities
Exchange Act of 1934, as amended) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Company's outstanding
securities pursuant to a transaction or series of related transactions which the
Board does not at any time recommend the Company's stockholders to accept or
approve;

(ii) the first date within any period of thirty-six (36)
consecutive months or less on which there is effected a change in the
composition of the Company's Board such that a majority of the Board ceases, by
reason of one or more contested elections for Board membership, to be comprised
of individuals who either (i) have been members of the Company's Board
continuously since the beginning of such period or (ii) have been elected or
nominated for election as Board members during such period by at least a
majority of the Board members described in clause (i) who were still in office
at the time such election or nomination was approved by the Board;

(iii) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the state in which the Company is incorporated;

(iv) the sale, transfer or other disposition of all or
substantially all of the assets of the Company in complete liquidation or
dissolution of the Company, but only if, in connection with such liquidation or
dissolution, shareholders of the Company are entitled to receive cash or equity
securities of the acquiring entity. Liquidations or dissolutions pursuant to a
Chapter 11 proceeding or an assignment for the benefit of creditors shall not be
considered a Change in Control;

(v) any reverse merger in which the Company is the surviving
entity but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from the persons holding those
securities immediately prior to such merger; or

<PAGE> 3

(vi) the issuance by the Company to a single person or related
group of persons (other than the Company or a person that directly or indirectly
controls, is controlled by or is under common control with, the Company) of
securities possessing more than twenty-five percent (25%) of the total combined
voting power of the Company's outstanding securities (determined after such
issuance) in a single transaction or a series of related transactions; but only
if such person or related group of persons is represented by, or is entitled to
be represented by, a majority of the members of the Board of Directors following
such transaction or series of transactions.

<PAGE> 1
EXHIBIT 10.47

ADDENDUM
TO
STOCK OPTION AGREEMENT

The following provisions are hereby incorporated into, and are
hereby made a part of, each Stock Option Agreement (the "Option Agreement") by
and between The Cerplex Group, Inc. (the "Corporation") and
__________________________________ ("Optionee") evidencing the stock option (the
"Option") granted to Optionee under the terms of the Corporation's Restated 1993
Stock Option/Stock Issuance Plan, as amended, and such provisions shall be
effective immediately. All capitalized terms used in this Addendum, to the
extent not otherwise specifically defined herein, shall have the meanings
assigned to such terms in the Option Agreement.

ACCELERATION OF OPTION
IN CONNECTION WITH CORPORATE TRANSACTION

1. Immediately prior to the effective date of a Corporate
Transaction or, if earlier, upon Optionee's involuntary dismissal or discharge
by the Corporation (for reason other than Misconduct) following the execution of
the definitive acquisition agreement executed in connection with the Corporate
Transaction, the Option, to the extent outstanding at the time but not otherwise
fully exercisable, shall automatically accelerate so that the Option shall
become exercisable for all the Option Shares at the time subject to the Option
and may be exercised for any or all of those Option Shares as fully vested
shares. The Option shall remain so exercisable until the earlier of (i) the
Expiration Date of the option term (or sooner termination upon Optionee's
cessation of Service) or (ii) if the Option is not to be assumed or replaced in
connection with the Corporate Transaction, the effective date of the Corporate
Transaction.

2. For purposes of this Addendum, Misconduct shall mean (i)
Optionee's commission during the course of his or her employment of any
dishonest or fraudulent act; (ii) Optionee's conviction of a felony, whether or
not committed in the course of employment; or (iii) the willful and knowing
disclosure by the Optionee of any trade secrets or confidential information of
the Corporation to persons not authorized to receive such confidential
information.

3. The provisions of Paragraph 1 of this Addendum shall govern
the acceleration of the Option in connection with a Corporate Transaction or
upon an involuntary dismissal or discharge following execution of the definitive
acquisition agreement and shall supersede any provisions to the contrary in the
Option Agreement or the Plan.

<PAGE> 2

IN WITNESS WHEREOF, The Cerplex Group, Inc. has caused this
Addendum to be executed by its duly-authorized officer as of the Effective Date
specified below.

THE CERPLEX GROUP, INC.

By
--------------------------
Title
-----------------------

EFFECTIVE DATE: , 199
-------------- --

<PAGE> 1
EXHIBIT 21.1

Subsidiaries of The Cerplex Group, Inc.,
----------------------------------------

<TABLE>
<CAPTION>
JURISDICTION OF
ORGANIZATION AND TYPE OF
ENTITY ENTITY OWNERSHIP
------ ------------------------ ---------
<S> <C> <C>
CERTECH Technology, Inc. Texas corporation 100% by Cerplex

Cerplex Mass., Inc. Massachusetts corporation 100% by Cerplex

Cerplex Limited England and Wales 100% by Cerplex
corporation

Apex Computer Company Washington corporation 100% by Cerplex

Modcomp/Cerplex L.P. ("Modcomp") Delaware limited 44% by Cerplex Sub and
partnership 51% by MJVI

Modcomp Canada Ltd. Canada corporation 100% by Modcomp

Cerplex SAS French corporation 100% by Cerplex and
Cerplex Limited

Cerplex Subsidiary II, Inc. Delaware corporation 100% by Cerplex
</TABLE>

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

The Board of Directors
The Cerplex Group, Inc.:

We consent to incorporation by reference in the registration statements (Nos.
33-84946 and 333-18431) on Form S-8, the registration statement (No. 333-12581)
on Form S-3 and the registration statement (No. 333-28425) on Form S-2 of The
Cerplex Group, Inc. of our report dated February 25, 1998, relating to the
consolidated balance sheets of The Cerplex Group, Inc. and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' deficiency and cash flows for each of the years in the
three-year period ended December 31, 1997, and all related schedules, which
report appears in the December 31, 1997 annual report on Form 10-K of The
Cerplex Group, Inc. Our report dated February 25, 1998, contains an explanatory
paragraph that states that the Company has suffered recurring losses from
operations, has net stockholders' and working capital deficiencies and does not
have the necessary funds to pay its secured and unsecured debt obligations which
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements and financial statement schedules
do not include any adjustments that might result from the outcome of this
uncertainty.

KPMG PEAT MARWICK LLP

By: /s/ KPMG Peat Marwick LLP
--------------------------------

Orange County, California
February 27, 1998

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 16,184
<SECURITIES> 0
<RECEIVABLES> 17,411
<ALLOWANCES> 7,701
<INVENTORY> 5,522
<CURRENT-ASSETS> 35,293
<PP&E> 37,292
<DEPRECIATION> 14,318
<TOTAL-ASSETS> 59,238
<CURRENT-LIABILITIES> 82,601
<BONDS> 0
0
0
<COMMON> 59,754
<OTHER-SE> 92,291
<TOTAL-LIABILITY-AND-EQUITY> 59,238
<SALES> 0
<TOTAL-REVENUES> 141,408
<CGS> 0
<TOTAL-COSTS> 120,875
<OTHER-EXPENSES> 32,362
<LOSS-PROVISION> 836
<INTEREST-EXPENSE> 8,223
<INCOME-PRETAX> (13,839)
<INCOME-TAX> 2,648
<INCOME-CONTINUING> (16,487)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,487)
<EPS-PRIMARY> (.56)
<EPS-DILUTED> 0

</TABLE>