-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CahmF/cueuVbEsCT8ETCMHWEZMS+gTQljyEEERLzx2myrzNLQwXZtqFRAbtwIE6d 9LNBCs/9xvtHg6T2iTK+Yg== 0000892569-96-002349.txt : 19961115 0000892569-96-002349.hdr.sgml : 19961115 ACCESSION NUMBER: 0000892569-96-002349 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CERPLEX GROUP INC CENTRAL INDEX KEY: 0000915870 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 330411354 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23602 FILM NUMBER: 96661637 BUSINESS ADDRESS: STREET 1: 1382 BELL AVE CITY: TUSTIN STATE: CA ZIP: 92680 BUSINESS PHONE: 7142585600 MAIL ADDRESS: STREET 1: 1382 BELL AVENUE CITY: TUSTIN STATE: CA ZIP: 92680 10-Q 1 FORM 10-Q - PERIOD ENDED SEPTEMBER 29, 1996 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 29, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-23602 THE CERPLEX GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 33-0411354 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1382 Bell Avenue, Tustin, CA 92680 (Address of principal executive offices) (Zip Code) (714) 258-5600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the Registrant's Common Stock on November 8, 1996 was 13,451,944. 2 THE CERPLEX GROUP, INC. TABLE OF CONTENTS Page ---- PART 1 - FINANCIAL INFORMATION Consolidated Balance Sheets....................................... 4 Consolidated Statements of Operations............................. 5 Consolidated Statement of Stockholders' Equity (Deficiency)....... 6 Consolidated Statements of Cash Flows............................. 7 Notes to Consolidated Financial Statements........................ 8 Management's Discussion and Analysis.............................. 11 PART II - OTHER INFORMATION Legal Proceedings................................................. 18 Changes in Securities............................................. 18 Defaults Upon Senior Securities................................... 18 Submission of Matters to a Vote of Security Holders............... 18 Other Information................................................. 19 Exhibits and Reports on Form 8-K.................................. 24 SIGNATURE................................................................. 36 EXHIBIT INDEX............................................................. 37 2 3 PART I FINANCIAL INFORMATION 3 4 THE CERPLEX GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) (Unaudited)
September 29, December 31, 1996 1995 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 26,521 $ 3,807 Accounts receivable, net 23,301 30,102 Inventories 22,674 27,789 Net assets of discontinued operations 412 2,597 Prepaid expenses and other 7,116 2,267 --------- --------- Total current assets 80,024 66,562 Property, plant and equipment, net 28,390 17,988 Investment in joint venture 7,723 Goodwill 5,682 6,647 Other long-term assets 3,804 2,973 --------- --------- Total assets $ 117,900 $ 101,893 ========= ========= LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable $ 24,410 $ 17,024 Accrued liabilities 24,990 13,622 Short-term borrowings 45,188 Current portion of long-term debt 241 536 Income taxes payable 1,296 2,161 --------- --------- Total current liabilities 96,125 33,343 --------- --------- Long-term debt, less current portion 18,033 68,382 Other long-term liabilities 6,214 Stockholders' Equity: Preferred Stock, par value $.001; 3,066,340 shares authorized; 8,000 shares designated Series B Preferred Stock, all of which are issued and outstanding, aggregate liquidation preference of $16,000 7,859 Common Stock, par value $.001; 30,000,000 shares authorized; 13,440,011 and 13,127,680 issued and outstanding in 1996 and 1995, respectively 13 13 Additional paid-in capital 50,645 47,528 Notes receivable from stockholders (139) (226) Unearned compensation (90) (143) Accumulated deficit (60,837) (47,026) Cumulative translation adjustment 77 22 --------- --------- Total stockholders' equity (deficiency) (2,472) 168 --------- --------- Total liabilities and stockholders' equity (deficiency) $ 117,900 $ 101,893 ========= =========
See accompanying notes to consolidated financial statements 4 5 THE CERPLEX GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited)
Three months ended Nine months ended ---------------------------- -------------------------- September 29, October 1, September 29, October 1, ------------- ---------- ------------- ---------- 1996 1995 1996 1995 ---- ---- ---- ---- Net sales $ 50,636 $ 35,381 $ 142,821 $ 101,870 Cost of sales 46,885 32,450 121,170 86,888 -------- -------- --------- --------- Gross profit 3,751 2,931 21,651 14,982 Selling, general & administrative expenses 12,233 13,191 27,872 22,502 Restructuring charges 2,084 2,084 -------- -------- --------- --------- Operating income (loss) (10,566) (10,260) (8,305) (7,520) Equity in earnings from joint venture 347 357 1,506 Gain on sale of InCirT Division 450 Interest expense, net 1,811 1,295 4,980 3,740 -------- -------- --------- --------- Income (loss) from continuing operations before taxes (12,377) (11,208) (12,478) (9,754) Income taxes (benefit) 563 (1,775) 1,333 (1,281) -------- -------- --------- --------- Income (loss) from continuing operations (12,940) (9,433) (13,811) (8,473) -------- -------- --------- --------- Discontinued operations, net of income taxes: Income (loss) from operations (2,118) (1,966) Estimated loss from liquidation of discontinued operations (13,446) (13,446) -------- -------- --------- --------- Income (loss) from discontinued operations (15,564) (15,412) -------- -------- --------- --------- Net income (loss) $(12,940) $(24,997) $ (13,811) $ (23,885) ======== ======== ========= ========= Income (loss) per share: Continuing operations $ (0.96) $ (0.72) $ (1.04) $ (0.65) Discontinued operations (1.19) (1.18) -------- -------- --------- --------- Net income (loss) per share $ (0.96) $ (1.91) $ (1.04) $ (1.83) ======== ======== ========= ========= Weighted average common and common equivalent shares outstanding 13,422 13,108 13,332 13,081 ======== ======== ========= =========
See accompanying notes to consolidated financial statements 5 6 THE CERPLEX GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (in thousands, except share data) (Unaudited)
Total Preferred Stock Common Stock Additional Stockholders' --------------- ------------ Paid-In Accumulated Equity Shares Amount Shares Amount Capital Other Deficit (deficiency) ------ ------ ------ ------ ------- ----- ------- ------------ Balance at December 31, 1995 13,127,680 $13 $47,528 $ (347) $(47,026) $ 168 Stock options and warrants exercised 151,930 18 18 Notes receivable from stockholders (3) (3) Net loss (1,573) (1,573) Amortization of unearned compensation 18 18 Translation adjustment (129) (129) ----- ------ ---------- --- ------- ------ -------- ------- Balance at March 31, 1996 13,279,610 13 47,546 (461) (48,599) (1,501) Issuance of Series B Convertible Preferred Stock 8,000 $7,911 7,911 Issuance of warrants 3,037 3,037 Stock options and warrants exercised 122,857 28 28 Net income 702 702 Amortization of unearned compensation 17 17 Translation adjustment 128 128 ----- ------ ---------- --- ------- ------ -------- ------- Balance at June 30, 1996 8,000 7,911 13,402,467 13 50,611 (316) (47,897) 10,322 S-3 Registration Costs of Series B Convertible Preferred Stock (52) (52) Stock options and warrants exercised 37,544 34 34 Net loss (12,940) (12,940) Notes receivable from stockholders 90 90 Amortization of unearned compensation 18 18 Translation adjustment 56 56 ----- ------ ---------- --- -------- ------ -------- ------- Balance at September 29, 1996 8,000 $7,859 13,440,011 $13 $ 50,645 $ (152) $(60,837) $(2,472) ===== ====== ========== === ======== ====== ======== =======
See accompanying notes to consolidated financial statements 6 7 THE CERPLEX GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (Unaudited)
Nine Months Ended ----------------- September 29, 1996 October 1, 1995 ------------------ --------------- Cash flows from operating activities: Net income (loss) $(13,811) $(23,885) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 6,319 6,861 Amortization of unearned compensation 53 53 Foreign currency transaction (gain) loss 35 (100) Non-cash charges related to End-of-Life Programs 14,639 Equity in earnings of joint venture (356) (1,506) Distribution of earnings of joint venture 3,090 Gain on sale of InCirT Division (450) Decrease (increase) in: Accounts receivable 9,142 30 Inventories 5,108 (7,558) Prepaid expenses and other 4,166 (1,703) Investment in other long-term assets (1,391) 1,905 Net assets of discontinued operations 2,185 1,317 (Decrease) increase in: Accounts and notes payable 3,639 3,910 Accrued liabilities (8,611) 614 Income taxes payable (885) (449) -------- -------- Net cash provided by (used in) operating activities 8,233 (5,872) -------- -------- Cash flows from investing activities: Purchase of plant and equipment (1,181) (4,036) Acquisition of businesses, net of cash acquired* 5,147 (4,500) Proceeds from sale of InCirT Division 5,500 -------- -------- Net cash used in investing activities 9,466 (8,536) -------- -------- Cash flows from financing activities: Proceeds from long-term debt, net 8,014 Proceeds from issuance of preferred stock 7,859 Proceeds from issuance of stock, net 80 25 Decrease in notes receivable from stockholders 87 76 Principal payments of long-term debt (410) (1,687) Principal payments of short term borrowings (2,343) -------- -------- Net cash provided by (used in) financing activities 5,273 6,428 -------- -------- Effect of exchange rate changes on cash (258) 17 -------- -------- Net increase (decrease) in cash and cash equivalents 22,714 (7,963) Cash and cash equivalents at beginning of period 3,807 9,442 -------- -------- Cash and cash equivalents at end of period $ 26,521 $ 1,479 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 5,266 $ 3,646 ======== ======== Income taxes $ 1,753 $ 1,122 ======== ======== *Acquisition of Businesses Amount paid $ (8,977) $ (4,500)
See accompanying notes to consolidated financial statements 7 8 THE CERPLEX GROUP, INC. and subsidiaries
Cash Acquired $ 14,124 -------- -------- $ 5,147 $ (4,500) ======== ========
See accompanying notes to consolidated financial statements 8 9 THE CERPLEX GROUP, INC. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying financial information has been prepared in accordance with the instructions to Form 10-Q and therefore does not necessarily include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The Company's fiscal year is the 52 or 53-week period ending on the Sunday closest to December 31. In the opinion of management, the financial information for the three and nine-month periods ended September 29, 1996 and October 1, 1995, and at September 29, 1996 reflects all adjustments (which include only normal, recurring adjustments) necessary for a fair presentation thereof. During 1995, the Company discontinued its end-of-life programs, a segment of the business, through a liquidation of remaining operations. Prior period financial results have been restated to reflect the discontinuance of this segment of the Company. NOTE 2 - INCOME PER SHARE Net income (loss) per share has been computed using the weighted average number of common shares and dilutive common equivalent shares outstanding during each period presented. Common equivalent shares consist of convertible preferred stock, stock options and warrants, which were computed using the treasury stock method. Common stock equivalent shares are not included in the computation of net income (loss) per share for the three and nine-month periods ended September 29, 1996 and October 1, 1995, respectively, because their effect would be anti-dilutive. NOTE 3 - INVENTORIES Inventories consist of the following:
September 29, December 31, 1996 1995 ------------- ------------ (in thousands) Spare and repair parts $15,812 $18,001 Work-in-process 3,233 6,402 Finished goods 3,629 3,386 ------- ---------- $22,674 $27,789 ======= ==========
9 10 THE CERPLEX GROUP, INC. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - ISSUANCE OF CONVERTIBLE PREFERRED STOCK AND WARRANTS In June 1996, the Company issued 8,000 shares of Series B Preferred Stock ("Series B Stock") at $1,000 per share in a private placement. The Series B Stock is convertible into Common Stock at the option of each holder at the lower of $5.07 per share or 80% of the average closing bid price over a ten-day period ending three days prior to the date of conversion. The Series B Stock will automatically convert into Common Stock on the earlier of five-years from the date of issuance or such date as the Company's Common Stock has traded above $19.13 per share for a specified period of time. The Series B Stock has certain rights, privileges and preferences, including a $2,000 per share preference in the event of a sale of the Company. The Board of Directors may not pay dividends to the holders of the Company's Common Stock unless and until the Board has paid an equivalent dividend to the holders of Series B Stock based upon the number of shares of Common Stock into which each share of Series B Stock is convertible. In April 1996, the Company 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 provide the holders the right to purchase 1,125,000 shares of Common Stock at $6 per share. As a result of the issuance of the warrants, the Company discounted the book value of the debt outstanding and increased paid-in capital by the fair market value of the warrants ($3.0 million). The discount is being amortized as additional interest expense over the period of the related debt on the interest method. In October 1996, the Company, in connection with the receipt of waivers of certain breaches of the Note Purchase Agreements and Credit Agreement, decreased the exercise price of the warrants from $6.00 to $2.50 per share. NOTE 5 - ACQUISITIONS In May 1996, the Company acquired Rank Xerox Limited's subsidiary, Cerplex SAS, for $6.1 million, including estimated taxes, registration fees, legal, accounting and other out-of-pocket expenses of $1.2 million. Cerplex SAS is the legal successor to Rank Xerox et Compagnie ("Rank Xerox SNC"), which was transformed immediately prior to the acquisition from societe en nom collectif (a type of partnership) into a societe par actions simplifee (a form of limited liability company), at which time its name was changed to Cerplex SAS. Cerplex SAS performs repair and refurbishment services primarily for large copiers in the northern region of France, near Lille. Based on the allocation of the purchase price to the fair value of the assets and liabilities (including long term liabilities for taxes and employment related matters) related to the acquisition, the Company reduced other long-term assets by the amount of negative goodwill ($1.5 million) in accordance with APB #16, Business Combinations. As part of the acquisition, RXL provided sufficient cash to fund certain liabilities of Cerplex SAS. Under the terms of the Stock Purchase Agreement, the Company has agreed to certain financial covenants over a four-year period that limit the amount of dividends and payments in the nature of corporate charges paid by Cerplex SAS; the maintenance of Cerplex SAS' current ratio greater than one; and restrictions on guarantees with respect to Cerplex and its subsidiaries (excluding Cerplex SAS). Accordingly, the cash of Cerplex SAS ($19.9 million at September 29, 1996) is generally not available to Cerplex for financing operations outside of Cerplex SAS. In addition, Cerplex SAS entered into a four-year Supply and Services Agreement with RXL to provide repair and refurbishment services with guaranteed levels of production hours (at standard rates) that decline over the period of the contract. Revenues and income before taxes of Cerplex SAS since the date of the acquisition were $18.3 million and $2.7 million, respectively. 10 11 THE CERPLEX GROUP, INC. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In April 1996, the Company acquired the remaining 51% interest in Modcomp/Cerplex L.P. ("Modcomp/Cerplex") for $2.8 million. Modcomp/Cerplex is a supplier of real-time computer systems, products and services for the process control industry. As a result of the acquisition of the remaining interest in Modcomp/Cerplex, the Company consolidated the results of operations and financial position of this entity effective April 1, 1996. Prior to April 1, 1996, the Company recorded its 49% interest in Modcomp/Cerplex on the equity method of accounting. The fair value of the assets and liabilities acquired exceeded the purchase price by approximately $2.0 million, resulting in negative goodwill. In accordance with APB #16, Business Combinations, the Company reduced other long-term assets to zero and recorded the remaining amount as negative goodwill ($500,000) which is being amortized into income over a five year period. Revenues and income before taxes of Modcomp/Cerplex since the date of the acquisition were $19.1 million and $1.9 million, respectively. Assuming the above acquisitions occurred at the beginning of 1996, the pro forma results of operations of the Company for the nine months ended September 29, 1996 would have been as follows:
Pro Forma --------- (in thousands) Net Sales $177,289 Income from continuing operations (12,617) Net income per share from continuing operations (0.95)
NOTE 6 - SALE OF INCIRT DIVISION Effective April 1, 1996, the Company sold its contract manufacturing division in Tustin, California ("InCirT Division") to Pen Interconnect for $3.5 million in cash and approximately $2.0 million in restricted common stock. The gain on the sale of the InCirT Division was $450,000. NOTE 7 - RESTRUCTURING CHARGES During the three-month period ended September 29, 1996, the Company closed its contract manufacturing operations in Texas and its computer training operations in Redmond, Washington. In connection with the closure of these operations, the Company recorded restructuring charges of $2.1 million. The restructuring charges related to write-downs of inventories, property and equipment and other assets to net realizable value, provision for losses on collection of accounts receivable, accruals for lease commitments and severance pay, and costs to complete closure of the facilities. 11 12 THE CERPLEX GROUP, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This report contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed under "Item 5. Other Information (a) Risk Factors." OVERVIEW The Company is an independent provider of electronic parts repair and logistics services worldwide. During the third quarter of 1995, the Board of Directors approved a Liquidation Plan to discontinue its end-of-life programs, a segment of the Company, through liquidation of these operations. Net sales of end-of life programs contributed 26% and 71% of consolidated net sales during 1994 and 1993, respectively. In its end-of-life programs, the Company assumed all responsibilities for the support and repair of products which are no longer manufactured or are being phased out of manufacturing. Generally, when the Company undertook an end-of-life program, it acquired substantially all of the unique test equipment, repair equipment and inventories needed to support the program. Services provided by the Company under end-of-life programs include repair, provision of spare parts for a defined period of time, plant return and parts reclamation, engineering and document control, warehousing, and vendor certification and management. The Company no longer undertakes these programs. The Company's continuing operations are focused on depot repair, logistics services, technical help desk, remanufacturing and remarketing, and spare parts services. 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. RESULTS OF OPERATIONS Results of Continuing Operations The following table sets forth items from the Company's Consolidated Statement of Operations as a percentage of net sales.
Three Months Ended Nine Months Ended September 29, October 1, September 29, October 1, 1996 1995 1996 1995 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Costs of sales 92.6 91.7 84.8 85.3 Gross margin 7.4 8.3 15.2 14.7 Selling, general and administrative 24.2 37.3 19.5 22.1 Restructuring charges 4.1 1.5 Operating income (loss) (20.9) (29.0) (5.8) (7.4)
12 13 THE CERPLEX GROUP, INC. AND SUBSIDIARIES Net sales for the three and nine-month periods ended September 29, 1996 increased $15.3 million and $40.9 million, respectively, to $50.6 million and $142.8 million, respectively, over the net sales for the corresponding periods of 1995. The increase in net sales of 43.1% and 40.2% in the three and nine-month periods of 1996 compared to the corresponding periods of the prior year is primarily attributable to the acquisition of the remaining 51% interest in Modcomp/Cerplex in April 1996, the acquisition of Cerplex SAS in May 1996, and the acquisition of Peripheral Computer Support, Inc. ("PCS") in May 1995. The increase in sales from such acquisitions was partially offset by the sale of the InCirT Division, effective April 1, 1996, decreased sales of repair services to British Telecommunications plc ("BT") and decreased sales in the Company's North American operations. Gross profit as a percentage of net sales for the three and nine-month periods ended September 29, 1996 was 7.4% and 15.2%, respectively, compared to 8.3% and 14.7% during the corresponding periods of the prior year. The gross profit ratios during the three and nine-month periods ended September 29, 1996 were adversely affected by a variety of factors primarily relating to the Company's North American operations including, without limitation, changes in the Company's business and the business of third parties, and the impact of unprofitable contracts and operations such as the Company's Texas operations and Redmond, Washington computer training operations which were closed during the third quarter. The effect of these factors included, without limitation, approximately $2.5 million in inventory writedowns, $.8 million in operating losses related to the Texas operations, $.7 million in operating losses related to sales of telephones purchased from Lucent and $.4 in operating losses from the Company's computer training operations. The Company's gross profit ratios during the three and nine month periods ended October 1, 1995 were also adversely impacted by inventory writedowns and the impact of unprofitable operations. See further discussion below regarding North American operations. Selling, general and administrative expenses as a percentage of net sales for the three and nine-month periods ended September 29, 1996 were 24.2% and 19.5%, respectively, compared to 37.3% and 22.1% during the corresponding periods of the prior year. Selling, general and administrative expenses during the three-month periods ended September 29, 1996 and October 1, 1995, respectively, included provisions for estimated losses on collection of accounts receivable and other assets of $2.0 million and $3.2 million, respectively, and, during the three-month period ended October 1, 1995, a $3.0 million provision for loss on an investment in a stock purchase warrant of Novadyne Computer Systems, Inc. Excluding these items, selling, general and administrative expenses as a percentage of net sales for the three and nine-month periods ended September 29, 1996 were 20.2% and 18.1%, respectively, compared to 19.8% and 16.0% during the corresponding periods of the prior year. The increase in selling, general and administrative expenses as a percentage of net sales is primarily due to increased corporate overhead related to the Company's expanded corporate staff and increased selling, general and administrative expenses related to PCS and Modcomp/Cerplex. During the three-month period ended September 29, 1996, the Company closed its contract manufacturing operations in Texas and its computer training operations in Redmond, Washington. In connection with the closure of these operations, the Company recorded restructuring charges of $2.1 million. The restructuring charges related to write-downs of inventories, property and equipment and other assets to net realizable value, provision for losses on collection of accounts receivable, accruals for lease commitments and severance pay, and costs to complete closure of the facilities. 13 14 THE CERPLEX GROUP, INC. AND SUBSIDIARIES Income (Loss) from Continuing Operations
Three Months Ended Nine Months Ended September 29, October 1, September 29, October 1, 1996 1995 1996 1995 ---- ---- ---- ---- (in thousands) Operating income (loss) $(10,566) $(10,260) $ (8,305) $(7,520) Equity in earnings of joint venture 347 357 1,506 Gain on sale of InCirT Division 450 Interest expense, net (1,811) (1,295) (4,980) (3,740) -------- -------- -------- ------- Income (loss) from continuing $(12,377) $(11,208) $(12,478) $(9,754) operations ======== ======== ======== =======
The operating losses during the three and nine month periods ending September 29, 1996 resulted primarily from a variety of factors affecting North American operations including, without limitation, declining sales and unprofitable contracts, changes in the Company's business and the business of the Company's customers, and the closure of unprofitable operations. To a lesser extent, the operating losses for the three-month period ending September 29, 1996 resulted from the effect declining sales to BT had on the Company's operations in the United Kingdom. Commencing during the third quarter of 1995, the Company discontinued its end-of-life programs and commenced a process to consolidate its North American depot operations into fewer, strategically located facilities. These actions have included closing the Company's Anaheim repair depot, consolidation of certain of the Company's Northern, CA repair depots into Livermore, CA, disposition of the Company's contract manufacturing operations in Tustin, CA (see Note 6), closing the Company's contract and repair operations in Texas, and closing the Company's computer training operations in Redmond, CA. As a result of the foregoing, the Company has substantially reduced the North American operations fixed costs of operations. The Company has recently reorganized its North American operations into two business lines; repair depots and spare parts sales. In addition, the Company has opened two new repair depots in Ontario, CA and Louisville, Kentucky, to improve its strategic location to major transportation centers. Although these repair depots are still in the start-up phase, the Company expects these locations will focus on high volume throughput for designated OEMs in line with its service outsourcing strategy. Equity in earnings of joint venture relates to the Company's ownership interest in Modcomp/Cerplex. As discussed in Note 5 - Acquisitions, the Company acquired the remaining 51% in Modcomp/Cerplex effective April 1, 1996. As a result, the Company consolidated the results of operations and financial position of this entity effective April 1, 1996. Prior to April 1, 1996, the Company recorded its 49% interest in Modcomp/Cerplex on the equity method of accounting. Effective April 1, 1996, the Company sold its contract manufacturing division in Tustin, CA to Pen Interconnect for $3.5 million in cash and restricted common stock valued at approximately $2 million at the time of the acquisition. The gain on the sale of the InCirT Division was $450,000. Interest expense for the three and nine-month periods ended September 29, 1996 increased $516,000 and $1,240,000 as a result of increased average borrowings under the Company's credit facilities and a higher weighted average interest rate. Average borrowings outstanding were $64.9 million during the nine-month period ended September 29, 1996 compared to $58.9 million during the nine-month period 14 15 THE CERPLEX GROUP, INC. AND SUBSIDIARIES ended October 1, 1995. The effective interest rate on credit facilities increased to 10.24% during the nine-month period ended September 29, 1996 from 8.47% during the nine-month period ended October 1, 1995. Income Taxes Income tax expense for the nine months ended September 29, 1996 is primarily related to income taxes on earnings of the Company's operations in Europe at an effective tax rate of 32%. The Company has not recorded an income tax benefit related to operating losses in the United States, and, accordingly, a full valuation allowance for deferred tax assets has continued to be maintained due to uncertainties surrounding their realization. The Company recorded an income tax benefit during the nine-month period ended October 1, 1995, of $1.3 million related to projected losses from continuing operations for 1996. No income tax benefit was recorded for the estimated loss from liquidation of discontinued operations. Discontinued Operations During 1995, the Company discontinued its end-of-life programs, a segment of the business, through a liquidation of remaining operations. During the nine-month period ended September 29, 1996, net sales of discontinued operations were $8.4 million. No gain or loss on discontinued operations was recorded during the nine-month period ended September 29, 1996. LIQUIDITY AND CAPITAL RESOURCES On October 12, 1994, the Company obtained a $60 million revolving line of credit ("Credit Facility") from a group of banks led by Wells Fargo Bank (the "Lenders"). The Credit Facility replaced the Company's $10 million credit line with CoastFed Business Credit Corp. ("CoastFed"). The Company used $6.1 million to retire the CoastFed line and $11.0 million to retire an outstanding note payable to IBM. The Credit Facility originally matured in October 1997 and provided for borrowings based on the Company continuing to meet certain financial covenants for leverage, cash flow, tangible net worth and liquidity ratio as defined in the Credit Agreement dated October 12, 1994, by and among the Company and the Lenders (the "Credit Agreement"). The interest rate on the Credit Facility as of December 31, 1995 was 8.81% based upon a blend of LIBOR and prime lending rates. Borrowings under the Credit Facility are secured by all of the Company's assets, including the assets and stock of the Company's subsidiaries. At December 31, 1995, the Company was not in compliance with the contractual obligations and financial covenants of the Credit Agreement. The financial covenants which the Company was not in compliance were liquidity ratio, minimum cash flow coverage, maximum leverage ratio, minimum net worth, and minimum past due accounts receivable. In April 1996, the Company entered into an amended Credit Agreement (the "Amended Credit Agreement") that reduced the maximum amount available under the line of credit from $60 million to $48 million and requires reductions in commitments to $47 million at September 29, 1996, $45 million at December 31, 1996, and $43 million at March 15, 1997. The interest rate on the Credit Facility has been increased to prime plus 2.25% and maturity date has been accelerated from October 1997 to March 31, 1997. The interest rate on the Credit Facility as of September 29, 1996 was 10.5% based upon prime lending rates. In consideration for the amendment to the Credit Agreement, the Company was required to provide the Lenders warrants to purchase 125,000 shares of common stock at $6 per share and pay certain commitment fees and out-of-pocket expenses. The Amended Credit Agreement includes revised covenants for liquidity, leverage, net worth, profitability and collateral, and requires additional reductions in outstanding borrowings (generally determined on the basis of percentage of proceeds) in the event of 15 16 THE CERPLEX GROUP, INC. AND SUBSIDIARIES the sale of assets and issuance of additional equity or certain excess cash flow as such terms are defined in the Amended Credit Agreement. The Company was in violation of certain financial covenants under the Amended Credit Agreement during the three-month period ended September 29, 1996. In consideration of decreasing the exercise price of the above warrants from $6 per share to $2.50, the Lenders have waived these covenant violations through November 30, 1996. The Company intends to negotiate an amendment to the Credit Facility, although there is no assurance that the Company will be successful in this regard. In November 1993, the Company sold $17.3 million in principal amount of its Series A 9.0% (changed to 9.5% in October 1994) Senior Subordinated Notes and $5.7 million in principal amount of its Series B 9.0% Senior Subordinated Notes with 920,000 detachable warrants to purchase Common Stock. The detachable warrants were issued at the option price of $.01 per share resulting in an original issue discount of $3.6 million on the Series B 9.0% Senior Subordinated Notes. The Series A Senior Subordinated Notes accrued interest at the rate of 9.5% per annum, payable quarterly, with principal amount thereof payable in three equal installments on November 9, in the years 1999, 2000 and 2001. The Company is subject to certain financial and other covenants which include restrictions on the incurrence of additional debt, payment of any dividends and certain other cash disbursements as well as the maintenance of certain financial ratios as defined in the Note Purchase Agreements pursuant to which the Senior Subordinated Notes were sold to the Company. At December 31, 1995, the Company was not in compliance with the contractual obligations and financial covenants of the Note Purchase Agreements. The financial covenants with which the Company was not in compliance were maximum leverage ratio, minimum net worth and minimum fixed charge ratio. In April 1996, the Company entered into an amendment to the Note Purchase Agreements that revised the covenants for maximum leverage, net worth and fixed charges. In consideration for the amendment to the Note Purchase Agreements, the Company was required to provide the Senior Note Holders warrants to purchase 1,000,000 shares of Common Stock at $6 per share. As a result of the issuance of the warrants, the Company discounted the book value of the debt outstanding and increased paid-in capital by the fair market value of the warrants ($3.0 million). The discount is being amortized as additional interest expense over the period of the related debt on the interest method. The Company was in violation of certain financial covenants under the Note Purchase Agreements during the three-month period ended September 29, 1996. In consideration of decreasing the exercise price of the above warrants from $6 per share to $2.50, the Senior Note Holders have waived these covenant violations through November 30, 1996. The Company intends to negotiate an amendment to the Note Purchase Agreements, although there is no assurance that the Company will be successful in this regard. The Company's primary sources for liquidity are cash flow from operations and its ability to reduce working capital requirements. The Company does not have available capacity under its Credit Agreement and is required to reduce borrowings during 1996 and repay the remaining borrowings at March 1997. Accordingly, additional funds will be needed to finance the Company's operations from the sale of assets, reduction in working capital, and/or obtaining additional equity or long-term debt. There can be no assurance that additional funds will be available when needed or, if available, that the terms of such transactions will be favorable to the Company and its stockholders. Effective April 1, 1996, the Company sold its contract manufacturing operations in Tustin, California for $3.5 million cash and restricted Common Stock valued at approximately $2.0 million at the time of the acquisition. The Company was required to use $2.0 million of the proceeds from the sale of the 16 17 THE CERPLEX GROUP, INC. AND SUBSIDIARIES InCirT Division to repay a portion of the borrowings under the Credit Agreement. In April 1996, the Company received a distribution from its earnings of Modcomp/Cerplex of $3.0 million which was used to acquire the remaining 51% interest of this partnership. In May 1996, the Company acquired Rank Xerox Limited's subsidiary, Cerplex SAS, for $6.1 million, including estimated taxes, registration fees, legal, accounting and other out-of-pocket expenses of $1.2 million. Cerplex SAS is the legal successor to Rank Xerox et Compagnie ("Rank Xerox SNC"), which was transformed immediately prior to the acquisition from a 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. Under the terms of the Stock Purchase Agreement, the Company has agreed to certain financial covenants over a four-year period that limit the amount of dividends and payments in the nature of corporate charges paid by Cerplex SAS; the maintenance of Cerplex SAS' current ratio greater than one; and restrictions on guarantees with respect to Cerplex and its subsidiaries (excluding Cerplex SAS). Accordingly, the cash of Cerplex SAS ($19.9 million at September 29, 1996) is generally not available to Cerplex for financing operations outside of Cerplex SAS. In addition, Cerplex SAS entered into a four-year Supply and Services Agreement with RXL to provide repair and refurbishment services with guaranteed levels of production hours (at standard rates) that decline over the period of the contract. The Company financed the acquisition of Cerplex SAS through a portion of the proceeds from the sale of InCirT and issuance of convertible Series B Stock. In June 1996, the Company issued 8,000 shares of Series B Stock at $1,000 per share in a private placement. The Series B Stock is convertible into Common Stock of the Company at the option of each holder at the lower of $5.07 per share or 80% of the average closing bid price over a ten-day period ending three days prior to the date of conversion. The Series B Stock will automatically convert into Common Stock on the earlier of five years from the date of issuance or such date as the Company's Common Stock has traded above $19.13 per share for a specified period of time. The Series B Stock has certain rights, privileges and preferences, including a $2,000 per share preference in the event of a sale of the Company. The Board of Directors may not pay dividends to the holders of the Company's Common Stock unless and until the Board has paid an equivalent dividend to the holders of Series B Stock based upon the number of shares of Common Stock into which each share of Series B Stock is convertible. The Company acquired inventory consisting of used telephones from Lucent Technologies, Inc. ("Lucent"). At September 29, 1996, the Company had $7.0 million of inventory, production cost commitments and assets related to the telephones acquired from Lucent. In June 1996, the Company executed a promissory note bearing interest at 9.75% in the amount of $4.6 million payable on September 15, 1996 in favor of Lucent, reflecting a portion of the amount invoiced to the Company by Lucent (the "Lucent Note"). Lucent has invoiced the Company for an additional $.6 million. Due to the quality of the inventory and the lack of availability of spare parts to effect repairs, the Company believes it has claims against Lucent. The Company currently does not intend to pay the Lucent Note or other Lucent invoices. The failure to pay the Lucent Note on September 15, 1996 constitutes an event of default under the Company's senior Credit Facility and may result in an event of default under the Company's Note Purchase Agreements. If the Company is required to pay the Lucent Note and other Lucent invoices in full, it would have a material adverse effect on the Company's financial resources. On October 7, 1996, the Company filed a lawsuit against Lucent in the Orange County Superior Court seeking to have the Lucent Note declared invalid. On November 6, 1996, Lucent filed a cross-complaint seeking payment of the Lucent Note, alleging damages for breach of contract and seeking a constructive trust on any proceeds from the sale of the telephones. The Company's failure to have the Lucent Note declared invalid, or the loss to 17 18 THE CERPLEX GROUP, INC. AND SUBSIDIARIES Lucent of any of the material claims asserted against the Company, could materially and adversely affect the Company. In October 1996, the Company entered into a transaction with Atwood Richards, Inc. ("ARI") pursuant to which the Company is obligated to continue to repair and refurbish the remaining telephones in inventory through December 31, 1996, and deliver 100% of the repaired product to ARI. The Company will receive trade credits for up to $7.5 million in goods and services depending on the number of telephones repaired. The trade credits received from ARI may be used to acquire various goods and services, and the Company also believes it may be able to use the trade credits to repay indebtedness or other operating expenses. There can be no assurance that the Company will be able to use the trade credits in the near term, if at all. The Company is committed to pay BT (pound)1.8 million (approximately $2.9 million as of September 29, 1996) in 1999 or earlier if certain sales volumes are reached, and to pay a former shareholder of PCS up to $500,000 during 1997. 18 19 THE CERPLEX GROUP, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 7, 1996 the Company filed a complaint against Lucent in the Orange County Superior Court seeking to have the Lucent Note declared invalid. Lucent filed an Answer and Cross-Complaint on November 6, 1996 for payment of the Lucent Note, breach of contract and a constructive trust on any proceeds from the sale of the phones. The Company's failure to have the Lucent Note declared invalid, or the loss to Lucent of any of the material claims asserted against the Company, could materially and adversely affect the Company. Such legal proceedings are more fully described in "Liquidity and Capital Resources" herein. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES During the quarter ended September 29, 1996, the Company was in default under its Amended Credit Agreement and its Note Purchase Agreements, as amended. The Company has obtained waivers through November 30, 1996 waiving compliance with the provisions of such agreements giving rise to the default. In addition, the Company has not paid any principal or interest on the Lucent Note. See "Liquidity and Capital Resources" herein for a more detailed discussion. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of its Stockholders on August 22, 1996. The following directors were elected at such meeting (the number of votes in favor of each director and the number of abstentions are indicated in the parenthetical following each director's name; there were no broker non-votes for any director): Richard C. Davis (9,566,036 in favor / 2,610 abstentions), Robert Finzi (9,566,836 in favor / 2,010 abstentions), Jerome Jacobson (9,566,636 in favor / 2,010 abstentions), Patrick S. Jones (9,566,636 in favor / 2,010 abstentions), William A. Klein (9,552,910 in favor / 15,736 abstentions), Myron Kunin (9,566,636 in favor / 2,010 abstentions) and James T. Schraith (9,557,400 in favor / 11,246 abstentions). In addition, the stockholders approved, by a vote of 9,536,740 in favor, 3,630 abstentions, and no broker non-votes, a proposal to authorize the issuance of Common Stock equal to 20% or more of the outstanding Common Stock upon conversion of the Company's Series B Stock. The stockholders also approved, by a vote of 9,357,503 in favor, 3,630 abstentions and no broker non-votes, certain amendments to the Company's 1993 Restated Stock Option Plan, as amended, which increased the number of shares of the Company's Common Stock available for issuance from 1,000,000 to 2,000,000 shares and increased the total number of shares of Common Stock for which any one individual may be granted stock options or separately exercisable stock appreciation rights in any calendar year from 300,000 to 500,000. Finally, the stockholders approved, by a vote of 9,564,146 in favor, 3,990 abstentions and no broker non-votes, the ratification of KPMG Peat Marwick LLP as the Company's independent auditors for the 1996 fiscal year. 19 20 THE CERPLEX GROUP, INC. AND SUBSIDIARIES ITEM 5. OTHER INFORMATION RISK FACTORS Losses and Accumulated Deficit. For the nine-month period ended September 29, 1996 and the year ended December 31, 1995, the Company reported a net loss of $13.8 million and $39.4 million, respectively. As of September 29, 1996, the Company had an accumulated deficit of $60.8 million. The Company also expects to report a loss for the fourth quarter of 1996. There can be no assurance that the Company will operate profitably in the future. Continued losses could materially and adversely affect the Company's business and the value of, and the market for, the Company's equity securities. Future Capital Needs; Uncertainty of Additional Financing. The Company's ability to maintain its current revenue base and to grow its business is dependent on the availability of adequate capital. Without sufficient capital, the Company's growth may be limited. During portions of 1995 and 1996, the Company was in default under its senior Credit Agreement and subordinated Note Purchase Agreements. The Company obtained a limited waiver of designated defaults through November 30, 1996 with its lenders and Subordinated Note Holders. The Company intends to negotiate an amendment to the Credit Agreement and Note Purchase Agreements, although there is no assurance that the Company will be successful in this regard. The failure of the Company to negotiate an amendment to the Credit Agreement and Note Purchase Agreements could have a material adverse effect upon the Company. The terms of the senior Credit Facility have resulted in a reduced borrowing base which will be further reduced over the period ending March 1997. The Company is required to use a portion of cash generated from operations, from sales of assets, and from sales of equity securities to further reduce its borrowing base under the Credit Agreement. In addition, the Company is restricted from accessing the cash or the assets of the Company's Cerplex SAS operations in France, which further limits the Company's financial resources. As a result, the Company currently has limited capital. In addition, the terms of the Company's Credit Agreement and Note Purchase Agreements restrict the Company's ability to incur additional indebtedness and could adversely affect the Company's ability to obtain additional financing. General market conditions and the Company's future performance (including its ability to generate profits and positive cash flow) will also impact the Company's financial resources. The failure of the Company to obtain additional capital when needed could have a material adverse effect on the Company's business and future prospects. No assurance can be given that the Company will not incur additional defaults under such agreements, or that additional financing will be available or, if available, will be on acceptable terms. Dispute with Lucent Technologies. The Company acquired inventory consisting of used telephones from Lucent. At September 29, 1996, the Company had $7.0 million of inventory, production cost commitments and assets related to the telephones acquired from Lucent. In June 1996, the Company executed a promissory note bearing interest at 9.75% in the amount of $4.6 million payable on September 15, 1996 in favor of Lucent, reflecting a portion of the amount invoiced to the Company by Lucent. Lucent has invoiced the Company for an additional $.6 million. Due to the quality of the inventory and the lack of availability of spare parts to effect repairs, the Company believes it has claims against Lucent. The Company currently does not intend to pay the Lucent Note or other Lucent invoices. The failure to pay the Lucent Note on September 15, 1996 constitutes an event of default under the Company's senior Credit Facility and may result in an event of default under the Company's Note Purchase Agreements. If the Company is required to pay the Lucent Note and other Lucent invoices in full, it would have a material adverse effect on the Company's financial resources. On October 7, 1996, the Company filed a lawsuit against Lucent in the Orange County Superior Court seeking to have the Lucent Note declared invalid. 20 21 THE CERPLEX GROUP, INC. AND SUBSIDIARIES On November 6, 1996, Lucent filed a cross-complaint seeking payment of the Lucent Note, alleging damages for breach of contract and seeking a constructive trust on any proceeds from the sale of the telephones. The Company's failure to have the Lucent Note declared invalid, or the loss to Lucent of any of the material claims asserted against the Company, could materially and adversely affect the Company. Risk of Excess and Unusable Inventory; Decreased Value of Assets. At September 29, 1996, inventory constituted approximately 19.2% of the Company's assets. Any decrease in the demand for the Company's repair services could result in a substantial portion of the Company's inventory becoming excess, obsolete or otherwise unusable. During the last few years, the Company wrote down a significant amount of inventory and a significant amount of other assets, including receivables, securities and goodwill. Changes in the Company's business, as well as the business of third parties, could adversely affect the value of assets remaining on the Company's financial statements, possibly resulting in write-offs. The existence, amounts and timing of any such additional write-offs will be dependent upon various factors including, without limitation, the volume and profitability of future operations, market conditions as well as the operations of the above-mentioned third parties. In addition, the Company became entitled to receive an aggregate of approximately 370,000 shares of Common Stock of Pen Interconnect in connection with the sale of its InCirT division which were valued at $5.40 per share. Recently, the trading price of such shares has decreased substantially and there can be no assurance that the Company will not be required to write down its investment with respect to such shares in the future. In October, the Company sold all of its inventory of phones purchased from Lucent to Atwood Richards, Inc. ("ARI"). The consideration paid to the Company from ARI was up to $7.5 million in trade credits. As of September 29, 1996, the Company had $7.0 million of inventory, production cost commitments and assets related to the telephones acquired from Lucent. The Company has no prior experience in using trade credits and there can be no assurance the Company will realize the value of the trade credits. There can be no assurance that the Company will not be required to write down significant amounts of its inventory or other assets in the future, which could have a material adverse effect on the Company's business and results of operations. Dependence on Key Customers. During the nine months ended September 29, 1996, BT, Rank Xerox, IBM, and SpectraVision accounted for approximately 12%, 9%, 8% and 4%, respectively, of continuing operations. During 1995, IBM and SpectraVision significantly decreased orders for certain programs which materially and adversely affected the Company and its results of operations. The Company ceased performing services for SpectraVision in August 1996. A significant portion of the Company's net sales attributable to IBM in 1995 were from discontinued operations, and, as such, the Company expects net sales attributable to IBM to continue to account for a decreasing percentage of the Company's net sales. Also, an agreement with IBM for spare parts (which accounted for approximately 7% of the Company's net sales from continuing operations through September 29, 1996) expired in September 1996. Although the Company will not provide spare parts under this agreement after September 1996, the Company believes it will continue to provide services to IBM under other programs. There can be no assurance that major customers of the Company will not terminate any or all of their arrangements with the Company; significantly change, reduce or delay the amount of services ordered from the Company; or significantly change the terms upon which the Company and these customers do business. Any such termination, change, reduction or delay could have a material adverse effect on the Company's business. Dependence on Customers in the Electronics Industry. The Company is dependent upon the continued growth, viability and financial stability of its customers and potential customers in the electronics industry, particularly the computer industry. The computer industry has been characterized by rapid 21 22 THE CERPLEX GROUP, INC. AND SUBSIDIARIES technological change, compressed product life cycles and pricing and margin pressures. Improvements in technology and quality of hardware products or other factors may result in a reduced need for parts and systems repairs in the future which may adversely affect the Company's business. The factors affecting segments of the electronics industry in general, and the Company's OEM customers in particular, could have an adverse effect on the Company's business. During 1995 and 1996, several of the Company's customers experienced severe financial difficulty resulting in significant losses to the Company as a result of write downs of receivables and other assets. There can be no assurance that existing customers or future customers will not experience financial difficulty, which could have a material adverse effect on the Company's business. Reliance on Short-Term Purchase Orders. The Company's customer contracts are typically subject to termination on short notice at the customer's discretion and purchase orders under such contracts typically only cover services over a 90-day period. The termination of any material contracts or any substantial decrease in the orders received from major customers could have a material adverse effect on the Company's business. Competition. The Company competes with the in-house repair centers of OEMs and 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 the Company for the services of unrelated OEMs and TPMs. In addition to competing with OEMs and TPMs, the Company also competes for depot repair business with a small number of independent organizations similar in size to the Company and a large number of smaller companies. Many of the companies with which the Company competes have significantly greater financial resources than the Company. There can be no assurance that the Company will be able to compete effectively in its target markets. Management of Growth. The Company's growth has placed, and will continue to place, a strain on the Company's managerial, operational and financial resources. These resources may be further strained by the geographically dispersed operations of the Company and the future addition of acquired depots or businesses, if any. The Company's ability to manage growth effectively will require it to continue to improve its operational, financial and management information systems; to develop the management skills of its managers and supervisors; and to train, motivate and effectively manage its employees. The Company's failure to effectively manage growth, including acquired operations, could have a material adverse effect on the Company's business. Expansion of International Sales. During the three-month period ended September 29, 1996, approximately 50% of the Company's business was in Europe and the Company intends to continue to expand its European operations. There can be no assurance that the Company will be able to successfully market, sell and deliver its products and services in these markets. In addition to the uncertainty as to the Company's ability to expand its international presence, there are certain risks inherent in doing business on an international level, such as unexpected changes in regulatory requirements, export restrictions, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in currency exchange rates and potentially adverse tax consequences, which could adversely impact the success of the Company's international operations. There can be no assurance that one or more of such factors will not have a material adverse effect on the Company's international operations and, consequently, on the Company's business, operating results and financial condition. 22 23 THE CERPLEX GROUP, INC. AND SUBSIDIARIES Dependence on Acquisition Strategy. Certain of the Company's repair programs result in decreasing net sales as the installed base of the particular products under such programs decreases over time. An important component of the Company's strategy to maintain its revenue and to grow its business has been the acquisition of repair programs and complementary businesses. Competition for these types of transactions is likely to intensify. The Company's ability to effect any significant transactions requiring capital will be limited by the terms of the Company's senior credit facility and subordinated notes. There can be no assurance that the Company will be able to acquire additional repair programs or complementary businesses or, if acquired, that such operations will prove to be profitable. Discontinued Operations; Change in Strategy. In September 1995, Cerplex adopted a plan to discontinue its end-of-life programs, a line of business which historically generated a significant percentage of the Company's total sales, but which in recent years experienced declining sales. Net sales from end-of-life programs declined from approximately $56 million in 1993 to $33 million in 1994 to $20 million in 1995. The net loss from discontinued operations for the year ended December 31, 1995 was $17.4 million. There can be no assurance that the Company will not incur additional losses from these operations. In connection with discontinuing its end-of-life business, the Company changed certain elements of its business strategy and is undergoing changes in management and operations, is developing a direct sales force and terminating the majority of its outside sales representatives, is reducing its emphasis on inventory acquisitions and focusing on targeted customers in specific industries. While the Company believes such changes will enhance the Company's opportunities, there can be no assurance that such changes will positively impact the Company's business and results of operations in the short or long term. Risk Associated with the Ability of Existing Stockholders to Control the Company. As of June 30, 1996, the officers, directors, principal stockholders and their affiliates owned approximately 52% of the outstanding Common Stock. Although there are currently no voting agreements or similar arrangements among such stockholders, if they were to act in concert, they would be able to elect a majority of the Company's directors, to determine the outcome of most corporate actions requiring stockholder approval and otherwise to control the business affairs of the Company. In addition, the Board of Directors of the Company has the authority under the Company's Restated Certificate of Incorporation to issue shares of the Company's authorized Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any unissued shares of Preferred Stock. The issuance of Preferred Stock may adversely affect the voting and dividend rights, rights upon liquidation and other rights of the holders of Common Stock. The issuance of Preferred Stock and the control by existing stockholders, if they were to act in concert, may have the effect of delaying, deferring or preventing a change in control of the Company. On June 11, 1996, the Company consummated a private placement of Series B Stock. Holders of Series B Stock are entitled to receive dividends as may be declared from time to time by the Board prior and in preference to payment of any dividends to the holders of Common Stock. In the event of any liquidation, dissolution or winding up of the Company or the merger or sale of the Company, the holders of Series B Stock will be entitled to receive, prior and in preference to any distribution to the holders of Common Stock, the amount of $2,000 per share of Series B Stock plus all accrued or declared but unpaid dividends. Additionally, the Series B Stock is convertible into Common Stock at a rate equal to the lower of a 20% discount to the trading price of the Common Stock or $5.07 per share. The conversion rights of the Series B Stock could have a significant dilutive effect upon the holders of Common Stock. Dependence on Key Personnel. The Company's continued success depends, to a large extent, upon the efforts and abilities of key managerial employees, particularly the Company's executive officers. 23 24 THE CERPLEX GROUP, INC. AND SUBSIDIARIES Competition for qualified management personnel in the industry is intense. The loss of services of certain of these key employees could have a material adverse effect on the Company's business. James T. Schraith, the Company's Chief Executive Officer, resigned in October 1996 to accept a key position with Compaq. William A. Klein, the Company's Chairman, is currently acting as President and Chief Executive Officer. The Company currently is searching for a new Chief Executive Officer. No Assurance of Public Market for Common Stock; Possible Volatility of Stock Price. Prior to the Company's initial public offering, there was no public market for the Common Stock, and there can be no assurance that an active trading market will be sustained. At September 29, 1996, the Company was not in compliance with Nasdaq National Market System's net tangible asset requirement which could result in the loss of listing on the National Market System unless the Company is able to increase its net tangible assets in the near term. The Company believes it will be eligible for listing on the Nasdaq SmallCap Market if it loses its National Market System listing. There can be no assurance that the Company will be able to maintain its listing on Nasdaq's National Market System or obtain listing on The Nasdaq SmallCap Market. In addition, the trading price of the Common Stock has been, and in the future could be, subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant contracts, changes in management or new products or services by the Company or its competitors, general trends in the industry and other events or factors. In addition, the stock market has experienced extreme price and volume fluctuations which have particularly affected the market price for many companies in similar industries and which have often been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. 24 25 THE CERPLEX GROUP, INC. AND SUBSIDIARIES ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS:
EXHIBIT NUMBER TITLE METHOD OF FILING - ------ ----- ---------------- 2.1 Agreement of Merger dated as of August 30, 1993, Incorporated herein by reference by and among Cerplex Incorporated, Diversified to Exhibit 2.1 to the Company's Manufacturing Services, Inc. ("DMS"), EMServe, Registration Statement on Form S-1 Inc. ("EMServe"), InCirT Technology Incorporated (File No. 33-75004) which was ("InCirT") and Testar, Inc. ("Testar"). declared effective by the Commission on April 8, 1994. 2.2 Agreement and Plan of Merger dated November 12, Incorporated herein by reference 1993, between The Cerplex Group Subsidiary, Inc. to Exhibit 2.2 to the Company's and Registrant (conformed copy to original). Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 2.3 Certificate of Ownership and Merger of Registrant Incorporated herein by reference with and into The Cerplex Group Subsidiary, Inc. to Exhibit 2.3 to the Company's dated as of November 12, 1993. Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 2.4 Asset Purchase Agreement effective December 17, Incorporated herein by reference 1993 by and between CerTech Technology, Inc., a to Exhibit 2.4 to the Company's wholly-owned subsidiary of the Registrant Registration Statement on Form S-1 ("CerTech"), and Spectradyne, Inc. ("Spectradyne"). (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 2.5 Purchase and Sale Agreement dated as of July 29, Incorporated herein by reference 1994, by and among The Cerplex Group, Inc., to Exhibit 2 to the Form 8-K filed Cerplex Limited, BT Repair Services Limited and July 29, 1994. British Telecommunications plc. 2.6 Contract for repair, calibration and warehousing of Incorporated herein by reference certain items of BT Equipment dated as of July 29, to Exhibit 10 to the Form 8-K 1994, among The Cerplex Group and Cerplex filed July 29, 1994. Limited and BT.
25 26 THE CERPLEX GROUP, INC. AND SUBSIDIARIES
2.7 Formation and Contribution Agreement effective Incorporated herein by reference December 1, 1994 by and among Modcomp/Cerplex to Exhibit 2.7 to the Company's L.P., Modular Computer Systems, Inc., Cerplex Annual Report on Form 10-K for Subsidiary, Inc. and The Cerplex Group, Inc. the fiscal year ended January 1, 1995. 2.8 Contingent Promissory Note dated December 1, 1994 Incorporated herein by reference issued by Modcomp/Cerplex L.P. to Modular to Exhibit 2.8 to the Company's Computer Systems, Inc. Annual Report on Form 10-K for the fiscal year ended January 1, 1995. 2.9 Limited Partnership Agreement of Modcomp/Cerplex Incorporated herein by reference L.P. effective December 1, 1994. to Exhibit 2.9 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 1994 by and among Cerplex Subsidiary, Inc., The to Exhibit 2.10 to the Company's Cerplex Group, Inc., Modular Computer Systems, Annual Report on Form 10-K for Inc. and Modcomp Joint Venture Inc. the fiscal year ended January 1, 1995. 2.11 Stock Purchase Agreement dated as of June 29, 1995 Incorporated herein by reference by and among The Cerplex Group, Inc., Tu Nguyen to Exhibit 2.11 to the Company's and Phuc Le. Quarterly Report on Form 10-Q for the quarter ended October 1, 1995. 2.12 Letter Agreement dated April 5, 1996 by and among Incorporated herein by reference Modular Computer Systems, Inc., Modcomp Joint to Exhibit 2.12 to the Company's Venture, Inc., AEG Aktiengesellschaft, the Annual Report on Form 10-K for Company, Cerplex Subsidiary, Inc. and the fiscal year ended December Modcomp/Cerplex L.P. 31, 1995. 3.1 Restated Certificate of Incorporation of the Incorporated herein by reference Registrant. to 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.
26 27 THE CERPLEX GROUP, INC. AND SUBSIDIARIES
3.3 Certificate of Designation of Preferences of Series B Incorporated herein by reference Preferred Stock of The Cerplex Group, Inc. to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 4.1 Stock Purchase Agreement dated as of November 19, Incorporated herein by reference 1993 by and among the Registrant, the stockholders to Exhibit 4.1 to the Company's of the Registrant identified in Part A of Schedule I Registration Statement on Form S-1 thereto and the purchasers of shares of the (File No. 33-75004) which was Registrant's Series A Preferred Stock identified in declared effective by the Schedule I thereto (including the Schedules thereto; Commission on April 8, 1994. Exhibits omitted). 4.2 Registration Rights Agreement dated as of November Incorporated herein by reference 19, 1993, by and among the Registrant, the investors to Exhibit 4.2 to the Company's listed on Schedule A thereto and the security holders Registration Statement on Form S-1 of the Registrant listed on Schedule B thereto, (File No. 33-75004) which was together with Amendment No.1. declared effective by the Commission on April 8, 1994. 4.3 Co-Sale Agreement dated as of November 19, 1993, Incorporated herein by reference by and among the Registrant, the managers listed on to Exhibit 4.3 to the Company's Schedule A thereto and the investors listed on Registration Statement on Form S-1 Schedule B thereto. (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 4.4 Warrant Agreement dated as of November 19, 1993, Incorporated herein by reference by and among the Registrant and the purchasers listed to Exhibit 4.4 to the Company's in Annex 1 thereto. Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 4.5 Placement Agent Warrant Purchase Agreement dated Incorporated herein by reference as of November 19, 1993, between the Registrant to Exhibit 4.5 to the Company's and Donaldson, Lufkin & Jenrette Securities Registration Statement on Form S-1 Corporation. (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 4.6 Observation Rights Agreement dated as of November Incorporated herein by reference 19, 1993, between the Registrant and certain stock to Exhibit 4.6 to the Company's purchasers. Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994.
27 28 THE CERPLEX GROUP, INC. AND SUBSIDIARIES
4.7 Observation Rights Agreement dated as of November Incorporated herein by reference 19, 1993, between the Registrant and certain note to Exhibit 4.7 to the Company's purchasers. Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 4.8 Note Purchase Agreement dated as of November 19, Incorporated herein by reference 1993, by and among the Registrant and The to Exhibit 4.8 to the Company's Northwestern Mutual Life Insurance Company, John Registration Statement on Form S-1 Hancock Mutual Life Insurance, Registrant and Bank (File No. 33-75004) which was of Scotland London Nominees Limited. declared effective by the Commission on April 8, 1994. 4.9 Amendment No. 2 to Registration Rights Agreement Incorporated herein by reference dated as of April 6, 1994, by and among the to Exhibit 4.9 to the Company's Registrant and certain of its Securities holders. Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 4.10 Amendment to Note Purchase Agreement, dated as of Incorporated herein by reference October 27, 1994, by and among the Company, to Exhibit 4.10 to the Company's Northwestern Mutual Life Insurance Company, John Annual Report on Form 10-K for Hancock Mutual Life Insurance Company and North the fiscal year ended December Atlantic Smaller Companies Trust P.L.C. 31, 1995. (collectively, the "Noteholders"). 4.11 Waiver and Amendment Agreement dated April 15, Incorporated herein by reference 1996 by and among Company, The Northwestern to Exhibit 4.11 to the Company's Mutual Life Insurance Company, John Hancock Annual Report on Form 10-K for Mutual Life Insurance Company and North Atlantic the fiscal year ended December Smaller Companies Investment Trust PLC. 31, 1995. 4.12 Warrant Agreement dated as of April 15, 1996 by Incorporated herein by reference and among Company, The Northwestern Mutual Life to Exhibit 4.12 to the Company's Insurance Company, John Hancock Mutual Life Annual Report on Form 10-K for Insurance Company and North Atlantic Smaller the fiscal year ended December Companies Investment Trust PLC. 31, 1995. 4.13 First Amendment to Warrant Agreement dated April Incorporated herein by reference 15, 1996 by and among Company and each of the to Exhibit 4.13 to the Company's holders of warrants listed on Schedule A thereto, Annual Report on Form 10-K for with respect to that certain Warrant Agreement dated the fiscal year ended December November 19, 1993. 31, 1995.
28 29 THE CERPLEX GROUP, INC. AND SUBSIDIARIES
4.14 First Amendment to Observation Rights Agreement Incorporated herein by reference dated as of April 15, 1996 between Company and to Exhibit 4.14 to the Company's certain note purchasers. Annual 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 dated as of April 15, 1996 by and among Company, to Exhibit 4.15 to the Company's the investors of Company listed on Schedule A Annual Report on Form 10-K for thereto and the security holders of Company listed on the fiscal year ended December Schedule B thereto. 31, 1995. 4.16 Warrant Agreement dated April 15, 1996 by and Incorporated herein by reference among Company, Wells Fargo Bank, National to Exhibit 4.16 to the Company's Association, Sumitomo Bank of California, BHF Annual Report on Form 10-K for Bank Aktiengesellschaft and Comerica Bank- the fiscal year ended December California. 31, 1995. 4.17 Stock Purchase Agreement dated June 10, 1996 by Incorporated herein by reference and among the Company and the investors listed on to Exhibit 4.17 to the Company's Schedule A thereto. Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 4.18 Fourth Amendment to Registration Rights Agreement Incorporated herein by reference dated June 10, 1996 by and among the Company, the to Exhibit 4.18 to the Company's investors listed on Schedule A thereto, the security Quarterly Report on Form 10-Q holders of the Company listed on Schedule B thereto, for the quarter ended June 30, the banks listed on Schedule C thereto and each of 1996. the parties listed on Schedule D thereto. 4.19 Certificate of Designation of Preferences of Series B Incorporated herein by reference Preferred Stock of The Cerplex Group, Inc. to Exhibit 3.3 filed herein.
29 30 THE CERPLEX GROUP, INC. AND SUBSIDIARIES
4.20 Waiver and Amendment Agreement dated as of Filed herein. October 31, 1996 by and among the Company, The Northwestern Mutual Life Insurance Company, John Hancock Mutual Life Insurance Company and North Atlantic Smaller Companies Investment Trust PLC, which waiver is made with reference to the Note Purchase Agreement, as amended, and Warrant Agreement dated April 15, 1996. 10.1 The Registrant's 1990 Stock Option Plan (the "1990 Incorporated herein by reference Plan"). to 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 1990 Plan. to Exhibit 10.2 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. 10.3 Form of Stock Purchase Agreement pertaining to the Incorporated herein by reference 1990 Plan. to 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 "1993 Incorporated herein by reference Plan"). to 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 employees) pertaining to the 1993 Plan. to 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.
30 31 THE CERPLEX GROUP, INC. AND SUBSIDIARIES
10.6 Form of Stock Option Agreement (grants to directors Incorporated herein by reference and certain officers) pertaining to the 1993 Plan. to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.7 Form of Stock Purchase Agreement for Installment Incorporated herein by reference Options pertaining to the 1993 Plan. to 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 Exercisable Options pertaining to the 1993 Plan. to 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, as Filed herein. amended (the "Restated Plan"). 10.10 Form of Stock Option Agreement, together with Incorporated herein by reference Addenda, pertaining to the Restated Plan. to 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 Agreement dated May 6, 1992 by and Incorporated herein by reference between IBM and the Company. to Exhibit 10.11 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. 10.12 Master Task Agreement dated December 1, 1991, by Incorporated herein by reference and between International Business Machines to Exhibit 10.12 to the Company's Incorporated ("IBM") and the Registrant, together Registration Statement on Form S-1 with Amendment to Master Agreement and Task (File No. 33-75004) which was Order. declared effective by the Commission on April 8, 1994.
31 32 THE CERPLEX GROUP, INC. AND SUBSIDIARIES
10.13 Technology Services Agreement effective March 1, Incorporated herein by reference 1993, by and between Novadyne Computer Systems, to Exhibit 10.12 to the Company's Inc. ("Novadyne") and Cerplex Incorporated (a Registration Statement on Form S-1 California corporation and a predecessor of the (File No. 33-75004) which was Registrant), together with Amendments Nos. 1 and 2. declared effective by the Commission on April 8, 1994. 10.14 Technology Services Agreement effective December Incorporated herein by reference 17, 1993, by and between Spectradyne, Inc. to Exhibit 10.13 to the ("Spectradyne") and the Registrant. Company's Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.15 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. 10.16 Lease Agreement dated April 1, 1992 by and Incorporated herein by reference between Henry G. Page Jr., and Diversified to 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. 10.17 Sublease dated January 1, 1994 by and between Bull Incorporated herein by reference and Cerplex Group, Inc. (a Massachusetts to 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. 10.18 Standard Industrial/Commercial Single-Tenant Lease Incorporated herein by reference - Net dated November 29, 1990 by and among Kilroy to Exhibit 10.18 to the Company's Building 73 Partnership, Cerplex Incorporated and Registration Statement on Form S-1 InCirT, together with Amendment No. 1. (File No. 33-75004) which was declared effective by the Commission on April 8, 1994.
32 33 THE CERPLEX GROUP, INC. AND SUBSIDIARIES
10.19 Lease dated December 17, 1993 by and between Incorporated herein by reference Spectradyne and CerTech. to Exhibit 10.19 to the Company's Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.20 Sublease dated March 1, 1993 by and between Incorporated herein by reference Novadyne and the Registrant together with Lease to Exhibit 10.20 to the Amendment dated July 22, 1991 by and between Company's Registration Statement McDonnell Douglas Realty Company and Novadyne. on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.21 Standard Industrial/Commercial Lease - Net dated Incorporated herein by reference September 4, 1991 by and between Proficient Food to Exhibit 10.21 to the Company's Company and W.C. Cartwright Corporation Registration Statement on Form S-1 ("Cartwright"), together with Addendum and (File No. 33-75004) which was Sublease dated September 6, 1991 by and between declared effective by the Cartwright and the Registrant. Commission on April 8, 1994. 10.22 Sublease dated July 30, 1992 by and between Incorporated herein by reference Cartwright and DMS. to 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. 10.23 Repair Services Agreement dated January 1, 1994 by Incorporated herein by reference and between Bull HN Information Systems, Inc. and to Exhibit 10.14 to the Company's the Registrant. Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.24 Credit Agreement dated as of October 12, 1994 (the Incorporated herein by reference "Credit Agreement") among The Cerplex Group, to Exhibit 10.24 to the Company's Inc., as Borrower; the lenders listed therein, as Annual Report on Form 10-K for Lenders; and Wells Fargo Bank, National the fiscal year ended January 1, Association, as Administrative Agent; and those 1995. certain exhibits, schedules and collateral documents to such Credit Agreement.
33 34 THE CERPLEX GROUP, INC. AND SUBSIDIARIES
10.25 Limited Waiver dated as of November 14, 1995 Incorporated herein by reference ("Waiver") by and among The Cerplex Group, Inc. to Exhibit 10.25 to the (the "Company"), the financial institutions listed on Company's Quarterly Report on the signature pages thereof ("Lenders"), and Wells Form 10-Q for the quarter ended Fargo Bank, National Association, as administrative October 1, 1995. agent for the Lenders ("Administrative Agent"), and for certain limited purposes, CerTech Technology, Inc., Cerplex Mass., Inc., Cerplex Limited, Apex Computer Company, Cerplex Subsidiary, Inc. and Peripheral Computer Support, Inc. (the "Subsidiaries"), which Waiver is made with reference to the Credit Agreement. 10.26 The Cerplex Group, Inc. Restated 1993 Stock Option Incorporated herein by reference Plan (Restated and Amended as of January 13, 1995). to Exhibit 10.26 to the Company's Quarterly 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 Agreement. to 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 15, 1996 by and among Company, the lenders whose to Exhibit 10.28 to the Company's signatures appear on the signature pages thereof, as Annual Report on Form 10-K for Lenders; Wells Fargo Bank, National Association, as the fiscal year ended December Administrative Agent; and the Subsidiaries for certain 31, 1995. limited purposes. 10.29 Promissory Note dated June 21, 1996 payable by the Incorporated herein by reference Company to Lucent Technologies. to Exhibit 10.29 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 10.30 Limited Waiver dated as of October 31, 1996 by and Filed herein. among the Company, Lenders and Administrative Agent, and for certain limited purposes, the Subsidiaries, Modcomp/Cerplex 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. 11.1 Statement Regarding Computation of Net Income Filed herein. (Loss) Per Share.
34 35 THE CERPLEX GROUP, INC. AND SUBSIDIARIES 35 36 THE CERPLEX GROUP, INC. AND SUBSIDIARIES (b) REPORTS ON FORM 8-K (1) On September 24, 1996, the Company filed a current report on Form 8-K updating the Company's risk factors. (2) On October 15, 1996, the Company filed a current report on Form 8-K regarding the resignation of James T. Schraith from the officers of President and Chief Executive Officer of the Company. 36 37 THE CERPLEX GROUP, INC. AND SUBSIDIARIES SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE CERPLEX GROUP, INC. Date: November 13, 1996 /s/ JAMES R. ECKSTAEDT ----------------------- James R. Eckstaedt Senior Vice President and Chief Financial Officer (Principal financial and chief accounting officer) 37 38 THE CERPLEX GROUP, INC. AND SUBSIDIARIES EXHIBIT INDEX QUARTER ENDED SEPTEMBER 29, 1996
Sequential Exhibit Description of Exhibits Page No. - ------- ----------------------- -------- 4.20 Waiver and Amendment Agreement dated as of October 31, 1996 by and among the Company, The Northwestern Mutual Life Insurance Company, John Hancock Mutual Life Insurance Company and North Atlantic Smaller Companies Investment Trust PLC, which waiver is made with reference to the Note Purchase Agreement, as amended, and Warrant Agreement dated April 15, 1996. 10.9 The Registrant's Restated 1993 Stock Option Plan, as amended (the "Restated Plan"). 10.30 Limited Waiver dated as of October 31, 1996 by and among the Company, Lenders and Administrative Agent, and for certain limited purposes, the Subsidiaries, Modcomp/Cerplex 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. 11.1 Computation of Net Income (Loss) Per Share. 27.1 Financial Data Schedule.
38 EX-4.20 2 WAIVER AND AMENDMENT AGREEMENT DATED 10-31-96 1 Exhibit 4.20 WAIVER AND AMENDMENT AGREEMENT WAIVER AND AMENDMENT AGREEMENT (this "Agreement"), dated as of October 31, 1996, by and among THE CERPLEX GROUP, INC., a Delaware corporation (together with its successors and assigns, the "Company"), THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY and NORTH ATLANTIC SMALLER COMPANIES INVESTMENT TRUST PLC (collectively, the "Noteholders"). RECITALS: A. The Company has entered into those certain separate Note Purchase Agreements, each dated as of November 19, 1993 (collectively, as amended pursuant to the terms of each of the amendment agreements set forth in Schedule A to this Agreement, the "Note Purchase Agreement"), with each of the Noteholders, pursuant to which the Company originally issued and sold to the Noteholders (i) an aggregate principal amount of Seventeen Million Two Hundred Fifty Thousand Dollars ($17,250,000) of the Company's Series A 9.00% Senior Subordinated Notes Due November 19, 2001 (as amended, the "Notes"), and (ii) an aggregate principal amount of Five Million Seven Hundred Fifty Thousand Dollars ($5,750,000) of the Company's Series B 9.00% Senior Subordinated Notes Due November 19, 2001 (the "Series B Notes"). The Company has prepaid the Series B Notes and such Series B Notes are no longer issued and outstanding. B. The Noteholders are the current holders of one hundred percent (100%) of the Notes outstanding as of the Effective Date. C. The Company and the Noteholders have entered into that certain Warrant Agreement (the "Existing 1996 Warrant Agreement," and as amended hereby, the "Amended 1996 Warrant Agreement"), dated as of April 15, 1996, pursuant to which the Company issued one million warrants of the Company to the Noteholders. D. Pursuant to a notice to the Noteholders dated September 23, 1996, the Company notified the Noteholders of certain Defaults and Events of Defaults under Section 6.3 and Section 6.4 of the Note Purchase Agreement (the "Noticed Events of Default," such term to include, for purposes of avoidance of doubt, all Defaults and Events of Defaults under Section 6.3 and Section 6.4 of the Note Purchase Agreement that may have existed prior to the date of such notice or after the date of such notice and prior to the Effective Date (as hereinafter defined) and the Company has requested that the Noteholders waive the Noticed Events of Default. 1 2 E. In consideration of the aforesaid waivers, the Company has agreed that the Existing 1996 Warrant Agreement shall be amended by changing the definition of "Initial Purchase Price" therein from $6.00 to $2.50. F. The Noteholders are agreeable, subject to the terms and conditions set forth below, to granting the aforesaid waivers, and in connection therewith, each of the Company and the Noteholders has agreed to amend the Existing 1996 Warrant Agreement as set forth herein. G. Unless otherwise expressly provided for herein, capitalized terms used herein and defined in the Note Purchase Agreement are used herein with the meanings ascribed to them in the Note Purchase Agreement. AGREEMENT: NOW THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. WAIVER. Subject to the satisfaction of the conditions set forth in Section 4, the Noteholders hereby waive, on the Effective Date, each of the Noticed Events of Default and agree that the effectiveness of Section 6.3 and Section 6.4 shall be temporarily suspended from and including the Effective Date to and including the earlier to occur of (a) the date that any holder of Senior Debt takes any action in respect of any default or any event of default under any Senior Credit Document and (b) November 30, 1996 (the "Reinstatement Date"). After the Reinstatement Date, Section 6.3 and Section 6.4 shall be in full force and effect. Except for the foregoing express waivers and suspensions, the terms of this Agreement shall not operate as a waiver of, or otherwise prejudice, the rights, remedies or powers of the Noteholders under the Note Purchase Agreement, under the Notes or under applicable law and all of such rights, remedies and powers are hereby expressly reserved. SECTION 2. AMENDMENT TO THE EXISTING 1996 WARRANT AGREEMENT; AFFIRMATION. 2.1 AMENDMENT TO THE EXISTING 1996 WARRANT AGREEMENT. The Company and, subject to the satisfaction of the conditions set forth in Section 4, each of the Noteholders hereby amend and restate the definition of "Initial Purchase Price" in the Existing 1996 Warrant Agreement as set forth below: INITIAL PURCHASE PRICE - means Two Dollars and Fifty Cents ($2.50). 2 3 2.2 AFFIRMATION OF OBLIGATIONS. The Company hereby acknowledges and affirms all of its obligations under the terms of the Note Purchase Agreement and under the Existing 1996 Warrant Agreement, as amended hereby. SECTION 3. WARRANTIES AND REPRESENTATIONS. To induce the Noteholders to enter into this Agreement, the Company warrants and represents to the Noteholders that as of the Effective Date: 3.1 CORPORATE ORGANIZATION AND AUTHORITY. The Company: (a) is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware; (b) has all legal and corporate power and authority to own and operate its Properties and to carry on its business as now conducted and as presently proposed to be conducted; (c) has all licenses, certificates, permits, franchises and other governmental authorizations necessary to own and operate its Properties and to carry on its business as now conducted and as presently proposed to be conducted, except where the failure to have such licenses, certificates and permits, either individually or in the aggregate, would not have, and could not reasonably be expected to have, a Material Adverse Effect; and (d) has duly qualified or has been duly licensed, and is authorized to do business and is in good standing, as a foreign corporation in each state except where the failure to be so qualified or licensed and authorized and in good standing, either individually or in the aggregate, would not have, and could not reasonably be expected to have, a Material Adverse Effect. 3.2 COMPLIANCE WITH LAW. The Company: (a) is not in violation of any law, ordinance, governmental rule or regulation to which it is subject; and (b) has not failed to obtain any license, certificate, permit, franchise or other governmental authorization necessary to the ownership of its Property or to the conduct of its business; 3 4 which violation or failure to obtain, either individually or in the aggregate, would have, or could reasonably be expected to have, a Material Adverse Effect. 3.3 LEGAL AND AUTHORIZED; OBLIGATIONS ARE ENFORCEABLE. (a) AUTHORIZATION. The execution and delivery by the Company of this Agreement and the performance by the Company of its obligations hereunder are within the corporate powers of the Company and do not conflict with, result in any breach in any of the provisions of, constitute a default under, or result in the creation of any Lien upon any Property of the Company under the provisions of, any agreement, charter instrument, bylaw or other instrument to which it is a party or by which it or any of its Property may be bound. (b) OBLIGATIONS ARE LEGAL AND ENFORCEABLE. The execution and delivery by the Company of this Agreement have been duly authorized by all necessary action on the part of the Company, and this Agreement has been executed and delivered by one or more duly authorized officers of the Company. This Agreement constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except that the enforceability thereof may be: (i) limited by applicable bankruptcy, reorganization, arrangement, insolvency, moratorium or other similar laws affecting the enforceability of creditors' rights generally; (ii) subject to the availability of equitable remedies; and (iii) with respect to indemnity and contribution, limited by state or federal laws relating to Securities or by the public policy underlying such laws. 3.4 NO DEFAULTS. (a) NO OTHER DEFAULTS. No Defaults or Events of Default exist, other than the Noticed Events of Default. No Senior Nonpayment Default exists that has not been waived and no Senior Nonpayment Default Notice has been issued by any holder of Senior Debt. (b) AMENDED FINANCING DOCUMENTS. No event has occurred and no condition exists that, upon the execution, delivery and effectiveness of this Agreement would constitute a Default or an Event of Default other than in respect of the Noticed Events of Default. (c) CHARTER INSTRUMENT, OTHER AGREEMENTS. The Company is not in violation in any respect of any term of any charter instrument or bylaw. Except 4 5 with respect to the failure of the Company to pay the promissory note payable to Lucent Technologies, Inc., the Company is not in violation in any material respect of any term in any agreement or other instrument to which it is a party or by which it or any of its Property may be bound, which would have, or could reasonably be expected to have, a Material Adverse Effect. SECTION 4. CONDITIONS. The waiver by the Noteholders set forth in Section 1 and the amendment described in Section 2 shall become effective on October 31, 1996 (the "Effective Date"), subject to all of the following conditions having been satisfied on or prior to such date: 4.1 EXECUTION AND DELIVERY OF THIS AGREEMENT. The Company and the Required Holders and all of the Warrantholders (as such term is defined in the Existing 1996 Warrant Agreement) shall have executed and delivered counterparts of this Agreement. 4.2 WAIVER BY HOLDERS OF SENIOR DEBT. The Company and each holder of Senior Debt whose consent is required therefor pursuant to the terms of the Senior Credit Documents shall have executed and delivered waivers with respect to all defaults and all events of default which exist under such Senior Credit Documents (including, without limitation, each of such events that relate to each of the Noticed Events of Default). The Company shall have delivered to each Noteholder a copy of the Limited Waiver entered into among the Company and the holders of Senior Debt, in the form of the execution draft of the Limited Waiver previously delivered to each Noteholder, together with a certification by a Senior Officer of the Company stating that such copy is a true and correct copy and such Limited Waiver cures or waives all defaults and all events of default which exist under the Senior Credit Documents. 4.3 NO DEFAULT; REPRESENTATIONS AND WARRANTIES TRUE. After giving effect to Section 1 hereof, no Default or Event of Default under the Note Purchase Agreement shall exist and the warranties and representations set forth in Section 3 hereof shall be true and correct on the Effective Date. 4.4 AUTHORIZATION OF TRANSACTIONS. The Company shall have authorized, by all necessary corporate action, its execution, delivery and performance of this Agreement and the consummation of all transactions contemplated by this Agreement and evidence of the same shall have been delivered to the Noteholders. 5 6 4.5 EXPENSES. The Company shall have paid all costs and expenses of the Noteholders relating to this Agreement (including, without limitation, any fees and disbursements of their special counsel). 4.6 PROCEEDINGS SATISFACTORY. All proceedings taken in connection with this Agreement shall be satisfactory to the Noteholders and their special counsel. The Noteholders and their special counsel shall have received copies of such documents and papers as they may reasonably request in connection therewith, in form and substance satisfactory to them. SECTION 5. MISCELLANEOUS. 5.1 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED, INTERPRETED AND ENFORCED IN ACCORDANCE WITH, AND GOVERNED BY, INTERNAL NEW YORK LAW. 5.2 DUPLICATE ORIGINALS. Two or more duplicate originals of this Agreement may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument. This Agreement may be executed in one or more counterparts and shall be effective when at least one counterpart shall have been executed by each party hereto, and each set of counterparts which, collectively, show execution by each party hereto shall constitute one duplicate original. 5.3 EFFECT OF THIS AGREEMENT. Except as specifically provided in this Agreement, no terms or provisions of the Note Purchase Agreement have been modified or changed by this Agreement and the terms and provisions of the Note Purchase Agreement shall continue in full force and effect. Except as specifically provided in this Agreement, no terms or provisions of the Existing 1996 Warrant Agreement have been modified or changed by this Agreement and the terms and provisions of the Existing 1996 Warrant Agreement, as amended hereby, shall continue in full force and effect. This Agreement and the waivers and amendments contained herein shall have and be in effect on and after the Effective Date. 5.4 WAIVERS AND AMENDMENTS OF THIS AGREEMENT. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated orally, or by any action or inaction, but only by an instrument in 6 7 writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. 5.5 SECTION HEADINGS. The titles of the sections hereof appear as a matter of convenience only, do not constitute a part of this Agreement and shall not affect the construction hereof. 5.6 COSTS AND EXPENSES. On the Effective Date, the Company shall pay all costs and expenses of the Noteholders related hereto, including, but not limited to, the statement for fees and disbursements of the Noteholders' special counsel presented to the Company on the Effective Date for matters in connection with this Agreement. The Company will also pay upon receipt of any statement thereof, each additional statement for fees and disbursements of the Noteholders' special counsel rendered after the Effective Date in connection with this Agreement. The obligations of the Company under this Section 5.6 shall survive the payment or prepayment of the Notes and the termination of the Note Purchase Agreement. 5.7 SURVIVAL. All warranties, representations, certifications and covenants made by the Company hereunder, or in any certificate or other instrument delivered pursuant hereto or thereto, shall be considered to have been relied upon by the Noteholders and shall survive the execution of this Agreement regardless of any investigation made by or on behalf of the Noteholders. All statements in any such certificate or other instrument shall constitute warranties and representations of the Company hereunder. [REMAINDER OF PAGE INTENTIONALLY BLANK. NEXT PAGE IS SIGNATURE PAGE.] 7 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on their behalf by a duly authorized officer or agent thereof, as the case may be, as of the date first above written. THE CERPLEX GROUP, INC. ------------------------------------ Name: Title: ACCEPTED: THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By: ------------------------------------------- Name: Title: JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By: ------------------------------------------- Name: Title: NORTH ATLANTIC SMALLER COMPANIES INVESTMENT TRUST PLC By: ------------------------------------------- Name: Title: [Signature page to the WAIVER AND AMENDMENT AGREEMENT among THE CERPLEX GROUP, INC. and the Noteholders listed therein.] 8 9 SCHEDULE A Amendment No. 1 to Note Purchase Agreement dated as of May 26, 1994. Amendment No. 2 to Note Purchase Agreement dated as of July 29, 1994. Amendment Agreement dated as of October 27, 1994. Waiver and Amendment Agreement dated as of April 15, 1996. 9 EX-10.9 3 THE REGISTRANT'S RESTATED 1993 STOCK OPTION PLAN 1 Exhibit 10.9 THE CERPLEX GROUP, INC. RESTATED 1993 STOCK OPTION PLAN (RESTATED AND AMENDED AS OF JULY 16, 1996) ARTICLE ONE GENERAL PROVISIONS I. PURPOSES OF THE PLAN A. The Restated 1993 Stock Option Plan (the "Plan") is intended to promote the interests of The Cerplex Group, Inc., a Delaware corporation (the "Corporation"), by providing eligible individuals with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation (or its parent or subsidiary corporations). II. STRUCTURE OF THE PLAN A. The Plan shall be divided into two separate equity programs: a. the Discretionary Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, and b. the Automatic Option Grant Program under which Eligible Directors shall automatically receive option grants at periodic intervals to purchase shares of Common Stock. B. The provisions of Articles One and Four shall apply to both equity programs under the Plan and shall accordingly govern the interests of all persons under the Plan. III. DEFINITIONS For purposes of the Plan, the following definitions shall be in effect: BOARD: the Corporation's Board of Directors. CHANGE IN CONTROL: a change in ownership or control of the Corporation effected through either of the following transactions: 1. 2 a. any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept; or b. there is a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members (rounded up to the next whole number) ceases, by reason of one or more contested of individuals who either (A) have been Board members continuously since the beginning of such period or (B) 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 (A) who were still in office at the time such election or nomination was approved by the Board. CODE: the Internal Revenue Code of 1986, as amended. COMMITTEE: the committee of two (2) or more non-employee Board members appointed by the Board to administer the Plan. COMMON STOCK: shares of the Corporation's common stock. CORPORATE TRANSACTION: either of the following stockholder-approved transactions to which the Corporation is a party: a. a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from those who held those securities immediately prior to such transaction, or b. the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. EFFECTIVE DATE: the first date on which the shares of the Corporation's Common Stock were registered under Section 12(g) of the Exchange Act. 2. 3 ELIGIBLE DIRECTOR: a non-employee Board member eligible to participate in the Automatic Option Grant Program in accordance with the eligibility provisions of Article One. EMPLOYEE: an individual who is in the employ of the Corporation or any Parent or Subsidiary, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. EXCHANGE ACT: the Securities Exchange Act of 1934, as amended from time to time. FAIR MARKET VALUE: the fair market value per share of Common Stock determined in accordance with the following provisions: a. If the Common Stock is not at the time listed or admitted to trading on any national stock exchange but is traded on the Nasdaq National Market, the Fair Market Value shall be the closing selling price per share on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no reported closing selling price for the Common Stock on the date in question, then the closing selling price on the last preceding date for which such quotation exists shall be determinative of Fair Market Value. b. If the Common Stock is at the time listed or admitted to trading on any national stock exchange, then the Fair Market Value shall be the closing selling price per share on the date in question on the exchange determined by the Committee to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no reported sale of Common Stock on such exchange on the date in question, then the Fair Market Value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists. HOSTILE TAKE-OVER: a change in ownership of the Corporation effected through the following transaction: a. any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's 3. 4 stockholders which the Board does not recommend such stockholders to accept, and b. more than fifty percent (50%) of the securities so acquired in such tender or exchange offer are accepted from holders other than the officers and directors of the Corporation subject to the short-swing profit restrictions of Section 16 of the Exchange Act. INCENTIVE OPTION: a stock option which satisfies the requirements of Code Section 422. NON-STATUTORY OPTION: a stock option not intended to meet the requirements of Code Section 422. OPTIONEE: any person to whom an option is granted under the Plan. PARENT: any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each such corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. PERMANENT DISABILITY OR PERMANENTLY DISABLED: the inability of the Optionee to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. SERVICE: the provision of services to the Corporation (or any Parent or Subsidiary) by an individual in the capacity of an Employee, a non-employee member of the board of directors or an independent consultant or advisor, except to the extent otherwise specifically provided in the applicable stock option agreement. SUBSIDIARY: each corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each such corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. TAKE-OVER PRICE: the greater of (a) the Fair Market Value per share of Common Stock on the date the option is surrendered to the Corporation in connection with a Hostile Take-Over or (b) the highest reported price per share of Common Stock paid by the tender offeror in effecting such Hostile Take-Over. However, if the surrendered option is an incentive stock option under the Federal tax laws, the Take-Over Price shall not exceed the clause (a) price per share. 4. 5 10% STOCKHOLDER: the owner of stock (as determined under Code Section 424(d)) possessing ten percent (10%) or more of the total combined voting power of all classes of stock of the Corporation. IV. ADMINISTRATION OF THE PLAN A. The Discretionary Option Grant Program shall be administered by the Committee. No Board member shall be eligible to serve on the Committee if such individual has, within the twelve (12)-month period immediately preceding the date of his or her appointment to the Committee, received an option grant or stock issuance under this Plan or any other stock plan of the Corporation (or any parent or subsidiary corporation) other than pursuant to the Automatic Grant Program under Article IV. Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. B. The Committee shall have full power and authority (subject to the express provisions of the Plan) to establish such rules and regulations as it may deem appropriate for the proper administration of the Plan and to make such determinations and interpretations concerning the Discretionary Option Grant Program and any outstanding option as it may deem necessary or advisable. The Committee shall have the authority to make option grants under the Discretionary Option Grant Program to any and all eligible individuals. The Committee shall have complete discretion to determine the number of shares to be covered by each such option, the time or times at which such option is to become exercisable and the maximum term for which the option is to remain outstanding. Decisions of the Committee shall be final and binding on all parties with an interest in any outstanding option under the Discretionary Option Grant Program. C. Administration of the Automatic Option Grant Program shall be self-executing in accordance with the terms of that program, and the Committee shall exercise no discretionary functions with respect to option grants made thereunder. V. ELIGIBILITY FOR OPTION GRANTS A. The persons eligible to participate in the Discretionary Option Grant Program shall be limited to the following: (i) officers and other Employees of the Corporation (or its parent or subsidiary corporations) who render services which contribute to the management, growth and financial success of the Corporation (or its parent or subsidiary corporations); (ii) non-employee members of the Board, other than those who are serving on the Committee; and 5. 6 (iii) those consultants or independent contractors who provide valuable services to the Corporation (or its parent or subsidiary corporations). B. The individuals eligible to participate in the Automatic Option Grant Program shall be (i) those individuals who are first elected or appointed as non-employee Board members on or after the 1995 Annual Stockholders Meeting, whether through appointment by the Board or election by the Corporation's stockholders, and (ii) those individuals who are reelected to serve as non-employee Board members after one or more Annual Stockholders Meetings beginning with the 1995 Annual Meeting. A non-employee Board member who has previously been in the employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to receive an option grant under the Automatic Option Grant Program at the time he or she first becomes a non-employee Board member, but such individual shall be eligible to receive periodic option grants under the Automatic Option Grant Program upon his or her reelection as a non-employee Board member at one or more Annual Stockholders Meetings. VI. STOCK SUBJECT TO THE PLAN A. Shares of the Common Stock shall be available for issuance under the Plan and shall be drawn from either the Corporation's authorized but unissued shares of Common Stock or from reacquired shares of Common Stock, including shares repurchased by the Corporation on the open market. The aggregate number of shares available for issuance under the Plan from and after the Effective Date shall not exceed 2,000,000 shares of Common Stock, subject to adjustment from time to time in accordance with the provisions of this Section VI. The maximum number of shares of Common Stock for which any one participant on the Plan may be granted stock options or separately exercisable stock appreciation rights in any calendar year shall not exceed 500,000 shares. B. Should one or more outstanding options under this Plan expire or terminate for any reason prior to exercise in full (including any option cancelled in accordance with the cancellation-regrant provisions of Section IV of Article Two of the Plan), the shares subject to the portion of the option not so exercised shall be available for subsequent option grant under the Plan. Shares subject to any option or portion thereof surrendered or cancelled in accordance with Section V of Article Two and all shares issued under the Plan, whether or not repurchased by the Corporation pursuant to its repurchase rights under the Plan, shall not be available for subsequent option grant under the Plan. Should the exercise price of an outstanding option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an outstanding option under the Plan, then the number of shares available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised, and not by the net number of shares of Common Stock issued to the option holder. 6. 7 C. In the event any change is made to the Common Stock issuable under the Plan by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without receipt of consideration, then appropriate adjustments shall be made to (i) the maximum number and/or class of shares issuable under the Plan, (ii) the maximum number and/or class of shares for which any one participant may be granted stock options or separately exercisable stock appreciation rights, (iii) the number and/or class of securities for which automatic option grants are to be subsequently made per Eligible Director under the Automatic Option Grant Program and (iv) the number and/or class of shares and price per share in effect under each outstanding option under the Plan. Such adjustments to the outstanding options shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Committee shall be final, binding and conclusive. 7. 8 ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM I. TERMS AND CONDITIONS OF OPTIONS Options granted pursuant to this Article Two shall be authorized by action of the Committee and may, at the Committee's discretion, be either Incentive Options or Non-Statutory Options. Individuals who are not Employees may only be granted Non-Statutory Options. Each option granted shall be evidenced by one or more instruments in the form approved by the Committee. Each such instrument shall, however, comply with the terms and conditions specified below, and each instrument evidencing an Incentive Option shall, in addition, be subject to the applicable provisions of Section II of this Article Two. A. Option Price. 1. The option price per share shall be fixed by the Committee. In no event, however, shall the option price per share of an Incentive Option be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the date of the option grant, and in no event shall the option price per share of a Non-Statutory Option be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the date of the option grant. 2. The option price shall become immediately due upon exercise of the option and, subject to the provisions of Section VI of this Article Two and the instrument evidencing the grant, shall be payable in one of the following alternative forms: - cash or check made payable to the Corporation's order; - shares of Common Stock held by the optionee for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date (as such term is defined below); or - through a broker-dealer sale and remittance procedure pursuant to which the optionee shall provide irrevocable written instructions (I) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate option price payable for the purchased shares plus all applicable Federal and State income and employment taxes required to be withheld by the Corporation in connection with such purchase and (II) to the Corporation 8. 9 to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. For purposes of this Section I.A.2, the Exercise Date shall be the date on which written notice of the option exercise is delivered to the Corporation. Except to the extent the sale and remittance procedure is used in connection with the exercise of the option, payment of the option price for the purchased shares must accompany such notice. B. Term and Exercise of Options. Each option granted under this Article Two shall be exercisable at such time or times, during such period, and for such number of shares as shall be determined by the Committee and set forth in the instrument evidencing the option grant. No such option, however, shall have a maximum term in excess of ten (10) years from the grant date. During the lifetime of the optionee, the option shall be exercisable only by the optionee and shall not be assignable or transferable by the optionee otherwise than by will or by the laws of descent and distribution following the optionee's death. C. Termination of Service. 1. Except to the extent otherwise provided pursuant to Section I.C.3 below, the following provisions shall govern the exercise period applicable to any options held by the optionee at the time of cessation of Service or death. - Should the optionee cease to remain in Service for any reason other than death or Permanent Disability, then the period during which each outstanding option held by such optionee is to remain exercisable shall be limited to the three (3)-month period following the date of such cessation of Service. - Should such Service terminate by reason of Permanent Disability, then the period during which each outstanding option held by the optionee is to remain exercisable shall be limited to the twelve (12)-month period following the date of such cessation of Service. - Should the optionee die while holding one or more outstanding options, then the period during which each such option is to remain exercisable shall be limited to the twelve (12)-month period following the date of the optionee's death. During such limited period, the option may be exercised by the personal representative of the optionee's estate or by the person or persons to whom the option is transferred pursuant to the optionee's will or in accordance with the laws of descent and distribution. 9. 10 - Under no circumstances, however, shall any such option be exercisable after the specified expiration date of the option term. - During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be exercisable for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the optionee's cessation of Service, terminate and cease to be outstanding with respect to any option shares for which the option is not at that time exercisable or in which the optionee is not otherwise at that time vested. 2. The Committee shall have discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to permit one or more options held by the optionee under this Article Two to be exercised, during the limited period of exercisability provided under Section I.C.1 above, not only with respect to the number of shares for which each such option is exercisable at the time of the optionee's cessation of Service but also with respect to one or more subsequent installments of purchasable shares for which the option would otherwise have become exercisable had such cessation of Service not occurred. 3. The Committee shall have discretion to extend the period of time for which any option granted under this Article Two is to remain exercisable following the optionee's cessation of Service or death from the limited period in effect under Section I.C.1 of this Article Two to such greater period of time as the Committee shall deem appropriate; provided, however, that in no event shall such option be exercisable after the specified expiration date of the option term. D. Stockholder Rights. An optionee shall have no stockholder rights with respect to any shares covered by the option until such individual shall have exercised the option and paid the option price for the purchased shares. E. Repurchase Rights. The shares of Common Stock acquired upon the exercise of any option granted under this Plan may be subject to repurchase by the Corporation in accordance with the following provisions: a. The Committee shall have the discretion to authorize the issuance of unvested shares of Common Stock under this Plan. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase any or all of those unvested shares at the 10. 11 option price paid per share. The terms and conditions upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Committee and set forth in the instrument evidencing such repurchase right. b. All of the Corporation's outstanding repurchase rights under this Plan shall automatically terminate, and all shares subject to such terminated rights shall immediately vest in full, upon the occurrence of a Corporate Transaction, except to the extent: (i) any such repurchase right is expressly assigned to the successor corporation (or parent thereof) in connection with the Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Committee at the time the repurchase right is issued. c. The Committee shall have discretion, exercisable either before or after the Optionee's cessation of Service, to cancel the Corporation's outstanding repurchase rights with respect to one or more shares purchased or purchasable by the Optionee under this Plan and thereby accelerate the vesting of such shares in whole or in part at any time. II. INCENTIVE OPTIONS The terms and conditions specified below shall be applicable to all Incentive Options granted under this Article Two. Incentive Options may only be granted to individuals who are Employees. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall not be subject to such terms and conditions. A. Dollar Limitation. The aggregate Fair Market Value (determined as of the respective date or dates of grant) of the Common Stock for which one or more options granted to any Employee under this Plan (or any other option plan of the Corporation or its parent or subsidiary corporations) may for the first time become exercisable as incentive stock options under the Federal tax laws during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as incentive stock options under the Federal tax laws shall be applied on the basis of the order in which such options are granted. B. 10% Stockholder. If any individual to whom an Incentive Option is granted is a 10% Stockholder, then the option price per share shall not be less than one hundred and ten percent (110%) of the fair market value per share of Common Stock on the grant date, and the option term shall not exceed five (5) years measured from the grant date. 11. 12 Except as modified by the preceding provisions of this Section II, the provisions of the Plan shall apply to all Incentive Options granted hereunder. III. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of a Corporate Transaction, the exercisability of each option outstanding under this Article Two shall automatically accelerate so that each such option shall, immediately prior to the specified effective date for the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for all or any portion of such shares. However, an outstanding option under this Article Two shall not so accelerate if and to the extent: (i) such option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation or parent thereof or be replaced with a comparable option to purchase shares of the capital stock of the successor corporation or parent thereof or (ii) the acceleration of such option is subject to other limitations imposed by the Committee at the time of grant. The determination of comparability under clause (i) above shall be made by the Committee, and its determination shall be final, binding and conclusive. B. Immediately following the consummation of the Corporate Transaction, all outstanding options under this Article Two shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation or its parent company. C. The Committee shall have the discretionary authority, exercisable either at the time the option is granted or at any time while the option remains outstanding, to provide for the automatic acceleration of one or more outstanding options under this Article Two upon the occurrence of a Corporate Transaction, whether or not those options are to be assumed or replaced in the Corporate Transaction, or alternatively to provide for the subsequent acceleration of any outstanding options under this Article Two which do not otherwise accelerate at the time of the Corporate Transaction, should the Optionee's Service terminate within a designated period following the effective date of such Corporate Transaction. The Committee shall also have the authority to provide for the immediate termination of any of the Corporation's outstanding repurchase rights under this Article Two which do not otherwise terminate at the time of the Corporate Transaction, upon the subsequent termination of the Optionee's Service within a designated period following the effective date of such Corporate Transaction. D. Each outstanding option under this Article Two which is assumed in connection with the Corporate Transaction or is otherwise to continue in effect shall be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities which would have been issuable, in consummation of such Corporate Transaction, to an actual holder of the same number of shares of Common Stock as are subject to such option immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the option price payable per share, provided 12. 13 the aggregate option price payable for such securities shall remain the same. In addition, the class and number of securities available for issuance under the Plan following the consummation of the Corporate Transaction shall be appropriately adjusted. D. The Committee shall have the discretionary authority, exercisable either in advance of any actually-anticipated Change in Control or at the time of an actual Change in Control, to provide for the automatic acceleration of one or more outstanding options under this Article Two (and the immediate termination of the Corporation's outstanding repurchase rights under this Article Two) upon the occurrence of the Change in Control. The Committee shall also have full power and authority to condition any such option acceleration (and the termination of outstanding repurchase rights) upon the subsequent termination of the optionee's Service within a specified period following the Change in Control. Any options accelerated in connection with the Change in Control shall remain fully exercisable until the expiration or sooner termination of the option term. E. Any options accelerated in connection with the Change in Control shall remain fully exercisable until the expiration or sooner termination of the option term. F. The grant of options under this Article Two shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. G. The exercisability as incentive stock options under the Federal tax laws of any options accelerated under this Section III in connection with a Corporate Transaction or Change in Control shall remain subject to the dollar limitation of Section II. IV. CANCELLATION AND REGRANT OF OPTIONS The Committee shall have the authority to effect, at any time and from time to time, with the consent of the affected optionees, the cancellation of any or all outstanding options under this Article Two and to grant in substitution new options under the Plan covering the same or different numbers of shares of Common Stock but with an option price per share not less than (i) Fair Market Value of the Common Stock on the new grant date in the case of an Incentive Option (ii) eighty-five percent (85%) of such Fair Market Value in the case of a Non-Statutory Option, or (iii) one hundred ten percent (110%) of such Fair Market Value in the case of an Incentive Option granted to a 10% Stockholder. V. STOCK APPRECIATION RIGHTS A. Provided and only if the Committee determines in its discretion to implement the stock appreciation right provisions of this Section V, one or more optionees may be granted the right, exercisable upon such terms and conditions as the Committee may establish, to surrender all or part of an unexercised option under this Article Two in 13. 14 exchange for a distribution from the Corporation in an amount equal to the excess of (i) the Fair Market Value (on the option surrender date) of the number of shares in which the optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (ii) the aggregate option price payable for such vested shares. B. No surrender of an option shall be effective hereunder unless it is approved by the Committee. If the surrender is so approved, then the distribution to which the optionee shall accordingly become entitled under this Section V may be made in shares of Common Stock valued at Fair Market Value on the option surrender date, in cash, or partly in shares and partly in cash, as the Committee shall in its sole discretion deem appropriate. C. If the surrender of an option is rejected by the Committee, then the optionee shall retain whatever rights the optionee had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights at any time prior to the later of (i) five (5) business days after the receipt of the rejection notice or (ii) the last day on which the option is otherwise exercisable in accordance with the terms of the instrument evidencing such option, but in no event may such rights be exercised more than ten (10) years after the date of the option grant. D. One or more officers of the Corporation subject to the short-swing profit restrictions of the Federal securities laws may be granted limited stock appreciation rights in tandem with their outstanding options under this Article Two. Upon the occurrence of a Hostile Take-Over, each outstanding option with such a limited stock appreciation right in effect for at least six (6) months shall automatically be cancelled and the optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to the cancelled option (whether or not the option is otherwise at the time exercisable for such shares) over (ii) the aggregate option price payable for such shares. The cash distribution payable upon such cancellation shall be made within five (5) days following the consummation of the Hostile Take-Over. Neither the approval of the Committee nor the consent of the Board shall be required in connection with such option cancellation and cash distribution. E. No stock appreciation right granted under this Section V shall be assignable or transferable by the optionee and shall be exercisable only by the optionee. The shares of Common Stock subject to any option surrendered or cancelled for an appreciation distribution pursuant to this Section V shall NOT be available for subsequent option grant under the Plan. VI. LOANS OR INSTALLMENT PAYMENTS The Committee may assist any optionee (including any officer) in the exercise of one or more outstanding options under this Article Two, including the satisfaction of any 14. 15 Federal and State income and employment tax obligations arising therefrom, by (a) authorizing the extension of a loan to such optionee from the Corporation or (b) permitting the optionee to pay the option price for the purchased Common Stock in installments over a period of years. The terms of any loan or installment method of payment (including the interest rate and terms of repayment) will be established by the Committee in its sole discretion. Loans and installment payments may be granted with or without security or collateral, but the maximum credit available to the optionee shall not exceed the sum of (i) the aggregate option price (less par value) of the purchased shares plus (ii) any federal and state income and employment tax liability incurred by the optionee in connection with the exercise of the option. 15. 16 ARTICLE THREE AUTOMATIC OPTION GRANT PROGRAM ------------------------------ I. OPTION TERMS A. GRANT DATES. Option grants shall be made on the dates specified below: 1. Each Eligible Director who is first elected or appointed as a non-employee Board member on or after the 1995 Annual Stockholders Meeting shall automatically be granted, on the date of such initial election or appointment, a Non-Statutory Option to purchase 20,000 shares of Common Stock. 2. On the date of each Annual Stockholders Meeting, beginning with the 1995 Annual Meeting, each individual who is reelected to serve as an Eligible Director after such meeting, shall automatically be granted a Non-Statutory Option to purchase 10,000 shares of Common Stock, provided such individual has served as a non-employee Board member for at least six (6) months prior to the date of such Annual Meeting. There shall be no limit on the number of such 10,000-share option grants any one Eligible Director may receive over his or her period of Board service. B. EXERCISE PRICE. 1. The exercise price per share shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must accompany the written notice of exercise delivered to the Corporation. C. OPTION TERM. Each option shall have a term of ten (10) years measured from the option grant date. D. EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately exercisable for any or all of the option shares. However, any shares purchased under the option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the Optionee's cessation of Board service prior to vesting in those shares. Each grant shall vest, and the Corporation's repurchase right shall lapse, in a series of forty-eight 16. 17 (48) equal and successive monthly installments over the Optionee's period of continued service as a Board member, with the first such installment to vest upon the Optionee's completion of one (1) month of Board service measured from the option grant date. E. EFFECT OF TERMINATION OF BOARD SERVICE. The following provisions shall govern the exercise of any options held by the Optionee at the time the Optionee ceases to serve as a Board member: (i) The Optionee (or, in the event of Optionee's death, the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution) shall have a twelve (12)-month period following the date of such cessation of Board service in which to exercise each such option. (ii) During the twelve (12)-month exercise period, the option may not be exercised in the aggregate for more than the number of vested shares of Common Stock for which the option is exercisable at the time of the Optionee's cessation of Board service. (iii) In no event shall the option remain exercisable after the expiration of the option term. Upon the expiration of the twelve (12)-month exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Board service, terminate and cease to be outstanding to the extent it is not exercisable for vested shares on the date of such cessation of Board service. II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER A. In the event of any Corporate Transaction, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of such shares as fully-vested shares of Common Stock. Immediately following the consummation of the Corporate Transaction, each automatic option grant shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). B. In connection with any Change in Control, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the 17. 18 Change in Control, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of such shares as fully-vested shares of Common Stock. Each such option shall remain exercisable for such fully-vested option shares until the expiration or sooner termination of the option term or the surrender of the option in connection with a Hostile Take-Over. C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each automatic option held by him or her for a period of at least six (6) months. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to the surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. No approval or consent of the Board shall be required in connection with such option surrender and cash distribution. D. The grant of options under the Automatic Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. III. AMENDMENT OF THE AUTOMATIC OPTION GRANT PROGRAM The provisions of this Automatic Option Grant Program, together with the option grants outstanding thereunder, may not be amended at intervals more frequently than once every six (6) months, other than to the extent necessary to comply with applicable Federal income tax laws and regulations. IV. REMAINING TERMS The remaining terms of each option granted under the Automatic Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 18. 19 ARTICLE FOUR MISCELLANEOUS I. AMENDMENT OF THE PLAN The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects whatsoever. However, (i) no such amendment or modification shall, without the consent of the holders, adversely affect rights and obligations with respect to options at the time outstanding under the Plan and (ii) any amendment made to the Automatic Option Grant Program (or any options outstanding thereunder) shall be in compliance with the limitations of that program. In addition, the Board shall not, without the approval of the Corporation's stockholders, (i) materially increase the maximum number of shares issuable under the Plan, except for permissible adjustments under Section VI.C of Article One, (ii) materially modify the eligibility requirements for the grant of options under the Plan or (iii) otherwise materially increase the benefits accruing to participants under the Plan. II. TAX WITHHOLDING A. The Corporation's obligation to deliver shares or cash upon the exercise of stock options or stock appreciation rights granted under the Discretionary Option Grant Program shall be subject to the satisfaction of all applicable Federal, State and local income and employment tax withholding requirements. B. The Committee may, in its discretion and upon such terms and conditions as it may deem appropriate (including the applicable safe-harbor provisions of Rule 16b-3 of the Exchange Act) provide any or all holders of outstanding option grants under Article Two with the election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such options, a portion of such shares with an aggregate Fair Market Value equal to the designated percentage (any multiple of 5% specified by the optionee) of the Federal, State and local income and employment taxes ("Taxes") incurred in connection with the acquisition of such shares. In lieu of such direct withholding, one or more optionees may also be granted the right to deliver shares of Common Stock to the Corporation in satisfaction of such Taxes. The withheld or delivered shares shall be valued at the Fair Market Value on the applicable determination date for such Taxes. 19. 20 III. EFFECTIVE DATE AND TERM OF PLAN 1. The Plan was adopted as an amendment and restatement of the 1993 Stock Option Plan originally adopted as of December 17, 1993 and became effective on the Effective Date. A. On January 13, 1995, the Board adopted an amendment to the Plan to increase the number of shares issuable thereunder by 500,000 shares to 1,000,000 shares and to implement the Automatic Option Grant Program, subject to stockholder approval at the 1995 Annual Stockholders Meeting. The Company's stockholders approved such amendment at the 1995 Annual Meeting of Stockholders held on May 18, 1995. B. On October 2, 1995, the Board adopted an amendment to the Plan to increase the total number of shares of Common Stock for which any one individual may be granted stock options or separately exercisable stock appreciation rights in any calendar year from 300,000 to 500,000. In addition, on December 4, 1995 the Board adopted an amendment to the Plan to increase the number of shares issuable thereunder by 500,000 shares to 1,500,000 shares and on July 16, 1996 the Board adopted an additional amendment to further increase the number of shares issuable thereunder by an additional 500,000 shares to 2,000,000 shares. No options granted on the basis of such 1,000,000-share increase or the 200,000-share increase shall become exercisable in whole or in part unless and until such stockholder approval is obtained. If such stockholder approval is not obtained, then any unexercised options granted on the basis of such increases shall terminate and cease to be outstanding. C. The provisions of each restatement of, and amendment to, the Plan shall apply only to options granted under the Plan from and after the effective date of such restatement or amendment. All options issued and outstanding under the Plan immediately prior to the adoption of each restatement or amendment shall continue to be governed by the terms and conditions of the Plan (and the instrument evidencing each such option) as in effect on the date each such option was previously granted, and nothing in a subsequent restatement or amendment shall be deemed to affect or otherwise modify the rights or obligations of the holders of such options with respect to the acquisition of shares of Common Stock thereunder. D. The Plan shall terminate upon the earliest of (i) the expiration of the ten (10) year period measured from the date the Plan was originally adopted by the Board, (ii) the date on which all shares available for issuance under the Plan have been issued pursuant to the exercise of outstanding options and stock appreciation rights, or (iii) the termination of all outstanding options in connection with a Corporate Transaction. If the date of termination is determined under clause (i) above, then no options outstanding on such date shall be affected by the termination of the Plan, and such securities shall thereafter continue to have force and effect in accordance with the provisions of the instruments evidencing such options. 20. 21 E. Options may be granted under this Plan to purchase shares of Common Stock in excess of the number of shares then available for issuance under the Plan, provided each option granted is not to become exercisable, in whole or in part, at any time prior to stockholder approval of an amendment authorizing a sufficient increase in the number of shares issuable under the Plan. IV. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares pursuant to options granted under the Plan shall be used for general corporate purposes. V. REGULATORY APPROVALS A. The implementation of the Plan, the granting of any option hereunder, and the issuance of stock upon the exercise or surrender of any such option shall be subject to the procurement by the Corporation of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the stock issued pursuant to it. B. No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of a Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any securities exchange on which stock of the same class is then listed. VI. NO EMPLOYMENT/SERVICE RIGHTS Neither the action of the Corporation in establishing the Plan, nor any action taken by the Committee hereunder, nor any provision of the Plan shall be construed so as to grant any individual the right to remain in the employ or service of the Corporation (or any parent or subsidiary corporation) for any period of specific duration, and the Corporation (or any parent or subsidiary corporation retaining the services of such individual) may terminate such individual's employment or service at any time and for any reason, with or without cause. VII. MISCELLANEOUS PROVISIONS A. Except as otherwise expressly authorized under the Plan, the right to acquire Common Stock or other assets under the Plan may not be assigned, encumbered or otherwise transferred by any optionee. 21. 22 B. The provisions of the Plan governing the vesting and exercise of options and shares issued under the Plan shall be governed by the laws of the State of California, as such laws are applied to contracts entered into and performed in such State. C. The provisions of the Plan shall inure to the benefit of, and be binding upon, the Corporation and its successors or assigns, whether by Corporate Transaction or otherwise, and the optionees, the legal representatives of their respective estates, their respective heirs or legatees and their permitted assignees. 22. EX-10.30 4 LIMITED WAIVER DATED AS OF OCTOBER 31, 1996 1 Exhibit 10.30 LIMITED WAIVER THIS LIMITED WAIVER (this "Waiver") is dated as of October 31, 1996, and entered into by and among THE CERPLEX GROUP, INC., a Delaware corporation ("Company"), THE FINANCIAL INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF ("Lenders") and WELLS FARGO BANK, NATIONAL ASSOCIATION, as administrative agent for Lenders ("Administrative Agent"), and, for purposes of Section 8 hereof, CERTECH Technology, Inc., Cerplex Mass., Inc., Cerplex Limited, Apex Computer Company, Cerplex Subsidiary, Inc., Peripheral Computer Support, Inc. ("PCS"), Modcomp/Cerplex L.P., Modcomp Joint Venture, Inc., Modular Computer Services, Inc., Modular Computer Systems GmbH and Modcomp France S.A. (collectively, "Guarantors") and is made with reference to that certain Credit Agreement dated as of October 12, 1994, as amended by First Amendment to Credit Agreement and Limited Waiver dated as of April 15, 1996 (the "First Amendment"), by and among Company, Lenders and Administrative Agent (as so amended, the "Credit Agreement"). Capitalized terms used herein without definition shall have the same meanings herein as set forth in the Credit Agreement. RECITALS: WHEREAS, Company has requested Lenders to waive certain provisions of the Credit Agreement through November 30, 1996; WHEREAS, on the terms and conditions set forth below, Lenders have agreed to waive compliance with such provisions of the Credit Agreement; NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto agree as follows: SECTION 1. WAIVER. Subject to the terms and conditions set forth herein and in reliance on the representations and warranties of Company herein contained, Lenders hereby waive compliance with the provisions of: (a) subsection 6.11 of the Credit Agreement with respect to the real property leases and subleases of Company and its Subsidiaries entered into or acquired by Company or any of its Subsidiaries after October 14, 1994 for the period from and including August 31, 1996 to and including November 30, 1996; provided, however, Company shall not be required to obtain landlord waivers with respect to (i) property located in Canada, France, Germany or the United Kingdom if, in the opinion of counsel to Administrative Agent, it is not customary in such countries to obtain such waivers, and (ii) property, other than property that constitutes the principal place of business of Company or any of its Subsidiaries, that is (A) located 1 2 in a state the laws of which do not create a statutory lien in favor of a landlord on the personal property of a tenant and (B) subject to a lease that does not create a contractual lien in favor of the landlord on the personal property of the tenant; (b) subsections 7.6A, 7.6B and 7.6C of the Credit Agreement for the period from and including September 30, 1996 to and including November 30, 1996; (c) subsection 7.6D of the Credit Agreement for the period from and including July 1, 1996 to and including November 30, 1996; (d) subsection 8.2(i) of the Credit Agreement with respect to the failure of Company to pay the promissory note payable to Lucent Technology, Inc. for the period from and including September 15, 1996 to and including November 30, 1996; (e) subsection 8.2(ii) of the Credit Agreement with respect to the failure of Company to comply with Sections 6.3 and 6.4 of the Note Purchase Agreement for the period from and including September 30, 1996 to and including November 30, 1996; (f) subsection 8.3 of the Credit Agreement with respect to the failure of Company to comply with subsections 7.6A, 7.6B and 7.6C of the Credit Agreement for the period from and including September 30, 1996 to and including November 30, 1996; (g) subsection 8.3 of the Credit Agreement with respect to the failure of Company to comply with subsection 7.6D of the Credit Agreement for the period from and including July 1, 1996 to and including November 30, 1996; (h) subsection 8.5 of the Credit Agreement with respect to the failure of Company to comply with subsection 6.11 of the Credit Agreement for the period from and including August 31, 1996 to and including November 30, 1996; (i) subsection 8.13 of the Credit Agreement for the period from and including September 30, 1996 to and including November 30, 1996; and (j) subsection 2.4B(iii) of the Credit Agreement with respect to the $350,000 received in respect of the assets sold to Ascent Logic Corporation for the period from and including the date of receipt of such proceeds to and including November 30, 1996 provided that such proceeds are held in trust by Company for Lenders. 2 3 SECTION 2. LIMITATION OF WAIVER. Without limiting the generality of the provisions of subsection 10.6 of the Credit Agreement, the waiver set forth above shall be limited precisely as written and relates solely to the noncompliance by Company with the provisions of subsections 2.4B(iii), 6.11, 7.6, 8.2(i), 8.2(ii), 8.3, 8.5 and 8.13 of the Credit Agreement in the manner and to the extent described above. Nothing in this Waiver shall be deemed to: (a) constitute a waiver of compliance by Company with respect to (i) subsections 2.4B(iii), 6.11, 7.6, 8.2(i), 8.2(ii), 8.3, 8.5 or 8.13 of the Credit Agreement in any other instance or (ii) any other term, provision or condition of the Credit Agreement or any other instrument or agreement referred to therein; or (b) prejudice any right or remedy that Administrative Agent or any Lender may now have (except to the extent such right or remedy was based upon existing defaults that will not exist after giving effect to this Waiver) or may have in the future under or in connection with the Credit Agreement or any other instrument or agreement referred to therein. Except as expressly set forth herein, the terms, provisions and conditions of the Credit Agreement and the other Loan Documents shall remain in full force and effect and in all other respects are hereby ratified and confirmed. SECTION 3. REPRESENTATIONS AND WARRANTIES. In order to induce Lenders to enter into this Waiver, Company hereby represents and warrants that after giving effect to this Waiver: (a) as of the date hereof, there exists no Event of Default or Potential Event of Default under the Credit Agreement; (b) except with respect to the matters disclosed to Lenders prior to the date hereof, all representations and warranties contained in the Credit Agreement and the other Loan Documents are true, correct and complete in all material respects on and as of the date hereof except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date; and (c) as of the date hereof, Company has performed all agreements to be performed on its part as set forth in the Credit Agreement. SECTION 4. CONDITIONS PRECEDENT TO EFFECTIVENESS. Sections 1(c) and 1(g) of this Waiver shall become effective as of July 1, 1996, Sections 1(a) and 1(h) of this Waiver shall become effective as of August 31, 1996, Section 1(d) of this Waiver shall become effective as of September 15, 1996 and Sections 1(b), 1(e), 3 4 1(f), 1(i) and 1(j) of this Waiver shall become effective as of September 30, 1996 only upon the satisfaction of all of the following conditions precedent: (a) Company shall deliver to Lenders (or to Administrative Agent for Lenders with sufficient originally executed copies, where appropriate, for each Lender and its counsel) the following: (i) counterparts of this Waiver executed by Company and the Credit Support Parties (other than Modular Computer Systems GmbH and Modcomp France S.A., which counterparts may be delivered as soon as practicable after the date hereof); and (ii) signature and incumbency certificates of the officers of Company executing this Waiver. (b) Company shall deliver to Administrative Agent a waiver, in form and substance satisfactory to Lenders, of Sections 6.3 and 6.4 of the Note Purchase Agreement duly executed by the parties to the Note Purchase Agreement required to execute such waiver. SECTION 5. COUNTERPARTS; EFFECTIVENESS This Waiver may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Waiver (other than the provisions of Section 1 hereof, the effectiveness of which is governed by Section 4 hereof) shall become effective upon the execution of a counterpart hereof by Company, Requisite Lenders and each of the Credit Support Parties and receipt by Company and Administrative Agent of written or telephonic confirmation of such execution and authorization of delivery thereof. SECTION 6. WARRANTS Company and Lenders hereby agree that the Purchase Price (as defined in that certain Warrant Agreement dated as of April 15, 1996 among Company and Lenders) is reduced to $2.50 per share of the Common Stock, $0.001 par value per share, of Company, effective as of the date of execution of this Waiver, and that Company shall deliver to Lenders an addendum to the existing warrants or a replacement warrant evidencing such change as soon as practicable after the execution of this Waiver. 4 5 SECTION 7. GOVERNING LAW. THIS WAIVER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES. SECTION 8. ACKNOWLEDGEMENT AND CONSENT BY GUARANTORS Company is a party to the Company Collateral Documents pursuant to which Company has created Liens in favor of Administrative Agent on certain Collateral to secure the Obligations. Guarantors are a party to the Guaranty and the Subsidiary Collateral Documents pursuant to which each Guarantor has (i) guarantied the Obligations and (ii) created Liens in favor of Administrative Agent on certain Collateral to secure the obligations of such Guarantor under the Guaranty. Company and Guarantors are collectively referred to herein as the "Credit Support Parties," and the Guaranty, the Company Collateral Documents and the Subsidiary Collateral Documents are collectively referred to herein as the "Credit Support Documents." Each Credit Support Party hereby acknowledges that it has reviewed the terms and provisions of this Waiver. Each Credit Support Party hereby confirms that each Credit Support Document to which it is a party or otherwise bound and all Collateral encumbered thereby will continue to guaranty or secure, as the case may be, to the fullest extent possible the payment and performance of all "Obligations," "Guaranteed Obligations" and "Secured Obligations," as the case may be (in each case as such terms are defined in the applicable Credit Support Document), including, without limitation, the payment and performance of all such "Obligations," "Guaranteed Obligations" or "Secured Obligations," as the case may be, in respect of the Obligations of Company now or hereafter existing under or in respect of the Credit Agreement and the Notes defined therein. Each Credit Support Party acknowledges and agrees that any of the Credit Support Documents to which it is a party or otherwise bound shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Waiver. Each Credit Support Party represents and warrants that all representations and warranties contained in the Credit Agreement and the Credit Support Documents to which it is a party or otherwise bound are true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. 5 6 SECTION 9. FEES AND EXPENSES. Company acknowledges and agrees that all costs, fees and expenses as described in subsection 10.2 of the Credit Agreement incurred by Administrative Agent and its counsel with respect to this Waiver and the documents and transactions contemplated hereby shall be for the account of the Company. 6 7 IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first above written. COMPANY: THE CERPLEX GROUP, INC. By: ----------------------------------------- Name: Title: LENDERS: WELLS FARGO BANK, NATIONAL ASSOCIATION, individually and as Administrative Agent By: ----------------------------------------- Name: Title: SUMITOMO BANK OF CALIFORNIA COMPANY By: ----------------------------------------- Name: Title: 7 8 BHF BANK AKTIENGESELLSCHAFT (FORMERLY BERLINER HANDELS-UND FRANKFURTER BANK) By: ----------------------------------------- Name: Title: By: ----------------------------------------- Name: Title: COMERICA BANK CALIFORNIA individually and as Administrative Agent By: ----------------------------------------- Name: Title: GUARANTORS: CERTECH TECHNOLOGY, INC. By: ----------------------------------------- Name: Title: CERPLEX MASS., INC. By: ----------------------------------------- Name: Title: 8 9 CERPLEX LIMITED By: ----------------------------------------- Name: Title: APEX COMPUTER COMPANY By: ----------------------------------------- Name: Title: CERPLEX SUBSIDIARY, INC. By: ----------------------------------------- Name: Title: PERIPHERAL COMPUTER SUPPORT, INC. By: ----------------------------------------- Name: Title: MODCOMP/CERPLEX, L.P. By: Cerplex Subsidiary, Inc., as general partner By: ----------------------------------------- Name: Title: MODCOMP JOINT VENTURE, INC. By: ----------------------------------------- Name: Title: 9 10 MODULAR COMPUTER SERVICES, INC. By: ----------------------------------------- Name: Title: MODULAR COMPUTER SYSTEMS GMBH By: ----------------------------------------- Name: Title: MODCOMP FRANCE S.A. By: ----------------------------------------- Name: Title: 10 EX-11.1 5 COMPUTATION OF NET INCOME (LOSS) PER SHARE. 1 Exhibit 11.1 THE CERPLEX GROUP, INC. EXHIBIT TO CONSOLIDATED FINANCIAL STATEMENTS COMPUTATION OF NET INCOME (LOSS) PER SHARE (in thousands, except per share data)
Three months ended Nine months ended ------------------ ----------------- September 29, October 1, September 29, October 1, ------------- ---------- ------------- ---------- 1996 1995 1996 1995 -------- -------- -------- -------- WEIGHTED AVERAGE COMMON AND COMMON SHARES EQUIVALENT SHARES OUTSTANDING Average common stock outstanding 13,422 13,108 13,332 13,081 Dilutive Convertible Preferred Stock options and warrants - based on the treasury stock method using the average price(1) -------- -------- -------- -------- Total 13,422 13,108 13,332 13,081 ======== ======== ======== ======== COMPOSITION OF NET INCOME Income (loss) from continuing operations $(12,940) $ (9,433) $(13,811) $ (8,473) Income from discontinued operations (15,564) (15,412) -------- -------- -------- -------- Net Income $(12,940) $(24,997) $(13,811) $(23,885) ======== ======== ======== ======== PER SHARE DATA Continuing operations $ (0.96) $ (0.72) $ (1.04) $ (0.65) Discontinued operations (1.19) (1.18) -------- -------- -------- -------- Net income per share $ (0.96) $ (1.91) $ (1.04) $ (1.83) ======== ======== ======== ========
(1) Stock options and warrants were not assumed to be converted under the treasury stock method for the three and nine month periods ended September 29, 1996 and October 1, 1995, because their effect would be anti-dilutive. 39 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1995 JAN-01-1996 SEP-29-1996 26,521 0 23,301 0 22,674 80,024 28,390 0 117,900 96,125 0 13 0 7,859 0 117,900 0 142,821 0 121,170 0 0 4,980 (12,478) 1,333 (13,811) 0 0 0 (13,811) (1.04) 0
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