-----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, BrLifb2XuadAB0doRDjStpWVlancLs+6TFliEsc3vw98t8dgegdXpf50+CK9ntwv e4GtwoN/KK2rznj9uF7cUQ== 0000892569-97-001334.txt : 19970514 0000892569-97-001334.hdr.sgml : 19970514 ACCESSION NUMBER: 0000892569-97-001334 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970329 FILED AS OF DATE: 19970513 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: 97603037 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 QUARTERLY REPORT FOR THE PERIOD ENDED 03/29/1997 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 29, 1997 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to ________________ Commission file number 0-23602 ------- 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 92780 - ---------------------------------------- -------------------- (Address of principal executive offices) (Zip Code) (714) 258-5600 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the Registrant's Common Stock on April 30, 1997 was 30,000,000. 2 THE CERPLEX GROUP, INC. TABLE OF CONTENTS
Page ---- PART I -- FINANCIAL INFORMATION Condensed Consolidated Balance Sheets........................................... 4 Condensed Consolidated Statements of Operations................................. 5 Condensed Consolidated Statement of Stockholders' Deficiency.................... 6 Condensed Consolidated Statements of Cash Flows................................. 7 Notes to Condensed Consolidated Financial Statements............................ 8 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 11 PART II -- OTHER INFORMATION Legal Proceedings............................................................... 17 Changes in Securities........................................................... 17 Defaults Upon Senior Securities................................................. 17 Submission of Matters to a Vote of Security Holders............................. 17 Other Information............................................................... 17 Exhibits and Reports on Form 8-K................................................ 22 SIGNATURE.................................................................................. 23
2 3 THE CERPLEX GROUP, INC. PART I FINANCIAL INFORMATION 3 4 THE CERPLEX GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) (Unaudited)
March 31 December 31 1997 1996 ------------ ------------- ASSETS Current assets: Cash and cash equivalents $ 22,936 $ 23,782 Accounts receivable, net 18,854 19,539 Inventories 14,314 17,326 Net assets of discontinued operations -- 1,681 Prepaid expenses and other current assets 5,796 8,146 ------------ ------------ Total current assets 61,900 70,474 Property, plant and equipment, net 27,122 28,039 Goodwill 4,694 4,953 Other long-term assets 1,738 2,028 ------------ ------------ Total assets $ 95,454 $ 105,494 ============ ============ LIABILITIES & STOCKHOLDERS' DEFICIENCY Current liabilities: Note payable to bank $ 6,000 $ 6,000 Notes payable 5,026 5,026 Accounts payable 16,148 19,498 Accrued and other current liabilities 23,972 25,347 Income taxes payable 2,254 1,729 ------------ ------------ Total current liabilities 53,400 57,600 ------------ ------------ Long-term debt, less current portion 56,907 56,817 Long-term obligations 6,214 6,214 Commitments and contingencies Stockholders' Deficiency: Preferred stock, par value $0.001; 3,066,340 shares authorized, none outstanding; 8,000 shares Series B Convertible Preferred Stock of which 5,589 and 7,197 are issued and outstanding as of March 31, 1997 and December 31, 1996, respectively; aggregate liquidation preference of $11,178 and $14,394 as of 1997, and 1996, respectively. 5,589 7,197 Common stock, par value $0.001 per share; 30,000,000 shares authorized; 17,076,652 and 14,110,949 issued and outstanding in 1997 and 1996, respectively. 17 14 Additional paid-in capital 53,253 51,648 Notes receivable from stockholders (139) (139) Unearned compensation (55) (73) Accumulated deficiency (79,417) (74,414) Cumulative translation adjustment (315) 630 ------------ ------------ Total stockholders' deficiency (21,067) (15,137) ------------ ------------ Total liabilities and stockholders' deficiency $ 95,454 $ 105,494 ============ ============
See accompanying notes to condensed consolidated financial statements 4 5 THE CERPLEX GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited)
Three months ended March 31 --------------------- 1997 1996 --------- -------- Net sales $ 46,340 $ 40,846 Cost of sales 38,829 33,915 -------- -------- Gross profit 7,511 6,931 Selling, general and administrative expenses 8,970 6,720 -------- -------- Operating income (loss) (1,459) 211 Equity in earnings from joint venture -- 357 Other expense, net 576 67 Interest expense, net 2,247 1,781 -------- -------- Loss before income taxes (4,282) (1,280) Provision for income taxes 721 293 -------- -------- Net loss $ (5,003) $ (1,573) ======== ======== Net loss per share $ (.32) $ (.12) ======== ======== Weighted average common shares outstanding 15,741 13,174 ======== ========
See accompanying notes to condensed consolidated financial statements 5 6 THE CERPLEX GROUP, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY (in thousands, except share data) (Unaudited)
Convertible Preferred Stock Common Stock Additional Total --------------- ------------------ Paid-In Accumulated Stockholders' Shares Amount Shares Amount Capital Other Deficiency Deficiency ------ ------ ----------- ------ ------- ----- ----------- ------------- Balance at December 31, 1996 7,197 $ 7,197 14,110,949 $14 $51,648 $ 418 $(74,414) $(15,137) Stock options exercised 10,665 Conversion of Preferred Stock (1,608) (1,608) 2,955,038 3 1,605 Net loss (5,003) (5,003) Amortization of unearned compensation 18 18 Translation adjustment (945) (945) ------- ------- ---------- --- ------- ----- -------- -------- Balance at March 31, 1997 5,589 $ 5,589 17,076,652 $17 $53,253 $(509) $(79,417) $(21,067) ====== ======= ========== === ======= ===== ======== ========
See accompanying notes to condensed consolidated financial statements 6 7 THE CERPLEX GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (Unaudited)
Three Months Ended March 31 --------------------------- 1997 1996 --------- --------- Cash flows from operating activities: Net loss $ (5,003) $ (1,573) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 2,295 1,859 Amortization of unearned compensation 18 18 Foreign currency transaction loss 25 36 Equity in earnings of joint venture -- (282) Decrease (increase) in: Accounts receivable 456 2,518 Inventories 2,763 (818) Prepaid expenses and other 2,112 (360) Investment in other long-term assets (381) (167) Net assets of discontinued operations 1,681 (323) (Decrease) increase in: Accounts payable (2,685) 3,888 Accrued and other current liabilities (458) (2,452) Income taxes payable 667 214 -------- -------- Net cash provided by operating activities 1,490 2,558 -------- -------- Cash flows from investing activities: Purchase of plant and equipment, net (747) (703) -------- -------- Net cash used in investing activities (747) (703) -------- -------- Cash flows from financing activities: Principal payments of long-term debt (257) (243) Proceeds from issuance of common stock -- 18 Other (5) (3) -------- -------- Net cash used in financing activities (262) (228) -------- -------- Effect of exchange rate changes on cash (1,327) (12) -------- -------- Net increase (decrease) in cash and cash equivalents (846) 1,615 Cash and cash equivalents at beginning of period 23,782 3,807 -------- -------- Cash and cash equivalents at end of period $ 22,936 $ 5,422 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the quarter for: Interest $ 1,625 $ 1,538 ======== ======== Income taxes $ 18 $ 18 ======== ======== Non-cash activities during the quarter: Capital lease additions $ 249 $ -- ======== ========
See accompanying notes to condensed consolidated financial statements 7 8 THE CERPLEX GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------- (a) ORGANIZATION, BASIS OF REPORTING AND PRINCIPLES OF CONSOLIDATION The Cerplex Group, Inc. (the "Company") was incorporated in California in May 1990 and reincorporated in Delaware in November 1993. The Company is a leading independent provider of electronic parts repair and logistics services for a wide range of electronic equipment for the computer and peripheral, telecommunications and office automation markets. The Company's key service offerings are depot repair, logistics services and spare parts management and sales, as well as a variety of ancillary services. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. (b) CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. In May 1996, the Company acquired Cerplex SAS. As part of the acquisition, sufficient cash was provided to fund certain liabilities of Cerplex SAS. Under the terms of the Stock Purchase Agreement, the Company has agreed to certain financial covenants over a four year period that limit the amount of dividends and payments in the nature of corporate charges paid by Cerplex SAS. Accordingly, the cash of Cerplex SAS is generally not available for financing operations outside of Cerplex SAS. The cash balance of Cerplex SAS at March 31, 1997 was $18.0 million. (c) INVENTORIES Inventories are stated at the lower of cost (determined by the weighted-average method) or market. (d) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation for the plant in the United Kingdom is provided utilizing the straight line method over the estimated useful life of twenty-five years. Depreciation for equipment is provided utilizing the straight-line method over the estimated useful lives (primarily three to five years) of the respective assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or useful life. (e) OTHER ASSETS Long-term investments are recorded at cost. The Company periodically assesses whether there has been an other than temporary decline in the market value below cost of the investment. Any such decline is charged to earnings resulting in the establishment of a new cost basis for the investment. Debt issuance costs incurred to obtain financing are capitalized and amortized using the straight-line method over the estimated life of the related debt. 8 9 THE CERPLEX GROUP, INC. (f) GOODWILL Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future cash flows. The amount of goodwill impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company's average cost of funds. (g) FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign subsidiaries are translated at year-end rates of exchange and net sales and expenses are translated at the average rates of exchange for the year. Translation gains and losses are excluded from the measurement of net income or loss and are recorded as a separate component of stockholders' deficiency. Gains and losses resulting from foreign currency transactions are included in net income. (h) INCOME TAXES Provisions are made for the amount of income taxes on the reported operations of each year. Tax credits are treated as reductions of the applicable Federal income tax provisions in the years earned. On a quarterly basis, the Company provides for state and foreign income taxes based on an estimate of the effective rate for the entire year. (i) REVENUE RECOGNITION Sales are recognized upon shipment of product to customers. Sales relating to deferred service contracts are recognized over the related contract terms on a straight-line basis. (j) LOSS PER SHARE Loss per share is computed using the weighted average number of common shares outstanding. Common stock equivalents consist of preferred stock, stock options and warrants, which were computed using the treasury stock method, respectively. Net loss per share excludes the effect of common stock equivalents, because their effect would be anti-dilutive. In 1997, Financial Accounting Standards No. 128 ("FAS 128") Earnings Per Share was issued. FAS 128 is effective for earnings per share calculations for periods ending after December 15, 1997. At that time the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods, as needed. (k) FINANCIAL STATEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. 9 10 THE CERPLEX GROUP, INC. NOTE 2 - BASIS OF PRESENTATION - ------------------------------ In the opinion of the Company's management, the accompanying unaudited condensed consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position as of March 31, 1997 and consolidated statement of operations and statement of cash flows for the three months ended March 31, 1997 and 1996. Results of operations for the three months ended March 31, 1997 are not necessarily indicative of results to be expected in the future. Although the Company believes that the disclosures in the accompanying financial statements are adequate to make the information presented not misleading, certain information and footnote information normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, and these financial statements should be read in conjunction with the Company's Form 10-K for the year ended December 31, 1996. The Company's fiscal year is the 52 or 53 week period ending on the Saturday closest to December 31. For purposes of presentation, the Company has indicated its accounting quarter and year end as March 31 and December 31, respectively. Certain reclassifications have been made to the 1996 consolidated financial statements to conform to the 1997 presentation. NOTE 3 - CONVERSIONS OF SERIES B PREFERRED STOCK - ------------------------------------------------ Due in part to the decreases in the trading price of the Company's Common Stock, the conversion rights of the Series B Preferred Stock have resulted in, and may in the future result in, dilution to the holders of Common Stock. In addition, due to the conversion of the Series B Preferred Stock, the Company has insufficient authorized Common Stock to effect the conversion of additional outstanding Series B Preferred Stock or to issue the Common Stock issuable upon exercise of outstanding options and warrants. The lack of authorized capital, as well as the existence of the Series B Preferred Stock, could impact adversely the ability of the Company to consummate an equity financing. The Company's Board of Directors recently approved an increase in the Company's authorized Common Stock from 30,000,000 to 60,000,000 shares. The Company intends to submit this increase to the Company's stockholders for approval at the Annual Meeting on June 10, 1997. Failure to receive such approval by July 1997 constitutes an event of default under the Company's senior credit facility. 10 11 THE CERPLEX GROUP, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed under "Item 5. Other Information (a) Risk Factors." OVERVIEW - -------- The Company is an independent provider of electronic parts repair, spare parts sales and management, and logistics. The Company's net sales have increased substantially over the last few years, primarily as a result of acquisitions. The Company is no longer permitted under the terms of its credit facility to engage in acquisitions. The Company's results of operations have been adversely affected over the last two years due to a variety of factors discussed below. During the third quarter of 1995, the Board of Directors approved a Liquidation Plan to discontinue its end-of-life programs, a segment of the Company, through liquidation of these operations. In its end-of-life programs, the Company assumed all responsibilities for the support and repair of products which are no longer manufactured or are being phased out of manufacturing. Generally, when the Company undertook an end-of-life program, it acquired substantially all of the unique test equipment, repair equipment and inventories needed to support the program. Services provided by the Company under end-of-life programs include repair, provision of spare parts for a defined period of time, plant return and parts reclamation, engineering and document control, warehousing, and vendor certification and management. The Company no longer undertakes these programs. The liquidation of end-of-life programs has been accounted for as discontinued operations. The results of operations for 1996 reflected, to a large degree, the resolution of several matters that have been adversely impacting the Company. Specifically, the Company closed its unprofitable Texas operations and reached a settlement with the SpectraVision bankruptcy; it established reserves for the impairment of assets, and incurred additional losses on common stock received in settlement of various transactions; it closed its training operations and business, resulting in restructuring charges and asset write-downs; and, due to changes in the Company's business, or the business of third parties, the Company recorded charges for inventory write-downs, uncollectable receivables and other assets. RESULTS OF OPERATIONS - --------------------- The following table sets forth items from the Company's Condensed Consolidated Statements of Operations as a percentage of net sales.
For the Three Month Period Ended March 31 ---------------- 1997 1996 ------- ------ Net sales 100.0% 100.0% Cost of sales 83.8 83.0 ----- ----- Gross margin 16.2 17.0 Selling, general and administrative 19.4 16.5 ----- ----- Operating income (loss) (3.2)% 0.5% ===== =====
11 12 THE CERPLEX GROUP, INC. NET SALES Net sales for the quarter ended March 31, 1997 increased $5.5 million or 13.5% to $46.3 million over net sales for the corresponding quarter of 1996. The increase in net sales for the first quarter of 1997 compared with the first quarter of 1996 is primarily due to $23.3 million in incremental sales from the acquisitions in the second quarter of 1996 of Cerplex SAS and the remaining 51% interest in Modcomp/Cerplex L.P., a Delaware limited partnership ("Modcomp/Cerplex"). This increase was partially offset by declines in North America sales attributable to a $4.2 million sales decline in the Company's spare parts business, a $3.3 million sales decrease in the Company's Southern California operations, a $3.2 million revenue decline due to the sale of the Company's InCirt division in the second quarter of 1996, and a $3.1 million revenue decline due to the closure of the Company's Texas contract service operations in the third quarter of 1996. GROSS PROFIT Gross profit as a percentage of net sales declined to 16.2% during the quarter ended March 31, 1997 from 17.0% during the quarter ended March 31, 1996. The decrease in the gross profit margin percentage was primarily driven by cost inefficiencies due to lower overall sales volumes in the Company's North America depot repair and spare parts businesses. In addition, the gross profit percentage was negatively impacted by additional inventory reserves. The decrease in the gross profit margin percentage was partially offset by higher margins in the Company's international operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A") increased by $2.3 million and as a percentage of net sales were 19.4% during the quarter ended March 31, 1997 compared with 16.5% during the quarter ended March 31, 1996. The increase in SG&A dollar spending is due to additional SG&A resulting from the additions of the Company's Cerplex SAS and Modcomp/Cerplex subsidiaries which were acquired in the second quarter of fiscal 1996, and from higher legal and consulting expenses incurred during the quarter. EQUITY IN EARNINGS FROM JOINT VENTURE & OTHER EXPENSES Equity in earnings of joint venture relates to the Company's 49% ownership interest in Modcomp/Cerplex prior to April 1996. The Company acquired the remaining 51% interest of Modcomp/Cerplex in the second quarter of 1996. The increase in other expenses for the first quarter of 1997 is primarily due to the write-off of $0.5 million in non-operating assets. 12 13 THE CERPLEX GROUP, INC. INTEREST EXPENSE Interest expense for the quarter ended March 31, 1997 increased to $2.2 million from $1.8 million in the corresponding quarter of 1996. The increase was due to increased debt amortization expenses together with a higher weighted average interest rate. The increase was partially offset by a lower average debt balance. Loan amortization costs in the quarter ended March 31, 1997 increased by $0.5 million to $0.8 million. The effective interest rate on credit facilities increased to 9.8% during the quarter ended March 31, 1997 from 9.2% during the quarter ended March 31, 1996. Average borrowings outstanding were $61.9 million during the quarter ended March 31, 1997 compared with $65.9 during the quarter ended March 31, 1996. INCOME TAXES Income tax expense for the quarter ended March 31, 1997 increased to $721,000 from $293,000 for the prior year quarter and is primarily related to income taxes on earnings of the Company's operations in Europe. The Company has not recorded an income benefit related to operating losses in the United States, and, accordingly, a full valuation allowance for deferred tax assets has continued to be maintained due to uncertainties surrounding their realization. 13 14 THE CERPLEX GROUP, INC. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- SENIOR CREDIT FACILITY The Company's senior credit agreement was established in October 1994 (the "Credit Agreement") with a group of banks led by Wells Fargo Bank. During part of 1996 and part of 1997, the Company was in default of various covenants in the Credit Agreement, which resulted in a series of waivers and amendments to the agreement. In April 1996, the Company entered into an amended Credit Agreement that reduced the maximum amount under the line of credit from $60.0 million to $48.0 million and required reductions in the total commitments to $47.0 million by September 30, 1996, to $45.0 million by December 31, 1996 and to $43.0 million by March 31, 1997. The interest rate on the Agreement was increased to prime plus 2.25% and the maturity accelerated from October 1997 to March 31, 1997. In consideration for the amendment, the Company provided the lenders with warrants to purchase 125,000 shares of common stock at $6 per share and paid certain commitment fees and out-of-pocket expenses. In November 1996, the Company entered into amendments to the Credit Agreement. As compensation for the amendments, the company repriced the 125,000 warrants issued in April 1996 from $6.00 per share to $2.50 per share. In April 1997, the agreement was again amended to provide for borrowings comprising a revolver and a term loan. The revolver has a maximum amount available of $6.0 million. The interest rate on the revolver is the prime lending rate plus 2.25%. The term loan is for $38.9 million and carries an interest rate of prime lending rate plus 3.125%. In addition, the Company must use to pay down the term loan 66.67% of all cumulative cash flow in excess of $9.0 million during 1997, and generally 66.67% of all proceeds from asset, stock investment and subsidiary sales, as well as 25% of the proceeds of any equity offerings. The Company reduced the term loan and the revolver by an aggregate of approximately $8.25 million on April 11, 1997 in connection with the sale of PCS described below. The amended Credit Agreement expires May 1, 1998. In consideration for the amendment to the Credit Agreement, the Company was required to provide the lenders with warrants to purchase 750,000 shares of the Company's common stock at an exercise price of $0.60, and to pay certain commitment fees and out-of-pocket expenses. In addition, the warrants issued April 1996 were repriced to an exercise price of $0.60. The April 1997 Credit Agreement includes revised covenants for profitability, current ratio, minimum tangible net worth, leverage and working capital. In addition, the Company is operating under waivers with respect to certain covenants under the Credit Agreement and is required to fulfill certain covenants, including covenants to hire a Chief Executive Officer by May 30, 1997 and to receive shareholder approval to increase authorized Common Stock from 30,000,000 to 60,000,000 shares by July 1997. SUBORDINATED NOTES In November 1993, the Company sold $17.3 million in principal amount of its Series A 9.0% (changed to 9.5% in October 1994) Senior Subordinated Notes and $5.7 million in principal amount of its Series B 9.0% Senior Subordinated Notes with 920,000 detachable warrants to purchase common stock. The detachable warrants were issued at the option price of $.01 per share resulting in an original issue discount of $3.6 million on the Series B 9.0% Senior Subordinated Notes. The Series A Senior Subordinated Notes accrued interest at the rate of 9.5% per annum, payable quarterly, with principal amount thereof payable in three installments in November 1999, 2000 and 2001. The Company is subject to certain financial and other covenants which include restrictions on the incurrence of additional debt, payment of any dividends and certain other cash disbursements as well as the maintenance of certain financial ratios. 14 15 THE CERPLEX GROUP, INC. During part of 1996 and 1997, the Company was in default of various covenants under the Note Purchase Agreement, which resulted in a series of waivers and amendments. In April 1996, the Company entered into an amendment to the Note Purchase Agreements which revised the covenants for maximum leverage, net worth and fixed charges. In consideration for the amendment to the Note Purchase Agreements, the Company was required to provide the Senior Subordinated Note Holders 1,000,000 warrants to purchase common stock at $6.00 per share. The warrants issued pursuant to the amended Note Purchase Agreements, and the amended Credit Agreement discussed above, were recorded at fair market value with such amount amortized as a charge against income over the period of the warrants. In November 1996, the Company entered into amendments to the Note Purchase Agreements which revised certain financial covenants. As compensation for the amendments, the company repriced the warrants issued in April 1996 from $6.00 per share to $2.50 per share. In April 1997, the Note Purchase Agreement was again amended revising certain covenants. Interest is now payable semi-annually instead of quarterly. The term of the Agreement is unchanged from the prior Agreement. In consideration for the amendment, the Company repriced the warrants issued in April 1996 to the April 4, 1997 market price of $0.60 per share. MISCELLANEOUS Effective April 1, 1996, the Company sold its contract manufacturing operations in Tustin, California for $3.5 million cash and restricted Common Stock valued at approximately $2.0 million at the time of the acquisition. The Company was required to use $2.0 million of the proceeds from the sale of the InCirT Division to repay a portion of the borrowings under the Credit Agreement. In April 1996, the Company received a distribution from its earnings of Modcomp/Cerplex of $3.0 million which was used to acquire the remaining 51% of this partnership. In May 1996, the Company acquired Rank Xerox Limited's subsidiary, Cerplex SAS, for $6.1 million, including estimated taxes, registration fees, legal, accounting, and other out-of-pocket expenses of $1.2 million. Under the terms of the Stock Purchase Agreement, the Company has agreed to certain financial covenants over a four-year period that limit the amount of dividends and payments in the nature of corporate charges paid by Cerplex SAS; the maintenance of Cerplex SAS' current ratio greater than one; and restrictions on guarantees with respect to Cerplex and its subsidiaries (excluding Cerplex SAS). Accordingly, the cash of Cerplex SAS is generally not available to Cerplex for financing operations outside of Cerplex SAS. In June 1996, the Company issued 8,000 shares of Series B Stock at $1,000 per share in a private placement. The Series B Preferred Stock is convertible into Common Stock of the Company at the option of each holder at the lower of $5.07 per share or 80% of the average closing bid price over a ten-day period ending three days prior to the date of conversion. The Series B Preferred Stock has certain rights, privileges and preferences, including a $2,000 per share preference in the event of a sale of the Company. The Board of Directors may not pay dividends to the holders of the Company's Common Stock unless and until the Board has paid an equivalent divided to the holders of Series B Preferred Stock based upon the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible. As of April 11, 1997, 5,880 shares of the Series B Preferred Stock had been converted into 16,502,125 shares of Common Stock. While additional holders of Series B Preferred Stock have converted their shares into Common Stock after such date, the issuance of any Common Stock above the 30,000,000 authorized shares remains subject to stockholder approval. 15 16 THE CERPLEX GROUP, INC. On April 11, 1997, the Company sold Peripheral Computer Support, Inc. ("PCS"), a subsidiary of the Company, for $14.5 million in cash and the cancellation of $500,000 of indebtedness. Of such amount, $8.25 million was used to pay down bank debt, $500,000 was placed into escrow, and approximately $750,000 was used to pay expenses associated with the transaction. The Company or it subsidiaries are required to pay BT 1.8 million pounds in 1999 or earlier if certain sales volumes are reached. The Company acquired inventory consisting of used telephones from Lucent Technologies, Inc. ("Lucent"). At December 31, 1996, the Company had $5.9 million of inventory, production cost commitments and assets related to the telephones acquired from Lucent. In June 1996, the Company executed a promissory note bearing interest at 9.75% in the amount of $4.6 million payable on September 15, 1996 in favor of Lucent, reflecting a portion of the amount invoiced to the Company by Lucent (the "Lucent Note"). Lucent has invoiced the company for an additional $0.6 million. Due to the quality of the inventory and the lack of availability of spare parts to effect repairs, the Company believes it has claims against Lucent. The Company currently does not intend to pay the Lucent note or other Lucent invoices. If the Company is required to pay the Lucent Note and other Lucent invoices in full, it would have a material adverse effect on the Company's financial resources. On October 7, 1996, the Company filed a lawsuit against Lucent in the Orange County Superior Court seeking to have the Lucent Note declared invalid. On November 6, 1996, Lucent filed a cross-complaint seeking payment of the Lucent Note, alleging damages for breach of contract and seeking a constructive trust on any proceeds from the sale of the telephones. The Company's failure to have the Lucent Note declared invalid, or the loss to Lucent of any of the material claims asserted against the Company, could materially and adversely affect the Company. In October 1996, the Company entered into a transaction with Atwood Richards, Inc. ("ARI") pursuant to which the Company was obligated to continue to repair and refurbish the remaining telephones in inventory through December 31, 1996, and deliver 100% of the repaired product to ARI. The Company will receive trade credits for up to $7.5 million in goods and services depending on the number of telephones repaired. The trade credits received from ARI may be used to acquire various goods and services. There can be no assurance that the Company will be able to use the trade credits in the near term, if at all. The Company's primary source for liquidity is cash flow from operations and its ability to reduce working capital requirements. The Company has limited available capacity under its Credit Agreement. Management believes it will remain in compliance with the financial covenants set forth in the revised Credit Agreement throughout 1997, and that the borrowing capacity combined with the net proceeds from the sale of PCS and forecasted cash flow from operations will be sufficient to meet the working capital needs for 1997. There can be no assurance that the existing borrowing capacity and cash flow from operations will be adequate. 16 17 THE CERPLEX GROUP, INC. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - -------------------------- Refer to disclosure set forth in Part I, Item 3 (Legal Proceedings) of the Company's Annual Report on Form 10-K for the 1996 fiscal year. ITEM 2. CHANGES IN SECURITIES - ------------------------------ None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - ---------------------------------------- During portions of 1996 and the beginning of 1997, the Company was in default under its senior Credit Agreement. The Company has renegotiated and amended such agreement to cure such defaults. See "Liquidity and Capital Resources" herein for a more detailed discussion. In addition, the Company is operating under waivers with respect to certain covenants under the Credit Agreement and is required to fulfill certain covenants by various deadlines over the next couple of months. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ None. ITEM 5. OTHER INFORMATION - -------------------------- (a) RISK FACTORS This report may contain forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause differences include, but are not limited to, those discussed below. LOSSES AND ACCUMULATED DEFICIT. For the quarter ended March 31, 1997, the Company reported a net loss of $5.0 million, including an operating loss of $1.5 million. As of March 31, 1997, the Company had an accumulated deficit of $79.4 million. There can be no assurance that the Company will reduce its operating losses or operate profitably in the future. The Company anticipates incurring additional operating losses during the second quarter of 1997. Continued losses could materially and adversely affect the Company's business and the value of, and the market for, the Company's equity securities. DEPENDENCE ON KEY CUSTOMERS. During 1996, Rank Xerox, IBM and BT accounted for approximately 17%, 12%, and 11%, of revenues, respectively. In the first quarter of 1997 these three customers accounted for approximately 30%, 7%, and 9%, respectively. During 1995, IBM significantly decreased orders for certain programs which materially and adversely affected the Company and its results of operations. A significant portion of the Company's net sales attributable to IBM in 1995 were from discontinued operations, and, as such, the Company expects net sales attributable to IBM to continue to account for a decreasing percentage of the Company's net sales. Sales to BT significantly decreased during 1996 to approximately $21.4 million representing a 36% decrease from 1995 and it is expected that sales during 1997 will decrease from the 1996 levels. There can be no assurance that major customers of the Company will not terminate any or all of their arrangements with the Company; significantly change, reduce or delay the amount of services ordered from the Company; or significantly change the terms upon which the Company and these customers do business. Any such termination, change, reduction or delay could have a material adverse effect on the Company's business. 17 18 THE CERPLEX GROUP, INC. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. The Company's ability to maintain its current revenue base and to grow its business is dependent on the availability of adequate capital. Without sufficient capital, the Company's growth may be limited and its existing operations may be adversely affected. The Company's financial condition and limited capital has adversely impacted the Company's relationship with certain customers and may adversely impact its relationship with customers in the future. During portions of 1996 and 1997, the Company was in default under its senior credit agreement and subordinated note agreement. While the Company has renegotiated amendments to such agreements, the terms of the senior credit facility have resulted in a reduced borrowing base which will be further reduced over the next twelve months and the Company currently has limited borrowing ability under such facility. The Company is required to use a portion of cash generated from operations, and from sales of assets to further reduce its borrowing base under the senior credit agreements. As a result, the Company currently has limited capital. In addition, the terms of such agreements restrict the Company's ability to incur additional indebtedness and could adversely affect the Company's ability to obtain additional financing. General market conditions and the Company's future performance, including its ability to generate profits and positive cash flow, will also impact the Company's financial resources. The failure of the Company to obtain additional capital when needed could have a material adverse effect on the Company's business and future prospects. The Company is required to maintain or fulfill certain covenants and obligations including the hiring of a Chief Executive Officer by May 30, 1997, to maintain its credit facility. No assurance can be given that the Company will be able to fulfill such obligations and covenants or to otherwise maintain its current credit facilities or that additional financing will be available or, if available, will be on acceptable terms. IMPACT OF SERIES B PREFERRED STOCK; LACK OF AUTHORIZED CAPITAL. In June 1996, the Company issued 8,000 shares of Series B Preferred Stock at $1,000 per share in a private placement. The Series B Preferred Stock is convertible into Common Stock of the Company at the option of each holder at the lower of $5.07 per share or 80% of the average closing bid price over a ten-day period ending three days prior to the date of conversion. The Series B Preferred Stock has certain rights, privileges and preferences, including preferential voting rights and a $2,000 per share preference in the event of a sale of the Company. The Board of Directors may not pay dividends to the holders of the Company's Common Stock unless and until the Board has paid an equivalent divided to the holders of Series B Preferred Stock based upon the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible. As of April 11, 1997, 5,880 shares of the Series B Preferred Stock had been converted into approximately 16,502,125 shares of Common Stock. Between March 31, 1997 and April 11, 1997, 3,469 shares of Series B Preferred Stock had been converted in 12,912,094 shares of Common Stock. Due in part to the decreases in the trading price of the Company's Common Stock, the conversion rights of the Series B Preferred Stock have resulted in, and may in the future result in, dilution to the holders of Common Stock. In addition, due to the conversion of the Series B Preferred Stock, the Company has insufficient authorized Common Stock to effect the conversion of additional outstanding Series B Preferred Stock or to issue the Common Stock issuable upon exercise of outstanding options and warrants. The lack of authorized capital, as well as the existence of the Series B Preferred Stock, could impact adversely the ability of the Company to consummate an equity financing. The Company's Board of Directors recently approved an increase in the Company's authorized Common Stock from 30,000,000 to 60,000,000 shares. The Company intends to submit this increase to the Company's stockholders for approval at the Annual Meeting on June 10, 1997. Failure to receive such approval by July 1997 constitutes an event of default under the Company's senior credit facility. 18 19 THE CERPLEX GROUP, INC. DISPUTE WITH LUCENT TECHNOLOGIES. The Company acquired inventory consisting of used telephones from Lucent. At December 31, 1996, the Company had $5.9 million of inventory, production cost commitments and assets, related to the telephones acquired from Lucent, which were subsequently sold to a Company that specializes in worldwide corporate bartering. In June 1996, the Company executed a promissory note bearing interest at 9.75% in the amount of $4.6 million payable on September 15, 1996 in favor of Lucent, reflecting a portion of the amount invoiced to the Company by Lucent. Lucent has invoiced the Company for an additional $0.6 million. Due to the quality of the inventory and the lack of availability of spare parts to effect repairs, the Company believes it has claims against Lucent. The Company currently does not intend to pay the Lucent note or other Lucent invoices. If the Company is required to pay the Lucent note and other Lucent invoices in full, it would have a material adverse effect on the Company's financial resources. On October 7, 1996, the Company filed a lawsuit against Lucent in the Orange County Superior Court seeking to have the Lucent note declared invalid. On November 6, 1996, Lucent filed a cross-complaint seeking payment of the Lucent Note, alleging damages for breach of contract and seeking a constructive trust on any proceeds from the sale of the telephones. The Company's failure to have the Lucent note declared invalid, or the loss to Lucent of any of the material claims asserted by the Company, could materially and adversely affect the Company. RISK OF EXCESS AND UNUSABLE INVENTORY; Decreased Value of Assets. At March 31 1997, inventory constituted approximately 15% of the Company's assets. Any decrease in the demand for the Company's repair services could result in an additional portion of the Company's inventory becoming excess, obsolete or otherwise unusable. During the last few years, the Company wrote down a significant amount of inventory and a significant amount of other assets, including receivables, securities and goodwill. Changes in the Company's business, as well as the business of third parties, could adversely affect the value of assets remaining, possibly resulting in write-offs. The existence, amounts and timing of any such additional write-offs will be dependent upon various factors including, without limitation, the volume and profitability of future operations, market conditions as well as the operations of the above-mentioned third parties. In addition, the Company became entitled to receive an aggregate of approximately 370,000 shares of Common Stock of Pen Interconnect, Inc. in connection with the sale of its InCirT division which were valued at $5.40 per share. The trading price of such shares has subsequently decreased substantially and the Company wrote off $1.1 million in the fourth quarter of 1996. No additional amounts were written off in the first quarter of 1997. There can be no assurance that the Company will not be required to write down additional amounts of its investment with respect to such shares in the future. In October 1996, the Company entered into an agreement to sell its phone inventory purchased from Lucent to Atwood Richards, Inc. ("ARI"). The consideration paid to the Company from ARI was up to $7.5 million in trade credits. The Company has no prior experience in using trade credits and there can be no assurance the Company will realize the value of the trade credits. There can be no assurance that the Company will not be required to write down significant amounts of its inventory or other assets in the future, which could have a material adverse effect on the Company's business and results of operations. DEPENDENCE ON CUSTOMERS IN THE ELECTRONICS INDUSTRY. The Company is dependent upon the continued growth, viability and financial stability of its customers and potential customers in the electronics industry, particularly the computer industry. The computer industry has been characterized by rapid technological change, compressed product life cycles and pricing and margin pressures. The factors affecting segments of the electronics industry in general, and the Company's OEM customers in particular, could have an adverse effect on the Company's business. During 1995 and 1996, several of the Company's customers experienced severe financial difficulty resulting in significant losses to the Company as a result of write downs of receivables and other assets. There can be no assurance that existing customers or future customers will not experience financial difficulty, which could have a material adverse effect on the Company's business. 19 20 THE CERPLEX GROUP, INC. RELIANCE ON SHORT-TERM PURCHASE ORDERS. The Company's customer contracts are typically subject to termination on short notice at the customer's discretion and purchase orders under such contracts typically only cover services over a 90-day period. The termination of any material contracts or any substantial decrease in the orders received from major customers could have a material adverse effect on the Company's business. COMPETITION. The Company competes with the in-house repair centers of original equipment manufacturers ("OEM'S") and third party maintainers ("TPM'S") for repair services. There is no assurance that these entities will choose to outsource their repair needs. In certain instances, these entities compete directly with the Company for the services of unrelated OEM'S and TPM'S. In addition to competing with OEM'S and TPM'S, the Company also competes for depot repair business with a small number of independent organizations similar in size to the Company and a large number of smaller companies. Many of the companies with which the Company competes have significantly greater financial resources than the Company. There can be no assurance that the Company will be able to compete effectively in its target markets. MANAGEMENT OF GROWTH. The Company's growth has placed, and will continue to place, a strain on the Company's managerial, operational and financial resources. These resources may be further strained by the geographically dispersed operations of the Company. The Company's ability to manage growth effectively will require it to continue to improve its operational, financial and management information systems; to develop the management skills of its managers and supervisors; and to train, motivate and effectively manage its employees. The Company's failure to effectively manage growth could have a material adverse effect on the Company's business. Due to factors associated with the Company's business and financial condition, there can be no assurance that the Company's growth in net sales will continue into the future. EXPANSION OF INTERNATIONAL SALES. During 1996, approximately 41% of the Company's sales were international. There can be no assurance that the Company will be able to successfully market, sell and deliver its products and services in these markets. In addition to the uncertainty as to the Company's ability to expand its international presence, there are certain risks inherent in doing business on an international level, such as unexpected changes in regulatory requirements, export restrictions, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in currency exchange rates and potentially adverse tax consequences, which could adversely impact the success of the Company's international operations. There can be no assurance that one or more of such factors will not have a material adverse effect on the Company's international operations and, consequently, on the Company's business, operating results and financial condition. DEPENDENCE ON ACQUISITION STRATEGY. Certain of the Company's repair programs result in decreasing net sales as the installed base of the particular products under such programs decreases over time. An important component of the Company's strategy to maintain its revenue and to grow its business has been the acquisition of repair programs and complementary businesses. Competition for these types of transactions is likely to intensify. The Company's ability to effect any significant transactions requiring capital will be limited by the Company's lack of working capital and by the terms of the Company's senior credit facility and subordinated notes. The Company is no longer permitted under the terms of its credit facility to engage in acquisitions. There can be no assurance that the Company will be able to acquire additional repair programs or complementary businesses in the future or, if acquired, that such operations will prove to be profitable. 20 21 THE CERPLEX GROUP, INC. DISCONTINUED OPERATIONS; CHANGE IN STRATEGY. In September 1995, Cerplex adopted a plan to discontinue its end-of-life programs, a line of business which historically generated a significant percentage of the Company's total sales, but which experienced declining sales. Net sales from end-of-life programs declined from approximately $33 million in 1994 to $20 million in 1995. In connection with discontinuing its end-of-life business, the Company changed certain elements of its business strategy and is undergoing changes in management and operations, is developing a direct sales force and terminating the majority of its outside sales representatives, is reducing its emphasis on inventory acquisitions and is focusing on targeted customers in specific industries. There can be no assurance that such changes will positively impact the Company's business and results of operations in the short or long term. RISK ASSOCIATED WITH THE ABILITY OF EXISTING STOCKHOLDERS TO CONTROL THE COMPANY. As of April 30, 1997, the officers, directors, principal stockholders and their affiliates owned greater than a majority of the outstanding common stock. Although there are currently no voting agreements or similar arrangements among such stockholders, if they were to act in concert, they would be able to elect a majority of the Company's directors, determine the outcome of most corporate actions requiring stockholder approval and otherwise control the business affairs of the Company. The Board of Directors of the Company has the authority under the Company's Restated Certificate of Incorporation to issue shares of the Company's authorized preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any unissued shares of preferred stock. The issuance of preferred stock may adversely affect the voting and dividend rights, rights upon liquidation and other rights of the holders of common stock. The issuance of preferred stock and the control by existing stockholders, if they were to act in concert, may have the effect of delaying, deferring or preventing a change in control of the Company. In April 1997, William A. Klein acquired 3,663,898 shares of Common Stock upon the conversion of Series B Preferred Stock, Richard C. Davis acquired 166,667 shares of Common Stock upon the conversion of Series B Preferred Stock and the Sprout Growth, II L.P. acquired 7,563,333 shares of Common Stock upon the conversion of Series B Preferred Stock. In addition, DLJ Capital Corporation has a pending conversion of 231 shares of Preferred Stock into 770,000 shares of Common Stock. DEPENDENCE ON KEY PERSONNEL. The Company's future success depends, to a large extent, upon the efforts and abilities of key employees. Competition for qualified personnel in the industry is intense. The loss of services of certain of these key employees could have a material adverse effect on the Company's business. During the last year, the Company has lost the services of several of its key executive officers and members of management. While the Company has filled several positions, the Company is currently searching for a new Chief Executive Officer and certain other key managers. William A. Klein, the Company's Chairman is currently acting as President and Chief Executive Officer, while the Company searches for a new Chief Executive Officer. The failure to engage a new Chief Executive Officer by May 30, 1997 will result in an event of default under the Company's senior Credit Facility. NO ASSURANCE OF PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the Company's initial public offering, there was no public market for the Common Stock. On February 20, 1997, the Company was removed from the NASDAQ National Market System and commenced trading on the NASDAQ OTC Bulletin Board. There can be no assurance of an active trading market for the Company's Common Stock. In addition, the trading price of the Common Stock has been, and in the future could be, subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant contracts, changes in management or new products or services by the Company or its competitors, general trends in the industry and other events or factors. In addition, the stock market has experienced extreme price and volume fluctuations which have particularly affected the market price for many companies in similar industries and which have often been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. 21 22 THE CERPLEX GROUP, INC. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits Exhibit Description - ------- ----------- 27.1 EDGAR Financial Data Schedule b) Reports on Form 8-K for the quarter ended March 29, 1997 None 22 23 THE CERPLEX GROUP, INC. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 13, 1997 THE CERPLEX GROUP, INC. /s/ ROBERT W. HUGHES ----------------------------- Robert W. Hughes Senior Vice President of Finance and Chief Financial Officer (Principal Accounting Officer) 23 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-27-1997 DEC-30-1996 MAR-29-1997 22,936 0 21,686 (2,832) 14,314 61,900 38,348 (11,226) 95,454 53,400 56,907 0 5,589 53,270 (79,926) 95,454 0 46,340 0 38,829 9,546 209 2,247 (4,282) 721 (5,003) 0 0 0 (5,003) (0.32) (0.32)
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