-----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, KDeR/MD6Arj1EnQEfV13+LEbw1W2IgAqcsBZOyNKzvDwQetbJoDPvk3kt8Tyzz7b xB80MjSX6jpI92FinpJIcQ== 0000892569-97-003094.txt : 19971114 0000892569-97-003094.hdr.sgml : 19971114 ACCESSION NUMBER: 0000892569-97-003094 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 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: SEC FILE NUMBER: 000-23602 FILM NUMBER: 97713703 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 FOR THE QUARTER ENDED SEPTEMBER 30, 1997 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1997 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ --------------- Commission file number 0-23602 ------------------------ THE CERPLEX GROUP, INC. ---------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 33-0411354 - ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1382 Bell Avenue, Tustin, CA 92780 ---------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (714) 258-5600 ---------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No ____ The number of shares outstanding of the Registrant's Common Stock on October 31, 1997 was 36,380,331. 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............................................... 13 PART II --- OTHER INFORMATION Legal Proceedings............................................................... 19 Changes in Securities........................................................... 19 Defaults Upon Senior Securities................................................. 19 Submission of Matters to a Vote of Security Holders............................. 19 Other Information............................................................... 19 Exhibits........................................................................ 24 SIGNATURE ........................................................................ 37
2 3 THE CERPLEX GROUP, INC. PART I FINANCIAL INFORMATION 3 4 THE CERPLEX GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data) (Unaudited)
September 30, December 31, 1997 1996 ------------- -------------- ASSETS Current Assets: Cash and cash equivalents $18,512 $23,782 Accounts receivable, net 10,782 19,539 Inventories 4,993 17,326 Net assets of discontinued operations -- 1,681 Prepaid expenses and other current assets 6,579 8,146 ------------ ------------- Total current assets 40,866 70,474 Property, plant and equipment, net 22,822 28,039 Goodwill -- 4,953 Other long-term assets 1,268 2,028 ------------ ------------- Total assets $64,956 $105,494 ============ ============= LIABILITIES & STOCKHOLDERS' DEFICIENCY Current Liabilities: Notes payable to banks $29,749 $ 6,000 Notes payable 4,714 5,026 Accounts payable 12,832 19,498 Accrued and other current liabilities 21,143 25,347 Income taxes payable 174 1,729 ------------ ------------- Total current liabilities 68,612 57,600 ------------ ------------- Long-term debt, less current portion 18,818 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 379 and 7,197 are issued and outstanding as of September 30, 1997 and December 31, 1996, respectively; aggregate liquidation preference of $758 and $14,394 as of September 30, 1997 and December 31, 1996, respectively. 379 7,197 Common stock, par value $0.001 per share; 60,000,000 shares authorized; 34,913,613 and 14,110,949 issued and outstanding as of September 30, 1997 and December 31, 1996, respectively. 35 14 Additional paid-in capital 59,340 51,648 Notes receivable from stockholders -- (139) Unearned compensation -- (73) Accumulated deficiency (87,745) (74,414) Cumulative translation adjustment (697) 630 ------------ ------------- Total stockholders' deficiency (28,688) (15,137) ------------ ------------- Total liabilities and stockholders' deficiency $ 64,956 $105,494 ============ =============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4 5 THE CERPLEX GROUP, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (dollars in thousands, except per share data) (Unaudited)
Three months ended September 30, Nine months ended September 30, ----------------------------------- ----------------------------------- 1997 1996 1997 1996 -------------- -------------- ---------------- --------------- (As Restated) (As Restated) Net sales $26,571 $ 50,636 $ 112,177 $142,821 Cost of sales 19,720 46,885 95,796 121,170 ------------- ---------- --------- -------- Gross profit 6,851 3,751 16,381 21,651 Selling, general and administrative expenses 3,129 11,842 23,250 27,702 Restructuring charges -- 2,084 4,307 2,084 ------------- ---------- --------- -------- Operating income (loss) 3,722 (10,175) (11,176) (8,135) Equity in earnings from joint venture -- -- -- 357 Gain on sale of InCirt Division -- -- -- 450 Loss on sale of MODCOMP (394) -- (394) -- Gain on sale of Peripheral Computer Support, Inc. -- -- 6,607 -- Other (income) expense, net (449) 391 549 170 Interest expense, net 1,925 1,811 5,881 4,980 ------------- --------- --------- -------- Income (loss) before income taxes 1,852 (12,377) (11,393) (12,478) Provision for income taxes 823 563 1,938 1,333 ------------- --------- --------- -------- Net income (loss) $ 1,029 $ (12,940) $ (13,331) $(13,811) ============= ========= ========= ======== Net income (loss) per common share $ 0.03 $ (1.12) $ (0.49) $ (1.23) ============= ========= ========= ======== Weighted average common and common equivalent shares outstanding 36,833 13,422 27,426 13,332 ============= ========= ========= ========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5 6 THE CERPLEX GROUP, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY (dollars in thousands, except share data) (Unaudited)
Total Convertible Additional Accumulated Shareholders' Preferred Stock Common Stock Paid-in-Capital Other Deficiency Deficiency ------------------- ------------------- --------------- -------- ------------ ----------- Shares Amount Shares Amount ------ ------ ------ ------ Balance at December 31, 1996 7,197 $7,197 14,110,949 14 51,648 $ 418 $ (74,414) $ (15,137) Stock options exercised -- -- 10,665 -- -- -- -- -- Conversion of Preferred Stock (1,608) (1,608) 2,955,038 3 1,605 -- -- -- Net loss -- -- -- -- -- -- (5,003) (5,003) Amortization of unearned compensation -- -- -- -- -- 18 -- 18 Translation adjustment -- -- -- -- -- (945) -- (945) ------- --------- ------------ ----- ---------- -------- --------- ----------- Balance at March 31, 1997 5,589 5,589 17,076,652 17 53,253 (509) (79,417) (21,067) Stock options exercised -- -- 5,887 -- -- -- -- -- Conversion of Preferred Stock (4,932) (4,932) 17,315,116 17 4,915 -- -- -- Net loss -- -- -- -- -- -- (9,357) (9,357) Amortization of unearned compensation -- -- -- -- -- 55 -- 55 Translation adjustment -- -- -- -- -- (382) -- (382) Reduction of notes receivable from shareholder -- -- -- -- -- 139 -- 139 Repricing of warrants -- -- -- -- 103 -- -- 103 Issuance of warrants -- -- -- -- 375 -- -- 375 ------- --------- ------------ ------ ---------- -------- ------------ ---------- Balance at June 30, 1997 657 657 34,217,655 34 58,646 (697) (88,774) (30,134) Conversion of Preferred Stock (278) (278) 695,958 1 277 -- -- -- Net income -- -- -- -- -- -- 1,029 1,029 Issuance of warrants -- -- -- -- 417 -- -- 417 ------- --------- ------------ ------ ---------- -------- ------------ ---------- Balance at September 30, 1997 379 $379 34,913,613 $ 35 $ 59,340 $ (697) $ (87,745) $(28,688) ======= ========= ============ ====== ========== ======== ============ ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6 7 THE CERPLEX GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (Unaudited)
Nine Months Ended September 30, -------------------------- 1997 1996 ----------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(13,331) $(13,811) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 6,337 6,319 Amortization of unearned compensation 73 53 Foreign currency transaction (gain) loss -- 35 Equity in earnings of joint venture -- (356) Distribution of earnings of joint venture -- 3,090 Non-cash charges related to restructure 4,307 -- Gain on sale of plant, property & equipment (17) -- Gain on sale of InCirT Division -- (450) Loss on the sale of MODCOMP 394 -- Gain on the sale of Peripheral Computer Support, Inc. (6,607) -- Decrease (increase) in: Accounts receivable 163 9,142 Inventories 5,667 5,108 Prepaid expenses and other current assets (1,109) 4,166 Other long-term assets (253) (1,391) Net assets of discontinued operations 1,681 2,185 Increase (decrease) in: Accounts payable (4,738) 3,639 Accrued and other current liabilities 317 (8,611) Income taxes payable (1,555) (885) ---------- ---------- Net cash provided by (used in) operating activities (8,671) 8,233 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of plant and equipment, net (1,470) (1,181) Acquisition of businesses, net of cash acquired -- 5,147 Proceeds from sale of plant, property & equipment 70 -- Proceeds from sale of InCirT Division -- 5,500 Proceeds from sale of Modcomp, net of $2.9 million of cash sold 5,591 -- Proceeds from sale of Peripheral Computer Support, Inc. 13,750 -- ---------- --------- Net cash provided by investing activities 17,941 9,466 ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of preferred stock -- 7,859 Proceeds from issuance of common stock -- 80 Repricing / Issuance of warrants 895 -- Decrease in notes receivable from stockholders 139 87 Principal payments / borrowings of long-term debt 686 (410) Principal payments of short term borrowings (14,991) (2,343) ---------- --------- Net cash provided by (used in) financing activities (13,271) 5,273 ---------- --------- Effect of exchange rate changes on cash (1,269) (258) ---------- --------- Net increase (decrease) in cash and cash equivalents (5,270) 22,714 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23,782 3,807 ---------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,512 $ 26,521 ========== ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 4,597 $ 5,266 ========== ========= Income taxes $ 3,162 $ 1,753 ========== ========= Acquisition of Businesses: Amount paid $ -- (8,977) Cash acquired -- 14,124 ---------- --------- $ -- $ 5,147 ========== =========
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 September 30, 1997 was $17.8 million. (C) INVENTORIES Inventories are stated at the lower of cost (determined by the weighted-average method) or market. (D) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation for the plant in the United Kingdom is provided utilizing the straight line method over the estimated useful life of twenty-five years. Depreciation for equipment is provided utilizing the straight-line method over the estimated useful lives (primarily three to five years) of the respective assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or useful life. (E) OTHER ASSETS Long-term investments are recorded at cost. The Company periodically assesses whether there has been an other than temporary decline in the market value below cost of the investment. Any such decline is charged to earnings resulting in the establishment of a new cost basis for the investment. Debt issuance costs incurred to obtain financing are capitalized and amortized using the straight-line method over the estimated life of the related debt. The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company's reported other investments are classified as available-for-sale under SFAS 115. Accordingly, any unrealized holding gains and losses, net of taxes, are excluded from income and recognized as a separate component of equity (deficiency) until realized. Realized gains, realized losses and decline in value, judged to be other than temporary, are included in other income. 8 9 THE CERPLEX GROUP, INC. (F) GOODWILL Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future cash flows. The amount of goodwill impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company's average cost of funds. (G) FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign subsidiaries are translated at quarter-end rates of exchange and net sales and expenses are translated at the average rates of exchange for the year. Translation gains and losses are excluded from the measurement of net income or loss and are recorded as a separate component of stockholders' deficiency. Gains and losses resulting from foreign currency transactions are included in net income. (H) INCOME TAXES Provisions are made for the amount of income taxes on the reported operations of each year. Tax credits are treated as reductions of the applicable Federal income tax provisions in the years earned. On a quarterly basis, the Company provides for state and foreign income taxes based on an estimate of the effective rate for the entire year. (I) REVENUE RECOGNITION Sales are recognized upon shipment of product to customers. Sales relating to deferred service contracts are recognized over the related contract terms on a straight-line basis. (J) INCOME (LOSS) PER SHARE Net income (loss) per share is computed using the weighted average number of common shares and dilutive common equivalent shares outstanding. Common stock equivalents consist of preferred stock, stock options and warrants, which were computed using the treasury stock method. Discounts on the issuance of Preferred Stock increase the net loss for determining net loss per share of Common Stock. Net loss per share excludes the effect of common stock equivalents, because their effect would be anti-dilutive. Amortization of $2,062,000 and $2,651,000 relating to the Preferred Stock discount feature has been reflected in the Company's financial statements during the three and nine-month periods ended September 30, 1996, respectively, and as such the loss per share has been restated for the three and nine-month periods ended September 30 1996. In 1997, Financial Accounting Standards No. 128 ("FAS 128") Earnings Per Share was issued. FAS 128 is effective for earnings per share calculations for periods ending after December 15, 1997. At that time the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods, as needed. The effects of this change are not expected to have a material effect on income (loss) per common share. (K) FINANCIAL STATEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. 9 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 September 30, 1997 and consolidated statement of operations and statement of cash flows for the three and nine month periods ended September 30, 1997 and 1996. Results of operations for the three and nine month periods ended September 30, 1997 are not necessarily indicative of results to be expected in the future. Although the Company believes that the disclosures in the accompanying financial statements are adequate to make the information presented not misleading, certain information and footnote information normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, and these financial statements should be read in conjunction with the Company's Form 10-K/A 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 September 30 and December 31, respectively. Certain reclassifications have been made to the 1996 condensed consolidated financial statements for the three and nine-month period ended September 30, 1997 to conform to the most recent 1997 presentation. NOTE 3 - COMMON STOCK AND CONVERSIONS OF SERIES B PREFERRED STOCK - ----------------------------------------------------------------- As of October 1, 1997, all 8,000 shares of Series B Preferred Stock have been converted into 22,887,823 shares of common stock. Authorized shares in the accompanying condensed consolidated financial statements have been restated to give retroactive effect to the increase in the common shares authorized. NOTE 4 - ACQUISITIONS - --------------------- In May 1996, the Company acquired Rank Xerox Limited's subsidiary, Cerplex SAS, for $6.1 million, including estimated taxes, registration fees, legal, accounting and other out-of-pocket expenses of $1.2 million. Cerplex SAS is the legal successor to Rank Xerox et Compagnie ("Rank Xerox SNC"), which was transformed immediately prior to the acquisition from societe en nom collectif ( a type of partnership) into a societe par actions simplifee ( a form of limited liability company), at which time its name was changed to Cerplex SAS. Cerplex SAS performs repair and refurbishment services primarily for large copiers in the northern region of France, near Lille. Based on the allocation of the purchase price to the fair value of the assets and liabilities (including long term liabilities for taxes and employment related matters) related to the acquisition, the Company reduced other long-term assets by the amount of negative goodwill ($1.5 million) in accordance with APB 16, Business Combinations. As part of the acquisition, RXL provided sufficient cash to fund certain liabilities of Cerplex SAS. Under the terms of the Stock Purchase Agreement, the Company has agreed to certain financial covenants over a four-year period that limit the amount of dividends and payments in the nature of corporate charges paid by Cerplex SAS; the maintenance of Cerplex SAS' current ratio greater than one; and restrictions on guarantees with respect to Cerplex and its subsidiaries (excluding Cerplex SAS). In addition, Cerplex SAS entered into a four-year Supply and Services Agreement with RXL to provide repair and refurbishment services with guaranteed levels of production hours (at standard rates) that decline over the period of the contract. Revenues and income before taxes of Cerplex SAS for the nine months ended September 30, 1997 were $ 39.6 million and $ 2.5 million, respectively. 10 11 THE CERPLEX GROUP, INC. In April 1996, the Company acquired the remaining 51% interest in Modcomp/Cerplex L.P. (Modcomp/Cerplex") for $2.8 million. Modcomp/Cerplex is a supplier of real-time computer systems, products and services for the process control industry. As a result of the acquisition of the remaining interest in Modcomp/Cerplex, the Company consolidated the results of operations and financial position of this entity effective April 1, 1996. Prior to April 1, 1996, the Company recorded its 49% interest in Modcomp/Cerplex on the equity method of accounting. The fair value of the assets and liabilities acquired exceeded the purchase price by approximately $2.0 million, resulting in negative goodwill. In accordance with APB #16, Business Combinations, the Company reduced other long-term assets to zero and recorded the remaining amount of $500,000 as negative goodwill, which was being amortized into income over a five year period. On August 27, 1997, the Company sold Modcomp/Cerplex for $8.5 million in cash. The effective date of the sale was June 30, 1997. Of such amount, $6.1 million was used to pay down bank debt and approximately $.6 million was used pay expenses associated with the transaction. The loss on the sale of Modcomp was $.4 million. NOTE 5 - SALES OF INCIRT DIVISION AND PCS SUBSIDIARY - ------------------------------------------------------ Effective April 1, 1996, the Company sold its contract manufacturing division in Tustin, California ("InCirT Division") to Pen Interconnect for $3.5 million in cash and approximately $2.0 million in restricted common stock. The gain on the sale of InCirT Division was $450,000. In August 1997, the Company sold the restricted shares. 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, $8.3 million was used to pay down bank debt, $500,000 was placed into escrow, and approximately $750,000 was used to pay expenses associated with the transaction. The escrow deposit will be used to pay or reimburse any losses or tax liabilities, as defined in the Purchase Agreement and Tax Allocation Agreement, respectively, or any other amounts incurred by the purchaser or PCS in connection with the sale. Subject to resolution of certain pending tax audit issues with PCS, the Company is entitled to any amounts remaining in the escrow deposit on the first anniversary of the closing date. The gain on the sale of PCS was $6.6 million (excluding the proceeds in escrow). NOTE 6 - RESTRUCTURING COSTS - ------------------------------ During the third quarter of 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, accrual for lease commitments and severance pay, and costs to complete closure of the facilities. During the second quarter of 1997, the Company's Board of Directors authorized and committed management to implement a consolidation and cost reduction plan to reduce North America staffing levels by 16%, eliminating 125 positions. As part of the restructure, the Company closed its Poughkeepsie, New York operations, relocating it to the Lawrence, Massachusetts. In addition, the Company consolidated its Redmond, Washington and is in the process of consolidating its Tustin, California operations, transferring their service programs to the Company's hub-based operations in northern and southern California, Kentucky, and 11 12 THE CERPLEX GROUP, INC. Massachusetts. As a result of these actions, the Company recorded a restructuring charge of $4.3 million, primarily for severance and termination benefits, lease termination costs and write-down of plant and equipment related to vacated facilities. NOTE 7 - GOODWILL - ------------------- During the second quarter of 1997, the Company wrote-off $1.1 million of goodwill as a result of continued declining sales based at its Leeds, England operation and $3.2 million in connection with the sale of PCS. The Company also wrote-down an additional $0.5 million in goodwill as a result of facility closures. 12 13 THE CERPLEX GROUP, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report may contain forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed under "Item 5. Other Information (a) Risk Factors." OVERVIEW - -------- The Company is an independent provider of electronic parts repair, spare parts sales and management, and logistics. Through 1996 the Company's net sales increased substantially, primarily as a result of acquisitions. Because of operating losses beginning in 1995 and resulting liquidity problems, 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 test equipment, repair equipment and inventories needed to support the program. Services provided by the Company under end-of-life programs include repair, provision of spare parts for a defined period of time, plant return and parts reclamation, engineering and document control, warehousing, and vendor certification and management. The Company no longer undertakes these programs. The liquidation of end-of-life programs has been accounted for as discontinued operations. The results of operations for 1996 and the beginning of 1997 reflect, to a large degree, the resolution of several matters that had been impacting the Company. Specifically, the Company closed its unprofitable Texas operations and reached a settlement relating to the SpectraVision bankruptcy; it established reserves for the impairment of assets, and incurred additional losses on common stock received in settlement of various transactions; it closed its training operations and approved the consolidation of certain operations, resulting in restructuring charges and asset write-downs; and, due to changes in the Company's business, or the business of third parties, the Company recorded charges for inventory write-downs, uncollectible receivables and other assets. The financial problems of SpectraVision, Novadyne and other clients resulted in write-offs of receivables and assets by the Company during 1995, 1996 and the first half of 1997 of over $16 million, which adversely affected the Company's results of operations. During 1997, the Company also restructured various aspects of its operations. The Company closed several facilities and reduced headcount with the goal of reducing overhead. RESULTS OF OPERATIONS The following table sets forth items from the Company's Condensed Consolidated Statements of Operations as a percentage of net sales.
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------------- ------------------------------------ 1997 1996 1997 1996 ---------------- ------------------- --------------- ------------------ Net sales 100.0% 100.0% 100.0% 100.0% Costs of sales 74.2 92.6 85.4 84.8 Gross margin 25.8 7.4 14.6 15.2 Selling, general & 11.8 23.4 20.7 19.4 administrative Restructuring charge -- 4.1 3.8 1.5 Operating income 14.0 (20.1) (10.0) (5.7) (loss)
13 14 THE CERPLEX GROUP, INC. NET SALES Net sales for the three and nine month periods ended September 30, 1997 decreased $24.1 million and $30.6 million, respectively, to $26.6 million and $112.2 million, respectively, over the net sales for the corresponding periods of 1996. The decrease in net sales of 47.6% and 21.4% in the three and nine month periods of 1997 compared to the corresponding periods of the prior year is attributable to the sale of its subsidiary, Modcomp/Cerplex L.P. ("Modcomp") effective June 1997, the April 1997 sale of Peripheral Computer Support, Inc. ("PCS"), a decrease in net sales in the Company's North American operations due to the Company's liquidity problems, particularly in relation to spare parts sales and a decrease in sales in the Company's European operations to B.T. The decrease in the nine month period ended September 30, 1997 is partially due to the April 1, 1996 sale of the InCirT Division and the closing of Certech Technology, Inc., the Company's Texas subsidiary. The decreases in the three and nine months ended September 30, 1997 were partially offset by the May 1996 purchase of Cerplex SAS. GROSS PROFIT Gross profit as a percentage of net sales for the three and nine month periods ended September 30, 1997 were 25.8% and 14.6%, respectively, compared to 7.4% and 15.2% during the corresponding periods of the prior year. The gross profit percentage during the three month period ended September 30, 1997 improved primarily as a result of a reversal of a $2.8 million valuation reserve related to trade credits received in conjunction with the Lucent telephone remarketing program. The Company determined that the allowance is not necessary in light of the utilization of the trade credits in settlement of the Lucent litigation, which was substantially completed in September 1997. The gross profit percentage during the nine month period decreased primarily as a result of a $4.2 million write-down of excess and obsolete inventory, property and equipment and other assets in the second quarter of 1997, offset by the reversal of the $2.8 million valuation reserve recorded in the third quarter. In addition, there was a decrease in the gross profit due to the inefficiencies of lower overall sales volumes in the Company's North America depot repair and spare parts businesses for the three and nine month period. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses as a percentage of net sales for the three month period ended September 30, 1997 decreased to 11.8% from 23.4% for the comparable period in 1996, and increased to 20.7% from 19.4% during the nine months ending September 30, 1997 as compared with the corresponding period in 1996. The decrease in selling, general and administrative expenses in the three month period ending September 30, 1997 as a percentage of net sales is primarily due to a $1.2 million bad debt reserve recorded in the prior year and a decrease in staffing of corporate finance, sales and marketing, information systems and human resources personnel and lower legal expenses in the quarter ended September 30, 1997. RESTRUCTURING CHARGES In the second quarter of 1997, the Company recorded a restructuring charge of $4.3 million, primarily for severance and termination benefits, lease termination costs and write-down of plant and equipment. EQUITY IN EARNINGS FROM JOINT VENTURE & OTHER EXPENSES Equity in earnings of joint venture relates to the Company's ownership interest in Modcomp. As discussed in the Company's financial statements, Note 4 - - Acquisitions, the Company acquired the remaining 51% of Modcomp 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 on the equity method of accounting. On August 27, 1997, the Company sold Modcomp, for $8.5 million in cash. Of such amount, approximately $6.1 million was used to pay down bank debt and approximately $.6 million was used to pay expenses associated with the transaction. The loss on the sale of Modcomp was $.4 million. 14 15 THE CERPLEX GROUP, INC. On April 11, 1997, the Company sold PCS, a subsidiary of the Company, for $14.5 million in cash and the cancellation of $500,000 of indebtedness. Of such amount, $8.3 million was used to pay down bank debt, $500,000 was placed into escrow, and approximately $750,000 was used to pay expenses associated with the transaction. The gain on the sale of PCS was $6.6 million. Effective April 1, 1996, the Company sold its contract manufacturing division in Tustin, California to Pen Interconnect for $3.5 million in cash and approximately $2.0 million in restricted common stock. The gain on the sale of the InCirT Division was $450,000. INTEREST EXPENSE Interest expense for the three and nine month periods ended September 30, 1997 increased $114,000 and $901,000, respectively, as a result of increased amortization of loan fees, the issuance of warrants and a higher weighted average interest rate. Average borrowings outstanding were $56.1 million during the nine month period ended September 30, 1997, compared to $64.9 million during the nine month period ended September 30, 1996. The effective interest rate on bank facilities increased to 11.19% during the nine month period ended September 30, 1997, from 10.24% during the nine month period ended September 30, 1996. INCOME TAXES Income tax expense for the three and nine months ended September 30, 1997 and 1996 is primarily related to income taxes on earnings of the Company's operations in Europe calculated at the effective tax rate of the various countries. The Company has not recorded an income tax benefit related to operating losses in the United States, and, accordingly, a full valuation allowance for deferred tax assets has continued to be maintained due to uncertainties surrounding their realization. 15 16 THE CERPLEX GROUP, INC. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- SENIOR CREDIT FACILITY The Company's senior credit agreement was established in October 1994 (the "Credit Agreement") with a group of banks led by Wells Fargo Bank (the "Lenders"). During part of 1996 and part of 1997, the Company was in default of various covenants in the Credit Agreement, which resulted in a series of waivers and amendments to the agreement. In April 1996, the Company entered into an amended Credit Agreement that reduced the maximum amount under the line of credit from $60.0 million to $48.0 million and required reductions in the total commitments to $47.0 million by September 30, 1996, to $45.0 million by December 31, 1996 and to $43.0 million by March 31, 1997. The interest rate on the Agreement was increased to prime plus 2.25% and the maturity accelerated from October 1997 to March 31, 1997. In consideration for the amendment, the Company provided the lenders with warrants to purchase 125,000 shares of common stock at $6 per share and paid certain commitment fees and out-of-pocket expenses. In November 1996, the Company entered into amendments to the Credit Agreement. As compensation for the amendments, the company repriced the 125,000 warrants issued in April 1996 from $6.00 per share to $2.50 per share. In April 1997, the agreement was again amended to provide for borrowings comprising a revolver and a term loan. The revolver had a maximum amount available of $6.0 million. The interest rate on the revolver was the prime lending rate plus 2.25%. The term loan was for $38.9 million and carried an interest rate of prime lending rate plus 3.125%. In addition, the Company must use to pay down the term loan 66.67% of all cumulative cash flow in excess of $9.0 million during 1997, and generally 66.67% of all proceeds from asset, stock investment and subsidiary sales, as well as 25% of the proceeds of any equity offerings. The Company reduced the term loan and the revolver by an aggregate of approximately $8.25 million on April 11, 1997 in connection with the sale of PCS. The amended Credit Agreement expires May 1, 1998. In consideration for the amendment to the Credit Agreement, the Company was required to provide the lenders with warrants to purchase 750,000 shares of the Company's common stock at an exercise price of $0.60, and to pay certain commitment fees and out-of-pocket expenses. In addition, the warrants issued April 1996 were repriced to an exercise price of $0.60. The April 1997 Credit Agreement included revised covenants for profitability, current ratio, minimum tangible net worth, leverage and working capital. In June 1997 and in August 1997, the Credit Agreement was again amended to reduce the maximum amount available under the term loan and the revolver to $31.4 million and $4.9 million, respectively. The interest rate on revolving loans was changed to the prime lending rate plus 2.00% for all non-revolving loans outstanding on August 6, 1997 and 15% for all revolving loans made thereafter. The interest rate on the term loan was increased to the prime lending rate plus 3.125%. The interest rates under the term loan and revolver were required to increase by 1% per month, effective September 1, 1997, for each month which such obligations were not paid in full, up to a maximum increase of 4%. As a result, at October 31, 1997, the interest rate on each of the loans had increased by an additional 2%. In addition, the mandatory pay down of the term loans and/or the revolving loans with the proceeds of any equity offering has been reduced from 25% to 20%, although the first $1.5 million of any equity offerings must be used to permanently reduce the term loans and/or the revolver. Under the Sixth Amendment, approximately $6.1 million of the net proceeds from the sale of Modcomp were used to pay down the term loan, and $2.0 million of the proceeds were used to pay down the revolver. The Company reborrowed $2.0 million of the Modcomp proceeds that were used to pay down the revolver. The Sixth Amendment also resulted in revised financial covenants and required the issuance of warrants to the Lenders to purchase 1,262,188 shares of Common Stock at $0.59 per share. 16 17 THE CERPLEX GROUP, INC. 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. During part of 1996, 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 another amendment to the Note Purchase Agreements which revised certain financial covenants. As compensation for the amendment, the company repriced the warrants issued in April 1996 from $6.00 per share to $2.50 per share. In 1997, the Company was again in default under the Note Purchase Agreement. In April 1997, the Note Purchase Agreement was again amended revising certain covenants. Interest is now payable semi-annually instead of quarterly. In consideration for the amendment, the Company repriced the warrants issued in April 1996 to the April 4, 1997 market price of $0.60 per share. On June 30, 1997, the Company received waivers with respect to various provisions of the Amended and Restated Note Purchase Agreement. On August 20, 1997, the Company completed negotiations with the subordinated note holders to further amend the Amended and Restated Note Purchase Agreement resulting in the First Amendment Agreement to the Amended and Restated Note Purchase Agreement. The First Amendment Agreement increased the interest rate to 15%. The interest payment of $819,375 that was due on August 19, 1997 was added to the principal balance, which increased the principal outstanding under the Amended and Restated Note Purchase Agreement to $18,069,375. The Company was also required to issue warrants for 500,096 of shares of Common Stock at $0.59 per share. Beginning in March 1998, interest is payable monthly, however, the Company may elect to add the portion of interest representing the difference between 9.5% and 15% to the outstanding principal balance. In addition, the covenants under the Amended and Restated Note Purchase Agreement as currently cast will be significantly more restrictive as of June 1998. Therefore, the Company believes that it will be in default again under such agreement at that time unless it is able to successfully renegotiate the covenants. If the Company repays the balance outstanding under the Amended and Restated Note Purchase Agreement on or before August 19, 1998, the portion of interest expense representing the difference between 9.5% and 15% will be forgiven and the warrants for 500,096 shares will be canceled. 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 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. 17 18 THE CERPLEX GROUP, INC. 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. As of October 1, 1997, all 8,000 shares of the Series B Preferred Stock had been converted in 22,887,823 shares of Common Stock. On April 11, 1997, the Company sold Peripheral Computer Support, Inc. ("PCS"), a subsidiary of the Company, for $14.5 million in cash and the cancellation of $ .5 million of indebtedness. Of such amount, $8.3 million was used to pay down bank debt, $ .5 million was placed into escrow, and approximately $ .8 million was used to pay expenses associated with the transaction. On August 27, 1997, the Company sold Modcomp for $8.5 million in cash. Of such amount, approximately $6.1 million was used to pay down bank debt and approximately $ .6 million was used to pay expenses associated with the transaction. The loss on the sale of Modcomp was $.4 million. The Company or its subsidiaries are required to pay BT 1.8 million pounds in 1999 or earlier if certain sales volumes are reached in connection with the purchase of BT's plant in Enfield, England. 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 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 believed it had claims against Lucent. 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. In October 1997, the Company executed a settlement agreement, which had been substantially completed in September 1997. The agreement provided for the payment to Lucent of $150,000 in cash and Lucent also received the trade credits that Cerplex had received when it sold the telephones to a third party. The Company also agreed to pay Lucent an additional $350,000 in six months or from any future sales of phones or proceeds from any insurance claims related to the phone remarketing program. The Company's primary sources for liquidity are cash flow from operations and its ability to reduce working capital requirements. The Company believes it will need additional cash in the near future to maintain its existing operations. The Company has no ability to borrow additional funds under the Credit Agreement and its ability to remain in compliance with the Credit Agreement and the Note Purchase Agreements remains subject to its ability to improve its operational results. The Company has engaged a financial advisor to assist it in pursuing financing alternatives; however, the Credit Agreement and Note Purchase Agreements prohibit the incurrence of additional indebtedness without the Lenders' and senior subordinated note holders' consent. No assurance can be made that additional financing will be available on acceptable terms to the Company, if at all, or that the Lenders and senior subordinated note holders will consent to any such financing. In the event that additional financing is not available, it is likely to have a material adverse effect on the Company's business and future prospects. 18 19 THE CERPLEX GROUP, INC. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - -------------------------- Refer to the disclosure set forth in Part I, Item 3 (Legal Proceedings) of the Company's Annual Report on Form 10-K/A for the 1996 fiscal year. On October 10, 1997, the Company executed a settlement agreement with Lucent Technologies, Inc. ("Lucent") pursuant to which the Company paid Lucent $150,000 and assigned all of the trade credits previously received by Cerplex in exchange for the phones. The Company also agreed to pay Lucent an additional $350,000 in six months or from any future sales of phones or proceeds from any insurance claims relating to the phone remarketing program, whichever comes first. In connection with this settlement, the Company agreed to a stipulation for entry of judgment in the amount of $350,000. Lucent has agreed not to enforce the stipulated judgment and to dismiss the action if the Company pays Lucent the additional $350,000 within six months. ITEM 2. CHANGES IN SECURITIES - ------------------------------ None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - ---------------------------------------- During portions of 1997, the Company was in breach of various provisions of the Credit Agreement and its Note Purchase Agreements. The Company has renegotiated and amended such agreements to cure such breaches. See "Liquidity and Capital Resources" herein for a more detailed discussion. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ None. ITEM 5. OTHER INFORMATION - -------------------------- 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. (A) RISK FACTORS LOSSES AND ACCUMULATED DEFICIT. For the three month period ended September 30, 1997, the Company reported net income of $1.1 million and operating profit of $3.7 million. The Company's income was attributable to the reversal of a $2.8 million valuation reserve related to trade credits received in connection with the Lucent remarketing program. However, for the nine month period ended September 30, 1997, the Company reported a net loss of $13.3 million, including an operating loss of $11.2 million. As of September 30, 1997, the Company had an accumulated deficit of $87.7 million. 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. DEPENDENCE ON KEY CUSTOMERS. During 1996, Rank Xerox, IBM, BT and Digital Equipment Corporation accounted for approximately 17%, 12%, 11%, and 4% of revenues, respectively. In the nine month period ended September 30, 1997, these customers accounted for approximately 31%, 6%, 12%, and 11% of revenues, respectively. During 1995 and 1996, IBM significantly decreased orders for certain programs which materially and adversely affected the Company and its results of operations. A significant portion of the Company's net sales attributable to IBM in 1995 were from discontinued operations, and, as such, the Company expects net sales attributable to IBM to continue to account for a decreasing percentage of the Company's net sales. During the first nine months of 1997, sales to IBM decreased 68% from the first nine months of 1996. Sales to BT significantly decreased during 1996 to approximately $21.4 million, representing 19 20 THE CERPLEX GROUP, INC. a 36% decrease from 1995. During the first nine months of 1997, sales to BT decreased 22% from the first nine months of 1996. There can be no assurance that major customers of the Company will not terminate any or all of their arrangements with the Company; significantly change, reduce or delay the amount of services ordered from the Company; or significantly change the terms upon which the Company and these customers do business. Any such termination, change, reduction or delay could have a material adverse effect on the Company's business. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. During portions of 1996 and 1997, the Company was in default under its Credit Agreement and Note Purchase Agreements. The Company has renegotiated amendments to its Credit Agreement and to its Note Purchase Agreements. The terms of the Credit Agreement, as amended, provide for a limited borrowing base which will be further reduced through and will expire in May 1998. The Company is required to use a portion of cash generated from operations and from sales of assets to further reduce its borrowing base under the Credit Agreement. The interest rate payable by the Company has increased significantly and is subject to significant further increases because the Company has not repayed amounts owed under the Credit Agreement in full by September 30, 1997. The terms of the Note Purchase Agreements have been amended to provide for an increase in the applicable interest rate from 9.5% to 15%. The Company is required to maintain or fulfill certain covenants and obligations in order to maintain its Credit Agreement and to be in compliance under its Note Purchase Agreements. General market conditions and the Company's future performance, including its ability to generate profits and positive cash flow, will impact the Company's financial resources and ability to fulfill such obligations and covenants or to otherwise maintain its Credit Agreement or Note Purchase Agreements. No assurance can be given that the Company will be able to fulfill such obligations and covenants or to otherwise maintain its Credit Agreement or Note Purchase Agreements. In addition, the covenants under the Note Purchase Agreements as currently cast will be significantly more restrictive as of June 1998. Therefore, the Company believes that it will be in default again under such agreements at that time unless it is able to successfully renegotiate the covenants. 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 have adversely impacted the Company's relationship with certain customers and vendors and may adversely impact its relationship with customers and vendors in the future. The Company believes it will need additional cash in the near future to maintain its existing operations but has no ability to borrow additional funds under the Credit Agreement. The Company has engaged a financial advisor to assist it in pursuing financing alternatives; however, the Credit Agreement and Note Purchase Agreements prohibit the incurrence of additional indebtedness without the Lenders' and senior subordinated note holders' consent. No assurance can be made that financing will be available on acceptable terms, if at all, or that the Lenders and senior subordinated note holders will consent to any such financing. In the event that additional financing is not available in the near future, it is likely to have a material adverse effect on the Company's business and future prospects. If additional funds are raised through the issuance of equity securities, the percentage ownership of the then current stockholders of the Company will be reduced and such equity securities may have rights, preferences or privileges senior to those of the holders of the Company's Common Stock. 20 21 THE CERPLEX GROUP, INC. RISK OF EXCESS AND UNUSABLE INVENTORY; DECREASED VALUE OF ASSETS. At September 30, 1997, inventory constituted approximately 7.7% 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 additional write-offs. The existence, amounts and timing of any such additional write-offs will be dependent upon various factors including, without limitation, the volume and profitability of future operations, market conditions as well as the operations of the above-mentioned third parties. DEPENDENCE ON CUSTOMERS IN THE ELECTRONICS INDUSTRY. The Company is dependent upon the continued growth, viability and financial stability of its customers and potential customers in the electronics industry, particularly the computer industry. The computer industry has been characterized by rapid technological change, compressed product life cycles and pricing and margin pressures. The factors affecting segments of the electronics industry in general, and the Company's OEM customers in particular, could have an adverse effect on the Company's business. During 1995 and 1996, several of the Company's customers experienced severe financial difficulty resulting in significant losses to the Company as a result of write-downs of receivables and other assets. There can be no assurance that existing customers or future customers will not experience financial difficulty, which could have a material adverse effect on the Company's business. RELIANCE ON SHORT-TERM PURCHASE ORDERS. The Company's customer contracts are typically subject to termination on short notice at the customer's discretion and purchase orders under such contracts typically only cover services over a 90-day period. The termination of any material contracts or any substantial decrease in the orders received from major customers could have a material adverse effect on the Company's business. COMPETITION. The Company competes with the in-house repair centers of original equipment manufacturers ("OEM's") and third party maintainers ("TPM's") for repair services. There is no assurance that these entities will choose to outsource their repair needs. In certain instances, these entities compete directly with the Company for the services of unrelated OEM's and TPM's. In addition to competing with OEM's and TPM's, the Company also competes for depot repair business with a small number of independent organizations similar in size to the Company and a large number of smaller companies. Many of the companies with which the Company competes have significantly greater financial resources than the Company. There can be no assurance that the Company will be able to compete effectively in its target markets. EXPANSION OF INTERNATIONAL SALES. During the nine months ended September 30, 1997, approximately 61% of the Company's sales were international. During 1996, approximately 41% of the Company's sales were international. There can be no assurance that the Company will be able to successfully market, sell and 21 22 THE CERPLEX GROUP, INC. deliver its products and services in these markets. In addition to the uncertainty as to the Company's ability to maintain or expand its international presence, there are certain risks inherent in doing business on an international level, such as unexpected changes in regulatory requirements, export restrictions, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in currency exchange rates and potentially adverse tax consequences, which could adversely impact the success of the Company's international operations. There can be no assurance that one or more of such factors will not have a material adverse effect on the Company's international operations and, consequently, on the Company's business, operating results and financial condition. DEPENDENCE ON ACQUISITION STRATEGY. Certain of the Company's repair programs result in decreasing net sales as the installed base of the particular products under such programs decreases over time. An important component of the Company's strategy to maintain its revenue and to grow its business has been the acquisition of repair programs and complementary businesses. Competition for these types of transactions is likely to intensify. The Company's ability to effect any transactions requiring capital will be limited by the Company's lack of working capital and by the terms of the Company's Credit Agreement and Note Purchase Agreements. The Company is no longer permitted under the terms of its Credit Agreement to engage in acquisitions. There can be no assurance that the Company will be able to acquire additional repair programs or complementary businesses in the future or, if acquired, that such operations will prove to be profitable. DISCONTINUED OPERATIONS; CHANGE IN STRATEGY. In September 1995, Cerplex adopted a plan to discontinue its end-of-life programs, a line of business which historically generated a significant percentage of the Company's total sales, but which experienced declining sales. Net sales from end-of-life programs declined from approximately $33 million in 1994 to $20 million in 1995 and further declined to $9.2 million in 1996. Sales from end-of-life program during 1997 were not material. In connection with discontinuing its end-of-life business, the Company changed certain elements of its business strategy and underwent changes in management and operations. The Company developed a direct sales force and terminated the majority of its outside sales representatives, reduced its emphasis on inventory acquisitions and focused on targeted customers in specific industries. There can be no assurance that such changes will positively impact 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 October 31, 1997, the officers, directors, principal stockholders and their affiliates owned greater than a majority of the outstanding common stock. Although there are currently no voting agreements or similar arrangements among such stockholders, if they were to act in concert, they would be able to elect a majority of the Company's directors, determine the outcome of most corporate actions requiring stockholder approval and otherwise control the business affairs of the Company. The Board of Directors of the Company has the authority under the Company's Restated Certificate of Incorporation to issue shares of the Company's authorized preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any unissued shares of preferred stock. The issuance of preferred stock may adversely affect the voting and dividend rights, rights upon liquidation and other rights of the holders of common stock. The issuance of preferred stock and the control by existing stockholders, if they were to act in concert, may have the effect of delaying, deferring or preventing a change in control of the Company. In April 1997, William A. Klein acquired 3,663,898 shares of Common Stock upon the conversion of Series B Preferred Stock, Richard C. Davis acquired 166,667 shares of Common Stock upon the conversion of Series B Preferred Stock and the Sprout Growth, II L.P. acquired 7,563,333 shares of Common Stock upon the conversion of Series B Preferred Stock. In addition, DLJ Capital Corporation converted 231 shares of Preferred Stock into 770,000 shares of Common Stock. 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 two years, the Company has lost the services of several of its key executive officers and members of 22 23 THE CERPLEX GROUP, INC. management. The Company has filled several positions, including hiring a new Chief Executive Officer, Stephen J. Hopkins. 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. 23 24 THE CERPLEX GROUP, INC. Item 16. Exhibits. a) Exhibits
EXHIBIT NUMBER TITLE METHOD OF FILING ------ ----- ---------------- 2.1 Agreement of Merger dated as of August 30, 1993, Incorporated herein by reference to by and among Cerplex Incorporated, Diversified Exhibit 2.1 to the Company's Manufacturing Services, Inc. ("DMS"), EMServe, Registration Statement on Form S-1 Inc. ("EMServe"), InCirT Technology Incorporated (File No. 33-75004) which was ("InCirT") and Testar, Inc. ("Testar"). declared effective by the Commission on April 8, 1994. 2.2 Agreement and Plan of Merger dated November 12, Incorporated herein by reference to 1993, between The Cerplex Group Subsidiary, Inc. Exhibit 2.2 to the Company's and Registrant (conformed copy to original). Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 2.3 Certificate of Ownership and Merger of Registrant Incorporated herein by reference to with and into The Cerplex Group Subsidiary, Inc. Exhibit 2.2 to the Company's dated as of November 12, 1993. Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 2.4 Asset Purchase Agreement effective December 17, Incorporated herein by reference to 1993 by and between Certech Technology, Inc., a Exhibit 2.4 to the Company's wholly-owned subsidiary of the Registrant Registration Statement on Form S-1 ("Certech"), and Spectradyne, Inc. ("Spectradyne"). (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 2.5 Purchase and Sale Agreement dated as of July 29, Incorporated herein by reference to 1994, by and among The Cerplex Group, Inc., Exhibit 2 to the Form 8-K filed July Cerplex Limited, BT Repair Services Limited and 29, 1994. BT. 2.6 Contract for repair, calibration and warehousing of Incorporated herein by reference to certain items of BT Equipment dated as of July 29, Exhibit 10 to the Form 8-K filed July 1994, among The Cerplex Group and Cerplex 29, 1994. Limited and BT. 2.7 Formation and Contribution Agreement effective Incorporated herein by reference to December 1, 1994 by and among Modcomp/Cerplex Exhibit 2.7 to the Company's Annual L.P., Modular Computer Systems, Inc., Cerplex Report on Form 10-K for the fiscal Subsidiary, Inc. and The Cerplex Group, Inc. year ended January 1, 1995. 2.8 Contingent Promissory Note dated December 1, 1994 Incorporated herein by reference to issued by Modcomp/Cerplex L.P. to Modular Exhibit 2.8 to the Company's Annual Computer Systems, Inc. Report on Form 10-K for the fiscal year ended January 1, 1995.
24 25
EXHIBIT NUMBER TITLE METHOD OF FILING ------ ----- ---------------- 2.9 Limited Partnership Agreement of Modcomp/Cerplex Incorporated herein by reference to L.P. effective December 1, 1994. Exhibit 2.8 to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1995. 2.10 Put/Call Option Agreement effective December 1, Incorporated herein by reference to 1994 by and among Cerplex Subsidiary, Inc., The Exhibit 2.8 to the Company's Annual Cerplex Group, Inc., Modular Computer Systems, Report on Form 10-K for the fiscal Inc. and Modcomp Joint Venture Inc. year ended January 1, 1995. 2.11 Stock Purchase Agreement dated as of June 29, 1995 Incorporated herein by reference to by and among The Cerplex Group, Inc., Tu Nguyen Exhibit 2.11 to the Company's and Phuc Le. Quarterly Report on Form 10-Q for the quarter ended October 1, 1995. 2.12 Letter Agreement dated April 5, 1996 by and among Incorporated herein by reference to Modular Computer Systems, Inc., Modcomp Joint Exhibit 2.12 to the Company's Venture, Inc., AEG Aktiengesellschaft, the Annual Report on Form 10-K for the Company, Cerplex Subsidiary, Inc. and fiscal year ended December 31, 1995. Modcomp/Cerplex L.P. 2.13 Stock Purchase Agreement dated as of May 24, Incorporated herein by reference to 1996, by and among The Cerplex Group, Inc., Exhibit 2.13 to the Company's Cerplex Limited, Rank Xerox - The Document Current Report on Form 8-K dated Company SA and Rank Xerox Limited (conformed May 24, 1996. copy to original). 2.14 Contract of Warranty dated as of May 24, 1996, by Incorporated herein by reference to and among The Cerplex Group, Inc., Cerplex Exhibit 2.14 to the Company's Limited, Rank Xerox - The Document Company SA Current Report on Form 8-K dated and Rank Xerox Limited (conformed copy to the May 24, 1996. original). 2.15 Supply and Services Agreement dated as of May 24, Incorporated herein by reference to 1996, by and among The Cerplex Group, Inc., Exhibit 2.15 to the Company's Cerplex Limited, Rank Xerox - The Document Current Report on Form 8-K dated Company SA and Rank Xerox Limited (conformed May 24, 1996. copy to the original). 2.16 Stock Purchase Agreement dated March 28, 1997 Incorporated herein by reference to relating to all of the outstanding stock of Peripheral Exhibit 2.13 to the Company's Computer Support, Inc. among the Company, PCS Annual Report on Form 10-K for the Acquisition Co., Inc., and Lincolnshire Equity fiscal year ended December 31, 1996. Partners, L.P. 2.17 Asset Purchase Agreement dated August 6, 1997 by Incorporated herein by reference to and among the Company, Cerplex Subsidiary, Inc., Exhibit 2.17 to the Company's Modcomp Joint Venture, Inc., Modcomp/Cerplex Quarterly Report on Form 10-Q for L.P. and CSP Inc. the quarter ended June 30, 1997.
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EXHIBIT NUMBER TITLE METHOD OF FILING ------ ----- ---------------- 3.1 Restated Certificate of Incorporation of the Incorporated herein by reference to Registrant. Exhibit 3.1 to the Company's Registration Statement on From S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 3.2 Bylaws of the Registrant Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 3.3 Certificate of Amendment of the Restated Certificate Incorporated herein by reference to of Incorporation of the Registrant (filed June 16, Exhibit 3.3 to the Company's 1997). Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 4.1 Stock Purchase Agreement dated as of November 19, Incorporated herein by reference to 1993 by and among the Registrant, the stockholders Exhibit 4.1 to the Company's of the Registrant identified in Part A of Schedule I Registration Statement on Form S-1 thereto and the purchasers of shares of the (File No. 33-75004) which was Registrant's Series A Preferred Stock identified in declared effective by the Commission Schedule I thereto (including the Schedules thereto; on April 8, 1994. Exhibits omitted). 4.2 Registration Rights Agreement dated as of November Incorporated herein by reference to 19, 1993, by and among the Registrant, the investors Exhibit 4.2 to the Company's listed on Schedule A thereto and the security holders Registration Statement on Form S-1 of the Registrant listed on Schedule B thereto, (File No. 33-75004) which was together with Amendment No. 1. declared effective by the Commission on April 8, 1994. 4.3 Co-Sale Agreement dated as of November 19, 1993, Incorporated herein by reference to by and among the Registrant, the managers listed on Exhibit 4.3 to the Company's Schedule A thereto and the investors listed on Registration Statement on Form S-1 Schedule B thereto. (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 4.4 Warrant Agreement dated as of November 19, 1993, Incorporated herein by reference to by and among the Registrant and the purchasers Exhibit 4.4 to the Company's listed in Annex 1 thereto. Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994.
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EXHIBIT NUMBER TITLE METHOD OF FILING ------ ----- ---------------- 4.5 Placement Agent Warrant Purchase Agreement dated Incorporated herein by reference to as of November 19, 1993, between the Registrant Exhibit 4.5 to the Company's and Donaldson, Lufkin & Jenrette Securities Registration Statement on Form S-1 Corporation. (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 4.6 Observation Rights Agreement dated as of November Incorporated herein by reference to 19, 1993, between the Registrant and certain stock Exhibit 4.6 to the Company's purchasers. Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 4.7 Observation Rights Agreement dated as of November Incorporated herein by reference to 19, 1993, between the Registrant and certain note Exhibit 4.7 to the Company's purchasers. Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 4.8 Note Purchase Agreement dated as of November 19, Incorporated herein by reference to 1993, by and among the Registrant and The Exhibit 4.8 to the Company's Northwestern Mutual Life Insurance Company, John Registration Statement on Form S-1 Hancock Mutual Life Insurance, Registrant and Bank (File No. 33-75004) which was of Scotland London Nominees Limited. declared effective by the Commission on April 8, 1994. 4.9 Amendment No. 2 to Registration Rights Agreement Incorporated herein by reference to dated as of April 6, 1994, by and among the Exhibit 4.9 to the Company's Registrant and certain of its Securities holders. Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 4.10 Amendment to Note Purchase Agreement, dated as Incorporated herein by reference to of October 27, 1994, by and among the Company, Exhibit 4.10 to the Company's Northwestern Mutual Life Insurance Company, John Annual Report on Form 10-K for the Hancock Mutual Life Insurance Company and North fiscal year ended March 31, 1995. Atlantic Smaller Companies Trust P.L.C. (collectively, the "Noteholders"). 4.11 Waiver and Amendment Agreement dated April 15, Incorporated herein by reference to 1996 by and among Company, The Northwestern Exhibit 4.11 to the Company's Mutual Life Insurance Company, John Hancock Annual Report on Form 10-K for the Mutual Life Insurance Company and North Atlantic fiscal year ended December 31, 1995. Smaller Companies Investment Trust PLC.
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EXHIBIT NUMBER TITLE METHOD OF FILING ------ ----- ---------------- 4.12 Warrant Agreement dated as of April 15, 1996 by Incorporated herein by reference to and among Company, The Northwestern Mutual Life Exhibit 4.12 to the Company's Insurance Company, John Hancock Mutual Life Annual Report on Form 10-K for the Insurance Company and North Atlantic Smaller fiscal year ended December 31, 1995. Companies Investment Trust PLC. 4.13 First Amendment to Warrant Agreement dated April Incorporated herein by reference to 15, 1996 by and among Company and each of the Exhibit 4.13 to the Company's holders of warrants listed on Schedule A thereto, Annual Report on Form 10-K for the with respect to that certain Warrant Agreement dated fiscal year ended December 31, 1995. November 19, 1993. 4.14 First Amendment to Observation Rights Agreement Incorporated herein by reference to dated as of April 15, 1996 between Company and Exhibit 4.14 to the Company's certain note purchasers. Annual Report on Form 10-K for the fiscal year ended December 31, 1995. 4.15 Third Amendment to Registration Rights Agreement Incorporated herein by reference to dated as of April 15, 1996 by and among Company, Exhibit 4.15 to the Company's the investors of Company listed on Schedule A Annual Report on Form 10-K for the thereto and the security holders of Company listed on fiscal year ended December 31, 1995. Schedule B thereto. 4.16 Warrant Agreement dated April 15, 1996 by and Incorporated herein by reference to among Company, Wells Fargo Bank, National Exhibit 4.16 to the Company's Association, Sumitomo Bank of California, BHF Annual Report on Form 10-K for the Bank Aktiengesellschaft and Comerica Bank- fiscal year ended December 31, 1995. California. 4.17 Stock Purchase Agreement dated June 10, 1996 by Incorporated herein by reference to and among the Company and the investors listed on Exhibit 4.17 to the Company's Schedule A thereto. Quarterly Report on Form 10-Q filed August 14, 1996. 4.18 Fourth Amendment to Registration Rights Agreement Incorporated herein by reference to dated June 10, 1996 by and among Company, the Exhibit 4.18 to the Company's investors listed on Schedule A thereto, the security Quarterly Report on Form 10-Q filed holders of Company listed on Schedule B thereto, the August 14, 1996. banks listed on Schedule C thereto and each of the parties listed on Schedule D thereto. 4.19 Certificate of Designation of Preferences of Series B Incorporated herein by reference to Preferred Stock of The Cerplex Group, Inc. Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q filed August 14, 1996. 4.20 Waiver and Amendment Agreement dated October Incorporated herein by reference to 31, 1996 by and among the company and the Exhibit 4.17 to the Company's Noteholders. Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
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EXHIBIT NUMBER TITLE METHOD OF FILING ------ ----- ---------------- 4.21 Waiver and Amendment Agreement dated December Incorporated herein by reference to 9, 1996 by and among the company and the Exhibit 4.18 to the Company's Noteholders. Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 4.22 Side Letter dated March 28, 1997 by and among the Incorporated herein by reference to Company and the Noteholders. Exhibit 4.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 4.23 Amended and Restated Note Purchase Agreement Incorporated herein by reference to dated April 9, 1997 by and among the Company and Exhibit 4.20 to the Company's the Noteholders. Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 4.24 Second Amendment to Warrant Agreement dated Incorporated herein by reference to April 9, 1997, by and among the Company and each Exhibit 4.21 to the Company's of the holders of warrants listed on Schedule A Annual Report on Form 10-K for the thereto, which Second Amendment amends the fiscal year ended December 31, 1996. Warrant Agreement dated November 19, 1993 as amended by the First Amendment to Warrant Agreement dated April 15, 1996. 4.25 Second Amendment to Warrant Agreement dated Incorporated herein by reference to April 9, 1997 by and among the Company and each Exhibit 4.22 to the Company's of the holders of warrants listed on Schedule A Annual Report on Form 10-K for the thereto, which Second Amendment amends the fiscal year ended December 31, 1996. Warrant Agreement dated April 15, 1996, as amended by a Waiver and Amendment Agreement dated October 31, 1996. 4.26 Amended and Restated Warrant Agreement dated Incorporated herein by reference to April 9, 1997 by and among the Company; Wells Exhibit 4.23 to the Company's Fargo Bank, National Association; BHF-Bank Annual Report on Form 10-K for the Aktiengesellschaft; and Citibank, N.A. fiscal year ended December 31, 1996. 4.27 Fifth Amendment to Registration Rights Agreement Incorporated herein by reference to dated as of April 9, 1997 by and among the Exhibit 4.27 to the Company's Company, the investors listed on Schedule A thereto, Quarterly Report on Form 10-Q for the security holders of the Company listed on the quarter ended June 30, 1997. Schedule B thereto, the banks listed on Schedule C thereto, and the parties listed on Schedule D thereto. 4.28 Waiver Agreement dated as of June 30, 1997 among Incorporated herein by reference to the Company and the Noteholders. Exhibit 4.28 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 4.29 Side letter dated July 10, 1997 by and among the Incorporated herein by reference to Company and the Noteholders. Exhibit 4.29 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
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EXHIBIT NUMBER TITLE METHOD OF FILING ------ ----- ---------------- 4.30 Side letter dated August 6, 1997 by and among the Incorporated herein by reference to Company and the Noteholders. Exhibit 4.30 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 4.31 Sixth Amendment to Registration Rights Agreement Incorporated herein by reference to dated as of August 20, 1997 by and among the Exhibit 4.31 to the Company's Company, the investors listed on Schedule A thereto, Current Report on Form 8-K dated the security holders of the Company listed on August 27, 1997. Schedule B thereto, the banks listed on Schedule C thereto, and the parties listed on Schedule D thereto. 4.32 First Amendment Agreement dated as of August 20, Incorporated herein by reference to 1997, by and among the Company, The Exhibit 4.32 to the Company's Northwestern Mutual Life Insurance Company, John Current Report on Form 8-K dated Hancock Mutual Life Insurance Company and North August 27, 1997. Atlantic Smaller Companies Investment Trust PLC. 4.33 Warrant Agreement dated as of August 20, 1997 by Incorporated herein by reference to and between the Company, The Northwestern Mutual Exhibit 4.33 to the Company's Life Insurance Company, John Hancock Mutual Life Current Report on Form 8-K dated Insurance Company and North Atlantic Smaller August 27, 1997. Companies Investment Trust PLC. 4.34 Third Amendment to Warrant Agreement dated as of Incorporated herein by reference to August 20, 1997, by and among the Company and Exhibit 4.34 to the Company's the Noteholders with respect to that certain Warrant Current Report on Form 8-K dated Agreement dated as of April 15, 1996 by and among August 27, 1997. the Company and the Noteholders. 4.35 Third Amendment to Warrant Agreement dated as of Incorporated herein by reference to August 20, 1997, by and among the Company and Exhibit 4.35 to the Company's the Noteholders with respect to that certain Warrant Current Report on Form 8-K dated Agreement dated as of November 19, 1993 by and August 27, 1997. among the Company and the Noteholders. 4.36 Warrant Agreement dated as of August 20, 1997 by Incorporated herein by reference to and between the Company and Citibank, N.A. Exhibit 4.36 to the Company's Current Report on Form 8-K dated August 27, 1997. 4.37 Second Amendment to Observation Rights Incorporated herein by reference to Agreement dated August 20, 1997 by and among the Exhibit 4.37 to the Company's Company, the Northwestern Mutual Life Insurance Current Report on Form 8-K dated Company and John Hancock Mutual Life Insurance August 27, 1997. Company. 10.1 The Registrant's 1990 Stock Option Plan (the "1990 Incorporated herein by reference to Plan"). Exhibit 10.1 to the Company's Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994.
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EXHIBIT NUMBER TITLE METHOD OF FILING ------ ----- ---------------- 10.2 Form of Stock Option Agreement pertaining to the Incorporated herein by reference to 1990 Plan. Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File No. 33-75005) which was declared effective by the Commission on April 8, 1994. 10.3 Form of Stock Purchase Agreement pertaining to the Incorporated herein by reference to 1990 Plan. Exhibit 10.3 to the Company's Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.4 The Registrant's 1993 Stock Option Plan (the "1993 Incorporated herein by reference to Plan"). Exhibit 10.4 to the Company's Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.5 Form of Stock option Agreement (grants to Incorporated herein by reference to employees) pertaining to the 1993 Plan. Exhibit 10.5 to the Company's Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.6 Form of Stock Option Agreement (grants to directors Incorporated herein by reference to and certain officers) pertaining to the 1993 Plan. Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.7 Form of Stock Purchase Agreement for Installment Incorporated herein by reference to Options pertaining to the 1993 Plan. Exhibit 10.7 to the Company's Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.8 Form of Stock Purchase Agreement for Immediately Incorporated herein by reference to Exercisable Options pertaining to the 1993 Plan. Exhibit 10.8 to the Company's Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994.
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EXHIBIT NUMBER TITLE METHOD OF FILING ------ ----- ---------------- 10.9 The Registrant's Restated 1993 Stock Option Plan Incorporated herein by reference to (the "Restated Plan"). Exhibit 10.9 to the Company's Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.10 Form of Stock Option Agreement, together with Incorporated herein by reference to Addenda, pertaining to the Restated Plan. Exhibit 10.10 to the Company's Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.11 Master Task Agreement dated December 1, 1991, by Incorporated herein by reference to and between International Business Machines Exhibit 10.11 to the Company's Incorporated ("IBM") and the Registrant, together Registration Statement on Form S-1 with Amendment to Master Agreement and Task (File No. 33-75004) which was Order. declared effective by the Commission on April 8, 1994. 10.12 Master Agreement dated May 6, 1992 by and Incorporated herein by reference to between IBM and the Company. Exhibit 10.12 to the Company's Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.13 Technology Services Agreement effective March 1, Incorporated herein by reference to 1993, by and between Novadyne Computer Systems, Exhibit 10.13 to the Company's Inc. ("Novadyne") and Cerplex Incorporated (a Registration Statement on Form S-1 California corporation and a predecessor of the (File No. 33-75004) which was Registrant), together with Amendments Nos. 1 and declared effective by the Commission 2. on April 8, 1994. 10.14 Technology Services Agreement effective December Incorporated herein by reference to 17, 1993, by and between Spectradyne, Inc. Exhibit 10.14 to the Company's ("Spectradyne") and the Registrant. Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.15 Repair Services Agreement dated January 1, 1994 by Incorporated herein by reference to and between Bull HN Information Systems, Inc. and Exhibit 10.24 to the Company's the Registrant. Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994.
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EXHIBIT NUMBER TITLE METHOD OF FILING ------ ----- ---------------- 10.16 Form of Indemnity Agreement. Incorporated herein by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.17 Lease Agreement dated April 1, 1992 by and Incorporated herein by reference to between Henry G. Page Jr., and Diversified Exhibit 10.16 to the Company's Manufacturing Services, Inc. ("DMS"). Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.18 Sublease dated January 1, 1994 by and between Bull Incorporated herein by reference to and Cerplex Group, Inc. (a Massachusetts Exhibit 10.17 to the Company's corporation). Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.19 Standard Industrial/Commercial Single-Tenant Lease Incorporated herein by reference to - Net dated November 29, 1990 by and among Exhibit 10.18 to the Company's Kilroy Building 73 Partnership, Cerplex Incorporated Registration Statement on Form S-1 and InCirT, together with Amendment No. 1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.20 Lease dated December 17, 1993 by and between Incorporated herein by reference to Spectradyne and Certech. Exhibit 10.19 to the Company's Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.21 Sublease dated March 1, 1993 by and between Incorporated herein by reference to Novadyne and the Registrant together with Lease Exhibit 10.20 to the Company's Amendment dated July 22, 1991 by and between Registration Statement on Form S-1 McDonnell Douglas Realty Company and Novadyne. (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.22 Standard Industrial/Commercial Lease - Net dated Incorporated herein by reference to September 4, 1991 by and between Proficient Food Exhibit 10.21 to the Company's Company and W.C. Cartwright Corporation Registration Statement on Form S-1 ("Cartwright"), together with Addendum and (File No. 33-75004) which was Sublease dated September 6, 1991 by and between declared effective by the Commission Cartwright and the Registrant. on April 8, 1994.
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EXHIBIT NUMBER TITLE METHOD OF FILING ------ ----- ---------------- 10.23 Sublease dated July 30, 1992 by and between Incorporated herein by reference to Cartwright and DMS. Exhibit 10.22 to the Company's Registration Statement on Form S-1 (File No. 33-75004) which was declared effective by the Commission on April 8, 1994. 10.24 Credit Agreement dated as of October 12, 1994 (the Incorporated herein by reference to "Credit Agreement") among The Cerplex Group, Exhibit 10.24 to the Company's Inc., as Borrower; the lenders listed therein, as Annual Report on Form 10-K for the Lenders; and Wells Fargo Bank, National fiscal year ended January 1, 1995. Association, as Administrative Agent; and those certain exhibits, schedules and collateral documents to such Credit Agreement. 10.25 Limited Waiver dated as of November 14, 1995 Incorporated herein by reference to ("Waiver") by and among The Cerplex Group, Inc. Exhibit 10.25 to the Company's (the "Company"), the financial institutions listed on Quarterly Report on Form 10-Q for the signature pages thereof ("Lenders"), and Wells the quarter ended October 1, 1995. Fargo Bank, National Association, as administrative agent for the Lenders ("Administrative Agent"), and for certain limited purposes, Certech Technology, Inc., Cerplex Mass., Inc., Cerplex Limited, Apex Computer Company, Cerplex Subsidiary, Inc. and Peripheral Computer Support, Inc. (the "Subsidiaries"), which Waiver is made with reference to the Credit Agreement. 10.26 The Cerplex Group, Inc. Restated 1993 Stock Option Incorporated herein by reference to Plan (Restated and Amended as of January 13, Exhibit 10.26 to the Company's 1995). Quarterly Report on Form 10-Q for the quarter ended October 1, 1995. 10.27 The Cerplex Group, Inc. Automatic Stock Option Incorporated herein by reference to Agreement. Exhibit 10.27 to the Company's Quarterly Report on Form 10-Q for the quarter October 1, 1995. 10.28 First Amendment to Credit Agreement dated April Incorporated herein by reference to 15, 1996 by and among Company, the lenders whose Exhibit 10.28 to the Company's signatures appear on the signature pages thereof, as Annual Report on Form 10-K for the Lenders; Wells Fargo Bank, National Association, as fiscal year ended December 31, 1995. Administrative Agent; and the Subsidiaries for certain limited purposes. 10.29 Promissory Note dated June 21, 1996 payable by the Incorporated herein by reference to Company to Lucent Technologies. Exhibit 10.29 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
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EXHIBIT NUMBER TITLE METHOD OF FILING ------ ----- ---------------- 10.30 Limited Waiver dated as of October 31, 1996 by and Incorporated herein by reference to among the Company, Lenders and Administrative Exhibit 10.29 to the Company's Agent, and for certain limited purposes, the Quarterly Report on Form 10-Q for Subsidiaries, Modcomp/Cerplex L.P., Modcomp the quarter ended September 29, Joint Venture, Inc., Modular Computer Services, 1996. Inc., Modular Computer Systems GmbH and Modcomp France S.A., which waiver is made with reference to the credit Agreement. 10.31 Extension and Forbearance Agreement dated March Incorporated herein by reference to 31, 1997 by and among the Company, the financial Exhibit 10.31 to the Company's institutions listed on the signature pages thereof and Annual Report on Form 10-K for the Wells Fargo Bank, National Association. fiscal year ended December 31, 1996. 10.32 Second Amendment to Credit Agreement dated Incorporated herein by reference to November 30, 1996 (the "Second Amendment") by Exhibit 10.32 to the Company's and among the Company, the financial institutions Annual Report on Form 10-K for the listed on the signature pages thereof ("Lenders") and fiscal year ended December 31, 1996. Wells Fargo Bank, National Association, as administrative agent for the Lenders, and for certain limited purposes, Certech Technology, Inc., Cerplex Mass., Inc., Cerplex Limited, Apex Computer Company, Cerplex Subsidiary, Inc., Peripheral Computer Support, Inc., Modcomp/Cerplex, L.P., Modcomp Joint Venture, Inc., Modular Computer Services, Inc., Modular Computer Systems GmbH and Modcomp France S.A., which Second Amendment amends the Credit Agreement dated October 12, 1994, as amended. 10.33 Third Amendment to Credit Agreement dated April Incorporated herein by reference to 9, 1997 (the "Third Amendment") by and among the Exhibit 10.33 to the Company's Company, the financial institutions listed on the Annual Report on Form 10-K for the signature pages thereof ("Lenders") and Wells Fargo fiscal year ended December 31, 1996. Bank, National Association, as administrative agent for the Lenders, and for certain limited purposes, Certech Technology, Inc., Cerplex Mass., Inc., Cerplex Limited, Apex Computer Company, Cerplex Subsidiary, Inc., Peripheral Computer Support, Inc., Modcomp/Cerplex, L.P., Modcomp Joint Venture, Inc., Modular Computer Services, Inc., Modular Computer Systems GmbH and Modcomp France S.A., which Third Amendment amends the Credit Agreement dated October 12, 1994, as amended.
35 36
EXHIBIT NUMBER TITLE METHOD OF FILING ------ ----- ---------------- 10.34 Fourth Amendment to Credit Agreement and Limited Incorporated herein by reference to Waiver dated as of May 30, 1997 and entered into the Company's Registration Statement by and among the Company, the financial institutions on Form S-2 (Registration No. 333- listed on the signature pages thereof ("Lenders") and 28425) filed with the Securities and Wells Fargo Bank, National Association, as Exchange Commission on June 3, administrative agent for the Lenders, and for certain 1997. limited purposes, Certech Technology, Inc., Cerplex Mass., Inc., Cerplex Limited, Apex Computer Company, Cerplex Subsidiary, Inc., Modcomp/Cerplex L.P., Modcomp Joint Venture, Inc., Modular Computer Services, Inc., Modular Computer Systems GmbH and Modcomp France S.A. 10.35 Fifth Amendment to Credit Agreement and Limited Incorporated herein by reference to Waiver dated June 30, 1997 by and among the Exhibit 10.35 to the Company's Company, the financial institutions listed on the Quarterly Report on Form 10-Q for signature pages thereof ("Lenders") and Wells Fargo the quarter ended June 30, 1997. Bank, National Association, as administrative agent for the Lenders and, for certain limited purposes, certain subsidiaries of the Company. 10.36 Sixth Amendment to Credit Agreement and Consent Incorporated herein by reference to dated August 6, 1997 by and among the Company, Exhibit 10.36 to the Company's the financial institutions listed on the signature pages Quarterly Report on Form 10-Q for thereof ("Lenders") and Wells Fargo Bank, National the quarter ended June 30, 1997. Association as administrative agent for the Lenders as administrative agent for the Lenders and, for certain limited purposes, certain subsidiaries of the Company. 10.37 Letter from Nightingale & Associates, LLC to the Filed herein. Company dated June 30, 1997, together with Letter from Nightingale & Associates, LLC to the Company dated August 18, 1997, amending terms of the June 30, 1997 letter. 27.1 EDGAR Financial Data Schedule
b) Reports on Form 8-K for the quarter ended September 30, 1997 On September 11, 1997 the Company filed a current Report on Form 8-K regarding the sale of the assets of its Modcomp subsidiary and the completion of amendments to its senior credit agreement and its note purchase agreement. 36 37 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: November 12, 1997 THE CERPLEX GROUP, INC. /s/ ROBERT W. HUGHES ------------------------------------- Robert W. Hughes Senior Vice President and Chief Financial Officer (Principal Accounting Officer) 37 EX-10.37 2 LETTER FROM NIGHTINGALE ASSOCIATES 1 ORIGINAL -------- June 30, 1997 VIA FACSIMILE - ------------- Mr. William A. Klein Chairman of the Board The Cerplex Group, Inc. 1382 Bell Avenue Tustin, CA 92680 Dear Mr. Klein: This Engagement Letter summarizes the proposed terms and conditions for engagement Nightingale & Associates, LLC ("N&A") by The Cerplex Group, Inc.("Cerplex" or the "Company"), a publicly held corporation headquartered in Tustin, California. I. DISCUSSION ---------- Cerplex has reported significant operating losses for its U.S. operations in recent quarters and is in default on its bank covenants. The Company has sold assets to raise cash for working capital and to reduce bank debts and is in the process of negotiating additional such sales. To provide a basis for improving U.S. operating profits, the turnaround firm of Hammer Associates was retained. Hammer has developed a turnaround plan which includes major consolidations of the Company's repair sites and significant reductions in corporate overhead expenses. Implementation of the plan has been started by announcing certain of the site consolidations and recently reducing the Company's workforce by approximately 150 employees. II. OBJECTIVES OF THE WORK ASSIGNMENT --------------------------------- Based on our discussions with Cerplex Group management on June 26th at the Company's headquarters, we perceive the key objectives of this project for Cerplex to be as follows: 2 A. Immediately Assume Interim Management Of Cerplex For Purposes Of Implementing the Turnaround Plan Developed by Management and Hammer Associates. B. Assist With Negotiation Of Necessary And Appropriate Waivers And Standstill Agreements With Secured Creditors. C. Begin Implementation of the "Hammer Plan" In Either Its Present Form, Or As Modified After Detailed Implementation Actions Are Developed With Management Charged With Taking Required Actions. D. Manage The Process Of Notifying Employees, Vendors And Other Interested Parties Of The Company's Plans Relating To Turnaround Of The Business. E. After Implementing The Turnaround Actions Required To Achieve Profitability, Restructure The Company's Financing In Order To Pay Off The Current Bank Group. F. Take Other Actions Appropriate For The Chief Executive Officer Of The Company. G. Provide Such Other Counsel, Assistance And Services As The Board Of Directors Of Cerplex May From Time To Time Require. III. REPORTING --------- N&A will report to the Board of Directors of Cerplex. A reporting program summarizing key problems, projects, priorities, timetables and progress will be established in connection with implementation of the Hammer Plan. Status report meetings will be held regularly by telephone or in person, as appropriate. N&A agrees that it will not make any fundamental decisions relating to or affecting Cerplex out of the ordinary course of business, without first obtaining the prior consent of the Board of Directors of Cerplex. IV. RESPONSIBILITY AND STAFFING FOR THE WORK ---------------------------------------- Stephen J. Hopkins will be the Officer-in-Charge of the Cerplex assignment with overall responsibility for the N&A work on the engagement and will be named Chief Executive Officer of Cerplex. Mr. Hopkins will be assisted by Mr. Michael R. D'Appolonia for certain special projects as may be required and appropriate. 3 V. ESTIMATE OF TIME AND COST ------------------------- In a situation such as the Cerplex assignment, it is impossible to provide a definitive estimate of future professional time and costs to complete the project. However, assuming that N&A staff members devote the time ranges shown below, we estimate that N&A Professional Time Fees will result in normal charges approximately as shown below. Expenses would typically add 15% to 20% to this cost. "Guesstimated" Monthly Professional Time Fee Costs
Expected Monthly Monthly Time Cost Range - ------------------------------ ---------------- ----------------------------------- ------------------------------------ Hourly Rate % Days Low High - ------------------------------ ---------------- ------------------ ---------------- ---------------- ------------------ S.J. Hopkins $350 80 - 100% 16-18 $56,000 $63,000 M.R. D'Appolonia 300 10 - 20% 2-4 6,000 12,000 ------ ------ 62,000 75,000 ------ ------ Senior Associate 225 60 - 80% 12-16 27,000 36,000 ------ ------
Exhibit I, attached, provides a summary of N&A Professional Time billing rates, the basis for charging expenses, and terms and conditions for engagement of our firm and is an integral part of this Engagement Letter. N&A fully understands that Cerplex desires to keep costs to a minimum, commensurate with achieving the objectives of the assignment and given a reasonable degree of comfort relative to the judgments, conclusions, and actions involved. In recognition of (1) a need to restrict initial cash costs of the project and (2) expectation of future payment of performance fees as outlined below, N&A has agreed to a $300 per hour billing rate for Mr. Hopkins and maximum cap of $50,000 per month for Professional Time Fees of Mr. Hopkins and Mr. D'Appolonia. In addition, it has been agreed that Professional Time Fees of a Senior Associate expected to be used is Month One of the project will be capped at $25,000. If circumstances dictate that additional N&A staff is required, or that more time than estimated above is required, we will advise you as far in advance as possible in order to reach joint agreement on any additional staffing requirements. VI. PERFORMANCE FEE --------------- N&A charges a Performance Fee, in addition to Professional Time Fees and expenses, for certain types of assignments, including interim management projects. Based on past practices and policies of our firm, N&A proposes a Performance Fee equal to: 4 A. $150,000 cash payment when implementation of the Hammer operating plan, or agreed upon equivalent, is completed. B. Options to purchase at least 1% of the common stock of Cerplex, at current market values, when bank debt is refinanced and permanent management is in place. VII. ADVANCE PAYMENT RETAINER ------------------------ N&A requires an Advance Payment Retainer for all assignments of the type described herein. Related to this project, N&A will require an Advance Payment Retainer of $75,000. VIII. CONFIDENTIALITY OF CLIENT INFORMATION ------------------------------------- N&A recognizes and acknowledges that the firm and its Principals and staff have access to proprietary and confidential information in all client assignments. N&A assures Cerplex management that all such non-public information received by the firm, its Principals and staff from Cerplex or its other professionals, will be held and treated in strict confidence, and will not knowingly be disclosed by N&A, its Principals, or staff to third parties, except (1) in connection with data provided to Lenders under confidentiality agreements or (2) as might be required in the event of future court proceedings. IX. RELEASE AND INDEMNIFICATION --------------------------- Given the nature of this assignment, in addition to coverage for Mr. Hopkins under the Company's directors and officers policy, N&A will require a release in the form of a "Release and Indemnification" agreement from Cerplex prior to undertaking the project. A copy of the "Release and Indemnification" agreement required is attached as Exhibit II. The rationale for this requirement is that to the extent that any adversarial issues or proceedings occur between the parties at interest in the situation, N&A, by its very presence, could be caught in the "cross fire." For information, N&A requires and has received release and indemnification agreements from a variety of parties when undertaking troubled company turnaround assignments. 5 X. CAVEAT ------ Given the nature of assignments such as that contemplated for Cerplex where (1) there is potential for loss of major customers due to the Company's financial situation, (2) results are based on implementation of a turnaround plan developed by a third party, and (3) efforts and actions of current Company employees and management are a key to success, there can be no assurance that unforeseen problems may not be encountered. In addition, it is likely that difficult and complex judgments and conclusions will have to be made on a rapid basis without full and complete information and analysis readily available. Accordingly, N&A undertakes assignments such as this on a "Best Efforts" basis only, and makes no representations, warranties or guarantees relative to outcome, performance or results. Our firm will be working on other client assignments during the period we will be working for Cerplex. However, we fully understand the urgency and importance of the Cerplex situation and will arrange schedules so that work on the assignment will proceed at a mutually satisfactory pace. As agreed, we plan to commence work tomorrow, Tuesday, July 1st on this project and will continue on the engagement subject to promptly receiving a signed copy of this Engagement Letter and Indemnity and the required Advance Retainer. If this Engagement Letter conforms with your understanding of the terms and conditions of our retention, will you please signify your agreement to same by signing and returning the executed copy enclosed with this letter. We look forward to working with you and your colleagues at Cerplex on this challenging project. Sincerely. /s/ Stephen J. Hopkins Stephen J. Hopkins President SJH/crc Enclosure cc: M.R. D'Appolonia 6 READ UNDERSTOOD AND AGREED TO BY: The Cerplex Group, Inc. By: /s/ William A. Klein ----------------------------------- Name William A. Klein ----------------------------------- Title Chairman of Board ----------------------------------- Date June 30, 1997 7 EXHIBIT I NIGHTINGALE & ASSOCIATES, LLC COMPENSATION AND FEE ARRANGEMENTS INTERIM MANAGEMENT I. PROFESSIONAL TIME FEES AND EXPENSES ----------------------------------- Nightingale & Associates, LLC ("N&A") charges professional time fees on an hourly basis for all assignments. Professional time fees on an hourly basis for Principals and the firm's Senior Advisors are as shown below: Mr. Stephen J. Hopkins $350 Mr. William J. Nightingale $350 Mr. Kevin I. Dowd $300 Mr. Michael R. D'Appolonia $300 Mr. Pierre Benoit $300 Mr. Tor B. Arneberg $300 Mr. S. Douglas Hopkins $275 Mr. Howard S. Hoffmann $275
Hourly time fees for Associates range from $150 to $300 per hour. Hours are capped at a maximum of ten hours per day regardless of the number of hours worked over that amount. This is generally to the client's advantage because both Principals and Associates tend to work well over ten hours per day on most assignments. Out-of-pocket expenses are billed at cost, and generally range from 10% to 20% of professional time fees, depending on the amount of travel involved. Out-of-pocket expenses consist primarily of transportation costs, meals, lodging, telephone, specifically assignable office assistance and report production and, in the case of divestiture related assignments, advertising and mailing costs. Out-of-pocket expenses also apply to N&A staff members who reside out of the area when working out of N&A's office in Stamford on a client project. For assignments undertaken for clients domiciled in the State of Connecticut, an 8% professional services tax on professional time fees and Performance Fees also applies. Invoices are submitted weekly or biweekly and are due and payable upon presentation. Prompt payment of invoices is a prerequisite for N&A's continued work on an assignment. 8 II. PERFORMANCE FEE --------------- For certain types of assignments, including Interim Management, N&A charges a Performance Fee in addition to professional time fees. For information, Performance Fees are also applicable to acquisition, divestiture, joint venture/licensing, refinancing, and asset recovery management assignments. The rationale for the Performance Fee is that given the firm's unique Interim Management capabilities and experience, N&A can usually materially improve the potential and performance of client operations, and/or achieve other challenging objectives that might apply. In addition, Interim Management engagements usually involve time and staffing commitments which typically preclude one or more of the firm's principals from managing assignments with other clients for an extended period of time. The Interim Management Performance Fee is based upon the circumstances, complexity, and size of the particular situation, and is established and agreed to by mutual consent between the client and N&A prior to formal engagement. Interim Management Performance Fees are due and payable in installments as the assignment progresses, on a basis to be mutually agreed to by the client and N&A. In any case, the final installment is due no more than thirty days after completion of the assignment. The term of an Interim Management engagement varies depending on circumstances and client needs. III. TERMINATION ARRANGEMENTS ------------------------ The services of N&A can be terminated by the client at any time during the course of an engagement by verbal notice, followed by written confirmation but, regardless of the timing and circumstances of any such termination, N&A will be entitled to: A. All Professional Time Fees and out-of-pocket expenses incurred and due up until the day after notice of termination has become effective, payable within ten days of termination. B. Any applicable Interim Management Performance Fees earned and due during the term of active N&A involvement. C. A minimum Interim Management Performance Fee or a Termination Fee in lieu thereof; payable within ten days of termination, the amount to be established when the assignment commences, and which varies depending upon the size and circumstances of the assignment. 9 For information, no client has ever terminated the services of N&A during the course off Performance Fee engagement. IV. CAVEAT ------ Given the nature of Interim Management assignments, there can be no guarantee that N&A will achieve results that meet either N&A or client standards and objectives. Accordingly, N&A undertakes such assignments only on a "Best Efforts" basis, and makes no representations, warranties, or guarantees that satisfactory results will be achieved. It is also understood and agreed that, to the extent an Interim Management assignment also involves sale of a business or business assets, N&A is not expected to engage in any activities which would require the firm to be licensed as a broker/dealer under applicable state and federal laws. 10 EXHIBIT II ---------- RELEASE AND INDEMNIFICATION --------------------------- The undersigned ("Cerplex" or the "Company"), acknowledging that Nightingale & Associates LLC ("N&A") has been engaged to render services to Cerplex relating to the Company, for and on behalf of its subsidiaries, and the successors and assigns of the Company and its subsidiaries, hereby waives and releases any and all claims or causes of action that it may now have or which may arise in the future against any "Consultant Party" (which shall consist of, collectively, N&A and each of its contractors and subcontractors, and all of the employees, officers, directors, shareholders and principals of N&A and all its contractors and subcontractors), arising out of or relating in any way to "Covered Services" (which shall consist of services rendered by any Consultant Party pursuant to the attached agreement relating to the Company or any aspect of its business or assets (whether such services consist of consulting services, management services, or any other type of services), including, without limitation, any loss or claim thereof arising or allegedly incurred as a result of actions taken or omitted to be taken by the Company, its shareholders, or any other party, based in any way upon any recommendations or suggestions by any Consultant Party relating to the Company or any aspect of its business or assets); but excluding from the foregoing waiver and release any claim or cause of action arising out of any act of gross negligence, willful misconduct, breach of the attached agreement or fraud of any Consultant Party. The Company further hereby agrees to indemnify and hold harmless each of the Consultant Parties from and against any liabilities, obligations, losses, damages, claims, penalties, actions, judgments, suits, costs, expenses and disbursements of any kind or nature whatsoever which may be imposed upon, incurred by or asserted against any of the Consultant Parties arising out of or relating in any way to Covered Services pursuant to the attached agreement including, (without limitation, any loss or claim thereof arising or allegedly incurred as a result of actions taken or omitted to be taken by the Company, its shareholders, or any other party, based in any way upon any recommendations or suggestions by any Consultant Party relating to the Company or any aspect of its business or assets); but excluding from the foregoing indemnification obligation any matter arising out of any act of gross negligence, willful misconduct, breach of the attached agreement or fraud of any Consultant Party. Dated: June 30, 1997 The Cerplex Group, Inc. /s/ William A. Klein ------------------------------ By William A. Klein ------------------------------ Name ------------------------------ Chairman of the Board Title 11 Mr. William A. Klein Chairman of the Board The Cerplex Group, Inc. August 18, 1997 Page 1 August 18, 1997 Via Facsimile - ------------- Mr. William A. Klein Chairman of the Board The Cerplex Group, Inc. 1382 Bell Avenue Tustin, CA 92680 Dear Bill: An Engagement Letter dated June 30, 1997 summarized terms and conditions for engagement of Nightingale & Associates, LLC ("N&A") by The Cerplex Group, Inc. ("Cerplex" or the "Company") to provide management director of Cerplex's financial and operational restructuring. This letter supplements the Engagement Letter of June 30th relating to billing for use of additional N&A resources on the Cerplex project. That letter established a billing cap of $50,000 per month for my Professional Time services and, to the extent utilized, those of Michael R. D'Appolonia. In addition, it was agreed that charges of up to $25,000 for Professional Time could be billed in the first month of the project for a Senior Associate who I anticipated would be required. Additional future work of N&A Associates required specific future agreement. Ms. Cathryn Low was assigned to the project effective July 10th and Cerplex was billed $25,000 for the four week period ended August 2nd. As we have discussed, in connection with a re-organization of the finance function, my plan is to name Cathryn as Interim Controller - North American Operations. I anticipate this will be a 60 to 90 day project while a search is conducted for a permanent Controller. Although Cathryn's per diem billing rate (10 hour basis) is $2,000, and I anticipate that she will be involved in the project on an essentially full-time basis, I have agreed to a total Professional time billing cap for services of Cathryn and myself on the project of $70,000 per month through the end of October. Even if a full-time North American Controller is not yet in place, I commit to a reduction of the monthly Professional Time billing cap for work for a combination of Cathryn Low and myself to $60,000 at that time. All other terms and conditions of the June 30th Engagement Letter continue in effect. 12 Mr. William A. Klein Chairman of the Board The Cerplex Group, Inc. August 18, 1997 Page 2 If this amendment to the June 30th Engagement Letter conforms with our understanding, please signify your agreement in the space provided below. Sincerely, /s/ STEPHEN J. HOPKINS ----------------------------- Stephen J. Hopkins SJH/crc cc: M.R. D'Appolonia READ, UNDERSTOOD AND AGREED TO BY: The Cerplex Group, Inc. By: /s/ WILLIAM A. KLEIN ------------------------------- William A. Klein Chairman of the Board August 27, 1997 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1996 JAN-01-1997 SEP-30-1997 18,512 0 12,209 1,427 4,993 40,866 39,185 16,363 64,956 68,612 0 0 379 35 (29,102) 64,956 112,177 112,177 95,796 23,250 549 0 5,881 (11,393) 1,938 (13,331) 0 0 0 (13,331) (0.49) 0
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