-----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, UD44WodQf045w4kqFxti9uKQAs09uvnSBcqBT7v+FswCwZJXL9h9SXtCZUeTuCNp wbjp7Qow73tqtkMkg9+bmw== 0000892569-98-001368.txt : 19980513 0000892569-98-001368.hdr.sgml : 19980513 ACCESSION NUMBER: 0000892569-98-001368 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980328 FILED AS OF DATE: 19980512 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: 98617037 BUSINESS ADDRESS: STREET 1: 1382 BELL AVE CITY: TUSTIN STATE: CA ZIP: 92680 BUSINESS PHONE: 7142585600 MAIL ADDRESS: STREET 1: 1382 BELL AVENUE CITY: TUSTIN STATE: CA ZIP: 92680 10-Q 1 FORM 10-Q FOR THE QUARTER ENDED MARCH 28, 1998 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 28, 1998 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 CERPLEX, INC. (Formerly known as The Cerplex Group, Inc.) - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 33-0411354 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1382 Bell Avenue, Tustin, CA 92780 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (714) 258-5300 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] The number of shares outstanding of the Registrant's Common Stock on April 24, 1998 was 36,390,084. 2 CERPLEX, INC. TABLE OF CONTENTS
Page ---- PART I -- FINANCIAL INFORMATION Condensed Consolidated Balance Sheets............................. 4 Condensed Consolidated Statements of Operations................... 5 Condensed Consolidated Statement of Stockholders' Deficiency...... 6 Condensed Consolidated Statements of Cash Flows................... 7 Notes to Condensed Consolidated Financial Statements.............. 8 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 11 PART II -- OTHER INFORMATION Legal Proceedings................................................. 14 Changes in Securities............................................. 14 Defaults Upon Senior Securities................................... 14 Submission of Matters to a Vote of Security Holders............... 14 Other Information................................................. 14 Exhibits and Reports on Form 8-K.................................. 16 SIGNATURE ............................................................ 17
2 3 CERPLEX, INC. PART I FINANCIAL INFORMATION 3 4 CERPLEX, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (Unaudited)
March 31, December 31, 1998 1997 -------- ----------- ASSETS Current assets: Cash and cash equivalents $ 15,746 $ 16,184 Accounts receivable, net 14,715 9,710 Inventories 6,229 5,522 Prepaid expenses and other current assets 2,257 3,877 -------- -------- Total current assets 38,947 35,293 Property, plant and equipment, net 23,053 22,974 Other long-term assets 662 971 -------- -------- Total assets $ 62,662 $ 59,238 ======== ======== LIABILITIES & STOCKHOLDERS' DEFICIENCY Current liabilities: Note payable $ 52,880 $ 46,336 Accounts payable 9,398 8,892 Accrued and other current liabilities 25,495 26,675 Income taxes payable 1,008 698 -------- -------- Total current liabilities 88,781 82,601 -------- -------- Long-term debt, less current portion 3,424 2,960 Long-term obligations 6,214 6,214 Commitments and contingencies Stockholders' Deficiency: Common stock, par value $0.001 per share; 60,000,000 shares authorized; 36,390,084 issued and outstanding 36 36 Additional paid-in capital 59,718 59,718 Accumulated deficiency (94,526) (90,901) Cumulative translation adjustment (985) (1,390) -------- -------- Total stockholders' deficiency (35,757) (32,537) -------- -------- Total liabilities and stockholders' deficiency $ 62,662 $ 59,238 ======== ========
See accompanying notes to condensed consolidated financial statements 4 5 CERPLEX, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited)
Three months ended March 31, ---------------------------- 1998 1997 -------- -------- Net sales $ 31,566 $ 46,340 Cost of sales 28,388 38,829 -------- -------- Gross profit 3,178 7,511 Selling, general and administrative expenses 3,881 8,970 -------- -------- Operating loss (703) (1,459) Other expense, net 10 576 Interest expense, net 2,514 2,247 -------- -------- Loss before income taxes (3,227) (4,282) Provision for income taxes 398 721 -------- -------- Net loss $ (3,625) $ (5,003) ======== ======== Basic and diluted loss per share $ (.10) $ (.32) ======== ======== Weighted average common shares used in the calculation of loss per share 36,390 15,741 ======== ========
See accompanying notes to condensed consolidated financial statements 5 6 CERPLEX, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY (in thousands, except share data) (Unaudited)
Common Stock Additional Cumulative Total ------------------------ Paid-In Translation Accumulated Stockholders' Shares Amount Capital Adjustment Deficiency Deficiency ---------- ----------- -------------- ------------- ------------- ------------- Balance at December 31, 1997 36,390,084 $ 36 $ 59,718 $ (1,390) $ (90,901) $ (32,537) Net loss (3,625) (3,625) Translation adjustment 405 405 ---------- ---------- ------------- ------------ ------------- ------------ Balance at March 31, 1998 36,390,084 $ 36 $ 59,718 $ (985) $ (94,526) $ (35,757) ========== ========== ============= ============ ============= ============
See accompanying notes to condensed consolidated financial statements 6 7 CERPLEX, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (Unaudited)
Three Months Ended March 31 --------------------------- 1998 1997 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (3,625) $ (5,003) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,530 2,295 Amortization of unearned compensation 18 Foreign currency transaction loss 25 Decrease (increase) in: Accounts receivable (5,005) 456 Inventories (707) 2,763 Prepaid expenses and other 1,637 2,112 Other long-term assets 312 (381) Net assets of discontinued operations -- 1,681 (Decrease) increase in: Accounts payable 506 (2,685) Accrued and other current liabilities (176) (458) Income taxes payable 310 667 -------- -------- Net cash provided by (used in) operating activities (5,218) 1,490 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of plant and equipment (596) (747) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments of long-term debt -- (257) Proceeds from notes payable 5,100 -- Other (5) -------- -------- Net cash provided by (used in) financing activities 5,100 (262) -------- -------- Effect of exchange rate changes on cash 276 (1,327) -------- -------- Net decrease in cash and cash equivalents (438) (846) Cash and cash equivalents at beginning of period 16,184 23,782 -------- -------- Cash and cash equivalents at end of period $ 15,746 $ 22,936 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the quarter for: Interest $ 1,208 $ 1,625 ======== ======== Income taxes $ 514 $ 18 ======== ======== Non-cash activities during the quarter: Capital lease additions $ -- $ 249 ======== ========
See accompanying notes to condensed consolidated financial statements 7 8 CERPLEX, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) ORGANIZATION, BASIS OF REPORTING AND PRINCIPLES OF CONSOLIDATION Cerplex, Inc. (the "Company") was incorporated in California in May 1990 and reincorporated in Delaware in November 1993. The Company is a leading independent provider of electronic parts repair and logistics services for a wide range of electronic equipment for the computer and peripheral, telecommunications and office automation markets. The Company's key service offerings are depot repair, logistics services and spare parts management and sales, as well as a variety of ancillary services. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. (b) CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. In May 1996, the Company acquired Cerplex SAS. As part of the acquisition, sufficient cash was provided to fund certain liabilities of Cerplex SAS. Under the terms of the Stock Purchase Agreement, the Company has agreed to certain financial covenants over a four year period that limit the amount of dividends and payments in the nature of corporate charges paid by Cerplex SAS. Accordingly, the cash of Cerplex SAS is generally not available for financing operations outside of Cerplex SAS. The cash balance of Cerplex SAS at March 31, 1998 was $14.0 million. (c) INVENTORIES Inventories are stated at the lower of cost (determined by the weighted-average method) or market. (d) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation for the plant in the United Kingdom is provided utilizing the straight line method over the estimated useful life of twenty-five years. Depreciation for equipment is provided utilizing the straight-line method over the estimated useful lives (primarily three to five years) of the respective assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or useful life. (e) OTHER ASSETS Long-term investments are recorded at cost. The Company periodically assesses whether there has been an other than temporary decline in the market value below cost of the investment. Any such decline is charged to earnings resulting in the establishment of a new cost basis for the investment. Debt issuance costs incurred to obtain financing are capitalized and amortized using the straight-line method over the estimated life of the related debt. 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 deficiency until realized. Realized gains, realized losses and decline in value, judged to be other than temporary, are included in other income. 8 9 CERPLEX, INC. (f) FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign subsidiaries are translated at year-end rates of exchange and net sales and expenses are translated at the average rates of exchange for the year. Translation gains and losses are excluded from the measurement of net income or loss and are recorded as a separate component of stockholders' deficiency. Gains and losses resulting from foreign currency transactions are included in net income. (g) 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. (h) 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. (i) LOSS PER SHARE Effective December 31, 1997, Cerplex adopted SFAS No. 128, "Earnings Per Share". This statement replaces the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Basic net loss per share is computed using the weighted average number of common shares outstanding. Diluted loss per share excludes the antidilutive effect of preferred stock, stock options and warrants. (j) 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 CERPLEX, INC. NOTE 2 - BASIS OF PRESENTATION In the opinion of the Company's management, the accompanying unaudited condensed consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position as of March 31, 1998 and 1997 and consolidated statements of operations and statements of cash flows for the three months ended March 31, 1998 and 1997. Results of operations for the three months ended March 31, 1998 are not necessarily indicative of results to be expected in the future. Although the Company believes that the disclosures in the accompanying financial statements are adequate to make the information presented not misleading, certain information and footnote information normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, and these financial statements should be read in conjunction with the Company's Form 10-K for the year ended December 31, 1997. The Company's fiscal year is the 52 or 53 week period ending on the Saturday closest to December 31. For purposes of presentation, the Company has indicated its accounting quarter and year end as March 31 and December 31, respectively. NOTE 3 - SUBSEQUENT EVENT The merger between The Cerplex Group, Inc. and Aurora Electronics, Inc. was completed on April 30, 1998. As a result of the merger, Cerplex became a wholly-owned subsidiary of Aurora, and Aurora changed its name to The Cerplex Group, Inc. Each outstanding share of Cerplex Common Stock will be converted into the right to receive 1.070168 shares of Aurora Common Stock. As part of the merger agreement, $33 million in cash will be infused into the new company under a restructuring plan. Proceeds from Aurora's New Senior Loan, together with proceeds from the Welsh, Carson, Anderson & Stowe VII, L.P. ("WCAS") financing and Rights Offering was partially used to retire Cerplex's Senior Debt, the related accrued interest and a $200,000 Amendment fee, which was due upon payment of the outstanding debt. After giving effect to the merger and WCAS Financing, WCAS will, in the aggregate, depending on the number of Rights Units purchased by the Aurora Public Stockholders in the Rights Offering, beneficially own approximately between 61% and 69% of the voting stock of Aurora on an as-converted basis. During the quarter ended March 31, 1998, Aurora provided Cerplex with unsecured loans in the amount of $5.1 million, which bears interest at the rate of 10% and becomes due and payable on June 30, 1998. An additional loan of $1.5 million was made on April 30, 1998. Cerplex used the funds for working capital purposes. 10 11 CERPLEX, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed under "Item 5. Other Information (a) Risk Factors." OVERVIEW The Company is an independent provider of electronic parts repair, spare parts sales and management, and logistics. The Company's net sales have increased substantially over the last few years, primarily as a result of acquisitions. The Company is no longer permitted under the terms of its credit facility to engage in acquisitions. The Company's results of operations have been adversely affected over the last two years due to a variety of factors discussed below. During the second quarter of 1997, the Cerplex Board authorized and committed management to implement a consolidation and cost reduction plan to reduce North America staffing. As part of the restructuring, Cerplex sold its PCS and MODCOMP/Cerplex subsidiaries. Also during 1997, Cerplex was in default under the Cerplex Senior Credit Agreement resulting in numerous waivers and amendments. On January 30, 1998, Aurora Electronics, Inc. (Aurora) signed a Merger Agreement with Cerplex. As a result of the Merger, Cerplex would become a wholly-owned subsidiary of Aurora, and the current equity holders of Cerplex would be entitled to receive in a tax-free exchange approximately 25% of the post-merger, fully-diluted common stock of Aurora, after giving effect to the WCAS Financing and the Rights Offering. Under the terms of the Merger Agreement, each share of Cerplex Common Stock would convert into shares of Aurora Common Stock at the Exchange Ratio. RESULTS OF OPERATIONS The following table sets forth items from the Company's Condensed Consolidated Statements of Operations as a percentage of net sales.
For the Three-Month Period Ended March 31, -------------------- 1998 1997 ------- ------ Net sales 100.0% 100.0% Cost of sales 89.9 83.8 ---- ----- Gross margin 10.1 16.2 Selling, general and administrative 12.3 19.4 ---- ----- Operating loss (2.2)% (3.2)% ==== =====
11 12 CERPLEX, INC. NET SALES Net sales for the quarter ended March 31, 1998 decreased $14.8 million or 31.9% to $31.6 million as compared to net sales for the corresponding quarter of 1997. The increase in net sales for the first quarter of 1998 compared with the first quarter of 1997 is primarily due to the sales of Cerplex's PCS subsidiary in April 1997 and MODCOMP/Cerplex effective June 30, 1997. These operations contributed $10.7 million in net sales in the first quarter of 1997. In addition, net sales of Cerplex's on-going repair business decreased $3.3 million in the first quarter of 1998 compared to 1997. GROSS PROFIT Gross profit as a percentage of net sales declined to 10.1% during the quarter ended March 31, 1998 from 16.2% during the quarter ended March 31, 1997. The decrease in the gross profit margin percentage was partially the result of the sales of PCS and Modcomp/Cerplex businesses, which had higher gross margins. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A") decreased by $5.1 million and as a percentage of net sales were 12.3% during the quarter ended March 31, 1998 compared with 19.4% during the quarter ended March 31, 1997. The decrease in SG&A dollar spending is due to the sale of PCS and Modcomp/Cerplex in the first half of 1997, along with Cerplex's consolidation and cost reduction plan initiated in June 1997, which reduced staffing in marketing, selling, finance and management information systems functions. INTEREST EXPENSE Interest expense for the quarter ended March 31, 1998 increased to $2.5 million from $2.2 million in the corresponding quarter of 1997. The increase was due to a higher weighted average interest rate. The effective interest rate on credit facilities increased to 15.2% during the quarter ended March 31, 1998 from 9.8% during the quarter ended March 31, 1997. Average borrowings outstanding were $50.8 million during the quarter ended March 31, 1998 compared with $61.9 during the quarter ended March 31, 1997. INCOME TAXES Income tax expense for the quarter ended March 31, 1998 decreased to $398,000 from $721,000 for the quarter ended March 31, 1997 and is primarily related to income taxes on earnings of the Company's operations in Europe. 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. LIQUIDITY AND CAPITAL RESOURCES SENIOR CREDIT FACILITY SUMMARY. The Credit Agreement contains a variety of restrictions, including prohibitions on dividends and the incurrence of additional debt. During portions of 1996 and 1997 Cerplex was in default of various covenants in the Credit Agreement, which resulted in a series of waivers and amendments over 12 13 CERPLEX, INC. the course of the two years. As described below, the amendments resulted in a decreased borrowing base from the initial $60 million to $30 million and in significantly increased interest rates. The amendments also resulted in the issuance of the Bank Warrants. As of March 31, 1998, $25,320,620 in principal was outstanding under the term loan at an interest rate of prime plus 7.125% (15.625%), $2,886,984 and $2,000,000 was outstanding under the revolver at an interest rates of 14.5% and 19.0%, respectively. The loans under the Credit Agreement became due and payable May 1, 1998. Cerplex and Citibank entered into a Forbearance Agreement on January 30, 1998, which provides for the forbearance of certain defaults through the earlier of April 30, 1998 or the date the Merger Agreement is terminated. In addition, Citibank agreed to accept the sum of (i) 98.5% of the outstanding principal amount of the amounts outstanding under the Credit Agreement, plus (ii) all accrued and unpaid fees, expenses and other amounts payable under the Credit Agreement as of April 30, 1998 (the "Repayment Amount") as full payment for the loans under the Credit Facility and to terminate all of the Bank Warrants if the Credit Facility is paid in full on or prior to April 30, 1998 in connection with the Merger. 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. On January 30, 1998, WCAS and the holders of Cerplex Subordinated Notes entered into the Note and Warrant Assignment and Transfer Agreement, pursuant to which WCAS purchased the Cerplex Subordinated Notes and warrants to purchase an aggregate of 1,500,096 shares of Cerplex Common Stock (the "Cerplex Warrants") held by such holders. The original Subordinated Note holders retained warrants to purchase an aggregate of 855,000 shares of Cerplex Common Stock. WCAS agreed to defer the February 19, 1998 scheduled interest payment and to add such amount to the outstanding principal balance of the Subordinated Notes. WCAS agreed that the Cerplex Warrants it acquired will be terminated and will not be considered outstanding in determining the consideration to be received by the Cerplex stockholders in the Merger. It is contemplated that WCAS will exchange the Subordinated Notes and the Cerplex Warrants it acquired for Aurora Senior Subordinated Notes as partial payment for the units to be purchased by WCAS as part of the WCAS Financing at an exchange rate equal to the amount paid by WCAS for such Cerplex securities. MISCELLANEOUS On April 11, 1997, the Company sold Peripheral Computer Support, Inc. ("PCS"), a subsidiary of the Company, for $14.5 million in cash and the cancellation of $500,000 of indebtedness. Of such amount, $8.25 million was used to pay down bank debt, $500,000 was placed into escrow, and approximately $750,000 was used to pay expenses associated with the transaction. The Company or it subsidiaries are required to pay BT 1.8 million pounds in 1999 or earlier if certain sales volumes are reached. 13 14 CERPLEX, INC. The Company acquired inventory consisting of used telephones from Lucent Technologies, Inc. ("Lucent"). At December 31, 1996, the Company had $5.9 million of inventory, production cost commitments and assets related to the telephones acquired from Lucent. In June 1996, the Company executed a promissory note bearing interest at 9.75% in the amount of $4.6 million payable on September 15, 1996 in favor of Lucent, reflecting a portion of the amount invoiced to the Company by Lucent (the "Lucent Note"). Lucent has invoiced the company for an additional $0.6 million. Due to the quality of the inventory and the lack of availability of spare parts to effect repairs, the Company believes it has claims against Lucent. The Company currently does not intend to pay the Lucent note or other Lucent invoices. If the Company is required to pay the Lucent Note and other Lucent invoices in full, it would have a material adverse effect on the Company's financial resources. On October 7, 1996, the Company filed a lawsuit against Lucent in the Orange County Superior Court seeking to have the Lucent Note declared invalid. On November 6, 1996, Lucent filed a cross-complaint seeking payment of the Lucent Note, alleging damages for breach of contract and seeking a constructive trust on any proceeds from the sale of the telephones. In October 1997, Cerplex 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 trade credits that Cerplex had received when it transferred the telephones to a third party. Cerplex also paid Lucent an additional $350,000 in April 1998. During the quarter ended March 31, 1998, Aurora provided Cerplex with unsecured loans in the amount of $5.1 million, which bears interest at the rate of 10% and becomes due and payable on June 30, 1998. An additional loan of $1.5 million was made on April 30, 1998. Cerplex used the funds for working capital purposes. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Refer to disclosure set forth in Part I, Item 3 (Legal Proceedings) of the Company's Annual Report on Form 10-K for the 1997 fiscal year. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES During portions of 1996 and 1997, the Company was in default under its senior Credit Agreement. The Company has renegotiated and amended such agreement to cure such defaults. See "Liquidity and Capital Resources" herein for a more detailed discussion. In addition, the Company is operating under waivers with respect to certain covenants under the Credit Agreement and is required to fulfill certain covenants by various deadlines over the next couple of months. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION (a) RISK FACTORS 14 15 CERPLEX, INC. This report may contain forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause differences include, but are not limited to, those discussed below. LOSSES AND ACCUMULATED DEFICIT. For the quarter ended March 31, 1998, the Company reported a net loss of $3.6 million, including an operating loss of $0.7 million. As of March 31, 1998, the Company had an accumulated deficit of $94.5 million. There can be no assurance that the Company will reduce its operating losses or operate profitably in the future. DEPENDENCE ON KEY CUSTOMERS. During 1997, Rank Xerox, IBM, BT and Digital Equipment Corporation accounted for approximately 32%, 6%, 12% and 11% of revenues, respectively. 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. The Company's ability to maintain its current revenue base and to grow its business is dependent on the availability of adequate capital. Without sufficient capital, the Company's growth may be limited and its existing operations may be adversely affected. The Company's financial condition and limited capital has adversely impacted the Company's relationship with certain customers and may adversely impact its relationship with customers in the future. During portions of 1996 and 1997, the Company was in default under its senior credit agreement and subordinated note agreement. While the Company has renegotiated amendments to such agreements, the terms of the senior credit facility have resulted in a reduced borrowing base which will be further reduced over the next twelve months and the Company currently has limited borrowing ability under such facility. The Company is required to use a portion of cash generated from operations, and from sales of assets to further reduce its borrowing base under the senior credit agreements. As a result, the Company currently has limited capital. In addition, the terms of such agreements restrict the Company's ability to incur additional indebtedness and could adversely affect the Company's ability to obtain additional financing. General market conditions and the Company's future performance, including its ability to generate profits and positive cash flow, will also impact the Company's financial resources. The failure of the Company to obtain additional capital when needed could have a material adverse effect on the Company's business and future prospects. 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. 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. 15 16 CERPLEX, INC. COMPETITION. The Company competes with the in-house repair centers of original equipment manufacturers ("OEM'S") and third party maintainers ("TPM'S") for repair services. There is no assurance that these entities will choose to outsource their repair needs. In certain instances, these entities compete directly with the Company for the services of unrelated OEM'S and TPM'S. In addition to competing with OEM'S and TPM'S, the Company also competes for depot repair business with a small number of independent organizations similar in size to the Company and a large number of smaller companies. Many of the companies with which the Company competes have significantly greater financial resources than the Company. There can be no assurance that the Company will be able to compete effectively in its target markets. MANAGEMENT OF GROWTH. The Company's growth has placed, and will continue to place, a strain on the Company's managerial, operational and financial resources. These resources may be further strained by the geographically dispersed operations of the Company. The Company's ability to manage growth effectively will require it to continue to improve its operational, financial and management information systems; to develop the management skills of its managers and supervisors; and to train, motivate and effectively manage its employees. The Company's failure to effectively manage growth could have a material adverse effect on the Company's business. Due to factors associated with the Company's business and financial condition, there can be no assurance that the Company's growth in net sales will continue into the future. EXPANSION OF INTERNATIONAL SALES. During 1997, approximately 59.1% of the Company's sales were international. There can be no assurance that the Company will be able to successfully market, sell and deliver its products and services in these markets. In addition to the uncertainty as to the Company's ability to expand its international presence, there are certain risks inherent in doing business on an international level, such as unexpected changes in regulatory requirements, export restrictions, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in currency exchange rates and potentially adverse tax consequences, which could adversely impact the success of the Company's international operations. There can be no assurance that one or more of such factors will not have a material adverse effect on the Company's international operations and, consequently, on the Company's business, operating results and financial condition. DEPENDENCE ON 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. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits Exhibit Description - ------- ----------- 27.1 EDGAR Financial Data Schedule b) Reports on Form 8-K for the quarter ended March 28, 1998 None 16 17 CERPLEX, INC. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 12, 1998 CERPLEX, INC. /s/ Steven L. Korby ---------------------------------- Steven L. Korby Executive Vice President of Finance and Chief Financial Officer (Principal Accounting Officer) 17 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 15,746 0 16,237 1,522 6,229 38,947 38,894 15,841 62,662 88,781 0 0 0 36 (35,773) 62,662 31,566 31,566 28,388 3,881 10 0 2,514 (3,227) 398 (3,625) 0 0 0 (3,625) (.10) (.10)
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