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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 24, 1996
THE CERPLEX GROUP, INC.
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(Exact name of registrant as specified in charter)
Delaware 0-23602 33-0411354
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1382 Bell Avenue, Tustin, California 92780
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(Address of principal executive offices) (Zip Code)
(714) 258-5600
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(Registrant's telephone number including area code)
Not applicable
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(Former name or former address, if changed since last report)
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ITEM 5. OTHER EVENTS.
RISK FACTORS
An investment in the Common Stock being offered by the Company
involves a high degree of risk. Prospective investors should carefully consider
the following risk factors before purchasing the Common Stock offered by the
Company.
Losses and Accumulated Deficit. For the six-month period ended June
30, 1996 and the year ended December 31, 1995, the Company reported a net loss
of $871,000 and $39.4 million, respectively. As of June 30, 1996, the Company
had an accumulated deficit of $47.9 million. The Company anticipates
write-offs during the three months ended September 30, 1996 associated with the
closure of its Texas operations and the resolution of the SpectraVision
bankruptcy. Operating results for the third quarter will also be impacted by
operating losses associated with the Texas operations and start-up costs
associated with new facilities. Due to these and other factors affecting its
business, the Company expects to report a loss for the third quarter of 1996.
There can be no assurance that the Company will operate profitably in the
future. Continued losses could materially and adversely affect the Company's
business and the value of, and the market for, the Company's equity securities.
Future Capital Needs; Uncertainty of Additional Financing. The
Company's ability to maintain its current revenue base and to grow its business
is dependent on the availability of adequate capital. Without sufficient
capital, the Company's growth may be limited. During portions of 1995 and the
beginning of 1996, the Company was in default under its senior credit agreement
("Credit Agreement") and subordinated note agreements. While the Company
renegotiated such agreements and executed amendments to such agreements in April
of 1996, due to the impact of operating losses, the Lucent Note discussed below
and other factors, the Company is no longer in compliance with certain financial
covenants and other provisions of the Credit Agreement and subordinated note
agreements. The Company's noncompliance with the Credit Agreement and
subordinated note agreements constitutes an event of default which entitles the
lenders to accelerate the Company's obligations thereunder. The Company is
currently in discussions with its lenders regarding potential changes to, or
waivers of defaults under, such agreements. The failure of the Company to be in
compliance with the Credit Agreement and subordinated note agreements could have
a material adverse effect upon the Company. The terms of the senior credit
facility have resulted in a reduced borrowing base which will be further reduced
over the period ending March 1997. The Company is required to use a portion of
cash generated from operations, from sales of assets and from sales of equity
securities to further reduce its borrowing base under the Credit Agreement. As
a result, the Company currently has limited capital. In addition, the terms of
the Company's Credit Agreement and subordinated note 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
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when needed could have a material adverse effect on the Company's business and
future prospects. No assurance can be given that the Company will be able to
cure its defaults under the Credit Agreement and subordinated note agreements,
will not incur additional defaults under such agreements, or that additional
financing will be available or, if available, will be on acceptable terms.
Dispute with Lucent Technologies. The Company acquired inventory
consisting of used telephones from Lucent Technologies ("Lucent"). In June
1996, the Company executed a promissory note 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. 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. The failure to pay the Lucent Note on September 15, 1996
constitutes an event of default under the Company's senior credit facility and
may result in an event of default under the Company's subordinated note
agreements. If the Company is required to pay the Lucent Note in full, it would
have a material adverse effect on the Company's financial resources.
Risk of Excess and Unusable Inventory; Decreased Value of Assets. At
the end of 1995, inventory constituted approximately 27% of the Company's
assets. Any decrease in the demand for the Company's repair services could
result in a substantial portion of the Company's inventory becoming excess,
obsolete or otherwise unusable. During the last few years, the Company wrote
down a significant amount of inventory and a significant amount of other assets,
including receivables, securities and goodwill. Changes in the Company's
business, as well as the business of third parties, could adversely affect the
value of assets remaining on the Company's financial statements, possibly
resulting in 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. In
particular, due to a variety of factors that the Company is currently assessing,
the Company may write down a portion of the inventory purchased from Lucent and
will write down assets associated with the Texas operations and the
SpectraVision bankruptcy. In addition, the Company received 333,407 shares of
Common Stock of Pen Interconnect in connection with the sale of its InCirT
division which were valued at $5.40 per share. Recently, the trading price of
such shares has decreased substantially and there can be no assurance that the
Company will not be required to write down its investment with respect to such
shares in the future. There can be no assurance that the Company will not be
required to write down significant amounts of its inventory or other assets in
the future, which could have a material adverse effect on the Company's business
and results of operations.
Dependence on Key Customers. During the six months ended June 30,
1996, BT, IBM, SpectraVision and Rank Xerox accounted for approximately 13%,
11%, 6% and 6%, respectively, of continuing operations. During 1995, IBM and
SpectraVision significantly decreased orders for certain programs which
materially and adversely affected the Company and its results of operations.
SpectraVision is currently operating under Chapter 11 of the U.S. Bankruptcy
Code, and the Company ceased performing services for SpectraVision in August
1996. A significant portion of the Company's net sales attributable to IBM in
1995 were from discontinued operations, and, as such, the Company expects net
sales attributable to IBM to continue to account for a decreasing percentage of
the Company's net sales. Also,
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IBM has informed the Company that it has changed its strategy for spare parts
and, as a result, will not renew an agreement (which accounted for
approximately 8% of the Company's 1995 net sales from continuing operations)
with the Company for such services which expires in September 1996. Although
the Company will not provide spare parts under this agreement after September
1996, the Company believes it will continue to provide services to IBM under
other programs. There can be no assurance that major customers of the Company
will not terminate any or all of their arrangements with the Company;
significantly change, reduce or delay the amount of services ordered from the
Company; or significantly change the terms upon which the Company and these
customers do business. Any such termination, change, reduction or delay could
have a material adverse effect on the Company's business.
Dependence on Customers in the Electronics Industry. The Company is
dependent upon the continued growth, viability and financial stability of its
customers and potential customers in the electronics industry, particularly the
computer industry. The computer industry has been characterized by rapid
technological change, compressed product life cycles and pricing and margin
pressures. Improvements in technology and quality of hardware products or
other factors may result in a reduced need for parts and systems repairs in the
future which may adversely affect the Company's business. The factors
affecting segments of the electronics industry in general, and the Company's
OEM customers in particular, could have an adverse effect on the Company's
business. During 1995, several of the Company's customers experienced severe
financial difficulty resulting in significant losses to the Company as a result
of write downs of receivables and other assets. There can be no assurance that
existing customers or future customers will not experience financial
difficulty, which could have a material adverse effect on the Company's
business.
Reliance on Short-Term Purchase Orders. The Company's customer
contracts are typically subject to termination on short notice at the
customer's discretion and purchase orders under such contracts typically only
cover services over a 90-day period. The termination of any material contracts
or any substantial decrease in the orders received from major customers could
have a material adverse effect on the Company's business.
Competition. The Company competes with the in-house repair centers of
OEMs and TPMs for repair services. There is no assurance that these entities
will choose to outsource their repair needs. In certain instances, these
entities compete directly with the Company for the services of unrelated OEMs
and TPMs. In addition to competing with OEMs and TPMs, the Company also
competes for depot repair business with a small number of independent
organizations similar in size to the Company and a large number of smaller
companies. Many of the companies with which the Company competes have
significantly greater financial resources than the Company. There can be no
assurance that the Company will be able to compete effectively in its target
markets.
Management of Growth. The Company's growth has placed, and will
continue to place, a strain on the Company's managerial, operational and
financial resources. These resources may be further strained by the
geographically dispersed operations of the Company and the future addition of
acquired depots or businesses, if any. The Company's ability to manage growth
effectively will require it to continue to improve its operational, financial
and
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management information systems; to develop the management skills of its
managers and supervisors; and to train, motivate and effectively manage its
employees. The Company's failure to effectively manage growth, including
acquired operations, could have a material adverse effect on the Company's
business.
Expansion of International Sales. During the six month period ended
June 30, 1996, approximately 21% of the Company's business was in Europe and
the Company intends to continue to expand its European operations. There can
be no assurance that the Company will be able to successfully market, sell and
deliver its products and services in these markets. In addition to the
uncertainty as to the Company's ability to expand its international presence,
there are certain risks inherent in doing business on an international level,
such as unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers, difficulties in staffing and managing foreign
operations, longer payment cycles, problems in collecting accounts receivable,
political instability, fluctuations in currency exchange rates and potentially
adverse tax consequences, which could adversely impact the success of the
Company's international operations. There can be no assurance that one or more
of such factors will not have a material adverse effect on the Company's
international operations and, consequently, on the Company's business,
operating results and financial condition.
Dependence on Acquisition Strategy. Certain of the Company's repair
programs result in decreasing net sales as the installed base of the particular
products under such programs decreases over time. An important component of
the Company's strategy to maintain its revenue and to grow its business has
been the acquisition of repair programs and complementary businesses.
Competition for these types of transactions is likely to intensify. The
Company's ability to effect any significant transactions requiring capital will
be limited by the terms of the Company's senior credit facility. There can be
no assurance that the Company will be able to acquire additional repair
programs or complementary businesses or, if acquired, that such operations will
prove to be profitable.
Discontinued Operations; Change in Strategy. In September 1995,
Cerplex adopted a plan to discontinue its end-of-life programs, a line of
business which historically generated a significant percentage of the Company's
total sales, but which in recent years experienced declining sales. Net sales
from end-of-life programs declined from approximately $56 million in 1993 to
$33 million in 1994 to $20 million in 1995. The net loss from discontinued
operations for the year ended December 31, 1995 was $17.4 million. There can
be no assurance that the Company will not incur additional losses from these
operations. In connection with discontinuing its end-of-life business, the
Company changed certain elements of its business strategy and is undergoing
changes in management and operations, is developing a direct sales force and
terminating the majority of its outside sales representatives, is reducing its
emphasis on inventory acquisitions and focusing on targeted customers in
specific industries. While the Company believes such changes will enhance the
Company's opportunities, there can be no assurance that such changes will
positively impact the Company's business and results of operations in the short
or long term.
Risk Associated with the Ability of Existing Stockholders to Control
the Company. As of June 30, 1996, the officers, directors, principal
stockholders and their affiliates owned approximately 52% of the outstanding
Common Stock. Although there are currently no
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voting agreements or similar arrangements among such stockholders, if they were
to act in concert, they would be able to elect a majority of the Company's
directors, to determine the outcome of most corporate actions requiring
stockholder approval and otherwise to control the business affairs of the
Company. In addition, the Board of Directors of the Company has the authority
under the Company's Restated Certificate of Incorporation to issue shares of
the Company's authorized Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions granted to or imposed upon any
unissued shares of Preferred Stock. The issuance of Preferred Stock may
adversely affect the voting and dividend rights, rights upon liquidation and
other rights of the holders of Common Stock. The issuance of Preferred Stock
and the control by existing stockholders, if they were to act in concert, may
have the effect of delaying, deferring or preventing a change in control of the
Company.
On June 11, 1996, the Company consummated a private placement of
Series B Stock. Holders of Series B Stock are entitled to receive dividends as
may be declared from time to time by the Board prior and in preference to
payment of any dividends to the holders of Common Stock. In the event of any
liquidation, dissolution or winding up of the Company or the merger or sale of
the Company, the holders of Series B Stock will be entitled to receive, prior
and in preference to any distribution to the holders of Common Stock, the
amount of $2,000 per share of Series B Stock plus all accrued or declared but
unpaid dividends. Additionally, the Series B Stock is convertible into Common
Stock at a rate equal to the lower of a 20% discount to the trading price of
the Common Stock or $5.07 per share. The conversion rights of the Series B
Stock could have a significant dilutive effect upon the holders of Common
Stock.
Dependence on Key Personnel. The Company's continued success depends,
to a large extent, upon the efforts and abilities of key managerial employees,
particularly the Company's executive officers. Competition for qualified
management personnel in the industry is intense. The loss of services of
certain of these key employees could have a material adverse effect on the
Company's business.
No Assurance of Public Market for Common Stock; Possible Volatility of
Stock Price. Prior to the Company's initial public offering, there was no
public market for the Common Stock, and there can be no assurance that an
active trading market will be sustained. In early 1996, the Company was not in
compliance with Nasdaq National Market System's requirement of at least
$1,000,000 in net tangible assets. While the Company regained compliance with
such requirement during the second quarter, additional losses could cause the
Company to fail to comply with such requirement which could result in the loss
of listing on the National Market System. There can be no assurance that the
Company will be able to meet this or other requirements or maintain its listing
on Nasdaq's National Market System. 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.
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ITEM 7. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS METHOD OF FILING
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2.1 Agreement of Merger dated as of August 30, 1993, by and Incorporated herein by reference to
among Cerplex Incorporated, Diversified Manufacturing Exhibit 2.1 to the Company's
Services, Inc. ("DMS"), EMServe, Inc. ("EMServe"), Registration Statement on Form S-1
InCirT Technology Incorporated ("InCirT") and Testar, (File No. 33-75004) which was declared
Inc. ("Testar"). effective by the Commission on April
8, 1994.
2.2 Agreement and Plan of Merger dated November 12, 1993, Incorporated herein by reference to
between The Cerplex Group Subsidiary, Inc. and Exhibit 2.2 to the Company's
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 with Incorporated herein by reference to
and into The Cerplex Group Subsidiary, Inc. dated as of Exhibit 2.3 to the Company's
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, 1993 by Incorporated herein by reference to
and between Certech Technology, Inc., a wholly-owned Exhibit 2.4 to the Company's
subsidiary of the Registrant ("Certech"), and Registration Statement on Form S-1
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, 1994, Incorporated herein by reference to
by and among The Cerplex Group, Inc., Cerplex Limited, Exhibit 2 to the Form 8-K filed July
BT Repair Services Limited and British 29, 1994.
Telecommunications plc.
2.6 Contract for repair, calibration and warehousing of Incorporated herein by reference to
certain items of BT Equipment dated as of July 29, 1994, Exhibit 10 to the Form 8-K filed July
among The Cerplex Group and Cerplex Limited and BT. 29, 1994.
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2.7 Formation and Contribution Agreement effective December Incorporated herein by reference to
1, 1994 by and among Modcomp/Cerplex L.P., Modular Exhibit 2.7 to the Company's Annual
Computer Systems, Inc., Cerplex Subsidiary, Inc. and Report on Form 10-K for the fiscal
The Cerplex Group, Inc. year ended January 1, 1995.
2.8 Stock Purchase Agreement dated as of June 29, 1995 Incorporated herein by reference to
by and among The Cerplex Group, Inc., Tu Nguyen and Exhibit 2.11 to the Company's
Phuc Le. Quarterly Report on Form 10-Q for the
quarter ended October 1, 1995.
2.9 Letter Agreement dated April 5, 1996 by and among Incorporated herein by reference to
Modular Computer Systems, Inc., ModComp Joint Venture, Exhibit 2.12 to the Company's Annual
Inc., AEG Aktiengesellschaft, the Company, Cerplex Report on Form 10-K for the fiscal
Subsidiary, Inc. and Modcomp/Cerplex L.P. year ended December 31, 1995.
2.10 Stock Purchase Agreement dated as of May 24, 1996, by Incorporated herein by reference to
and among The Cerplex Group, Inc., Cerplex Limited, Exhibit 2.10 to the Company's Current
Rank Xerox - The Document Company SA and Rank Xerox Report on Form 8-K dated May 24, 1996.
Limited (conformed copy to original).
2.11 Contract of Warranty dated as of May 24, 1996, by and Incorporated herein by reference to
among The Cerplex Group, Inc. Cerplex Limited, Rank Exhibit 2.11 to the Company's Current
Xerox - The Document Company SA and Rank Xerox Limited Report on Form 8-K dated May 24, 1996.
(conformed copy to original).
2.12 Supply and Services Agreement dated as of May 24, 1996, Incorporated herein by reference to
by and among The Cerplex Group, Inc. Cerplex Limited, Exhibit 2.12 to the Company's Current
Rank Xerox - The Document Company SA and Rank Xerox Report on Form 8-K dated May 24, 1996.
Limited (conformed copy to original).
4.1 Registration Rights Agreement dated as of November 19, Incorporated herein by reference to
1993, by and among the Registrant, the investors listed Exhibit 4.2 to the Company's
on Schedule A thereto and the security holders of the Registration Statement on Form S-1
Registrant listed on Schedule B thereto, together with (File No. 33-75004) which was declared
Amendment No.1. effective by the Commission on April
8, 1994.
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4.2 Warrant Agreement dated as of November 19, 1993, by and Incorporated herein by reference to
among the Registrant and the purchasers listed in Annex Exhibit 4.4 to the Company's
1 thereto. Registration Statement on Form S-1
(File No. 33-75004) which was declared
effective by the Commission on April 8,
1994.
4.3 Placement Agent Warrant Purchase Agreement dated as of Incorporated herein by reference to
November 19, 1993, between the Registrant and Exhibit 4.5 to the Company's
Donaldson, Lufkin & Jenrette Securities Corporation. Registration Statement on Form S-1
(File No. 33-75004) which was declared
effective by the Commission on April 8,
1994.
4.4 Observation Rights Agreement dated as of November 19, Incorporated herein by reference to
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.
4.5 Observation Rights Agreement dated as of November 19, Incorporated herein by reference to
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.
4.6 Note Purchase Agreement dated as of November 19, 1993, Incorporated herein by reference to
by and among the Registrant and The Northwestern Mutual Exhibit 4.8 to the Company's
Life Insurance Company, John Hancock Mutual Life Registration Statement on Form S-1
Insurance, Registrant and Bank of Scotland London (File No. 33-75004) which was declared
Nominees Limited. effective by the Commission on April 8,
1994.
4.7 Amendment No. 2 to Registration Rights Agreement dated Incorporated herein by reference to
as of April 6, 1994, by and among the Registrant and Exhibit 4.9 to the Company's
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.
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4.8 Amendment to Note Purchase Agreement, dated as of Incorporated herein by reference to
October 27, 1994, by and among the Company, Exhibit 4.10 to the Company's Annual
Northwestern Mutual Life Insurance Company, John Report on Form 10-K for the fiscal
Hancock Mutual Life Insurance Company and North year ended March 31, 1995.
Atlantic Smaller Companies Trust P.L.C. (collectively,
the "Noteholders").
4.9 Waiver and Amendment Agreement dated April 15, 1996 by Incorporated herein by reference to
and among Company, The Northwestern Mutual Life Exhibit 4.11 to the Company's Annual
Insurance Company, John Hancock Mutual Life Insurance Report on Form 10-K for the fiscal
Company and North Atlantic Smaller Companies Investment year ended December 31, 1995.
Trust PLC.
4.10 Warrant Agreement dated as of April 15, 1996 by and Incorporated herein by reference to
among Company, The Northwestern Mutual Life Insurance Exhibit 4.12 to the Company's Annual
Company, John Hancock Mutual Life Insurance Company and Report on Form 10-K for the fiscal
North Atlantic Smaller Companies Investment Trust PLC. year ended December 31, 1995.
4.11 First Amendment to Warrant Agreement dated April 15, Incorporated herein by reference to
1996 by and among Company and each of the holders of Exhibit 4.13 to the Company's Annual
warrants listed on Schedule A thereto, with respect to Report on Form 10-K for the fiscal
that certain Warrant Agreement dated November 19, 1993. year ended December 31, 1995.
4.12 First Amendment to Observation Rights Agreement dated Incorporated herein by reference to
as of April 15, 1996 between Company and certain note Exhibit 4.14 to the Company's Annual
purchasers. Report on Form 10-K for the fiscal
year ended December 31, 1995.
4.13 Third Amendment to Registration Rights Agreement dated Incorporated herein by reference to
as of April 15, 1996 by and among Company, the Exhibit 4.15 to the Company's Annual
investors of Company listed on Schedule A thereto and Report on Form 10-K for the fiscal
the security holders of Company listed on Schedule B year ended December 31, 1995.
thereto.
4.14 Warrant Agreement dated April 15, 1996 by and among Incorporated herein by reference to
Company, Wells Fargo Bank, National Association, Exhibit 4.16 to the Company's Annual
Sumitomo Bank of California, BHF Bank Report on Form 10-K for the fiscal
Aktiengesellschaft and Comerica Bank-California. year ended December 31, 1995.
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4.15 Stock Purchase Agreement dated June 10, 1996 by and Incorporated herein by reference to
among the Company and the investors listed on Schedule Exhibit 4.17 to the Company's
A thereto. Quarterly Report on Form 10-Q filed
August 14, 1996.
4.16 Fourth Amendment to Registration Rights Agreement dated Incorporated herein by reference to
June 10, 1996 by and among Company, the investors Exhibit 4.18 to the Company's
listed on Schedule A thereto, the security holders of Quarterly Report on Form 10-Q filed
Company listed on Schedule B thereto, the banks listed August 14, 1996.
on Schedule C thereto and each of the parties listed on
Schedule D thereto.
4.17 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.
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SIGNATURES
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: September 24, 1996
THE CERPLEX GROUP, INC.
By: /s/ JAMES R. ECKSTAEDT
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James R. Eckstaedt
Chief Financial Officer
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