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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.)
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(Exact name of registrant as specified in its charter)
Delaware 33-0411354
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1382 Bell Avenue, Tustin, CA 92780
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(Address of principal executive offices) (Zip Code)
(714) 258-5300
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(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.
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CERPLEX, INC.
TABLE OF CONTENTS
Page
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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
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CERPLEX, INC.
PART I
FINANCIAL INFORMATION
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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
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CERPLEX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended March 31,
----------------------------
1998 1997
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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
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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
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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
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment (596) (747)
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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)
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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
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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.
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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.
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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.
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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)%
==== =====
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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
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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.
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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
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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.
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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
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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)
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