-----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, EMl46y97j/jPTljHxS6JaKdhVQ2iItKj9iG1FiK8Du/+VbMDybPZJRSGMzJ999/h cKTJxdSkO+Y1ZUjGADKsFg== 0000891618-98-000001.txt : 19980105 0000891618-98-000001.hdr.sgml : 19980105 ACCESSION NUMBER: 0000891618-98-000001 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971003 FILED AS OF DATE: 19980102 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNICATIONS & POWER INDUSTRIES HOLDING CORP CENTRAL INDEX KEY: 0001000654 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 770407395 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-96858-01 FILM NUMBER: 98500124 BUSINESS ADDRESS: STREET 1: 607 HANSEN WY CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4154934000 MAIL ADDRESS: STREET 1: 607 HANSEN WAY M/S A2000 STREET 2: P O BOX 51110 CITY: PALO ALTO STATE: CA ZIP: 94303-1110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNICATIONS & POWER INDUSTRIES INC CENTRAL INDEX KEY: 0001000564 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 770405693 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-96858 FILM NUMBER: 98500125 BUSINESS ADDRESS: STREET 1: 607 HANSEN WAY CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4154934000 MAIL ADDRESS: STREET 1: 607 HANSEN WAY M/S A200 STREET 2: P O BOX 51110 CITY: PALO ALTO STATE: CA ZIP: 94303-1110 10-K405 1 FORM 10-K FOR THE YEAR ENDED OCTOBER 3, 1997 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 3, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_______________to_______________ Commission File Number: 33-96858-01 Commission File Number: 33-96858 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION COMMUNICATIONS & POWER INDUSTRIES, INC. (Exact name of registrant (Exact name of registrant as specified in its charter) as specified in its charter) DELAWARE DELAWARE (State of Incorporation) (State of Incorporation) 77-0407395 77-0405693 (I.R.S. employer identification number) (I.R.S. employer identification number) 607 HANSEN WAY 607 HANSEN WAY PALO ALTO, CALIFORNIA 94303-1110 PALO ALTO, CALIFORNIA 94303-1110 (650) 846-2900 (650) 846-2900 (Address, including zip code, (Address, including zip code, and telephone number, including and telephone number, including area code, of registrant's principal area code, of registrant's principal executive offices) executive offices) Securities registered pursuant Securities registered pursuant to Section 12(b) of the Act: to Section 12(b) of the Act: NONE NONE Securities registered pursuant Securities registered pursuant to Section 12(g) of the Act: to Section 12(g) of the Act: NONE NONE
Indicate by check mark whether each 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 [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock of Communications & Power Industries Holding Corporation held by non-affiliates is $1,050,000, based upon the selling price of such stock. No voting stock of Communications & Power Industries, Inc. is held by non-affiliates of Communications & Power Industries, Inc. Communications & Power Industries, Inc.'s voting stock is wholly owned by Communications & Power Industries Holding Corporation, a Delaware corporation. Neither Communications & Power Industries, Inc.'s nor Communications & Power Industries Holding Corporation's common stock is publicly traded. Indicate the number of shares outstanding for each of the Registrant's classes of Common Stock, as of the latest practicable date: COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION: 199,350 SHARES OF COMMON STOCK, $.01 PAR VALUE, AT DECEMBER 1, 1997. COMMUNICATIONS & POWER INDUSTRIES, INC.: 1 SHARE OF COMMON STOCK, $.01 PAR VALUE, AT DECEMBER 1, 1997. DOCUMENTS INCORPORATED BY REFERENCE: (None) 2 PART 1 ITEM 1: BUSINESS GENERAL Communications & Power Industries Holding Corporation, Inc. ("Holding"), through its wholly-owned subsidiary, Communications & Power Industries, Inc. ("CPI", both companies together referred to as the "Company"), is a world leader in the development, manufacture and distribution of components for systems used primarily to generate, amplify and transmit high-power/high-frequency microwave and radio frequency signals. End-use applications of these systems include the transmission and amplification of voice, data and video signals for broadcasting and telecommunications, transmission of radar signals for navigation and location, transmission of false signals for electronic countermeasures (e.g., decoys and signal "jammers") and various other uses in the industrial, medical and scientific markets. The Company's products include microwave and power grid vacuum electronic devices, microwave amplifiers, modulators, and various other power supply equipment and devices. These products are consumable and have a finite life based upon hours of usage, operating environment and application. The Company operates six manufacturing locations in North America, and sells and services its products and customers worldwide primarily through a direct sales force. Communications & Power Industries, Inc. is a wholly-owned subsidiary of Communications & Power Industries Holding Corporation. Both Holding and CPI are Delaware corporations formed in 1995. Prior to August 11, 1995, the Company's operations were part of the Electron Devices Business division (the "Predecessor") of Varian Associates, Inc. ("Varian") and, except as the context may otherwise require, the term the "Company" as used in this Annual Report on Form 10-K refers to both the Company and the Predecessor. The principal executive offices of Holding and CPI are located at 607 Hansen Way, Palo Alto, California 94303 and their telephone number is (650) 846-2900. PRODUCTS The Company offers a comprehensive range of microwave and power grid vacuum electronic devices, microwave amplifiers, modulators and various other power supply equipment and devices for use in the communication, radar, electronic countermeasures, industrial, medical and scientific markets. The Company offers over 6,600 products which generally have selling prices from $2,000 to $50,000, with certain products ranging in price up to $1,000,000. These products are consumable and have a finite life based upon hours of usage, operating environment and application. Certain of the Company's products are sold in more than one market depending on the specific power and frequency requirements of the end-user and the physical operating conditions of the environment in which the vacuum electronic device will be located. Specific products which the Company offers include: - VACUUM ELECTRONIC DEVICES. Helix traveling wave vacuum electronic devices, klystron amplifiers, klystron oscillators, gyrotrons, coupled cavity traveling wave vacuum electronic devices, magnetrons, ring loop traveling wave vacuum electronic devices, cross field amplifiers, extended interaction klystrons, power grid vacuum electronic devices, Klystrodes(R) and inductive output vacuum electronic devices. -1- 3 - AMPLIFIERS. Satellite communication amplifiers, instrumentation amplifiers, traveling wave vacuum electronic device transmitters, FET modulators, magnetron modulators, test sets, X-ray generators, Heat Wave(TM) products, microwave power modules, microwave power boosters, traveling wave vacuum electronic device amplifiers and millimeter wave subsystems. - RELATED DEVICES. Diode switches, waveguide assemblies, pressure windows, receiver protectors, hermetic seals, high voltage power supplies and radio frequency cavities. MARKETS The Company's products are used primarily to generate, amplify and transmit high-power/high-frequency microwave, electronic and radio frequency signals. End-use applications of these devices include the transmission and amplification of voice, data, and video signals for broadcasting and telecommunications, transmission of radar signals for navigation and location, transmission of false radar signals for electronic countermeasures (e.g., decoys and signal "jammers") and various other uses in the industrial, medical and scientific markets. In Fiscal 1997, commercial sales, which represent sales for which a U.S. Government entity is not the end-user, represented approximately $190.1 million, or 75% of the Company's total sales, compared to approximately $187.9 million, or 73%, in Fiscal 1996. U.S. Government sales, both direct and through original equipment manufacturers ("OEM"), represented approximately $63.3 million, or 25% of the Company's total sales, compared to approximately $69.5 million, or 27%, in Fiscal 1996. These percentages reflect the Company's development of products for the commercial marketplace. Prior to 1990, the Company's primary customers were U.S. Government agencies and OEMs manufacturing defense-related products. In Fiscal 1989, U.S. Government sales represented approximately 48% of the Company's sales. Since the late 1980s, the United States defense budget has been shrinking; however, based on a stable trend of order receipts for spares and upgrades from Fiscal 1995 to Fiscal 1997, management expects that U.S. Government and defense-related end-users will continue to provide a steady source of revenue. In Fiscal 1997, approximately 67% of sales were derived from U.S. customers, while approximately 33% were derived from international customers. Many domestic OEMs, primarily those in the satellite communications market, export their products, and management believes that some percentage of the Company's sales to U.S. customers ultimately have international end-users. Excluding sales to the U.S. Government, no single customer accounted for more than 5% of the Company's total sales in either Fiscal 1997, Fiscal 1996 or Fiscal 1995. The Company operates in six different markets: - - Communications Market - The communications market is comprised of applications for satellite communications ("SatCom") and broadcast sectors. In this market, the Company's products generate, amplify and transmit signals and data within an overall communication system. Sales in the communications market were $122.5 million in Fiscal 1997 compared to $118.4 million in Fiscal 1996 and $110.5 million in Fiscal 1995(1). (1) For Fiscal 1995, reported sales represent sales on a historical basis of the combined Predecessor and Successor. As there were no sales to Varian in these markets, pro forma sales comparisons do not differ from historical sales comparisons. -2- 4 - - Radar Market - The radar market includes microwave and power grid vacuum electronic devices, amplifiers and related equipment for air, ground and shipboard radar systems. The Company's vacuum electronic devices have been an integral component of radar systems for over four decades. Sales in the radar market were $75.4 million in Fiscal 1997 compared to $74.6 million for Fiscal 1996 and $76.9 million for Fiscal 1995(1). - - Electronic Countermeasures Market - The electronic countermeasures market utilizes microwave vacuum electronic devices for systems that provide protection for ships, aircraft and high-value land targets against radar-guided munitions. Sales in the electronic countermeasures market were $11.8 million, $17.2 million, and $20.1 million in Fiscal 1997, Fiscal 1996 and Fiscal 1995(2), respectively. - - Industrial Market - The industrial market includes applications for a wide range of systems used for materials processing, instrumentation and voltage generation. Sales in this market were $21.9 million in Fiscal 1997 and $27.2 million in Fiscal 1996. In Fiscal 1995, sales were $22.6 million on a pro forma basis(2) and $22.0 million on a historical combined basis. - - Medical Market - The Company participates in the diagnostic and treatment sectors of the medical market. In the diagnostic market, the Company provides X-ray generators, including state-of-the-art, high-efficiency, lightweight power supplies and modern digital-based consoles for diagnostic equipment. In the treatment market, the Company provides microwave generators (klystrons) for high-end cancer therapy machines. Sales in this market were $17.6 million in Fiscal 1997 and $16.3 million in Fiscal 1996. In Fiscal 1995, sales were $17.4 million on a pro forma basis(2) and $15.8 million on a historical basis. - - Scientific Market - The scientific market consists primarily of equipment utilized in reactor fusion programs and accelerators for high-energy particle physics, referred to as "Big Science." Sales in the scientific market were $4.2 million, $3.7 million and $5.7 million in Fiscal 1997, Fiscal 1996 and Fiscal 1995(1), respectively. SALES, MARKETING AND SERVICE As of October 3, 1997, the Company had approximately 115 direct marketing and sales professionals representing the largest direct sales, service and technical support organization focused exclusively on high-power/high-frequency signal generation, amplification and transmission. The Company's sales and service organization is supplemented by outside representatives and a distributor which service certain lower volume accounts. Each of the Company's sales professionals is responsible for marketing the Company's entire product line. Company sales professionals receive extensive technical training in all of the Company's products, which allows them to provide customers with appropriate technical support, including information on product application and implementation. In addition to its direct sales force, the Company utilizes 32 external sales organizations and one stocking distributor, Richardson Electronics, Ltd., to service the needs of low volume customers. The majority of the third-party organizations which the Company utilizes are located outside the U.S. and focus primarily on customers in South America, South East Asia, the Far East, the Middle East, Africa and Eastern Europe. Through the use of third-party sales organizations, the Company has been better able to meet the needs of its foreign customers by establishing a local presence in lower volume markets. (1) For Fiscal 1995, reported sales represent sales on a historical basis of the combined Predecessor and Successor. As there were no sales to Varian in these markets, pro forma sales comparisons do not differ from historical sales comparisons. (2) For Fiscal 1995, pro forma sales reflect the additional markup agreed to under the terms of the product supply agreements between CPI and Varian. -3- 5 The Company also has a specialized network of eight factory service centers for the SatCom replacement market. These service centers are located in California, New Jersey, Amsterdam, Moscow, Tokyo, Singapore, Nanjing and Jakarta. MANUFACTURING The Company manufactures over 6,600 products in its six manufacturing locations in North America. The Company has implemented modern manufacturing methodologies based upon "continuous improvement," including JIT materials handling, Demand Flow Technology, Statistical Process Control and Value Managed Relationships with suppliers and customers. The Company has achieved the ISO-9000 international certification standard utilized in the European Community. The Company's manufacturing process for power supplies, amplifiers and transmitters consists of purchasing, high level assembly, and test. The Company utilizes contract manufacturers whenever possible for subassembly. In the manufacture of vacuum electronic devices, multiple steps are required. The process starts with procurement of raw material and sub-assemblies from qualified suppliers, who often deliver on a JIT basis. Raw materials are then formed, primarily by machining, cleaning and plating certain parts. These steps utilize statistical process control techniques to assure quality and high production yields. Subassembly is then performed to produce a vacuum envelope, the essential part of a vacuum electronic device. This subassembly process is performed utilizing Demand Flow Technology, which helps to minimize inventory. Vacuum assemblies are processed by pumping the atmosphere from the assemblies while heating the assemblies in a furnace and simultaneously charging them with an electrical current. When this step is complete, final assembly and testing is performed on each product before shipment. The Company has developed sophisticated test programs to assure that each product meets operating specifications. Certain materials necessary for the manufacture of the Company's products, such as molybdenum, OFHC copper, and some cathodes, are obtained from sole, or a limited group of, suppliers. In addition, prices of these raw materials and key components are subject to fluctuation. COMPETITION The industries and markets in which the Company operates are highly competitive. The Company encounters intense competition in most of its business areas from numerous other companies (such as Litton Industries, Inc., English Electric Valve Company (General Electric Company plc), NEC Corporation and Thomson CSF), some of which have resources substantially greater than those of the Company. Some of these competitors are also customers of the Company. The Company's ability to compete in its markets depends to a large extent on its ability to provide high quality products with shorter lead times at a lower price than its competitors, and its readiness in facilities, equipment and personnel. The Company must also continually engage in effective research and development efforts in order to introduce innovative new products for technologically sophisticated customers and markets. There is an inherent risk that advances in existing technology, including solid state technology, or the development of new technology could adversely affect the Company's financial condition and results of operations. Although solid state devices generally serve end-users' low-power requirements more cost effectively and efficiently than microwave vacuum electronic devices, only microwave vacuum electronic devices currently serve high-power/high-frequency demands. The laws of physics limit the ability of solid state technology to efficiently or cost effectively serve the high-power/high-frequency applications of the Company's customers. These applications' extreme operating parameters necessitate heat dissipation capabilities which are satisfied by the Company's products. The Company's management believes that each technology serves its own niche without significant overlap. -4- 6 BACKLOG As of October 3, 1997, the Company had an order backlog of $169.0 million, representing over seven months of sales compared to order backlog of $153.4 million as of September 27, 1996 and $138.9 million as of September 29, 1995. Although the backlog consists of firm orders for which goods and services are yet to be provided, these orders can be and sometimes are modified or terminated. However, the amount of modifications and terminations has historically not been material compared to total contract volume. INTELLECTUAL PROPERTY The Company owns a number of United States and foreign patents having various expiration dates (collectively, the "Patents"). The Patents are directed to various aspects of the technologies used by the Company in many of its operations. In addition to the Patents, the Company has certain trade secrets, know-how, trademarks and copyrights related to its technology and products. The Company also has acquired certain intellectual property rights and incurred certain obligations through license and research and development agreements with third parties. These agreements may include royalty bearing licenses, technology cross licenses and manufacturing supply agreements. Management does not believe that any single patent or license is material to the success of the Company as a whole. As a result of contracts with the U.S. Government which contain patent and/or data rights clauses, the U.S. Government also has acquired royalty-free licenses or other rights in inventions and technology resulting from certain work done by the Company on behalf of the U.S. Government. The Company also has certain software license agreements with vendors and suppliers which affect the Company's intellectual property rights. The Company generally enters into confidentiality agreements with its employees, consultants and vendors, and generally limits access to and distribution of its proprietary information. The Company maintains an intellectual property protection program designed to preserve the intellectual property assets for the Company's future products. This program includes the filing of new domestic and foreign patent applications, copyright and trademark applications and the pursuit of enforcement of its intellectual property rights. Nevertheless, there can be no assurance that the steps taken by the Company will prevent misappropriation or loss of its technology. As part of the Acquisition, six United States patents and one United States patent application, and their foreign counterparts, are jointly owned by the Company and Varian along with related trade secrets and know-how, including drawings, manufacturing and testing processes and designs (the "Key Component Technology"). The Key Component Technology relates to the manufacture and testing of certain key electron beam guns and key medical klystrons, and any improvements thereto. Upon the consummation of the Acquisition, the Company and Varian entered into a Cross License Agreement to allocate the rights to the Key Component Technology between the Company and Varian. In addition, in connection with the consummation of the Acquisition, the Company and Varian entered into a Trademark License Agreement to permit the Company to continue to market, advertise, distribute and sell its products using Varian's trademarks on its products for a period of three years and may identify its products as "formerly made by Varian" for a period of ten years. -5- 7 RESEARCH AND DEVELOPMENT Company-sponsored research and development expense was approximately $7.7 million, $8.3 million, $1.2 million and $7.4 million during Fiscal 1997, Fiscal 1996, the 7-week period ending September 29, 1995 and the 45-week period ending August 11, 1995, respectively. Customer-sponsored research and development was approximately $5.9 million, $7.3 million, $1.4 million and $8.8 million during Fiscal 1997, Fiscal 1996, the 7-week period ending September 29, 1995 and the 45-week period ending August 11, 1995, respectively. For customer-sponsored research and development, the costs were charged to cost of sales to match revenue received. EMPLOYEES As of October 3, 1997, the Company had approximately 1,658 employees compared to 1,763 employees as of September 27, 1996. This 6.0% reduction in headcount was primarily due to the consolidation of the Company's Salt Lake City, Utah product lines into its San Carlos, California facility that was completed in December 1996. None of the Company's employees is subject to a collective bargaining agreement although a limited number of the Company's sales force members located in Europe are members of work councils or unions. The Company has not experienced any work stoppages and believes that it has good relations with its employees. Because of the specialized and technical nature of the Company's business, the Company is highly dependent on the continued service of, and on its ability to attract and retain, qualified technical, marketing, sales and managerial personnel. The competition for such personnel is intense, and the failure to retain and/or recruit additional or substitute key personnel in a timely manner, could have a material adverse effect on the Company's business and operating results. U.S. GOVERNMENT CONTRACTS AND REGULATIONS Management expects that a decreasing but significant portion of the Company's sales will continue in the foreseeable future to result from contracts with the U.S. Government, either directly or through prime contractors or subcontractors. The Company's business with the U.S. Government is performed under fixed-price and, to a lesser degree, cost-plus contracts. Fixed-price contracts accounted for approximately 92% of the Company's U.S. Government sales in Fiscal 1997 and cost-plus contracts accounted for approximately 8%. This ratio is consistent with Fiscal 1996 but more weighted toward fixed-price contracts than in Fiscal 1995 when the ratio was approximately 88% fixed-price and 12% cost-plus. Under fixed-price contracts, the Company agrees to perform certain work for a fixed price and, accordingly, realizes all the benefit or detriment from decreases or increases in the costs of performing the contract. In addition, under U.S. Government regulations, certain costs, including certain financing costs, portions of research and development costs, and certain expenses related to the preparation of competitive bids and proposals and international sales are not reimbursable. The U.S. Government also regulates the methods under which costs are allocated to U.S. Government contracts. U.S. Government contracts are, by their terms, subject to termination by the U.S. Government either for its convenience or default by the contractor. Cost-plus contracts provide that, upon termination, the contractor is generally entitled to reimbursement of its incurred costs and, if the termination is -6- 8 for convenience, a fee proportionate to the percentage of the work completed under the contract is permitted. If the termination is for default, a contractor may also receive a fee proportionate to any items delivered to and accepted by the U.S. Government. Fixed-price contracts provide for payment upon termination for items delivered to and accepted by the U.S. Government, and, if the termination is for convenience, for reimbursement of its other incurred costs and a reasonable profit on incurred costs. If a contract termination is for default, however, (i) the contractor is paid an amount agreed upon for completed and partially completed products and services accepted by the U.S. Government, (ii) the U.S. Government is not liable for the contractor's incurred costs with respect to unaccepted items, and is entitled to repayment of advance payments and progress payments, if any, related to the terminated portions of the contracts and (iii) the contractor may be liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source. In addition to the right of the U.S. Government to terminate, U.S. Government contracts are conditioned upon the availability of Congressional appropriations. Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may take many years. Consequently, at the outset of a major program, multi-year contracts are usually funded for only the first year (including any termination penalty), and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years. The Company's contracts with foreign governmental defense agencies are subject to certain similar limitations and risks as those encountered with U.S. Government contracts. Licenses are required from U.S. Government agencies to export many of the Company's products. Certain of the Company's products are not permitted to be exported. Holding and Varian entered into a novation agreement with the U.S. Government, as required by federal procurement regulations, applicable to all contracts between or relating to the Predecessor and the U.S. Government (the "Acquired Government Contracts") which were acquired by the Company in connection with the Acquisition. This novation agreement provides, among other things, that the Company assumes all obligations under the Acquired Government Contracts and that the U.S. Government recognizes the transfer to the Company of the Acquired Government Contracts and related assets. Due to its business with the U.S. Government, the Company may also be subject to "qui tam" (whistle blower) suits brought by private plaintiffs in the name of the U.S. Government upon the allegation that the Company submitted a false claim to the U.S. Government, as well as to false claim suits brought by the U.S. Government. A judgment against the Company in a qui tam or false claim suit could cause the Company to be liable for substantial damages and could carry penalties of suspension or debarment which would make the Company ineligible to be awarded any U.S. Government contracts for a period of up to three years and, thereby, could potentially have a material adverse effect on the Company's financial condition and results of operations. Similar to other companies which derive a substantial portion of their sales from contracts with the U.S. Government for defense-related products, the Company is subject to business risks, including changes in governmental appropriations, national defense policies or regulations and availability of funds. Any of these factors could adversely affect the Company's business with the U.S. Government in the future. ENVIRONMENTAL MATTERS The Company is subject to a wide variety of federal, state and local environmental laws and regulations which are subject to change and utilizes in its operations a number of chemicals which are classified as hazardous or similar substances. It is difficult to predict what impact these environmental laws and regulations may have on the Company in the future. Restrictions on chemical uses or certain manufacturing processes could restrict the ability of the Company to operate in the manner in which the Company is currently operated or is permitted to be operated. Although Varian is currently involved in a substantial long-term remediation program relating to the past operations of the Predecessor, management believes that the Company's current operations are in substantial compliance with current -7- 9 environmental laws and regulations. Nevertheless, it is possible that the Company may experience releases of certain chemicals to environmental media, either from its own operations or properties or from third-party operations or properties (such as off-site landfills), which could constitute violations of environmental law (and have an impact on its operations) or which could cause the incurrence of material cleanup costs or other damages. For these reasons, the Company is involved from time to time in legal proceedings involving compliance with environmental requirements applicable to its ongoing operations, and may be involved in legal proceedings involving exposure to chemicals or the remediation of environmental contamination from past or present operations. Because certain environmental laws impose joint, several, strict and retroactive liability upon current owners or operators of facilities from which there have been releases of hazardous substances, the Company could be held liable for remedial measures or other damages (such as liability for personal injury actions) at properties it owns or utilizes in its operations, even if the contamination was not caused by the Company's operations. Varian has agreed to indemnify the Company, to the extent permissible by law, for environmental claims arising from the Predecessor's operations prior to the consummation of the Acquisition, subject to certain exceptions and limitations. See "Business - Relationship with Varian - Acquisition Agreement." With certain limited exceptions, the Company is not indemnified by Varian for environmental claims arising from the Company's operations after the consummation of the Acquisition. There can be no assurance that material costs or liabilities will not be incurred by the Company in connection with proceedings or claims related to environmental conditions arising from the Company's operations. In addition, although Varian will retain financial and other responsibility for certain environmental liabilities of the Predecessor, including those for which, under law, the Company would otherwise be responsible, there can be no assurance that Varian will reimburse the Company for any particular environmental costs or do so in a timely manner. Although the Company believes that Varian currently has sufficient financial resources to satisfy its environmental indemnification obligations to the Company, because of the long-term nature of many of Varian's remediation obligations, there can be no assurance that Varian will continue to have the financial resources to comply fully with its indemnification obligations to the Company. Unreimbursed liabilities arising from environmental claims, if significant, could have a material adverse effect on the Company's results of operations and financial condition. The Company is aware that Varian is engaged in certain ongoing environmental investigatory and remedial work, which is in various stages of completion. Varian has indemnified the Company, to the extent permissible by law, for environmental claims arising from the operation of the Predecessor prior to the consummation of the Acquisition, subject to certain exceptions and limitations. Based on information currently available to the Company, the following provides a summary of the investigatory and remedial work being undertaken at the various properties owned or utilized by the Predecessor with respect to its operations. PALO ALTO, CALIFORNIA. As a result of actual and threatened claims brought by other property owners and the State of California with regard to contamination present under and emanating from the Company's facilities located at the Palo Alto, California property (which facilities are leased by way of assignment and subleased by the Company and which serves as the Company's headquarters and one of its principal manufacturing complexes containing two manufacturing facilities), Varian has entered into a consent order (the "Palo Alto Consent Order") with the California Environmental Protection Agency. In accordance with the Palo Alto Consent Order, Varian has submitted, and the regulatory agencies have approved, a Remedial Action Plan to investigate and remediate groundwater and soil vapor contamination at the affected property to acceptable levels. Varian has entered into an agreement with the master lessor of the property pursuant to which it is obligated to comply with the remediation -8- 10 obligations under the Palo Alto Consent Order. As a sublessee or assignee of the property, the Company's right to continued occupancy of these premises will be dependent upon Varian's fulfillment of its responsibilities to the master lessor, including its obligation to comply with the Palo Alto Consent Order. The Palo Alto, California facilities are also known to be within areas of regional groundwater contamination, which contamination is being addressed by federal and state environmental regulatory agencies. The Palo Alto, California property is adjacent to the Hewlett-Packard 640 Page Mill Road National Priorities List Site (the "HP Site") listed pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"). As a result of allegations that contamination resulting from Varian's historical operations, including its operations of the Predecessor, has migrated from that property to the HP Site and elsewhere, the Company is aware that Varian, as well as Hewlett-Packard and Stanford University, has been named in an order issued by the San Francisco Bay Regional Water Quality Control Board, and that Varian, together with Hewlett-Packard, is remediating a portion of the HP Site known as the California-Olive-Emerson Operable Unit, principally through the use of a groundwater treatment system, in response to that order. The Palo Alto, California property is also adjacent to the Hillview-Porter State Study Area ("Hillview-Porter Site") identified by the California Environmental Protection Agency. Varian has not been named as a potentially responsible party in connection with the Hillview-Porter Site, although the Company is aware that allegations have been made that this property has impacted, and been impacted by, the Hillview-Porter Site. Although liability under environmental laws such as CERCLA is strict, there often are a number of parties responsible for regional contamination, and such parties often will allocate the remedial action costs among themselves, taking into consideration equitable and other factors. Several potentially responsible parties, including Hewlett-Packard and Varian, have been identified by the United States Environmental Protection Agency with respect to the HP Site, and several potentially responsible parties, currently not including Varian, have been identified by the California Environmental Protection Agency with respect to the Hillview-Porter Site. SALT LAKE CITY, UTAH. Prior to the acquisition and use by Varian of the Salt Lake City, Utah property, such property was used for other industrial purposes, including the manufacturing of munitions. As a result of actual and threatened claims brought by other property owners and the State of Utah with regard to groundwater contamination present under and emanating from the Salt Lake City facility, Varian has entered into a consent order (the "Salt Lake City Consent Order") with the State of Utah. Pursuant to the terms of the Salt Lake City Consent Order, Varian has installed a groundwater remediation system to address the groundwater and soil contamination conditions. Up until December 1996, the Company leased approximately 44,000 square feet of space at this facility but has since relocated its product lines to San Carlos, California. OTHER FACILITIES. The Company's other main manufacturing facilities, which are located in San Carlos and Santa Clara, California, Beverly, Massachusetts, and Georgetown, Ontario, Canada, all have soil and groundwater contamination which either may or does require remediation. Pursuant to legal requirements, Varian has installed a groundwater remediation system which is presently in operation at the Beverly property. In addition, the Company is aware that an action has been commenced against Varian by adjoining property owners and others, and that other claims may be made, with respect to off-site contamination allegedly emanating from the Beverly, Massachusetts facility. -9- 11 THE ACQUISITION Prior to August 11, 1995, the Company's operations were part of the Electron Devices Business division of Varian. On August 11, 1995, CPII Acquisition Corp. ("CPII Acquisition") acquired (in the matter described below) substantially all of the assets that were used primarily in developing, manufacturing and distributing microwave and power grid vacuum electronic devices, microwave amplifiers, modulators and various other power supply equipment and devices through the Predecessor. Pursuant to the terms of a Stock Sale Agreement dated June 9, 1995, as amended, among Holding, CPII Acquisition and Varian (the "Acquisition Agreement"), prior to the consummation of the Acquisition, Varian and its affiliates contributed the assets of the Predecessor that were located in the United States to CPI, which was a newly-formed, wholly-owned Varian subsidiary. Subsequently, upon the consummation of the Acquisition, Varian transferred all of the outstanding capital stock of CPI to CPII Acquisition. The assets of the Predecessor that were located in foreign jurisdictions were transferred from Varian or its affiliates to newly-formed direct or indirect subsidiaries of CPI. In consideration of the transfer of such capital stock and assets, CPII Acquisition (including its affiliates) paid Varian (including its affiliates) an aggregate purchase price of $196.2 million, subject to a post-closing adjustment (the "Purchase Price"). Holding, CPII Acquisition and CPI's subsidiaries also assumed certain specified liabilities of the Predecessor. The liabilities assumed by Holding (with respect to which CPI has agreed to perform any necessary services) included certain balance sheet liabilities of the Predecessor, which aggregated approximately $24.1 million as of August 11, 1995, and certain contingent liabilities (such as for certain product warranty claims) (the "Assumed Liabilities"). Upon the merger of CPII Acquisition with and into CPI immediately following the consummation of the Acquisition, CPI became a wholly-owned subsidiary of Holding. In connection with the consummation of the Acquisition, the Company also entered into the following transactions: (1) Two senior term loans of CPI in the aggregate amount of $42.0 million and a revolving credit facility in a principal amount of up to $35.0 million (including a $5.0 million sub-facility for letters of credit, and subsequently increased to $7.5 million) pursuant to a senior credit agreement (as subsequently amended, the "Senior Credit Agreement"), of which approximately $23.0 million was drawn in connection with the consummation of the Acquisition, (2) Issuance of 12% Series A Senior Subordinated Notes due 2005 (the "Series A Senior Subordinated Notes") of CPI in the aggregate principal amount of $100.0 million (guaranteed by Holding and all of the Company's direct and indirect subsidiaries), (3) Issuance of units (the "Units") consisting of 150,000 shares of Series A 14% Senior Redeemable Exchangeable Cumulative Preferred Stock due 2007 (the "Series A Senior Preferred Stock") of CPI and 10,500 shares of common stock of Holding ("Holding Common Stock") for $15.0 million, (4) Issuance of 100,000 shares of 14% Junior Cumulative Preferred Stock (the "Junior Preferred Stock") of CPI to Green Equity Investors II, L.P., a Delaware limited partnership ("GEI II") for $10.0 million, and (5) Issuance of shares of Holding Common Stock to GEI II and certain members of the senior management of CPI for $20.0 million (including $0.8 million paid by notes from members of senior management). CPI subsequently exchanged the Series A Senior Subordinated Notes and Series A Senior Preferred Stock, in exchange offers (the "Exchange Offers") registered under the Securities Act of 1933, for -10- 12 otherwise identical 12% Series B Senior Subordinated Notes due 2005 (the "Notes") and Series B 14% Senior Redeemable Exchangeable Cumulative Preferred Stock due 2007 (the "Senior Preferred Stock"), respectively. GEI II initiated the Acquisition and currently owns approximately 72.0% of the outstanding shares of Holding Common Stock. Holding, in turn, owns all of the outstanding common stock of CPI. Accordingly, GEI II is able to elect all of the members of the board of directors of Holding and thus to exercise control over Holding's and CPI's business and affairs. Leonard Green & Partners, L.P., a Delaware limited partnership, is an investment advisor to, and an affiliate of the general partner of, GEI II. See "Security Ownership of Certain Beneficial Owners and Management" and "Certain Relationships and Related Transactions." RELATIONSHIP WITH VARIAN The Company continues to maintain certain relationships with Varian arising from the Predecessors' previous relationship with Varian and arising under the Acquisition Agreement and the Ancillary Agreements (as defined below). The descriptions of certain of such relationships set forth below are qualified in their entirety by reference to the full texts of documents relating thereto, copies of which are included as exhibits to this Annual Report on Form 10-K. Acquisition Agreement. The Acquisition Agreement contains customary representations, warranties and covenants. The Company and Varian agreed to indemnify one another for breaches of representations and warranties contained in the Acquisition Agreement or the ancillary agreements executed in connection therewith (the "Ancillary Agreements"), provided claims with respect thereto are asserted on or before December 31, 1996. With respect to such breaches of representations and warranties, no claims were asserted by either party. In addition, pursuant to the terms of the Acquisition Agreement, Varian agreed to indemnify and reimburse the Company for all losses arising from breaches of covenants and agreements of Varian in the Acquisition Agreement and the Ancillary Agreements, all Retained Liabilities (as defined in the Acquisition Agreement), environmental claims arising from the pre-closing operation of the Predecessor (as more fully described below), certain matters pertaining to Varian's interest in its Palo Alto, California and Santa Clara, California facilities, and certain other matters as specified in the Acquisition Agreement. In turn, the Company agreed to indemnify and reimburse Varian for all losses arising from breaches of covenants and agreements of the Company in the Acquisition Agreement and the Ancillary Agreements, all Assumed Liabilities, environmental claims arising from the post-closing operation of the Predecessor (as more fully described below), and certain other matters as specified in the Acquisition Agreement. As to such indemnification obligations of Varian and the Company, there are no time or dollar limitations. The indemnification provisions in the Acquisition Agreement and the Ancillary Agreements are generally intended to be the exclusive remedies of the parties with respect to such agreements, subject to certain exceptions. The environmental indemnification provisions of the Acquisition Agreement provide generally that environmental liabilities of the Predecessor are retained by Varian to the extent they arise from the pre-closing operation of the Predecessor and are the obligations of the Company to the extent they arise from the post-closing operation of the Predecessor, subject to certain exceptions. Specifically, pursuant to the Acquisition Agreement, Varian agreed to indemnify the Company for liabilities related to environmental claims arising from the following: (i) Varian's possession or use of the acquired properties before the closing, (ii) violations (or purported violations) of environmental laws resulting from pre-closing conditions or activities at the acquired properties, (iii) hazardous materials present at the acquired properties as of the closing, (iv) disposal (other than by the Company or its agents) of hazardous materials generated by Varian before the closing, and (v) post-closing releases of hazardous materials by -11- 13 Varian resulting from the ongoing operation of Varian's business. In addition to the foregoing and notwithstanding any other provision of the Acquisition Agreement, Varian agreed to indemnify the Company against third party claims arising out of, and to repair, subject to certain conditions, pre-closing environmental conditions that constitute violations of environmental laws, plus contamination arising from such conditions both before and after the closing, to the extent the Company discovers such conditions within the six months following the closing. The Acquisition Agreement provides that Varian will have exclusive control of and sole discretion as to the investigation and remediation of matters for which it is required to indemnify the Company. Varian is required to undertake such actions in compliance with all applicable laws, and without unreasonably interfering with the conduct of the Company. In turn, the Company agreed to indemnify Varian for liabilities related to environmental claims arising from the following: (i) the Company's possession or use of the acquired properties after the closing, (ii) violations (or purported violations) of environmental laws resulting from post-closing conditions or activities at the acquired properties (subject to the Company's rights with respect to conditions and related contamination discovered within the first six months following the closing, as described above), (iii) any incremental costs incurred by Varian as a result of the Company's introduction of hazardous materials at the acquired properties after the closing, (iv) disposal of hazardous materials by the Company or its agents after the closing, and (v) the post-closing migration of hazardous materials that were present before the closing or the post-closing exacerbation of environmental conditions existing before the closing, but in each case only to the extent resulting from the Company's active negligent conduct. In the event of post-closing releases, the Company is required to respond to and remediate certain types of such releases at its expense. However, in the event of post-closing releases which contribute to existing groundwater contamination which is otherwise being remediated by Varian, Varian agreed to treat such contaminated groundwater, to the extent required and if it is feasible to do so, using its own treatment systems. The Company will be required to reimburse Varian for Varian's incremental costs related thereto. With respect to Varian's duty to repair certain items identified by the Company within six months following the closing, the Company reached an agreement and settlement with Varian, effective October 1996, on such items identified. The Company has, in turn, provided Varian with a release from its obligation to handle the actual repair and a release from any fines and/or penalties which may result from the Company's failure to complete the identified repairs. Pursuant to the Acquisition Agreement, Varian's environmental indemnification obligations do not extend to the following: (i) liabilities for certain building materials, such as asbestos, and hazardous materials that are lawfully present, used or stored at the acquired properties as of the closing (other than liabilities for personal injuries related thereto), (ii) claims asserted by the Company or its successors for diminution in property value or consequential damages caused by the presence of hazardous materials at the acquired properties, or (iii) environmental response actions other than those required by the Acquisition Agreement, governmental order or self-executing environmental laws. If a dispute arises as to whether and the extent to which a release of hazardous materials occurred before or after the closing, Varian has agreed to bear the burden of proof as to such matter by a preponderance of the evidence. In the event that both Varian and the Company are partly responsible for a particular environmental liability, such liability will be allocated between the parties in accordance with their respective contributions to such liability. If there is a dispute concerning the indemnification of only a portion of a claim, the indemnitor is required to immediately assume full responsibility for the undisputed portion of the claim. Any dispute between Varian and the Company will be settled by arbitration. The arbitrator is authorized to allocate fees and costs based upon the respective merits of the parties' respective positions in the dispute. -12- 14 Transitional Services Agreement. Pursuant to the terms of the Transitional Services Agreement (the "Transitional Services Agreement") between Varian and the Company, Varian provided certain services to the Company in order to facilitate the transition of the Company to a stand-alone operation. Such services included, among other things, general financial services, certain management information services, payroll processing, and monitoring of security systems and fire alarms. In addition, in connection with the separation and creation of independent utilities and systems at the Company's facilities, the Transitional Services Agreement required Varian to pay or reimburse the Company (in some cases), subject to certain limitation. As of October 3, 1997, all obligations under this agreement were fulfilled. The Company continues to interact with Varian on management information issues regarding legacy systems written by Varian, but it is no longer dependent on Varian for support and any on-going arrangements have been negotiated at an arm's-length basis. Key Component Agreement. Pursuant to the Key Components Supply Agreement (the "Key Component Agreement") between the Company and Varian, during the term thereof, the Company is required to meet Varian's requirements for certain key electron beam guns and key medical klystrons and any improvements thereto (the "Key Components"), provided that the Company may discontinue production of any Key Component as to which Varian fails to maintain certain specified purchase levels. In addition, the Company is prohibited from selling any Key Component that Varian continues to purchase from the Company to any third person for use within the Varian Field of Use (as defined below). In turn, during the term of the Key Component Agreement, Varian is required to purchase all of its requirements for Key Components from the Company, except for certain specified Key Components as to which Varian will be permitted to purchase a portion of its requirements from other sources. The preceding provisions are effective as to all Key Components for a period of five years following the closing of the Acquisition and, at Varian's election with respect to any one or more of the Key Components, for a period of five years thereafter. Varian has the right to elect to purchase Key Components from sources other than the Company and to enforce certain rights under the Cross License Agreement (as defined below) in the event of failures in the quality, quantity or timely delivery of Key Components produced by the Company or the obsolescence of the Company's Key Components. Cross License Agreement. Pursuant to the Cross License Agreement (the "Cross License Agreement"), for a period of 10 years from the closing of the Acquisition, Varian has exclusive rights relating to the Key Component Technology as it relates to medical and industrial linear accelerators (the "Varian Field of Use"). In all other areas, the Company retains the exclusive right to utilize the Key Component Technology. At the end of the term of the Cross License Agreement, Varian is obligated to transfer its entire interest in the Key Component Technology to the Company, with Varian retaining only a non-exclusive license to make, use or sell Key Component Technology for use in the Varian Field of Use. The Company has the unrestricted and exclusive right to utilize the Key Component Technology in fields other than the Varian Field of Use and the right to utilize Key Component Technology in order to supply Key Components to Varian for use within the Varian Field of Use pursuant to the Key Component Agreement. See "- Key Component Agreement" The Cross License Agreement also grants mutual non-exclusive licenses under Varian's and the Company's intellectual property rights to the extent necessary to permit both the Company and Varian to continue to conduct their respective businesses as they did as of the closing date. Trademark License Agreement. Generally, under the terms of the Trademark License Agreement, the Company is licensed to use Varian trademarks on its products for a period of three years from the closing of the Acquisition (although during the third year Varian trademarks may only be used in connection with the Company's own trademarks), provided that such products either were manufactured by the Predecessor as of the date of consummation of the Acquisition or are derivatives or improvements thereof. After the third year, the Company may not use any Varian trademarks alone, but for an -13- 15 additional seven years may identify such products as "formerly made by Varian". At the expiration of the ten year period, the Company will not be permitted to utilize any Varian trademarks. ITEM 2: PROPERTIES The Company owns, leases or subleases manufacturing, assembly, warehouse, service and office properties having an aggregate floor space of approximately 1,215,000 square feet, of which approximately 186,000 are leased or subleased to third parties. The table below provides summary information regarding principal properties owned or leased by the Company:
(square footage) Property Owned Leased/Subleased -------- ----- ---------------- San Carlos, California................ 320,000(a) Beverly, Massachusetts................ 213,000(b) Georgetown, Ontario, Canada........... 126,000 Santa Clara, California............... - 107,000(c) Palo Alto, California................. - 429,000(d) Various locations..................... - 19,100(e)
(a) The San Carlos, California square footage includes approximately 21,000 square feet leased to a tenant which provides services to the Company and others. (b) The Beverly, Massachusetts property was reduced from 251,000 square feet in Fiscal 1996 to 213,000 square feet in Fiscal 1997 based on the sale of one of its three buildings to an existing tenant. The current square footage still includes approximately 42,000 square feet leased to four tenants. (c) This facility is leased by way of assignment of Varian's lessee interest. Effective February 1997, in conjunction with the relocation of its manufacturing facility to Palo Alto, California, the entire Santa Clara, California facility is being subleased to one tenant. (d) This facility is primarily leased by way of assignment of Varian's lessee interest with the remainder subleased from Varian. The Palo Alto, California footage includes approximately 10,000 square feet subleased back to Varian and approximately 6,000 square feet subleased to another tenant. (e) Includes both leased facilities occupied entirely by the Company's field sales and service organizations and 4 foreign shared use facilities which the Company is sharing for varying periods of time with Varian pursuant to a shared use agreement. Based on consolidation efforts that were completed in the first half of Fiscal 1997, the Company has eliminated most of its excess space. Overall, the Company believes its properties are adequate for the needs of the Company for the foreseeable future and, in any event, for at least the next twelve months. The Company's lenders under the Senior Credit Agreement have the right to a security interest in all of the Company's interest in the real property that it owns and leases, and have taken a security interest in the Company's real property located in Beverly, Massachusetts and Georgetown, Ontario, Canada. The Company's right to continued occupancy of the leased and subleased premises is dependent upon Varian's compliance with its obligations to the master lessor. In particular, the Company's headquarters and one principal complex, including three of the Company's manufacturing facilities, located at the Palo Alto, California site adjacent to Varian's world headquarters and primary manufacturing facilities, are leased by way of assignment or subleased from Varian. Therefore, the Company's occupancy rights are dependent on Varian's fulfillment of its responsibilities to the master lessor, including its obligation to continue environmental remediation activities under a consent order with the California Environmental Protection Agency. The consequences of the loss by the Company of such occupancy rights could include the loss of valuable improvements and favorable lease terms, the incurrence of substantial relocation expenses and the disruption of the Company's business operations. -14- 16 ITEM 3: LEGAL PROCEEDINGS The Company is involved from time to time in various legal proceedings and is the subject of various cost accounting and other government pricing claims. Pursuant to the Acquisition Agreement, Varian has agreed to indemnify the Company against liabilities arising from litigation and governmental claims pertaining to the operation of the Predecessor prior to the consummation of the Acquisition. Accordingly, management believes that litigation and governmental claims pending against Varian and relating to the operation of the Predecessor prior to the Acquisition will not have a material adverse effect on the Company's financial condition or results of operations. See "Business - Environmental Matters." ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fiscal year ended October 3, 1997. -15- 17 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. CPI is a wholly-owned subsidiary of Holding. Neither CPI's nor Holding's common stock is publicly traded. No cash dividends have been declared on the common stock of the Company during the 53-week period ended October 3, 1997. Restrictive covenants in the Senior Credit Agreement generally restrict the declaration or payment of dividends on the Company's common stock. The Notes also restrict the declaration and payment of dividends unless the Company satisfies certain financial covenants, among other things. ITEM 6: SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA The historical and pro forma financial data set forth below for Fiscal 1993 through Fiscal 1994 has been derived from the historical audited financial statements of the Predecessor audited by Coopers & Lybrand L.L.P., independent public accountants. For Fiscal 1995 through Fiscal 1997, historical financial data has been derived from the historical audited financial statements audited by KPMG Peat Marwick LLP, independent public accountants, whose report appears elsewhere in this Annual Report on Form 10-K. The information contained in this table should be read in conjunction with the information set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as the historical audited financial statements of Holding and CPI (and the Predecessor) included elsewhere in this Annual Report on Form 10-K. As a consequence of the Acquisition, effective August 11, 1995, each of Holding and CPI is deemed for financial reporting purposes to have become a new reporting entity ("Successor") on the following date and periods subsequent to the August 11, 1995 date reflect the allocation of the costs of the Acquisition to assets and liabilities based on estimates of fair values in accordance with the purchase method of accounting. Accordingly, the results of operations of Successor subsequent to August 11, 1995 are not fully comparable to the results of the operations of the Company as constituted prior to such date. In particular, operating results subsequent to August 11, 1995 reflect decreases in operating expenses relating to corporate allocations, incremental depreciation and amortization relating to the purchase method adjustments referred to above and other interest charges relating to new indebtedness related to the Acquisition. The Company has included the Fiscal 1995 pro forma information as management believes it presents a more meaningful comparison to the post acquisition financial information. -16- 18 SELECTED FINANCIAL DATA
Successor Predecessor ---------------------------------- --------------------------------- (Dollars in Thousands) 53 Weeks 52 Weeks 7 Weeks 45 Weeks 52 Weeks 52 Weeks Ended Ended Ended Ended Ended Ended October September September August September October 3, 1997 27, 1996 29, 1995 12, 1995 30, 1994 1, 1993 --------- --------- --------- --------- --------- --------- CPI AND HOLDING STATEMENT OF OPERATIONS DATA: Sales $ 253,439 257,449 36,398 214,677 246,890 255,295 Cost of sales 183,678 184,482 27,634 160,156 186,996 198,625 --------- --------- --------- --------- --------- --------- Gross profit 69,761 72,967 8,764 54,521 59,894 56,670 Marketing, general and administrative before corporate allocations 32,269 35,354 6,013 26,071 25,583 27,068 Research and development 7,681 8,308 1,198 7,429 7,619 7,565 Corporate allocations -- -- -- 11,160 11,273 11,776 Write-off of acquired in-process research and development -- -- 31,363 -- -- -- --------- --------- --------- --------- --------- --------- Operating income (loss) 29,811 29,305 (29,810) 9,861 15,419 10,261 Interest expense 19,039 18,894 2,497 -- -- -- Income tax expense (benefit) (3,000) 2,068 (2,709) 3,649 5,859 3,899 --------- --------- --------- --------- --------- --------- Net earnings (loss) before preferred dividends $ 13,772 8,343 (29,598) 6,212 9,560 6,362 ========= ========= ========= ========= ========= ========= EBITDA (a) 39,432 38,736 4,894 21,026 27,814 21,806 Certain Non-Cash Charges: Depreciation and amortization 9,621 7,731 941 11,165 12,395 11,545 Inventory write-up related to purchase accounting -- 1,700 2,400 -- -- -- In-process research & development write-off -- -- 31,363 -- -- -- Amortization of deferred debt issue costs 1,952 1,962 199 -- -- -- Capital expenditures (b) 10,767 12,501 880 6,063 10,698 7,278 Non-recurring capital (b) -- -- -- -- 4,115 2,536
Successor Predecessor ----------------------------------- ------------------ October September September September October CPI BALANCE SHEET DATA: 3, 1997 27, 1996 29, 1995 30, 1994 1, 1993 ---------- ------ ------ ------ ------ Working capital $ 40,467 34,576 35,204 60,421 67,302 Total assets 237,396 228,142 214,902 162,149 169,619 Total equity (deficit) 15,306 4,400 (1,538) 119,854 125,657 Long-term debt and redeemable preferred stock 149,100 150,472 151,260 - - HOLDING BALANCE SHEET DATA: Working capital $ 40,467 34,576 35,204 60,421 67,302 Total assets 237,396 228,142 214,902 162,149 169,619 Total equity (deficit) 2,841 (6,379) (10,884) 119,854 125,657 Long-term debt and redeemable preferred stock 149,100 150,472 151,260 - -
(a) EBITDA represents earnings before provision for income taxes, interest expense, depreciation and amortization and excludes any charge related to the purchase accounting write-up of inventory and the write-off of acquired in-process research and development. (b) Capital expenditures exclude the one-time costs of seismic retrofits, which are substantially completed, at certain of the Company's manufacturing facilities. These costs are presented separately as "Non-recurring Capital Expenditures". For the 53-weeks ended October 3, 1997, capital expenditures includes $1,584,000 of equipment acquired under a capital lease. -17- 19 UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENTS The unaudited pro forma consolidated condensed income statements of Holding and CPI have been prepared by the Company's management from historical income statements included in this Form 10-K. The unaudited pro-forma consolidated condensed income statement for Fiscal 1995 reflect adjustments as if the Acquisition had occurred on September 30, 1994. These unaudited pro forma financial statements should be read in conjunction with the notes included herewith, the Predecessor's audited financial statements and notes thereto for Fiscal 1995 and "Management's Discussion and Analysis of Financial Condition and Results of Operations." included elsewhere in this Annual Report on Form 10-K. These unaudited pro forma financial statements do not purport to represent what Holding's or CPI's results of operations would have been had the Acquisition and the financing therefor occurred on the date specified, or to project Holding's or CPI's results of operations for any future period or date. The pro forma adjustments described in the accompanying notes are based upon certain assumptions that management of the Company believes are reasonable in such circumstances. In the opinion of management, all adjustments have been made that are necessary to present fairly the pro forma data. -18- 20 UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENTS The following pro forma financial statements were included by CPI in the Registration Statement for the Exchange Offers filed in November, 1995, and were based upon preliminary estimates of the fair values of the net assets acquired. These pro forma statements have not been adjusted to reflect final values because the effect of the finalization of the estimates does not materially affect the amounts previously presented.
For the 52 Weeks Ended September 29, 1995 ------------------------------------------------------------ Predecessor Successor ProForma 45 Weeks Ended 7 Weeks Ended 52 Weeks Ended (Dollars in thousands) August 11, September 29, Pro Forma September 29, 1995 1995 Adjustments 1995 (c) -------- -------- -------- -------- CONSOLIDATED STATEMENT OF OPERATIONS OF CPI: Sales $214,677 36,398 2,170(i) 253,245 Cost of sales 160,156 27,634 591(i) 180,144 (5,837)(ii) (2,400)(iii) -------- -------- -------- -------- Gross profit 54,521 8,764 9,816 73,101 Research and development 7,429 1,198 8,627 Marketing 17,506 2,763 20,269 General and administrative 19,725 3,250 (10,532)(iv) 13,162 885(v) (166)(vi) Write-off of acquired in-process research and development 31,363 (31,363)(viii) -------- -------- -------- -------- Operating income (loss) 9,861 (29,810) 50,992 31,043 Interest expense -- 2,497 15,240(vii) 19,077 1,340(vii) -------- -------- -------- -------- Earnings (loss) before income taxes 9,861 (32,307) 34,412 11,966 Provision (benefit) for income taxes 3,649 (2,709) 3,846(ix) 4,786 -------- -------- -------- -------- Net earnings (loss) 6,212 (29,598) 30,566 7,180 Dividends on preferred stock -- -- 3,776(x) 3,776 -------- -------- -------- -------- Earnings attributable to Common Stock $ 6,212 (29,598) 26,790 3,404 ======== ======== ======== ======== CERTAIN CONSOLIDATED STATEMENT OF OPERATIONS INFORMATION OF HOLDING: Operating income (loss) of Holding 9,861 (29,810) 50,992 31,043 Interest expense -- 2,497 16,580(vii) 19,077 Preferred dividends of consolidated subsidiary -- -- 3,776(x) 3,776 -------- -------- -------- -------- Earnings (loss) before income taxes 9,861 (32,307) 30,636 8,190 Provision (benefit) for income taxes 3,649 (2,709) 3,846(ix) 4,786 -------- -------- -------- -------- Net earnings (loss) 6,212 (29,598) 26,790 3,404 ======== ======== ======== ======== OTHER FINANCIAL DATA OF CPI AND HOLDING: Depreciation and amortization(a) $ 11,165 941 6,988 EBITDA (b) (c) 21,026 2,494 38,031 Cash interest expense (a) -- 2,497 17,737 Ratio of EBITDA to cash interest expense (b) N/A N/A 2.14x
(a) Excludes amortization of deferred debt issuance costs. (b) EBITDA represents earnings before provision for income taxes, interest expense, depreciation and amortization and the write-off of acquired in-process research and development. EBITDA and the ratio of EBITDA to cash interest expense are presented because they may be used by some investors as a financial indicator of the ability to service or incur indebtedness. EBITDA should not be considered as an alternative to net income, as a measure of operating results, cash flows or liquidity. (c) As described in more detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-K, certain events occurred during the fourth quarter of Fiscal 1995 which may not be indicative of future operating results. -19- 21 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENTS (i) Reflects the pro forma increase, under the terms of the product supply agreements between CPI and Varian entered into in connection with the consummation of the Acquisition, in the historical pricing of sales and purchases between CPI and Varian. (ii) Represents an adjustment to depreciation for the 45 week period ending August 11, 1995 based on the estimated fair values of fixed assets acquired. (iii) Represents the portion of the purchase price allocated to inventory which was charged to cost of sales for the 7 week period ending September 29, 1995. (iv) Reflects pro forma adjustments relating to: (a) the reduction in facility costs as a result of (i) the difference between previously allocated corporate rent and the estimated depreciation and facility cost on owned facilities, and (ii) a purchase accounting adjustment to reflect management's plan to eliminate certain excess space which is currently vacant. (b) the elimination of previously allocated costs for corporate services no longer required on a stand alone basis, principally representing allocations for environmental remediation costs to be retained by Varian and for office space at Varian's corporate headquarters. (c) cost reductions from outsourcing corporate services calculated as the difference between the amounts previously allocated for management information systems, group insurance and legal counsel and the agreed amounts with outside providers for these services on a stand alone basis. (d) the reduction of executive management compensation expense as a result of the replacement of Varian management compensation plans with revised compensation programs. This reduction is primarily due to lower management bonuses as a result of increased management ownership. (e) non-recurring expenses incurred during the seven week period ended September 29, 1995 as a direct result of the Acquisition. The adjustments for each component are as follows:
52 weeks ended September 29, 1995 ------------------ (a) $ 3,279 (b) 1,176 (c) 1,882 (d) 3,347 (e) 848 ------------- $ 10,532 =============
(v) Represents the amortization of goodwill resulting from the Acquisition, calculated for the 45 week period ending August 11, 1995, over an estimated life of 25 years. (vi) Represents the reduction in amortization due to the elimination of purchased goodwill. (vii) Represents the estimated interest expense from the use of borrowings to finance the Acquisition and future working capital requirements, plus the amortization of deferred debt issuance costs. (viii) Represents the one-time write-off of acquired in-process research and development. (ix) The tax effect of using a 40% rate on pro forma income before taxes. (x) Preferred stock dividends include all dividends paid on the Senior Preferred Stock and Junior Preferred Stock.. -20- 22 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company serves the communications, radar, electronic countermeasures, industrial, medical and scientific markets. In addition, the Company divides the communications market into applications for ground-based satellite uplinks for military and commercial uses ("SatCom") and broadcast sectors. Orders for Fiscal 1997 of $275.8 million were at their highest level since Fiscal 1990. Compared to Fiscal 1996, orders increased by $8.5 million, or approximately 3.2%. Orders related to products sold in the radar, scientific and medical markets increased by $14.8 million, $2.1 million and $1.7 million, respectively, which represents an increase from the prior year of 19.6%, 36.7% and 9.8%, respectively. These increases were partially offset by decreases in orders for products sold in the electronic countermeasures and industrial markets of $8.1 million, or 29.3%, and $2.4 million, or 11.7%, respectively. Orders related to the communications market remained consistent with prior year levels. Nevertheless, incoming order levels fluctuate significantly on a quarterly basis and a particular year's order rate may not be indicative of future order levels. In addition, the Company's sales are highly dependent upon manufacturing scheduling and performance and, accordingly, it is not possible to accurately predict when orders will be recognized as sales. The Company's products have applications among both commercial and government customers. The commercial sector represents all sales for which the U.S. Government is not the end-user. However, the end-user markets identified above are not categorized based upon whether they consist entirely of sales into commercial or government sectors. Therefore, sales in any one of the Company's markets may consist of sales to either commercial customers, the U.S. Government, or both. The commercial sector contributed approximately $190.1 million, or 75% of the Company's total sales, compared to approximately $187.9 million, or 73%, in Fiscal 1996. U.S. Government sales contributed approximately $63.3 million, or 25% of the Company's total sales, compared to approximately $69.5 million, or 27%, in Fiscal 1996. These trends are consistent with the Company's focus on commercial applications of its products and their long-term growth strategies. Sales for Fiscal 1997 of $253.4 million were approximately 1.6% below the prior year level of $257.4 million due primarily to the divestiture of a single product line which accounted for approximately $2.6 million of the difference and in part to disruptions experienced during the fiscal year from consolidation efforts. These were both, however, one-time events that were completed in Fiscal 1997 and are not expected to reoccur. While the Company's total sales have been relatively stable during the last five fiscal years, sales growth has taken place in the communications, industrial and medical markets that have offset declines in the radar, electronic countermeasures and scientific markets. The Company's sales to the radar market, in particular, declined by $19.3 million, from $94.9 million in Fiscal 1993 to $75.4 million in Fiscal 1997, due primarily to the U.S. Department of Defense's ("DoD") reduction in procurement of spare vacuum electronic devices for U.S. Government inventories. Fiscal 1997 sales to the radar market did, however, show an increase from the prior year, from $74.5 million in Fiscal 1996 to $75.4 million in Fiscal 1997, which is the first upward trend seen since the late 1980's. Strong order receipts in this market during Fiscal 1997, as mentioned above, primarily due to larger market share gains on military programs indicates that this sales trend is likely to continue. Fiscal 1997 reflects the Company's second full fiscal year on a stand-alone basis. In 1997, the Company did achieve a number of its long-term goals including the introduction of several new products to the communications and medical markets and, most significantly, the completion of the Company's consolidation efforts. The relocation of the Company's Salt Lake City, Utah plant to San Carlos, California was started during Fiscal 1996 but was not completed until the first half of Fiscal 1997. Costs -21- 23 associated with this move including travel and training expenses, temporary duplication of labor and facility resources, and poor manufacturing yields on the moved product lines negatively impacted EBITDA by approximately $2.4 million in Fiscal 1996 and another $2.0 million in Fiscal 1997 but, again, this relocation was a one-time event that was completed in Fiscal 1997. Also in the first quarter of Fiscal 1997, the Company relocated one of its manufacturing plants from a leased facility in Santa Clara, California to its owned facility in Palo Alto, California. Although less disruptive than the Salt Lake City plant relocation, delays in shipping products during the first half of the fiscal year did occur making overall ramp-up to meet customer delivery schedules difficult. EFFECT OF ACQUISITION ON RESULTS OF OPERATIONS The consummation of the Acquisition has affected the Company's results of operations in certain significant respects. As a result of the Acquisition, the Company adjusted upwards the historical book value of certain assets in accordance with GAAP relating to purchase accounting rules, which will significantly impact the Company's results of operations subsequent to the Acquisition and their comparability to operations of the Predecessor: - - The write-up of the inventory by $4.1 million was expensed to cost of goods sold during the periods following the Acquisition, which significantly affects gross margins. During the seven week period ended September 29, 1995, $2.4 million was expensed to cost of sales, which also impacted working capital, and $1.7 million was expensed in the first quarter of Fiscal 1996. - - The purchase accounting allocation of certain assets, such as property, plant and equipment, will significantly affect depreciation and amortization in the future. The portion of the purchase price allocated to in-process research and development was charged to operations immediately after consummation of the Acquisition. The in-process research and development activity of the Company involves the development of various classes of microwave vacuum electronic devices and microwave vacuum electronic device systems for communications and power applications, including significant extensions and improvements to existing products through fundamental physical and electrical research necessary to design new microwave vacuum electronic devices, control and power elements, and related systems. Projects are classified as in-process research and development if they have not demonstrated technological feasibility and have not resulted in commercial products and have no alternative future use. As of the date of the consummation of the Acquisition, the outcomes of these research and development projects were uncertain and involved technological risk. - - Certain corporate overhead and corporate services, including an allocation for occupied facilities, historically charged to the Predecessor by Varian, have been reduced due to outsourcing of certain services, elimination of services no longer required on a stand-alone basis, or eliminated due to the Company's ownership of certain of its facilities and the application of purchase accounting following the Acquisition. In addition, management compensation plans have been modified at a reduced cost. The structure of the transaction has also created certain tax benefits because of the Company's ability to write-up inventory, property, plant and equipment and intangible assets for tax purposes. -22- 24 RESULTS OF OPERATIONS The following table sets forth the Company's historical results of operations as a percentage of sales for each of the periods indicated.
Proforma ------ 52 Weeks 52 Weeks 52 Weeks Ended Ended Ended October 3, September 27, September 29, 1997 1996 1995 ----- ----- ----- Sales 100.0% 100.0% 100.0% Cost of sales 72.5 71.7 71.1 ----- ----- ----- Gross profit 27.5 28.3 28.9 Research and development 3.0 3.2 3.4 Marketing 7.8 7.7 8.0 General and administrative 5.0 6.0 5.2 ----- ----- ----- Operating income 11.7 11.4 12.3 Interest expense 7.5 7.4 7.6 ----- ----- ----- Earnings before taxes 4.2 4.0 4.7 Provision for income taxes (1.2) 0.8 1.9 ----- ----- ----- Net earnings 5.4% 3.2% 2.8% ===== ===== ===== Other Data: EBITDA (a) 15.6% 15.0% 15.0% Preferred Dividends 1.7% 1.4% --
(a) EBITDA represents earnings before provision for income taxes, interest expense, depreciation and amortization, the charge related to the purchase accounting write-up of inventory and the write-off of acquired in-process research and development. Fiscal 1997 Compared to Fiscal 1996 SALES. Sales for Fiscal 1997 were approximately $253.4 million, a decrease of approximately $4.0 million, or 1.6%, as compared to sales of $257.4 million in Fiscal 1996. This decline was due in part to the divestiture of a single product line accounting for $2.6 million in sales which was done in conjunction with the Company's relocation of two other product lines from Salt Lake City, Utah to San Carlos, California. Also, even though shippable orders were on hand that would have allowed the Company to exceed its prior fiscal year sales, the Company was unable to fully ramp-up the production of relocated product lines and the production of new products for the Satcom market to meet its scheduled delivery dates. In terms of markets, communications sales were $122.5 million in Fiscal 1997 which represents an increase of approximately $4.1 million, or 3.4%, from Fiscal 1996 primarily as a result of new product releases. Radar sales increased approximately $.9 million, or 1.2%, to $75.4 million in Fiscal 1997 as a result of a 19.6% increase in order receipts (most of which are shippable in Fiscal 1998). Medical sales increased by approximately $1.3 million, or 8.2%, to $17.6 million due to increased demand from Varian. Scientific sales were $4.2 million which represents an increase of approximately $.5 million, or 12.9%, from the prior fiscal year due to new energy research as well as a specific development project related to the Accelerator Production of Tritium. Offsetting the $6.8 million increase in these four markets were lower sales of products sold to the industrial and electronic countermeasures markets. Industrial sales decreased by $5.3 million, or 19.5%, to $21.9 million in Fiscal 1997 due to the timing of customer defined delivery schedules combined with the slowdown in -23- 25 demand for high power amplifiers used for instrumentation and power supplies used in semiconductor applications. Electronic countermeasures sales declined by $5.5 million, or 31.8%, to $ 11.8 million as a result of completing several military programs early in the fiscal year and was compounded by product development delays in a new transmitter application. COST OF SALES. Cost of sales in Fiscal 1997 of $183.7 million decreased by $.8 million from Fiscal 1996 primarily due to higher depreciation costs. Cost of sales as a percentage of sales was 72.5% in Fiscal 1997 compared to 71.7% in Fiscal 1996. The purchase accounting allocation of certain assets, specifically property, plant and equipment that was revalued as of the date of the Acquisition, has had a significant effect on depreciation which, as an element of cost of sales, was approximately $1.7 million higher in Fiscal 1997 compared to Fiscal 1996. RESEARCH AND DEVELOPMENT. Research and development expenses decreased in Fiscal 1997 to $7.7 million, or 3.0% of total sales, as compared to $8.3 million, or 3.2% of total sales, during Fiscal 1996 as a higher proportion of engineering resources were expensed to cost of sales in conjunction with the ramp-up of new products. MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and administrative expenses were $32.3 million in Fiscal 1997, or 12.8% of sales, as compared to $35.3 million, or 13.7% of sales, in Fiscal 1996. Marketing costs were relatively consistent between the two periods but general and administrative expenses decreased by $2.9 million in Fiscal 1997 primarily due to lower management incentive accruals and the gain on the sale of certain assets. EBITDA. EBITDA was $39.4 million for Fiscal 1997, an increase of $0.7 million, or 2.5%, as compared to EBITDA, excluding the $1.7 million charge related to the purchase accounting write-up of inventory, of $38.7 million for Fiscal 1996. Both Fiscal 1997 and Fiscal 1996 were negatively impacted by the Company's efforts to consolidate its Salt Lake City, Utah operation into its San Carlos, California operation. In Fiscal 1997, costs associated with this consolidation, including travel and training expenses, temporary duplication of labor and facility resources, and poor manufacturing yields on the moved product lines, negatively impacted EBITDA by approximately $2.0 million compared to $2.4 million in Fiscal 1996. However, due to the completion of these consolidation efforts in the first half of Fiscal 1997, these costs are not expected to continue. EBITDA was approximately 15.6% of sales in Fiscal 1997 compared to approximately 15.0% in Fiscal 1996 which reflects the partial year improvements from the completion of consolidation efforts. NET EARNINGS. Net earnings before preferred dividends were $13.8 million for Fiscal 1997, an increase of $5.4 million, as compared to $8.3 million for Fiscal 1996. In Fiscal 1997, the Company has fully recognized its deferred tax assets and has eliminated the valuation allowance established in connection with the Acquisition, recognizing a resultant $3.0 million tax benefit. Fiscal 1996 Compared to Pro forma Fiscal 1995 SALES. Sales for Fiscal 1996 were approximately $257.4 million, an increase of approximately $4.2 million, or 1.7%, as compared to pro forma sales of $253.2 million in Fiscal 1995 and an increase of approximately $6.4 million, or 2.5%, as compared to historical sales of $251.1 million in Fiscal 1995. In terms of markets, communications(1), and industrial(2) sales increased while CPI's four other markets (1) As there were no sales to Varian in these markets, pro forma sales comparisons do not differ from the historical sales comparisons. (2) There were sales to Varian in these markets. Pro forma Fiscal 1995 is used in this comparison so that both years appropriately reflect the markup agreed to under the terms of the product supply agreements between CPI and Varian. -24- 26 showed some decline. Communications(1) sales increased approximately $7.9 million, or 7.1%, in Fiscal 1996 over pro forma Fiscal 1995, primarily as a result of continued growth in Direct Broadcast Satellite (DBS) requirements as well as growth in wireless communication product and small terminal applications for private networks and emerging countries telephony requirements. Industrial(2) sales rose approximately $4.6 million, or 20.4%, over pro forma Fiscal 1995, primarily as a result of growth in the industrial microwave market as well as an increase in demand for high power amplifiers used for instrumentation. Offsetting these sales gains were a decline in electronic countermeasures1 and medical2 sales of approximately $2.9 million, or 14.4%, and $1.1 million, or 6.3%, respectively below pro forma Fiscal 1995, due primarily to the timing of customer shipment schedules. Radar1 sales declined approximately $2.3 million, or 3.0%, below pro forma Fiscal 1995, due to DoD Acquisition Reform Initiatives reducing logistic inventory levels. Scientific1 sales declined approximately $2.0 million, or 35.1%, due to the slow down in development programs from the U.S. Department of Energy. COST OF SALES. Cost of sales, excluding a $1.7 million charge related to the purchase accounting write-up of inventory, was $182.8 million in Fiscal 1996, an increase of $2.7 million, as compared to pro forma cost of sales of $180.1 million for Fiscal 1995. Cost of sales, excluding the $1.7 million inventory charge, was 71.0% of sales for Fiscal 1996 compared to the pro forma 71.1% margin for Fiscal 1995. Cost of sales of the Predecessor on a historical basis was 74.6% for the 45 weeks ended August 11, 1995. The Company's ongoing efforts to reduce "cost of quality" (defined as the amount of scrap, rework, manufacturing variance costs, warranty costs, inventory write-offs, quality assistance and quality control costs and unscheduled downtime) were slowed in Fiscal 1996 by the negative impact of efforts to consolidate its Salt Lake City, Utah facility into its San Carlos, California facility. RESEARCH AND DEVELOPMENT. Research and development expenses decreased in Fiscal 1996 to $8.3 million, or 3.2% of total sales, as compared to $8.6 million, or 3.4% of total pro forma sales, during Fiscal 1995. The decrease in research and development expenses during Fiscal 1996 was primarily due to the Company's focus on several customer-funded research and development projects. Overall, the Company continues its emphasis on delivering new products to the marketplace. MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and administrative expenses were $35.4 million in Fiscal 1996, or 13.7% of sales, as compared to a pro forma $33.4 million, or 13.2% of pro forma sales, for Fiscal 1995. Fiscal 1996 reflects the actual costs of CPI operating on a stand-alone basis. On a historical basis, marketing, general and administrative expenses were 17.3% of total sales for the 45 weeks ended August 11, 1995. The lower percentages in Fiscal 1996 reflect the reduced overhead structure of the Successor. EBITDA. EBITDA, excluding the $1.7 million charge related to the purchase accounting write-up of inventory, was $38.7 million for Fiscal 1996, an increase of $0.7 million, or 1.8%, as compared to $38.0 million on a pro forma basis for Fiscal 1995. Both Fiscal 1996 and pro forma Fiscal 1995 were negatively impacted by the Company's efforts to consolidate its Salt Lake City, Utah operation into its San Carlos, California operation. In Fiscal 1996, costs associated with this consolidation, including travel and training expenses, temporary duplication of labor and facility resources, and poor manufacturing yields on the moved product lines, negatively impacted EBITDA by approximately $2.4 million. In the fourth quarter of Fiscal 1995, the initial relocation announcement had a significant impact on the morale and productivity of the Salt Lake City employees. The Company believes that the impact of the relocation announcement, along with higher commissions earned by certain salespeople (1) As there were no sales to Varian in these markets, pro forma sales comparisons do not differ from the historical sales comparisons. (2) There were sales to Varian in these markets. Pro forma Fiscal 1995 is used in this comparison so that both years appropriately reflect the markup agreed to under the terms of the product supply agreements between CPI and Varian. -25- 27 and sales representatives as a result of a higher than normal rate of incoming orders in the fourth quarter (which commissions are earned prior to the generation of sales), negatively impacted pro forma Fiscal 1995 EBITDA by approximately $2.0 million. EBITDA was 15.0% of sales in Fiscal 1996 which is flat compared to Fiscal 1995 pro forma EBITDA margin of 15.0% of total pro forma sales, but reflects the earnings of the Company on a stand alone basis. Historical EBITDA, as a percentage of sales, for the 45 weeks ended August 11, 1995 was 9.8%. NET EARNINGS. Net earnings before preferred dividends were $8.3 for Fiscal 1996 an increase of $1.1 million, or 16.2%, as compared to pro forma net earnings of $7.2 million for Fiscal 1995. In Fiscal 1995, in connection with the Acquisition, the Company wrote off $31.4 million of acquired in-process research and development, which significantly affected net income for the seven weeks ended September 29, 1995. LIQUIDITY AND CAPITAL RESOURCES The Company's continuing operating activities have provided adequate capital and liquidity for the Company for the periods presented. Prior to the Acquisition, the Predecessor's short-term cash requirements were provided by Varian through an intercompany credit facility arrangement. Cash flows provided by operating activities decreased to $5.3 million for Fiscal 1997 from $11.3 million for Fiscal 1996 as higher net earnings were offset by higher levels of inventory and accounts receivable as well as lower accrued liabilities and advances from customers. Inventory increased by $4.3 million primarily due to delays in product shipments, and accounts receivable increased by $1.9 million related to the high volume of shipments in the last month of the year. Accrued liabilities decreased by $7.3 million primarily due to lower accrued payroll and employee benefit requirements as of October 3, 1997 as compared to September 27, 1996. Investing activities in Fiscal 1997 were comprised principally of capital expenditures for property, plant and equipment which amounted to $9.2 million in Fiscal 1997, $12.5 million in Fiscal 1996 and $6.9 million in Fiscal 1995. Investments in property, plant and equipment decreased $3.3 million in Fiscal 1997, as compared to Fiscal 1996, primarily as a result of the Company's completion of consolidation efforts in its San Carlos and Palo Alto facilities. The Company's continuing operations typically do not have large capital requirements. Excluding the one-time improvements made in connection with consolidation activities, which were completed in Fiscal 1997, expenditures for the purchase of property, plant and equipment in Fiscal 1997 and Fiscal 1996 were $6.6 million and $8.7 million, respectively. Expenditures in Fiscal 1995, excluding costs of seismic retrofits, were $6.9 million. Capital expenditures are generally made to replace existing assets, increase productivity, facilitate cost reductions or meet regulatory requirements. The Company has begun to upgrade its computer systems with equipment and software that is "Year 2000" compliant and, as a result, has acquired $1.6 million of equipment in Fiscal Year 1997 under a capital lease. Financing activities in Fiscal 1997 and Fiscal 1996 were related almost entirely to repayments of or proceeds from the Company's Senior Credit Agreement. -26- 28 The Company's primary source of liquidity, other than funds generated from operations or other sources of liquidity, is the $35.0 million revolving credit facility provided by the Senior Credit Agreement. Of this amount, $6.4 million was available for CPI to draw upon as of October 3, 1997. The Senior Credit Agreement does not require CPI, at any time, to exchange any of its floating-rate obligations under the Senior Credit Agreement into fixed-rate obligations. Management believes that the Company will have adequate capital resources and liquidity to meet its obligations, fund all required capital expenditures and pursue its business strategy for the foreseeable future (and in any event for at least the next twelve months). Such capital resources and liquidity are expected to be available from the Company's cash flow provided by operations and borrowings under CPI's Senior Credit Agreement. Impact of Inflation Generally, the Company has been able to pass on inflation-related cost increases to its customers; consequently, inflation has not had a material impact on the Company's historical operations or profitability. Foreign Currency Exposure Although the majority of the Company's net sales, including international sales, are made pursuant to contracts denominated in U.S. dollars, a varying portion of the Company's net sales are denominated in foreign currencies. In general, the most significant foreign currencies for the Company are the British pound, the German mark and the French franc. Although a decrease in the value of any of these currencies compared to the U.S. dollar would have the effect of reducing the Company's net sales (which are reported in U.S. dollars), the Company does not believe that its exposure to such foreign currency rate fluctuations is significant. Recent Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in the financial statements. It requires classification of other comprehensive income, as defined by the standard, by their nature (e.g., unrealized gains or losses on securities) in a financial statement, but does not require a specific format for that statement. The accumulated balance of other comprehensive income is to be displayed separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997 and reclassification of financial statements for earlier periods provided for comparative purposes is required. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997. The Company plans to adopt SFAS No. 130 and SFAS No. 131 in 1998 and does not expect that the adoption of these pronouncements will have a material effect on the Company's consolidated financial statements except that there may be significant modifications in segment disclosures. -27- 29 Year 2000 The Company has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the "Year 2000" issue and is developing an implementation plan to resolve the issue. The Year 2000 problem is the result of computer programs being written using two digits rather that four to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company presently believes that, with modifications to existing software and converting to new software, the Year 2000 problem will not pose significant operational problems for the Company's computer systems as modified and converted. However, if such modifications and conversions are not completed timely, the Year 2000 problem may have a material impact on the operations of the Company. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information called for by this item is set forth in the consolidated financial statements of CPI and Holding contained in this report. Specific financial statements can be found at the pages listed in the following index:
COMMUNICATIONS & POWER INDUSTRIES INC. Page ---- Index to Financial Statements.............................................................................F-1 Consolidated Balance Sheets as of October 3, 1997 and September 27, 1996..................................F-4 Consolidated Statements of Operations for the 53-week period ended October 3, 1997 (Successor), the 52-week period ended September 27, 1996 (Successor), the 7-week period ended September 29, 1995 (Successor) and the 45-week period ended August 11, 1995 (Predecessor) ..........................................................F-5 Consolidated Statements of Stockholders' Equity (Deficit) for the 53-week period ended October 3, 1997 (Successor), the 52-week period ended September 27, 1996 (Successor), the 7-week period ended September 29, 1995 (Successor) and the 45-week period ended August 11, 1995 (Predecessor)........................................................................................F-6 Consolidated Statements of Cash Flows for the 53-week period ended October 3, 1997 (Successor), the 52-week period ended September 27, 1996 (Successor), the 7-week period ended September 29, 1995 (Successor) and the 45-week period ended August 11, 1995 (Predecessor) ..........................................................F-7 Notes to the Consolidated Financial Statements............................................................F-9 Financial Statement Schedule.............................................................................F-61
-28- 30
COMMUNICATIONS & POWER INDUSTRIES INC. Page ---- Consolidated Balance Sheets as of October 3, 1997 and September 27, 1996.................................F-33 Consolidated Statements of Operations for the 53-week period ended October 3, 1997 (Successor), the 52-week period ended September 27, 1996 (Successor), the 7-week period ended September 29, 1995 (Successor) and the 45-week period ended August 11, 1995 (Predecessor) .........................................................F-34 Consolidated Statements of Stockholders' Equity (Deficit) for the 53-week period ended October 3, 1997 (Successor), the 52-week period ended September 27, 1996 (Successor), the 7-week period ended September 29, 1995 (Successor) and the 45-week period ended August 11, 1995 (Predecessor).......................................................................................F-35 Consolidated Statements of Cash Flows for the 53-week period ended October 3, 1997 (Successor), the 52-week period ended September 27, 1996 (Successor), the 7-week period ended September 29, 1995 (Successor) and the 45-week period ended August 11, 1995 (Predecessor) .........................................................F-36 Notes to the Consolidated Financial Statements...........................................................F-38 Financial Statement Schedule.............................................................................F-62
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. In connection with the audit of the financial statements for the 53-weeks ended October 3, 1997, the 52-weeks ended September 27, 1996, the 7-weeks ended September 29, 1995 and the 45-weeks ended August 11, 1995, there were no disagreements with KPMG Peat Marwick LLP on accounting or financial disclosure. -29- 31 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS DIRECTORS AND EXECUTIVE OFFICERS OF HOLDING The following is a table setting forth certain information with respect to the directors and executive officers of Holding. All directors serve for a period of one year or until their successors are duly elected and qualified.
Name Age Position Al D. Wilunowski................. 51 Chief Executive Officer, President and Director Alvin J. Ferreira................ 53 Vice President and Assistant Secretary Lynn E. Harvey................... 42 Chief Financial Officer, Treasurer and Secretary Chester G. Lob................... 71 Vice President and Assistant Treasurer Leonard I. Green................. 64 Director John G. Danhakl.................. 41 Director Gregory J. Annick................ 33 Director
DIRECTORS AND EXECUTIVE OFFICERS OF CPI The following is a table setting forth certain information with respect to the individuals who are the directors and executive officers of CPI. All directors serve for a period of one year or until their successors are duly elected and qualified.
Name Age Position Al D. Wilunowski................. 51 Chief Executive Officer, President and Director Joseph Caldarelli................ 47 Vice President James J. Commendatore............ 54 Vice President Alvin J. Ferreira................ 53 Vice President Dennis J. Gleason................ 44 Vice President Lynn E. Harvey................... 42 Chief Financial Officer H. Frederick Koehler............. 62 Vice President Chester G. Lob................... 71 Vice President Armand Staprans.................. 66 Vice President Leonard I. Green................. 64 Director John G. Danhakl.................. 41 Director Gregory J. Annick................ 33 Director
-30- 32 Al D. Wilunowski became Chief Executive Officer, President and a Director of Holding and CPI in August 1995. Mr. Wilunowski was an Executive Vice President of Varian and the Chief Operating Officer of the Predecessor from 1990 until August 1995. Prior to May 1990, Mr. Wilunowski was a Corporate Vice President of Varian and President of the Electron Devices Group since 1989. From 1986 until April 1989, he was General Manager of Varian's Nuclear Magnetic Resonance Instrument business. Mr. Wilunowski has also served as General Manager of three of Varian's Semiconductor Equipment business units. Prior to joining Varian, Mr. Wilunowski was Vice President and General Manager of Searle Analytic, a division of G.D. Searle. Mr. Wilunowski received a B.S.B.A. degree from Northwestern University and an M.B.A. from the University of Chicago. Joseph Caldarelli became a Vice President of CPI in August 1995. Mr. Caldarelli was Vice President and General Manager for Canada Microwave Products ("CMP"), an operating unit of the Predecessor, from 1985 until August 1995 and has been President and a director of Varian Canada, Inc. from 1992 until August, 1995. From 1982 until 1985, Mr. Caldarelli was Marketing Manager of CMP and served as its Equipment Operations Manager from 1979 until 1982. Prior to joining Varian, Mr. Caldarelli served as Manufacturing Engineering Manager for Medtronic Canada, Inc. Mr. Caldarelli holds a B.S. in Mechanical Engineering from the University of Toronto. James J. Commendatore became a Vice President of CPI in August 1995. Mr. Commendatore was Vice President and General Manager of the Predecessor's Microwave Equipment Products ("MEP") business unit from December 1994 until August 1995. From October 1993 until December 1994, he served as MEP's Business Support Process Manager, responsible for operations and administration, and as Controller. He also served as MEP's Controller from August 1989 until October 1993. Mr. Commendatore's background also includes various finance, supervisory, and management posts with United Technology Center, Litton Industries, Inc., National Semiconductor, Advanced Memory Systems, and Amdahl Corporation. Mr. Commendatore holds B.S. degrees in Business and Industrial Management and an M.B.A. degree, all from California State University, San Jose. Alvin J. Ferreira became a Vice President of CPI and Vice President and Assistant Secretary of Holding in August 1995. Mr. Ferreira was Vice President and General Manager of the Traveling Wave Tubes Products business unit of the Predecessor from 1992 to August 1995. From 1990 until 1992, Mr. Ferreira was Corporate Vice President of Operations for Varian and in 1989 served as manufacturing manager of Varian's Instrument Division. Mr. Ferreira began his career with Varian in 1965 and, between 1965 and 1989, held a number of positions in production. Dennis J. Gleason became a Vice President of CPI in August 1995. Mr. Gleason was Vice President and General Manager of the Crossed Field & Receiver Protector Products ("CFRPP") unit of the Predecessor from 1989 until August, 1995. From 1987 until 1989, Mr. Gleason served as Assistant General Manager of CFRPP. From 1982 until 1987, Mr. Gleason held a number of positions with the Predecessor, including serving as Manufacturing Engineering Manager and Product Assurance Manager at the then-Electro-Optical Sensors unit of the Predecessor. Prior to being employed by Varian, Mr. Gleason served as an officer in the U.S. Navy Nuclear Submarine Program. Mr. Gleason received B.S. and M.S. degrees in Aerospace Engineering from the University of Notre Dame. Lynn E. Harvey became Chief Financial Officer of Holding and CPI in August 1995. Ms. Harvey was the Business Support Process Manager and Controller of the Power Grid Tube Products unit of the Predecessor from 1993 to August 1995. From 1984 until 1993, Ms. Harvey held various finance, supervisory and management positions with Varian Associates. Ms. Harvey received a B.S. degree from the University of California, Berkeley. -31- 33 H. Frederick Koehler became Vice President of CPI in August 1995. Mr. Koehler was Vice President and General Manager of the Power Grid Tube Products unit of the Predecessor from 1992 to August 1995. From 1989 until 1991, Mr. Koehler was President and Chief Executive Officer of Trio-Tech International, an electronic test equipment manufacturer. From 1985 until 1989, he served as President of Leach Relay Group of Leach Corporation and from 1979 until 1985, he was a Vice President at Memorex Corporation. Mr. Koehler received a B.S. from the U.S. Military Academy, West Point and an M.S.E.E. from Syracuse University. Chester G. Lob became Vice President of CPI and Vice President and Assistant Treasurer of Holding in August 1995. Dr. Lob was Sales Manager of the Predecessor from 1989 until August 1995. From 1986 until 1989, Dr. Lob was manager of business development of the Predecessor. Previously, he served as Vice President and Chief Engineer of the Predecessor from 1980 until 1986. Dr. Lob joined Varian in 1965 with Varian's acquisition of the General Electric Company's Microwave Laboratory at Stanford University, where Dr. Lob served as General Manager. Dr. Lob holds a B.S. degree in electrical engineering from Tulane University and was awarded M.S. and Ph.D. degrees in the same field from the University of Illinois. Armand Staprans became Vice President of CPI in August 1995. Dr. Staprans was Vice President and General Manager of the Microwave Power Tube Products unit of the Predecessor from 1991 until August 1995. Previously, he was Operations Manager of the then-Coupled Cavity Tube unit of the Predecessor from 1986 until 1989, and became General Manager of that unit in 1989. From 1978 until 1986, Dr. Staprans served as Chief Engineer for the then-Microwave Tube Division unit of the Predecessor. Dr. Staprans joined Varian in 1957 as an engineer in its microwave tube operations. He has held various other positions with Varian and the Predecessor in engineering, development and management. Dr. Staprans received his B.S., M.S. and Ph.D. degrees from the University of California, Berkeley, and has been named as an inventor on seven patents. Leonard I. Green has been an executive officer and an equity owner of LGP, a merchant banking firm which manages GEI II, since the formation of LGP and GEI II in 1994 by the principals of Leonard Green & Associates, L.P. ("LGA"). Mr. Green has also been, individually or through a corporation, a partner in LGA, a merchant banking firm, since its inception in 1989. Before forming LGA, Mr. Green had been a partner of Gibbons, Green, van Amerongen for more than five years. Mr. Green is also a director of Rite Aid Corporation, Carr-Gottstein Foods Co. and Hechinger Company. John G. Danhakl has been an executive officer and an equity owner of LGP, a merchant banking firm which manages GEI II, since 1995. Mr. Danhakl had previously been a Managing Director at Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and had been with DLJ since 1990. Prior to 1990, Mr. Danhakl was a Vice President at Drexel Burnham Lambert from 1985 to 1990. Mr. Danhakl is also a director of The Arden Group, Inc., Twin Laboratories, Inc., Leslie's Poolmart, Inc., Big 5 Corp. and Hechinger Company. Gregory J. Annick has been an executive officer and an equity owner, through a trust, of LGP, a merchant banking firm which manages GEI II, since the formation of LGP and GEI II in 1994 by the principals of LGA. He joined LGA as an associate in 1989, became a principal in 1993, and through a corporation became a partner of LGA in 1994. From 1988 to 1989, he was an associate with the merchant banking firm of Gibbons, Green, van Amerongen. Before that time, Mr. Annick was a financial analyst in mergers and acquisitions with Goldman, Sachs & Co. Mr. Annick is also a director of Carr-Gottstein Foods Co., Leslie's Poolmart, Inc. and Hechinger Company. -32- 34 ITEM 11: EXECUTIVE COMPENSATION The information set forth in the following table relates to the Chief Executive Officer and President of both Holding and CPI (who formerly served at the Predecessor's Chief Operating Officer) and the next four most highly compensated executive officers of Holding and CPI (collectively, the "Named Executive Officers") for Fiscal 1997, Fiscal 1996 and for the 7-week period ending September 29, 1995.
SUMMARY COMPENSATION TABLE ANNUAL LONG TERM COMPENSATION COMPENSATION --------------------------------------------- ------------- NAME AND OTHER ANNUAL LTIP ALL OTHER PRINCIPAL POSITION FISCAL BONUS($) COMPENSATION PAYOUTS($) COMPENSATION($) WITH THE COMPANY YEAR SALARY($) (a) (b) (c) (d) - ------------------------------- ------ -------- --------- ------------- ---------- --------------- Al D. Wilunowski 1997(1) $302,744 $184,246 $ 38,041 $408,611 $112,324 Chief Executive Officer 1996(2) 302,744 376,591 34,672 541,613 17,195 and President 1995(3) 40,754 63,365 2,314 78,062 2,077 Joseph Caldarelli 1997(1) 102,435 67,070 8,173 53,173 7,326 Vice President 1996(2) 102,153 75,012 8,080 58,966 6,939 1995(3) 10,814 9,774 1,341 12,687 781 Alvin J. Ferreira 1997(1) 128,700 43,599 12,055 45,973 7,436 Vice President 1996(2) 128,700 55,539 2,756 69,178 7,528 1995(3) 17,325 16,066 -- 17,421 932 Dennis J. Gleason 1997(1) 127,452 81,173 12,843 66,649 6,181 Vice President 1996(2) 127,452 118,993 2,582 73,368 6,174 1995(3) 17,157 15,272 -- 17,252 833 Armand Staprans 1997(1) 128,654 96,529 17,535 67,278 11,828 Vice President 1996(2) 128,654 107,842 2,826 74,060 10,899 1995(3) 17,318 16,448 -- 17,415 1,086
(1) 53-weeks ending October 3, 1997 (2) 52-weeks ending September 27, 1996 (3) 7-weeks ending September 29, 1995 (a) Consists of awards paid in Fiscal 1998 and Fiscal 1997 under CPI's Management Incentive Plan for Fiscal 1997 and Fiscal 1996, respectively. Data for the 7-week period ending September 29, 1995 represents the amount paid by the Company in Fiscal 1996 relating to the Varian plan for Fiscal 1995. (b) Consists of amounts reimbursed for the payment of taxes on certain perquisites and personal benefits. (c) Consists of cash payouts (1) in Fiscal 1998 under the long-term incentive feature of CPI's Management Incentive Plan for the three year period ended Fiscal 1997; (2) in Fiscal 1997 under the long-term incentive feature of CPI's Management Incentive Plan for the two year period ended Fiscal 1996; and (3) in Fiscal 1996 under the long-term incentive feature of Varian's Omnibus Stock Plan for the three-year period ended with Fiscal 1995, paid by the Company for the 7-weeks ended September 29, 1995. (d) Consists of (1) Company contributions to CPI's 401(k) plan and Supplemental Retirement Plan and (2) Company paid premiums for group life insurance for Fiscal 1997, Fiscal 1996 and, for the 7-week period ending September 29, 1995. The Company generally provides its executives with compensation (including cash compensation and employee benefits) reasonably comparable to the compensation provided to them as executives of the Predecessor, except that the Company does not at this time contemplate that any of its executives will be provided with stock options, restricted stock, SARs, phantom stock or similar equity benefits, other than the shares purchased by the Management Investors (as defined below) under Holding's 1995 Management Equity Plan, although the Company may consider implementing plans or arrangements providing for one or more of such benefits in the future. Employee benefit plans offered to the Company's Named Executive Officers and the Company's other executives include health, life and disability insurance and both a defined contribution retirement plan and a supplemental executive retirement plan. -33- 35 THE HOLDING EQUITY PLAN The Named Executive Officer and certain of Holding's and CPI's other executive officers are participants in Holding's 1995 Management Equity Plan (the "Holding Equity Plan"). Under the Holding Equity Plan, participants may purchase shares of Holding Common Stock ("Management Shares") at a price determined by Holding's board of directors to be the fair market value of such Holding Common Stock on the date the participant executes an agreement to purchase the shares. Holding has reserved a total of 50,000 shares of Holding Common Stock for issuance under the Holding Equity Plan, 45,870 of which were issued to the Company's Chief Executive Officer, certain executive officers and key employees (collectively, any executive officers and key employees who may acquire Management Shares are referred to as the "Management Investors") in Fiscal 1995. No additional shares were issued in Fiscal 1996 and 650 shares were repurchased in Fiscal 1997. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Neither Holding nor CPI has a Compensation Committee. None of the directors of Holding or CPI are officers or employees or former officers or employees of Holding, CPI or any of their respective subsidiaries, other than Mr. Wilunowski, or had any relationships which would require disclosure by the Company pursuant to Item 404 of Regulation S-K ("Certain Relationships and Related Transactions"), except as described below. LGP is investment adviser to, and an affiliate of the general partner of, GEI II, which holds approximately 72.0% of the outstanding shares of Holding. Holding, in turn, owns all of the outstanding shares of common stock of CPI. Messrs. Green, Danhakl and Annick, who are directors of Holding and CPI, are also stockholders of the general partner of LGP. See "Directors and Executive Officers." In connection with the Acquisition, Holding and CPI entered into a Management Services Agreement with LGP pursuant to which LGP will receive an annual fee of approximately $362,000 plus reasonable expenses for providing management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analysis, negotiating and structuring financing, and exploring, negotiating and arranging expansion and capital market opportunities, in the future. The Management Services Agreement has a term of up to twelve years. Holding and CPI believe that the contacts and expertise provided by LGP in these areas enhance the Company's opportunities and management's expertise in these matters and that the fees to be paid to LGP fairly reflect the value of the services provided by LGP. In Fiscal 1997, LGP received $376,000 pursuant to the terms of the Management Service Agreement. In addition to an annual fee for such management consulting services, the Management Services Agreement provides that LGP may receive reasonable and customary fees and expenses from time to time for providing financial advisory and investment banking services in connection with major financial transactions that may be undertaken in the future. The Senior Credit Agreement and the indenture governing the Notes (the "Indenture") also include certain provisions regarding approval of affiliate transactions. COMPENSATION OF DIRECTORS Individuals who are officers of Holding and CPI, as well as Messrs. Green, Danhakl and Annick, will not receive any compensation directly for their service on Holding's and CPI's Boards of Directors. Holding and CPI have entered into a management services agreement pursuant to which LGP will receive an annual fee plus reasonable expenses for providing management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analyses, negotiating and structuring financing and exploring expansion opportunities, in the future. See "ITEM 13 Certain Relationships and Related Transactions." It is anticipated that other directors, if any, will receive customary fees for service on Holding's and CPI's respective Boards of Directors. -34- 36 ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All of CPI's common stock is owned by Holding. The following table sets forth, as of December 8, 1997, certain information with respect to the beneficial ownership of Holding Common Stock by (i) each person known by Holding to own beneficially 5% or more of the outstanding shares of Holding Common Stock, (ii) each director of Holding and CPI, (iii) the person named in the summary compensation table, and (iv) all executive officers and directors as a group.
Percent of Amount and Nature of Shares Name and Address of Beneficial Owner (a) Beneficial Ownership Outstanding - ---------------------------------------- -------------------- ------------ Green Equity Investors II, L.P.(b)........................ 143,630 72.05% 11111 Santa Monica Boulevard, Suite 2000 Los Angeles, California 90025 Leonard I. Green(b)....................................... 143,630 72.05% 11111 Santa Monica Boulevard Suite 2000 Los Angeles, California 90025 John G. Danhakl(b)........................................ 143,630 72.05% 11111 Santa Monica Boulevard, Suite 2000 Los Angeles, California 90025 Gregory J. Annick(b)...................................... 143,630 72.05% 11111 Santa Monica Boulevard, Suite 2000 Los Angeles, California 90025 Al D. Wilunowski(c)....................................... 21,400 10.73% 607 Hansen Way Palo Alto, California 94303 Joseph Caldarelli(d)...................................... 3,000 1.50% Alvin J. Ferreira......................................... 2,500 1.25% Dennis J. Gleason......................................... 2,000 1.00% Armand Staprans........................................... 2,500 1.25% Directors and Executive Officers as a group (12 persons)(b)........................................... 182,080 91.34%
(a) Addresses are given only for persons listed as beneficial owners of 5% or more of Holding Common Stock. (b) GEI II is a Delaware limited partnership managed by LGP, which is an affiliate of the general partner of GEI II. Each of Mr. Green, Jonathan D. Sokoloff, Mr. Danhakl, Mr. Annick, Jennifer Holden Dunbar and Peter J. Nolan, either directly (whether through ownership interest or position) or through one or more intermediaries, may be deemed to control LGP and such general partner. LGP and such general partner may be deemed to control the voting and disposition of the shares of Holding Common Stock owned by GEI II. Accordingly, for certain purposes, Messrs. Green, Sokoloff, Danhakl, Annick and Nolan and Ms. Holden Dunbar may be deemed to be beneficial owners of the shares of Holding Common Stock held by GEI II. All of the shares of Holding Common Stock shown in the table as being beneficially owned by Messrs. Green, Danhakl and Annick are owned by GEI II. (c) Includes 400 shares originally acquired by Mr. Wilunowski and subsequently transferred to his child. (d) Includes 750 shares originally acquired by Mr. Caldarelli and subsequently transferred to his children. -35- 37 Terms of Subscription and Stockholder Agreements Holding Common Stock and Junior Preferred Stock purchased by GEI II was purchased pursuant to a Stock Subscription Agreement between Holding, CPI and GEI II. GEI II was also granted certain demand and "piggyback" registration rights for any shares of Holding Common Stock it may own pursuant to the Holding Common Stock Registration Rights Agreement dated as of August 11, 1995 among Holding, GEI II and the initial purchaser of CPI's Series A Senior Preferred Stock. Holders of Holding Common Stock issued to qualified institutional buyers and/or institutional accredited investors are entitled to the benefit of agreements with Holding and CPI which contain certain demand and "piggyback" registration rights, customary "tag-along" sale rights exercisable by the investor, and customary "drag-along" sale rights exercisable by GEI II in certain circumstances. In addition, the Management Investors have been granted certain registration rights and "tag-along" rights and are subject to certain "drag-along" obligations. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Management Agreements LGP is investment adviser to, and an affiliate of the general partner of, GEI II, which holds approximately 72.0% of the outstanding shares of Holding. Holding, in turn, owns all of the outstanding shares of common stock of CPI. Messrs. Green, Danhakl and Annick, who are directors of Holding and CPI, are also stockholders of the general partner of LGP. In connection with the Acquisition, Holding and CPI entered into a Management Services Agreement with LGP pursuant to which LGP will receive an annual fee of approximately $362,000 plus reasonable expenses for providing management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analysis, negotiating and structuring financing, and exploring, negotiating and arranging expansion and capital market opportunities, in the future. The Management Services Agreement has a term of up to twelve years. Holding and CPI believe that the contacts and expertise provided by LGP in these areas enhance the Company's opportunities and management's expertise in these matters and that the fees to be paid to LGP fairly reflect the value of the services provided by LGP. In Fiscal 1997, LGP received $376,000 pursuant to the terms of the Management Services Agreement. In addition to an annual fee for such management consulting services, the Management Services Agreement provides that LGP may receive reasonable and customary fees and expenses from time to time for providing financial advisory and investment banking services in connection with major financial transactions that may be undertaken in the future. The Senior Credit Agreement and the Indenture also include certain provisions regarding approval of affiliate transactions. -36- 38 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K (a) Financial Statement Schedule of CPI and Holding Schedule II - Valuation and Qualifying Accounts (b) Reports on Form 8-K None. (c) Schedule of Exhibits
Exhibit No. Description - ----------- ----------- 2.1 (1) Stock Sale Agreement between CPI (as successor by merger to CPII Acquisition Corp., then known as Communications & Power Industries Holding Corporation) and Varian dated as of June 9 ,1995. 2.2 (1) First Amendment to Stock Sale Agreement among Holding, CPI (as successor by merger to CPII Acquisition) and Varian dated as of August 11, 1995. 2.3 (1) Second Amendment to Stock Sale Agreement among Holding, CPI (as successor by merger to CPII Acquisition) and Varian dated as of August 11, 1995. 3.1 (1) Restated Certificate of Incorporation of CPI filed with the Delaware Secretary of State on August 11, 1995. 3.2 (1) Bylaws of CPI. 3.3 (1) Certificate of Incorporation of Holding. 3.4 (1) Bylaws of Holding. 4.1 (1) Indenture among CPII Acquisition, Holding, the other guarantors of the Notes (the "Guarantors") and U.S. Trust Company of California, N.A., relating to the Notes dated as of August 11, 1995. 4.2 (1) First Supplemental Indenture among CPI, Holding, the other Guarantors and U.S. Trust Company of California, N.A., relating to the Notes dated as of August 11, 1995. 4.3 (1) Form of Notes (included in Exhibit 4.1, Exhibit A). 4.4 (1) Form of Indenture between CPI and Shawmut Bank Connecticut, National Association, relating to the Exchange Notes. 4.5 (1) Form of Exchange Note (included in Exhibit 4.5, Exhibit A).
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Exhibit No. Description - ----------- ----------- 4.6 (2) Form of Second Supplemental Indenture among CPI, Holding, the other Guarantors and U.S. Trust Company of California, N.A., relating to the Notes. 10.1 (1) Credit Agreement among CPI, Holding, CPII Acquisition, the other obligors named therein, the lenders named therein and Bankers Trust Company, as Agent, dated as of August 11, 1995 (including Annex A (Definitions; Rules of Construction) and Annex F (Financial Covenants)). 10.1.1 First Amendment to Credit Agreement among CPI, Holding, the other obligors named therein, the lenders named therein and Bankers Trust Company, as Agent, dated as of December 31, 1996. 10.1.2 Second Amendment to Credit Agreement among CPI, Holding, the other obligors named therein, the lenders named therein and Bankers Trust Company, as Agent, dated as of April 1, 1997. 10.1.3 Third Amendment to Credit Agreement among CPI, Holding, the other obligors named therein, the lenders named therein and Bankers Trust Company, as Agent, dated as of June 27, 1997. 10.2 (1) Term A Notes in the amount of $8,333,333.32, $4,166,666.67, $4,166,666.67, $4,166,666.67 and $4,166,666.76 made by CPI in favor of Bankers Trust Company, Dresdner Bank AG, First Bank National Association, The Nippon Credit Bank, Ltd. and Union Bank, respectively, dated as of August 11, 1995. 10.3 (1) Term B Notes in the amount of $11,666,666.68 and $5,666,666.67 made by CPI in favor of Bankers Trust Company and Crescent/Mach I Partners, respectively, dated as of August 11, 1995. 10.4 (1) Revolving Credit Notes in the amount of $11,666,666.68, $5,833,333.33, $5,833,333.33, $5,833,333.33 and $5,833,333.33 made by CPI in favor of Bankers Trust Company, Dresdner Bank AG, First Bank National Association, The Nippon Credit Bank, Ltd, and Union Bank, respectively, dated as of August 11, 1995. 10.5 (1) Swingline Note in the amount of $5,000,000 made by CPI in favor of Bankers Trust Company dated as of August 11, 1995. 10.6 (1) Security Agreement among CPI, CPII Acquisition, the other assignors named therein and Bankers Trust Company, as Agent, dated as of August 11, 1995. 10.7 (1) Pledge Agreement made by CPI, Holding, CPII Acquisition, and CPI Subsidiary Holdings, Inc. in favor of Bankers Trust Company, as Agent, dated as of August 11, 1995. 10.8 (1) Continuing Guaranty made by each of the Guarantors in favor of the Lenders and Agent under the Senior Credit Agreement, dated as of August 11, 1995. 10.9 (1) Transitional Services Agreement between CPI and Varian dated as of August 10, 1995. 10.10(3)(+)Key Components Supply Agreement between CPI and Varian dated as of August 10, 1995.
-38- 40
Exhibit No. Description - ----------- ----------- 10.11 (1)Cross License Agreement between the CPI and Varian dated as of August 10, 1995. 10.12 (1)Trademark License Agreement between CPI and Varian dated as of August 10, 1995. 10.13 (1)Assignment and Assumption of Lessee's Interest in Lease (Units 1-4, Palo Alto) and Covenants, Conditions and Restrictions on Leasehold Interests (Units 1-12, Palo Alto) dated as of August 10, 1995 between Varian Realty Inc., Varian Associates, Inc. and CPI. 10.14 (1)Sublease (Portion of Building 2 Located on Unit 5, Palo Alto) dated as of August 10, 1995 between Varian Realty Inc. and CPI. 10.15 (1)Sublease (Unit 8, Palo Alto) dated as of August 10, 1995 between Varian Realty Inc. and CPI. 10.16 (1)Sublease (Building 4, Palo Alto) .dated as of August 10, 1995 between CPI, as Sublessee, Varian Associates, Inc., as Sublessor, and Varian Realty Inc., as Adjacent Property Sublessor. 10.17 (1)Assignment and Assumption of Tenant's Interest in Lease (Santa Clara, California) dated as of August 10, 1995 between Varian and CPI. 10.18 (1)Lease (Salt Lake City, Utah) dated as of August 10, 1995 between CPI and Varian Associates, Inc. 10.19 (1)Shared Use Agreement dated as of August 11, 1995 between Varian (on behalf of itself and its subsidiaries) and CPI (as successor by merger to CPII Acquisition Corp.) (on behalf of itself and its subsidiaries). 10.20 (1)Purchase Agreement among CPII Acquisition, Holding, the other Guarantors and the initial purchasers of the Series A Senior Subordinated Notes (the "Initial Notes Purchasers") dated as of August 11, 1995. 10.21 (1)Purchase Agreement among CPII Acquisition, Holding and the initial purchaser of the Series A Senior Preferred Stock (the "Initial Senior Preferred Stock Purchaser") dated as of August 11, 1995. 10.22 (1)A/B Exchange Registration Rights agreement among CPI (as successor by merger to CPII Acquisition), Holding, the other Guarantors and the Initial Notes Purchasers dated as of August 11, 1995. 10.23 (1)Amendment to A/B Exchange Registration Rights Agreement among CPI, Holding, the other Guarantors and the Initial Notes Purchasers dated as of August 11,1995. 10.24 (1)A/B Exchange Registration Rights Agreement between CPI (as successor by merger to CPII Acquisition) and the Initial Senior Preferred Stock Purchaser dated as of August 11, 1995. 10.25 (1)Amendment to A/B Exchange Registration Rights Agreement between CPI and the Initial Senior Preferred Stock Purchaser dated as of August 11, 1995.
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Exhibit No. Description - ----------- ----------- 10.26 (1)Holding Common Stock Registration Rights Agreement by and among Holding, GEI II and the Initial Senior Preferred Stock Purchaser dated as of August 11, 1995 relating to the Holding Common Stock sold with the Series A Senior Preferred Stock. 10.27 (1)Stockholders Agreement by and among Holding, GEI II and the Initial Senior Preferred Stock Purchaser dated as of August 11, 1995 relating to the Holding Common Stock sold with the Series A Senior Preferred Stock. 10.28 (1)Stock Subscription Agreement among Holding, CPII Acquisition Corp. and GEI II dated as of August 11, 1995. 10.29 (1)Management Services Agreement among CPI, Holding and Leonard Green & Partners, L.P. dated as of August 11, 1995. 10.30 (1)1995 Holding Management Equity Plan (including Form of Management Subscription and Stockholders Agreement). 10.31 (1)Letter from Holding to Al D. Wilunowski dated June 9, 1995 relating to terms of employment. 10.32 (1)Letter from Holding to Alvin J. Ferreira dated June 9, 1995 relating to terms of employment. 10.33 (1)Letter from Holding to Dennis J. Gleason dated June 9, 1995 relating to terms of employment. 10.34 (1)Letter from Holding to H. Frederick Koehler dated June 9, 1995 relating to terms of employment. 10.35 (1)Letter from Holding to Armand Staprans dated June 9, 1995 relating to terms of employment. 21 (1) Subsidiaries of CPI and Holding. 27.1 Financial Data Schedule (Communications & Power Industries, Inc.) 27.2 Financial Data Schedule (Communications & Power Industries Holding Corporation)
- -------------- (1) Incorporated by reference to CPI's Registration Statement on Form S-1 (Registration No. 33-96858), filed on September 12, 1995. (2) Incorporated by reference to Amendment No.3 to CPI's Registration Statement on Form S-1 (Registration No.33-96858), filed on November 9, 1995. (3) Incorporated by reference to Amendment No.1 to CPI's Registration Statement on Form S-1 (Registration Statement No.33-96858), filed on October 25, 1995. (+) Certain portions of this Exhibit have been omitted and filed separately under an application for confidential treatment with the Securities and Exchange Commission. -40- 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. COMMUNICATIONS & POWER INDUSTRIES, INC. By: /s/ Al D. Wilunowski ---------------------------------------- Al D. Wilunowski Chief Executive Officer and President Date: December 23, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Leonard I. Green Director 12-23-97 - ---------------------------- ------------------- /s/ John G. Danhakl Director 12-23-97 - ---------------------------- ------------------- /s/ Gregory J. Annick Director 12-23-97 - ---------------------------- ------------------- Chief Financial Officer, Treasurer and Secretary /s/ Lynn E. Harvey (Principal Financial and Accounting Officer) 12-23-97 - --------------------------- ------------------- Director, Chief Executive Officer and President /s/ Al D. Wilunowski (Principal Executive Officer) 12-23-97 - ---------------------------- -------------------
Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Securities Exchange Act of 1934 by Registrants which have not Registered Securities Pursuant to Section 12 of the Securities Exchange Act of 1934: No annual report to security holders covering either registrant's last fiscal year has been sent to either registrant's security holders and no proxy statement, form of proxy or other proxy soliciting material has been sent to more than ten of either registrant's security holders with respect to any annual or other meeting of security holders. No such report or proxy material is expected to be furnished to security holders subsequent to the filing of the annual report on this Form. -41- 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION By: /s/ Al D. Wilunowski ---------------------------------------- Al D. Wilunowski Chief Executive Officer and President Date: December 23, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Leonard I. Green Director 12-23-97 - ---------------------------- ------------------- /s/ John G. Danhakl Director 12-23-97 - ---------------------------- ------------------- /s/ Gregory J. Annick Director 12-23-97 - ---------------------------- ------------------- Chief Financial Officer, Treasurer and Secretary /s/ Lynn E. Harvey (Principal Financial and Accounting Officer) 12-23-97 - --------------------------- ------------------- Director, Chief Executive Officer and President /s/ Al D. Wilunowski (Principal Executive Officer) 12-23-97 - ---------------------------- -------------------
Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Securities Exchange Act of 1934 by Registrants which have not Registered Securities Pursuant to Section 12 of the Securities Exchange Act of 1934: No annual report to security holders covering either registrant's last fiscal year has been sent to either registrant's security holders and no proxy statement, form of proxy or other proxy soliciting material has been sent to more than ten of either registrant's security holders with respect to any annual or other meeting of security holders. No such report or proxy material is expected to be furnished to security holders subsequent to the filing of the annual report on this Form. -42- 44 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) INDEX TO FINANCIAL STATEMENTS COMMUNICATIONS & POWER INDUSTRIES, INC.
Page ---- Independent Auditors' Report...........................................................F-3 Consolidated Balance Sheets as of October 3, 1997 and September 27, 1996 ..............F-4 Consolidated Statements of Operations for the 53-week period ended October 3, 1997 (Successor), the 52-week period ended September 27, 1996 (Successor), the 7-week period ended September 29, 1995 (Successor) and the 45-week period ended August 11, 1995 (Predecessor) .......................................F-5 Consolidated Statements of Stockholders' Equity (Deficit) for the 53-week period ended October 3, 1997 (Successor), the 52-week period ended September 27, 1996 (Successor), the 7-week period ended September 29, 1995 (Successor) and the 45-week period ended August 11, 1995 (Predecessor) ............................F-6 Consolidated Statements of Cash Flows for the 53-week period ended October 3, 1997 (Successor), the 52-week period ended September 27, 1996 (Successor), the 7-week period ended September 29, 1995 (Successor) and the 45-week period ended August 11, 1995 (Predecessor) ........................................F-7 Notes to the Consolidated Financial Statements.........................................F-9
F-1 45 INDEX TO FINANCIAL STATEMENTS, CONTINUED COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION Independent Auditors' Report..........................................................F-32 Consolidated Balance Sheets as of October 3, 1997 and September 27, 1996 .............F-33 Consolidated Statements of Operations for the 53-week period ended October 3, 1997 (Successor), the 52-week period ended September 27, 1996 (Successor), the 7-week period ended September 29, 1995 (Successor) and the 45-week period ended August 11, 1995 (Predecessor) ......................................F-34 Consolidated Statements of Stockholders' Equity (Deficit) for the 53-week period ended October 3, 1997 (Successor), the 52-week period ended September 27, 1996 (Successor), the 7-week period ended September 29, 1995 (Successor) and the 45-week period ended August 11, 1995 (Predecessor) ...........................F-35 Consolidated Statements of Cash Flows for the 53-week period ended October 3, 1997 (Successor), the 52-week period ended September 27, 1996 (Successor), the 7-week period ended September 29, 1995 (Successor) and the 45-week period ended August 11, 1995 (Predecessor) ......................................F-36 Notes to the Consolidated Financial Statements........................................F-38 FINANCIAL STATEMENT SCHEDULES Communications & Power Industries, Inc................................................F-61 Communications & Power Industries Holding Corporation.................................F-62
F-2 46 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Communications & Power Industries, Inc.: We have audited the accompanying consolidated balance sheets of Communications & Power Industries, Inc. (a wholly owned subsidiary of Communications & Power Industries Holding Corporation) and subsidiaries ( "CPI" or the "Successor") as of October 3, 1997 and September 27, 1996, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the 53-week period ended October 3, 1997, the 52-week period ended September 27, 1996 and the 7-week period ended September 29, 1995. We have also audited the related consolidated statements of operations, stockholders'equity, and cash flows of CPI's predecessor, the Electron Devices Business of Varian Associates, Inc. (the "Predecessor") for the 45-week period ended August 11, 1995. In connection with our audits of the consolidated financial statements for the periods indicated above, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of CPI's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in the notes to the consolidated financial statements, CPI acquired assets and assumed liabilities on August 11, 1995 in a transaction that was accounted for as a purchase. Accordingly, the consolidated financial statements of the Successor are presented on a different cost basis than the consolidated financial statements of the Predecessor and, therefore, are not comparable. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Communications & Power Industries, Inc. and subsidiaries as of October 3, 1997 and September 27, 1996, the results of their operations and their cash flows for the 53-week period ended October 3, 1997, the 52-week period ended September 27, 1996, the 7-week period ended September 29, 1995, and the results of operations and cash flows of the Electron Devices Business of Varian Associates, Inc. for the 45-week period ended August 11, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG PEAT MARWICK, LLP San Jose, California November 17, 1997 F-3 47 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
October 3, September 27, ASSETS 1997 1996 ------ --------- ------------- CURRENT ASSETS Cash and cash equivalents $ 2,027 1,753 Accounts receivable, net 52,326 50,380 Inventories 50,750 46,471 Deferred taxes 7,133 7,109 Other current assets 1,221 2,133 --------- --------- Total current assets 113,457 107,846 Property, plant, and equipment, net 79,994 79,873 Goodwill, net 24,144 25,203 Debt issue costs, net 7,893 9,651 Deferred taxes 11,908 5,569 --------- --------- Total assets $ 237,396 228,142 ========= ========= LIABILITIES, SENIOR REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - ----------------------------------------------------------------------- CURRENT LIABILITIES Revolving credit facility $ 22,800 17,000 Current portion of term loans 5,700 3,950 Accounts payable - trade 10,419 10,527 Accrued expenses 15,088 22,371 Product warranty 4,211 4,327 Income taxes payable 11,975 10,560 Advance payments from customers 2,797 4,535 --------- --------- Total current liabilities 72,990 73,270 Senior term loans 29,950 35,650 Senior subordinated notes 100,000 100,000 Obligations under capital leases 1,584 - --------- --------- Total liabilities 204,524 208,920 --------- --------- SENIOR REDEEMABLE PREFERRED STOCK ($.01 par value, 325,000 shares authorized; 196,779 and 171,482 shares issued and outstanding as of 1997 and 1996, respectively, liquidation preference $100 per share) 17,566 14,822 --------- --------- Commitments and contingencies STOCKHOLDERS' EQUITY Junior Preferred Stock ($.01 par value, 525,000 shares authorized; 131,186 and 114,321 shares issued and outstanding as of 1997 and 1996, respectively, liquidation preference $100 per share) 1 1 Common stock ($.01 par value, 400,000 shares authorized; 1 share issued and outstanding as of 1997 and 1996) - - Additional paid-in capital 32,143 30,521 Accumulated deficit (15,738) (25,080) Stockholder loans (1,100) (1,042) --------- --------- Net stockholders' equity 15,306 4,400 --------- --------- Total liabilities, senior redeemable preferred stock and stockholders' equity $ 237,396 228,142 ========= =========
See accompanying notes to the consolidated financial statements. F-4 48 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
Successor Predecessor -------------------------------------------- ------------- 53-Week 52-Week 7-Week 45-Week period ended period ended period ended period ended October 3, September 27, September 29, August 11, 1997 1996 1995 1995 --------- --------- --------- --------- Sales $ 253,439 257,449 36,398 214,677 Cost of sales 183,678 184,482 27,634 160,156 --------- --------- --------- --------- Gross Profit 69,761 72,967 8,764 54,521 --------- --------- --------- --------- Operating costs and expenses: Research and development 7,681 8,308 1,198 7,429 Selling and Marketing 19,701 19,886 2,763 17,506 General and administrative 12,568 15,468 3,250 19,725 Write-off of acquired in-process research and development - - 31,363 - --------- --------- --------- --------- Total operating costs and expenses 39,950 43,662 38,574 44,660 --------- --------- --------- --------- Operating income (loss) 29,811 29,305 (29,810) 9,861 Interest expense 19,039 18,894 2,497 - --------- --------- --------- --------- Earnings (loss) before taxes 10,772 10,411 (32,307) 9,861 Income tax expense (benefit) (3,000) 2,068 (2,709) 3,649 --------- --------- --------- --------- Net earnings (loss) 13,772 8,343 (29,598) 6,212 Preferred dividends: Senior Redeemable Preferred Stock 2,530 2,148 - - Junior Preferred Stock 1,686 1,432 - - --------- --------- --------- --------- Net earnings (loss) attributable to Common Stock $ 9,556 4,763 (29,598) 6,212 ========= ========= ========= =========
See accompanying notes to the consolidated financial statements. F-5 49 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT) (in thousands, except share data)
Junior Additional Preferred Common Paid-in Accumulated Stock Stock Capital Deficit ---------- ------- ---------- ------------ PREDECESSOR: Balances, September 30, 1994 - - - - Net repayments to Varian Net earnings ---------- ------- ---------- ------------ Balances, August 11, 1995 - - - - SUCCESSOR: Elimination of business equity Issuance of stock in connection with the Acquisition: 10,500 shares of common stock of Holding issued in connection with the issuance of the Senior Redeemable Preferred Stock 1,050 Issuance of 100,000 shares of Junior Preferred Stock 1 9,999 Less issue costs (654) Issuance of 1 share of Common stock to Holding 20,000 Less issue costs (1,307) Less stockholder loans Amortization of discount and issue costs on Senior Redeemable Preferred Stock (29) Net loss (29,598) ---------- ------- ---------- ------------ Balances, September 29, 1995 1 - 29,088 (29,627) Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) Payment of dividends on Senior Redeemable Preferred Stock (2,149) Payment of dividends on Junior Preferred Stock 1,433 (1,433) Net earnings 8,343 Repayment of stockholder loans Interest accrued on stockholder loans ---------- ------- ---------- ------------ Balances, September 27, 1996 1 - 30,521 (25,080) Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) Payment of dividends on Senior Redeemable Preferred Stock (2,530) Payment of dividends on Junior Preferred Stock 1,686 (1,686) Net earnings 13,772 Interest accrued on stockholder loans Purchase of Treasury Stock (64) ---------- ------- ---------- ------------ Balances, October 3, 1997 $ 1 - 32,143 (15,738) ========== ======= ========== ============
Total Stockholders' Stockholder Business Equity Loans Equity (Deficit) ---------- -------- ------------- PREDECESSOR: Balances, September 30, 1994 - 119,854 119,854 Net repayments to Varian (4,475) (4,475) Net earnings 6,212 6,212 ---------- -------- ------------- Balances, August 11, 1995 - 121,591 121,591 SUCCESSOR: Elimination of business equity (121,591) (121,591) Issuance of stock in connection with the Acquisition: 10,500 shares of common stock of Holding issued in connection with the issuance of the Senior Redeemable Preferred Stock 1,050 Issuance of 100,000 shares of Junior Preferred Stock Less issue costs 9,346 Issuance of 1 share of Common stock to Holding Less issue costs Less stockholder loans (1,000) 17,693 Amortization of discount and issue costs on Senior Redeemable Preferred Stock (29) Net loss (29,598) ---------- -------- ------------- Balances, September 29, 1995 (1,000) - (1,538) Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) Payment of dividends on Senior Redeemable Preferred Stock (2,149) Payment of dividends on Junior Preferred Stock - Net earnings 8,343 Repayment of stockholder loans 25 25 Interest accrued on stockholder loans (67) (67) ---------- -------- ------------- Balances, September 27, 1996 (1,042) - 4,400 Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) Payment of dividends on Senior Redeemable Preferred Stock (2,530) Payment of dividends on Junior Preferred Stock - Net earnings 13,772 Interest accrued on stockholder loans (58) (58) Purchase of Treasury Stock (64) ---------- -------- ------------- Balances, October 3, 1997 (1,100) - 15,306 ========== ======== =============
See accompanying notes to the consolidated financial statements. F-6 50 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Successor Predecessor ------------------------------------------ ----------- 53-Week 52-Week 7-Week 45-Week period ended period ended period ended period ended October 3, September 27, September 29, August 11, 1997 1996 1995 1995 -------- -------- -------- -------- OPERATING ACTIVITIES Net cash provided by operating activities $ 5,311 11,290 14,823 4,083 -------- -------- -------- -------- INVESTING ACTIVITIES Purchase of businesses, net of cash acquired - - (196,200) - Proceeds from sale of property, plant and equipment 2,545 - - - Purchase of property, plant, and equipment (9,183) (12,472) (880) (6,063) (Increase) decrease in other non current assets 9 (114) (27) 742 -------- -------- -------- -------- Net cash used in investing activities (6,629) (12,586) (197,107) (5,321) -------- -------- -------- -------- FINANCING ACTIVITIES Repayment of intercompany funding to Varian - - - (4,475) Net (Repayments)/Proceeds from revolving credit facility 5,800 (2,600) 19,600 - Net (Repayments)/Proceeds from the issuance of debt: Senior term loans (3,950) (2,400) 42,000 - Senior subordinated notes - - 100,000 - Debt issue costs (194) (243) (11,570) - (Repayments)/Proceeds from the sale of stock: Senior Redeemable Preferred Stock - - 15,000 - Junior Preferred Stock - - 10,000 - Common stock - - 20,000 - Common and preferred stock issue costs - - (3,479) - Treasury stock (64) - - - Stockholder loans - 25 (1,000) - -------- -------- -------- -------- Net cash provided by (used in) financing activities 1,592 (5,218) 190,551 (4,475) -------- -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 274 (6,514) 8,267 (5,713) Cash and cash equivalents at beginning of period 1,753 8,267 - 5,607 -------- -------- -------- -------- Cash and cash equivalents at end of period $ 2,027 1,753 8,267 (106) ======== ======== ======== ========
See accompanying notes to the consolidated financial statements. F-7 51 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (in thousands)
Successor Predecessor --------------------------------------------- ------------ 53-Week 52-Week 7-Week 45-Week period ended period ended period ended period ended October 3, September 27, September 29, August 11, 1997 1996 1995 1995 -------- -------- -------- -------- DETAIL OF NET CASH PROVIDED BY OPERATING ACTIVITIES Net earnings (loss) $ 13,772 8,343 (29,598) 6,212 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Write-off of acquired in-process research and development - - 31,363 - Depreciation 8,572 6,670 803 10,999 Amortization of deferred debt issue costs 1,952 1,962 199 - Amortization of goodwill 1,049 1,061 138 166 Deferred taxes (6,363) (9,752) (2,926) 6,726 Interest accrued on stockholder loans (58) (67) - - (Gain)/Loss on the disposition of assets (471) - - - Changes in operating assets and liabilities: Accounts receivable (1,946) (5,637) (7,977) 3,051 Inventories (4,279) (1,706) 4,581 (6,109) Other current assets 913 433 7 (1,592) Accounts payable - trade (108) (5,947) 9,843 462 Accrued expenses (7,283) 2,585 9,024 (13,716) Product warranty (116) (363) 95 (40) Income tax payable 1,415 10,560 - - Advance payments from customers (1,738) 3,148 (729) (2,076) -------- -------- -------- -------- Net cash provided by operating activities $ 5,311 11,290 14,823 4,083 ======== ======== ======== ========
See accompanying notes to the consolidated financial statements. F-8 52 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BACKGROUND AND THE ACQUISITION Prior to August 11, 1995, Communication and Power Industries Inc.'s ("CPI" or "Successor") operations were the principal operations of the Electron Devices Business (the "Predecessor"), a segment of Varian Associates, Inc. ("Varian"), excluding the Tempe, Arizona operations. The Predecessor consisted of substantially all of the assets of Varian and its affiliates that were used primarily in developing, manufacturing and distributing microwave and power grid vacuum electronic devices, microwave amplifiers, modulators and various other power supply equipment and devices. On August 11, 1995, CPI acquired these assets (the "Acquisition") from Varian and was then merged with a wholly owned subsidiary of Communications & Power Industries Holding Corporation ("Holding"), a corporation newly formed by a group of investors, including management of Holding and CPI. References to CPI or its business for periods prior to August 11, 1995 shall be references to the Predecessor and its business, unless the context otherwise requires. A summary of the assets acquired and liabilities assumed at their fair values is as follows (in thousands): ASSETS ACQUIRED: Accounts receivable $ 36,766 Inventories 49,346 Other current assets 2,573 Property, plant and equipment 73,994 Goodwill 26,235 Other assets 27 -------- Total assets acquired 188,941 -------- LIABILITIES ASSUMED: Accounts payable - trade 6,631 Accrued expenses 10,762 Advance payments from customers 2,116 Product warranty 4,595 -------- Total liabilities assumed 24,104 -------- Purchase price allocated to in-process research and development 31,363 ======== Purchase price paid to Varian $196,200 ========
The Acquisition has been accounted for as a purchase, and, accordingly, the purchase price was allocated based upon the fair values of assets acquired and liabilities assumed as of August 11, 1995. In connection with the Acquisition, CPI entered into two senior term loans in the aggregate amount of $42.0 million (the "Senior Term Loans") and a revolving credit facility in a principal amount of up to $35.0 million (including a $5.0 million sub-facility for letters of credit, subsequently increased to $7.5 million) pursuant to the Credit Agreement with Bankers Trust Company, as agent, and the lenders thereunder (as subsequently amended, the "Senior Credit Agreement"), of which F-9 53 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED approximately $23.0 million was drawn in connection with the consummation of the Acquisition. Additional financing for the Acquisition was obtained through the issuance of 12% Senior Subordinated Notes due 2005 (the "Senior Subordinated Notes") of CPI in the aggregate principal amount of $100.0 million, the issuance of Series A 14% Senior Redeemable Exchangeable Cumulative Preferred Stock due 2007 (the "Senior Redeemable Preferred Stock") of CPI and the issuance of Series A 14% Junior Cumulative Preferred Stock (the "Junior Preferred Stock") of CPI and common stock of Holding. A summary of the Acquisition financing was as follows (in thousands): Bank borrowings $ 9,200 Senior term loans 42,000 Senior subordinated debt 100,000 Senior Redeemable Preferred Stock 15,000 Junior Preferred Stock 10,000 Holding common stock 20,000 -------- $196,200 ========
The accompanying consolidated financial statements include the results of the Predecessor for the 45-week period ended August 11, 1995. The accompanying consolidated financial statements for the 53-week period ended October 3, 1997, the 52-week period ended September 27, 1996 and the 7-week period ended September 29, 1995 include the results of CPI and its direct and indirect wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, significant intercompany balances and transactions within the Predecessor have been eliminated. In connection with the Acquisition, Varian retained certain assets and liabilities of the Predecessor. The retention of these assets and liabilities reduced the Predecessor's cash flow from operating activities during the 45-week period ending August 11, 1995. This was partially offset by an increase in CPI's cash flow from operating activities during the 7-week period ended September 29, 1995. The Predecessor's and Successor's fiscal years are the 52- or 53-week periods which end on the Friday nearest September 30. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents Currency on hand, demand deposits, and all highly liquid investments with an original maturity of three months or less are considered to be cash and cash equivalents. F-10 54 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Goodwill The excess of the purchase price over the fair value of the net assets acquired is classified as goodwill and is being amortized over its estimated useful life of 25 years on a straight-line basis. CPI periodically evaluates the ongoing profitability of the business to determine if impairment in the value of this asset has occurred. Impairment of Long-Lived Assets and Assets to be Disposed Of CPI adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, on January 1, 1996. SFAS No. 121 requires long-lived assets to be evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell. The adoption of SFAS No. 121 did not have a material effect on CPI'S results of operations Warranty CPI's products are generally warranted for a variety of periods, typically one to five years or a predetermined product usage life. Estimated future costs of repair, replacement or customer accommodations are reflected in the accompanying consolidated financial statements. Environmental Liabilities Liabilities for environmental expenditures are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. There were no environmental liabilities established by CPI during Fiscal 1997 or Fiscal 1996. Environmental costs of the Predecessor were accumulated at the corporate level within Varian and charged to the Predecessor through corporate allocations. In connection with the Acquisition, Varian retained the environmental liabilities of the Predecessor existing as of the closing date at the Predecessor's facilities. Deferred Debt Issue Costs Costs incurred related to the issuance of CPI's long-term debt and other credit facilities are capitalized and amortized over the estimated time the obligations are expected to be outstanding using the effective interest method. The amortization period used for the deferred costs associated with the revolving credit facility, the Senior Term Loans, and the Senior Subordinated Notes is 3 years, 7 years and 10 years, respectively. F-11 55 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Senior Redeemable Preferred Stock CPI's Senior Redeemable Preferred Stock was issued in units with an aggregate of 10,500 shares of common stock of Holding. The fair value of the shares of Holding's common stock issued, and the issue costs associated with the issuance of the Senior Redeemable Preferred Stock, have been reflected as a reduction of the Senior Redeemable Preferred Stock issued and is being amortized via a charge to accumulated deficit over the period until mandatory redemption, 12 years, using the effective interest method. Income Taxes Income taxes are accounted for under the asset and liability method. CPI's deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis and the financial reporting basis of assets and liabilities. The Predecessor's operations were included in the consolidated income tax returns filed by Varian. However, for purposes of the financial statements of the Predecessor, the provision for income taxes was prepared using the effective tax rate of Varian's consolidated financial statements on a separate entity basis. The provision for income taxes of CPI and the Predecessor is based upon the differences between financial reporting and tax basis of assets and liabilities measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. The computed amount of the current provision for income taxes of the Predecessor was recorded to business equity. F-12 56 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Supplemental Cash Flow Information For Fiscal 1997, cash was paid for interest and taxes in the amount of $17,087,000 and $1,662,000, respectively. For Fiscal 1996, cash was paid for interest and taxes in the amount of $16,932,000 and $524,000, respectively. There were no interest payments or taxes paid during the 7-week period ended September 29, 1995, nor were there any cash payments made for interest or taxes by the Predecessor (all cash payments relating to such matters were made by Varian) during the period presented. Non-cash financing activities included the payment of preferred dividends by CPI on its Senior Redeemable Preferred Stock and its Junior Preferred Stock through the issuance of 25,297 and 21,482 additional shares of its Senior Redeemable Preferred Stock and 16,865 and 14,321 additional shares of its Junior Preferred Stock during Fiscal 1997 and Fiscal 1996, respectively. No dividends were issued during the 7-week period ended September 29, 1995. Amortization of discount and issue costs on the Senior Redeemable Preferred Stock was $214,000, $214,000 and $29,000 during Fiscal 1997, Fiscal 1996 and the 7-week period ended September 29, 1995, respectively. During Fiscal 1997, equipment of $1,584,000 was acquired under a capital lease. Revenue Recognition Sales and related cost of sales are recognized primarily upon shipment of products. Sales and related cost of sales under long-term contracts to commercial customers and the U. S. government are recognized primarily as units are delivered. The estimated sales values of performance under certain U. S. government fixed-price and fixed-price incentive contracts in process are recognized under the percentage of completion method of accounting where the sales value is determined on the basis of costs incurred. Provisions for anticipated losses are made in the period in which they first become determinable. Sales under cost-reimbursement contracts, primarily research and development contracts, are recorded as costs are incurred and include estimated earned fees in the proportion that costs incurred to date bear to total estimated costs. The fees under certain U.S. government contracts may be increased or decreased in accordance with cost or performance incentive provisions which measure actual performance against established targets or other criteria. Such incentive fee awards or penalties are included in revenue at the time the amounts can be reasonably determined. Business Risks and Credit Concentrations CPI develops, manufactures and distributes components for systems used to generate, amplify and transmit high-power/high frequency microwave and radio frequency signals. End use applications of these systems include the transmission and amplification of voice, data and video signals for broadcasting and telecommunications, transmission of radar signals for navigation and location, transmission of false signals for electronic countermeasures and various other uses in the industrial, medical and scientific markets. F-13 57 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Defense-related applications such as certain radar, electronic countermeasures and military communications constitute a significant portion of CPI's sales. The U.S. defense budget has been declining since the mid-1980s. Although management believes that CPI has successfully responded to shrinking defense budgets by refocusing its operations on commercial and other non-defense applications, a significant further decline in U.S. or global military spending could have a material adverse effect on CPI's sales and earnings. Additionally, companies engaged in supplying defense-related equipment and services to government agencies are subject to certain business risks, including the ability of the U.S. government to suspend them from receiving new contracts or to terminate existing contracts for the U.S. government's convenience or for the default of the contractor. In addition, the U.S. government could terminate contracts due to insufficient or terminated congressional appropriations. CPI's contracts with foreign governmental defense agencies are subject to similar limitations and risks as those encountered with U.S. government contracts. CPI believes that both its customer and industry base is well diversified, however, changes in the marketplace of any of the above named industries may significantly affect management's estimates and CPI's performance. CPI's customers are located throughout the United States, Canada, Europe and Asia. No single customer accounted for more than 5% of CPI's sales in either of the Successor or Predecessor periods and no accounts receivable balance from any customer exceeded 5% of net accounts receivable. Generally, CPI requires no collateral from its customers and CPI estimates an allowance for doubtful accounts based on the credit worthiness of its customers as well as general economic conditions. Consequently, an adverse change in those factors could affect CPI's estimate of its bad debts. Historical credit losses have been within management's expectations. Foreign Currency Translation The functional currency of CPI's foreign subsidiaries is the U.S. dollar. Accordingly, assets and liabilities of subsidiaries outside of the United States representing cash, inventory and accounts receivable or payable are translated into U.S. dollars at the exchange rates in effect at year-end. Other accounts including property, plant and equipment are translated at historical exchange rates, which for assets acquired in connection with the Acquisition represent the rate as of August 11, 1995. Revenue and expense items are translated at effective rates of exchange prevailing during each year, except that depreciation is expensed at historical exchange rates. CPI enters into forward exchange contracts to hedge sales transactions and firm commitments denominated in foreign currencies. Gains and losses on the forward contracts are recognized based on changes in exchange rates, as are offsetting foreign exchange gains and losses on the underlying transactions. CPI does not engage in foreign currency speculation. The aggregate transaction and exchange gains and losses was $463,000 loss and $296,000 loss for Fiscal 1997 and Fiscal 1996, respectively. For the 7-week period ending September 29, 1995, the aggregate transaction and exchange gains and losses were not significant. For the 45-week period ending August 11, 1995, the aggregate exchange gain or loss, net of the gain or loss from the foreign F-14 58 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED exchange contracts, was accumulated at the corporate level within Varian and allocated to the Predecessor based on its estimated proportionate share of international sales, and is included in the corporate allocations described later in these notes. Fair Value of Financial Instruments Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The carrying value of CPI's cash and cash equivalents, accounts receivable, accounts payable and debt obligations approximate their fair values which, for debt, is based upon current rates available to CPI for debt of the same maturities. Based on recent trading activity, CPI's Senior Subordinated Notes have been trading at a premium, or approximately 111%, as of December 1997. Use of 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 the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Recent Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in the financial statements. It requires classification of other comprehensive income, as defined by the standard, by their nature (e.g., unrealized gains or losses on securities) in a financial statement, but does not require a specific format for that statement. The accumulated balance of other comprehensive income is to be displayed separately from retained earnings and additional paid-in-capital in the equity section of the balance sheet. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997 and reclassification of financial statements for earlier periods provided for comparative purposes is required. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997. CPI plans to adopt SFAS No. 130 and SFAS No. 131 in 1998 and does not expect that the adoption of these pronouncements will have a material effect on the Company's consolidated financial statements except that there may be significant modifications in segment disclosures. F-15 59 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED ACCOUNTS RECEIVABLE Accounts receivable are stated net of allowances for doubtful accounts of $0.28 million as of October 3, 1997 and $0.20 million as of September 27, 1996. INVENTORIES Inventories are stated at the lower of average cost or market (net realizable value). The main components of inventories are as follows:
Fiscal Year (Dollars in thousands) 1997 1996 ------- ------- Raw materials and parts $36,814 33,648 Work in process 12,274 9,277 Finished goods 1,662 3,546 ------- ------ Total inventories $50,750 46,471 ======= =======
PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment acquired by CPI at the date of the Acquisition is carried at fair value as of the date of acquisition. Property, plant and equipment added since the Acquisition is carried at historical cost. Major improvements are capitalized, while maintenance and repairs are expensed currently. Plant and equipment are depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized using the straight-line method over their estimated useful lives, or the remaining term of the lease, whichever is shorter. F-16 60 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Estimated useful lives of property, plant, and equipment are: Land leaseholds Life of the lease Buildings 40 years Machinery and equipment 3 to 7 years The main components of property, plant, and equipment are as follows:
Fiscal Year ----------------------- (Dollars in thousands) 1997 1996 -------- -------- Land and land leaseholds $ 36,284 36,548 Buildings 17,989 13,682 Machinery and equipment 38,121 31,470 Leased equipment 1,584 -- Construction in progress 1,736 5,581 -------- -------- Subtotal 95,714 87,281 Less accumulated depreciation and amortization (15,720) (7,408) -------- -------- Net property, plant, and equipment $ 79,994 79,873 ======== ========
Accumulated amortization of equipment under capital lease arrangements was $33,000 for Fiscal 1997. ACCRUED EXPENSES Accrued expenses are comprised of the following:
Fiscal Year -------------------- (Dollars in thousands) 1997 1996 ------- ------- Taxes $ 586 823 Payroll and employee benefits 9,939 13,436 Accrued exit costs -- 775 Accrued interest 2,483 2,392 Other 2,080 4,945 ------- ------- Total accrued expenses $15,088 22,371 ======= =======
COSTS TO EXIT AN ACTIVITY OF THE PREDECESSOR Prior to consummation of the Acquisition, management of the Predecessor had begun to formulate plans to exit certain activities of the Predecessor, which were finalized shortly after the Acquisition. These plans included two principal costs: (a) the costs associated with the contractually required closing and consolidation of CPI's Salt Lake City, Utah, operation into CPI's San Carlos, California, facility completed during the F-17 61 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED first half of Fiscal 1997, and (b) the costs associated with disposing of certain excess plant capacity, which includes the consolidation, completed during the first quarter of Fiscal 1997, of one of its leased manufacturing facilities into its Palo Alto, California, facility. In connection with the Acquisition, CPI accrued $1,259,000. In Fiscal 1996 and 1997, CPI had expended approximately $500,000 and $800,000, respectively, related to closing, consolidation and relocation costs associated with CPI's established exit plans. SENIOR CREDIT AGREEMENT The Senior Credit Agreement provides for two term loans in the aggregate amount of $42.0 million, comprised of a $25.0 million "Term Loan A" tranche and a $17.0 million "Term Loan B" tranche, and a $35.0 million revolving credit facility which includes a sub-facility for letters of credit. This sub-facility was increased from $5.0 million to $7.5 million effective June 27, 1997. Availability of advances under the Revolving Credit Facility is subject to a borrowing base test. CPI's obligations under the Senior Credit Agreement are secured by substantially all of its assets (including the issued and outstanding capital stock of its direct and indirect subsidiaries) and are guaranteed by Holding and all of CPI's subsidiaries. As of October 3, 1997, CPI had $6.4 million available under the Revolving Credit Facility of which $1.7 million was available for issuance of letters of credit. Borrowings under the Revolving Credit Facility and Term Loan A bear interest at a rate equal to the Eurodollar Rate (approximately 5.76% as of October 3, 1997) plus 2.5% per annum or the Base Rate (8.50% as of October 3, 1997) plus 1.0% per annum and borrowings under Term Loan B bear interest at a rate equal to the Eurodollar Rate plus 3.0% per annum or Base Rate plus 1.5% per annum, in each case as selected by CPI. Applicable interest rates on Term Loan A and the Revolving Credit Facility will be reduced after the first anniversary of the consummation of the Acquisition by up to 0.5% per annum if CPI meets and continues to meet certain financial tests. In addition to customary fronting and other fees, CPI will pay a fee equal to 1.5% per annum on undrawn amounts of letters of credit and a commitment fee of 0.5% per annum on unused facilities under the Revolving Credit Facility. The Senior Credit Agreement also provides for a prepayment premium in the event that it is voluntarily prepaid within two years of the establishment of the Senior Credit Agreement unless such prepayment is made with funds raised through an initial public offering of Holding's stock. The Term Loans are subject to quarterly payments in the aggregate annual amounts as follows (in thousands):
Term Term Fiscal Year Loan A Loan B - ------------ ------- ------- 1998 $ 5,500 200 1999 6,000 200 2000 7,500 200 2001 - 6,050 2002 - 10,000 ------- ------- $19,000 16,650 ======= =======
F-18 62 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED As of October 3, 1997, CPI had made payments of $6,000,000 against Term Loan A and $350,000 against Term Loan B, of which, $3,750,000 and $200,000 were paid in Fiscal 1997 against Term Loan A and Term Loan B, respectively. The Revolving Credit Facility matures on August 11, 2000. CPI is required to make prepayments on the Senior Facility with 75% of Excess Cash Flow (as defined in the Senior Credit Agreement), 75% of the net proceeds of certain stock issuances and 100% of the net proceeds from certain asset sales. Such prepayments will be applied to remaining principal installments of the Term Loans allocated on a pro rata basis and following repayment of the Term Loans, to reduce permanently the Revolving Credit Facility. In addition, CPI is subject to certain affirmative and negative covenants customarily contained in agreements of this type, including, without limitation, covenants that restrict, subject to specified exceptions: (i) incurrence of additional indebtedness and other obligations; (ii) mergers or consolidations; (iii) asset sales; (iv) changes of control and corporate structure; (v) granting or incurrence of liens to secure any other indebtedness (including the Notes or the notes for which the Senior Preferred Stock is exchangeable (the "Exchange Notes")); (vi) prepayment or modification of the terms of other indebtedness (including the Notes and the Exchange Notes); (vii) engaging in transactions with affiliates; (viii) declaration or payment of dividends or distributions on CPI's capital stock; (ix) capital expenditures; and (x) other acquisition and investment activities. In addition, the Senior Credit Agreement requires that CPI, on a consolidated basis, maintain certain specified financial covenants, including a minimum fixed charge coverage ratio, minimum net worth and minimum EBITDA. As of October 3, 1997, CPI was in compliance with all covenants except with respect to a certain asset sale, for which a waiver to apply the net proceeds to the Revolving Credit Facility rather than a pro rata share to the Term Loans was obtained. SENIOR SUBORDINATED NOTES The $100 million principal amount of Senior Subordinated Notes mature in 2005 and bear interest at 12% per annum, payable semiannually. The payment of principal of, premium and interest on, and other obligations evidenced by the Notes is subordinated in right of payment, as set forth in the indenture governing the Senior Subordinated Notes (the "Indenture"), to the prior payment in full of all senior indebtedness (as defined), including indebtedness under the Senior Credit Agreement, whether outstanding on the date of the Indenture or thereafter incurred. CPI's payment obligations under the Notes are jointly and severally guaranteed by Holding and CPI's subsidiaries. F-19 63 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The Notes are not redeemable at CPI's option prior to August 1, 2000. Thereafter, the Notes are subject to redemption at the option of CPI, in whole or in part, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, thereon to the applicable redemption date, if redeemed during the 12-month period beginning on August 1 of the years indicated below:
Year Percentage ---- ---------- 2000 106.0% 2001 104.5% 2002 103.0% 2003 101.5% 2004 and thereafter 100.0%
Notwithstanding the foregoing, prior to August 1, 1998, CPI may redeem up to 35% of the aggregate principal amount of the Notes originally outstanding at a redemption price of 112% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the redemption date, with the net proceeds of one or more public offerings of common stock of Holding. Upon the occurrence of a change of control, each holder of Notes will have the right to require CPI to offer to repurchase all or any part of such holder's Notes. The Senior Credit Agreement currently prohibits CPI from making such an offer. In addition, the Indenture covering the Notes provides for various restrictions, including restrictions on mergers or the sales of CPI's assets, dividend payments, purchase, redemption, acquisition or retirement of equity interests of CPI or its affiliates, principal payment on any indebtedness of CPI or guarantors that is subordinated to the Notes, the incurrence of certain indebtedness, or the making of any restricted investment, as defined. SENIOR REDEEMABLE PREFERRED STOCK CPI is authorized to issue up to 325,000 shares of nonvoting Series B 14% Senior Redeemable Exchangeable Cumulative Preferred Stock due 2007 (the "Senior Preferred Stock"), including shares of Senior Preferred Stock which may be used to pay dividends on the Senior Preferred Stock if CPI so elects. Dividends on the Senior Preferred Stock accrue at the rate of 14% per annum and are payable quarterly, commencing on November 1, 1995. On or before August 1, 2000, CPI may, at its option and subject to debt covenant restrictions, pay dividends in cash or in shares of Senior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. After August 1, 2000, dividends may be paid only in cash. During the year ended October 3, 1997, CPI paid preferred dividends through the issuance of 25,297 shares of its Senior Redeemable Preferred Stock. The Senior Preferred Stock is not redeemable prior to August 1, 2000. Thereafter, the Senior Preferred Stock will be redeemable at the option of CPI, in whole or in part from time to time, initially at 107% of the liquidation preference thereof and at decreasing prices thereafter to and including August 1, 2004 and thereafter at 100% of the liquidation preference thereof, together in F-20 64 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED each case with accumulated and unpaid dividends thereon. In addition, on or prior to August 1, 1998, CPI may, on one or more occasions, redeem any or all of the shares of Senior Preferred Stock then outstanding at a redemption price equal to 114% of the liquidation preference thereof plus accumulated and unpaid dividends thereon, with the proceeds of one or more public offerings of Holding's common stock. The Senior Preferred Stock is subject to mandatory redemption in whole on August 1, 2007 at a price equal to the liquidation preference thereof, plus accumulated and unpaid dividends. In the event of a change of control, CPI will be required to make an offer to each holder of shares of Senior Preferred Stock to repurchase all or a portion of such holder's Senior Preferred Stock at a price equal to 101% of the liquidation preference thereof, plus accumulated and unpaid dividends. The Senior Credit Agreement currently prohibits and the Indenture currently restricts CPI from making such an offer. In addition, CPI will be required to use the proceeds from certain asset sales to permanently reduce senior indebtedness of CPI, to invest in certain related assets or businesses or to offer to repurchase Senior Preferred Stock. Any such repurchases shall be effected at an offer price equal to 100% of the liquidation preference of the shares of Senior Preferred Stock purchased, plus accumulated and unpaid dividends. The Certificate of Designation covering the Senior Preferred Stock contains certain provisions that, among other things, limit the ability of CPI to incur indebtedness, pay dividends, incur liens, make loans or investments, transact with affiliates and engage in mergers and consolidations. CPI may, at its option, on any dividend payment date, exchange all, but not less than all, of the outstanding shares of Senior Preferred Stock into 14% Junior Subordinated Notes due 2007 (the "Exchange Notes"), so long as such exchange is permitted by the Senior Credit Agreement and the Indenture, in an aggregate principal amount not to exceed the aggregate liquidation preference, plus accumulated and unpaid dividends on the date of exchange. The Exchange Notes will be general unsecured obligations of CPI and will be subordinated to all existing and future senior indebtedness of CPI, including indebtedness under the Senior Credit Agreement and the Indenture. Except for terms relating to these subordination provisions, payment of interest on a quarterly basis, the option to issue additional Exchange Notes on or prior to August 1, 2000 in lieu of paying cash interest, optional redemption and the date on which repayment is mandatory (all of which terms would be similar to the terms of Senior Preferred Stock), the terms of the Exchange Notes will be generally identical to the Notes. JUNIOR PREFERRED STOCK CPI is authorized to issue up to 525,000 shares of nonvoting Series A 14% Junior Cumulative Preferred Stock (the "Junior Preferred Stock") including shares of Junior Preferred Stock which may be used to pay dividends on the Junior Preferred Stock if CPI elects to pay dividends in shares of Junior Preferred Stock. The aggregate liquidation preference of the Junior Preferred Stock issued in connection with the consummation of the Acquisition was $10.0 million. Dividends on the Junior Preferred Stock accrue at the rate of 14% per annum and are payable quarterly, commencing on November 1, 1995. On or before the redemption of the Senior Preferred Stock or the exchange of Senior Preferred Stock into Exchange Notes, CPI is required to pay dividends on the Junior F-21 65 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Preferred Stock in additional fully paid and non-assessable shares of Junior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. After such redemption or exchange, CPI may, at its option and subject to debt and senior preferred stock covenant restrictions, pay dividends on the Junior Preferred Stock in cash or in additional fully paid and non-assessable shares of Junior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. During the year ended October 3, 1997, CPI paid preferred dividends through the issuance of 16,865 shares of its Junior Preferred Stock. The Junior Preferred Stock ranks junior in right of payment to all liabilities of CPI and to any preferred stock, including Senior Preferred Stock, that is senior in right of payment to the Junior Preferred Stock and ranks senior in right of payment to any additional preferred stock which does not expressly provide that it ranks senior to or on a parity with the Junior Preferred Stock and CPI's common stock. LEASE COMMITMENTS At October 3, 1997, CPI was committed to minimum rentals under noncancellable operating lease agreements primarily for land and facility space. CPI also leases certain computer equipment under capital leases that expire in 2002. Payments under these capital leases are deferred until 1998, with payments following over the next 48 months. As collateral for these capital leases, CPI has issued a $1.0M letter of credit in favor of the lender. A summary of future minimum lease payments (in thousands) follows:
Capital Operating Fiscal Year Leases Leases - ----------- --------- --------- 1998 $ 87 $ 1,559 1999 520 871 2000 520 536 2001 520 167 2002 434 78 Thereafter -- 5,356 --------- --------- Total future minimum lease payments 2,081 $ 8,567 ========= Less amount representing interest 497 --------- Present value of future minimum lease payments 1,584 Less current portion of obligations Under capital leases -- --------- Obligations under capital leases, less Current portion $ 1,584 =========
Real estate taxes, insurance, and maintenance are also obligations of CPI. Rental expense under noncancellable operating leases amounted to $734,000, $777,000, $257,000 and $1,242,000 for F-22 66 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Fiscal 1997, for Fiscal 1996, for the 7-week period ended September 29, 1995 and for the Predecessor 45-week period ended August 11, 1995, respectively. CONTINGENCIES The amount of outstanding letters of credit provided for under CPI's Senior Credit Agreement was approximately $5.8 million as of October 3, 1997. These outstanding obligations are comprised of the following: $3.4 million to one foreign customer related to an advance payment guarantee, $1.0 million to a lender related to a capital lease arrangement and $1.4 million to various other beneficiaries related primarily to insurance needs and performance bond guarantees. Varian is currently a defendant in certain legal actions relating to the Predecessor and could incur an uninsured liability in one or more of them. The agreement for the sale of the Predecessor provides for Varian's retention of liability arising out of the above referenced litigation. Accordingly, in the opinion of management, the outcome of that litigation will not have a material adverse effect on the financial condition, results of operations or cash flows of CPI. Varian has also been named by the Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at sites to which Varian (including in some cases the Predecessor) is alleged to have shipped manufacturing waste for disposal. Varian is also involved in various stages of environmental investigation and/or remediation under the direction of, or in consultation with, local and/or state agencies at certain facilities of CPI. Uncertainty as to (a) the extent to which Varian caused, if at all, the conditions being investigated; (b) the extent of environmental contamination and risks; (c) the applicability of changing and complex environmental laws; (d) the number and financial viability of other potentially responsible parties; (e) the stage of the investigation and/or remediation; (f) the unpredictability of investigation and/or remediation costs (including as to when they will be incurred); (g) applicable clean-up standards; (h) the remediation (if any) which will ultimately be required; and (i) available technology make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. The agreement for the sale of the Predecessor provides for Varian's retention of liability arising out of investigative and remedial action and environmental claims for conditions existing as of the closing date at the above-referenced facilities. Accordingly, based on information currently available, management believes that the costs of these matters are not likely to have a material adverse effect on the financial condition, results of operations and cash flows of CPI. From time to time, CPI may be subject to other claims that arise in the ordinary course of business. In the opinion of management, all such matters involve amounts which would not have a material adverse effect on CPI's consolidated financial position if unfavorably resolved. There are currently no such matters. F-23 67 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED INDUSTRY SEGMENTS AND SALES CPI operates in a single business segment. CPI covers and is engaged in the development, manufacture and sale of a broad line of electron devices used in broadcasting, communications, and other commercial and military applications. CPI's North American operations (in the United States and Canada) are responsible for the design and development of all products as well as manufacturing and shipping to meet worldwide customer commitments. CPI's operations outside of North America consist of sales offices in certain foreign countries. Accordingly, for financial statement purposes, it is not meaningful to segregate operating profits for the foreign operations. Identifiable assets outside of North America are less than 10% of total consolidated assets. Information about CPI's sales to geographical regions are presented in the table below.
(Dollars in thousands) Net Sales --------- 53-WEEK PERIOD ENDING OCTOBER 3, 1997: United States & Canada $ 173,593 Europe & Territories (1) 57,368 Other 22,478 --------- Total Sales $ 253,439 ========= 52-WEEK PERIOD ENDING SEPTEMBER 27, 1996: United States & Canada $ 171,656 Europe & Territories (1) 54,733 Other 31,060 --------- Total Sales $ 257,449 ========= 7-WEEK PERIOD ENDING SEPTEMBER 29, 1995: United States & Canada $ 26,020 Europe & Territories (1) 7,388 Other 2,990 --------- Total Sales $ 36,398 ========= 45-WEEK PERIOD ENDING AUGUST 11, 1995: United States & Canada $ 151,078 Europe & Territories (1) 45,361 Other 18,238 --------- Total Sales $ 214,677 =========
(1) Includes primarily Europe, Russia, Middle East and India. Export sales to unaffiliated customers located outside of North America, mainly in South America and Asia, were $24,167,000, $27,602,000, $3,204,000 and $16,300,000 for Fiscal 1997, Fiscal 1996, the 7-week period ended September 29, 1995 and the 45-week period ended August 11, 1995, respectively. F-24 68 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The following table summarizes sales under prime contracts from the U.S. government for the periods presented in the accompanying consolidated financial statements:
Sales under prime contracts from the (Dollars in thousands) U.S. Government ------------------ SUCCESSOR: 53-week period ended October 3, 1997 $ 34,006 52-week period ended September 27, 1996 41,927 7-week period ended September 29, 1995 5,915 PREDECESSOR: 45-week period ended August 11, 1995 34,700
RESEARCH AND DEVELOPMENT CPI-sponsored research and development costs related to both present and future products are expensed currently. Customer-sponsored research and developments costs are charged to cost of sales to match revenue received. Total expenditures incurred by CPI on research and development are summarized as follows:
CPI Customer Total (Dollars in thousands) Sponsored Sponsored Incurred --------- --------- --------- SUCCESSOR: 53-week period ended October 3, 1997 $ 7,681 5,897 13,578 52-week period ended September 27,1996 8,303 7,250 15,558 7-week period ended September 29,1995 1,198 1,353 2,551 PREDECESSOR: 45-week period ended August 11, 1995 7,429 8,771 16,200
In connection with the Acquisition, a portion of the purchase price was allocated to the value of in-process research and development projects. These projects involved the research and development of new products and significant extensions and improvements to existing products which had not demonstrated their technological feasibility as of the acquisition date and did not have an alternative future use. Accordingly, immediately upon consummation of the acquisition, the value associated with these projects were charged to expense. F-25 69 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED PROVISION FOR INCOME TAXES Earnings (loss) before income taxes for domestic and non-U.S. operations is as follows:
Successor Predecessor -------------------------------------------- ------------ 53-week 52-week 7-week 45-week period ended period ended period ended period ended October 3, September 27, September 29, August 11, (Dollars in thousands) 1997 1996 1995 1995 ------------ ------------ ------------ ------------ Domestic $ 7,381 7,750 (32,713) 6,867 Non-U.S 3,391 2,661 406 2,994 ------------ ------------ ------------ ------------ Total $ 10,772 10,411 (32,307) 9,861 ============ ============ ============ ============
The provision (benefit) for income taxes is comprised of the following:
Successor Predecessor ---------------------------------------------- ----------- 53-week 52-week 7-week 45-week period ended period ended period ended period ended October 3, September 27, September 29, August 11, (Dollars in thousands) 1997 1996 1995 1995 ------------ ------------ ------------ ------------ Current U.S. federal $ 1,677 9,257 -- 2,934 State 573 1,957 5 545 Non-U.S 1,113 606 212 712 ------------ ------------ ------------ ------------ Total Current 3,363 11,820 217 4,191 ------------ ------------ ------------ ------------ Deferred U.S. federal (5,699) (8,844) (2,926) (531) State (1,098) (1,154) -- -- Non-U.S 434 246 -- (11) ------------ ------------ ------------ ------------ Total Deferred (6,363) (9,752) (2,926) (542) ------------ ------------ ------------ ------------ Provision (benefit) for income taxes$ $ (3,000) 2,068 (2,709) 3,649 ============ ============ ============ ============
F-26 70 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Significant items making up deferred tax assets and liabilities are as follows:
Fiscal Year -------------------------- (Dollars in thousands) 1997 1996 -------- -------- DEFERRED TAX ASSETS: Inventory $ 4,770 3,716 Product Warranty 2,523 1,577 Accrued Vacation 1,999 2,120 Deferred compensation 525 841 Excess Purchase Price 10,426 11,541 Foreign tax credits -- 1,184 Other 2,124 1,033 -------- -------- 22,367 22,012 Less: Valuation allowance -- (8,000) -------- -------- 22,367 14,012 DEFERRED TAX LIABILITIES: Accelerated depreciation (2,645) (1,059) Foreign jurisdictions, net (681) (246) Other -- (29) -------- -------- Net deferred tax asset $ 19,041 12,678 ======== ========
Foreign tax credit carryforward of $1,184,000 in 1996 was utilized during the fiscal year ended in 1997. There are no unused tax carryovers as of the end of fiscal 1997. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Based upon the level of historical taxable income and projections for future taxable income, management now believes it is more likely than not the Company will realize the benefits of such deferred tax assets. Accordingly, the valuation allowance established during the prior years was eliminated during 1997. F-27 71 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The reconciliation between the effective tax rates and the statutory federal income tax rates applicable to the Predecessor and the Successor is shown in the following schedule:
Successor Predecessor ------------------------------------------ ------------ 53-week 52-week 7-week 45-week period ended period ended period ended period ended October 3, September 27, September 29, August 11, 1997 1996 1995 1995 ------------ ------------ ------------ ------------ Statutory federal income tax rate 35.0% 35.0% (35.0%) 35.0% State and local income tax, net of federal tax benefit 6.4% 4.9% (4.7%) 5.0% Rate differential on foreign income tax expense (benefit) and withholding tax 3.0% .2% .2% (.1%) Foreign sales corporation -- (2.8%) -- (1.9%) Losses and credits for which no benefit has been recorded -- -- 31.0% -- Change to the beginning of year valuation allowance (74.3%) (19.2%) Other 2.0% 1.8% .1% (1.0%) ------------ ------------ ------------ ------------ Effective tax rate (27.9%) 19.9% (8.4%) 37.0% ============ ============ ============ ============
RETIREMENT AND PROFIT SHARING PLANS Effective August 12, 1995, CPI adopted a qualified 401(k) plan covering substantially all its domestic and Canadian employees. CPI's major obligation is to contribute an amount based on a percentage of each participant's base pay. CPI also has a Supplemental Retirement Plan covering certain executive officers. Total contributions to these plans by CPI was $2.5 million for Fiscal 1997, $2.6 million for Fiscal 1996 and $247,000 for the 7-week period ended September 29, 1995. Total contributions of the Predecessor for all plans amounted to $4.3 million for the 45-week period ended August 11, 1995. CPI's bonus program provides incentive bonuses to senior management if certain performance goals are achieved and to employees if these goals are exceeded. Such performance goals are measured based upon earnings before interest, taxes, depreciation and amortization, return on sales and asset utilization. F-28 72 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED TRANSACTIONS WITH VARIAN Sales to, and purchases from, Varian lines of business were as follows:
Successor Predecessor ------------------------------------------ ------------- 53-week 52-week 7-week 45-week period ended period ended period ended period ended October 3, September 27, September 29, August 11, (Dollars in thousands) 1997 1996 1995 1995 ------------- ----------- ------------- ------------ Sales to Varian $ 9,234 12,809 1,014 8,800 Purchases from Varian $ 5,742 5,171 315 3,700
Sales and purchases of the Predecessor have been recorded at cost to the originating business unit, so that no profit margin is recognized on transfer. In connection with the Acquisition, CPI entered into various agreements with Varian that provide for various services to be performed by or for Varian or for products to be purchased from or provided to Varian. A summary of the significant agreements are as follows: Transitional Services Agreement. Under the Transitional Services Agreement, Varian provided certain services to CPI in order to facilitate the transition of CPI to a stand-alone operation. In addition, in connection with the separation and creation of independent utilities and systems at CPI's facilities, the Transitional Services Agreement required Varian to pay or reimburse CPI (in some cases), subject to certain limitations. As of October 3, 1997, all obligations under this agreement were fulfilled and any on-going arrangements between the companies have been negotiated at an arm's-length basis. Supply Agreements. CPI and Varian entered into four product supply agreements which contain certain customary provisions pertaining to, among other things, pricing, shipment, delivery, acceptance and payment of certain products. Such terms will vary to a certain degree among the Supply Agreements in order to reflect differences in the types of products subject to the particular Supply Agreement and the arrangements between the parties with respect to such products. These agreements cover periods ranging from one to five years from the date of the Acquisition and, in the case of certain "Key Components," Varian has the right to extend the term of the agreement for an additional five years. The supply agreements generally impose upon CPI and Varian certain minimum purchase quantities and generally restrict CPI's ability to market certain specific products to third parties. Management believes that the terms of these supply agreements are no less favorable to CPI than that which would be obtained from independent third parties for the purchase or supply of similar products. Trademark License Agreement. Generally, under the terms of the Trademark License Agreement, CPI is licensed to use Varian trademarks on its products for a period of three years (although during the third year Varian trademarks may only be used in connection with CPI's own trademarks). After the third year, CPI may not use any Varian trademarks alone, but for an additional seven years may F-29 73 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED identify its products as "formerly made by Varian". At the expiration of the 10-year period, CPI will not be permitted to utilize any Varian trademarks. CPI and Varian have also entered into certain other agreements covering access to certain of CPI's facilities as well as subleased and shared facilities. CORPORATE ALLOCATIONS Operating earnings of the Predecessor include allocations of costs accumulated at the corporate level within Varian. Where it was possible to specifically identify corporate amounts with the activities of the Predecessor, these amounts have been charged or credited directly to the Predecessor without allocation or apportionment. Costs of a wholly corporate nature (i.e. those that are considered to relate purely to the support of Varian's centralized corporate structure) were not allocated. Shared or common costs have been allocated to the Predecessor on the basis which is considered to most fairly and reasonably reflect the utilization of the services provided to, or benefit obtained by, the Predecessor. Typical measures and activity indicators used for apportionment purposes include sales revenues, headcount and facility area measurements. Management believes that the cost allocations are reasonable and reflect the costs incurred to support the operations of the Predecessor. Additionally, management believes that the costs for such services would have been less on a stand-alone basis, although determination as to specific amounts is not practicable. Allocations of corporate expenses included in the consolidated statements of operations for the 45-week period ended August 11, 1995 were $11.2 million. RELATED PARTY TRANSACTIONS Holding and CPI have entered into an agreement to pay $362,000, plus out-of-pocket expenses, annually to an advisor group of Holding's majority shareholder. Certain individuals of the investor's advisor group are members of Holding's and CPI's respective Boards of Directors. In addition, on August 11, 1995, CPI paid this advisor group a fee of $3,330,000 for services rendered in connection with the Acquisition. In connection with Holding's 1995 Management Equity Plan, certain executive officers of CPI and Holding elected to pay a portion of the purchase price for their Management Shares by delivery of a secured promissory note to Holding. The aggregate principle amount of such Management Notes was $975,356 as of October 3, 1997. Of this amount, $800,000 is secured by a pledge of a portion (from 50% to 75%) of the Management Shares issued to each executive officer and is guaranteed by Varian. The balance of $175,356 is secured by a pledge of approximately 91% of the Management Shares issued, but is not guaranteed by Varian. Outstanding principal under each type of Management Note bears interest at an annually adjustable rate equal to the "Applicable Federal Rate" in effect under Internal Revenue Code Section 1274(d) for obligations of a term equal to the then-remaining term of such note. Recourse by Holding under both types of Management Notes is limited to the Management Shares pledged to secure the applicable note. F-30 74 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED PARENT COMPANY DATA Holding has guaranteed CPI's senior debt obligations. Holding has no operations other than its ownership of CPI. The consolidated balance sheets of Holding as of October 3, 1997 and September 27, 1996 are substantially identical to that of CPI and its subsidiaries, other than the presentation of CPI's preferred stock as minority interest and the components of stockholders' equity of Holding and is summarized as follows (in thousands, except per share amounts):
October 3, September 27, ASSETS 1997 1996 ------ --------- --------- Current Assets $ 113,457 107,846 Long-term Assets 123,939 120,296 --------- --------- $ 237,396 228,142 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities $ 72,990 73,270 Long-term debt and deferred taxes 131,534 135,650 --------- --------- 204,524 208,920 Senior Redeemable Preferred Stock of subsidiary 17,566 14,822 Junior Preferred Stock of subsidiary 12,465 10,779 Stockholders' Equity: Common stock ($.01 par value, 400,000 shares authorized, 199,350 and 200,000 shares issued and outstanding as of 1997 and 1996) 2 2 Additional paid-in capital 19,740 19,741 Accumulated deficit (15,801) (25,080) Less stockholder loans (1,100) (1,042) --------- --------- $ 237,396 228,142 ========= =========
Separate financial statements of CPI's direct and indirect subsidiaries, all of which guarantee the Notes, are not included because (i) these subsidiaries are jointly and severally liable and (ii) the separate financial statements and other disclosures concerning these subsidiaries are not deemed by CPI to be material to investors. BUSINESS EQUITY Business equity is comprised of intercompany balances arising in the ordinary course of business between the Predecessor and other Varian entities, together with various adjustments resulting from the carve-out of the Predecessor as presented in these consolidated financial statements. F-31 75 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Communications & Power Industries Holding Corporation: We have audited the accompanying consolidated balance sheets of Communications & Power Industries Holding Corporation and subsidiaries ("Holding" or the "Successor") as of October 3, 1997 and September 27, 1996, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the 53-week period ended October 3, 1997, the 52-week period ended September 27, 1996 and the 7-week period ended September 29, 1995. We have also audited the related consolidated statements of operations, stockholders' equity, and cash flows of Holding's predecessor, the Electron Devices Business of Varian Associates, Inc. (the "Predecessor") for the 45-week period ended August 11, 1995. In connection with our audits of the consolidated financial statements for the periods indicated above, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of Holding's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in the notes to the consolidated financial statements, Holding acquired assets and assumed liabilities on August 11, 1995 in a transaction that was accounted for as a purchase. Accordingly, the consolidated financial statements of the Successor are presented on a different cost basis than the consolidated financial statements of the Predecessor and, therefore, are not comparable. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Communications & Power Industries Holding Corporation and subsidiaries as of October 3, 1997 and September 27, 1996, the results of their operations and their cash flows for the 53-week period ended October 3, 1997, the 52-week period ended September 27, 1996, the 7-week period ended September 29, 1995, and the results of operations and cash flows of the Electron Devices Business of Varian Associates, Inc. for the 45-week period ended August 11, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. s/KPMG PEAT MARWICK, LLP San Jose, California November 17, 1997 -F-32- 76 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
October 3, September 27, ASSETS 1997 1996 ------------ ------------ CURRENT ASSETS Cash and cash equivalents $ 2,027 1,753 Accounts receivable, net 52,326 50,380 Inventories 50,750 46,471 Deferred taxes 7,133 7,109 Other current assets 1,221 2,133 ------------ ------------ Total current assets 113,457 107,846 Property, plant, and equipment, net 79,994 79,873 Goodwill, net 24,144 25,203 Debt issue costs, net 7,893 9,651 Deferred taxes 11,908 5,569 ------------ ------------ Total assets $ 237,396 228,142 ============ ============ LIABILITIES, SENIOR REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Revolving credit facility $ 22,800 17,000 Current portion of term loans 5,700 3,950 Accounts payable - trade 10,419 10,527 Accrued expenses 15,088 22,371 Product warranty 4,211 4,327 Income taxes payable 11,975 10,560 Advance payments from customers 2,797 4,535 ------------ ------------ Total current liabilities 72,990 73,270 Senior term loans 29,950 35,650 Senior subordinated notes 100,000 100,000 Obligations under capital leases 1,584 -- ------------ ------------ Total liabilities 204,524 208,920 ------------ ------------ SENIOR REDEEMABLE PREFERRED STOCK OF SUBSIDIARY($.01 par value, 325,000 shares authorized; 196,779 and 171,482 shares issued and outstanding as of 1997 and 1996, respectively, liquidation preference $100 per share) 17,566 14,822 ------------ ------------ JUNIOR PREFERRED STOCK OF SUBSIDIARY ($.01 par value, 525,000 shares authorized: 131,186 and 114,321 shares issued and outstanding as of 1997 and 1996, respectively, liquidation preference $100 per share) 12,465 10,779 ------------ ------------ Commitments and contingencies STOCKHOLDERS' EQUITY Common stock ($.01 par value, 400,000 shares authorized; 199,350 and 200,000 shares issued and outstanding as of 1997 and 1996, respectively) 2 2 Additional paid-in capital 19,677 19,741 Accumulated deficit (15,738) (25,080) Stockholder loans (1,100) (1,042) ------------ ------------ Net stockholders' equity (deficit) 2,841 (6,379) ------------ ------------ Total liabilities, senior redeemable preferred stock and stockholders' equity $ 237,396 228,142 ============ ============
See accompanying notes to the consolidated financial statements. -F-33- 77 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
Successor Predecessor ------------------------------------------- ------------ 53-Week 52-Week 7-Week 45-Week period ended period ended period ended period ended October 3, September 27, September 29, August 11, 1997 1996 1995 1995 ------------ ------------ ------------ ------------ Sales $ 253,439 257,449 36,398 214,677 Cost of sales 183,678 184,482 27,634 160,156 ------------ ------------ ------------ ------------ Gross Profit 69,761 72,967 8,764 54,521 ------------ ------------ ------------ ------------ Operating costs and expenses: Research and development 7,681 8,308 1,198 7,429 Selling and Marketing 19,701 19,886 2,763 17,506 General and administrative 12,568 15,468 3,250 19,725 Write-off of acquired in-process research and development -- -- 31,363 -- ------------ ------------ ------------ ------------ Total operating costs and expenses 39,950 43,662 38,574 44,660 ------------ ------------ ------------ ------------ Operating income (loss) 29,811 29,305 (29,810) 9,861 Interest expense 19,039 18,894 2,497 -- ------------ ------------ ------------ ------------ Earnings (loss) before taxes 10,772 10,411 (32,307) 9,861 Income tax expense (benefit) (3,000) 2,068 (2,709) 3,649 ------------ ------------ ------------ ------------ Net earnings (loss) before preferred 13,772 8,343 (29,598) 6,212 stock dividends of subsidiary Preferred dividends: Senior Redeemable Preferred Stock 2,530 2,148 -- -- Junior Preferred Stock 1,686 1,432 -- -- ------------ ------------ ------------ ------------ Net earnings (loss) attributable to Common Stock $ 9,556 4,763 (29,598) 6,212 ============ ============ ============ ============
See accompanying notes to the consolidated financial statements. -F-34- 78 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT) (in thousands, except share data)
Total Additional Stockholders' Common Paid-in Accumulated Stockholder Business Equity Stock Capital Deficit Loans Equity (Deficit) ----------- ----------- ----------- ----------- ----------- ----------- PREDECESSOR: Balances, September 30, 1994 -- -- -- -- 119,854 119,854 Net repayments to Varian (4,475) (4,475) Net earnings 6,212 6,212 ----------- ----------- ----------- ----------- ----------- ----------- Balances, August 11, 1995 -- -- -- -- 121,591 121,591 SUCCESSOR: Elimination of business equity (121,591) (121,591) Issuance of stock in connection with the Acquisition: 10,500 shares of common stock of Holding issued in connection with the issuance of the Senior Redeemable Preferred Stock 1,050 1,050 Issuance of 1 share of Common stock to Holding 2 19,998 Less issue costs (1,307) Less stockholder loans (1,000) 17,693 Amortization of discount and issue costs on Senior Redeemable Preferred Stock (29) (29) Net loss (29,598) (29,598) ----------- ----------- ----------- ----------- ----------- ----------- Balances, September 29, 1995 2 19,741 (29,627) (1,000) -- (10,884) Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) (214) Payment of dividends on Senior Redeemable Preferred Stock (2,149) (2,149) Payment of dividends on Junior Preferred Stock (1,433) (1,433) Net earnings 8,343 8,343 Repayment of stockholder loans 25 25 Interest accrued on stockholder loans (67) (67) ----------- ----------- ----------- ----------- ----------- ----------- Balances, September 27, 1996 2 19,741 (25,080) (1,042) -- (6,379) Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) (214) Payment of dividends on Senior Redeemable Preferred Stock (2,530) (2,530) Payment of dividends on Junior Preferred Stock (1,686) (1,686) Net earnings 13,772 13,772 Interest accrued on stockholder loans (58) (58) Purchase of Treasury Stock (64) (64) ----------- ----------- ----------- ----------- ----------- ----------- Balances, October 3, 1997 $ 2 19,677 (15,738) (1,100) -- 2,841 =========== =========== =========== =========== =========== ===========
See accompanying notes to the consolidated financial statements. -F-35- 79 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Successor Predecessor ------------------------------------------- ------------- 53-Week 52-Week 7-Week 45-Week period ended period ended period ended period ended October 3, September 27, September 29, August 11, 1997 1996 1995 1995 ------------- ------------- ------------- ------------- OPERATING ACTIVITIES Net cash provided by operating activities $ 5,311 11,290 14,823 4,083 ------------- ------------- ------------- ------------- INVESTING ACTIVITIES Purchase of businesses, net of cash acquired -- -- (196,200) -- Proceeds from sale of property, plant and equipment 2,545 -- -- -- Purchase of property, plant, and equipment (9,183) (12,472) (880) (6,063) (Increase) decrease in other non current assets 9 (114) (27) 742 ------------- ------------- ------------- ------------- Net cash used in investing activities (6,629) (12,586) (197,107) (5,321) ------------- ------------- ------------- ------------- FINANCING ACTIVITIES Repayment of intercompany funding to Varian -- -- -- (4,475) Net (Repayments)/Proceeds from revolving credit facility 5,800 (2,600) 19,600 -- Net (Repayments)/Proceeds from the issuance of debt: Senior term loans (3,950) (2,400) 42,000 -- Senior subordinated notes -- -- 100,000 -- Debt issue costs (194) (243) (11,570) -- (Repayments)/Proceeds from the sale of stock: Senior Redeemable Preferred Stock -- -- 15,000 -- Junior Preferred Stock -- -- 10,000 -- Common stock -- -- 20,000 -- Common and preferred stock issue costs -- -- (3,479) -- Treasury stock (64) -- -- -- Stockholder loans -- 25 (1,000) -- ------------- ------------- ------------- ------------- Net cash provided by (used in) financing activities 1,592 (5,218) 190,551 (4,475) ------------- ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 274 (6,514) 8,267 (5,713) Cash and cash equivalents at beginning of period 1,753 8,267 -- 5,607 ------------- ------------- ------------- ------------- Cash and cash equivalents at end of period $ 2,027 1,753 8,267 (106) ============= ============= ============= =============
See accompanying notes to the consolidated financial statements. -F-36- 80 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (in thousands)
Successor Predecessor ------------------------------------------- ------------ 53-Week 52-Week 7-Week 45-Week period ended period ended period ended period ended October 3, September 27, September 29, August 11, 1997 1996 1995 1995 ------------- ------------- ------------- ------------- DETAIL OF NET CASH PROVIDED BY OPERATING ACTIVITIES Net earnings (loss) before preferred $ 13,772 8,343 (29,598) 6,212 dividends of subsidiary Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Write-off of acquired in-process research and development -- -- 31,363 -- Depreciation 8,572 6,670 803 10,999 Amortization of deferred debt issue costs 1,952 1,962 199 -- Amortization of goodwill 1,049 1,061 138 166 Deferred taxes (6,363) (9,752) (2,926) 6,726 Interest accrued on stockholder loans (58) (67) -- -- (Gain)/Loss on the disposition of assets (471) -- -- -- Changes in operating assets and liabilities: Accounts receivable (1,946) (5,637) (7,977) 3,051 Inventories (4,279) (1,706) 4,581 (6,109) Other current assets 913 433 7 (1,592) Accounts payable - trade (108) (5,947) 9,843 462 Accrued expenses (7,283) 2,585 9,024 (13,716) Product warranty (116) (363) 95 (40) Income tax payable 1,415 10,560 -- -- Advance payments from customers (1,738) 3,148 (729) (2,076) ------------- ------------- ------------- ------------- Net cash provided by operating activities $ 5,311 11,290 14,823 4,083 ============= ============= ============= =============
See accompanying notes to the consolidated financial statements. -F-37- 81 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BACKGROUND AND THE ACQUISITION Prior to August 11, 1995, Communication and Power Industries Inc.'s ("CPI" or "Successor") operations were the principal operations of the Electron Devices Business (the "Predecessor"), a segment of Varian Associates, Inc. ("Varian"), excluding the Tempe, Arizona operations. The Predecessor consisted of substantially all of the assets of Varian and its affiliates that were used primarily in developing, manufacturing and distributing microwave and power grid vacuum electronic devices, microwave amplifiers, modulators and various other power supply equipment and devices. On August 11, 1995, CPI acquired these assets (the "Acquisition") from Varian and was then merged with a wholly owned subsidiary of Communications & Power Industries Holding Corporation ("Holding"), a corporation newly formed by a group of investors, including management of Holding and CPI. References to CPI or its business for periods prior to August 11, 1995 shall be references to the Predecessor and its business, unless the context otherwise requires. A summary of the assets acquired and liabilities assumed at their fair values is as follows (in thousands): ASSETS ACQUIRED: Accounts receivable $ 36,766 Inventories 49,346 Other current assets 2,573 Property, plant and equipment 73,994 Goodwill 26,235 Other assets 27 -------- Total assets acquired 188,941 -------- LIABILITIES ASSUMED: Accounts payable - trade 6,631 Accrued expenses 10,762 Advance payments from customers 2,116 Product warranty 4,595 -------- Total liabilities assumed 24,104 -------- Purchase price allocated to in-process research and development 31,363 -------- Purchase price paid to Varian $196,200 ========
The Acquisition has been accounted for as a purchase, and, accordingly, the purchase price was allocated based upon the fair values of assets acquired and liabilities assumed as of August 11, 1995. In connection with the Acquisition, CPI, a wholly-owned subsidiary of Holding, entered into two senior term loans in the aggregate amount of $42.0 million (the "Senior Term Loans") and a revolving credit facility in a principal amount of up to $35.0 million (including a $5.0 million sub- -F-38- 82 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED facility for letters of credit, subsequently increased to $7.5 million) pursuant to the Credit Agreement with Bankers Trust Company, as agent, and the lenders thereunder (as subsequently amended, the "Senior Credit Agreement"), of which approximately $23.0 million was drawn in connection with the consummation of the Acquisition. Additional financing for the Acquisition was obtained through the issuance of 12% Senior Subordinated Notes due 2005 (the "Senior Subordinated Notes") of CPI in the aggregate principal amount of $100.0 million, the issuance of Series A 14% Senior Redeemable Exchangeable Cumulative Preferred Stock due 2007 (the "Senior Redeemable Preferred Stock") of CPI and the issuance of Series A 14% Junior Cumulative Preferred Stock (the "Junior Preferred Stock") of CPI and common stock of Holding. A summary of the Acquisition financing was as follows (in thousands): Bank borrowings $ 9,200 Senior term loans 42,000 Senior subordinated debt 100,000 Senior Redeemable Preferred Stock 15,000 Junior Preferred Stock 10,000 Holding common stock 20,000 -------- $196,200 ========
The accompanying consolidated financial statements include the results of the Predecessor for the 45-week period ended August 11, 1995. The accompanying consolidated financial statements for the 53-week period ended October 3, 1997, the 52-week period ended September 27, 1996 and the 7-week period ended September 29, 1995 include the results of CPI and its direct and indirect wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, significant intercompany balances and transactions within the Predecessor have been eliminated. In connection with the Acquisition, Varian retained certain assets and liabilities of the Predecessor. The retention of these assets and liabilities reduced the Predecessor's cash flow from operating activities during the 45-week period ending August 11, 1995. This was partially offset by an increase in CPI's cash flow from operating activities during the 7-week period ended September 29, 1995. The Predecessor's and Successor's fiscal years are the 52- or 53-week periods which end on the Friday nearest September 30. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents Currency on hand, demand deposits, and all highly liquid investments with an original maturity of three months or less are considered to be cash and cash equivalents. -F-39- 83 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Goodwill The excess of the purchase price over the fair value of the net assets acquired is classified as goodwill and is being amortized over its estimated useful life of 25 years on a straight-line basis. CPI periodically evaluates the ongoing profitability of the business to determine if impairment in the value of this asset has occurred. Impairment of Long-Lived Assets and Assets to be Disposed Of The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, on January 1, 1996. SFAS No. 121 requires long-lived assets to be evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell. The adoption of SFAS No. 121 did not have a material effect on the Company's results of operations. Warranty The Company's products are generally warranted for a variety of periods, typically one to five years or a predetermined product usage life. Estimated future costs of repair, replacement or customer accommodations are reflected in the accompanying consolidated financial statements. Environmental Liabilities Liabilities for environmental expenditures are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. There were no environmental liabilities established by the Company during Fiscal 1997 or Fiscal 1996. Environmental costs of the Predecessor were accumulated at the corporate level within Varian and charged to the Predecessor through corporate allocations. In connection with the Acquisition, Varian retained the environmental liabilities of the Predecessor existing as of the closing date at the Predecessor's facilities. Deferred Debt Issue Costs Costs incurred related to the issuance of CPI's long-term debt and other credit facilities are capitalized and amortized over the estimated time the obligations are expected to be outstanding using the effective interest method. The amortization period used for the deferred costs associated with the revolving credit facility, the Senior Term Loans, and the Senior Subordinated Notes is 3 years, 7 years and 10 years, respectively. -F-40- 84 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Senior Redeemable Preferred Stock CPI's Senior Redeemable Preferred Stock was issued in units with an aggregate of 10,500 shares of common stock of Holding. The fair value of the shares of Holding's common stock issued, and the issue costs associated with the issuance of the Senior Redeemable Preferred Stock, have been reflected as a reduction of the Senior Redeemable Preferred Stock issued and is being amortized via a charge to accumulated deficit over the period until mandatory redemption, 12 years, using the effective interest method. Income Taxes Income taxes are accounted for under the asset and liability method. Holding's deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis and the financial reporting basis of assets and liabilities. The Predecessor's operations were included in the consolidated income tax returns filed by Varian. However, for purposes of the financial statements of the Predecessor, the provision for income taxes was prepared using the effective tax rate of Varian's consolidated financial statements on a separate entity basis. The provision for income taxes of Holding and the Predecessor is based upon the differences between financial reporting and tax basis of assets and liabilities measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. The computed amount of the current provision for income taxes of the Predecessor was recorded to business equity. -F-41- 85 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Supplemental Cash Flow Information For Fiscal 1997, cash was paid for interest and taxes in the amount of $17,087,000 and $1,662,000, respectively. For Fiscal 1996, cash was paid for interest and taxes in the amount of $16,932,000 and $524,000, respectively. There were no interest payments or taxes paid during the 7-week period ended September 29, 1995, nor were there any cash payments made for interest or taxes by the Predecessor (all cash payments relating to such matters were made by Varian) during the period presented. Non-cash financing activities included the payment of preferred dividends by CPI on its Senior Redeemable Preferred Stock and its Junior Preferred Stock through the issuance of 25,297 and 21,482 additional shares of its Senior Redeemable Preferred Stock and 16,865 and 14,321 additional shares of its Junior Preferred Stock during Fiscal 1997 and Fiscal 1996, respectively. No dividends were issued during the 7-week period ended September 29, 1995. Amortization of discount and issue costs on the Senior Redeemable Preferred Stock was $214,000, $214,000 and $29,000 during Fiscal 1997, Fiscal 1996 and the 7-week period ended September 29, 1995, respectively. During Fiscal 1997, equipment of $1,584,000 was acquired under a capital lease. Revenue Recognition Sales and related cost of sales are recognized primarily upon shipment of products. Sales and related cost of sales under long-term contracts to commercial customers and the U.S. government are recognized primarily as units are delivered. The estimated sales values of performance under certain U.S. government fixed-price and fixed-price incentive contracts in process are recognized under the percentage of completion method of accounting where the sales value is determined on the basis of costs incurred. Provisions for anticipated losses are made in the period in which they first become determinable. Sales under cost-reimbursement contracts, primarily research and development contracts, are recorded as costs are incurred and include estimated earned fees in the proportion that costs incurred to date bear to total estimated costs. The fees under certain U.S. government contracts may be increased or decreased in accordance with cost or performance incentive provisions which measure actual performance against established targets or other criteria. Such incentive fee awards or penalties are included in revenue at the time the amounts can be reasonably determined. Business Risks and Credit Concentrations The Company develops, manufactures and distributes components for systems used to generate, amplify and transmit high-power/high frequency microwave and radio frequency signals. End use applications of these systems include the transmission and amplification of voice, data and video signals for broadcasting and telecommunications, transmission of radar signals for navigation and location, transmission of false signals for electronic countermeasures and various other uses in the industrial, medical and scientific markets. -F-42- 86 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Defense-related applications such as certain radar, electronic countermeasures and military communications constitute a significant portion of the Company's sales. The U.S. defense budget has been declining since the mid-1980s. Although management believes that the Company has successfully responded to shrinking defense budgets by refocusing its operations on commercial and other non-defense applications, a significant further decline in U.S. or global military spending could have a material adverse effect on the Company's sales and earnings. Additionally, companies engaged in supplying defense-related equipment and services to government agencies are subject to certain business risks, including the ability of the U.S. government to suspend them from receiving new contracts or to terminate existing contracts for the U.S. government's convenience or for the default of the contractor. In addition, the U.S. government could terminate contracts due to insufficient or terminated congressional appropriations. The Company's contracts with foreign governmental defense agencies are subject to similar limitations and risks as those encountered with U.S. government contracts. The Company believes that both its customer and industry base is well diversified, however, changes in the marketplace of any of the above named industries may significantly affect management's estimates and the Company's performance. The Company's customers are located throughout the United States, Canada, Europe and Asia. No single customer accounted for more than 5% of the Company's sales in either of the Successor or Predecessor periods and no accounts receivable balance from any customer exceeded 5% of net accounts receivable. Generally, the Company requires no collateral from its customers and the Company estimates an allowance for doubtful accounts based on the credit worthiness of its customers as well as general economic conditions. Consequently, an adverse change in those factors could effect the Company's estimate of its bad debts. Foreign Currency Translation The functional currency of the Company's foreign subsidiaries is the U.S. dollar. Accordingly, assets and liabilities of subsidiaries outside of the United States representing cash, inventory and accounts receivable or payable are translated into U.S. dollars at the exchange rates in effect at year-end. Other accounts including property, plant and equipment are translated at historical exchange rates, which for assets acquired in connection with the Acquisition represent the rate as of August 11, 1995. Revenue and expense items are translated at effective rates of exchange prevailing during each year, except that depreciation is expensed at historical exchange rates. The Company enters into forward exchange contracts to hedge sales transactions and firm commitments denominated in foreign currencies. Gains and losses on the forward contracts are recognized based on changes in exchange rates, as are offsetting foreign exchange gains and losses on the underlying transactions. The Company does not engage in foreign currency speculation. -F-43- 87 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The aggregate transaction and exchange gains and losses was $463,000 loss and $296,000 loss for Fiscal 1997 and Fiscal 1996, respectively. For the 7-week period ending September 29, 1995, the aggregate transaction and exchange gains and losses were not significant. For the 45-week period ending August 11, 1995, the aggregate exchange gain or loss, net of the gain or loss from the foreign exchange contracts, was accumulated at the corporate level within Varian and allocated to the Predecessor based on its estimated proportionate share of international sales, and is included in the corporate allocations described later in these notes. Fair Value of Financial Instruments Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The carrying value of the Company's cash and cash equivalents, accounts receivable, accounts payable and debt obligations approximate their fair values which, for debt, is based upon current rates available to the Company for debt of the same maturities. Based on recent trading activity, the Company's Senior Subordinated Notes have been trading at a premium, or approximately 111%, as of December 1997. Use of 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 the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Recent Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in the financial statements. It requires classification of other comprehensive income, as defined by the standard, by their nature (e.g., unrealized gains or losses on securities) in a financial statement, but does not require a specific format for that statement. The accumulated balance of other comprehensive income is to be displayed separately from retained earnings and additional paid-in-capital in the equity section of the balance sheet. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997 and reclassification of financial statements for earlier periods provided for comparative purposes is required. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997. -F-44- 88 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The Company plans to adopt SFAS No. 130 and SFAS No. 131 in 1998 and does not expect that the adoption of these pronouncements will have a material effect on the Company's consolidated financial statements except that there may be significant modifications in segment disclosures. ACCOUNTS RECEIVABLE Accounts receivable are stated net of allowances for doubtful accounts of $0.28 million as of October 3, 1997 and $0.20 million as of September 27, 1996. INVENTORIES Inventories are stated at the lower of average cost or market (net realizable value). The main components of inventories are as follows:
Fiscal Year (Dollars in thousands) 1997 1996 ------- ------- Raw materials and parts $36,814 33,648 Work in process 12,274 9,277 Finished goods 1,662 3,546 ------- ------ Total inventories $50,750 46,471 ======= =======
PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment acquired by the Company at the date of the Acquisition is carried at fair value as of the date of acquisition. Property, plant and equipment added since the Acquisition is carried at historical cost. Major improvements are capitalized, while maintenance and repairs are expensed currently. Plant and equipment are depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized using the straight-line method over their estimated useful lives, or the remaining term of the lease, whichever is shorter. -F-45- 89 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Estimated useful lives of property, plant, and equipment are: Land leaseholds Life of the lease Buildings 40 years Machinery and equipment 3 to 7 years The main components of property, plant, and equipment are as follows:
Fiscal Year ----------------------- (Dollars in thousands) 1997 1996 -------- -------- Land and land leaseholds $ 36,284 36,548 Buildings 17,989 13,682 Machinery and equipment 38,121 31,470 Leased equipment 1,584 -- Construction in progress 1,736 5,581 -------- -------- Subtotal 95,714 87,281 Less accumulated depreciation and amortization (15,720) (7,408) -------- -------- Net property, plant, and equipment $ 79,994 79,873 ======== ========
Accumulated amortization of equipment under capital lease arrangements was $33,000 for Fiscal 1997. ACCRUED EXPENSES Accrued expenses are comprised of the following:
Fiscal Year -------------------- (Dollars in thousands) 1997 1996 ------- ------- Taxes $ 586 823 Payroll and employee benefits 9,939 13,436 Accrued exit costs -- 775 Accrued interest 2,483 2,392 Other 2,080 4,945 ------- ------- Total accrued expenses $15,088 22,371 ======= =======
-F-46- 90 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED COSTS TO EXIT AN ACTIVITY OF THE PREDECESSOR Prior to consummation of the Acquisition, management of the Predecessor had begun to formulate plans to exit certain activities of the Predecessor, which were finalized shortly after the Acquisition. These plans included two principal costs: (a) the costs associated with the contractually required closing and consolidation of the Company's Salt Lake City, Utah, operation into the Company's San Carlos, California, facility completed during the first half of Fiscal 1997, and (b) the costs associated with disposing of certain excess plant capacity, which includes the consolidation, completed during the first quarter of Fiscal 1997, of one of its leased manufacturing facilities into its Palo Alto, California, facility. In connection with the Acquisition, the Company accrued $1,259,000. In Fiscal 1996 and 1997, the Company had expended approximately $500,000 and $800,000, respectively, related to closing, consolidation and relocation costs associated with the Company's established exit plans. SENIOR CREDIT AGREEMENT The Senior Credit Agreement provides for two term loans in the aggregate amount of $42.0 million, comprised of a $25.0 million "Term Loan A" tranche and a $17.0 million "Term Loan B" tranche, and a $35.0 million revolving credit facility which includes a sub-facility for letters of credit. This sub-facility was increased from $5.0 million to $7.5 million effective June 27, 1997. Availability of advances under the Revolving Credit Facility is subject to a borrowing base test. CPI's obligations under the Senior Credit Agreement are secured by substantially all of its assets (including the issued and outstanding capital stock of its direct and indirect subsidiaries) and are guaranteed by Holding and all of CPI's subsidiaries. As of October 3, 1997, CPI had $6.4 million available under the Revolving Credit Facility of which $1.7 million was available for issuance of letters of credit. Borrowings under the Revolving Credit Facility and Term Loan A bear interest at a rate equal to the Eurodollar Rate (approximately 5.76% as of October 3, 1997) plus 2.5% per annum or the Base Rate (8.50% as of October 3, 1997) plus 1.0% per annum and borrowings under Term Loan B bear interest at a rate equal to the Eurodollar Rate plus 3.0% per annum or Base Rate plus 1.5% per annum, in each case as selected by CPI. Applicable interest rates on Term Loan A and the Revolving Credit Facility will be reduced after the first anniversary of the consummation of the Acquisition by up to 0.5% per annum if CPI meets and continues to meet certain financial tests. In addition to customary fronting and other fees, CPI will pay a fee equal to 1.5% per annum on undrawn amounts of letters of credit and a commitment fee of 0.5% per annum on unused facilities under the Revolving Credit Facility. The Senior Credit Agreement also provides for a prepayment premium in the event that it is voluntarily prepaid within two years of the establishment of the Senior Credit Agreement unless such prepayment is made with funds raised through an initial public offering of Holding's stock. -F-47- 91 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The Term Loans are subject to quarterly payments in the aggregate annual amounts as follows (in thousands):
Term Term Fiscal Year Loan A Loan B - ------------ ------- ------- 1998 5,500 200 1999 6,000 200 2000 7,500 200 2001 - 6,050 2002 - 10,000 ------- ------- $19,000 16,650 ======= =======
As of October 3, 1997, CPI had made payments of $6,000,000 against Term Loan A and $350,000 against Term Loan B, of which $3,750,000 and $200,000 were paid in Fiscal 1997 against Term Loan A and Term Loan B, respectively. The Revolving Credit Facility matures on the date five years after the closing of the Acquisition. CPI is required to make prepayments on the Senior Facility with 75% of Excess Cash Flow (as defined in the Senior Credit Agreement), 75% of the net proceeds of certain stock issuances and 100% of the net proceeds from certain asset sales. Such prepayments will be applied to remaining principal installments of the Term Loans allocated on a pro rata basis and following repayment of the Term Loans, to reduce permanently the Revolving Credit Facility. In addition, CPI is subject to certain affirmative and negative covenants customarily contained in agreements of this type, including, without limitation, covenants that restrict, subject to specified exceptions: (i) incurrence of additional indebtedness and other obligations; (ii) mergers or consolidations; (iii) asset sales; (iv) changes of control and corporate structure; (v) granting or incurrence of liens to secure any other indebtedness (including the Notes or the notes for which the Senior Preferred Stock is exchangeable (the "Exchange Notes")); (vi) prepayment or modification of the terms of other indebtedness (including the Notes and the Exchange Notes); (vii) engaging in transactions with affiliates; (viii) declaration or payment of dividends or distributions on CPI's capital stock; (ix) capital expenditures; and (x) other acquisition and investment activities. In addition, the Senior Credit Agreement requires that CPI, on a consolidated basis, maintain certain specified financial covenants, including a minimum fixed charge coverage ratio, minimum net worth and minimum EBITDA. As of October 3, 1997, CPI was in compliance with all covenants except with respect to a certain asset sale, for which a waiver to apply the net proceeds to the Revolving Credit Facility rather than a pro rata share to the Term Loans was obtained. -F-48- 92 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED SENIOR SUBORDINATED NOTES The $100 million principal amount of Senior Subordinated Notes mature in 2005 and bear interest at 12% per annum, payable semiannually. The payment of principal of, premium and interest on, and other obligations evidenced by the Notes is subordinated in right of payment, as set forth in the indenture governing the Senior Subordinated Notes (the "Indenture"), to the prior payment in full of all senior indebtedness (as defined), including indebtedness under the Senior Credit Agreement, whether outstanding on the date of the Indenture or thereafter incurred. CPI's payment obligations under the Notes are jointly and severally guaranteed by Holding and CPI's subsidiaries. The Notes are not redeemable at CPI's option prior to August 1, 2000. Thereafter, the Notes are subject to redemption at the option of CPI, in whole or in part, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, thereon to the applicable redemption date, if redeemed during the 12-month period beginning on August 1 of the years indicated below:
Year Percentage ---- ---------- 2000 106.0% 2001 104.5% 2002 103.0% 2003 101.5% 2004 and thereafter 100.0%
Notwithstanding the foregoing, prior to August 1, 1998, CPI may redeem up to 35% of the aggregate principal amount of the Notes originally outstanding at a redemption price of 112% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the redemption date, with the net proceeds of one or more public offerings of common stock of Holding. Upon the occurrence of a change of control, each holder of Notes will have the right to require CPI to offer to repurchase all or any part of such holder's Notes. The Senior Credit Agreement currently prohibits CPI from making such an offer. In addition, the Indenture covering the Notes provides for various restrictions, including restrictions on mergers or the sales of CPI's assets, dividend payments, purchase, redemption, acquisition or retirement of equity interests of CPI or its affiliates, principal payment on any indebtedness of CPI or guarantors that is subordinated to the Notes, the incurrence of certain indebtedness, or the making of any restricted investment, as defined. SENIOR REDEEMABLE PREFERRED STOCK CPI is authorized to issue up to 325,000 shares of nonvoting Series B 14% Senior Redeemable Exchangeable Cumulative Preferred Stock due 2007 (the "Senior Preferred Stock"), including shares of Senior Preferred Stock which may be used to pay dividends on the Senior Preferred Stock if CPI so elects. Dividends on the Senior Preferred Stock accrue at the rate of 14% per annum and are payable quarterly, commencing on November 1, 1995. On or before August 1, 2000, CPI may, at its option and subject to debt covenant restrictions, pay dividends in cash or in shares of Senior -F-49- 93 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. After August 1, 2000, dividends may be paid only in cash. During the year ended October 3, 1997, CPI paid preferred dividends through the issuance of 25,297 shares of its Senior Redeemable Preferred Stock. The Senior Preferred Stock is not redeemable prior to August 1, 2000. Thereafter, the Senior Preferred Stock will be redeemable at the option of CPI, in whole or in part from time to time, initially at 107% of the liquidation preference thereof and at decreasing prices thereafter to and including August 1, 2004 and thereafter at 100% of the liquidation preference thereof, together in each case with accumulated and unpaid dividends thereon. In addition, on or prior to August 1, 1998, CPI may, on one or more occasions, redeem any or all of the shares of Senior Preferred Stock then outstanding at a redemption price equal to 114% of the liquidation preference thereof plus accumulated and unpaid dividends thereon, with the proceeds of one or more public offerings of Holding's common stock. The Senior Preferred Stock is subject to mandatory redemption in whole on August 1, 2007 at a price equal to the liquidation preference thereof, plus accumulated and unpaid dividends. In the event of a change of control, CPI will be required to make an offer to each holder of shares of Senior Preferred Stock to repurchase all or a portion of such holder's Senior Preferred Stock at a price equal to 101% of the liquidation preference thereof, plus accumulated and unpaid dividends. The Senior Credit Agreement currently prohibits and the Indenture currently restricts CPI from making such an offer. In addition, CPI will be required to use the proceeds from certain asset sales to permanently reduce senior indebtedness of CPI, to invest in certain related assets or businesses or to offer to repurchase Senior Preferred Stock. Any such repurchases shall be effected at an offer price equal to 100% of the liquidation preference of the shares of Senior Preferred Stock purchased, plus accumulated and unpaid dividends. The Certificate of Designation covering the Senior Preferred Stock contains certain provisions that, among other things, limit the ability of CPI to incur indebtedness, pay dividends, incur liens, make loans or investments, transact with affiliates and engage in mergers and consolidations. CPI may, at its option, on any dividend payment date, exchange all, but not less than all, of the outstanding shares of Senior Preferred Stock into 14% Junior Subordinated Notes due 2007 (the "Exchange Notes"), so long as such exchange is permitted by the Senior Credit Agreement and the Indenture, in an aggregate principal amount not to exceed the aggregate liquidation preference, plus accumulated and unpaid dividends on the date of exchange. The Exchange Notes will be general unsecured obligations of CPI and will be subordinated to all existing and future senior indebtedness of CPI, including indebtedness under the Senior Credit Agreement and the Indenture. Except for terms relating to these subordination provisions, payment of interest on a quarterly basis, the option to issue additional Exchange Notes on or prior to August 1, 2000 in lieu of paying cash interest, optional redemption and the date on which repayment is mandatory (all of which terms would be similar to the terms of Senior Preferred Stock), the terms of the Exchange Notes will be generally identical to the Notes. -F-50- 94 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED JUNIOR PREFERRED STOCK CPI is authorized to issue up to 525,000 shares of nonvoting Series A 14% Junior Cumulative Preferred Stock (the "Junior Preferred Stock") including shares of Junior Preferred Stock which may be used to pay dividends on the Junior Preferred Stock if CPI elects to pay dividends in shares of Junior Preferred Stock. The aggregate liquidation preference of the Junior Preferred Stock issued in connection with the consummation of the Acquisition was $10.0 million. Dividends on the Junior Preferred Stock accrue at the rate of 14% per annum and are payable quarterly, commencing on November 1, 1995. On or before the redemption of the Senior Preferred Stock or the exchange of Senior Preferred Stock into Exchange Notes, CPI is required to pay dividends on the Junior Preferred Stock in additional fully paid and non-assessable shares of Junior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. After such redemption or exchange, CPI may, at its option and subject to debt and senior preferred stock covenant restrictions, pay dividends on the Junior Preferred Stock in cash or in additional fully paid and non-assessable shares of Junior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. During the year ended October 3, 1997, CPI paid preferred dividends through the issuance of 16,865 shares of its Junior Preferred Stock. The Junior Preferred Stock ranks junior in right of payment to all liabilities of CPI and to any preferred stock, including Senior Preferred Stock, that is senior in right of payment to the Junior Preferred Stock and ranks senior in right of payment to any additional preferred stock which does not expressly provide that it ranks senior to or on a parity with the Junior Preferred Stock and CPI's common stock. LEASE COMMITMENTS At October 3, 1997, the Company was committed to minimum rentals under noncancellable operating lease agreements primarily for land and facility space. The Company also leases certain computer equipment under capital leases that expire in 2002. Payments under these capital leases are deferred until 1998, with payments following over the next 48 months. As collateral for these capital leases, the Company has issued a $1.0M letter of credit in favor of the lender. A summary of future minimum lease payments (in thousands) follows: -F-51- 95 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Capital Operating Fiscal Year Leases Leases - ----------- --------- --------- 1998 $ 87 $ 1,559 1999 520 871 2000 520 536 2001 520 167 2002 434 78 Thereafter -- 5,356 --------- --------- Total future minimum lease payments 2,081 $ 8,567 ========= Less amount representing interest 497 --------- Present value of future minimum lease payments 1,584 Less current portion of obligations Under capital leases -- --------- Obligations under capital leases, less Current portion $ 1,584 =========
Real estate taxes, insurance, and maintenance are also obligations of the Company. Rental expense under noncancellable operating leases amounted to $734,000, $777,000, $257,000 and $1,242,000 for Fiscal 1997, Fiscal 1996, the 7-week period ended September 29, 1995 and the Predecessor 45-week period ended August 11, 1995, respectively. CONTINGENCIES The amount of outstanding letters of credit provided for under the Company's Senior Credit Agreement was approximately $5.8 million as of October 3, 1997. These outstanding obligations are comprised of the following: $3.4 million to one foreign customer related to an advance payment guarantee, $1.0 million to a lender related to a capital lease arrangement and $1.4 million to various other beneficiaries related primarily to insurance needs and performance bond guarantees. Varian is currently a defendant in certain legal actions relating to the Predecessor and could incur an uninsured liability in one or more of them. The agreement for the sale of the Predecessor provides for Varian's retention of liability arising out of the above referenced litigation. Accordingly, in the opinion of management, the outcome of that litigation will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. Varian has also been named by the Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at sites to which Varian (including in some cases the Predecessor) is alleged to have shipped manufacturing waste for disposal. Varian is also involved in various stages of environmental investigation and/or remediation under the direction of, or in consultation with, local and/or state agencies at certain facilities of the Company. Uncertainty as to (a) the extent to which Varian caused, if at all, the conditions being investigated; (b) the extent of environmental -F-52- 96 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED contamination and risks; (c) the applicability of changing and complex environmental laws; (d) the number and financial viability of other potentially responsible parties; (e) the stage of the investigation and/or remediation; (f) the unpredictability of investigation and/or remediation costs (including as to when they will be incurred); (g) applicable clean-up standards; (h) the remediation (if any) which will ultimately be required; and (i) available technology make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. The agreement for the sale of the Predecessor provides for Varian's retention of liability arising out of investigative and remedial action and environmental claims for conditions existing as of the closing date at the above-referenced facilities. Accordingly, based on information currently available, management believes that the costs of these matters are not likely to have a material adverse effect on the financial condition, results of operations and cash flows of CPI. From time to time, the Company may be subject to other claims that arise in the ordinary course of business. In the opinion of management, all such matters involve amounts which would not have a material adverse effect on the Company's consolidated financial position if unfavorably resolved. There are currently no such matters. INDUSTRY SEGMENTS AND SALES The Company operates in a single business segment. The Company covers and is engaged in the development, manufacture and sale of a broad line of electron devices used in broadcasting, communications, and other commercial and military applications. CPI's North American operations (in the United States and Canada) are responsible for the design and development of all products as well as manufacturing and shipping to meet worldwide customer commitments. CPI's operations outside of North America consist of sales offices in certain foreign countries. Accordingly, for financial statement purposes, it is not meaningful to segregate operating profits for the foreign operations. Identifiable assets outside of North America are less than 10% of total consolidated assets. Information about CPI's sales to geographical regions are presented in the table below. -F-53- 97 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollars in thousands) Net Sales --------- 53-WEEK PERIOD ENDING OCTOBER 3, 1997: United States & Canada $ 173,593 Europe & Territories (1) 57,368 Other 22,478 --------- Total Sales $ 253,439 ========= 52-WEEK PERIOD ENDING SEPTEMBER 27, 1996: United States & Canada $ 171,656 Europe & Territories (1) 54,733 Other 31,060 --------- Total Sales $ 257,449 ========= 7-WEEK PERIOD ENDING SEPTEMBER 29, 1995: United States & Canada $ 26,020 Europe & Territories (1) 7,388 Other 2,990 --------- Total Sales $ 36,398 ========= 45-WEEK PERIOD ENDING AUGUST 11, 1995: United States & Canada $ 151,078 Europe & Territories (1) 45,361 Other 18,238 --------- Total Sales $ 214,677 =========
(1) Includes primarily Europe, Russia, Middle East and India. Export sales to unaffiliated customers located outside of North America, mainly in South America and Asia, were $24,167,000, $27,602,000, $3,204,000 and $16,300,000 for Fiscal 1997, Fiscal 1996, the 7-week period ended September 29, 1995, and the 45-week period ended August 11, 1995, respectively. The following table summarizes sales under prime contracts from the U.S. government for the periods presented in the accompanying consolidated financial statements:
Sales under prime contracts from the (Dollars in thousands) U.S. Government ------------------ SUCCESSOR: 53-week period ended October 3, 1997 $ 34,006 52-week period ended September 27, 1996 41,927 7-week period ended September 29, 1995 5,915 PREDECESSOR: 45-week period ended August 11, 1995 34,700
-F-54- 98 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED RESEARCH AND DEVELOPMENT Company-sponsored research and development costs related to both present and future products are expensed currently. Customer-sponsored research and development costs are charged to cost of sales to match revenue received. Total expenditures incurred by the Company on research and development are summarized as follows:
Company Customer Total (Dollars in thousands) Sponsored Sponsored Incurred --------- --------- --------- SUCCESSOR: 53-week period ended October 3, 1997 $ 7,681 5,897 13,578 52-week period ended September 27, 1996 8,303 7,250 15,558 7-week period ended September 29, 1995 1,198 1,353 2,551 PREDECESSOR: 45-week period ended August 11, 1995 7,429 8,771 16,200
In connection with the Acquisition, a portion of the purchase price was allocated to the value of in-process research and development projects. These projects involved the research and development of new products and significant extensions and improvements to existing products which had not demonstrated their technological feasibility as of the acquisition date and did not have an alternative future use. Accordingly, immediately upon consummation of the acquisition, the value associated with these projects were charged to expense. PROVISION FOR INCOME TAXES Earnings (loss) before income taxes for domestic and non-U.S. operations is as follows:
Successor Predecessor -------------------------------------------- ------------ 53-week 52-week 7-week 45-week period ended period ended period ended period ended October 3, September 27, September 29, August 11, (Dollars in thousands) 1997 1996 1995 1995 ------------ ------------ ------------ ------------ Domestic $ 7,381 7,750 (32,713) 6,867 Non-U.S 3,391 2,661 406 2,994 ------------ ------------ ------------ ------------ Total $ 10,772 10,411 (32,307) 9,861 ============ ============ ============ ============
-F-55- 99 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The provision (benefit) for income taxes is comprised of the following:
Successor Predecessor ---------------------------------------------- ----------- 53-week 52-week 7-week 45-week period ended period ended period ended period ended October 3, September 27, September 29, August 11, (Dollars in thousands) 1997 1996 1995 1995 ------------ ------------ ------------ ------------ Current U.S. federal $ 1,677 9,257 -- 2,934 State 573 1,957 5 545 Non-U.S 1,113 606 212 712 ------------ ------------ ------------ ------------ Total Current 3,363 11,820 217 4,191 Deferred U.S. federal (5,699) (8,844) (2,926) (531) State (1,098) (1,154) -- -- Non-U.S 434 246 -- (11) ------------ ------------ ------------ ------------ Total Deferred (6,363) (9,752) (2,926) (542) ------------ ------------ ------------ ------------ Provision (benefit) for income taxes $ (3,000) 2,068 (2,709) 3,649 ============ ============ ============ ============
Significant items making up deferred tax assets and liabilities are as follows:
Fiscal Year -------------------------- (Dollars in thousands) 1997 1996 -------- -------- DEFERRED TAX ASSETS: Inventory $ 4,770 3,716 Product Warranty 2,523 1,577 Accrued Vacation 1,999 2,120 Deferred compensation 525 841 Excess Purchase Price 10,426 11,541 Foreign tax credits -- 1,184 Other 2,124 1,033 -------- -------- 22,367 22,012 Less: Valuation allowance -- (8,000) -------- -------- 22,367 14,012 DEFERRED TAX LIABILITIES: Accelerated depreciation (2,645) (1,059) Foreign jurisdictions, net (681) (246) Other -- (29) -------- -------- Net deferred tax asset $ 19,041 12,678 ======== ========
Foreign tax credit carryforward of $1,184,000 in 1996 was utilized during the fiscal year ended in 1997. There are no unused tax carryovers as of the end of fiscal 1997. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or -F-56- 100 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Based upon the level of historical taxable income and projections for future taxable income, management now believes it is more likely than not the Company will realize the benefits of such deferred tax assets. Accordingly, the valuation allowance established during the prior years was eliminated during 1997. The reconciliation between the effective tax rates and the statutory federal income tax rates applicable to the Predecessor and the Successor is shown in the following schedule:
Successor Predecessor ------------------------------------------ ------------ 53-week 52-week 7-week 45-week period ended period ended period ended period ended October 3, September 27, September 29, August 11, 1997 1996 1995 1995 ------------ ------------ ------------ ------------ Statutory federal income tax rate 35.0% 35.0% (35.0%) 35.0% State and local income tax, net of federal tax benefit 6.4% 4.9% (4.7%) 5.0% Rate differential on foreign income tax expense (benefit) and withholding tax 3.0% .2% .2% (.1%) Foreign sales corporation -- (2.8%) -- (1.9%) Losses and credits for which no benefit has been recorded -- -- 31.0% -- Change to the beginning of year valuation allowance (74.3%) (19.2%) Other 2.0% 1.8% .1% (1.0%) ------------ ------------ ------------ ------------ Effective tax rate (27.9%) 19.9% (8.4%) 37.0% ============ ============ ============ ============
RETIREMENT AND PROFIT SHARING PLANS Effective August 12, 1995, CPI adopted a qualified 401(k) plan covering substantially all its domestic and Canadian employees. CPI's major obligation is to contribute an amount based on a percentage of each participant's base pay. CPI also has a Supplemental Retirement Plan covering certain executive officers. Total contributions to these plans by the Company was $2.5 million for Fiscal 1997, $2.6 million for Fiscal 1996 and $247,000 for the 7-week period ended September 29, 1995. Total contributions of the Predecessor for all plans amounted to $4.3 million for the 45-week period ended August 11, 1995. CPI's bonus program provides incentive bonuses to senior management if certain performance goals are achieved and to employees if these goals are exceeded. Such performance goals are measured based upon earnings before interest, taxes, depreciation and amortization, return on sales and asset utilization. -F-57- 101 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED TRANSACTIONS WITH VARIAN Sales to, and purchases from, Varian lines of business were as follows:
Successor Predecessor ------------------------------------------ ------------- 53-week 52-week 7-week 45-week period ended period ended period ended period ended October 3, September 27, September 29, August 11, (Dollars in thousands) 1997 1996 1995 1995 ------------- ----------- ------------- ------------ Sales to Varian $ 9,234 12,809 1,014 8,800 Purchases from Varian $ 5,742 5,171 315 3,700
Sales and purchases of the Predecessor have been recorded at cost to the originating business unit, so that no profit margin is recognized on transfer. In connection with the Acquisition, CPI entered into various agreements with Varian that provide for various services to be performed by or for Varian or for products to be purchased from or provided to Varian. A summary of the significant agreements are as follows: Transitional Services Agreement. Under the Transitional Services Agreement, Varian provided certain services to CPI in order to facilitate the transition of CPI to a stand-alone operation. In addition, in connection with the separation and creation of independent utilities and systems at CPI's facilities, the Transitional Services Agreement required Varian to pay or reimburse CPI (in some cases), subject to certain limitations. As of October 3, 1997, all obligations under this agreement were fulfilled and any on-going arrangements between the companies have been negotiated at an arm's-length basis. Supply Agreements. CPI and Varian entered into four product supply agreements which contain certain customary provisions pertaining to, among other things, pricing, shipment, delivery, acceptance and payment of certain products. Such terms will vary to a certain degree among the Supply Agreements in order to reflect differences in the types of products subject to the particular Supply Agreement and the arrangements between the parties with respect to such products. These agreements cover periods ranging from one to five years from the date of the Acquisition and, in the case of certain "Key Components," Varian has the right to extend the term of the agreement for an additional five years. The supply agreements generally impose upon CPI and Varian certain minimum purchase quantities and generally restrict CPI's ability to market certain specific products to third parties. Management believes that the terms of these supply agreements are no less favorable to CPI than that which would be obtained from independent third parties for the purchase or supply of similar products. Trademark License Agreement Generally, under the terms of the Trademark License Agreement, CPI is licensed to use Varian trademarks on its products for a period of three years (although during the third year Varian trademarks may only be used in connection with CPI's own trademarks). After the third year, CPI may not use any Varian trademarks alone, but for an additional seven years may identify its products as "formerly made by Varian". At the expiration of the 10-year period, CPI will not be permitted to utilize any Varian trademarks. -F-58- 102 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED CPI and Varian have also entered into certain other agreements covering access to certain of CPI's facilities as well as subleased and shared facilities. CORPORATE ALLOCATIONS Operating earnings of the Predecessor include allocations of costs accumulated at the corporate level within Varian. Where it was possible to specifically identify corporate amounts with the activities of the Predecessor, these amounts have been charged or credited directly to the Predecessor without allocation or apportionment. Costs of a wholly corporate nature (i.e. those that are considered to relate purely to the support of Varian's centralized corporate structure) were not allocated. Shared or common costs have been allocated to the Predecessor on the basis which is considered to most fairly and reasonably reflect the utilization of the services provided to, or benefit obtained by, the Predecessor. Typical measures and activity indicators used for apportionment purposes include sales revenues, headcount and facility area measurements. Management believes that the cost allocations are reasonable and reflect the costs incurred to support the operations of the Predecessor. Additionally, management believes that the costs for such services would have been less on a stand-alone basis, although determination as to specific amounts is not practicable. Allocations of corporate expenses included in the consolidated statements of operations for the 45-week period ended August 11, 1995 were $11.2 million. RELATED PARTY TRANSACTIONS Holding and CPI have entered into an agreement to pay $362,000, plus out-of-pocket expenses, annually to an advisor group of Holding's majority shareholder. Certain individuals of the investor's advisor group are members of Holding's and CPI's respective Boards of Directors. In addition, on August 11, 1995, CPI paid this advisor group a fee of $3,330,000 for services rendered in connection with the Acquisition. In connection with Holding's 1995 Management Equity Plan, certain executive officers of CPI and Holding elected to pay a portion of the purchase price for their Management Shares by delivery of a secured promissory note to Holding. The aggregate principle amount of such Management Notes was $975,356 as of October 3, 1997. Of this amount, $800,000 is secured by a pledge of a portion (from 50% to 75%) of the Management Shares issued to each executive officer and is guaranteed by Varian. The balance of $175,356 is secured by a pledge of approximately 91% of the Management Shares issued, but is not guaranteed by Varian. Outstanding principal under each type of Management Note bears interest at an annually adjustable rate equal to the "Applicable Federal Rate" in effect under Internal Revenue Code Section 1274(d) for obligations of a term equal to the then-remaining term of such note. Recourse by Holding under both types of Management Notes is limited to the Management Shares pledged to secure the applicable note. -F-59- 103 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED GUARANTEES Holding has guaranteed CPI's senior debt obligations. Holding has no operations other than its ownership of CPI. The consolidated balance sheets of CPI as of October 3, 1997 and September 27, 1996 are substantially identical to that of Holding and its subsidiaries. BUSINESS EQUITY Business equity is comprised of intercompany balances arising in the ordinary course of business between the Predecessor and other Varian entities, together with various adjustments resulting from the carve-out of the Predecessor as presented in these consolidated financial statements. -F-60- 104 SCHEDULE II COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Balance at Charged to Balance at Beginning of Costs and End of Description Period Expenses Deductions Period ----------- ------------ ---------- ---------- ---------- PREDECESSOR: 45-week period ended August 11, 1995: Allowance for doubtful accounts receivable 1,000 80 (880) 1 200 SUCCESSOR: 7-week period ended September 29, 1995: Allowance for doubtful accounts receivable 200 -- -- 200 52-week period ended September 27, 1996: Allowance for doubtful accounts receivable 200 -- (4) 196 53-week period ended October 3, 1997: Allowance for doubtful accounts receivable 196 178 (92) 282
- ---------- 1 The reduction in the allowance account is principally due to the retention of certain accounts receivable by Varian and their related allowances in accordance with the Acquisition Agreement. -F-61- 105 SCHEDULE II COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Balance at Charged to Balance at Beginning of Costs and End of Description Period Expenses Deductions Period ----------- ------------ ---------- ---------- ---------- PREDECESSOR: 45-week period ended August 11, 1995: Allowance for doubtful accounts receivable 1,000 80 (880) 1 200 SUCCESSOR: 7-week period ended September 29, 1995: Allowance for doubtful accounts receivable 200 -- -- 200 52-week period ended September 27, 1996: Allowance for doubtful accounts receivable 200 -- (4) 196 53-week period ended October 3, 1997: Allowance for doubtful accounts receivable 196 178 (92) 282
- ---------- 1 The reduction in the allowance account is principally due to the retention of certain accounts receivable by Varian and their related allowances in accordance with the Acquisition Agreement. -F-62- 106 INDEX TO EXHIBITS
Exhibit No. Description - ----------- ----------- 2.1 (1) Stock Sale Agreement between CPI (as successor by merger to CPII Acquisition Corp., then known as Communications & Power Industries Holding Corporation) and Varian dated as of June 9 ,1995. 2.2 (1) First Amendment to Stock Sale Agreement among Holding, CPI (as successor by merger to CPII Acquisition) and Varian dated as of August 11, 1995. 2.3 (1) Second Amendment to Stock Sale Agreement among Holding, CPI (as successor by merger to CPII Acquisition) and Varian dated as of August 11, 1995. 3.1 (1) Restated Certificate of Incorporation of CPI filed with the Delaware Secretary of State on August 11, 1995. 3.2 (1) Bylaws of CPI. 3.3 (1) Certificate of Incorporation of Holding. 3.4 (1) Bylaws of Holding. 4.1 (1) Indenture among CPII Acquisition, Holding, the other guarantors of the Notes (the "Guarantors") and U.S. Trust Company of California, N.A., relating to the Notes dated as of August 11, 1995. 4.2 (1) First Supplemental Indenture among CPI, Holding, the other Guarantors and U.S. Trust Company of California, N.A., relating to the Notes dated as of August 11, 1995. 4.3 (1) Form of Notes (included in Exhibit 4.1, Exhibit A). 4.4 (1) Form of Indenture between CPI and Shawmut Bank Connecticut, National Association, relating to the Exchange Notes. 4.5 (1) Form of Exchange Note (included in Exhibit 4.5, Exhibit A).
107
Exhibit No. Description - ----------- ----------- 4.6 (2) Form of Second Supplemental Indenture among CPI, Holding, the other Guarantors and U.S. Trust Company of California, N.A., relating to the Notes. 10.1 (1) Credit Agreement among CPI, Holding, CPII Acquisition, the other obligors named therein, the lenders named therein and Bankers Trust Company, as Agent, dated as of August 11, 1995 (including Annex A (Definitions; Rules of Construction) and Annex F (Financial Covenants)). 10.1.1 First Amendment to Credit Agreement among CPI, Holding, the other obligors named therein, the lenders named therein and Bankers Trust Company, as Agent, dated as of December 31, 1996. 10.1.2 Second Amendment to Credit Agreement among CPI, Holding, the other obligors named therein, the lenders named therein and Bankers Trust Company, as Agent, dated as of April 1, 1997. 10.1.3 Third Amendment to Credit Agreement among CPI, Holding, the other obligors named therein, the lenders named therein and Bankers Trust Company, as Agent, dated as of June 27, 1997. 10.2 (1) Term A Notes in the amount of $8,333,333.32, $4,166,666.67, $4,166,666.67, $4,166,666.67 and $4,166,666.76 made by CPI in favor of Bankers Trust Company, Dresdner Bank AG, First Bank National Association, The Nippon Credit Bank, Ltd. and Union Bank, respectively, dated as of August 11, 1995. 10.3 (1) Term B Notes in the amount of $11,666,666.68 and $5,666,666.67 made by CPI in favor of Bankers Trust Company and Crescent/Mach I Partners, respectively, dated as of August 11, 1995. 10.4 (1) Revolving Credit Notes in the amount of $11,666,666.68, $5,833,333.33, $5,833,333.33, $5,833,333.33 and $5,833,333.33 made by CPI in favor of Bankers Trust Company, Dresdner Bank AG, First Bank National Association, The Nippon Credit Bank, Ltd, and Union Bank, respectively, dated as of August 11, 1995. 10.5 (1) Swingline Note in the amount of $5,000,000 made by CPI in favor of Bankers Trust Company dated as of August 11, 1995. 10.6 (1) Security Agreement among CPI, CPII Acquisition, the other assignors named therein and Bankers Trust Company, as Agent, dated as of August 11, 1995. 10.7 (1) Pledge Agreement made by CPI, Holding, CPII Acquisition, and CPI Subsidiary Holdings, Inc. in favor of Bankers Trust Company, as Agent, dated as of August 11, 1995. 10.8 (1) Continuing Guaranty made by each of the Guarantors in favor of the Lenders and Agent under the Senior Credit Agreement, dated as of August 11, 1995. 10.9 (1) Transitional Services Agreement between CPI and Varian dated as of August 10, 1995. 10.10(3)(+)Key Components Supply Agreement between CPI and Varian dated as of August 10, 1995.
108
Exhibit No. Description - ----------- ----------- 10.11 (1)Cross License Agreement between the CPI and Varian dated as of August 10, 1995. 10.12 (1)Trademark License Agreement between CPI and Varian dated as of August 10, 1995. 10.13 (1)Assignment and Assumption of Lessee's Interest in Lease (Units 1-4, Palo Alto) and Covenants, Conditions and Restrictions on Leasehold Interests (Units 1-12, Palo Alto) dated as of August 10, 1995 between Varian Realty Inc., Varian Associates, Inc. and CPI. 10.14 (1)Sublease (Portion of Building 2 Located on Unit 5, Palo Alto) dated as of August 10, 1995 between Varian Realty Inc. and CPI. 10.15 (1)Sublease (Unit 8, Palo Alto) dated as of August 10, 1995 between Varian Realty Inc. and CPI. 10.16 (1)Sublease (Building 4, Palo Alto) .dated as of August 10, 1995 between CPI, as Sublessee, Varian Associates, Inc., as Sublessor, and Varian Realty Inc., as Adjacent Property Sublessor. 10.17 (1)Assignment and Assumption of Tenant's Interest in Lease (Santa Clara, California) dated as of August 10, 1995 between Varian and CPI. 10.18 (1)Lease (Salt Lake City, Utah) dated as of August 10, 1995 between CPI and Varian Associates, Inc. 10.19 (1)Shared Use Agreement dated as of August 11, 1995 between Varian (on behalf of itself and its subsidiaries) and CPI (as successor by merger to CPII Acquisition Corp.) (on behalf of itself and its subsidiaries). 10.20 (1)Purchase Agreement among CPII Acquisition, Holding, the other Guarantors and the initial purchasers of the Series A Senior Subordinated Notes (the "Initial Notes Purchasers") dated as of August 11, 1995. 10.21 (1)Purchase Agreement among CPII Acquisition, Holding and the initial purchaser of the Series A Senior Preferred Stock (the "Initial Senior Preferred Stock Purchaser") dated as of August 11, 1995. 10.22 (1)A/B Exchange Registration Rights agreement among CPI (as successor by merger to CPII Acquisition), Holding, the other Guarantors and the Initial Notes Purchasers dated as of August 11, 1995. 10.23 (1)Amendment to A/B Exchange Registration Rights Agreement among CPI, Holding, the other Guarantors and the Initial Notes Purchasers dated as of August 11,1995. 10.24 (1)A/B Exchange Registration Rights Agreement between CPI (as successor by merger to CPII Acquisition) and the Initial Senior Preferred Stock Purchaser dated as of August 11, 1995. 10.25 (1)Amendment to A/B Exchange Registration Rights Agreement between CPI and the Initial Senior Preferred Stock Purchaser dated as of August 11, 1995.
109
Exhibit No. Description - ----------- ----------- 10.26 (1)Holding Common Stock Registration Rights Agreement by and among Holding, GEI II and the Initial Senior Preferred Stock Purchaser dated as of August 11, 1995 relating to the Holding Common Stock sold with the Series A Senior Preferred Stock. 10.27 (1)Stockholders Agreement by and among Holding, GEI II and the Initial Senior Preferred Stock Purchaser dated as of August 11, 1995 relating to the Holding Common Stock sold with the Series A Senior Preferred Stock. 10.28 (1)Stock Subscription Agreement among Holding, CPII Acquisition Corp. and GEI II dated as of August 11, 1995. 10.29 (1)Management Services Agreement among CPI, Holding and Leonard Green & Partners, L.P. dated as of August 11, 1995. 10.30 (1)1995 Holding Management Equity Plan (including Form of Management Subscription and Stockholders Agreement). 10.31 (1)Letter from Holding to Al D. Wilunowski dated June 9, 1995 relating to terms of employment. 10.32 (1)Letter from Holding to Alvin J. Ferreira dated June 9, 1995 relating to terms of employment. 10.33 (1)Letter from Holding to Dennis J. Gleason dated June 9, 1995 relating to terms of employment. 10.34 (1)Letter from Holding to H. Frederick Koehler dated June 9, 1995 relating to terms of employment. 10.35 (1)Letter from Holding to Armand Staprans dated June 9, 1995 relating to terms of employment. 21 (1) Subsidiaries of CPI and Holding. 27.1 Financial Data Schedule (Communications & Power Industries, Inc.) 27.2 Financial Data Schedule (Communications & Power Industries Holding Corporation)
- -------------- (1) Incorporated by reference to CPI's Registration Statement on Form S-1 (Registration No. 33-96858), filed on September 12, 1995. (2) Incorporated by reference to Amendment No.3 to CPI's Registration Statement on Form S-1 (Registration No.33-96858), filed on November 9, 1995. (3) Incorporated by reference to Amendment No.1 to CPI's Registration Statement on Form S-1 (Registration Statement No.33-96858), filed on October 25, 1995. (+) Certain portions of this Exhibit have been omitted and filed separately under an application for confidential treatment with the Securities and Exchange Commission. EX-10.1.1 2 FIRST AMENDMENT TO CREDIT AGREEMENT 12/31/96 1 EXHIBIT 10.1.1 AMENDMENT NO. 1 TO CREDIT AGREEMENT This AMENDMENT No. 1 TO CREDIT AGREEMENT (this "Amendment"), is made and entered into as of December 31, 1996, among COMMUNICATIONS & POWER INDUSTRIES, INC. (the "Borrower"), COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION, CPI SUBSIDIARY HOLDINGS INC., COMMUNICATIONS & POWER INDUSTRIES INTERNATIONAL INC., COMMUNICATIONS & POWER INDUSTRIES ASIA INC., COMMUNICATIONS & POWER INDUSTRIES ITALIA S.R.L., COMMUNICATIONS & POWER INDUSTRIES EUROPE LIMITED, COMMUNICATIONS & POWER INDUSTRIES CANADA INC., COMMUNICATIONS & POWER INDUSTRIES AUSTRALIA PTY LIMITED, CPI SALES CORP., (collectively, the "Obligors"), BANKERS TRUST COMPANY, as agent (the "Agent"), and the various lenders (the "Lenders") from time to time party to the Credit Agreement, dated as of August 11, 1995 (as the same has been amended and modified through the date hereof, the "Agreement"), among the Obligors, the Agent and the Lenders. WHEREAS, the Obligors, the Agent and the Lenders desire to amend certain provisions of the Agreement. NOW, THEREFORE, in consideration of the foregoing, the premises and mutual covenants contained herein and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings given thereto in the Agreement. 2. Effectiveness of this Amendment. This Amendment shall become effective and the Agreement shall be amended as provided herein as of December 31, 1996 on the date (the "Effective Date") on which the Agent receives an executed copy of this Amendment from each Obligor and the Required Lenders. The Agent shall confirm the effectiveness of this Amendment by sending written notice of the Effective Date to the Obligors and the Lenders. 3. Amendments. As of the Effective Date: (a) Section 5.8 of the Agreement shall be amended in its entirety to read as follows: "Each Obligor shall cause each of its (a) fiscal years (each, a "Fiscal Year") to consist of a 52- or 53-week period ending on a Friday immediately before or after September 30 of each year and (b) fiscal quarters (each, a "Fiscal Quarter") to consist of a 13- or 14-week period ending on a Friday immediately before or after December 31, March 31, June 30 and September 30 of each year or, in each case, any other period approved in writing by Requisite Lenders." 2 (b) The defined term "Capital Expenditures" set forth in Annex F of the Agreement shall be amended in its entirety to read as follows: '"Capital Expenditures" shall mean, on a Consolidated basis for Parent and its Subsidiaries without duplication, all payments or accruals (including the incurrence of Capital Lease Indebtedness) for any fixed assets or improvements or for replacements, substitutions or additions thereto, that have a useful life of more than one year and that are required to be capitalized under GAAP; provided, that the term "Capital Expenditures" shall not include expenditures permitted under Section 5.5(d) for the purchase, replacement or restoration of assets from the proceeds of any insurance or condemnation award and, provided further, that the term "Capital Expenditures" shall not include up to $3,600,000 of costs incurred in Fiscal Year 1996 as a result of certain consolidations of the plant, property and equipment of the Obligors.' (c) The defined term "Consolidated Fixed Charges" set forth in Annex F of the Agreement shall be amended in its entirety to read as follows: '"Consolidated Fixed Charges" shall mean, for any Test Period, the sum, without duplication, of the amounts for such Test Period of (a) Consolidated Interest Expense paid in cash, (b) income taxes paid in cash, (c) cash dividends paid on the Preferred Stock, (d) the scheduled amortization of principal actually paid on Funded Indebtedness other than the Term Loans, and (e) the sum of the scheduled principal payments made in respect of the Terms Loans during such Test Period, provided that (i) if five such scheduled principal payments are made in such Test Period, only the four scheduled principal payments made immediately prior to the last day of such Test Period shall be included as "Consolidated Fixed Charges" under this clause (e) and (ii) if a scheduled amortization payment in respect of the Term Loans is required to be made within seven days after the last day of such Test Period, such scheduled amortization payment together with the three scheduled amortization payments made immediately prior to the last day of such Test Period shall be included as "Consolidated Fixed Charges" under this clause (e).' (d) The defined terms "Q1", "Q2", "Q3" and "Q4" set forth in Annex F of the Agreement shall be amended in their entirety to read as follows: '"Q1" shall mean, for any Fiscal Year, the first Fiscal Quarter of such Fiscal Year. "Q2" shall mean, for any Fiscal Year, the second Fiscal 2 3 Quarter of such Fiscal Year. "Q3" shall mean, for any Fiscal Year, the third Fiscal Quarter of such Fiscal Year. "Q4" shall mean, for any Fiscal Year, the fourth Fiscal Quarter of such Fiscal Year. 4. Representations and Warranties. Each Obligor makes, as of the Effective Date, each of the representations and warranties set forth in Section 3 of the Agreement, and such representations and warranties are, by this reference, incorporated herein as if set forth herein in their entirety, provided that references to "Loan Documents" shall, for purposes of this paragraph, be deemed to include this Amendment. 5. Miscellaneous. (a) Except as expressly modified by this Amendment, the Agreement shall continue to be and remain in full force and effect in accordance with its terms. Any future reference to the Agreement shall from and after the Effective Date be deemed to be a reference to the Agreement as amended by this Amendment. (b) This Amendment may be executed in any number of counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument. (c) THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. COMMUNICATIONS & POWER INDUSTRIES, INC. By: /s/ AL D. WILUNOWSKI -------------------------------- Name: Al D. Wilunowski Title: Chief Executive Officer and President COMMUNICATIONS & POWER INDUSTRIES, HOLDING CORPORATION By: /s/ AL D. WILUNOWSKI -------------------------------- Name: Al D. Wilunowski Title: Chief Executive Officer and President CPI SUBSIDIARY HOLDINGS INC. By: /s/ AL D. WILUNOWSKI -------------------------------- Name: Al D. Wilunowski Title: President and Treasurer COMMUNICATIONS & POWER INDUSTRIES, INTERNATIONAL INC. By: /s/ AL D. WILUNOWSKI -------------------------------- Name: Al D. Wilunowski Title: President and Treasurer COMMUNICATIONS & POWER INDUSTRIES, ASIA INC. By: /s/ AL D. WILUNOWSKI -------------------------------- Name: Al D. Wilunowski Title: President and Secretary S-1 5 COMMUNICATIONS & POWER INDUSTRIES ITALIA S.R.L. By: /s/ ALPHONSE D. WILUNOWSKI -------------------------------- Name: Alphonse D. Wilunowski Title: (per power of attorney) COMMUNICATIONS & POWER INDUSTRIES EUROPE LIMITED By: /s/ ALPHONSE D. WILUNOWSKI -------------------------------- Name: Alphonse D. Wilunowski Title: Director COMMUNICATIONS & POWER INDUSTRIES CANADA INC. By: /s/ ALPHONSE D. WILUNOWSKI -------------------------------- Name: Alphonse D. Wilunowski Title: Vice President COMMUNICATIONS & POWER INDUSTRIES AUSTRALIA PTY LIMITED By: /s/ ALPHONSE D. WILUNOWSKI -------------------------------- Name: Alphonse D. Wilunowski Title: (per power of attorney) CPI SALES CORP. By: /s/ ALPHONSE D. WILUNOWSKI -------------------------------- Name: Alphonse D. Wilunowski Title: President S-2 6 BANKERS TRUST COMPANY, as Lender and as Agent By: /s/ MARY JO JOLLY -------------------------------- Name: Mary Jo Jolly Title: Assistant Vice President S-3 7 DRESDNER BANK AG, New York Branch and Grand Cayman Branch By: /s/ CHRISTOPHER E. SARISKY -------------------------------- Name: Christopher E. Sarisky Title: Assistant Treasurer By: /s/ THOMAS J. NADRAMIA -------------------------------- Name: Thomas J. Nadramia Title: Vice President S-4 8 FIRST BANK NATIONAL ASSOCIATION By /s/ ROBERT W. MILLER ----------------------------- Name: Robert W. Miller Title: Vice President S-5 9 MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. By /s/ GILLES MARCHAND ----------------------------- Name: Gilles Marchand, CFA Title: Authorized Signatory S-6 10 CRESCENT/MACH I PARTNERS, L.P. By TCW ASSET MANAGEMENT COMPANY Its Investment Adviser By /s/ MARK L. GOLD ------------------------- Name: Mark L. Gold Title: Managing Director TCW ASSET MANAGEMENT COMPANY as Attorney-in-Fact for PENNSYLVANIA LIFE INSURANCE COMPANY By /s/ MARK L. GOLD -------------------------------- Name: Mark L. Gold Title: Managing Director S-7 11 SENIOR DEBT PORTFOLIO By BOSTON MANAGEMENT AND RESEARCH, as Investment Adviser By [SIG] ------------------------- Name: Title: S-8 12 THE NIPPON CREDIT BANK, LTD. Los Angeles Agency By /s/ BERNARDO E. CORREA-HENSCHKE -------------------------------- Name: Bernardo E. Correa-Henschke Title: Vice President & Senior Manager S-9 13 UNION BANK OF CALIFORNIA, N.A. By /s/ STEPHEN R. SWEENEY ------------------------- Name: Stephen R. Sweeney Title: Vice President S-10 EX-10.1.2 3 SECOND AMENDMENT TO CREDIT AGREEMENT 04/01/97 1 EXHIBIT 10.1.2 AMENDMENT NO. 2 TO CREDIT AGREEMENT This AMENDMENT No. 2 TO CREDIT AGREEMENT (this "Amendment"), is made and entered into as of April 1, 1997, among COMMUNICATIONS & POWER INDUSTRIES, INC. (the "Borrower"), COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION, CPI SUBSIDIARY HOLDINGS, INC., COMMUNICATIONS & POWER INDUSTRIES INTERNATIONAL INC., COMMUNICATIONS & POWER INDUSTRIES ASIA INC., COMMUNICATIONS & POWER INDUSTRIES ITALIA S.R.L., COMMUNICATIONS & POWER INDUSTRIES EUROPE LIMITED, COMMUNICATIONS & POWER INDUSTRIES CANADA INC., COMMUNICATIONS & POWER INDUSTRIES AUSTRALIA PTY LIMITED, CPI SALES CORP., (collectively, the "Obligors"), BANKERS TRUST COMPANY, as agent (the "Agent"), and the various lenders (the "Lenders") from time to time party to the Credit Agreement, dated as of August 11, 1995 (as the same has been amended and modified through the date hereof, the "Agreement"), among the Obligors, the Agent and the Lenders. WHEREAS, the Obligors, the Agent and the Lenders desire to amend certain provisions of the Agreement. NOW, THEREFORE, in consideration of the foregoing, the premises and mutual covenants contained herein and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings given thereto in the Agreement. 2. Effectiveness of this Agreement. This Amendment shall become effective and the Agreement shall be amended as provided herein on the first date on which the Agent receives an executed copy of this Amendment from each Obligor and the Required Lenders (the "Effective Date"). 3. Amendments. As of the Effective Date: (a) The reference to "$35,500,000" under the caption Consolidated EBITDA set forth opposite Q2, 1997 in paragraph 1 of Annex F of the Agreement shall be amended to read "$34,500,000". (b) The reference to "1.10:1.00" under the caption "Ratio" set forth opposite Q2, 1997 in paragraph 2 of Annex F of the Agreement shall be amended to read "1.02:1.00". 4. Representations and Warranties. Each Obligor makes, as of the Effective Date, each of the representations and warranties set forth in Section 3 of the Agreement, and such representations and warranties are, by this reference, incorporated herein as if set forth herein in their entirety, provided that references to "Loan Documents" shall, for purposes of this paragraph, be deemed to include this Amendment. 2 5. Miscellaneous. (a) Except as expressly modified by this Agreement, the Agreement shall continue to be and remain in full force and effect in accordance with its terms. Any future reference to the Agreement shall from and after the Effective Date by deemed to be a reference to the Agreement as amended by this Amendment. (b) This Amendment may be executed in any number of counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument. (c) THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. COMMUNICATIONS & POWER INDUSTRIES, INC. By: /s/ LYNN E. HARVEY ------------------------------ Name: Lynn E. Harvey Title: Chief Financial Officer Treasurer and Secretary COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION By: /s/ LYNN E. HARVEY ------------------------------ Name: Lynn E. Harvey Title: Chief Financial Officer Treasurer and Secretary CPI SUBSIDIARY HOLDINGS, INC. By: /s/ LYNN E. HARVEY ------------------------------ Name: Lynn E. Harvey Title: Secretary 2 3 COMMUNICATIONS & POWER INDUSTRIES INTERNATIONAL INC. By /s/ Lynn E. Harvey ------------------------------ Name: Lynn E. Harvey Title: Secretary COMMUNICATIONS & POWER INDUSTRIES ASIA INC. By /s/ Lynn E. Harvey ------------------------------ Name: Lynn E. Harvey Title: Treasurer COMMUNICATIONS & POWER INDUSTRIES ITALIA S.R.L. By /s/ Lynn E. Harvey ------------------------------ Name: Lynn E. Harvey Title: (Per Power of Attorney) COMMUNICATIONS & POWER INDUSTRIES EUROPE LIMITED By /s/ Lynn E. Harvey ------------------------------ Name: Lynn E. Harvey Title: Secretary COMMUNICATIONS & POWER INDUSTRIES CANADA INC. By /s/ Lynn E. Harvey ------------------------------ Name: Lynn E. Harvey Title: Vice President 3 4 COMMUNICATIONS & POWER INDUSTRIES AUSTRALIA PTY LIMITED By /s/ LYNN E. HARVEY ----------------------------- Name: Lynn E. Harvey Title: (Per Power of Attorney) CPI SALES CORP. By /s/ LYNN E. HARVEY ----------------------------- Name: Lynn E. Harvey Title: Secretary and Treasurer BANKERS TRUST COMPANY, as Lender and as Agent By ----------------------------- Name: Title: 4 5 COMMUNICATIONS & POWER INDUSTRIES AUSTRALIA PTY LIMITED By ----------------------------- Name: Title: CPI SALES CORP. By ----------------------------- Name: Title: BANKERS TRUST COMPANY, as Lender and as Agent By /s/ ROBERT R. TELESCA ----------------------------- Name: Robert R. Telesca Title: Assistant Vice President 4 6 DRESDNER BANK AG, New York Branch and Grand Cayman Branch By /s/ JOHN W. SWEENEY ----------------------------- Name: John W. Sweeney Title: Assistant Vice President By /s/ CHRISTOPHER E. SARISKY ----------------------------- Name: Christopher E. Sarisky Title: Assistant Treasurer 5 7 FIRST BANK NATIONAL ASSOCIATION By /s/ ROBERT W. MILLER -------------------------- Name: Robert W. Miller Title: Vice President 6 8 MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. By --------------------------- Name: Title: 7 9 SENIOR DEBT PORTFOLIO By BOSTON MANAGEMENT AND RESEARCH, as Investment Adviser By /s/ [SIG] --------------------------- Name: Title: 8 10 THE NIPPON CREDIT BANK, LTD. Los Angeles Agency By /s/ BERNARDO E. CORREA-HENSCHKE -------------------------------- Name: Bernardo E. Correa-Henschke Title: Vice President & Senior Manager 9 11 UNION BANK OF CALIFORNIA, N.A. By /s/ STEPHEN R. SWEENEY --------------------------- Name: Stephen R. Sweeney Title: Vice President 10 EX-10.1.3 4 THIRD AMENDMENT TO CREDIT AGREEMENT 06/27/97 1 EXHIBIT 10.1.3 AMENDMENT NO. 3 TO CREDIT AGREEMENT This AMENDMENT No. 3 TO CREDIT AGREEMENT (this "Amendment"), is made and entered into as of June 27, 1997, among COMMUNICATIONS & POWER INDUSTRIES, INC. (the "Borrower"), COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION, CPI SUBSIDIARY HOLDINGS, INC., COMMUNICATIONS & POWER INDUSTRIES INTERNATIONAL INC., COMMUNICATIONS & POWER INDUSTRIES ASIA INC., COMMUNICATIONS & POWER INDUSTRIES ITALIA S.R.L., COMMUNICATIONS & POWER INDUSTRIES EUROPE LIMITED, COMMUNICATIONS & POWER INDUSTRIES CANADA INC., COMMUNICATIONS & POWER INDUSTRIES AUSTRALIA PTY LIMITED, CPI SALES CORP., (collectively, the "Obligors"), BANKERS TRUST COMPANY, as agent (the "Agent"), and the various lenders (the "Lenders") from time to time party to the Credit Agreement, dated as of August 11, 1995 (as the same has been amended and modified through the date hereof, the "Agreement"), among the Obligors, the Agent and the Lenders. WHEREAS, the Obligors, the Agent and the Lenders desire to amend certain provisions of the Agreement. NOW, THEREFORE, in consideration of the foregoing, the premises and mutual covenants contained herein and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings given thereto in the Agreement. 2. Effectiveness of this Amendment. This Amendment shall become effective and the Agreement shall be amended as provided herein on the first date on which the Agent receives an executed copy of this Amendment from each Obligor and the Required Lenders (the "Effective Date"). 3. Amendments. As of the Effective Date: (a) The reference to "$5,000,000" contained in clause (1) of paragraph 1(a)(i) of Annex E to the Agreement (Letters of Credit) shall be amended to read "$7,500,000". (b) The reference to "$5,000,000" contained in clause (1) of paragraph (c) of Exhibit H to the Agreement (Form of Letter of Credit Request) shall be amended to read "$7,500,000". 4. Representations and Warranties. Each Obligor makes, as of the Effective Date, each of the representations and warranties set forth in Section 3 of the Agreement, and such representations and warranties are, by this reference, incorporated herein as if set forth herein in their entirety, provided that references to "Loan Documents" shall, for purposes of this paragraph, be deemed to include this Amendment. 2 5. Miscellaneous. (a) Except as expressly modified by this Amendment, the Agreement shall continue to be and remain in full force and effect in accordance with its terms. Any future reference to the Agreement shall from and after the Effective Date be deemed to be a reference to the Agreement as amended by this Amendment. (b) This Amendment may be executed in any number of counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument. (c) THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. COMMUNICATIONS & POWER INDUSTRIES, INC. By: /s/ LYNN E. HARVEY ------------------------------ Name: Lynn E. Harvey Title: Chief Financial Officer Treasurer and Secretary COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION By: /s/ LYNN E. HARVEY ------------------------------ Name: Lynn E. Harvey Title: Chief Financial Officer Treasurer and Secretary CPI SUBSIDIARY HOLDINGS, INC. By: /s/ LYNN E. HARVEY ------------------------------ Name: Lynn E. Harvey Title: Secretary 2 3 COMMUNICATIONS & POWER INDUSTRIES INTERNATIONAL INC. By: /s/ LYNN E. HARVEY -------------------------------- Name: Lynn E. Harvey Title: Secretary COMMUNICATIONS & POWER INDUSTRIES ASIA INC. By: /s/ LYNN E. HARVEY -------------------------------- Name: Lynn E. Harvey Title: Treasurer COMMUNICATIONS & POWER INDUSTRIES ITALIA S.R.L. By: /s/ LYNN E. HARVEY -------------------------------- Name: Lynn E. Harvey Title: (Per Power of Attorney) COMMUNICATIONS & POWER INDUSTRIES EUROPE LIMITED By: /s/ LYNN E. HARVEY -------------------------------- Name: Lynn E. Harvey Title: Secretary COMMUNICATIONS & POWER INDUSTRIES CANADA INC. By: /s/ LYNN E. HARVEY -------------------------------- Name: Lynn E. Harvey Title: Vice President 3 4 COMMUNICATIONS & POWER INDUSTRIES AUSTRALIA PTY LIMITED By: /s/ LYNN E. HARVEY -------------------------------- Name: Lynn E. Harvey Title: (Per Power of Attorney) CPI SALES CORP. By: /s/ LYNN E. HARVEY -------------------------------- Name: Lynn E. Harvey Title: Secretary and Treasurer BANKERS TRUST COMPANY as Lender and as Agent By: -------------------------------- Name: Title: 4 5 COMMUNICATIONS & POWER INDUSTRIES AUSTRALIA PTY LIMITED By: -------------------------------- Name: Title: CPI SALES CORP. By: -------------------------------- Name: Title: BANKERS TRUST COMPANY, as Lender and as Agent By: /s/ MARY JO JOLLY -------------------------------- Name: Mary Jo Jolly Title: Assistant Vice President 4 6 DRESDNER BANK AG, New York Branch and Grand Cayman Branch By: /s/ THOMAS J. NADRAMIA -------------------------------- Name: Thomas J. Nadramia Title: Vice President By: /s/ BRIGITTE SACIN -------------------------------- Name: Brigitte Sacin Title: Assistant Treasurer 5 7 FIRST BANK NATIONAL ASSOCIATION By /s/ MICHAEL S. HARTER --------------------------------- Name: Michael S. Harter Title: Commercial Banking Officer 6 8 MERRILL LYNCH MORTGAGE CAPITAL By --------------------------------- Name: Title: 6A 9 MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. By /s/ GILLES MARCHAND --------------------------------- Name: Giles Marchand CFA Title: Authorized Signatory 7 10 SENIOR DEBT PORTFOLIO By BOSTON MANAGEMENT AND RESEARCH, as Investment Adviser By --------------------------------- Name: Title: 8 11 UNION BANK OF CALIFORNIA, N.A. By /s/ STEPHEN R. SWEENEY ------------------------------- Name: Stephen R. Sweeney Title: Vice President 9 EX-27.1 5 CPI, INC. FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-K COMMUNICATIONS & POWER INDUSTRIES, INC. FOR YEAR ENDED OCTOBER 3, 1997 0001000564 COMMUNICATIONS & POWER INDUSTRIES, INC 1000 YEAR OCT-03-1997 SEP-28-1996 OCT-03-1997 2,027 0 52,326 0 50,750 113,457 79,994 0 237,396 72,990 131,534 17,566 1 0 15,305 237,396 253,439 253,439 183,678 183,678 7,681 0 19,039 10,772 (3,000) 13,772 0 0 0 13,772 0 0
EX-27.2 6 CPI HOLDINGS CORP. FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) CONSOLIDATED BALANCE SHEET & STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-K COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION FOR YEAR ENDED OCTOBER 3, 1997 0001000654 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION 1000 YEAR OCT-03-1997 SEP-28-1996 OCT-03-1997 2,027 0 52,326 0 50,750 113,457 79,994 0 237,396 72,990 131,534 17,566 0 2 2,839 237,396 253,439 253,439 183,678 183,678 7,681 0 19,039 10,772 (3,000) 13,772 0 0 0 13,772 0 0
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