10-Q 1 f72413e10-q.txt FORM 10-Q FOR QUARTER ENDED 3/30/01 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 30, 2001 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 COMMUNICATIONS & POWER INDUSTRIES HOLDING INDUSTRIES, INC. CORPORATION (Exact name of registrant as (Exact name of registrant as specified in its charter) specified in its charter) DELAWARE DELAWARE (State of Incorporation) (State of Incorporation) 77-0407395 77-0405693 (I.R.S. employer (I.R.S. employer identification number) identification number) 811 HANSEN WAY 811 HANSEN WAY PALO ALTO, CALIFORNIA 94303-1110 PALO ALTO, CALIFORNIA 94303-1110 (650) 846-2800 (650) 846-2800 (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 [ ]. APPLICABLE ONLY TO CORPORATE ISSUERS: 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: 4,908,172 SHARES OF COMMON STOCK, $.01 PAR VALUE, AT MARCH 30, 2001. COMMUNICATIONS & POWER INDUSTRIES, INC.: 1 SHARE OF COMMON STOCK, $.01 PAR VALUE, AT MARCH 30, 2001. 2 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) PART I: FINANCIAL INFORMATION COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION Consolidated Condensed Balance Sheets, March 30, 2001 and September 29, 2000 .................. 2 Consolidated Condensed Statements of Operations for the 13-week periods ended March 30, 2001 and March 31, 2000 ................................................................... 3 Consolidated Condensed Statements of Operations for the 26-week periods ended March 30, 2001 and March 31, 2000 ................................................................... 4 Consolidated Condensed Statements of Cash Flows for the 26-week periods ended March 30, 2001 and March 31, 2000 ................................................................... 5 Notes to Consolidated Condensed Financial Statements .......................................... 10 Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................................................... 14 COMMUNICATIONS & POWER INDUSTRIES, INC. Consolidated Condensed Balance Sheets, March 30, 2001 and September 29, 2000 .................. 6 Consolidated Condensed Statements of Operations for the 13-week periods ended March 30, 2001 and March 31, 2000 ................................................................... 7 Consolidated Condensed Statements of Operations for the 26-week periods ended March 30, 2001 and March 31, 2000 ................................................................... 8 Consolidated Condensed Statements of Cash Flows for the 26-week periods ended March 30, 2001 and March 31, 2000 ................................................................... 9 Notes to Consolidated Condensed Financial Statements .......................................... 10 Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................................................... 14 PART II: OTHER INFORMATION Other Information ............................................................................. 19 SIGNATURES ........................................................................................ 20
-1- 3 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands-unaudited)
March 30, September 29, 2001 2000 --------- ------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,584 $ 4,766 Accounts receivable, net 42,654 42,434 Inventories 69,862 63,949 Deferred taxes 6,972 6,972 Other current assets 1,745 1,603 --------- --------- Total current assets 124,817 119,724 Property, plant, and equipment, net 64,595 68,656 Goodwill and other intangibles, net 24,782 26,090 Debt issue costs, net 5,658 4,627 Deferred taxes 7,891 7,888 --------- --------- Total assets $ 227,743 $ 226,985 ========= ========= LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Revolving credit facility $ 24,105 $ 39,800 Current portion of term loans -- 6,012 Current portion of capital leases 1,035 960 Accounts payable 19,949 18,462 Accrued expenses 15,205 16,903 Accrued dividends 2,118 -- Product warranty 3,071 2,978 Income taxes payable 9,412 9,518 Advance payments from customers 6,512 5,210 --------- --------- Total current liabilities 81,407 99,843 Senior term loans 20,000 10,000 Mortgage financing 18,000 -- Senior subordinated notes 100,000 100,000 Obligations under capital leases 472 895 --------- --------- Total liabilities 219,879 210,738 --------- --------- SENIOR REDEEMABLE PREFERRED STOCK OF SUBSIDIARY 28,372 28,265 --------- --------- JUNIOR PREFERRED STOCK OF SUBSIDIARY 20,582 19,170 --------- --------- Commitments and contingencies STOCKHOLDERS' DEFICIT Common stock 49 49 Additional paid-in capital 19,111 19,111 Accumulated deficit (59,093) (49,215) Stockholder loans (1,157) (1,133) --------- --------- Net stockholders' deficit (41,090) (31,188) --------- --------- Total liabilities, preferred stock and stockholders' deficit $ 227,743 $ 226,985 ========= =========
See accompanying notes to the unaudited consolidated condensed financial statements. -2- 4 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (in thousands - unaudited)
13-Week 13-Week period ended period ended March 30, March 31, 2001 2000 ------------ ------------ Sales $ 66,570 $ 60,340 Cost of sales 53,947 47,040 -------- -------- Gross profit 12,623 13,300 -------- -------- Operating costs and expenses: Research and development 1,541 2,186 Selling and marketing 4,415 4,524 General and administrative 6,057 4,770 -------- -------- Total operating costs and expenses 12,013 11,480 -------- -------- Operating income 610 1,820 Gain on the sale of property, plant and equipment 887 -- Foreign currency gain (loss) 281 (90) Interest expense (5,364) (4,677) -------- -------- Loss before taxes (3,586) (2,947) Income tax expense 250 206 -------- -------- Net loss (3,836) (3,153) Preferred dividends: Senior redeemable preferred stock 1,077 939 Junior preferred stock 718 626 -------- -------- Net loss attributable to common stock $ (5,631) $ (4,718) ======== ========
See accompanying notes to the unaudited consolidated condensed financial statements. -3- 5 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (in thousands - unaudited)
26-Week 26-Week period ended period ended March 30, March 31, 2001 2000 ------------- ------------ Sales $ 126,946 $ 115,330 Cost of sales 101,525 89,878 --------- --------- Gross profit 25,421 25,452 --------- --------- Operating costs and expenses: Research and development 2,929 4,109 Selling and marketing 8,327 9,098 General and administrative 10,357 8,723 --------- --------- Total operating costs and expenses 21,613 21,930 --------- --------- Operating income 3,808 3,522 Gain on the sale of property, plant and equipment 887 -- Foreign currency gain (loss) 95 (170) Interest expense (10,531) (9,227) --------- --------- Loss before taxes (5,741) (5,875) Income tax expense 500 401 --------- --------- Net loss (6,241) (6,276) Preferred dividends: Senior redeemable preferred stock 2,118 1,846 Junior preferred stock 1,412 1,231 --------- --------- Net loss attributable to common stock $ (9,771) $ (9,353) ========= =========
See accompanying notes to the unaudited consolidated condensed financial statements. -4- 6 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands - unaudited)
26-Week 26-Week period ended period ended March 30, March 31, 2001 2000 ------------ ------------ OPERATING ACTIVITIES Net cash (used in) provided by operating activities $ (4,527) $ 11,116 -------- -------- INVESTING ACTIVITIES Proceeds from sale of property, plant and equipment 1,922 -- Purchase of property, plant and equipment, net (2,332) (2,764) -------- -------- Net cash used in investing activities (410) (2,764) -------- -------- FINANCING ACTIVITIES Repayments on capital leases (348) (414) Payment of debt issue costs (2,153) -- Repayment of terminated revolving credit facility (40,000) (4,700) Proceeds from revolving credit facility 24,305 -- Repayments on terminated senior term loans (16,049) (3,395) Proceeds from senior term loan 20,000 -- Proceeds from mortgage financing 18,000 -- -------- -------- Net cash provided by (used in) financing activities 3,755 (8,509) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (1,182) (157) Cash and cash equivalents at beginning of period 4,766 4,247 ======== ======== Cash and cash equivalents at end of period $ 3,584 $ 4,090 ======== ========
See accompanying notes to the unaudited consolidated condensed financial statements. -5- 7 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands-unaudited)
March 30, September 29, 2001 2000 --------- ------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,128 $ 4,766 Accounts receivable, net 43,225 42,434 Inventories 69,862 63,949 Deferred taxes 6,972 6,972 Other current assets 1,719 1,603 --------- --------- Total current assets 124,906 119,724 Property, plant, and equipment, net 50,245 68,656 Goodwill and other intangibles, net 24,782 26,090 Debt issue costs, net 5,345 4,627 Note receivable from parent 5,750 -- Deferred taxes 7,891 7,888 --------- --------- Total assets $ 218,919 $ 226,985 ========= ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND DEFICIT CURRENT LIABILITIES Revolving credit facility $ 24,105 $ 39,800 Current portion of term loans -- 6,012 Current portion of capital leases 1,035 960 Accounts payable 20,547 18,462 Accrued expenses 15,303 16,903 Accrued dividends 2,118 -- Product warranty 3,071 2,978 Income taxes payable 9,412 9,518 Advance payments from customers 6,512 5,210 --------- --------- Total current liabilities 82,103 99,843 Senior term loans 20,000 10,000 Senior subordinated notes 100,000 100,000 Deferred income on sale-leaseback 7,947 -- Obligations under capital leases 472 895 --------- --------- Total liabilities 210,522 210,738 --------- --------- SENIOR REDEEMABLE PREFERRED STOCK 28,372 28,265 --------- --------- Commitments and contingencies STOCKHOLDERS' DEFICIT: Junior preferred stock 2 2 Common stock -- -- Additional paid-in capital 39,740 38,328 Accumulated deficit (58,560) (49,215) Stockholder loans (1,157) (1,133) --------- --------- Net stockholders' deficit (19,975) (12,018) --------- --------- Total liabilities, senior redeemable preferred stock and stockholders' deficit $ 218,919 $ 226,985 ========= =========
See accompanying notes to the unaudited consolidated condensed financial statements. -6- 8 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (in thousands - unaudited)
13-Week 13-Week period ended period ended March 30, March 31, 2001 2000 ------------ ------------ Sales $ 66,570 $ 60,340 Cost of sales 53,947 47,040 -------- -------- Gross profit 12,623 13,300 -------- -------- Operating costs and expenses: Research and development 1,541 2,186 Selling and marketing 4,415 4,524 General and administrative 6,343 4,770 -------- -------- Total operating costs and expenses 12,299 11,480 -------- -------- Operating income 324 1,820 Gain on the sale of property, plant and equipment 887 -- Foreign currency gain (loss) 281 (90) Interest expense (4,636) (4,677) -------- -------- Loss before taxes (3,144) (2,947) Income tax expense 250 206 -------- -------- Net loss (3,394) (3,153) Preferred dividends: Senior redeemable preferred stock 1,077 939 Junior preferred stock 718 626 -------- -------- Net loss attributable to common stock $ (5,189) $ (4,718) ======== ========
See accompanying notes to the unaudited consolidated condensed financial statements. -7- 9 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (in thousands - unaudited)
26-Week 26-Week period ended period ended March 30, March 31, 2001 2000 ------------ ------------ Sales $ 126,946 $ 115,330 Cost of sales 101,525 89,878 --------- --------- Gross profit 25,421 25,452 --------- --------- Operating costs and expenses: Research and development 2,929 4,109 Selling and marketing 8,327 9,098 General and administrative 10,632 8,723 --------- --------- Total operating costs and expenses 21,888 21,930 --------- --------- Operating income 3,533 3,522 Gain on the sale of property, plant and equipment 887 -- Foreign currency gain (loss) 95 (170) Interest expense (9,723) (9,227) --------- --------- Loss before taxes (5,208) (5,875) Income tax expense 500 401 --------- --------- Net loss (5,708) (6,276) Preferred dividends: Senior redeemable preferred stock 2,118 1,846 Junior preferred stock 1,412 1,231 --------- --------- Net loss attributable to common stock $ (9,238) $ (9,353) ========= =========
See accompanying notes to the unaudited consolidated condensed financial statements -8- 10 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands - unaudited)
26-Week 26-Week period ended period ended March 30, March 31, 2001 2000 ------------ ------------ OPERATING ACTIVITIES Net cash (used in) provided by operating activities $ (4,677) $ 11,116 -------- -------- INVESTING ACTIVITIES Proceeds from sale of property to parent 17,250 -- Proceeds from sale of property, plant and equipment 1,922 -- Purchase of property, plant and equipment, net (2,332) (2,764) -------- -------- Net cash provided by (used in) investing activities 16,840 (2,764) -------- -------- FINANCING ACTIVITIES Repayments on capital leases (348) (414) Payment of debt issue costs (1,709) -- Repayments of terminated revolving credit facility (40,000) (4,700) Proceeds from revolving credit facility 24,305 -- Repayments of terminated senior term loans (16,049) (3,395) Proceeds from senior term loan 20,000 -- -------- -------- Net cash used in financing activities (13,801) (8,509) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (1,638) (157) Cash and cash equivalents at beginning of period 4,766 4,247 -------- -------- Cash and cash equivalents at end of period $ 3,128 $ 4,090 ======== ========
See accompanying notes to the unaudited consolidated condensed financial statements. -9- 11 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements of Communications & Power Industries Holding Corporation ("Holding") and Communications & Power Industries, Inc. ("CPI", both companies together referred to as the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted and, accordingly, these financial statements should be read in conjunction with the financial statements and the notes thereto contained in the Company's September 29, 2000 Annual Report on Form 10-K. Management believes that these unaudited interim condensed financial statements contain all adjustments, all of which are of a normal recurring nature, necessary to present fairly the financial position of the Company, and its results of operations and cash flows for the interim period presented. The results for the interim periods reported are not necessarily indicative of the results for the complete fiscal year 2001. 2. INVENTORIES Inventories are stated at the lower of average cost or market (net realizable value). The main components of inventories are as follows:
(Dollars in thousands) March 30, September 29, 2001 2000 --------- ------------- Raw materials and parts $49,439 $46,859 Work in process 18,308 14,731 Finished goods 2,115 2,359 ------- ------- Total inventories $69,862 $63,949 ======= =======
3. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest was $10.0 million and $8.6 million for the 26-week periods ended March 30, 2001 and March 31, 2000, respectively. Cash paid for taxes was $0.6 million and $0.1 million for the 26-week periods ended March 30, 2001 and March 31, 2000, respectively. Non-cash financing activities of CPI included the payment of preferred stock dividends on its Junior Preferred Stock through the issuance of 7,181 shares of its Junior Preferred Stock during the quarter ended March 30, 2001. During the six months ended March 30, 2001, CPI paid preferred stock dividends on its Junior Preferred Stock through the issuance of 14,119 shares of Junior Preferred Stock. 4. SEGMENTS AND RELATED INFORMATION The Company has two reportable segments: vacuum electronic devices ("VEDs") and satcom equipment. The CEO, identified as the Chief Operating Decision Maker, evaluates performance and allocates resources based on the Company's principle performance measure, earnings before income taxes, interest, depreciation and amortization ("EBITDA"). -10- 12 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) Summarized financial information concerning Holding's reportable segments is shown in the following table. Included in the "Other" column is financial information for the Company's Solid State Products Division, which did not meet the quantitative thresholds, and certain unallocated corporate-level operating expenses. Intersegment product transfers are recorded at cost.
(Dollars in thousands) Satcom 13-Week Period Ended VED's Equipment Other Total -------------------- ------- --------- ------- ------- March 30, 2001: Revenues from external customers $48,700 $ 15,551 $ 2,319 $66,570 Intersegment product transfers 4,469 -- 284 4,753 EBITDA -- Holding 7,621 (599) (1,918) 5,104 EBITDA -- CPI 7,621 (599) (2,366) 4,656 March 31, 2000: Revenues from external customers 46,513 12,638 1,189 60,340 Intersegment product transfers 1,921 -- 228 2,149 EBITDA -- Holding 6,593 272 (1,206) 5,659 EBITDA -- CPI 6,593 272 (1,206) 5,659
(Dollars in thousands) Satcom 26-Week Period Ended VED's Equipment Other Total -------------------- ------- --------- ------- -------- March 30, 2001: Revenues from external customers $96,044 $ 27,067 $ 3,835 $126,946 Intersegment product transfers 8,740 -- 698 9,438 EBITDA -- Holding 15,081 (661) (2,968) 11,452 EBITDA -- CPI 15,081 (661) (3,416) 11,004 March 31, 2000: Revenues from external customers 87,654 24,693 2,983 115,330 Intersegment product transfers 4,509 -- 407 4,916 EBITDA -- Holding 12,171 766 (1,901) 11,036 EBITDA -- CPI 12,171 766 (1,901) 11,036
-11- 13 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) A reconciliation of EBITDA from reportable segments to Loss before taxes is as follows:
Holding CPI ----------------------------- ----------------------------- 13-Week Period Ended 13-Week Period Ended ----------------------------- ----------------------------- (Dollars in thousands) March 30, March 31, March 30, March 31, 2001 2000 2001 2000 --------- --------- --------- --------- Segment EBITDA $ 5,104 $ 5,659 $ 4,656 $ 5,659 Less: Depreciation and amortization 3,326 3,929 3,164 3,929 Interest expense 5,364 4,677 4,636 4,677 ------- ------- ------- ------- Loss before taxes $(3,586) $(2,947) $(3,144) $(2,947) ======= ======= ======= =======
Holding CPI ----------------------------- ----------------------------- 26-Week Period Ended 26-Week Period Ended ----------------------------- ----------------------------- (Dollars in thousands) March 30, March 31, March 30, March 31, 2001 2000 2001 2000 -------- -------- -------- -------- Segment EBITDA $ 11,452 $ 11,036 $ 11,004 $ 11,036 Less: Depreciation and amortization 6,662 7,684 6,489 7,684 Interest expense 10,531 9,227 9,723 9,227 -------- -------- -------- -------- Loss before taxes $ (5,741) $ (5,875) $ (5,208) $ (5,875) ======== ======== ======== ========
5. NEW CREDIT FACILITY On December 22, 2000, the Company terminated the Senior Credit Agreement and replaced it with a $61.0 million secured credit facility ("Credit Facility"). This new facility consists of a $41.0 million revolving line of credit, with a sub-facility of $10.0 million for letters of credit, which expires on December 22, 2004, and a $20.0 million term loan that expires on December 22, 2002. The Credit Facility is secured by substantially all of the assets of CPI and is guaranteed by Holding and all of CPI's subsidiaries. Availability under the revolving credit facility is based upon eligible receivables, machinery and equipment and certain real estate and, as of March 30, 2001, CPI had $12.7 million of availability. The revolving line of credit provides for borrowings that will bear interest at a rate equal to LIBOR plus 3.25% per annum or Prime plus 1.75% per annum. The term loan provides for borrowings that will bear interest at rate equal to Prime plus 5.50% per annum. Additionally, the terms of the facility require the Company to maintain certain financial covenants and limit the payment of cash dividends on the Senior and Junior Preferred Stock. In addition to customary fronting and other fees, CPI will pay a fee equal to -12- 14 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) 1.25% per annum on outstanding but undrawn amounts of letters of credit; and additionally CPI will pay customary collateral management fees and a commitment fee of 0.375% per annum on unused facilities under the Credit Facility. 6. SALE-LEASEBACK TRANSACTION On December 22, 2000, a sale-leaseback transaction related to CPI's facilities in San Carlos, California was accomplished between CPI and Holding. Holding paid CPI aggregate consideration of $23.0 million for the San Carlos real estate, consisting of $17.25 million in cash and an unsecured promissory note in the principal amount of $5.75 million maturing in nine years, with interest-only payments on a quarterly basis at the rate of 15.5% per annum, with up to 35.25% of each interest payment payable in kind, at Holding's option, by its issuance of additional notes. CPI and Holding entered into a lease of the San Carlos real property for a term of twenty (20) years on a net basis with a fixed annual rent (payable in equal monthly installments) of $2.45 million. Holding financed the cash portion of the San Carlos purchase price and its fees and expenses with respect to the transaction by borrowing $18.0 million from Wells Fargo Bank, which loan matures June 1, 2002, bears interest at Prime or LIBOR plus 3.25%, and is secured on a non-recourse basis (subject to normal and customary exceptions) by the San Carlos real property. CPI realized a gain of approximately $8.5 million on the transaction that will be amortized over the term of the lease. The current portion of the unrealized gain of $0.4 million is included in CPI's accrued expenses. The unrealized gain is not shown for Holding as it is eliminated upon consolidation. -13- 15 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion reflects the consolidated results of Communications & Power Industries Holding Corporation, which are materially consistent with those of CPI except as identified below. 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. The Company defines and discusses its orders and sales trends by the end markets to more clearly relate its business to outside investors. Internally, however, the Company is organized into six operating units that are differentiated based on products. Four of these operating units comprise the Company's vacuum electronic device ("VED") segment. The Company also has a satellite communications equipment segment and a solid state products segment. Segment data is included in Note 4 of the Notes to Unaudited Consolidated Condensed Financial Statements. Orders during the second quarter of Fiscal 2001 were $78.1 million as compared to $84.3 million for the second quarter of Fiscal 2000. The decrease of $6.2 million, or 7.4%, was driven primarily by the decrease in orders in the communications market as compared to the second quarter of Fiscal 2000 when the company generated an order for $13.6 million related to the XM Radio satellite service. The decrease in the communications market was offset by increased orders in CPI's other markets. Orders for the first six months of Fiscal 2001 of $145.9 million were essentially flat compared to the same time period in Fiscal 2000. Offsetting the decrease in the communications market related to the large XM Radio order in Fiscal 2000, there was higher demand for products in the non-XM Radio communications, radar, industrial, medical and scientific markets of $1.4 million, $6.7 million, $4.6 million, $2.9 million and $1.2 million, respectively, partially offset by $3.2 million lower orders for products used in electronic countermeasures. Radar orders increased due to higher demand for spare and rebuilt VED's primarily for military applications. Industrial orders increased due to orders for build-to-print power supplies manufactured by CPI's Canadian operation. Medical orders were higher in Fiscal 2001 due primarily to increased demand for the Company's line of x-ray generators. Scientific demand increased primarily due to an order for vacuum electronic devices to be used on a collaborative project with five United States national laboratories. Electronic countermeasure orders for the first half of Fiscal 2001 were lower than the comparable period in Fiscal 2000 due to the exercise of a contract option for airborne decoy products in the prior year. Overall, incoming order levels fluctuate significantly on a quarterly basis and a particular quarter's order rate may not be indicative of future order levels. In addition, the Company's sales are highly dependent upon manufacturing scheduling, performance and shipments and, accordingly, it is not possible to accurately predict when these orders will be recognized as sales. As of March 30, 2001, the Company had order backlog of $173.7 million, compared to order backlog of $175.2 million, as of March 31, 2000, both of which represent approximately eight months of sales. Order backlog as of March 30, 2001, increased by $12.1 million, or 7.5%, from $161.6 million at the end of Fiscal 2000. -14- 16 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) Sales for the second quarter of Fiscal 2001 were $66.6 million, an increase of $6.2 million, or 10.3%, compared to $60.3 million for the same period in Fiscal 2000. The increase from a year ago was primarily attributed to the communications and medical markets with increases of $5.2 million, or 24.1% and $3.1 million, or 62.2%, respectively. Sales in the communications market increased as a result of two new products. The Gen IV, the Company's next generation, high power amplifier, and the XM Radio project both began shipping in volume in Fiscal 2001. Medical sales increased as a result of a new line of INDICO generators which are used in x-ray applications. These increases were partially offset by a decline in sales to the radar market of $3.0 million, or 13.2%, that resulted from customer-defined shipping schedules. Sales to the Company's other markets were up slightly from the same time last year. Sales for the first six months of Fiscal 2001 were $126.9 million compared to $115.3 million for the first six months of Fiscal 2000, an increase of $11.6 million, or 10.1%, due to improved sales in the communication and medical markets as discussed above. Gross profit for the second quarter of Fiscal 2001 was $12.6 million, or 19.0% of sales, compared with $13.3 million, or 22.0% generated in the second quarter of Fiscal 2000. Gross profit for the first half of Fiscal 2001 was $25.4 million, or 20.0% compared to $25.5 million, or 22.1% of sales, for the same period of Fiscal 2000. The decline as a percentage of sales for both periods was primarily attributable to higher start-up costs on several new satcom products, and to a lesser degree, due to increases in energy related costs at the Company's California operations. Operating costs and expenses were $12.0 million, or 18.0% of sales, for the second quarter of Fiscal 2001 compared to $11.5 million, or 19.0% of sales, a year ago. The increase in operating cost dollars, despite the decline as a percentage of sales, is attributable to the costs associated with certain consolidation activities including the relocation of the Satcom Division's production from Palo Alto, California to the Company's facility in Ontario, Canada, and the relocation of the Company's administrative offices into a single building in Palo Alto. Costs-to-date attributable to these consolidation efforts were approximately $1.7 million. These increases are offset somewhat by lower research and development costs in the satcom equipment segment as that segment's engineering resources were predominantly focused on production ramp-up issues rather than new product development. Operating costs and expenses for the first six months of Fiscal 2001 were $21.6 million, or 17.0% of sales, compared to $21.9 million, or 19.0% of sales, for the same period of Fiscal 2000. Excluding the effects of the Company's consolidation efforts, operating costs as a percentage of sales for the first half of Fiscal 2001 were 15.7% compared to 19.0% for the same period of Fiscal 2000. The decline in operating costs and expenses from a year ago reflects cost control measures implemented in the latter half of Fiscal 2000 as well as lower research and development costs in the satcom equipment segment. Earnings before interest, income taxes, depreciation and amortization ("EBITDA")(1) for the second quarter of Fiscal 2001 were $5.1 million, or 7.7% of sales, compared to $5.7 million, or 9.4% of sales, (1) EBITDA is presented because some investors may use it as a financial indicator of the ability to service or incur indebtedness. EBITDA should not be considered as an alternative to net earnings (loss), as a measure of operating results, cash flows or liquidity. -15- 17 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) for the second quarter of Fiscal 2000. EBITDA for the first six months of Fiscal 2001 was $11.5 million, or 9.0% of sales, compared to $11.0 million, or 9.6% of sales, for the same period in Fiscal 2000. The decrease in EBITDA of $0.5 million for the first six months was attributable to the Company's consolidation costs, as previously discussed, offset in part by a $0.9 million gain on the sale of a building in Beverly, Massachusetts, which had been previously leased to various third parties. Excluding the effects of the consolidation costs and the building sale, adjusted EBITDA for the first six months was $12.3 million, or 9.7% of sales, compared to $11.0 million, or 9.6% of sales, during the same period in Fiscal 2000. FINANCIAL CONDITION For Holding, cash flows used in operating activities for the first six months of Fiscal 2001 were $4.5 million, compared to cash flows provided by operating activities of $11.1 million during the first six months of Fiscal 2000. The decrease in cash provided of $15.6 million was due primarily to changes in accounts receivable and advance payments from customers that contributed $10.7 million and $5.3 million less cash flow, respectively, in the first half of Fiscal 2001 compared to Fiscal 2000. The lower cash provided by accounts receivable was the result of higher shipments during the second quarter of Fiscal 2001 compared to the same period in Fiscal 2000, and shipments that were lower at the end of Fiscal 2000 compared to the end of Fiscal 1999. The credit worthiness of accounts receivable remains strong and days sales outstanding at the end of the second quarter of Fiscal 2001 was 58 days compared to 62 days at the end of Fiscal 2000. For CPI, cash flows used in operating activities for the first six months of Fiscal 2001 were $4.7 million, compared to cash flows provided by operating activities of $11.1 million during the first six months of Fiscal 2000. The decrease in cash provided of $15.8 million was due primarily to the causes discussed above. For Holding, investing activities decreased cash by $0.4 million in the first six months of Fiscal 2001 compared to $2.8 million in the first six months of Fiscal 2000. This decrease in cash used of $2.4 million was related to a reduction in capital expenditures compared to the first six months of Fiscal 2000 of $0.4 million, coupled with $1.9 million proceeds from the sale of the building in Beverly, Massachusetts. For CPI, in addition to the investing activities discussed in the previous sentence, there were net proceeds of $17.25 million from the sale of CPI's facilities in San Carlos to its parent as part of a sale-leaseback transaction. Capital expenditure requirements for both Holding and CPI for Fiscal 2001 are expected to be similar to the amount spent in Fiscal 2000, with the exception that consolidation efforts discussed below could add additional requirements of approximately $2.5 to $3.0 million, of which $0.6 million has been expended in the first half of Fiscal 2001. For Holding, financing activities during the first half of Fiscal 2001 were related primarily to repayments on its Senior Credit Agreement, which was terminated on December 22, 2000, and proceeds and expenses from its new $61.0 million secured credit facility ("Credit Facility"). This new facility consists of a $41.0 million revolving line of credit, with a sub-facility of $10.0 million for letters of credit, which expires December 22, 2004, and a $20.0 million term loan which expires December 22, 2002. The facility is secured by substantially all of the assets of CPI, and is guaranteed by Holding and all of CPI's subsidiaries. Availability under the revolving credit facility is based upon eligible receivables, machinery and equipment and certain real estate. Also on December 22, 2000, a sale-leaseback transaction related to CPI's facilities in San Carlos was accomplished between CPI and Holding. Holding paid CPI aggregate consideration of $23.0 million for the San Carlos real estate, consisting of -16- 18 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) $17.25 million in cash and an unsecured promissory note of $5.75 million maturing in nine years. CPI and Holding entered into a lease of the San Carlos real property for a term of twenty years on a net basis with a fixed annual rent of $2.45 million. Holding financed the cash portion of the San Carlos purchase price by borrowing $18.0 million, which loan matures June 1, 2002. For CPI, financing activities were similar to those discussed above for Holding with the exception that the $18.0 million of mortgage financing and its related debt issue costs of $0.4 million did not apply to CPI. The Company continues to focus on strategic consolidation efforts approved by the Company's Board of Directors on October 18, 2000. As of the end of the second quarter of Fiscal 2001, the Company has completed the transfer of one of its satcom product lines to the facility in Ontario, Canada and is in the process of transferring others. The relocation of its administrative offices into a single building in Palo Alto is nearly complete and the Company is actively looking for tenants to sublease up to 52,300 square feet of office space. The Company expects to complete this consolidation over the next 9 to 15 months. Management believes that as a result of its recent debt restructuring, the Company will have adequate capital resources and liquidity (including cash flow from operations and borrowing under its revolving credit facility) to meet its obligations, fund all required capital expenditures and pursue its business strategy related to consolidation efforts described above for at least the next twelve months. Market Risk The Company's market risk disclosures set forth in its Annual Report on Form 10-K for the fiscal year ended September 29, 2000, have not changed significantly. Forward-Looking Statements This document contains forward-looking statements that relate to future events or the Company's future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "except," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither the Company nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. All written and oral forward-looking statements made in connection with this report which are attributable to the Company or persons acting on the Company's behalf are expressly qualified in their entirety by the "risk factors" and other cautionary statements included herein. The Company is under no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results or to changes in the Company's expectations. The information in this report is not a complete description of the Company's business or the risks associated with an investment in the Company's securities. We urge you to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports filed with the SEC. -17- 19 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) Risk Factors You should carefully consider the various risks and uncertainties that impact the Company's business and the other information in this report and the Company's other filings with the SEC before you decide to invest in the Company or to maintain or increase your investment. Such risks and uncertainties include, but are not limited to, the following: product demand and market acceptance risks; the effect of general economic conditions; the impact of competitive products and pricing; new product development and commercialization; technological difficulties and the ability to increase margins; production interruptions and cost increases resulting from California's energy crisis; U.S. Government export policies; changes in Governmental appropriations, national defense policies and availability of Government funds; changes in environmental regulation and legislation; availability of certain critical materials and raw material price fluctuations; the Company's ability to generate the significant amount of cash needed to service its debt; and the Company's ability to obtain financing in the future. If any of the following risks actually occur, the Company's business, results of operations, or financial condition would likely suffer and actual results could differ materially from those projected. -18- 20 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2: CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. None. -19- 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMUNICATIONS & POWER INDUSTRIES, INC. By: /s/ Bart F. Petrini ---------------------------------------------------- Bart F. Petrini Chief Executive Officer and President Date: May 11, 2001 By: /s/ Lynn E. Harvey ---------------------------------------------------- Lynn E. Harvey Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) Date: May 11, 2001 -20-