-----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, NK1KqMCV7pYr9p3eQDk+ugwSWApRBrskGUENW6pCG47fi64YDZqMHgq/+u/AzdWj tIopq0bV3y58L1dxVqYv8w== 0000891618-01-502779.txt : 20020413 0000891618-01-502779.hdr.sgml : 20020413 ACCESSION NUMBER: 0000891618-01-502779 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010928 FILED AS OF DATE: 20011224 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: 1934 Act SEC FILE NUMBER: 033-96858-01 FILM NUMBER: 1822227 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: 1934 Act SEC FILE NUMBER: 033-96858 FILM NUMBER: 1822228 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 f78039ore10-k405.txt FORM 10-K405 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 September 28, 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 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION (Exact name of registrant as specified in its charter) DELAWARE (State of Incorporation) 77-0407395 (IRS employer identification number) 811 HANSEN WAY PALO ALTO, CALIFORNIA 94303-1110 (650) 846-2900 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Commission File Number: 33-96858 COMMUNICATIONS & POWER INDUSTRIES, INC. (Exact name of registrant as specified in its charter) DELAWARE (State of Incorporation) 77-0405693 (IRS employer identification number) 811 HANSEN WAY PALO ALTO, CALIFORNIA 94303-1110 (650) 846-2900 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: 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: 4,908,172 SHARES OF COMMON STOCK, $.01 PAR VALUE, AT DECEMBER 7, 2001. COMMUNICATIONS & POWER INDUSTRIES, INC.: 1 SHARE OF COMMON STOCK, $.01 PAR VALUE, AT DECEMBER 7, 2001. DOCUMENTS INCORPORATED BY REFERENCE: (None) FORWARD-LOOKING STATEMENTS This document contains forward-looking statements. These statements 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," "expect," "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. You should read the following discussion and analysis in conjunction with the Financial Statements and related Notes thereto contained elsewhere in this report. 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. PART 1 ITEM 1: BUSINESS GENERAL Communications & Power Industries Holding Corporation ("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, internet 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. In Fiscal 1999, the Company added a line of solid-state products including GaAs FET amplifiers, frequency converters and multiplier amplifiers. The majority of the Company's products are consumable and have a finite life. The Company operates six manufacturing operations in North America, and sells and services its products and customers worldwide primarily through a direct sales force. CPI 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 (the "Predecessor") of Varian Associates, Inc. ("Varian"). The principal executive offices of Holding and CPI are located at 811 Hansen Way, Palo Alto, California 94303 and their telephone number is (650) 846-2900. -1- 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 communications, radar, electronic countermeasures, medical, industrial and scientific markets. The Company offers over 6,800 products that generally have selling prices from $2,000 to $50,000, with certain products ranging in price up to $1,000,000. Most of 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. MARKETS The Company operates in six different markets: - - Communications Market - The communications market is comprised of applications for satellite communications ("satcom"), wireless point-to-point and point-to-multipoint radio 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 $109.9 million in Fiscal 2001 compared to $87.8 million in Fiscal 2000 and $105.4 million in Fiscal 1999. - - Radar Market - The radar market includes microwave and power grid vacuum electronic devices, amplifiers, receiver protectors 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 five decades. Sales in the radar market were $87.9 million in Fiscal 2001 compared to $90.8 million in Fiscal 2000, and $85.4 million in Fiscal 1999. - - 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 $21.8 million, $21.9 million, and $19.4 million in Fiscal 2001, Fiscal 2000, and Fiscal 1999, respectively. - - 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 $27.4 million, $20.9 million, and $20.5 million in Fiscal 2001, Fiscal 2000, and Fiscal 1999, 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 $20.0 million, $17.5 million, and $17.2 million in Fiscal 2001, Fiscal 2000, and Fiscal 1999, respectively. - - 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 $5.5 million, $4.2 million, and $7.8 million in Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively. -2- 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 $214.8 million or 78.8%, of the Company's total sales in Fiscal 2001 compared to $188.9 million, or 77.7% in Fiscal 2000, and approximately $199.7 million, or 78.1%, in Fiscal 1999. U.S. Government sales, both direct and through original equipment manufacturers ("OEMs"), contributed approximately $57.7 million or 21.2%, of the Company's total sales in Fiscal 2001 compared to approximately $54.2 million, or 22.3%, in Fiscal 2000 and $56.0 million, or 21.9%, in Fiscal 1999. These percentages reflect the Company's development of products for the commercial marketplace. 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 2001, management expects that U.S. Government and defense-related end-users will continue to provide a steady source of revenue. In Fiscal 2001, approximately 67.0% of sales were derived from U.S. customers, while approximately 33.0% were derived from international customers compared to Fiscal 2000 where approximately 67.3% of sales were derived from the U.S. and approximately 32.7% were from international customers. However, many domestic OEMs, primarily those in the satcom 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 Fiscal 2001, Fiscal 2000 or Fiscal 1999. SALES, MARKETING AND SERVICE As of September 28, 2001, the Company has over 150 direct sales, marketing and technical support 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. Most of the Company's sales professionals are 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 over 35 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 that 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. The Company also has a specialized network of eleven factory service centers for the satcom replacement market. These service centers are located in the United States (California and New Jersey), Amsterdam, Brazil, China, India, Indonesia, Japan, Russia, Singapore and South Africa. -3- MANUFACTURING The Company manufactures its products within six manufacturing operations 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. Generally, each of the Company's manufacturing units use similar production processes consisting of product development, purchasing, high level assembly and test. For satcom equipment and solid-state devices, the process is primarily one of integration and contract manufacturers are used whenever possible. Satcom equipment utilizes both vacuum electronic devices ("VEDs") and solid-state technology and, therefore, procures components from the Company's other manufacturing units. For VEDs, 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 them in a furnace and simultaneously stimulating 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, cupernickel, 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 Northrop Grumman (formerly Litton), MM Tech (formerly Marconi Applied Technologies, formerly EEV), Xicom and Thales (formerly 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 competitive prices, 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. Solid-state devices generally serve end-users' low-power requirements, however, only microwave vacuum electronic devices currently serve higher-power and higher-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 that are best satisfied by the Company's vacuum electron device products. The Company's management believes that each technology serves its own niche without significant overlap. -4- BACKLOG As of September 28, 2001, the Company had an order backlog of $151.5 million compared to order backlog of $161.6 million as of September 29, 2000 and $146.4 million as of October 1, 1999. Backlog was unusually high in Fiscal 2000 primarily due to an order for $13.6 million related to the XM Radio satellite service. 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. 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. In August 1995, 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 August 1995, the Company and Varian entered into a Trademark License Agreement that allows the Company to identify its products as "formerly made by Varian" for a period of ten years. -5- RESEARCH AND DEVELOPMENT Company-sponsored research and development ("R&D") expense was approximately $5.8 million, $8.7 million, and $9.0 million during Fiscal 2001, Fiscal 2000, and Fiscal 1999, respectively. Research and development expenses decreased during FY 2001 in the Satcom equipment segment as that segment's engineering resources were predominantly focused on production ramp up issues rather than new product development. Customer-sponsored R&D was approximately $5.0 million, $6.5 million, and $8.6 million during Fiscal 2001, Fiscal 2000, and Fiscal 1999, respectively. For customer-sponsored R&D, the costs were charged to cost of sales to match revenue received. EMPLOYEES As of September 28, 2001, the Company had approximately 1,720 employees compared to 1,650 employees as of September 29, 2000. 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 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 95.4% of the Company's U.S. Government sales in Fiscal 2001 and cost-plus contracts accounted for 4.6% compared to Fiscal 2000's mix of approximately 91.6% fixed-price and approximately 8.4% cost-plus and Fiscal 1999's mix of approximately 93% fixed-price and approximately 7% 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 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 -6- 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. 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 that 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 variety of federal, state and local environmental laws and regulations and utilizes in its operations a number of chemicals or similar substances that are classified as hazardous. Management believes that the Company's current operations are in substantial compliance with current environmental laws and regulations. However, changes in law or limitations 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. In addition, it is possible that the Company may experience releases of certain chemicals or other events that could cause the incurrence of material cleanup costs or other damages. 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 regulatory compliance, exposure to chemicals or the remediation of environmental contamination. Varian has agreed to indemnify the Company for environmental claims arising from the Predecessor's operations (including pre-existing contamination) prior to August 11, 1995, subject to certain exceptions and limitations. Environmental investigation and remedial work is being undertaken by Varian, pursuant to the agreement between CPI and Varian dated August 11, 1995, at two of the Company's manufacturing facilities, Palo Alto and Beverly, and the San Carlos and Georgetown facilities also have soil and groundwater contamination which may require remediation. The Company subleases a portion -7- of the larger Varian Palo Alto campus, as to which Varian has entered into a Consent Order with the California Environmental Protection Agency for remediation of soil and groundwater contamination. The Palo Alto site also abuts a federal Superfund site and a state Superfund site. Varian also has been sued or threatened with suit with respect to some of the Company's facilities. Since the consummation of the acquisition, Varian has at its expense conducted all required investigation and remediation work at the Company's facilities arising from the Predecessor's operations. 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 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. With certain limited exceptions, the Company is not indemnified by Varian for environmental claims arising from the Company's operations after August 11, 1995. 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. ITEM 2: PROPERTIES The Company owns, leases or subleases manufacturing, assembly, warehouse, service and office properties having an aggregate floor space of approximately 1,107,641 square feet, of which approximately 33,279 square feet are leased or subleased to third parties. The table that follows 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............ 166,500(b) Georgetown, Ontario, Canada....... 126,000 21,975(c) Palo Alto, California............. -- 429,000(d) San Jose, California.............. -- 27,727(e) Various locations................. -- 16,439(f)
(a) The San Carlos, California square footage includes approximately 21,564 square feet leased to two tenants who provide services to the Company and others. (b) The Beverly, Massachusetts square footage includes approximately 2,700 square feet leased to two tenants. (c) The Ontario, Canada square footage includes approximately 6,000 square feet leased 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 square footage includes approximately 3,015 square feet leased to two tenants. (e) This facility is leased from Watch Holdings, LLC c/o GE Capital Realty Group. Lease will expire in June 2002 with a five-year extension available upon request prior to expiration. (f) Includes both leased facilities occupied entirely by the Company's field sales and service organizations and three foreign shared use facilities which the Company is sharing for varying periods of time under rental agreements with Varian. In Fiscal 2001, the Company began relocating its Satcom Division's production operation from Palo Alto, California to its facility in Ontario, Canada. The move is expected to be substantially complete in the first quarter of Fiscal 2002. Also in Fiscal 2001, the Company relocated its administrative offices into a single building in Palo Alto and is actively looking for tenants to sublease the additional 52,300 square feet of office space. -8- CPI's lenders under its secured credit facility, have the right to a security interest in all of the Company's interest in the real property that it owns and leases excluding its San Carlos, California real property. 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 $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 LIBOR plus 3.25% and is secured on a non-recourse basis (subject to normal and customary exceptions) by the San Carlos real property. The Company's headquarters and one principal complex, including two 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. 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 agreement between CPI and Varian dated August 11, 1995, Varian has agreed to indemnify the Company against liabilities arising from litigation and governmental claims pertaining to the operation of the Predecessor prior to August 11, 1995. Accordingly, management believes that litigation and governmental claims pending against Varian and relating to the operation of the Predecessor prior to August 1995, 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 fourth quarter of Fiscal 2001. -9- 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 52-week period ended September 28, 2001. Restrictive covenants under the Company's credit facility 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 FINANCIAL DATA The following selected financial data has been derived from the consolidated financial statements. The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. -10- FIVE-YEAR SELECTED FINANCIAL DATA -- COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION AND SUBSIDIARIES
Years Ended 52 Weeks 52 Weeks 52 Weeks 52 Weeks 53 Weeks (Dollars in Thousands) Ended Ended Ended Ended Ended September 28, September 29, October 1, October 2, October 3, 2001 2000 1999 1998 1997 ------------- ------------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Sales $ 272,521 243,054 255,680 260,688 253,439 Gross profit 49,189 54,306 56,042 66,278 69,761 Operating income 4,837 8,303 8,752 26,720 29,811 Interest expense 20,734 18,663 17,805 17,793 19,039 Income tax expense (benefit) 2,950 1,232 605 3,750 (3,000) --------- -------- -------- ------- -------- Net (loss) earnings before preferred dividends $ (18,847) (11,592) (9,658) 5,177 13,772 ========= ======== ======== ======= ======== EBITDA(a) 18,183 23,619 22,527 38,017 39,441 Certain Non-Cash Charges: Depreciation and amortization 13,346 15,316 13,635 11,297 9,630 Amortization of deferred debt issue costs 1,987 1,288 1,209 1,372 1,952 Capital expenditures(b) 5,902 5,325 8,588 8,204 10,767 BALANCE SHEET DATA: Working capital $ 22,048 19,881 26,907 45,957 40,467 Total assets 204,067 226,985 233,584 229,212 237,396 Long-term debt and redeemable preferred stock 148,569 139,160 142,039 146,981 149,100 Total (deficit) equity (57,608) (31,188) (12,962) 2,512 2,841
- ---------------- The Company has paid no cash dividends on its common stock in any of the years presented above. (a) EBITDA represents earnings before provision for income taxes, interest expense, depreciation and amortization. In Fiscal 1999, EBITDA also excludes a charge of $140,000 related to the purchase accounting write-up of inventory. (b) Capital expenditures as reported here include equipment acquired under a capital lease. Capital leases, primarily related to the purchase of new computer and telephone equipment, were $114,000 in Fiscal 2001, $0 in Fiscal 2000, and $309,000 in Fiscal 1999. In addition, in Fiscal 2001, capital expenditures include $1,445,000 of costs associated with consolidation and relocation activities discussed above in note (b). -11- FIVE-YEAR SELECTED FINANCIAL DATA -- COMMUNICATIONS & POWER INDUSTRIES, INC. AND SUBSIDIARIES
Years Ended 52 Weeks 52 Weeks 52 Weeks 52 Weeks 53 Weeks (Dollars in Thousands) Ended Ended Ended Ended Ended September 28, September 29, October 1, October 2, October 3, 2001 2000 1999 1998 1997 ------------- ------------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Sales $ 272,521 243,054 255,680 260,688 253,439 Gross profit 49,189 54,306 56,042 66,278 69,761 Operating income 3,813 8,303 8,752 26,720 29,811 Interest expense 18,646 18,663 17,805 17,793 19,039 Income tax expense (benefit) 2,950 1,232 605 3,750 (3,000) --------- -------- -------- ------- -------- Net (loss) earnings before preferred dividends $ (17,783) (11,592) (9,658) 5,177 13,772 ========= ======== ======== ======= ======== EBITDA(a) 16,661 23,619 22,527 38,017 39,441 Certain Non-Cash Charges: Depreciation and amortization 12,848 15,316 13,635 11,297 9,630 Amortization of deferred debt issue costs 1,655 1,288 1,209 1,372 1,952 Capital expenditures(b) 5,902 5,325 8,588 8,204 10,767 BALANCE SHEET DATA: Working capital $ 39,265 19,881 26,907 45,957 40,467 Total assets 195,649 226,985 233,584 229,212 237,396 Long-term debt and redeemable preferred stock 156,304 139,160 142,039 146,981 149,100 Total (deficit) equity (34,450) (12,018) 3,660 16,912 15,306
- -------------- The Company has paid no cash dividends on its common stock in any of the years presented above. (a) EBITDA represents earnings before provision for income taxes, interest expense, depreciation and amortization. In Fiscal 1999, EBITDA also excludes a charge of $140,000 related to the purchase accounting write-up of inventory. (b) Capital expenditures as reported here include equipment acquired under a capital lease. Capital leases, primarily related to the purchase of new computer and telephone equipment, were $114,000 in Fiscal 2001, $0 in Fiscal 2000, and $309,000 in Fiscal 1999. In addition, Fiscal 2001 capital expenditures include $1,445,000 of costs associated with consolidation and relocation activities discussed above in note (b). -12- ITEM 7: 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 and should be read in conjunction with the consolidated financial statements and notes thereto: OVERVIEW The Company serves the communications, radar, electronic countermeasures, medical, industrial 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 these end markets in order 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 its solid-state products segment. Segment data is included in Note 11 of the Notes to Consolidated Financial Statements. Orders for Fiscal 2001 were higher than any year since 1997 at $266.5 million. This level is $6.3 million, or 2.4% higher than the $260.2 million in Fiscal 2000 and reflects increased orders in the radar and medical markets offset in part by a decrease in the communications market. Order receipts for the Company's communications products were $93.9 million, a decrease of $12.7 million, or 11.9%, from the prior fiscal year due principally to a non-recurring $13.6 million order for XM Radio in Fiscal 2000. Medical orders were $31.5 million in Fiscal 2001, an increase of $9.5 million or 43.2% from Fiscal 2000. The increased orders relate to medical klystrons used in medical accelerators manufactured by Varian Medical as well as orders for x-ray subsystems produced by the Company's Canadian facility. Radar orders were $95.7 million, an increase of $7.9 million or 9.1% from $87.8 million in Fiscal 2000. The increase reflects increased spares buys by the U.S. Navy as well as a large order from the Army for klystrons. Electronic countermeasures orders were $21.9 million, an increase of $1.1 million or 5.1% from the prior year. Industrial orders were $17.2 million, flat from Fiscal 2000. Orders for products sold to the scientific market, the Company's smallest market, increased slightly by $0.3 million or 5.8%, for a total of $6.3 million in Fiscal 2001. 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. Sales for Fiscal 2001 were $272.5 million compared to sales of $243.1 million in Fiscal 2000, an increase of $29.5 million or 12.1%. This increase was primarily related to higher sales of products used in the satcom portion of the Company's communications market including sales of the Company's new Gen IV product line and sales of units for the XM Radio project. -13- Looking forward, orders are expected to be down from Fiscal 2001 levels. The commercial communications market is forecasted to be down from last year's level due to the reduction in capital expenditures by the Company's customers resulting from the current worldwide economic slowdown. The medical, industrial and scientific markets are expected to be relatively flat from Fiscal 2001. However, sale of VEDs into the radar and electronic countermeasures markets may see some positive impact from the recent global events, specifically in the defense spares business and products used for cold sterilization. The exact affect, however, is difficult to predict at this time. RESULTS OF OPERATIONS The following table sets forth Holding's historical results of operations as a percentage of sales for each of the periods indicated.
52 Weeks 52 Weeks 52 Weeks Ended Ended Ended September 28, 2001 September 29, 2000 October 1, 1999 ------------------ ------------------ --------------- Sales 100.0% 100.0% 100.0% Cost of sales 82.0 77.7 78.1 ----- ----- ----- Gross profit 18.0 22.3 21.9 Research and development 2.1 3.6 3.5 Selling and Marketing 6.4 7.6 7.7 General and administrative(a) 7.7 7.7 7.3 ----- ----- ----- Operating income 1.8 3.4 3.4 Interest expense 7.6 7.7 7.0 ----- ----- ----- Loss before taxes (5.8) (4.3) (3.6) Income tax expense 1.1 0.5 0.2 ----- ----- ----- Net loss (6.9)% (4.8)% (3.8)% ===== ===== ===== Other Data: EBITDA(b) 6.7% 9.7% 8.8% Preferred Dividends 2.7% 2.6% 2.2%
- ----------------- (a) For purposes of MD&A, general and administrative results include foreign currency (loss) gain. (b) 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. Fiscal 2001 Compared to Fiscal 2000 SALES. Sales for Fiscal 2001 of $272.5 million were $29.5 million, or 12.1%, higher than the prior year level of $243.1 million due primarily to increases in products sold to the Company's communications market. Communications sales were $109.8 million, an increase of $22.0 million, or 25.1% from Fiscal 2000 sales of $87.8 million. Sales of products in the medical market were $27.4 million, up $6.5 million or 31.4% from Fiscal 2000 sales of $20.8 million. This increase was driven primarily by the Company's new line of generators used in x-ray applications. Industrial and scientific sales were $20.0 million and $5.5 million, respectively, which represents an increase of $2.5 million and $1.4 million, respectively, over Fiscal 2000. Radar sales, on the other hand, decreased $2.9 million, or 3.2%, to $87.9 million in Fiscal 2001 compared to $90.8 million in Fiscal 2000. Sales of products to the Company's electronic countermeasures market of $21.9 million in Fiscal 2001 were consistent with the Fiscal 2000 level. COST OF SALES. Cost of sales in Fiscal 2001 were $223.3 million, or 82.0% of sales, compared to $188.7 million, or 77.7% of sales in Fiscal 2000. This increase in cost of $34.6 million, or 18.3%, was attributable to higher volume, higher start-up and warranty costs on several new satcom products, increased provisions for potentially excess and obsolete inventories and to increases in energy related costs at the Company's California operations. The increase in provisions for excess and obsolete -14- inventories includes $3.4 million which was recorded in the fourth quarter related to products or product lines which management has determined, in light of recent economic conditions and the transfer of the Satcom Division's production to Canada, are unlikely to be saleable. RESEARCH AND DEVELOPMENT. R&D expenses in Fiscal 2001 decreased by $2.9 million to $5.8 million, or 2.1% of sales, compared to Fiscal 2000's level of $8.7 million, or 3.6% of sales. The decrease is attributable to 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. SELLING, MARKETING, GENERAL AND ADMINISTRATIVE. Selling, marketing, general and administrative expenses in Fiscal 2001 were $38.6 million, or 14.1% of sales, as compared to $37.3 million, or 15.3% of sales, in Fiscal 2000. Selling and marketing costs decreased approximately $1.0 million in Fiscal 2001 due primarily to reductions at the Satcom division for Marcom advertising and personnel. The decrease in marketing and selling costs were partially offset by a $2.3 million increase in general and administrative costs. The increase is 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. General and administrative costs-to-date attributable to these consolidation efforts were approximately $3.7 million. Excluding the effects of the Company's consolidation efforts, operating costs as a percentage of sales for Fiscal 2001 were 12.8% compared to 15.3% for the same period of Fiscal 2000 reflecting the impact of cost-cutting measures in effect throughout the Company. EBITDA. EBITDA was $18.2 million, or 6.7% of sales in Fiscal 2001 compared to EBITDA of $23.6 million, or 9.7% of sales, in Fiscal 2000. Fiscal 2001 EBITDA declined by $5.4 million primarily due to costs incurred associated with the Company's consolidation activities. NET LOSS. Net loss before taxes and preferred dividends was $15.9 million for Fiscal 2001 compared to a net loss before taxes and preferred dividends of $10.4 million for Fiscal 2000. Net loss after taxes but before preferred dividends was $18.8 million for Fiscal 2001, a decline of $7.3 million compared to losses of $11.6 million for Fiscal 2000. In spite of a consolidated pretax loss, a provision for income tax expense was booked in Fiscal 2001 based on the net impact of federal alternative minimum tax, profitability in most foreign operations, the release of amounts previously accrued for potential examinations by tax authorities, and deferred income tax expense resulting from a decrease in deferred tax assets. The Fiscal 2000 provision for income tax expense was primarily due to the fact that most foreign operations were profitable. DIFFERENCES BETWEEN HOLDING AND CPI. In Fiscal 2001, CPI's net loss before taxes was $14.8 million, which was approximately $1.1 million lower than Holdings' net loss before taxes. This difference is attributable to the sale-leaseback transaction between CPI and Holding which took place in December 2000. As a result of this transaction, operating costs for CPI were approximately $1.0 million higher than those of Holding due to rental payments paid by CPI to Holding for use of the San Carlos facility offset by amortization of the deferred gain on the sales-leaseback and additional depreciation on the San Carlos facility. Interest expense, net, for CPI was approximately $2.0 million lower than that of Holding. The decrease primarily relates to the fact that Holding's interest expense figure includes interest paid on the mortgage financing of the San Carlos facility. In addition, interest income from Holding of $0.7 million related to an intercompany receivable is included in CPI's results, but is eliminated upon consolidation for Holding. All other operations data for CPI is consistent with Holding's for Fiscal 2001. -15- Fiscal 2000 Compared to Fiscal 1999 SALES. Sales for Fiscal 2000 of $243.1 million were $12.6 million, or 4.9%, below the prior year level of $255.7 million as declines in products sold to the Company's communications and scientific markets were partially offset by increases in sales of products to radar, electronic countermeasures, medical and industrial markets. Communications sales were $87.8 million in Fiscal 2000, which represents a decline of $17.6 million, or 16.7% from Fiscal 1999 sales of $105.4 million. Sales of products to the scientific market were approximately $4.2 million, down $3.6 million, or 46.7%, from Fiscal 1999 sales of $7.8 million. Radar sales, on the other hand, increased $5.4 million, or 6.3%, to $90.8 million in Fiscal 2000 compared to $85.4 million in Fiscal 1999. Also on the upside, sales of products to the Company's electronic countermeasures market of $21.9 million in Fiscal 2000 reflects an increase of $2.5 million, or 12.7%, from Fiscal 1999 as expendable decoy products continue to gain increasing attention from military customers as a cost effective means of protecting personnel and hardware. Medical and Industrial sales were $20.9 million and $17.5 million, respectively, which represents an increase of $0.4 million and $0.3 million, respectively, over Fiscal 1999. COST OF SALES. Cost of sales in Fiscal 2000 were $188.7 million, or 77.7% of sales, compared to $199.6 million, or 78.1% of sales in Fiscal 1999. This decrease in cost of $10.9 million, or 5.5%, was primarily due to lower volume. Adjusting Fiscal 1999 to exclude the unfavorable impact of one-time charges of approximately $6.2 million (charges related to changes in estimated costs-to-complete for certain contracts due to technical complexity, write-off of certain excess inventory and discontinuation of a satcom product line), adjusted cost of sales in Fiscal 1999 were $193.4 million, or 75.6% of sales. Excluding these one-time charges, cost of sales in Fiscal 2000 actually increased as a percentage of sales from adjusted Fiscal 1999 due in part to higher depreciation costs ($10.4 million in Fiscal 2000 compared to $9.3 million in Fiscal 1999) and in part to the mix of new products with inherently higher costs at the early stages of their learning curve. Cost of sales in Fiscal 2000 were also unfavorably impacted by higher material costs that resulted from expediting part shortages during the implementation of new business systems in the early part of the fiscal year. RESEARCH AND DEVELOPMENT. R&D expenses in Fiscal 2000 decreased by $0.3 million to $8.7 million, or 3.6% of sales, compared to Fiscal 1999's level of $9.0 million, or 3.5% of sales. The Company's internal R&D efforts remained high as a percentage of sales primarily to focus on meeting the needs of its satcom market. SELLING, MARKETING, GENERAL AND ADMINISTRATIVE. Selling, marketing, general and administrative expenses in Fiscal 2000 were $37.3 million, or 15.3% of sales, as compared to $38.3 million, or 15.0% of sales, in Fiscal 1999. Selling and marketing costs decreased $1.1 million in Fiscal 2000 due to lower international selling expenses related to lower international sales, and a reduction in marketing costs due to the consolidation of the Traveling Wave Technology (TWT) Division into the Microwave Power Products (MPP) Division in the second half of Fiscal 1999. General and administrative (G&A) costs appear consistent with Fiscal 1999; however, Fiscal 1999 included one-time charges to G&A of $1.2 million related to severance costs and settlement costs related to a product performance dispute. The increase in G&A, excluding the one-time charges, is due primarily to higher depreciation costs for new management information systems and the use of outside consultants in the implementation of these systems. EBITDA. EBITDA was $23.6 million, or 9.7% of sales, in Fiscal 2000 compared to EBITDA of $22.5 million, or 8.8% of sales, in Fiscal 1999. Adjusting Fiscal 1999 to exclude the unfavorable impact of one-time charges of an aggregate $7.4 million (see discussion under "Cost of Sales" and "Selling, Marketing, General and Administrative" sections above), adjusted EBITDA for Fiscal 1999 was -16- approximately $30.0 million, or 11.7% of sales. Fiscal 2000 EBITDA actually declined by $6.3 million compared to adjusted Fiscal 1999 due primarily to lower sales volume and shifts in product mix towards lower margin new products. NET LOSS. Net loss before taxes and preferred dividends was $10.4 million for Fiscal 2000 compared to a net loss before taxes and preferred dividends of $9.1 million for Fiscal 1999. Net loss after taxes but before preferred dividends was $11.6 million for Fiscal 2000, a decline of $1.9 million compared to losses of $9.7 million for Fiscal 1999. In spite of a consolidated pretax loss, a provision for income tax expense was booked in both Fiscal 2000 and Fiscal 1999 due to the fact that most foreign operations were profitable. FINANCIAL CONDITION OF HOLDING Net cash provided from operating activities was $1.7 million in Fiscal 2001, $9.9 million in Fiscal 2000 and $6.3 million in Fiscal 1999. The decrease in cash provided by operating activities in Fiscal 2001 is due primarily to lower earnings as a result of the Company's consolidation efforts and higher start-up and warranty costs on several new satcom products, increases in receivables due to higher sales and decreases in accounts payable, offset in part by decreases in deferred tax assets and inventories. Investing activities were comprised principally of investment in property, plant and equipment totaling $5.8 million in Fiscal 2001, $5.3 million in Fiscal 2000, and $8.3 million in Fiscal 1999. Included in the $5.8 million of capital expenditures for Fiscal 2001 is approximately $1.4 million related to the Company's consolidation activities. This use of cash was offset in part by proceeds from the sale of property, plant and equipment of $1.9 million, the majority of which related to the sale of rental property at the Company's Beverly, Massachusetts facility. The Company's investment in plant and equipment in Fiscal 2001 and Fiscal 2000 were lower than historical levels due to cost control measures implemented by the Company during the second half of Fiscal 2000. The Company's continuing operations typically do not have large capital requirements. Capital expenditures are generally made to replace existing assets, increase productivity, facilitate cost reductions or meet regulatory requirements. The Company expects the level of capital expenditures in Fiscal 2002 to be relatively consistent with Fiscal 2000 and 2001 levels and estimates approximately $4.5 million of capital spending will be required by normal operations in Fiscal 2002. Financing activities during Fiscal 2001 were related almost entirely to repayments of the CPI's Senior Credit Agreement and proceeds from a new $61.0 million secured credit facility ("Credit Facility") dated December 22, 2000. 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 that expires 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. 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 $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 LIBOR plus 3.25% and is secured -17- on a non-recourse basis (subject to normal and customary exceptions) by the San Carlos real property. In a further effort to provide capital and liquidity in the long term and in an effort to decrease production costs and more efficiently use the Company's facilities, the Company approved a plan to relocate its Satcom Division's production operation from Palo Alto, California to its facility in Ontario, Canada. The move is expected to be substantially complete during the first quarter of Fiscal 2002 with remaining spending of approximately $1.0 million. Also during Fiscal 2001, the Company relocated its administrative offices into a single building in Palo Alto and is actively looking for tenants to sublease 52,300 square feet of office space. As discussed above, the Company's short-term debt includes mortgage financing of $18.0 million with Wells Fargo Bank that expires on June 1, 2002. Management expects that cash to be generated by operations and borrowing under its Credit Facility in conjunction with either extending or finding alternative collateral-based financing by June 1, 2002 will allow it to meet the mortgage obligation. In addition, the Company recently received a bid for its property in San Carlos for an amount in excess of its existing mortgage which would allow the Company to continue to operate on this property on a leaseback basis. Although this specific bid was turned down, the Company believes a sale of the San Carlos property could be a viable alternative if necessary to meet cash requirements in the future. There can be no assurance that the combination of cash generated by operations, borrowing availability from the Company's Credit Facility and additional collateral-based financing will be sufficient to meet the Company's cash requirements. If the Company is unable to satisfy such cash requirements from these sources, the Company will adopt one or more alternatives, such as reducing or delaying capital expenditures, reducing discretionary costs, negotiating an increase to the Company's borrowing capacity under its line of credit, and selling and leasing back its facility in San Carlos, California in a transaction with an outside party. FINANCIAL CONDITION OF CPI Net cash provided from operating activities was $2.0 million in Fiscal 2001, $9.9 million in Fiscal 2000 and $6.3 million in Fiscal 1999. The decrease in cash provided by operating activities in Fiscal 2001 is due primarily to lower earnings as a result of the Company's consolidation efforts and higher start-up and warranty costs on several new satcom products, increases in receivables due to higher sales and decreases in accounts payable, offset in part by decreases in deferred tax assets and inventories. Net cash provided by investing activities were $13.4 million principally due to proceeds from the sale by CPI of the San Carlos, California facility to Holding of $17.3 million and the sale of rental property at the Company's Beverly, Massachusetts facility of $1.9 million. These proceeds were offset by investment in property, plant and equipment totaling $5.8 million in Fiscal 2001, $5.3 million in Fiscal 2000, and $8.3 million in Fiscal 1999. Included in the $5.8 million of capital expenditures for Fiscal 2001 is approximately $1.4 million related to the Company's consolidation activities. The Company's investment in plant and equipment in Fiscal 2001 and Fiscal 2000 were lower than historical levels due to cost control measures implemented by the Company during the second half of Fiscal 2000. The Company's continuing operations typically do not have large capital requirements. Capital expenditures are generally made to replace existing assets, increase productivity, facilitate cost reductions or meet regulatory requirements. The Company expects the level of capital expenditures in Fiscal 2002 to be relatively consistent with Fiscal 2000 and 2001 levels and estimates approximately $4.5 million of capital spending will be required by normal operations in Fiscal 2002. Financing activities during Fiscal 2001 were related almost entirely to repayments of the Company's Senior Credit Agreement and proceeds from a new $61.0 million secured credit facility ("Credit -18- Facility") dated December 22, 2000. 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 that expires 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. In a further effort to provide capital and liquidity in the long term and in an effort to decrease production costs and more efficiently use the Company's facilities, the Company approved a plan to relocate its Satcom Division's production operation from Palo Alto, California to its facility in Ontario, Canada. The move is expected to be substantially complete during the first quarter of Fiscal 2002 with remaining spending of approximately $1.0 million. Also during Fiscal 2001, the Company relocated its administrative offices into a single building in Palo Alto and is actively looking for tenants to sublease 52,300 square feet of office space. As discussed above, CPI's parent has mortgage financing of $18.0 million with Wells Fargo Bank that expires on June 1, 2002. Management expects that cash to be generated by operations and borrowing under its Credit Facility in conjunction with either extending or finding alternative collateral-based financing by June 1, 2002 will allow it to meet the mortgage obligation. In addition, the Company recently received a bid for its property in San Carlos for an amount in excess of its existing mortgage which would allow the Company to continue to operate on this property on a leaseback basis. Although this specific bid was turned down, the Company believes this is another viable alternative if necessary to meet cash requirements in the future. There can be no assurance that the combination of cash generated by operations, borrowing availability from the Company's Credit Facility and additional collateral-based financing will be sufficient to meet the Company's cash requirements. If the Company is unable to satisfy such cash requirements from these sources, the Company will adopt one or more alternatives, such as reducing or delaying capital expenditures, reducing discretionary costs, negotiating an increase to the Company's borrowing capacity under its line of credit, and selling and leasing back the facility in San Carlos, California, owned by its parent, in a transaction with an outside party. Market Risk The Company is exposed to interest rate risk on its outstanding debt, as well as foreign currency exchange rate risk inherent in its sales commitments, and non-U.S. dollar denominated assets and liabilities. The Company regularly assesses the potential impact of these risks and therefore does not anticipate any material losses in these areas. The Company does not use derivative financial instruments for speculative or trading purposes. The Company has outstanding debt associated with its purchase of the Electron Device Business of Varian in August 1995, the majority of which relates to the Senior Subordinated Notes, which mature in 2005 and bear a fixed interest rate of 12 percent per annum. The remaining debt, with a carrying value of approximately $59.3 million at September 28, 2001, is subject to changes in the Prime or LIBOR Rates. To reduce the Company's exposure to interest rate risk, the Company consistently monitors available money rates accessible under its credit facility and will lock in rates for specific periods of time. The majority of the Company's revenue and expense activities are transacted in U.S. dollars. However, CPI does enter into these transactions in other currencies, primarily the Canadian dollar, the British pound, the German mark, the Australian dollar and the French and Swiss franc. The Company limits its foreign currency exposure primarily through natural hedging (offsetting foreign currency payables with foreign currency receivables), but may enter into forward contracts if necessary. These efforts reduce, -19- but do not eliminate the impact of foreign currency rate movements. The Company performed a sensitivity analysis in which it assessed the potential loss in future earnings from the impact of a 10 percent adverse movement in interest and foreign currency exchange rates on outstanding debt and non-U.S. dollar denominated assets and liabilities. The impact was determined based on the hypothetical change from shifts in the market rates over a period of one year. Other market sensitive financial instruments were not included in the analysis as they were not material. In terms of interest rate risk, a 10 percent adverse movement in the Base Rate or Effective Rate on the Company's variable rate debt would result in a decrease in future earnings of less than $0.3 million. In terms of foreign currency exchange rate risk, a 10 percent adverse movement in the levels of foreign currency exchange rates against the U.S. dollar with all other variables held constant would have virtually no effect on future earnings as foreign payable and receivable balances have similar values, minimizing the foreign exchange exposure. Actual results, however, could differ materially. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations." Under SFAS No. 141, entities are required to account for all business combinations initiated after June 30, 2001 using one method, the purchase method. The Company adopted SFAS No. 141 on July 1, 2001. The adoption did not have a material effect on the Company's consolidated financial position or results of operations. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. Upon adoption of SFAS No. 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under SFAS No. 141 will be reclassified to goodwill. Companies are required to adopt SFAS No. 142 for fiscal years beginning after December 15, 2001, but early adoption is permitted. The Company disclosed plans for early adoption in its third quarter 10-Q, however, due to uncertainties involved in implementation, the Company has decided to forgo early adoption and plans to adopt this Statement beginning in the first quarter of Fiscal 2003. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 143, "Accounting for Asset Retirement Obligation" (SFAS No. 143). SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, and will require companies to record a liability for asset retirement obligations in the period in which they are incurred, which typically could be upon completion or shortly thereafter. The FASB decided to limit the scope to legal obligation and the liability will be recorded at fair value. The Company does not expect the adoption of SFAS 143 to have a material effect on its consolidated financial position, results of operations, or cash flows. -20- In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. It provides a single accounting model for long-lived assets to be disposed of and replaces SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The Company does not expect the adoption of SFAS 144 to have a material effect on its consolidated financial position, results of operations, or cash flows. Risk Factors You should carefully consider the following risks 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. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties may also adversely impact and impair the Company's business. If any of the following risks actually occur, the Company's business, results of operations, or financial condition would likely suffer. In such case, the trading price of the Company's capital stock and senior subordinated notes could decline and you may lose all or part of your investment. - - The Company has had historical losses. The Company has had operating losses for the past three fiscal years, and has an accumulated deficit, as of September 28, 2001, of $75.6 million. The Company's ability to generate revenues and profits is subject to the risks and uncertainties encountered by companies in very competitive markets. - - The Company's leverage is substantial, which could adversely affect its financial health and ability to obtain financing in the future and react to changes in its business. The Company has a significant amount of debt, which could make it more difficult for the Company to satisfy its obligations under its credit facilities. It could also require the Company to dedicate a substantial portion of its cash flow from operations to payments on debt, which will reduce the funds available for working capital, capital expenditures, and other general corporate expenses. In addition, it could have the effect of limiting the Company's flexibility in planning for, or reacting to, changes in its business and the markets in which it competes. - - The Company's ability to generate the significant amount of cash needed to service its debt and grow its business depends on many factors beyond the Company's control. The Company's ability to make payments on its debt and to fund its planned capital expenditures will depend on its ability to generate cash and to secure financing in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond the Company's control. If the business does not generate sufficient cash flow from operations, and sufficient future borrowings are not available to the Company under its credit facilities or from other sources of financing, the Company may not be able to repay its debt, grow its business or fund its other liquidity needs. - - The markets in which the Company operates are competitive. The Company encounters competition in certain business areas from other companies, some of which have resources substantially greater than those of the Company. The Company's ability to compete in such markets depends to a large extent on its ability to provide high quality products with shorter lead times at competitive prices, and its readiness in facilities, equipment and personnel. - - Certain markets in which the Company operates are subject to technological change. The Company must continually engage in effective research and development efforts in order to introduce innovative new products for technologically sophisticated customers and markets. There is an -21- 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. The Company's success will depend on its ability to anticipate or adapt to new technology on a timely basis, and if it fails to adapt successfully to technological changes or fails to obtain access to important technologies, the business will suffer. - - Changes to governmental environmental regulation and legislation could adversely affect the Company's business. The Company is subject to a variety of federal, state and local environmental laws and regulations and utilizes in its operations a number of chemicals or similar substances that are classified as hazardous. Management believes that the Company's current operations are in substantial compliance with current environmental laws and regulations. However, changes in law or limitations 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. In addition, it is possible that the Company may experience releases of certain chemicals or other events that could cause the incurrence of material cleanup costs or other damages. - - A portion of the Company's sales are, and are expected to continue to be, from contracts through the United States Government, which are subject to Government regulation, changes in Governmental appropriations, national defense policies and availability of government funds. United States 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, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years. Government contracts are, by their terms, subject to termination by the United States Government at its convenience or by default of the contractor. Changes in governmental regulation or congressional appropriation could negatively impact the Company's revenues. - - The Company depends on a limited group of suppliers for certain materials necessary for the manufacture of its products. If the Company is unable to procure the necessary materials from its suppliers, its ability to manufacture products could be severely impaired, and the Company's growth, financial condition and results of operations could suffer. In addition, the prices of these raw materials are subject to fluctuation and could also negatively impact the Company's financial condition. - - The Company's principal common stockholders can exercise significant control over the Company and could limit the ability of the Company's other stockholders to influence the outcome of transactions requiring shareholder vote. As of December 7, 2001, approximately 76% of the Company's outstanding common stock is owned by the Company's executive officers, directors and principal stockholders. These stockholders will have the ability to exercise influence over all matters requiring approval by the Company's stockholders, including the election of directors and approval of significant corporate transactions. -22- ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information called for by this item is set forth in the consolidated financial statements of Holding and CPI contained in this report. Specific financial statements can be found at the pages listed in the following index:
COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION Page ---- Index to Financial Statements............................................................................... F-1 Independent Auditors' Report................................................................................ F-2 Consolidated Balance Sheets as of September 28, 2001 and September 29, 2000 ................................ F-3 Consolidated Statements of Operations for the 52-week periods ended September 28, 2001, September 29, 2000, and October 1, 1999 ............................................................................. F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the 52-week periods ended September 28, 2001, September 29, 2000, and October 1, 1999 ..................................................... F-5 Consolidated Statements of Cash Flows for the 52-week periods ended September 28, 2001, September 29, 2000, and October 1, 1999 ............................................................................. F-6 Notes to the Consolidated Financial Statements.............................................................. F-8 Financial Statement Schedule................................................................................ F-52
COMMUNICATIONS & POWER INDUSTRIES, INC. Page ----- Independent Auditors' Report................................................................................ F-27 Consolidated Balance Sheets as of September 28, 2001 and September 29, 2000 ................................ F-28 Consolidated Statements of Operations for the 52-week periods ended September 28, 2001, September 29, 2000, and October 1, 1999 ............................................................................. F-29 Consolidated Statements of Stockholders' Equity (Deficit) for the 52-week periods ended September 28, 2001, September 29, 2000, and October 1, 1999 ..................................................... F-30 Consolidated Statements of Cash Flows for the 52-week periods ended September 28, 2001, September 29, 2000, and October 1, 1999 ............................................................................. F-31 Notes to the Consolidated Financial Statements.............................................................. F-33 Financial Statement Schedule................................................................................ F-53
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. In connection with the audit of the financial statements for the three years ended September 28, 2001, there were no disagreements with KPMG LLP on accounting or financial disclosure. -23- 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 - ---- --- -------- William P. Rutledge....... 59 Chairman of the Board and Director Bart F. Petrini........... 62 Chief Executive Officer, President and Director Joel A. Littman........... 49 Chief Financial Officer, Treasurer and Secretary John R. Beighley.......... 49 Vice President and Assistant Secretary Leonard I. Green.......... 68 Director John G. Danhakl........... 45 Director John M. Baumer............ 34 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 - ---- --- -------- William P. Rutledge....... 59 Chairman of the Board and Director Bart F. Petrini........... 62 Chief Executive Officer, President and Director Joel A. Littman........... 49 Chief Financial Officer, Treasurer and Secretary John R. Beighley.......... 49 Vice President and Assistant Secretary O. Joseph Caldarelli...... 51 Vice President and Co-Chief Operating Officer Robert A. Fickett......... 41 Vice President and Co Chief Operating Officer Don C. Coleman............ 47 Vice President David Kim................. 43 Vice President Mike Cheng................ 46 Vice President Leonard I. Green.......... 68 Director John G. Danhakl........... 45 Director John M. Baumer............ 34 Director
-24- William P. Rutledge became Chairman of the Board of Holding and CPI in June 1999. He was also interim Chief Executive Officer during the period June 1999 to November 1999. Prior to this appointment, Mr. Rutledge served as President and Chief Executive Officer of Allegheny Teledyne Incorporated ("Teledyne, Inc") from August 1996 to March 1997. Mr. Rutledge held several other positions at Teledyne, Inc. beginning with Group Executive in 1986, Vice President in 1987, Senior Vice President 1988, Executive Vice President in 1989, and President in 1990. In 1991 he was elected as Chief Executive Officer and appointed as Chairman in 1993. Prior to joining Teledyne, Inc. Mr. Rutledge held several management positions at FMC from 1971 to 1986. Mr. Rutledge received a BS in Metallurgical Engineering from Lafayette College and an MS in Financial Management from George Washington University. Bart F. Petrini became Chief Executive Officer, President and a director of Holding and CPI in November 1999. Prior to this, Mr. Petrini served as Executive Vice President and General Manager in the Electron Device Group of Richardson Electronics beginning in 1994 and ending with his joining CPI. Mr. Petrini began his career with Western Electric (now Lucent Technologies) as a Manufacturing Engineer and capped a 20-year career in high tech manufacturing as Division Vice President of Manufacturing in ITT's Electro-Optical Products Division. Mr. Petrini then joined Varian Associates in 1980 as General Manager of their Eimac Division and in 1983 was promoted to General Manager of the Microwave Tube Division. In 1985, Mr. Petrini left Varian to become President and CEO of a Silicon Valley start-up microwave company. Mr. Petrini received a degree in Mechanical Engineering from Bucknell University in 1960 and a MBA in 1970 from George Washington University. Joel A. Littman became Chief Financial Officer of Holding and CPI in September 2001. Mr. Littman was Corporate Controller for CPI from November 1996 to September 2001. From September 1989 to November 1996 Mr. Littman served as Controller of the Microwave Power Products Division of Varian Associates and CPI. Prior to that Mr. Littman held various finance positions with Varian Associates and TRW. Mr. Littman received a B.A. degree in economics and a MBA, both from the University of California at Los Angeles. John R. Beighley became a Vice President of CPI in March 1997 and currently heads the Company's Worldwide Field Sales Organization. From May 1992 to March 1997, Mr. Beighley was Western Hemisphere Sales Manager responsible for sales in the Americas, as well as the Far East and Australia. From June 1989 to May 1992, Mr. Beighley was the North American Sales Manager. From March 1981 to June 1989, Mr. Beighley held a number of Product Marketing and Field Sales positions with CPI's predecessor, Varian. Mr. Beighley received a BS degree in Marketing from San Francisco State University and a MBA from Santa Clara University. O. Joseph Caldarelli became a Vice President of CPI in August 1995 and Co-Chief Operating Officer in October 2000. Mr. Caldarelli is also the Division President of the Communications and Medical Products ("CMP") Division. Mr. Caldarelli was Vice President and General Manager for this same operating unit under the Predecessor, from 1985 until August 1995 and was 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. Robert A. Fickett became a Vice President of CPI in April 1998 and Co-Chief Operating Officer in October 2000. Mr. Fickett has also been the Division President of the Microwave Power Products ("MPP") Division since April 1998. From January 1996 to April 1998, Mr. Fickett was Vice President of Operations for MPP. From 1993 until January 1996, he was President and Chief Executive Officer of Altair Technologies, Inc., a contract manufacturer. From 1982 until 1993, Mr. Fickett held a number of positions with Varian, including Engineering Manager of MPP's Klystron Engineering Group, which he was promoted to in 1989. Mr. Fickett received a B.S. degree in Mechanical Engineering from the -25- University of California, Berkeley. Don C. Coleman became a Vice President of CPI and Division President of the Beverly Microwave Division ("BMD") in February 1999. Mr. Coleman was Vice President of Manufacturing for BMD from February of 1996 until accepting his current position. From 1990 until 1996, Mr. Coleman held the position of Engineering Manager for Receiver Protector Products at BMD. Mr. Coleman held a variety of manufacturing and development engineering positions at Varian from the time he joined the company in 1976 until 1990. Prior to being employed by Varian, Mr. Coleman attended the University of Massachusetts where he received a B.S. degree in Engineering. David Kim became the Division President of the Solid State Products Division in October 2001. From October 1999 to September 2001, Mr. Kim was Vice President of the Solid State Products Division and was Vice President of Engineering at the Microwave Components division of Aydin Corporation for one year prior to CPI's acquisition of the division. Mr. Kim received a B.S. degree in Electrical Engineering from the University of California, Berkeley and a M.S. degree in Electrical Engineering from San Jose State University. Mike Cheng became a Vice President of CPI in August 2000 and currently heads the Company's Eimac Division. From April 1999 to August 2000, Mr. Cheng was Vice President of Operations for MPP. From 1994 until April 1999, he was Vice President of Marketing for MPP. From 1980 until 1994, Mr. Cheng held a number of manufacturing and engineering positions with Varian, including Production Manager of MPP's Klystron Engineering Group, which he was promoted to in 1989. Prior to joining Varian, Mr. Cheng was an engineer in the Nuclear Energy Division of General Electric Corporation. Mr. Cheng received a B.S. degree in Chemical Engineering from the University of California, Berkeley and an MBA from Golden Gate University. Leonard I. Green became a director of the Company in August 1995. He has been an executive officer of Leonard Green & Partners, L.P. ("LGP"), a merchant banking firm which manages Green Equity Investors II, L.P. ("GEI"), since the formation of LGP and GEI in 1994. Mr. Green has been, individually or through a corporation, a partner in a merchant-banking firm affiliated with LGP since 1989. Prior to 1989, 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 and several private companies. John G. Danhakl became a director of the Company in August 1995. He has been an executive officer of LGP, a merchant-banking firm that manages GEI, 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 joining DLJ, Mr. Danhakl was a Vice President at Drexel Burnham Lambert Incorporated. Mr. Danhakl is also a director of Twinlab Corporation, The Arden Group, Inc. and several private companies. John M. Baumer became a director of the Company in October 2001. He has been an executive officer of LGP, a merchant-banking firm that manages GEI, since 1999. Mr. Baumer had previously been a Vice President at DLJ, and had been with DLJ since 1995. Prior to joining DLJ, Mr. Baumer was at Fidelity Investments and Arthur Andersen. Mr. Baumer is also a director of Intercontinental Art, Inc., Petco Animal Supplies, Inc. and VCA Antech, Inc. -26- ITEM 11: EXECUTIVE COMPENSATION The following table shows certain information concerning compensation paid or accrued by the Company during Fiscal 2001 to the Chief Executive Officer, the next four most highly compensated executive officers of Holding and CPI, and one additional highly compensated individual (collectively, the "Named Executive Officers") for the three fiscal years ending September 28, 2001. SUMMARY COMPENSATION TABLE
ANNUAL LONG TERM COMPENSATION COMPENSATION ----------------------------------------- ---------------- SECURITIES NAME AND OTHER UNDERLYING ALL PRINCIPAL POSITION FISCAL ANNUAL OPTIONS OTHER WITH THE COMPANY YEAR SALARY BONUS(a) COMPENSATION(b) (# OF SHARES)(c) COMPENSATION(d) - ------------------ ------ -------- ---------- --------------- ---------------- --------------- Bart F. Petrini 2001 $262,019 -- $17,387 100,000 $153,994 Chief Executive Officer and 2000 $221,154 $125,000 $7,500 100,000 $114,931 President John R. Beighley 2001 146,077 53,625 17,021 5,000 16,213 Vice President 2000 130,388 55,000 21,780 5,000 8,495 1999 119,678 41,405 20,019 -- 8,270 Don C. Coleman 2001 139,462 52,208 17,230 5,000 9,011 Vice President 2000 125,383 40,000 9,816 5,000 7,550 1999 109,540 13,296 -- -- 5,203 Robert A. Fickett 2001 211,462 -- 24,090 16,750 14,982 Vice President 2000 174,039 10,000 19,894 16,750 11,738 1999 134,828 75,930 9,679 -- 6,404 O. Joseph Caldarelli 2001 184,033 -- 6,864 8,000 14,147 Vice President 2000 101,002 35,500 7,072 8,000 8,332 1999 92,613 173,912 7,740 -- 5,040 Lynn E. Harvey(e) 2001 158,462 95,000 15,960 8,000 10,828 Chief Financial Officer 2000 139,231 30,000 17,079 8,000 9,394 1999 127,221 48,627 12,808 -- 8,479
(a) Consists of awards under CPI's Management Incentive Plan for Fiscal 2001 to be paid in Fiscal 2002. Fiscal 1999 bonus amount also includes a special bonus awarded to certain management in April 1999. (b) Consists of amounts paid for personal benefits and amounts reimbursed for the payment of taxes on certain perquisites. (c) Consists of stock options granted under the 2000 Stock Option Plan. Each option granted vests at the rate of 25% per year except 4,250 of Mr. Fickett's options which vest at 50% per year over a two year period. (d) Consists of (1) Company contributions to CPI's 401(k) plan and Non-Qualified Deferred Compensation Plan, (2) Company paid premiums for group life insurance and, (3) in the case of Mr. Petrini and Mr. Beighley, relocation costs. (e) Ms. Harvey was Chief Financial Officer until she retired on September 28, 2001. -27- STOCK OPTIONS IN FISCAL 2001 There were no stock options issued to the Company's "Named Executive Officers" during the fiscal year ended September 28, 2001. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
SHARES ACQUIRED ON VALUE NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE - ---- ----------- -------- ----------- ------------- Bart F. Petrini -- -- 25,000 75,000 John R. Beighley -- -- 1,250 3,750 Don C. Coleman -- -- 1,250 3,750 Robert A. Fickett -- -- 5,250 11,500 O. Joseph Caldarelli -- -- 2,000 6,000 Lynn E. Harvey -- -- 2,000 6,000
The value of unexercised options at the end of Fiscal 2001 is not considered significant as the value of the Company's common stock at the end of Fiscal 2001, as determined by the Board of Directors, has not changed significantly from the value at the grant date (July 2000). HOLDING'S 2000 STOCK OPTION PLAN In March 2000, Holding established the Communications & Power Industries 2000 Stock Option Plan ("the Plan") and reserved 250,000 shares of Holding's common stock for issuance under the Plan. Options granted under Holding's stock option plan are granted at fair market value, expire ten years from the date of grant and generally vest in four equal annual installments, commencing one year from the date of grant. The stock options granted pursuant to this Plan are not considered "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code, as amended and are subject to all of the terms and restrictions contained in the Stock Option and Stockholders Agreements. As of the fiscal year ended September 28, 2001, Holding granted options to purchase 235,050 shares of its common stock to officers and employees of Holding. As of September 28, 2001, 57,075 of the options were exercisable. THE HOLDING EQUITY PLAN The Named Executive Officers 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 1,250,000 shares of Holding Common Stock for issuance under the Holding Equity Plan, 1,146,750 of which were issued to the Company's former Chief Executive Officer, certain executive officers and key employees (collectively, any executive officers and key employees -28- who may acquire Management Shares are referred to as the "Management Investors") in Fiscal 1995. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Neither Holding nor CPI has a Compensation Committee. All decisions on the compensation of executive officers and directors of Holding, CPI or any of their respective subsidiaries are made by the full board of directors. 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. Petrini. None of the directors or officers has any relationships that 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 73.1% of the outstanding shares of Holding. Holding, in turn, owns all of the outstanding shares of common stock of CPI. Messrs. Green, Danhakl and Baumer, 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. See "Certain Relationships and Related Transactions -- Management Agreements." COMPENSATION OF DIRECTORS Individuals who are officers of Holding and CPI, as well as Messrs. Green, Danhakl and Baumer, will not receive any compensation directly for their service on Holding's and CPI's Boards of Directors. Mr. Rutledge was paid annual compensation of $25,000 in Fiscal 2001. In addition, 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 "Certain Relationships and Related Transactions." -29- 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 7, 2001 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) each 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)........................ 3,590,750 73.16% 11111 Santa Monica Boulevard, Suite 2000 Los Angeles, California 90025 Leonard I. Green(b)....................................... 3,590,750 73.16% 11111 Santa Monica Boulevard, Suite 2000 Los Angeles, California 90025 John G. Danhakl(b)........................................ 3,590,750 73.16% 11111 Santa Monica Boulevard, Suite 2000 Los Angeles, California 90025 John M. Baumer(b)......................................... 3,590,750 73.16% 11111 Santa Monica Boulevard, Suite 2000 Los Angeles, California 90025 Al D. Wilunowski(c)....................................... 535,000 10.90% 811 Hansen Way Palo Alto, California 94303 Bart F. Petrini........................................... 0 0% William P. Rutledge....................................... 0 0% John R. Beighley.......................................... 11,250 .23% Don C. Coleman............................................ 11,250 .23% Robert A. Fickett......................................... 13,000 .26% O. Joseph Caldarelli...................................... 75,000 1.53% Lynn E. Harvey............................................ 37,500 .76% Directors and Executive Officers as a group (7 persons)(b) ......................................... 3,709,500 75.58%
- --------- (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. Each of Mr. Green, Jonathan D. Sokoloff, Mr. Danhakl, Mr. Baumer 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. Accordingly, for certain purposes, Messrs. Green, Sokoloff, Danhakl, Baumer and Nolan may be deemed to be beneficial owners of the shares of Holding Common Stock held by GEI. All of the shares of Holding Common Stock shown in the table as being beneficially owned by Messrs. Green, Danhakl and Baumer are owned by GEI. (c) Includes 25,000 shares originally acquired by Mr. Wilunowski and subsequently transferred to his child. -30- Terms of Subscription and Stockholder Agreements Holding Common Stock and Junior Preferred Stock purchased by GEI II were purchased pursuant to a Stock Subscription Agreement among 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. GEI II subsequently sold its shares of CPI Junior Preferred Stock in June 1997. 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 73.1% of the outstanding shares of Holding. Holding, in turn, owns all of the outstanding shares of common stock of CPI. Messrs. Green, Danhakl and Baumer, 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 2001, LGP earned $362,000 pursuant to the terms of the Management Services Agreement. -31- PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K (a) Financial Statement Schedule of Holding and CPI 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). 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.
-32-
Exhibit No. Description - ----------- ----------- 10.1(6) Loan and Security Agreement by and among CPI as borrower, the other obligors named therein, the lenders that are signatories hereto as the senders, and Foothill Capital Corporation as the arranger and administrative agent, dated as of December 15, 2000 10.2(6) Intellectual Property Security Agreement between CPI and Foothill Capital Corporation as Agent for the Lenders dated December 15, 2000 10.3(6) Stock Pledge and Security Agreement by CPI to and in favor of Foothill Capital Corporation, as agent for itself and the other lenders dated December 15, 2000. 10.4(6) Stock Pledge and Security Agreement by Holding and various CPI subsidiaries to and in favor of Foothill Capital Corporation, as agent for itself and the other lenders, dated December 15, 2000. 10.5(6) Environmental Indemnity Agreement for the benefit of Foothill Capital Corporation, as agent for itself and the other lenders and the lenders, dated December 15, 2000. 10.6(6) Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing by and among CPI, First American Title Company and Foothill Capital Corporation, as agent for itself and the other lenders, dated December 15, 2000. 10.7(6) Guaranty and Security Agreement in favor of Foothill Capital Corporation as Agent for itself and the lenders and the other lenders pursuant to that certain Loan and Security Agreement by and among CPI, the other obligors, Foothill and the other lenders named herein, dated December 15, 2000. 10.8(6) Continuing Guaranty in favor of Foothill Capital Corporation, as agent for itself and the lenders and the other lenders pursuant to that certain Loan and Security Agreement by and among CPI, the other obligors named therein, Foothill and the other lenders named herein, dated December 15, 2000. 10.9(6) Intercreditor Agreement among the CPI Parties and Foothill Capital Corporation, as agent for itself and other lenders, dated December 15, 2000. 10.10(6) Fourth Amendment of Lease by and between The Board of Trustees of the Leland Stanford Junior University and CPI, dated December 15, 2000. 10.11(6) Loan Agreement between CPI and Wells Fargo Bank, National Association, executed as of December 15, 2000. 10.12(6) Promissory Note Secured by Deed of Trust by Holding in favor of Wells Fargo Bank, National Association, dated December 15, 2000. 10.13(6) Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing by and among Holding, American Securities Company and Wells Fargo Bank, National Association, dated December 15, 2000.
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Exhibit No. Description - ----------- ----------- 10.14(6) Subordination Agreement by CPI and Holding in favor of Wells Fargo Bank, National Association, dated December 15, 2000. 10.15(6) Hazardous Materials Indemnity Agreement by Holding in favor of Wells Fargo Bank, National Association, dated December 15, 2000. 10.16(6) Unsecured Promissory Note by Holding in favor of CPI, dated December 15, 2000. 10.17(6) Lease dated as of December 1, 2000 by and between Holding, as lessor, and CPI, as lessee. 10.18(1) Cross License Agreement between CPI and Varian dated as of August 10, 1995. 10.19(1) Trademark License Agreement between CPI and Varian dated as of August 10, 1995. 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. 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.
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Exhibit No. Description - ----------- ----------- 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(4) Letter from Holding to Bart F. Petrini dated October 11, 1999 relating to terms of employment. 10.32(5) Communications & Power Industries 2000 Stock Option Plan. 10.33(5) Form of Stock Option Agreement. 10.34(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. 10.35(1) Sublease (Unit 8, Palo Alto) dated as of August 10, 1995 between Varian Realty Inc. and CPI. 10.36(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. 21(1) Subsidiaries of CPI and Holding.
- -------------- (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. (4) Incorporated by reference to CPI's Annual Report on Form 10-K, filed on December 29, 1999. (5) Incorporated by reference to CPI's Annual Report on Form 10-K, filed on December 28, 2000. (6) Incorporated by reference to CPI's Quarterly Report on Form 10-Q, filed on February 12, 2001. -35- 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/ Bart F. Petrini ------------------------------------- Bart F. Petrini Chief Executive Officer and President Date: December 26, 2001 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 December 26, 2001 - ---------------------------- /s/ John G. Danhakl Director December 26, 2001 - ---------------------------- /s/ John M. Baumer Director December 26, 2001 - ---------------------------- /s/ William P. Rutledge Chairman of the Board and Director December 26, 2001 - ---------------------------- /s/ Bart F. Petrini Director, Chief Executive Officer - ---------------------------- and President December 26, 2001 (Principal Executive Officer) /s/ Joel A. Littman Chief Financial Officer, - ---------------------------- Treasurer and Secretary December 26, 2001 (Principle Financial and Accounting Officer)
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. -36- 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/ Bart F. Petrini ------------------------------------- Bart F. Petrini Chief Executive Officer and President Date: December 26, 2001 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 December 26, 2001 - ---------------------------- /s/ John G. Danhakl Director December 26, 2001 - ---------------------------- /s/ John M. Baumer Director December 26, 2001 - ---------------------------- /s/ William P. Rutledge Chairman of the Board and Director December 26, 2001 - ---------------------------- /s/ Bart F. Petrini Director, Chief Executive Officer - ---------------------------- and President December 26, 2001 (Principal Executive Officer) /s/ Joel A. Littman Chief Financial Officer, - ---------------------------- Treasurer and Secretary December 26, 2001 (Principle Financial and Accounting Officer)
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. -37- 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 HOLDING CORPORATION
Page ---- Independent Auditors' Report..............................................................................F-2 Consolidated Balance Sheets as of September 28, 2001 and September 29, 2000 ..............................F-3 Consolidated Statements of Operations for the 52-week periods ended September 28, 2001, September 29, 2000 and October 1, 1999 ............................................................................F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the 52-week periods ended September 28, 2001, September 29, 2000 and October 1, 1999 ........................................................F-5 Consolidated Statements of Cash Flows for the 52-week periods ended September 28, 2001, September 29, 2000 and October 1, 1999..................................................................................F-6 Notes to the Consolidated Financial Statements............................................................F-8 COMMUNICATIONS & POWER INDUSTRIES, INC. Independent Auditors' Report.............................................................................F-27 Consolidated Balance Sheets as of September 28, 2001 and September 29, 2000 .............................F-28 Consolidated Statements of Operations for the 52-week periods ended September 28, 2001, September 29, 2000 and October 1, 1999 ...........................................................................F-29 Consolidated Statements of Stockholders' Equity (Deficit) for the 52-week periods ended September 28, 2001, September 29, 2000 and October 1, 1999........................................................F-30 Consolidated Statements of Cash Flows for the 52-week periods ended September 28, 2001, September 29, 2000 and October 1, 1999 ..........................................................................F-31 Notes to the Consolidated Financial Statements...........................................................F-33 FINANCIAL STATEMENT SCHEDULES Communications & Power Industries Holding Corporation....................................................F-52 Communications & Power Industries, Inc...................................................................F-53
F-1 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) as of September 28, 2001 and September 29, 2000, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the 52-week periods ended September 28, 2001, September 29, 2000, and October 1, 1999. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement schedule. 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 auditing standards generally accepted in the United States of America. 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. 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 September 28, 2001 and September 29, 2000, and the results of their operations and their cash flows for the 52-week periods ended September 28, 2001, September 29, 2000, and October 1, 1999, in conformity with accounting principles generally accepted in the United States of America. 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 LLP Mountain View, California December 7, 2001 F-2 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
September 28, September 29, 2001 2000 ------------- ------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,903 4,766 Accounts receivable, net 46,738 42,434 Inventories 57,678 63,949 Deferred taxes 3,500 6,972 Other current assets 2,241 1,603 --------- --------- Total current assets 113,060 119,724 Property, plant, and equipment, net 62,698 68,656 Goodwill and other intangibles, net 23,452 26,090 Debt issue costs, net 4,857 4,627 Deferred taxes -- 7,888 --------- --------- Total assets $ 204,067 226,985 ========= ========= LIABILITIES, SENIOR REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Revolving credit facility $ 21,293 39,800 Current portion of term loans -- 6,012 Current portion of capital leases 919 960 Mortgage financing 18,000 -- Accounts payable 14,729 18,462 Accrued expenses 17,859 16,903 Product warranty 4,225 2,978 Income taxes payable 407 9,518 Accrued dividends payable 4,387 -- Advance payments from customers 9,193 5,210 --------- --------- Total current liabilities 91,012 99,843 Senior term loans 20,000 10,000 Senior subordinated notes 100,000 100,000 Obligations under capital leases 90 895 --------- --------- Total liabilities 211,102 210,738 --------- --------- SENIOR REDEEMABLE PREFERRED STOCK ($.01 par value, 325,000 shares authorized; 297,346 shares issued and outstanding as of 2001 and 2000, liquidation preference $100 per share) 28,479 28,265 --------- --------- JUNIOR PREFERRED STOCK OF CPI ($.01 par value, 525,000 shares authorized: 227,475 and 198,232 shares issued and outstanding as of 2001 and 2000, respectively, liquidation preference $100 per share) 22,094 19,170 --------- --------- Commitments and contingencies STOCKHOLDERS' DEFICIT Common stock ($.01 par value, 6,500,000 shares authorized; 4,908,172 shares issued and outstanding as of 2001 and 2000.) 49 49 Additional paid-in capital 19,111 19,111 Accumulated deficit (75,587) (49,215) Stockholder loans (1,181) (1,133) --------- --------- Net stockholders' deficit (57,608) (31,188) --------- --------- Total liabilities, preferred stock and stockholders' deficit $ 204,067 226,985 ========= =========
See accompanying notes to the consolidated financial statements. F-3 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
52-Week 52-Week 52-Week period ended period ended period ended September 28, September 29, October 1, 2001 2000 1999 ------------ ------------ ------------ Sales $ 272,521 243,054 255,680 Cost of sales 223,332 188,748 199,638 --------- --------- --------- Gross profit 49,189 54,306 56,042 --------- --------- --------- Operating costs and expenses: Research and development 5,767 8,690 8,983 Selling and marketing 17,544 18,524 19,590 General and administrative 20,911 18,253 18,206 --------- --------- --------- Total operating costs and expenses 44,222 45,467 46,779 --------- --------- --------- Operating income 4,967 8,839 9,263 Foreign currency loss (130) (536) (511) Interest expense 20,734 18,663 17,805 --------- --------- --------- Loss before taxes (15,897) (10,360) (9,053) Income tax expense 2,950 1,232 605 --------- --------- --------- Net loss (18,847) (11,592) (9,658) Preferred dividends: Senior Redeemable Preferred Stock 4,387 3,822 3,331 Junior Preferred Stock 2,924 2,548 2,222 --------- --------- --------- Net loss attributable to common stock $ (26,158) (17,962) (15,211) ========= ========= =========
See accompanying notes to the consolidated financial statements. F-4 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 Equity Stock Capital Deficit Loans (Deficit) -------- ---------- ----------- ----------- ------------- Balances, October 2, 1998 $ 49 19,134 (15,614) (1,057) 2,512 ======== ======== ======== ======== ======== Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) (214) Payment of dividends on Senior Redeemable Preferred Stock (3,331) (3,331) Payment of dividends on Junior Preferred Stock (2,222) (2,222) Net loss (9,658) (9,658) Interest accrued on stockholder loans (49) (49) -------- -------- -------- -------- -------- Balances, October 1, 1999 $ 49 19,134 (31,039) (1,106) (12,962) ======== ======== ======== ======== ======== Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) (214) Payment of dividends on Senior Redeemable Preferred Stock (3,822) (3,822) Payment of dividends on Junior Preferred Stock (2,548) (2,548) Net loss (11,592) (11,592) Repayment of stockholder loans 20 20 Interest accrued on stockholder loans (47) (47) Purchase of Treasury Stock (23) (23) -------- -------- -------- -------- -------- Balances, September 29, 2000 $ 49 19,111 (49,215) (1,133) (31,188) ======== ======== ======== ======== ======== Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) (214) Dividends on Senior Redeemable Preferred Stock (4,387) (4,387) Payment of dividends on Junior Preferred Stock (2,924) (2,924) Net loss (18,847) (18,847) Interest accrued on stockholder loans (48) (48) -------- -------- -------- -------- -------- Balances, September 28, 2001 $ 49 19,111 (75,587) (1,181) (57,608) ======== ======== ======== ======== ========
See accompanying notes to the consolidated financial statements. F-5 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
52-Week 52-Week 52-Week period ended period ended period ended September 28, September 29, October 1, 2001 2000 1999 ------------ ------------ ------------ OPERATING ACTIVITIES Net cash provided by operating activities $ 1,677 9,897 6,282 -------- -------- -------- INVESTING ACTIVITIES Proceeds from sale of property, plant and equipment 1,944 -- 54 Purchase of property, plant, and equipment (5,788) (5,325) (8,260) Purchase of net current assets in connection with acquisitions -- -- (1,861) Purchase of property and equipment in connection with acquisitions -- -- (523) Purchase of intangible assets in connection with acquisitions -- -- (6,526) -------- -------- -------- Net cash used in investing activities (3,844) (5,325) (17,116) -------- -------- -------- FINANCING ACTIVITIES Repayments on capital leases (960) (855) (688) Payment of debt issue costs (2,217) -- -- Repayment of terminated revolving credit facility (40,000) -- -- Net proceeds from revolving credit facility 21,530 4,800 21,700 Repayments on terminated senior term loans (16,049) (7,995) (6,379) Proceeds from senior term loan 20,000 -- -- Proceeds from mortgage financing 18,000 -- -- Purchases of treasury stock -- (23) -- Proceeds from stockholder loans -- 20 -- -------- -------- -------- Net cash provided by (used in) financing activities 304 (4,053) 14,633 -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,863) 519 3,799 Cash and cash equivalents at beginning of period 4,766 4,247 448 -------- -------- -------- Cash and cash equivalents at end of period $ 2,903 4,766 4,247 ======== ======== ========
See accompanying notes to the consolidated financial statements. F-6 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (in thousands)
52-Week 52-Week 52-Week period ended period ended period ended September 28, September 29, October 1, 2001 2000 1999 ------------ ------------ ------------ DETAIL OF NET CASH PROVIDED BY OPERATING ACTIVITIES Net loss $(18,847) (11,592) (9,658) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 10,708 12,682 10,851 Amortization of deferred debt issue costs 1,987 1,288 1,209 Amortization of goodwill and intangibles 2,638 2,634 2,784 Allowance for doubtful accounts (362) (346) 507 Deferred taxes 11,360 289 -- Interest accrued on stockholder loans (48) (47) (49) Net (gains) losses on the disposition of assets (792) 212 61 Changes in operating assets and liabilities: Accounts receivable (3,942) 7,508 382 Inventories 6,271 (11,423) 1,752 Other current assets (638) (79) 17 Accounts payable (3,733) 4,940 72 Accrued expenses 956 414 601 Product warranty 1,247 (597) (169) Income tax payable (9,111) 540 (1,281) Advance payments from customers 3,983 3,474 (797) -------- -------- -------- Net cash provided by operating activities $ 1,677 9,897 6,282 ======== ======== ========
See accompanying notes to the consolidated financial statements. F-7 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1. NATURE OF OPERATIONS Communications & Power Industries Holding Corporation ("Holding"), through its wholly owned subsidiary, Communications & Power Industries, Inc. ("CPI", both companies together referred to as "the Company") develops, manufactures and distributes microwave and power grid vacuum electronic devices, microwave amplifiers, modulators and various other power supply equipment and devices. The Company operates six manufacturing operations in North America, and sells and services its products and customers worldwide primarily through a direct sales force. In August 1995, CPI acquired substantially all of the assets of Varian Associates, Inc.'s ("Varian") Electron Device business (the "Predecessor") and then was merged with a wholly owned subsidiary of Communications & Power Industries Holding Corporation, a corporation newly formed by a group of investors, including management of Holding and CPI. The acquisition was 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. 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements include the accounts of Holding and its direct and indirect wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company's fiscal years are the 52- or 53-week periods which end on the Friday nearest September 30. All references to years in these notes to consolidated financial statements represent fiscal year unless otherwise noted. Liquidity Holding's short-term debt includes mortgage financing of $18.0 million with Wells Fargo Bank that expires on June 1, 2002. Management expects that cash to be generated by operations and borrowing under its Credit Facility in conjunction with either extending or finding alternative collateral-based financing by June 1, 2002 will allow it to meet the mortgage obligation. In addition, the Company recently received a bid for its property in San Carlos for an amount in excess of its existing mortgage which would allow the Company to continue to operate on this property on a leaseback basis. Although this specific bid was turned down, the Company believes this is a viable alternative if necessary to meet cash requirements in the future. F-8 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED There can be no assurance that the combination of cash generated by operations, borrowing availability from the Company's Credit Facility and additional collateral-based financing will be sufficient to meet the Company's cash requirements. If the Company is unable to satisfy such cash requirements from these sources, the Company will adopt one or more alternatives, such as reducing or delaying capital expenditures, reducing discretionary costs, negotiating an increase to the Company's borrowing capacity under its line of credit, and selling and leasing back its facility in San Carlos, California in a transaction with a third party. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. 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 affect the Company's estimate of its bad debts. Historical credit losses have been within management's expectations and most transactions to third world economies are backed by letters of credit. 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. Revenue Recognition Sales are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectibility is reasonably assured. The Company's products are generally subject to warranties, and the Company provides for the estimated future costs of repair, replacement or customer accommodation in costs of sales. The estimated sales values of performance under certain contracts to commercial customers and 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. F-9 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Property, Plant, and Equipment Property, plant and equipment are stated at 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. Estimated useful lives of property, plant, and equipment are as follows: land leaseholds, the life of the lease; buildings, 20 to 40 years; machinery and equipment, 3 to 7 years. Gains and losses resulting from the disposition of assets (property, plant and equipment) are reported on a net basis in the caption "General and administrative" on the Consolidated Statements of Operations. Net gains (losses) on the disposition of assets were $0.8 million, ($0.2) million and ($61,000) for fiscal years 2001, 2000 and 1999, respectively. Accounting for Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of its carrying amount to future net cash flows expected to be generated from the operation and sale of long-lived assets. If such assets are considered to be impaired, the Company's carrying value is reduced to its estimated fair value. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. The Company assesses the recoverability of the carrying amount of goodwill by determining whether the carrying amount of goodwill can be recovered through undiscounted net cash flows of the acquired operation over the remaining amortization period. If determined to be impaired, the carrying amount is reduced to its estimated fair value which is based on an estimate of discounted future net cash flows. Goodwill is being amortized on a straight-line basis over estimated useful lives ranging from 15 to 25 years. Accumulated amortization was $11.6 million and $9.0 million as of September 28, 2001 and September 29, 2000, respectively. On October 6, 1998, CPI acquired Microwave Components Division ("MCD") of Aydin Corporation for approximately $8.9 million with net assets of approximately $2.4 million. Of the $6.5 million difference between the purchase price and the fair value of the net assets acquired, $3.4 million was allocated to goodwill and $3.1 million was allocated to other identifiable intangibles including customer list, trade name, covenant not to compete, software rights and debt issuance cost, whose useful lives range from 1 to 3 years. This acquisition was accounted for as a purchase. Product Warranty The Company's products are generally warranted for a variety of periods, typically one to three years or a predetermined product usage life. A provision for estimated future costs of repair, replacement or customer accommodations are reflected in the accompanying consolidated financial statements. F-10 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 years 2001, 2000 nor 1999. Varian retained the environmental liabilities existing at the time the Company acquired substantially all of the assets of Varian's Electron Device business in August 1995. Deferred Debt Issue Costs Costs incurred related to the issuance of CPI's long-term debt, mortgage financing 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 mortgage financing, term loan, revolving credit facility, and the Senior Subordinated Notes is 18 months, 2 years, 4 years and 10 years, respectively. 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 straight-line 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 provision for income taxes 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. Business Risks and Credit Concentrations Defense-related applications such as certain radar, electronic countermeasures and military communications constitute a significant portion of the Company's sales. Companies engaged in supplying defense-related equipment and services to government agencies are subject to certain business risks peculiar to that industry. Sales to the government may be affected by changes in procurement policies, budget considerations, changing concepts of national defense, political developments abroad, and other factors. F-11 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Foreign Currency Translation The functional currency of the Company's foreign subsidiaries is the U.S. dollar. Gains or losses resulting from the translation into U.S. dollars of amounts denominated in foreign currencies are included in the determination of net loss. Fair Value of Financial Instruments Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, revolving credit facility, term loans, mortgage financing and long-term debt. The carrying value of the Company's cash and cash equivalents, accounts receivable, accounts payable, revolving credit facility, mortgage financing and term loans approximate their fair values due to the relatively short period to maturity of the instruments. The fair value of CPI's Senior Subordinated Notes as of November 15, 2001, based on quoted market prices or pricing models using current market rates, has been quoted at a level of 47.00 (100.00 is face value). Stock-Based Compensation The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations including FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation an interpretation of APB Opinion No. 25" issued in March 2000, to account for its fixed plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. Comprehensive Income The Company has no components of other comprehensive income (loss) and, accordingly, comprehensive loss is the same as reported net loss for all periods presented. 3. BALANCE SHEET COMPONENTS Accounts Receivable Accounts receivable are stated net of allowances for doubtful accounts of $0.4 million and $0.8 million as of September 28, 2001 and September 29, 2000, respectively. F-12 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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) September 28, September 29, 2001 2000 ------------- ------------- Raw materials and parts $40,776 46,859 Work in process 14,874 14,731 Finished goods 2,028 2,359 ------- ------- Total inventories $57,678 63,949 ======= =======
Property, Plant, and Equipment The main components of property, plant, and equipment are as follows:
(Dollars in thousands) September 28, September 29, 2001 2000 ------------- ------------- Land and land leaseholds $ 36,632 36,655 Buildings 21,487 21,117 Machinery and equipment 55,158 52,801 Leased equipment 3,914 4,102 Construction in progress 1,540 672 --------- --------- Subtotal 118,731 115,347 Less accumulated depreciation And amortization (56,033) (46,691) --------- --------- Net property, plant and equipment $ 62,698 68,656 ========= =========
Accumulated amortization of equipment under capital lease arrangements was $2.8 million and $2.0 million and as of September 28, 2001 and September 29, 2000, respectively, and related amortization expense is included in depreciation expense on the statement of cash flows. Accrued Expenses Accrued expenses are comprised of the following:
(Dollars in thousands) September 28, September 29, 2001 2000 ------------- ------------- Taxes $ 1,360 $ 1,147 Payroll and employee benefits 10,303 10,149 Accrued interest 2,755 3,216 Other 3,441 2,391 ------- ------- Total accrued expenses $17,859 $16,903 ======= =======
4. CREDIT FACILITY On December 22, 2000, the Company terminated the previous credit agreement and replaced it with a $61.0 million secured credit facility ("Credit Facility"). This Credit Facility consists of a $41.0 million revolving line of credit, with a sub-facility of $10.0 million for letters of credit, which F-13 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED expires December 22, 2004, and a $20.0 million term loan, which expires 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 Credit Facility is based upon eligible receivables, machinery and equipment and certain real estate. As of September 28, 2001, CPI had $15.4 million available under the revolving line of credit. 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 a rate equal to Prime plus 5.50% per annum. Additionally, the terms of the Credit 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 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. 5. SENIOR SUBORDINATED NOTES OF CPI The $100 million principal amount of Senior Subordinated Notes ("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 Notes (the "Indenture"), to the prior payment in full of all senior indebtedness (as defined), including indebtedness under the credit facility, 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 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 as follows:
Year Percentage ---- ---------- 2002 103.0% 2003 101.5% 2004 and thereafter 100.0%
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 Credit Facility 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. F-14 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 6. SENIOR REDEEMABLE PREFERRED STOCK OF CPI CPI is authorized to issue up to 325,000 shares of nonvoting Series B 14% Senior Redeemable Exchangeable Cumulative Preferred Stock (the "Senior Preferred Stock") due 2007, including shares of Senior Preferred Stock which may be used to pay dividends on the Senior Preferred Stock if the Company 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. Beginning August 1, 2000, dividends may only be paid in cash. For the year ending September 28, 2001, $4.4 million of cash dividends were accrued for payment on Senior Preferred Stock. In addition, at a value of $100 per share, CPI paid preferred dividends on its Senior Preferred Stock through the issuance of 38,226 and 33,312 shares for fiscal years 2000 and 1999, respectively. The Senior Preferred Stock is 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. 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 Credit Facility 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 (the "Exchange Notes") due 2007, so long as such exchange is permitted by the Credit Facility 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 Credit Facility and the Indenture. Except for terms relating to these subordination provisions, payment of interest on a quarterly basis, 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-15 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 7. JUNIOR PREFERRED STOCK OF CPI 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 formation of CPI in 1995 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. At a value of $100 per share, CPI paid preferred dividends on its Junior Preferred Stock through the issuance of 29,243, 25,484, and 22,208 shares for fiscal years 2001, 2000 and 1999, respectively. 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. 8. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest was $19.2 million, $16.7 million, and $16.6 million, in fiscal years 2001, 2000 and 1999, respectively. Cash paid (refunded) for taxes was $0.6 million, $(32,000), and $1.8 million in fiscal years 2001, 2000 and 1999, respectively. Non-cash financing activities included the following: Dividends on Senior Redeemable Preferred Stock included $4.4 million of accrued but unpaid preferred dividends in fiscal year 2001 and the issuance of 38,226 and 33,312 shares of Senior Redeemable Preferred Stock in 2000 and 1999, respectively. Preferred stock dividends on Junior Preferred Stock was through the issuance of 29,243, 25,484, and 22,208 shares of Junior Preferred Stock during fiscal years 2001, 2000, and 1999, respectively. Amortization of discount and issue costs on the Senior Redeemable Preferred Stock was $0.2 million for each of the fiscal years 2001, 2000 and 1999. Equipment of $0.1 million and $0.3 million was acquired under capital leases for fiscal years 2001 and 1999, respectively; no equipment was acquired under capital leases for fiscal year 2000. 9. LEASES At September 28, 2001, the Company was committed to minimum rentals under non-cancelable operating lease agreements primarily for land and facility space. The Company also leases certain F-16 computer and telephone equipment under capital leases that expire in 2004. As collateral for these capital leases, the Company has issued letters of credit totaling $0.6 million. A summary of future minimum lease payments (in thousands) follows:
Capital Operating Sublease Fiscal Year Leases Leases Income ----------- ------- --------- -------- 2002 $ 971 1,154 1,024 2003 75 593 112 2004 20 430 6 2005 -- 294 -- 2006 -- 8 -- ------ ------ ------ Total future minimum lease payments 1,066 2,479 1,142 ====== ====== Less amount representing interest, sales tax and additional obligations 57 ------ Present value of future minimum lease payments 1,009 Less current portion of obligations under capital leases 919 ------ Obligations under capital leases, less current portion $ 90 ======
Real estate taxes, insurance, and maintenance are also obligations of the Company. Rental expense under non-cancelable operating leases amounted to $1.2 million, $1.0 million, and $0.9 million for fiscal years 2001, 2000 and 1999, respectively. 10. CONTINGENCIES The amount of outstanding letters of credit provided for under CPI's Credit Facility was $4.3 million as of September 28, 2001. These outstanding obligations are comprised of the following: $2.9 million related to eleven performance bond guarantees, $0.6 million to two lenders related to capital lease arrangements and $0.8 million to various other beneficiaries related primarily to insurance and service contracts. Varian is currently a defendant in certain legal actions relating to its operation of the assets sold to the Company and could incur an uninsured liability in one or more of them. The Company's acquisition agreement with Varian 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 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 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 F-17 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 Company's acquisition agreement with Varian 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 Company's consolidated financial position or results of operations. 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, as of September 28, 2001, all such matters involve amounts which would not have a material adverse effect on the Company's consolidated financial position if unfavorably resolved. 11. SEGMENTS AND RELATED INFORMATION The Company has two reportable segments: vacuum electronic devices ("VEDs") and satcom equipment. Reportable segments are differentiated based on product. The VED segment is made up of four operating units, which have been aggregated. Each operating unit has a President that reports to the Office of the Chief Operating Officer, held jointly by two of the Presidents, that in turn reports directly to the Chief Executive Officer ("CEO"). The CEO evaluates performance and allocates resources to each of these operating units based on the Company's principal performance measure, earnings before income taxes, interest, depreciation and amortization ("EBITDA"). These four operating units have similar economic characteristics as measured by EBITDA. The Company's analysis of the similarity of economic characteristics was based on both a historical and anticipated future analysis of performance. In addition, the aggregated units are similar in (i) the nature of their products, (ii) their manufacturing processes, (iii) their customers and, (iv) their distribution and sales methods. The VED segment develops, manufactures and distributes high power/high frequency microwave and radio frequency signal components. Its products include linear beam, cavity, power grid, crossed field and magnetron devices. These products are used in the communication, radar, electronic countermeasures, industrial, medical and scientific markets 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. These products are distributed through the Company's direct sales force, independent sales representatives and distributors. The satcom equipment segment manufactures and supplies high power amplifiers and networks for satellite communication uplink and industrial applications. This segment also provides spares, service and other post sales support. Its products are distributed through the Company's direct sales force and independent sales representatives. Sales and marketing, finance and administration expenses are allocated to the operating units and are included in the results reported. The accounting policies of the reportable segments are the same as F-18 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED those described in the summary of significant accounting policies. Intersegment product transfers are recorded at cost. Summarized financial information concerning the Company'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.
(Dollars in thousands) Satcom VEDs Equipment Other Total -------- ------ ----- ------- Fiscal Year 2001: Revenues from external customers $203,656 64,819 4,046 272,521 Intersegment product transfers 20,081 -- 1,432 21,513 EBITDA 29,183 (4,046) (6,954) 18,183 Total assets 109,684 33,015 61,368 204,067 Capital expenditures 3,522 1,487 779 5,788 Fiscal Year 2000: Revenues from external customers $188,800 48,190 6,064 243,054 Intersegment product transfers 9,524 -- 1,232 10,756 EBITDA 29,773 (3,348) (2,806) 23,619 Total assets 120,012 27,956 79,017 226,985 Capital expenditures 3,078 996 1,251 5,325 Fiscal Year 1999: Revenues from external customers $186,852 61,901 6,927 255,680 Intersegment product transfers 14,514 -- 1,740 16,254 EBITDA 23,862 2,939 (4,274) 22,527 Total assets 118,701 32,648 82,235 233,584 Capital expenditures 5,447 920 1,893 8,260
A reconciliation of EBITDA from reportable segments to Loss before Taxes is as follows:
(Dollars in thousands) Fiscal Year -------------------------------------------- 2001 2000 1999 -------- -------- -------- Segment EBITDA $ 18,183 $ 23,619 22,527 Less: Depreciation and amortization 13,346 15,316 13,635 Other -- -- 140 Interest expense 20,734 18,663 17,805 -------- -------- -------- Loss before taxes $(15,897) $(10,360) (9,053) ======== ======== ========
CPI's operations outside of North America consist of sales offices in certain foreign countries. Long-lived assets outside of North America are less than 10% of total consolidated assets. Information about CPI's sales to geographical regions is presented in the table below. Sales to unaffiliated customers are based on the location of the customer. There are no individual foreign countries in which sales are considered material. F-19 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Sales by geographic area as follows:
(Dollars in thousands) Fiscal Year -------------------------------------- 2001 2000 1999 -------- -------- -------- United States $182,637 $163,484 167,508 All foreign countries 89,884 79,570 88,172 -------- -------- -------- Total Sales $272,521 $243,054 255,680 ======== ======== ========
CPI has a single customer that accounts for 10% or more of consolidated sales. Sales to this customer were $42.8 million, $41.3 million and $40.8 million of the Company's consolidated sales for fiscal years 2001, 2000, and 1999, respectively. A substantial majority of these sales were VED segment products, but this customer also purchased satcom equipment products. 12. 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:
(Dollars in thousands) CPI Customer Total Sponsored Sponsored Incurred --------- --------- -------- 52-week period ended September 28, 2001 $5,767 5,012 10,779 52-week period ended September 29, 2000 $8,690 6,476 15,166 52-week period ended October 1, 1999 $8,983 8,586 17,569
13. PROVISION FOR INCOME TAXES Earnings (loss) before income taxes for domestic and non-U.S. operations is as follows:
(Dollars in thousands) Fiscal Year ---------------------------------------- 2001 2000 1999 -------- -------- -------- Domestic $(10,431) $(13,985) $(12,017) Non-U.S (5,466) 3,625 2,964 -------- -------- -------- Total $(15,897) $(10,360) (9,053) ======== ======== ========
Income tax expense is comprised of the following: F-20 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollars in thousands) Fiscal Year --------------------------------------- 2001 2000 1999 -------- -------- -------- CURRENT U.S. federal $ (8,730) -- -- State 10 -- -- Non-U.S 310 943 605 -------- -------- -------- Total Current (8,410) 943 605 -------- -------- -------- DEFERRED U.S. federal 9,350 -- -- State 2,994 -- -- Non-U.S (984) 289 -- -------- -------- -------- Total Deferred 11,360 289 -- -------- -------- -------- Income tax expense $ 2,950 1,232 605 ======== ======== ========
The significant components of the CPI's deferred tax assets and liabilities are as follows:
(Dollars in thousands) September 28, September 29, 2001 2000 ------------- ------------- DEFERRED TAX ASSETS: Inventory and other reserves $ 6,708 6,216 Accrued vacation 1,721 1,977 Deferred compensation and other accruals 727 658 Excess purchase price -- 7,309 Foreign jurisdictions, net 2,953 -- Net operating loss and credit carryforwards 6,928 9,216 -------- -------- Gross deferred tax assets 19,037 25,376 Valuation allowance (12,373) (6,434) -------- -------- Total deferred tax assets 6,664 18,942 DEFERRED TAX LIABILITIES: Accelerated depreciation (3,164) (3,217) Foreign jurisdictions, net -- (865) -------- -------- Total deferred tax liabilities (3,164) (4,082) -------- -------- Net deferred tax asset $ 3,500 14,860 ======== ========
The provision for income tax expense for fiscal year 2001 consists of current federal alternative minimum tax (AMT), the release of amounts previously accrued for potential examinations by tax authorities, and deferred income tax expense resulting from a net decrease in deferred tax assets. State and foreign income tax expense results from current income tax payables in those jurisdictions. The provision for income tax expense for the fiscal years 2000 and 1999 consists of current income tax payable in foreign jurisdictions. Although the Company has a consolidated pretax loss, most foreign operations were profitable during fiscal years 2001, 2000 and 1999. Deferred tax assets have declined as the result of the utilization of net operating loss and credit carryforwards and amortization of capitalized research and development costs (excess purchase price). In assessing the realizability of deferred tax assets, management considers whether it is more F-21 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at September 28, 2001. The net change in the total valuation allowance for the 52-week period ended September 28, 2001 and September 29, 2000, was an increase of $5.9 million and $1.7 million, respectively. As of September 28, 2001, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $14.1 million and $8.7 million, respectively, available to reduce future income subject to income taxes. The federal net operating loss carryforwards expire beginning in 2018. State net operating loss carryforwards expire beginning in 2003. As of September 28, 2001, the Company has foreign tax credit and AMT credit carryforwards for federal income tax purposes of $0.6 million and $92,000, and manufacturers' investment credit for California income tax purposes of approximately $0.8 million available to reduce future federal and California income taxes, respectively. Foreign tax credit carryforwards expire beginning in 2003. Federal AMT credit and California credit will carryforward indefinitely. The Internal Revenue code of 1986 substantially restricts the ability of a corporation to utilize existing net operating losses in the event of an "ownership change" of the corporation. The Company has not yet determined if such an ownership change has occurred. If such an ownership change has occurred, then the utilization of the net operating losses will be subject to an annual limitation in future years. The differences between the effective income tax rate and the statutory federal income tax rate are as follows:
Fiscal Year ------------------------------ 2001 2000 1999 ---- ---- ---- Statutory federal income tax benefit rate (35.0)% (35.0)% (35.0)% Net operating loss not utilized -- 30.7% 39.4% Foreign tax rate differential 2.0% 11.9% (7.2)% State taxes 18.9% -- -- Non-deductible expenses 24.4% .6% (.8)% Other 8.3% 3.7% 10.3% ---- ---- ---- Effective tax rate 18.6% 11.9% 6.7% ==== ==== ====
F-22 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 14. STOCK-BASED BENEFIT PLANS 2000 Stock Option Plan In March 2000, Holding established the Communications & Power Industries 2000 Stock Option Plan ("the Plan") and reserved 250,000 shares of common stock for issuance under the Plan. Options granted under Holding's stock option plan are granted at fair market value, expire ten years from the date of grant and generally vest in four equal annual installments, commencing one year from the date of grant. The stock options granted pursuant to the Plan are not considered "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code, as amended and are subject to all of the terms and restrictions obtained in the Stock Option and Stockholders Agreements. A summary of the status of Holding's fixed stock option plan is as follows:
Options Outstanding -------------------------------------- Options Number of Weighted- Available for Shares Under average Exercise Grant Option Price ------------- ------------ ---------------- Authorized 250,000 -- -- Granted (232,500) 232,500 $ 4.00 -------- -------- -------- Balance at September 29, 2000 17,500 232,500 $ 4.00 -------- -------- -------- Granted (11,300) 11,300 $ 4.00 Canceled 8,750 (8,750) $ 4.00 -------- -------- -------- Balance at September 28, 2001 14,950 235,050 $ 4.00 ======== ======== ========
The per share weighted-average fair value of stock options granted during fiscal years 2001 and 2000 was $.60 and $1.00, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal years 2001 and 2000: risk-free interest rate of 4.09% in fiscal year 2001 and 5.85% in fiscal year 2000; expected life of 5 years for both years; no expected stock price volatility as the shares are not publicly traded; and a dividend yield of 0.0% in both years. There were 57,075 options exercisable as of September 28, 2001, and no options were exercisable as of September 29, 2000. Outstanding options as of September 28, 2001 and September 29, 2000, had a weighted-average remaining contractual life of 8.75 and 9.75 years, respectively. SFAS No. 123, "Accounting for Stock Based Compensation" requires a company to determine the fair market value of all stock-based compensation awards using an option pricing model and to disclose pro forma net income as if the resulting stock based compensation amounts were recorded in the Consolidated Statements of Operations. Had compensation cost for Holding's stock-based compensation plan been determined based on the fair value at the grant dates, consistent with the method prescribed under SFAS No. 123, Holding's fiscal years 2001 and 2000 net loss would not F-23 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED have been materially different from the net loss reported in the accompanying Statements of Operations. Holding Equity Plan In August 1995, Holding established the Holding 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 1,250,000 shares of Holding Common Stock for issuance under the Holding Equity Plan, 1,146,750 of which were issued to the Company's Chief Executive Officer, certain officers and key employees in fiscal year 1995. As of September 28, 2001, based on retirements and management changes, 164,828 of these Management Shares have been repurchased, and 73,000 have been resold. 15. RETIREMENT AND PROFIT SHARING PLANS CPI provides a qualified 401(k) investment plan covering substantially all of its domestic employees and a pension contribution plan covering substantially all of its Canadian employees. The plans provide for CPI to contribute an amount based on a percentage of each participant's base pay. CPI also has a Non-Qualified Deferred Compensation Plan (the "Non-Qualified Plan") that allows eligible executives and directors to defer a portion of their compensation. Participant contributions and Company matching contributions are always 100% vested. The deferred compensation liability amounted to approximately $0.4 million as of September 28, 2001 and September 29, 2000. Total CPI contributions to these plans were $2.7 million, $2.8 million and $2.8 million for fiscal years 2001, 2000, and 1999, respectively. 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. 16. Related Party Transactions Sale-leaseback transaction with CPI. 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 F-24 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 on the sale of the property of approximately $8.5 million. Intercompany accounts and transactions associated with this sale-leaseback transaction have been eliminated in consolidation. Outside Advisors Holding and CPI have entered into a management services agreement to pay $0.4 million, plus out-of-pocket expenses, annually to an advisor group, which is an affiliate of Holding's majority shareholder. Certain individuals who are stockholders of the general partner of this advisor group are members of Holding's and the Company's respective Boards of Directors. The management services agreement provides management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analyses, negotiating and structuring financing and exploring expansion opportunities. Stockholder Loans In connection with Holding's 1995 Management Equity Plan, certain executive officers of the Company 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 principal amount of such Management Notes was $0.9 million as of September 28, 2001. Of this amount, $0.7 million 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 $0.2 million 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. The first payments on these promissory notes were required to be made on August 11, 2000. No such payments have been made, and the Company is reviewing its options with respect to these notes. 17. GUARANTEES Holding has guaranteed CPI's senior debt obligations. Other than the transactions associated with the San Carlos real estate purchase and related financing and leaseback arrangements, the consolidated balance sheets of Holding as of September 28, 2001 and September 29, 2000 are substantially identical to that of CPI. F-25 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 18. Quarterly Financial Data (Unaudited)
(Dollars in thousands) ---------------------------------------------------------------------------------------------------------- Sept. 28, June 29, Mar. 30, Dec. 29, Sept. 29, June 30, Mar. 31, Dec. 31, Quarter Ended 2001 2001 2001 2000 2000 2000 2000 1999 -------- -------- -------- -------- -------- -------- -------- -------- Sales $ 72,851 $ 72,724 $ 66,570 $ 60,376 $ 61,357 $ 66,367 $ 60,340 $ 54,990 Gross profit $ 8,115 $ 15,653 $ 12,623 $ 12,798 $ 12,381 $ 16,473 $ 13,300 $ 12,152 Net loss $(10,733) $ (1,873) $ (3,836) $ (2,405) $ (4,730) $ (586) $ (3,153) $ (3,123)
F-26 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) as of September 28, 2001 and September 29, 2000, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the 52-week periods ended September 28, 2001, September 29, 2000, and October 1, 1999. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement schedule. 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 auditing standards generally accepted in the United States of America. 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. 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 September 28, 2001 and September 29, 2000, and the results of their operations and their cash flows for the 52-week periods ended September 28, 2001, September 29, 2000, and October 1, 1999, in conformity with accounting principles generally accepted in the United States of America. 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 LLP Mountain View, California December 7, 2001 F-27 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
September 28, September 29, 2001 2000 ------------- ------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,903 4,766 Accounts receivable, net 46,738 42,434 Inventories 57,678 63,949 Deferred taxes 3,500 6,972 Other current assets 2,241 1,603 --------- --------- Total current assets 113,060 119,724 Property, plant, and equipment, net 48,672 68,656 Goodwill and other intangibles, net 23,452 26,090 Debt issue costs, net 4,715 4,627 Note receivable from parent 5,750 -- Deferred taxes -- 7,888 --------- --------- Total assets $ 195,649 226,985 ========= ========= LIABILITIES, SENIOR REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Revolving credit facility $ 21,293 39,800 Current portion of term loans -- 6,012 Current portion of capital leases 919 960 Accounts payable 15,175 18,462 Accrued expenses 18,196 16,903 Product warranty 4,225 2,978 Income taxes payable 407 9,518 Accrued dividends payable 4,387 -- Advance payments from customers 9,193 5,210 --------- --------- Total current liabilities 73,795 99,843 Senior term loans 20,000 10,000 Senior subordinated notes 100,000 100,000 Deferred income on sale-leaseback 7,735 -- Obligations under capital leases 90 895 --------- --------- Total liabilities 201,620 210,738 --------- --------- SENIOR REDEEMABLE PREFERRED STOCK ($.01 par value, 325,000 shares authorized; 297,346 shares issued and outstanding as of 2001 and 2000, respectively, liquidation preference $100 per share) 28,479 28,265 --------- --------- Commitments and contingencies STOCKHOLDERS' DEFICIT Junior Preferred Stock ($.01 par value, 525,000 shares authorized; 227,475 and 198,232 shares issued and outstanding as of 2001 and 2000, respectively, liquidation preference $100 per share) 2 2 Common stock ($.01 par value, 400,000 shares authorized; 1 share issued and outstanding as of 2001 and 2000) -- -- Additional paid-in capital 41,252 38,328 Accumulated deficit (74,523) (49,215) Stockholder loan (1,181) (1,133) --------- --------- Net stockholders' deficit (34,450) (12,018) --------- --------- Total liabilities, senior redeemable preferred stock and stockholders' deficit $ 195,649 226,985 ========= =========
See accompanying notes to the consolidated financial statements. F-28 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
52-Week 52-Week 52-Week period ended period ended period ended September 28, September 29, October 1, 2001 2000 1999 ------------- ------------- ------------ Sales $ 272,521 243,054 255,680 Cost of sales 223,332 188,748 199,638 --------- --------- --------- Gross profit 49,189 54,306 56,042 --------- --------- --------- Operating costs and expenses: Research and development 5,767 8,690 8,983 Selling and marketing 17,544 18,524 19,590 General and administrative 21,935 18,253 18,206 --------- --------- --------- Total operating costs and expenses 45,246 45,467 46,779 --------- --------- --------- Operating income 3,943 8,839 9,263 Foreign currency loss (130) (536) (511) Interest expense 18,646 18,663 17,805 --------- --------- --------- Loss before taxes (14,833) (10,360) (9,053) Income tax expense 2,950 1,232 605 --------- --------- --------- Net loss (17,783) (11,592) (9,658) Preferred dividends: Senior Redeemable Preferred Stock 4,387 3,822 3,331 Junior Preferred Stock 2,924 2,548 2,222 --------- --------- --------- Net loss attributable to common stock $ (25,094) (17,962) (15,211) ========= ========= =========
See accompanying notes to the consolidated financial statements. F-29 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)
Total Junior Additional Stockholders' Preferred Common Paid-in Accumulated Stockholder Equity Stock Stock Capital Deficit Loans (Deficit) --------- -------- ---------- ----------- ----------- ------------- Balances, October 2, 1998 $ 1 -- 33,582 (15,614) (1,057) 16,912 ======== ======== ======== ======== ======== ======== Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) (214) Payment of dividends on Senior Redeemable Preferred Stock (3,331) (3,331) Payment of dividends on Junior Preferred Stock 1 2,221 (2,222) -- Net loss (9,658) (9,658) Interest accrued on stockholder loan (49) (49) -------- -------- -------- -------- -------- -------- Balances, October 1, 1999 $ 2 -- 35,803 (31,039) (1,106) 3,660 ======== ======== ======== ======== ======== ======== Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) (214) Payment of dividends on Senior Redeemable Preferred Stock (3,822) (3,822) Payment of dividends on Junior Preferred Stock 2,548 (2,548) -- Net loss (11,592) (11,592) Repayment of stockholder loan 20 20 Interest accrued on stockholder loan (47) (47) Purchase of Treasury Stock (23) (23) -------- -------- -------- -------- -------- -------- Balances, September 29, 2000 $ 2 -- 38,328 (49,215) (1,133) (12,018) ======== ======== ======== ======== ======== ======== Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) (214) Dividends on Senior Redeemable Preferred Stock (4,387) (4,387) Payment of dividends on Junior Preferred Stock 2,924 (2,924) -- Net loss (17,783) (17,783) Interest accrued on stockholder loan (48) (48) -------- -------- -------- -------- -------- -------- Balances, September 28, 2001 $ 2 -- 41,252 (74,523) (1,181) (34,450) ======== ======== ======== ======== ======== ========
See accompanying notes to the consolidated financial statements. F-30 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
52-Week 52-Week 52-Week period ended period ended period ended September 28, September 29, October 1, 2001 2000 1999 ------------ ------------ ------------ OPERATING ACTIVITIES Net cash provided by operating activities $ 1,953 9,897 6,282 -------- -------- -------- INVESTING ACTIVITIES Proceeds from sale of property to parent 17,250 -- -- Proceeds from sale of property, plant and equipment 1,944 -- 54 Purchase of property, plant, and equipment (5,788) (5,325) (8,260) Purchase of net current assets in connection with acquisitions -- -- (1,861) Purchase of property and equipment in connection with acquisitions -- -- (523) Purchase of intangible assets in connection with acquisitions -- -- (6,526) -------- -------- -------- Net cash provided by (used in) investing activities 13,406 (5,325) (17,116) -------- -------- -------- FINANCING ACTIVITIES Repayments on capital leases (960) (855) (688) Payment of debt issue costs (1,743) -- -- Repayment of terminated revolving credit facility (40,000) -- -- Net Proceeds from revolving credit facility 21,530 4,800 21,700 Repayments of terminated senior term loans (16,049) (7,995) (6,379) Proceeds from senior term loans 20,000 -- -- Purchases of treasury stock -- (23) -- Proceeds from stockholder loan -- 20 -- -------- -------- -------- Net cash (used in) provided by financing activities (17,222) (4,053) 14,633 -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,863) 519 3,799 Cash and cash equivalents at beginning of period 4,766 4,247 448 -------- -------- -------- Cash and cash equivalents at end of period $ 2,903 4,766 4,247 ======== ======== ========
See accompanying notes to the consolidated financial statements. F-31 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (in thousands)
52-Week 52-Week 52-Week period ended period ended period ended September 28, September 29, October 1, 2001 2000 1999 ------------ ------------ ------------ DETAIL OF NET CASH PROVIDED BY OPERATING ACTIVITIES Net loss $(17,783) (11,592) (9,658) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 10,210 12,682 10,851 Amortization of deferred debt issue costs 1,655 1,288 1,209 Amortization of goodwill and intangibles 2,638 2,634 2,784 Allowance for doubtful accounts (362) (346) 507 Gain on sale of property to parent (317) -- -- Deferred taxes 11,360 289 -- Interest accrued on stockholder loan (48) (47) (49) Net (gains) losses on the disposition of assets (792) 212 61 Changes in operating assets and liabilities: Accounts receivable (3,942) 7,508 382 Inventories 6,271 (11,423) 1,752 Other current assets (638) (79) 17 Accounts payable (3,287) 4,940 72 Accrued expenses 869 414 601 Product warranty 1,247 (597) (169) Income tax payable (9,111) 540 (1,281) Advance payments from customers 3,983 3,474 (797) -------- -------- -------- Net cash provided by operating activities $ 1,953 9,897 6,282 ======== ======== ========
See accompanying notes to the consolidated financial statements. F-32 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Communications & Power Industries, Inc. ("CPI" or "the Company") develops, manufactures and distributes microwave and power grid vacuum electronic devices, microwave amplifiers, modulators and various other power supply equipment and devices. The Company operates six manufacturing operations in North America, and sells and services its products and customers worldwide primarily through a direct sales force. In August 1995, CPI acquired substantially all of the assets of Varian Associates, Inc.'s ("Varian") Electron Device business (the "Predecessor") and then was 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. The acquisition was 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. 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements include the accounts of CPI and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company's fiscal years are the 52- or 53-week periods which end on the Friday nearest September 30. All references to years in these notes to consolidated financial statements represent fiscal year unless otherwise noted. Liquidity The Company's parent has short-term mortgage financing debt of $18.0 million with Wells Fargo Bank that expires on June 1, 2002. Management expects that cash to be generated by operations and borrowing under its Credit Facility in conjunction with either extending or finding alternative collateral-based financing by June 1, 2002 will allow it to meet the mortgage obligation. In addition, the Company's parent recently received a bid for its property in San Carlos for an amount in excess of its existing mortgage which would allow the Company to continue to operate on this property on a leaseback basis for a sufficient period of time that was in excess of the existing mortgage financing. Although this specific bid was turned down, the Company believes this is a viable alternative if necessary to meet cash requirements in the future. F-33 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED There can be no assurance that the combination of cash generated by operations, borrowing availability from the Company's Credit Facility and additional collateral-based financing will be sufficient to meet the Company's cash requirements. If the Company is unable to satisfy such cash requirements from these sources, the Company will adopt one or more alternatives, such as reducing or delaying capital expenditures, reducing discretionary costs, negotiating an increase to the Company's borrowing capacity under its line of credit, and selling and leasing back the facility in San Carlos, California, owned by its parent, in a transaction with a third party. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. 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 and most transactions to third world economies are backed by letters of credit. 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. Revenue Recognition Sales are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectibility is reasonably assured. The Company's products are generally subject to warranties, and the Company provides for the estimated future costs of repair, replacement or customer accommodation in costs of sales. The estimated sales values of performance under certain contracts to commercial customers and 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. F-34 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Property, Plant, and Equipment Property, plant and equipment are stated at 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. Estimated useful lives of property, plant, and equipment are as follows: land leaseholds, the life of the lease; buildings, 20 to 40 years; machinery and equipment, 3 to 7 years. Gains and losses resulting from the disposition of assets (property, plant and equipment) are reported on a net basis in the caption "General and administrative" on the Consolidated Statements of Operations. Net gains (losses) on the disposition of assets were $0.8 million, ($0.2) million and ($61,000) for fiscal years 2001, 2000 and 1999, respectively. Accounting for Long-Lived Assets CPI reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of its carrying amount to future net cash flows expected to be generated from the operation and sale of long-lived assets. If such assets are considered to be impaired, the Company's carrying value is reduced to its estimated fair value. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. The Company assesses the recoverability of the carrying amount of goodwill by determining whether the carrying amount of goodwill can be recovered through undiscounted net cash flows of the acquired operation over the remaining amortization period. If determined to be impaired, the carrying amount is reduced to its estimated fair value which is based on an estimate of discounted future net cash flows. Goodwill is being amortized on a straight-line basis over estimated useful lives ranging from 15 to 25 years. Accumulated amortization was $11.6 million and $9.0 million as of September 28, 2001 and September 29, 2000, respectively. On October 6, 1998, CPI acquired Microwave Components Division ("MCD") of Aydin Corporation for approximately $8.9 million with net assets of approximately $2.4 million. Of the $6.5 million difference between the purchase price and the fair value of the net assets acquired, $3.4 million was allocated to goodwill and $3.1 million was allocated to other identifiable intangibles including customer list, trade name, covenant not to compete, software rights and debt issuance cost, whose useful lives range from 1 to 3 years. This acquisition was accounted for as a purchase. Product Warranty CPI's products are generally warranted for a variety of periods, typically one to three years or a predetermined product usage life. A provision for estimated future costs of repair, replacement or customer accommodations are reflected in the accompanying consolidated financial statements. F-35 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 years 2001, 2000 nor 1999. Varian retained the environmental liabilities existing at the time CPI acquired substantially all of the assets of Varian's Electron Device business in August 1995. 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 term loan, revolving credit facility, and the Senior Subordinated Notes is 2 years, 4 years and 10 years, respectively. 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 straight-line 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 provision for income taxes 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. Business Risks and Credit Concentrations Defense-related applications such as certain radar, electronic countermeasures and military communications constitute a significant portion of the Company's sales. Companies engaged in supplying defense-related equipment and services to government agencies are subject to certain business risks peculiar to that industry. Sales to the government may be affected by changes in procurement policies, budget considerations, changing concepts of national defense, political developments abroad, and other factors. F-36 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Foreign Currency Translation The functional currency of CPI's foreign subsidiaries is the U.S. dollar. Gains or losses resulting from the translation into U.S. dollars of amounts denominated in foreign currencies are included in the determination of net loss. Fair Value of Financial Instruments Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, revolving credit facility, term loans, mortgage financing and long-term debt. The carrying value of CPI's cash and cash equivalents, accounts receivable, accounts payable, revolving credit facility and term loans approximate their fair values due to the relatively short period to maturity of the instruments. The fair value of CPI's Senior Subordinated Notes as of November 15, 2001, based on quoted market prices or pricing models using current market rates, has been quoted at a level of 47.00 (100.00 is face value). Comprehensive Income The Company has no components of other comprehensive income (loss) and, accordingly, comprehensive loss is the same as reported net loss for all periods presented. 3. BALANCE SHEET COMPONENTS Accounts Receivable Accounts receivable are stated net of allowances for doubtful accounts of $0.4 million and $0.8 million as of September 28, 2001 and September 29, 2000, respectively. Inventories Inventories are stated at the lower of average cost or market (net realizable value). The main components of inventories are as follows:
September 28, September 29, (Dollars in thousands) 2001 2000 ------------- ------------- Raw materials and parts $40,776 46,859 Work in process 14,874 14,731 Finished goods 2,028 2,359 ------- ------ Total inventories $57,678 63,949 ======= ======
Property, Plant, and Equipment The main components of property, plant, and equipment are as follows: F-37 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
September 28, September 29, (Dollars in thousands) 2001 2000 ------------- ------------- Land and land leaseholds $ 27,109 $ 36,655 Buildings 13,771 21,117 Machinery and equipment 55,158 52,801 Leased equipment 3,914 4,102 Construction in progress 1,540 672 --------- --------- Subtotal 101,492 115,347 Less accumulated depreciation and amortization (52,820) (46,691) --------- --------- Net property, plant and equipment $ 48,672 $ 68,656 ========= =========
Accumulated amortization of equipment under capital lease arrangements was $2.8 million and $2.0 million as of September 28, 2001 and September 29, 2000, respectively, and related amortization expense is included in depreciation expense on the statement of cash flows. Accrued Expenses Accrued expenses are comprised of the following:
September 28, September 29, (Dollars in thousands) 2001 2000 ------------- ------------- Taxes $ 1,360 1,147 Payroll and employee benefits 10,303 10,149 Accrued interest 2,667 3,216 Other 3,866 2,391 ------- ------ Total accrued expenses $18,196 16,903 ======= ======
4. CREDIT FACILITY On December 22, 2000, the Company terminated the previous 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 December 22, 2004, and a $20.0 million term loan, which expires 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 Credit Facility is based upon eligible receivables, machinery and equipment and certain real estate. As of September 28, 2001, CPI had $15.4 million available under the revolving line of credit. 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 F-38 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED will bear interest at a rate equal to Prime plus 5.50% per annum. Additionally, the terms of the Credit 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 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. 5. SENIOR SUBORDINATED NOTES The $100 million principal amount of Senior Subordinated Notes ("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 Notes (the "Indenture"), to the prior payment in full of all senior indebtedness (as defined), including indebtedness under the credit facility, 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 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 as follows:
Year Percentage ---- ---------- 2002 103.0% 2003 101.5% 2004 and thereafter 100.0%
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 Credit Facility 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. 6. 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 (the "Senior Preferred Stock") due 2007, 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. Beginning August 1, 2000, dividends may be paid only in cash. F-39 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the year ending September 28, 2001, $4.4 million of cash dividends were accrued for payment on Senior Preferred Stock. In addition, at a value of $100 per share, CPI paid preferred dividends on its Senior Preferred Stock through the issuance of 38,226 and 33,312 shares for fiscal years 2000 and 1999, respectively. The Senior Preferred Stock is 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. 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 (the "Exchange Notes") due 2007, so long as such exchange is permitted by the Credit Facility 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 Credit Facility and the Indenture. Except for terms relating to these subordination provisions, payment of interest on a quarterly basis, 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. 7. 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 formation of CPI in 1995 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 F-40 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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. At a value of $100 per share, CPI paid preferred dividends on its Junior Preferred Stock through the issuance of 29,243, 25,484, and 22,208 shares for fiscal years 2001, 2000, and 1999, respectively. 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. 8. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest was $18.2 million, $16.7 million and $16.6 million in fiscal years 2001, 2000, and 1999, respectively. Cash paid (refunded) for taxes was $0.6 million, $(32,000), and $1.8 million in fiscal years 2001, 2000, and 1999, respectively. Non-cash financing activities included the following: Dividends on Senior Redeemable Preferred Stock included $4.4 million of accrued but unpaid preferred dividends in fiscal year 2001 and the issuance of 38,226 and 33,312 shares of Senior Redeemable Preferred Stock in fiscal years 2000 and 1999, respectively. Preferred stock dividends on Junior Preferred Stock was through the issuance of 29,243, 25,484, and 22,208 shares of Junior Preferred Stock during fiscal years 2001, 2000, and 1999, respectively. Amortization of discount and issue costs on the Senior Redeemable Preferred Stock was $0.2 million for each of the fiscal years 2001, 2000, and 1999. Equipment of $0.1 million and $0.3 million was acquired under capital leases for fiscal years 2001 and 1999, respectively; no equipment was acquired under capital leases for fiscal year 2000. 9. LEASES At September 28, 2001, CPI was committed to minimum rentals under non-cancelable operating lease agreements primarily for land and facility space. CPI also leases certain computer and telephone equipment under capital leases that expire in 2004. As collateral for these capital leases, CPI has issued letters of credit totaling $0.6 million. As noted in Note 15 -- Related Party Transactions, on December 22, 2000, CPI and Holding entered into an operating 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. A summary of future minimum lease payments (in thousands) follows: F-41 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Capital Operating Sublease Fiscal Year Leases Leases Income - ----------- ------- -------- -------- 2002 $ 971 3,604 1,042 2003 76 3,043 112 2004 19 2,880 6 2005 -- 2,744 -- 2006 -- 2,458 -- Later years -- 34,913 -- ------ ------ ----- Total future minimum lease payments 1,066 49,642 1,142 ====== ===== Less amount representing interest, sales tax and additional obligation 57 ------ Present value of future minimum lease payments 1,009 Less current portion of obligations under capital leases 919 ------ Obligations under capital leases, less current portion $ 90 ======
Real estate taxes, insurance, and maintenance are also obligations of CPI. Rental expense under non-cancelable operating leases amounted to $3.0 million, $1.0 million, and $0.9 million for fiscal years 2001, 2000, and 1999, respectively. 10. CONTINGENCIES The amount of outstanding letters of credit provided for under CPI's Credit Facility was $4.3 million as of September 28, 2001. These outstanding obligations are comprised of the following: $2.9 million related to eleven performance bond guarantees, $0.6 million to two lenders related to capital lease arrangements and $0.8 million to various other beneficiaries related primarily to insurance and service contracts. Varian is currently a defendant in certain legal actions relating to its operation of the assets sold to the Company and could incur an uninsured liability in one or more of them. The Company's acquisition agreement with Varian 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 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 F-42 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 Company's acquisition agreement with Varian 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 Company's consolidated financial position or results of operations. From time to time, CPI may be subject to other claims that arise in the ordinary course of business. In the opinion of management, as of September 28, 2001, all such matters involve amounts which would not have a material adverse effect on the Company's consolidated financial position if unfavorably resolved. 11. SEGMENTS AND RELATED INFORMATION The Company has two reportable segments: vacuum electronic devices ("VEDs") and satcom equipment. Reportable segments are differentiated based on product. The VED segment is made up of four operating units, which have been aggregated. Each operating unit has a President that reports to the Office of the Chief Operating Officer, held jointly by two of the Presidents, that in turn reports directly to the Chief Executive Officer ("CEO"). The CEO evaluates performance and allocates resources to each of these operating units based on the Company's principal performance measure, earnings before income taxes, interest, depreciation and amortization ("EBITDA"). These four operating units have similar economic characteristics as measured by EBITDA. The Company's analysis of the similarity of economic characteristics was based on both a historical and anticipated future analysis of performance. In addition, the aggregated units are similar in (i) the nature of their products, (ii) their manufacturing processes, (iii) their customers and, (iv) their distribution and sales methods. The VED segment develops, manufactures and distributes high power/high frequency microwave and radio frequency signal components. Its products include linear beam, cavity, power grid, crossed field and magnetron devices. These products are used in the communication, radar, electronic countermeasures, industrial, medical and scientific markets 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. Its products are distributed through the Company's direct sales force, independent sales representatives and distributors. The satcom equipment segment manufactures and supplies high power amplifiers and networks for satellite communication uplink and industrial applications. This segment also provides spares, service and other post sales support. These products are distributed through the Company's direct sales force and independent sales representatives. F-43 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Sales and marketing, finance and administration expenses are allocated to the operating units and are included in the results reported. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment product transfers are recorded at cost. Summarized financial information concerning the Company'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.
Satcom (Dollars in thousands) VEDs Equipment Other Total -------- --------- -------- -------- Fiscal Year 2001: Revenues from external customers $203,656 64,819 4,046 272,521 Intersegment product transfers 20,081 -- 1,432 21,513 EBITDA 29,183 (4,046) (8,476) 16,661 Total Assets 109,684 33,015 52,950 195,649 Capital Expenditures 3,522 1,487 779 5,788 Fiscal Year 2000: Revenues from external customers $188,800 48,190 6,064 243,054 Intersegment product transfers 9,524 -- 1,232 10,756 EBITDA 29,773 (3,348) (2,806) 23,619 Total Assets 120,012 27,956 79,017 226,985 Capital Expenditures 3,078 996 1,251 5,325 Fiscal Year 1999: Revenues from external customers $186,852 61,901 6,927 255,680 Intersegment product transfers 14,514 -- 1,740 16,254 EBITDA 23,862 2,939 (4,274) 22,527 Total Assets 118,701 32,648 82,235 233,584 Capital Expenditures 5,447 920 1,893 8,260
A reconciliation of EBITDA from reportable segments to Loss before Taxes is as follows:
Fiscal Year --------------------------------------- (Dollars in thousands) 2001 2000 1999 -------- ------- ------- Segment EBITDA $ 16,661 23,619 22,527 Less: Depreciation and amortization 12,848 15,316 13,635 Other -- -- 140 Interest expense 18,646 18,663 17,805 -------- ------- ------- Loss before taxes $(14,833) (10,360) (9,053) ======== ======= =======
F-44 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED CPI's operations outside of North America consist of sales offices in certain foreign countries. Long-lived assets outside of North America are less than 10% of total consolidated assets. Information about CPI's sales to geographical regions is presented in the table below. Sales to unaffiliated customers are based on the location of the customer. There are no individual foreign countries in which sales are considered material. Sales by geographic area are as follows:
Fiscal Year ----------------------------------------- (Dollars in thousands) 2001 2000 1999 -------- -------- ------- United States $182,637 $163,484 167,508 All foreign countries 89,884 79,570 88,172 -------- -------- ------- Total Sales $272,521 $243,054 255,680 ======== ======== =======
CPI has a single customer that accounts for 10% or more of consolidated sales. Sales to this customer were $42.8 million, $41.3 million, and $40.8 million of the Company's consolidated sales for fiscal years 2001, 2000, and 1999, respectively. A substantial majority of these sales were VED segment products, but this customer also purchased satcom equipment products. 12. RESEARCH AND DEVELOPMENT CPI-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 CPI on research and development are summarized as follows:
CPI Customer Total (Dollars in thousands) Sponsored Sponsored Incurred --------- --------- -------- 52-week period ended September 28, 2001 $5,767 5,012 10,779 52-week period ended September 29, 2000 $8,690 6,476 15,166 52-week period ended October 1, 1999 $8,983 8,586 17,569
13. PROVISION FOR INCOME TAXES Earnings (loss) before income taxes for domestic and non-U.S. operations is as follows:
Fiscal Year ------------------------------------ (Dollars in thousands) 2001 2000 1999 -------- ------- ------- Domestic $ (9,367) (13,985) (12,017) Non-U.S (5,466) 3,625 2,964 -------- ------- ------- Total $(14,833) (10,360) (9,053) ======== ======= =======
F-45 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Income tax expense is comprised of the following:
Fiscal Year ----------------------------------- (Dollars in thousands) 2001 2000 1999 -------- ----- ---- CURRENT U.S. federal $ (8,730) -- -- State 10 -- -- Non-U.S 310 943 605 -------- ----- --- Total Current (8,410) 943 605 -------- ----- --- DEFERRED U.S. federal 9,350 -- -- State 2,994 -- -- Non-U.S (984) 289 -- -------- ----- --- Total Deferred 11,360 289 -- -------- ----- --- Income tax expense $ 2,950 1,232 605 ======== ===== ===
The significant components of the CPI's deferred tax assets and liabilities are as follows:
September 28, September 29, (Dollars in thousands) 2001 2000 ------------- ------------- DEFERRED TAX ASSETS: Inventory and other reserves $ 6,708 6,216 Accrued vacation 1,721 1,977 Deferred compensation and other accruals 727 658 Excess purchase price -- 7,309 Foreign jurisdictions, net 2,953 -- Net operating loss and credit carryforwards 6,498 9,216 -------- ------- Gross deferred tax assets 18,607 25,376 Valuation allowance (11,943) (6,434) -------- ------- Total deferred tax assets 6,664 18,942 DEFERRED TAX LIABILITIES: Accelerated depreciation (3,164) (3,217) Foreign jurisdictions, net -- (865) -------- ------- Total deferred tax liabilities (3,164) (4,082) -------- ------- Net deferred tax asset $ 3,500 14,860 ======== =======
The provision for income tax expense for fiscal year 2001 consists of current federal alternative minimum tax (AMT), the release of amounts previously accrued for potential examinations by tax authorities, and deferred income tax expense resulting from a net decrease in deferred tax assets. State and foreign income tax expense results from current income tax payables in those jurisdictions. The provision for income tax expense for the fiscal years 2000 and 1999 consists of current income tax payable in foreign jurisdictions. Although the Company has a consolidated pretax loss, most foreign operations were profitable during fiscal years 2001, 2000 and 1999. F-46 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Deferred tax assets have declined as the result of the utilization of net operating loss and credit carryforwards and amortization of capitalized research and development costs (excess purchase price). 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 not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at September 28, 2001. The net change in the total valuation allowance for the 52-week period ended September 28, 2001 and September 29, 2000 was an increase of $5.5 million and $1.7 million, respectively. As of September 28, 2001, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $13.1 million and $8.4 million, respectively, available to reduce future income subject to income taxes. The federal net operating loss carryforwards expire beginning in 2018. State net operating loss carryforwards expire beginning in 2003. As of September 28, 2001, the Company has foreign tax credit and AMT credit carryforwards for federal income tax purposes of $0.6 million and $92,000; and manufacturers' investment credit for California income tax purposes of approximately $0.8 million available to reduce future federal and California income taxes, respectively. Foreign tax credit carryforwards expire beginning in 2003. Federal AMT credit and California credit will carryforward indefinitely. The Internal Revenue code of 1986 substantially restricts the ability of a corporation to utilize existing net operating losses in the event of an "ownership change" of the corporation. The Company has not yet determined if such an ownership change has occurred. If such an ownership change has occurred, then the utilization of the net operating losses will be subject to an annual limitation in future years. The differences between the effective income tax rate and the statutory federal income tax rate are as follows:
Fiscal Year ------------------------------ 2001 2000 1999 ------ ------ ------ Statutory federal income tax benefit rate (35.0%) (35.0%) (35.0%) Net operating loss not utilized -- 30.7% 39.4% Foreign tax rate differential 2.2% 11.9% (7.2%) State taxes 20.2% -- -- Non-deductible expenses 26.1% .6% (.8%) Other 6.4% 3.7% 10.3% ------ ------ ------ Effective tax rate 19.9% 11.9% 6.7% ====== ====== ======
F-47 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 14. RETIREMENT AND PROFIT SHARING PLANS CPI provides a qualified 401(k) investment plan covering substantially all of its domestic employees and a pension contribution plan covering substantially all of its Canadian employees. The plans provide for CPI to contribute an amount based on a percentage of each participant's base pay. CPI also has a Non-Qualified Deferred Compensation Plan (the "Non-Qualified Plan") that allows eligible executives and directors to defer a portion of their compensation. Participant contributions and CPI matching contributions to the Non-Qualified Plan are always 100% vested. The deferred compensation liability amounted to approximately $0.4 million as of September 28, 2001 and September 29, 2000. Total CPI contributions to these plans were $2.7 million, $2.8 million and $2.8 million for fiscal years 2001, 2000, and 1999, respectively. 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. 15. RELATED PARTY TRANSACTIONS Sale-leaseback transaction with Holding 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 on the sale of the property of approximately $8.5 million which is being recognized as income over the 20 year term of the lease. Holding Summary CPI's related party transactions with Holding consist of the following (in thousands); F-48 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
September 28, September 29, 2001 2000 ------------- ------------- Note receivable from parent $5,750 -- Accounts payable to parent $ 446 -- Deferred income on sale-leaseback Current portion $ 425 -- Deferred portion $7,735 -- Shareholder loan $1,181 $1,133
Fiscal Year ------------------------ 2001 2000 ------ ------ Rent expense $1,838 -- Interest income on note receivable $ 690 -- Interest income on shareholder loan $ 48 $ 47 Realized gain on sale of property $ 317 --
Stockholder Loans 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. Holding owes CPI for the amount of unpaid promissory notes, plus accrued interest, that is owed to Holdings by Holdings' shareholders. The aggregate principal amount of such Management Notes was $0.9 million as of September 28, 2001. Of this amount, $0.7 million 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 $2.0 million 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. The first payments on these promissory notes were required to be made on August 11, 2000. No such payments have been made, and the Company is reviewing its options with respect to these notes. Outside Advisors Holding and CPI have entered into a management services agreement to pay $0.4 million, plus out-of-pocket expenses, annually to an advisor group, which is an affiliate of Holding's majority shareholder. Certain individuals who are stockholders of the general partner of this advisor group are members of Holding's and the Company's respective Boards of Directors. The management services agreement provides management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analyses, negotiating and structuring financing and exploring expansion opportunities. F-49 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 16. PARENT COMPANY DATA Holding has guaranteed CPI's senior debt obligations. Other than the following, the consolidated balance sheets of Holding as of September 28, 2001 and September 29, 2000 are substantially identical to that of CPI and its subsidiaries: (i) the presentation of CPI's preferred stock as minority interest and the components of stockholders' equity of Holding, and (ii) the transactions associated with the San Carlos real estate purchase and related financing and leaseback arrangements, as noted in Note 15 -- Related Party Transactions. The consolidated balance sheets of Holding are summarized as follows (in thousands, except per share amounts):
September 28, September 29, 2001 2000 ------------- ------------- ASSETS Current assets $ 113,060 119,724 Long-term assets 91,007 107,261 --------- -------- Total assets $ 204,067 226,985 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities $ 91,012 99,843 Long-term debt and deferred taxes 120,090 110,895 --------- -------- Total liabilities 211,102 210,738 Senior Redeemable Preferred Stock of subsidiary 28,479 28,265 Junior Preferred Stock of subsidiary 22,094 19,170 Stockholders' Equity: Common stock ($.01 par value, 6,500,000 shares authorized; 4,908,172 shares issued and outstanding as of 2001 and 2000.) 49 49 Additional paid-in capital 19,111 19,111 Accumulated deficit (75,587) (49,215) Less stockholder loans (1,181) (1,133) --------- -------- Total liabilities and stockholders' equity $ 204,067 226,985 ========= ========
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. F-50 COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 18. Quarterly Financial Data (Unaudited)
(Dollars in thousands) ---------------------------------------------------------------------------------------------------- Sept. 28, June 29, Mar. 30, Dec. 29, Sept. 29, June 30, Mar. 31, Dec. 31, Quarter Ended 2001 2001 2001 2000 2000 2000 2000 1999 - ------------- --------- -------- -------- -------- --------- -------- -------- -------- Sales $ 72,851 $ 72,724 $ 66,570 $ 60,376 $ 61,357 $ 66,367 $ 60,340 $ 54,990 Gross profit $ 8,115 $ 15,653 $ 12,623 $ 12,798 $ 12,381 $ 16,473 $ 13,300 $ 12,152 Net loss $(10,475) $ (1,600) $ (3,394) $ (2,314) $ (4,730) $ (586) $ (3,153) $ (3,123)
F-51 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 - ----------- ------------ ----------- ---------- ----------- 52-week period ended October 1, 1999: Allowance for doubtful accounts receivable $ 636 543 (36) 1,143 52-week period ended September 29, 2000: Allowance for doubtful accounts receivable 1,143 523 (869) 797 52-week period ended September 28, 2001: Allowance for doubtful accounts receivable 797 355 (717) 435
F-52 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 - ----------- ------------ ----------- ---------- ----------- 52-week period ended October 1, 1999: Allowance for doubtful accounts receivable $636 543 (36) 1,143 52-week period ended September 29, 2000: Allowance for doubtful accounts receivable 1,143 523 (869) 797 52-week period ended September 28, 2001: Allowance for doubtful accounts receivable 797 355 (717) 435
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