-----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, Aayx5lTTVwwtgk7sDQInj+WuhQd7TKnOfoAq/+FtlaLuLPo4orReONC5aq5DsTmP rs2Zee/Y6SIFIt/LuHAViA== 0000891618-98-005513.txt : 19981231 0000891618-98-005513.hdr.sgml : 19981231 ACCESSION NUMBER: 0000891618-98-005513 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981002 FILED AS OF DATE: 19981230 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNICATIONS & POWER INDUSTRIES HOLDING CORP CENTRAL INDEX KEY: 0001000654 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 770407395 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-96858-01 FILM NUMBER: 98777606 BUSINESS ADDRESS: STREET 1: 607 HANSEN WY CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4154934000 MAIL ADDRESS: STREET 1: 607 HANSEN WAY M/S A2000 STREET 2: P O BOX 51110 CITY: PALO ALTO STATE: CA ZIP: 94303-1110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNICATIONS & POWER INDUSTRIES INC CENTRAL INDEX KEY: 0001000564 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 770405693 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-96858 FILM NUMBER: 98777607 BUSINESS ADDRESS: STREET 1: 607 HANSEN WAY CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4154934000 MAIL ADDRESS: STREET 1: 607 HANSEN WAY M/S A200 STREET 2: P O BOX 51110 CITY: PALO ALTO STATE: CA ZIP: 94303-1110 10-K405 1 FORM 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 2, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ______________ Commission File Number: 33-96858-01 Commission File Number: 33-96858 COMMUNICATIONS & POWER INDUSTRIES HOLDING COMMUNICATIONS & CORPORATION POWER INDUSTRIES, INC. (Exact name of registrant as specified in its (Exact name of registrant as specified in charter) its charter) DELAWARE DELAWARE (State of Incorporation) (State of Incorporation) 77-0407395 77-0405693 (IRS employer identification number) (IRS employer identification number) 607 HANSEN WAY 607 HANSEN WAY PALO ALTO, CALIFORNIA 94303-1110 PALO ALTO, CALIFORNIA 94303-1110 (650) 846-2900 (650) 846-2900 (Address, including zip code, and telephone (Address, including zip code, and telephone number, including area code, of number, including area code, of registrant's principal executive offices) registrant's principal executive offices) Securities registered pursuant to Section Securities registered pursuant to Section 12(b) of the Act: 12(b) of the Act: NONE NONE Securities registered pursuant to Section Securities registered pursuant to Section 12(g) of the Act: 12(g) of the Act: NONE NONE
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock of Communications & Power Industries Holding Corporation held by non-affiliates is $1,050,000, based upon the selling price of such stock. No voting stock of Communications & Power Industries, Inc. is held by non-affiliates of Communications & Power Industries, Inc. Communications & Power Industries, Inc.'s voting stock is wholly owned by Communications & Power Industries Holding Corporation, a Delaware corporation. Neither Communications & Power Industries, Inc.'s nor Communications & Power Industries Holding Corporation's common stock is publicly traded. Indicate the number of shares outstanding for each of the Registrant's classes of Common Stock, as of the latest practicable date: COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION: 196,420 SHARES OF COMMON STOCK, $.01 PAR VALUE, AT DECEMBER 1, 1998. COMMUNICATIONS & POWER INDUSTRIES, INC.: 1 SHARE OF COMMON STOCK, $.01 PAR VALUE, AT DECEMBER 1, 1998. DOCUMENTS INCORPORATED BY REFERENCE: (None) 2 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 and telecommunications, transmission of radar signals for navigation and location, transmission of false signals for electronic countermeasures (e.g., decoys and signal "jammers") and various other uses in the industrial, medical and scientific markets. The Company's products include microwave and power grid vacuum electronic devices, microwave amplifiers, modulators, and various other power supply equipment and devices. These products are consumable and have a finite life based upon hours of usage, operating environment and application. The Company operates six manufacturing locations in North America, and sells and services its products and customers worldwide primarily through a direct sales force. Communications & Power Industries, Inc. is a wholly owned subsidiary of Communications & Power Industries Holding Corporation. Both Holding and CPI are Delaware corporations formed in 1995. Prior to August 11, 1995, the Company's operations were part of the Electron Devices Business division (the "Predecessor") of Varian Associates, Inc. ("Varian") and, except as the context may otherwise require, the term the "Company" as used in this Annual Report on Form 10-K refers to both the Company and the Predecessor. The principal executive offices of Holding and CPI are located at 607 Hansen Way, Palo Alto, California 94303 and their telephone number is (650) 846-2900. PRODUCTS The Company offers a comprehensive range of microwave and power grid vacuum electronic devices, microwave amplifiers, modulators and various other power supply equipment and devices for use in the communication, radar, electronic countermeasures, industrial, medical and scientific markets. The Company offers over 6,800 products that generally have selling prices from $2,000 to $50,000, with certain products ranging in price up to $1,000,000. These products are consumable and have a finite life based upon hours of usage, operating environment and application. Certain of the Company's products are sold in more than one market depending on the specific power and frequency requirements of the end-user and the physical operating conditions of the environment in which the vacuum electronic device will be located. Specific products that the Company offers include: - VACUUM ELECTRONIC DEVICES. Helix traveling wave vacuum electronic devices, klystron amplifiers, klystron oscillators, gyrotrons, coupled cavity traveling wave vacuum electronic devices, magnetrons, ring loop traveling wave vacuum electronic devices, cross field amplifiers, extended interaction klystrons, power grid vacuum electronic devices, Klystrodes(R) and inductive output vacuum electronic devices. -1- 3 - AMPLIFIERS. Satellite communication amplifiers, instrumentation amplifiers, traveling wave vacuum electronic device transmitters, FET modulators, magnetron modulators, test sets, X-ray generators, Heat Wave(TM) products, microwave power modules, microwave power boosters, traveling wave vacuum electronic device amplifiers and millimeter wave subsystems. - RELATED DEVICES. Diode switches, waveguide assemblies, pressure windows, receiver protectors, hermetic seals, high voltage power supplies and radio frequency cavities. MARKETS The Company operates in six different markets: - - Communications Market - The communications market is comprised of applications for satellite communications ("satcom") and broadcast sectors. In this market, the Company's products generate, amplify and transmit signals and data within an overall communication system. Sales in the communications market were $118.8 million in Fiscal 1998 compared to $122.5 million in Fiscal 1997 and $118.4 million in Fiscal 1996. - - Radar Market - The radar market includes microwave and power grid vacuum electronic devices, amplifiers and related equipment for air, ground and shipboard radar systems. The Company's vacuum electronic devices have been an integral component of radar systems for over five decades. Sales in the radar market were $87.4 million in Fiscal 1998 compared to $75.4 million in Fiscal 1997 and $74.6 million for Fiscal 1996. - - 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 $12.1 million, $11.8 million, and $17.2 million in Fiscal 1998, Fiscal 1997, and Fiscal 1996, 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 $19.4 million, $21.9 million and $27.2 million in Fiscal 1998, Fiscal 1997 and Fiscal 1996, 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 $18.8 million, $17.6 million and $16.3 million in Fiscal 1998, Fiscal 1997 and Fiscal 1996, 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 $4.2 million, $4.2 million and $3.7 million in Fiscal 1998, Fiscal 1997 and Fiscal 1996. 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 $201.4 million, or 77.3%, of the Company's total sales in Fiscal 1998 -2- 4 compared to approximately $190.1 million, or 75.0%, in Fiscal 1997 and $187.9 million, or 73.0%, in Fiscal 1996. U.S. Government sales, both direct and through original equipment manufacturers ("OEMs"), contributed approximately $59.3 million, or 22.7%, of the Company's total sales in Fiscal 1998 compared to approximately $63.3 million, or 25.0%, in Fiscal 1997 and $69.5 million, or 27.0%, in Fiscal 1996. 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 1998, management expects that U.S. Government and defense-related end-users will continue to provide a steady source of revenue. In Fiscal 1998, approximately 61.5% of sales were derived from U.S. customers, while approximately 38.5% were derived from international customers compared to Fiscal 1997 where approximately 68.4% of sales were derived from the U.S. and approximately 31.6% were from international customers. However, many domestic OEMs, primarily those in the satellite communications market, export their products, and management believes that some percentage of the Company's sales to U.S. customers ultimately have international end-users. Excluding sales to the U.S. Government, no single customer accounted for more than 5% of the Company's total sales in Fiscal 1998, Fiscal 1997 or Fiscal 1996. SALES, MARKETING AND SERVICE As of October 2, 1998, 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. Each of the Company's sales professionals is responsible for marketing the Company's entire product line. Company sales professionals receive extensive technical training in all of the Company's products, which allows them to provide customers with appropriate technical support, including information on product application and implementation. In addition to its direct sales force, the Company utilizes 32 external sales organizations and one stocking distributor, Richardson Electronics, Ltd., to service the needs of low volume customers. The majority of the third-party organizations which the Company utilizes are located outside the U.S. and focus primarily on customers in South America, South East Asia, the Far East, the Middle East, Africa and Eastern Europe. Through the use of third-party sales organizations, the Company has been better able to meet the needs of its foreign customers by establishing a local presence in lower volume markets. The Company also has a specialized network of nine factory service centers for the satcom replacement market. These service centers are located in California, New Jersey, Amsterdam, Moscow, Tokyo, Singapore, Nanjing, Jakarta and Calcutta, India. MANUFACTURING The Company manufactures over 6,800 products in its six manufacturing locations in North America. The Company has implemented modern manufacturing methodologies based upon "continuous improvement," including JIT materials handling, Demand Flow Technology, Statistical Process Control and Value Managed Relationships with suppliers and customers. The Company has achieved the ISO-9000 international certification standard utilized in the European Community. Generally, each of the Company's manufacturing units uses similar production processes consisting of product development, purchasing, high level assembly and test. The Company utilizes contract manufacturers whenever possible primarily for its Amplifier products. For vacuum electronic devices, the process starts with procurement of raw material and sub-assemblies from qualified suppliers, who -3- 5 often deliver on a JIT basis. Raw materials are then formed, primarily by machining, cleaning and plating certain parts. These steps utilize statistical process control techniques to assure quality and high production yields. Subassembly is then performed to produce a vacuum envelope, the essential part of a vacuum electronic device. This subassembly process is performed utilizing Demand Flow Technology, which helps to minimize inventory. Vacuum assemblies are processed by pumping the atmosphere from the assemblies while heating the assemblies in a furnace and simultaneously charging them with an electrical current. When this step is complete, final assembly and testing is performed on each product before shipment. The Company has developed sophisticated test programs to assure that each product meets operating specifications. Certain materials necessary for the manufacture of the Company's products, such as molybdenum, OFHC copper, and some cathodes, are obtained from sole, or a limited group of, suppliers. In addition, prices of these raw materials and key components are subject to fluctuation. COMPETITION The industries and markets in which the Company operates are highly competitive. The Company encounters intense competition in most of its business areas from numerous other companies (such as Litton Industries, Inc., English Electric Valve Company (General Electric Company plc), MCL and Thomson CSF, some of which have resources substantially greater than those of the Company. Some of these competitors are also customers of the Company. The Company's ability to compete in its markets depends to a large extent on its ability to provide high quality products with shorter lead times at a lower price than its competitors, and its readiness in facilities, equipment and personnel. The Company must also continually engage in effective research and development efforts in order to introduce innovative new products for technologically sophisticated customers and markets. There is an inherent risk that advances in existing technology, including solid state technology, or the development of new technology could adversely affect the Company's financial condition and results of operations. Although solid state devices generally serve end-users' low-power requirements more cost effectively and efficiently than microwave vacuum electronic devices, only microwave vacuum electronic devices currently serve high-power/high-frequency demands. The laws of physics limit the ability of solid state technology to efficiently or cost effectively serve the high-power/high-frequency applications of the Company's customers. These applications' extreme operating parameters necessitate heat dissipation capabilities that are satisfied by the Company's products. The Company's management believes that each technology serves its own niche without significant overlap. BACKLOG As of October 2, 1998, the Company had an order backlog of $160.8 million, representing approximately seven months of sales compared to order backlog of $169.0 million as of October 3, 1997 and $153.4 million as of September 27, 1996. 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 -4- 6 and development agreements with third parties. These agreements may include royalty-bearing licenses, technology cross licenses and manufacturing supply agreements. Management does not believe that any single patent or license is material to the success of the Company as a whole. As a result of contracts with the U.S. Government which contain patent and/or data rights clauses, the U.S. Government also has acquired royalty-free licenses or other rights in inventions and technology resulting from certain work done by the Company on behalf of the U.S. Government. The Company also has certain software license agreements with vendors and suppliers which affect the Company's intellectual property rights. The Company generally enters into confidentiality agreements with its employees, consultants and vendors, and generally limits access to and distribution of its proprietary information. The Company maintains an intellectual property protection program designed to preserve the intellectual property assets for the Company's future products. This program includes the filing of new domestic and foreign patent applications, copyright and trademark applications and the pursuit of enforcement of its intellectual property rights. Nevertheless, there can be no assurance that the steps taken by the Company will prevent misappropriation or loss of its technology. As part of the Acquisition (see "Business - The Acquisition"), six United States patents and one United States patent application, and their foreign counterparts, are jointly owned by the Company and Varian along with related trade secrets and know-how, including drawings, manufacturing and testing processes and designs (the "Key Component Technology"). The Key Component Technology relates to the manufacture and testing of certain key electron beam guns and key medical klystrons, and any improvements thereto. Upon the consummation of the Acquisition, the Company and Varian entered into a Cross-License Agreement to allocate the rights to the Key Component Technology between the Company and Varian. In addition, in connection with the Acquisition, 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. RESEARCH AND DEVELOPMENT Company-sponsored research and development expense was approximately $7.5 million, $7.7 million and $8.3 million during Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. Customer-sponsored research and development was approximately $6.0 million, $5.9 million and $7.3 million during Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. For customer-sponsored research and development, the costs were charged to cost of sales to match revenue received. EMPLOYEES As of October 2, 1998, the Company had approximately 1,690 employees compared to 1,658 employees as of October 3, 1997. 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. -5- 7 U.S. GOVERNMENT CONTRACTS AND REGULATIONS Management expects that a decreasing but significant portion of the Company's sales will continue in the foreseeable future to result from contracts with the U.S. Government, either directly or through prime contractors or subcontractors. The Company's business with the U.S. Government is performed under fixed-price and, to a lesser degree, cost-plus contracts. Fixed-price contracts accounted for approximately 94% of the Company's U.S. Government sales in Fiscal 1998 and cost-plus contracts accounted for approximately 6%. In Fiscal 1997 and Fiscal 1996, fixed-price contracts accounted for approximately 92% and cost-plus contracts accounted for approximately 8% of the Company's U.S. Government sales. 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 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 -6- 8 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 wide variety of federal, state and local environmental laws and regulations which are subject to change, and utilizes in its operations a number of chemicals which are classified as hazardous or similar substances. It is difficult to predict what impact these environmental laws and regulations may have on the Company in the future. Restrictions on chemical uses or certain manufacturing processes could restrict the ability of the Company to operate in the manner in which the Company is currently operated or is permitted to be operated. Although Varian is currently involved in a substantial long-term remediation program relating to the past operations of the Predecessor, management believes that the Company's current operations are in substantial compliance with current environmental laws and regulations. Nevertheless, it is possible that the Company may experience releases of certain chemicals to environmental media, either from its own operations or properties or from third-party operations or properties (such as off-site landfills), which could constitute violations of environmental law (and have an impact on its operations) or which could cause the incurrence of material cleanup costs or other damages. For these reasons, the Company is involved from time to time in legal proceedings involving compliance with environmental requirements applicable to its ongoing operations, and may be involved in legal proceedings involving exposure to chemicals or the remediation of environmental contamination from past or present operations. Because certain environmental laws impose joint, several, strict and retroactive liability upon current owners or operators of facilities from which there have been releases of hazardous substances, the Company could be held liable for remedial measures or other damages (such as liability for personal injury actions) at properties it owns or utilizes in its operations, even if the contamination was not caused by the Company's operations. Varian has agreed to indemnify the Company, to the extent permissible by law, for environmental claims arising from the Predecessor's operations prior to the consummation of the Acquisition, subject to certain exceptions and limitations. See "Business Relationship with Varian - Acquisition Agreement." With certain limited exceptions, the Company is not indemnified by Varian for environmental claims arising from the Company's operations after the consummation of the Acquisition. There can be no assurance that material costs or liabilities will not be incurred by the Company in connection with proceedings or claims related to environmental conditions arising from the Company's operations. In addition, although Varian will retain financial and other responsibility for certain environmental liabilities of the Predecessor, including those for which, under law, the Company would otherwise be responsible, there can be no assurance that Varian will reimburse the Company for any particular environmental costs or do so in a timely manner. Although the Company believes that Varian currently has sufficient financial resources to satisfy its environmental indemnification obligations to the Company, because of the long-term nature of many of Varian's remediation obligations, there can be no assurance that Varian will continue to have the financial resources to comply fully with its indemnification obligations to the Company. Unreimbursed liabilities arising from environmental claims, if significant, could have a material adverse effect on the Company's results of operations and financial condition. The Company is aware that Varian is engaged in certain ongoing environmental investigatory and remedial work, which is in various stages of completion. Varian has indemnified the Company, to the extent permissible by law, for environmental claims arising from the operation of the Predecessor prior -7- 9 to the consummation of the Acquisition, subject to certain exceptions and limitations. Based on information currently available to the Company, the following provides a summary of the investigatory and remedial work being undertaken at the various properties owned or utilized by the Predecessor with respect to its operations. PALO ALTO, CALIFORNIA. As a result of actual and threatened claims brought by other property owners and the State of California with regard to contamination present under and emanating from the Company's facilities located at the Palo Alto, California property (which facilities are leased by way of assignment and subleased by the Company and which serves as the Company's headquarters and one of its principal manufacturing complexes containing three manufacturing units), Varian has entered into a consent order (the "Palo Alto Consent Order") with the California Environmental Protection Agency. In accordance with the Palo Alto Consent Order, Varian has submitted, and the regulatory agencies have approved, a Remedial Action Plan to investigate and remediate groundwater and soil vapor contamination at the affected property to acceptable levels. Varian has entered into an agreement with the master lessor of the property pursuant to which it is obligated to comply with the remediation obligations under the Palo Alto Consent Order. As a sublessee or assignee of the property, the Company's right to continue occupancy of these premises will be dependent upon Varian's fulfillment of its responsibilities to the master lessor, including its obligation to comply with the Palo Alto Consent Order. The Palo Alto, California facilities are also known to be within areas of regional groundwater contamination, which contamination is being addressed by federal and state environmental regulatory agencies. The Palo Alto, California property is adjacent to the Hewlett-Packard 640 Page Mill Road National Priorities List Site (the "HP Site") listed pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"). As a result of allegations that contamination resulting from Varian's historical operations, including its operations of the Predecessor, has migrated from that property to the HP Site and elsewhere, the Company is aware that Varian, as well as Hewlett-Packard and Stanford University, has been named in an order issued by the San Francisco Bay Regional Water Quality Control Board, and that Varian, together with Hewlett-Packard, is remediating a portion of the HP Site known as the California-Olive-Emerson Operable Unit, principally through the use of a groundwater treatment system, in response to that order. The Palo Alto, California property is also adjacent to the Hillview-Porter State Study Area ("Hillview-Porter Site") identified by the California Environmental Protection Agency. Varian has not been named as a potentially responsible party in connection with the Hillview-Porter Site, although the Company is aware that allegations have been made that this property has impacted, and been impacted by, the Hillview-Porter Site. Although liability under environmental laws such as CERCLA is strict, there often are a number of parties responsible for regional contamination, and such parties often will allocate the remedial action costs among themselves, taking into consideration equitable and other factors. Several potentially responsible parties, including Hewlett-Packard and Varian, have been identified by the United States Environmental Protection Agency with respect to the HP Site, and several potentially responsible parties, currently not including Varian, have been identified by the California Environmental Protection Agency with respect to the Hillview-Porter Site. OTHER FACILITIES. The Company's other main manufacturing facilities, which are located in San Carlos, California, Beverly, Massachusetts, and Georgetown, Ontario, Canada, all have soil and groundwater contamination which either may or does require remediation. Pursuant to legal requirements, Varian has installed a groundwater remediation system that is presently in operation at the Beverly property. In addition, the Company is aware that an action has been commenced against Varian by adjoining property owners and others, and that other claims may be made, with respect to off-site contamination allegedly emanating from the Beverly, Massachusetts facility. -8- 10 THE ACQUISITION Prior to August 11, 1995, the Company's operations were part of the Electron Devices Business division of Varian. On August 11, 1995, CPII Acquisition Corp. ("CPII Acquisition") acquired (in the matter described below) substantially all of the assets that were used primarily in developing, manufacturing and distributing microwave and power grid vacuum electronic devices, microwave amplifiers, modulators and various other power supply equipment and devices through the Predecessor. Pursuant to the terms of a Stock Sale Agreement dated June 9, 1995, as amended, among Holding, CPII Acquisition and Varian (the "Acquisition Agreement"), prior to the consummation of the Acquisition, Varian and its affiliates contributed the assets of the Predecessor that were located in the United States to CPI, which was a newly-formed, wholly-owned Varian subsidiary. Subsequently, upon the consummation of the Acquisition, Varian transferred all of the outstanding capital stock of CPI to CPII Acquisition. The assets of the Predecessor that were located in foreign jurisdictions were transferred from Varian or its affiliates to newly formed direct or indirect subsidiaries of CPI. In consideration of the transfer of such capital stock and assets, CPII Acquisition (including its affiliates) paid Varian (including its affiliates) an aggregate purchase price of $196.2 million, subject to a post-closing adjustment (the "Purchase Price"). Holding, CPII Acquisition and CPI's subsidiaries also assumed certain specified liabilities of the Predecessor. The liabilities assumed by Holding included certain balance sheet liabilities of the Predecessor, which aggregated approximately $24.1 million as of August 11, 1995, and certain contingent liabilities (such as for certain product warranty claims) (the "Assumed Liabilities"). Upon the merger of CPII Acquisition with and into CPI immediately following the consummation of the Acquisition, CPI became a wholly owned subsidiary of Holding. In connection with the consummation of the Acquisition, the Company entered into two senior term loans in the aggregate amount of $42.0 million and a revolving credit facility in a principal amount of up to $35.0 million (including a $5.0 million sub-facility for letters of credit, and subsequently increased to $7.5 million) pursuant to a Senior Credit Agreement. The Company also issued the following: (1) 12% Series A Senior Subordinated Notes due 2005 (the "Series A Senior Subordinated Notes") of CPI in the aggregate principal amount of $100.0 million (guaranteed by Holding and all of the Company's direct and indirect subsidiaries), (2) Units consisting of 150,000 shares of Series A 14% Senior Redeemable Exchangeable Cumulative Preferred Stock due 2007 (the "Series A Senior Preferred Stock") of CPI and 10,500 shares of common stock of Holding ("Holding Common Stock") for $15.0 million, (3) 100,000 shares of 14% Junior Cumulative Preferred Stock (the "Junior Preferred Stock") of CPI for $10.0 million, and (4) Shares of Holding Common Stock to Green Equity Investors II, L.P., a Delaware limited partnership ("GEI II") and certain members of the senior management of CPI for $20.0 million (including $0.8 million paid by notes from members of senior management). CPI subsequently exchanged the Series A Senior Subordinated Notes and Series A Senior Preferred Stock, in exchange offers (the "Exchange Offers") registered under the Securities Act of 1933, for otherwise identical 12% Series B Senior Subordinated Notes due 2005 (the "Notes") and Series B 14% Senior Redeemable Exchangeable Cumulative Preferred Stock due 2007 (the "Senior Preferred Stock"), respectively. GEI II initiated the Acquisition and currently owns approximately 73.1% of the outstanding shares of Holding Common Stock. Holding, in turn, owns all of the outstanding common stock of CPI. Accordingly, GEI II is able to elect all of the members of the board of directors of Holding and thus to exercise control over Holding's and CPI's business and affairs. Leonard Green & Partners, L.P., a -9- 11 Delaware limited partnership, is an investment advisor to, and an affiliate of the general partner of, GEI II. See "Security Ownership of Certain Beneficial Owners and Management" and "Certain Relationships and Related Transactions." RELATIONSHIP WITH VARIAN The Company continues to maintain certain relationships with Varian arising from the Predecessors' previous relationship with Varian and arising under the Acquisition Agreement and the Ancillary Agreements (as defined below). The descriptions of certain of such relationships set forth below are qualified in their entirety by reference to the full texts of documents relating thereto, copies of which are included as exhibits to this Annual Report on Form 10-K. Acquisition Agreement. The Acquisition Agreement contains customary representations, warranties and covenants. In addition, pursuant to the terms of the Acquisition Agreement, Varian agreed to indemnify and reimburse the Company for all losses arising from breaches of covenants and agreements of Varian in the Acquisition Agreement and the Ancillary Agreements, all Retained Liabilities (as defined in the Acquisition Agreement), environmental claims arising from the pre-closing operation of the Predecessor (as more fully described below), certain matters pertaining to Varian's interest in its Palo Alto, California and Santa Clara, California facilities, and certain other matters as specified in the Acquisition Agreement. In turn, the Company agreed to indemnify and reimburse Varian for all losses arising from breaches of covenants and agreements of the Company in the Acquisition Agreement and the Ancillary Agreements, all Assumed Liabilities, environmental claims arising from the post-closing operation of the Predecessor (as more fully described below), and certain other matters as specified in the Acquisition Agreement. As to such indemnification obligations of Varian and the Company, there are no time or dollar limitations. The indemnification provisions in the Acquisition Agreement and the Ancillary Agreements are generally intended to be the exclusive remedies of the parties with respect to such agreements, subject to certain exceptions. The environmental indemnification provisions of the Acquisition Agreement provide generally that environmental liabilities of the Predecessor are retained by Varian to the extent they arise from the pre-closing operation of the Predecessor and are the obligations of the Company to the extent they arise from the post-closing operation of the Predecessor, subject to certain exceptions. Specifically, pursuant to the Acquisition Agreement, Varian agreed to indemnify the Company for liabilities related to environmental claims arising from the following: (i) Varian's possession or use of the acquired properties before the closing, (ii) violations (or purported violations) of environmental laws resulting from pre-closing conditions or activities at the acquired properties, (iii) hazardous materials present at the acquired properties as of the closing, (iv) disposal (other than by the Company or its agents) of hazardous materials generated by Varian before the closing, and (v) post-closing releases of hazardous materials by Varian resulting from the ongoing operation of Varian's business. In addition to the foregoing and notwithstanding any other provision of the Acquisition Agreement, Varian agreed to indemnify the Company against third party claims arising out of, and to repair, subject to certain conditions, pre-closing environmental conditions that constitute violations of environmental laws, plus contamination arising from such conditions both before and after the closing, to the extent the Company discovers such conditions within the six months following the closing. The Acquisition Agreement provides that Varian will have exclusive control of and sole discretion as to the investigation and remediation of matters for which it is required to indemnify the Company. Varian is required to undertake such actions in compliance with all applicable laws, and without unreasonably interfering with the conduct of the Company. In turn, the Company agreed to indemnify Varian for liabilities related to environmental claims arising from the following: (i) the Company's possession or use of the acquired properties after the closing, (ii) violations (or purported violations) of environmental laws resulting from post-closing conditions or -10- 12 activities at the acquired properties (subject to the Company's rights with respect to conditions and related contamination discovered within the first six months following the closing, as described above), (iii) any incremental costs incurred by Varian as a result of the Company's introduction of hazardous materials at the acquired properties after the closing, (iv) disposal of hazardous materials by the Company or its agents after the closing, and (v) the post-closing migration of hazardous materials that were present before the closing or the post-closing exacerbation of environmental conditions existing before the closing, but in each case only to the extent resulting from the Company's active negligent conduct. In the event of post-closing releases, the Company is required to respond to and remediate certain types of such releases at its expense. However, in the event of post-closing releases which contribute to existing groundwater contamination which is otherwise being remediated by Varian, Varian agreed to treat such contaminated groundwater, to the extent required and if it is feasible to do so, using its own treatment systems. The Company will be required to reimburse Varian for Varian's incremental costs related thereto. Pursuant to the Acquisition Agreement, Varian's environmental indemnification obligations do not extend to the following: (i) liabilities for certain building materials, such as asbestos, and hazardous materials that are lawfully present, used or stored at the acquired properties as of the closing (other than liabilities for personal injuries related thereto), (ii) claims asserted by the Company or its successors for diminution in property value or consequential damages caused by the presence of hazardous materials at the acquired properties, or (iii) environmental response actions other than those required by the Acquisition Agreement, governmental order or self-executing environmental laws. If a dispute arises as to whether and the extent to which a release of hazardous materials occurred before or after the closing, Varian has agreed to bear the burden of proof as to such matter by a preponderance of the evidence. In the event that both Varian and the Company are partly responsible for a particular environmental liability, such liability will be allocated between the parties in accordance with their respective contributions to such liability. If there is a dispute concerning the indemnification of only a portion of a claim, the indemnitor is required to immediately assume full responsibility for the undisputed portion of the claim. Any dispute between Varian and the Company will be settled by arbitration. The arbitrator is authorized to allocate fees and costs based upon the respective merits of the parties' respective positions in the dispute. Key Component Agreement. Pursuant to the Key Components Supply Agreement (the "Key Component Agreement") between the Company and Varian, during the term thereof, the Company is required to meet Varian's requirements for certain key electron beam guns and key medical klystrons and any improvements thereto (the "Key Components"), provided that the Company may discontinue production of any Key Component as to which Varian fails to maintain certain specified purchase levels. In addition, the Company is prohibited from selling any Key Component that Varian continues to purchase from the Company to any third person for use within the Varian Field of Use (as defined below). In turn, during the term of the Key Component Agreement, Varian is required to purchase all of its requirements for Key Components from the Company, except for certain specified Key Components as to which Varian will be permitted to purchase a portion of its requirements from other sources. The preceding provisions are effective as to all Key Components for a period of five years following the closing of the Acquisition and, at Varian's election with respect to any one or more of the Key Components, for a period of five years thereafter. Varian has the right to elect to purchase Key Components from sources other than the Company and to enforce certain rights under the Cross License Agreement (as defined below) in the event of failures in the quality, quantity or timely delivery of Key Components produced by the Company or the obsolescence of the Company's Key Components. -11- 13 Cross License Agreement. Pursuant to the Cross License Agreement (the "Cross License Agreement"), for a period of ten years from the closing of the Acquisition, Varian has exclusive rights relating to the Key Component Technology as it relates to medical and industrial linear accelerators (the "Varian Field of Use"). In all other areas, the Company retains the exclusive right to utilize the Key Component Technology. At the end of the term of the Cross License Agreement, Varian is obligated to transfer its entire interest in the Key Component Technology to the Company, with Varian retaining only a non-exclusive license to make, use or sell Key Component Technology for use in the Varian Field of Use. The Company has the unrestricted and exclusive right to utilize the Key Component Technology in fields other than the Varian Field of Use and the right to utilize Key Component Technology in order to supply Key Components to Varian for use within the Varian Field of Use pursuant to the Key Component Agreement. The Cross License Agreement also grants mutual non-exclusive licenses under Varian's and the Company's intellectual property rights to the extent necessary to permit both the Company and Varian to continue to conduct their respective businesses as they did as of the closing date. Trademark License Agreement. Generally, under the terms of the Trademark License Agreement, the Company is licensed to identify its products as "formerly made by Varian" for a period of ten years from the closing of the Acquisition. At the expiration of the ten year period, the Company will not be permitted to utilize any Varian trademarks. ITEM 2: PROPERTIES The Company owns, leases or subleases manufacturing, assembly, warehouse, service and office properties having an aggregate floor space of approximately 1,212,300 square feet, of which approximately 203,700 are leased or subleased to third parties. The table below provides summary information regarding principal properties owned or leased by the Company:
(square footage) Property Owned Leased/Subleased -------- ----- ---------------- San Carlos, California......... 320,000(a) Beverly, Massachusetts......... 213,000(b) Georgetown, Ontario, Canada.... 126,000 Santa Clara, California........ - 107,000(c) Palo Alto, California.......... - 429,000(d) Various locations.............. - 17,300(e)
(a) The San Carlos, California square footage includes approximately 42,000 square feet leased to two tenants who provide services to the Company and others. (b) The Beverly, Massachusetts square footage includes approximately 42,000 square feet leased to four tenants. (c) This facility is leased by way of assignment of Varian's lessee interest. The entire facility is being subleased to one tenant until December 31, 1998, the date of expiration of the Master Lease. (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 12,700 square feet leased to two tenants. (e) Includes both leased facilities occupied entirely by the Company's field sales and service organizations and four foreign shared use facilities which the Company is sharing for varying periods of time under rental agreements with Varian. Based on lease and sublease arrangements mentioned above, the Company has eliminated most of its excess space. Overall, the Company believes its properties are adequate for the needs of the Company for the foreseeable future and, in any event, for at least the next twelve months. The Company's lenders under the Senior Credit Agreement have the right to a security interest in all of the Company's interest in the real property that it owns and leases, and have taken a security interest in the Company's real property located in Beverly, Massachusetts and Georgetown, Ontario, Canada. -12- 14 The Company's right to continued occupancy of the leased and subleased premises is dependent upon Varian's compliance with its obligations to the master lessor. In particular, the Company's headquarters and one principal complex, including three of the Company's manufacturing facilities, located at the Palo Alto, California site adjacent to Varian's world headquarters and primary manufacturing facilities, are leased by way of assignment or subleased from Varian. Therefore, the Company's occupancy rights are dependent on Varian's fulfillment of its responsibilities to the master lessor, including its obligation to continue environmental remediation activities under a consent order with the California Environmental Protection Agency. The consequences of the loss by the Company of such occupancy rights could include the loss of valuable improvements and favorable lease terms, the incurrence of substantial relocation expenses and the disruption of the Company's business operations. ITEM 3: LEGAL PROCEEDINGS The Company is involved from time to time in various legal proceedings and is the subject of various cost accounting and other government pricing claims. Pursuant to the Acquisition Agreement, Varian has agreed to indemnify the Company against liabilities arising from litigation and governmental claims pertaining to the operation of the Predecessor prior to the consummation of the Acquisition. Accordingly, management believes that litigation and governmental claims pending against Varian and relating to the operation of the Predecessor prior to the Acquisition will not have a material adverse effect on the Company's financial condition or results of operations. See "Business - Environmental Matters." ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during Fiscal 1998. -13- 15 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 October 2, 1998. Restrictive covenants in the Senior Credit Agreement generally restrict the declaration or payment of dividends on the Company's common stock. The Notes also restrict the declaration and payment of dividends unless the Company satisfies certain financial covenants, among other things. ITEM 6: SELECTED FINANCIAL DATA The historical financial data set forth below for Fiscal 1994 has been derived from the historical audited financial statements of the Predecessor audited by Coopers & Lybrand L.L.P., independent public accountants. For Fiscal 1995 through Fiscal 1998, historical consolidated financial data has been derived from the historical audited financial statements audited by KPMG Peat Marwick LLP, independent public accountants. The information contained in this table should be read in conjunction with the information set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as the historical audited financial statements of Holding and CPI included elsewhere in this Annual Report on Form 10-K. As a consequence of the Acquisition, effective August 11, 1995, each of Holding and CPI is deemed for financial reporting purposes to have become a new reporting entity ("Successor") on the following date and periods subsequent to the August 11, 1995 date reflect the allocation of the costs of the Acquisition to assets and liabilities based on estimates of fair values in accordance with the purchase method of accounting. Accordingly, the results of operations of Successor subsequent to August 11, 1995 are not fully comparable to the results of the operations of the Company as constituted prior to such date. In particular, operating results subsequent to August 11, 1995 reflect decreases in operating expenses relating to corporate allocations, incremental depreciation and amortization relating to the purchase method adjustments referred to above and other interest charges relating to new indebtedness related to the Acquisition. -14- 16 SELECTED FINANCIAL DATA
Successor Predecessor -------------------------------------------------------- -------------------------- (Dollars in Thousands) 52 Weeks 53 Weeks 52 Weeks 7 Weeks 45 Weeks 52 Weeks Ended Ended Ended Ended Ended Ended October 2, October 3, September 27, September 29, August 12, September 30, 1998 1997 1996 1995 1995 1994 ---------- ---------- ------------- ------------- ---------- ------------- CPI AND HOLDING STATEMENT OF OPERATIONS DATA: Sales $260,688 253,439 257,449 36,398 214,677 246,890 Cost of sales 194,410 183,678 184,482 27,634 160,156 186,996 -------- -------- -------- -------- -------- -------- Gross profit 66,278 69,761 72,967 8,764 54,521 59,894 Marketing, general and administrative before corporate allocations 32,103 32,269 35,354 6,013 26,071 25,583 Research and development 7,455 7,681 8,308 1,198 7,429 7,619 Corporate allocations -- -- -- -- 11,160 11,273 Write-off of acquired in-process research and development -- -- -- 31,363 -- -- -------- -------- -------- -------- -------- -------- Operating income (loss) 26,720 29,811 29,305 (29,810) 9,861 15,419 Interest expense 17,793 19,039 18,894 2,497 -- -- Income tax expense (benefit) 3,750 (3,000) 2,068 (2,709) 3,649 5,859 ======== ======== ======== ======== ======== ======== Net earnings (loss) before preferred $ 5,177 13,772 8,343 (29,598) 6,212 9,560 ======== ======== ======== ======== ======== ======== dividends EBITDA (a) 38,021 39,432 38,736 4,894 21,026 27,814 Certain Non-Cash Charges: Depreciation and amortization 11,301 9,621 7,731 941 11,165 12,395 Inventory write-up related to purchase accounting -- -- 1,700 2,400 -- -- In-process research & development write-off -- -- -- 31,363 -- -- Amortization of deferred debt issue costs 1,372 1,952 1,962 199 -- -- Capital expenditures (b) 8,204 10,767 12,501 880 6,063 10,698 Non-recurring capital (b) -- -- -- -- -- 4,115
Successor Predecessor ---------------------------------------------------- -------------- October 2, October 3, September 27, September 29, September 30, CPI BALANCE SHEET DATA: 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Working capital $ 45,957 40,467 34,576 35,204 60,421 Total assets 229,212 237,396 228,142 214,902 162,149 Total equity (deficit) 16,912 15,306 4,400 (1,538) 119,854 Long-term debt and redeemable preferred stock 146,981 149,100 150,472 151,260 -- HOLDING BALANCE SHEET DATA: Working capital $ 45,957 40,467 34,576 35,204 60,421 Total assets 229,212 237,396 228,142 214,902 162,149 Total equity (deficit) 2,512 2,841 (6,379) (10,884) 119,854 Long-term debt and redeemable preferred stock 146,981 149,100 150,472 151,260 --
- ------------ (a) EBITDA represents earnings before provision for income taxes, interest expense, depreciation and amortization and excludes any charge related to the purchase accounting write-up of inventory and the write-off of acquired in-process research and development. (b) Capital expenditures exclude the one-time costs of seismic retrofits, which are substantially completed, at certain of the Company's manufacturing facilities. These costs are presented separately as "Non-recurring Capital Expenditures". For Fiscal 1998 and Fiscal 1997 capital expenditures includes $1,545,000 and $1,584,000, repectively, of equipment acquired under a capital lease. -15- 17 EFFECT OF ACQUISITION ON RESULTS OF OPERATIONS The consummation of the Acquisition has affected the Company's results of operations in certain significant respects. As a result of the Acquisition, the Company adjusted upwards the historical book value of certain assets in accordance with GAAP relating to purchase accounting rules, which has impacted the Company's results of operations subsequent to the Acquisition and their comparability to operations of the Predecessor: - - The write-up of the inventory by $4.1 million was expensed to cost of goods sold during the periods following the Acquisition, which affected gross margins. During the seven week period ended September 29, 1995, $2.4 million was expensed to cost of sales, which also impacted working capital, and $1.7 million was expensed in the first quarter of Fiscal 1996. - - The purchase accounting allocation of certain assets, such as property, plant and equipment, has and will continue to significantly affect depreciation and amortization. The portion of the purchase price allocated to in-process research and development was charged to operations immediately after consummation of the Acquisition. The in-process research and development activity of the Company involves the development of various classes of microwave vacuum electronic devices and microwave vacuum electronic device systems for communications and power applications, including significant extensions and improvements to existing products through fundamental physical and electrical research necessary to design new microwave vacuum electronic devices, control and power elements, and related systems. Projects are classified as in-process research and development if they have not demonstrated technological feasibility and have not resulted in commercial products and have no alternative future use. As of the date of the consummation of the Acquisition, the outcomes of these research and development projects were uncertain and involved technological risk. - - Certain corporate overhead and corporate services, including an allocation for occupied facilities, historically charged to the Predecessor by Varian, have been reduced due to outsourcing of certain services, elimination of services no longer required on a stand-alone basis, or eliminated due to the Company's ownership of certain of its facilities and the application of purchase accounting following the Acquisition. In addition, management compensation plans have been modified at a reduced cost. The structure of the transaction has also created certain tax benefits because of the Company's ability to write-up inventory, property, plant and equipment and intangible assets for tax purposes. -16- 18 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company serves the communications, radar, electronic countermeasures, industrial, medical and scientific markets. In addition, the Company divides the communications market into applications for ground-based satellite uplinks for military and commercial uses ("satcom") and broadcast sectors. This diverse marketplace combined with a broad range of products and a stable volume of replacement business has helped the Company to maintain a level of consistency in its sales and EBITDA performance for Fiscal 1998 compared to prior years in spite of economic weakness in the Far East and embargo issues with India. The Company has continued its strategic focus on releasing new products in spite of lower margin expectations and has supplemented its product offerings through two small product line acquisitions completed in early Fiscal 1998. The Company has also maintained a focus on commercial applications for its products and their long-term growth strategies. Finally, infrastructure improvements, including the completion of facility consolidation efforts in Fiscal 1997, a streamlined corporate organization and unique global distribution capabilities, have established the basis for the Company's operating effectiveness. Orders for Fiscal 1998 were $258.9 million compared to orders of $275.8 million in Fiscal 1997 and $267.3 million in Fiscal 1996. CPI's market share remained relatively consistent between Fiscal 1998 and Fiscal 1997, as the total market was negatively impacted by economic conditions in the Far East that slowed direct procurement and had an associated impact on procurement from domestic OEM's. The most significant decline, in terms of dollars, occurred in the communications market where orders for Fiscal 1998 decreased by $6.6 million, or 5.5%, from Fiscal 1997 primarily due to a delay on Far East satcom business. Industrial orders declined by $0.9 million, or 5.0%, primarily due to semiconductor market conditions. Orders for products sold in the radar, electronic countermeasures and scientific markets also declined by $5.7 million, $5.6 million and $1.7 million, respectively, but the decline was related more to the timing of order receipts including several large multi-year orders that were received in Fiscal 1997 than to economic issues. These decreases were partially offset by an increase in orders for products sold to the medical market of $3.5 million, or 18.5%, due primarily to increased demand for high end, high power linear accelerators for cancer treatment and increased business in international x-ray markets as other countries continue to build their medical infrastructure. 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 1998 of $260.7 million were approximately 2.9% above the prior year level of $253.4 million due to strong demand for products used in radar applications offset partially by declines in both the communications and industrial markets. The Company's growth expectations for Fiscal 1998, particularly in the satcom portion of its communications market, were significantly hindered by the economic changes in the Far East. Management estimates that orders and sales to Far East customers, both direct and through domestic OEM's, were negatively impacted by $38.9 million and $19.3 million, respectively. This negative impact was mitigated, however, by the Company's focus on, and release of, several new products including solid state amplifiers, radio frequency transceivers ("RFT's") and transmitters, along with increased demands for the Company's Klystrode(R) IOT device that is addressing the FCC's digital signal mandate for all U.S. broadcast stations. The Company also broadened its product base by acquiring two small product lines from Hughes in the first quarter of Fiscal 1998 that -17- 19 added approximately $2.2 million of sales during the year. Looking forward, the Company is anticipating that Far East economic conditions will continue into Fiscal 1999 and will hinder growth in the communications and industrial markets. A stable replacement business along with increased market acceptance of the Company's new products will help offset this somewhat and management will continue to control expenses. RESULTS OF OPERATIONS The following table sets forth the Company's historical results of operations as a percentage of sales for each of the periods indicated.
52 Weeks 53 Weeks 52 Weeks Ended Ended Ended October 2, October 3, September 27, 1998 1997 1996 --------- -------- -------- Sales 100.0% 100.0% 100.0% Cost of sales 74.6 72.5 71.7 ---- ---- ---- Gross profit 25.4 27.5 28.3 Research and development 2.9 3.0 3.2 Marketing 7.3 7.8 7.7 General and administrative 5.0 5.0 6.0 ---- ---- ---- Operating income 10.2 11.7 11.4 Interest expense 6.8 7.5 7.4 ---- ---- ---- Earnings before taxes 3.4 4.2 4.0 Provision for income taxes 1.4 (1.2) 0.8 ==== ==== ==== Net earnings 2.0% 5.4% 3.2% ==== ==== ==== Other Data: EBITDA (a) 14.6% 15.6% 15.0% Preferred Dividends 1.9% 1.7% 1.4
- ------------ (a) EBITDA represents earnings before provision for income taxes, interest expense, depreciation and amortization and the charge related to the purchase accounting write-up of inventory that impacted the first quarter of Fiscal 1996. Fiscal 1998 Compared to Fiscal 1997 SALES. Sales for Fiscal 1998 were approximately $260.7 million, an increase of approximately $7.2 million, or 2.9%, as compared to sales of $253.4 million in Fiscal 1997. The Company's sales increased due to strong demand for products used in radar applications offset partially by declines in both communications and industrial markets that were primarily driven by softness in the Asian economy. Sales to the radar market increased to $87.4 million in Fiscal 1998 from $75.4 million in Fiscal 1997, an increase of $12.0 million, or 15.9%. Sales to the communications market decreased to $118.8 million in Fiscal 1998 from $122.5 million in Fiscal 1997, a decline of $3.7 million, or 3.1%. Industrial sales declined to $19.4 million in Fiscal 1998 from $21.9 million in Fiscal 1997, a decrease of $2.5 million, or 11.4%. Sales to the Company's other three markets (medical, electronic countermeasures and scientific) combined increased to $35.1 million in Fiscal 1998 from $33.5 million in Fiscal 1997, an increase of approximately $1.5 million, or 4.5% primarily due to increase demand for the Company's medical products. COST OF SALES. Cost of sales in Fiscal 1998 were $194.4 million or 74.6% of sales compared to $183.7 million, or 72.5% of sales in Fiscal 1997. This increase in costs of $10.7 million, or 5.8%, was due to higher sales volume ($5.2 million), unfavorable product mix ($4.4 million) and higher depreciation costs -18- 20 ($1.1 million). Unfavorable product mix was directly related to the Company's focus on releasing new products to the communications, electronic countermeasures and scientific markets. Although this has enhanced the Company's technological capability and its ability to service customers, new products have historically generated higher costs and, therefore, lower margins as a result of start-up issues including small lot production volumes, lower yields and higher engineering labor content. These costs were minimized somewhat in the current fiscal year by a change in accounting estimate for disposal costs that lowered management's calculation of cost-to-complete reserves by approximately $1 million. Also unfavorably impacting product mix was the completion of a high margin U.S. military satcom program that ran the full year in Fiscal 1997 and was substantially completed early in Fiscal 1998. Depreciation costs were higher in Fiscal 1998 as compared to Fiscal 1997 due to new capital equipment purchases that have been added to a fixed depreciation base that resulted from the revaluation of all property, plant and equipment as of the Acquisition date. The Company expects to have an increase in depreciation through the year 2000 since most of its acquired assets were identified as having at least a five year depreciation life. RESEARCH AND DEVELOPMENT. Research and development expenses decreased slightly in Fiscal 1998 to approximately $7.5 million, or 2.9% of total sales, as compared to approximately $7.7 million, or 3.0% of total sales, during Fiscal 1997. The Company continues to focus on new product development both through Company-sponsored funds as well as Customer-sponsored funds that are reported as revenue. Customer-sponsored R&D was approximately $6.0 million in Fiscal 1998 compared to approximately $5.9 million in Fiscal 1997. MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and administrative expenses were $32.1 million in Fiscal 1998, or 12.3% of sales, as compared to $32.3 million, or 12.8% of sales, in Fiscal 1997. Overall, marketing costs were lower in Fiscal 1998 by approximately $0.6 million due to favorable currency valuation rates impacting Europe but this was partially offset by general and administrative costs that were higher by $0.4 million due to additional goodwill amortization that resulted from two product line acquisitions completed in the first quarter of Fiscal 1998. EBITDA. EBITDA was $38.0 million, or 14.6% of sales, for Fiscal 1998 compared to EBITDA of $39.4 million, or 15.6% of sales, for Fiscal 1997. As mentioned above, product mix with a focus on new products was the main reason for the EBITDA decline in spite of higher sales volume and significant progress in improving yields on product lines that were moved from Salt Lake City, Utah during the Company's Fiscal 1997 consolidation effort. NET EARNINGS. Net earnings before preferred dividends were $5.2 million for Fiscal 1998, a decrease of $8.6 million from Fiscal 1997 primarily due to an increase in the Company's effective tax rate. This tax rate change resulted in lower earnings of $6.8 million and was due to the fact that, in Fiscal 1997, the Company fully recognized its deferred tax assets and eliminated the valuation allowance established in connection with the acquisition, thereby incurring a tax benefit that was not repeated in Fiscal 1998. The balance of the earnings decline was due to lower gross margins of $3.5 million that resulted from changes in product mix, partially offset by lower interest expense of $1.2 million that resulted primarily from a decrease in debt of $15.2 million. Fiscal 1997 Compared to Fiscal 1996 SALES. Sales for Fiscal 1997 were approximately $253.4 million, a decrease of approximately $4.0 million, or 1.6%, as compared to sales of $257.4 million in Fiscal 1996. This decline was due in part to the divestiture of a single product line accounting for $2.6 million in sales, which was done in conjunction with the Company's relocation of two other product lines from Salt Lake City, Utah to San Carlos, California. Also, even though shippable orders were on hand that would have allowed the Company to exceed its prior fiscal year sales, the Company was unable to fully ramp-up the production -19- 21 of relocated product lines and the production of new products for the satcom market to meet its scheduled delivery dates. In terms of markets, communications sales were $122.5 million in Fiscal 1997 which represents an increase of approximately $4.1 million, or 3.4%, from Fiscal 1996 primarily as a result of new product releases. Radar sales increased approximately $.9 million, or 1.2%, to $75.4 million in Fiscal 1997 as a result of a 19.6% increase in order receipts (most of which are shippable in Fiscal 1998). Medical sales increased by approximately $1.3 million, or 8.2%, to $17.6 million due to increased demand from Varian. Scientific sales were $4.2 million which represents an increase of approximately $.5 million, or 12.9%, from the prior fiscal year due to new energy research as well as a specific development project related to the Accelerator Production of Tritium. Offsetting the $6.8 million increase in these four markets were lower sales of products sold to the industrial and electronic countermeasures markets. Industrial sales decreased by $5.3 million, or 19.5%, to $21.9 million in Fiscal 1997 due to the timing of customer defined delivery schedules combined with the slowdown in demand for high power amplifiers used for instrumentation and power supplies used in semiconductor applications. Electronic countermeasure sales declined by $5.5 million, or 31.8%, to $ 11.8 million as a result of completing several military programs early in the fiscal year and was compounded by product development delays in a new transmitter application. COST OF SALES. Cost of sales in Fiscal 1997 of $183.7 million decreased by $.8 million from Fiscal 1996 primarily due to higher depreciation costs. Cost of sales as a percentage of sales was 72.5% in Fiscal 1997 compared to 71.7% in Fiscal 1996. The purchase accounting allocation of certain assets, specifically property, plant and equipment that was revalued as of the date of the Acquisition, has had a significant effect on depreciation which, as an element of cost of sales, was approximately $1.7 million higher in Fiscal 1997 compared to Fiscal 1996. RESEARCH AND DEVELOPMENT. Research and development expenses decreased in Fiscal 1997 to $7.7 million, or 3.0% of total sales, as compared to $8.3 million, or 3.2% of total sales, during Fiscal 1996 as a higher proportion of engineering resources were expensed to cost of sales in conjunction with the ramp-up of new products. MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and administrative expenses were $32.3 million in Fiscal 1997, or 12.8% of sales, as compared to $35.3 million, or 13.7% of sales, in Fiscal 1996. Marketing costs were relatively consistent between the two periods but general and administrative expenses decreased by $2.9 million in Fiscal 1997 primarily due to lower management incentive accruals and the gain on the sale of certain assets. EBITDA. EBITDA was $39.4 million for Fiscal 1997, an increase of $0.7 million, or 2.5%, as compared to EBITDA, excluding the $1.7 million charge related to the purchase accounting write-up of inventory, of $38.7 million for Fiscal 1996. Both Fiscal 1997 and Fiscal 1996 were negatively impacted by the Company's efforts to consolidate its Salt Lake City, Utah operation into its San Carlos, California operation. In Fiscal 1997, costs associated with this consolidation, including travel and training expenses, temporary duplication of labor and facility resources, and poor manufacturing yields on the moved product lines, negatively impacted EBITDA by approximately $2.0 million compared to $2.4 million in Fiscal 1996. However, due to the completion of these consolidation efforts in the first half of Fiscal 1997, these costs are not expected to continue. EBITDA was approximately 15.6% of sales in Fiscal 1997 compared to approximately 15.0% in Fiscal 1996 which reflects the partial year improvements from the completion of consolidation efforts. NET EARNINGS. Net earnings before preferred dividends were $13.8 million for Fiscal 1997, an increase of $5.4 million, as compared to $8.3 million for Fiscal 1996. In Fiscal 1997, the Company has fully recognized its deferred tax assets and has eliminated the valuation allowance established in connection with the Acquisition, recognizing a resultant $3.0 million tax benefit. -20- 22 FINANCIAL CONDITION The Company's continuing operating activities have provided adequate capital and liquidity for the Company for the periods presented. Cash flow from operating activities was $23.3 million in Fiscal 1998 as compared to $5.3 million in Fiscal 1997. This change of $18.0 million was primarily related to changes in operating assets and liabilities that resulted in an increase in cash of $1.6 million in Fiscal 1998 as compared to a decrease in cash of $13.1 million in Fiscal 1997. A consistent level of accrued liabilities, a lower level of accounts receivable, and better timing between inventory usage and accounts payable levels were the main factors. Lower accounts receivable resulted from a Company-wide focus on collections that improved days sales outstanding ("DSO") to 65 DSO at the end of Fiscal 1998 as compared to 69 DSO at the end of Fiscal 1997. Inventory levels increased in Fiscal 1998 but this was offset by a similar increase in accounts payable. Investing activities were comprised principally of investment in property, plant and equipment totaling $6.6 million in Fiscal 1998, $9.2 million in Fiscal 1997 and $12.5 million in Fiscal 1996. Also, in Fiscal 1998, the Company invested $2.7 million in two small product line acquisitions to add to products currently being manufactured in the Company's Beverly, Massachusetts and Palo Alto, California facilities. The Company's continuing operations typically do not have large capital requirements. Excluding one-time improvements made in both Fiscal 1997 and Fiscal 1996 in connection with facility consolidation efforts, capital spending was $6.6 million, $6.6 million and $8.7 million in Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. 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 1999 to be relatively consistent with the recurring level in Fiscal 1998. Financing activities during the three-year period were related almost entirely to repayments of, or proceeds from, the Company's Senior Credit Agreement. Non-cash financing activities during Fiscal 1998 and Fiscal 1997 included $1.5 million and $1.6 million, respectively, of purchases under capital leases. These purchases were related to the implementation of a new business enterprise system that is part of the Company's overall plan to address "Year 2000" issues, to improve efficiency and to reduce dependency on aging Varian legacy systems. The Company's primary source of liquidity, other than funds generated from operations or other sources of liquidity, is the $35.0 million revolving credit facility provided by the Senior Credit Agreement. Of this amount, $16.4 million was available for CPI to draw upon as of October 2, 1998. The Senior Credit Agreement does not require CPI, at any time, to exchange any of its floating-rate obligations under the Senior Credit Agreement into fixed-rate obligations. As of October 6, 1998, the Company amended this Agreement and increased the Revolving Credit Facility by $10.0 million to allow CPI to operate with a similar level of liquidity as it had prior to its acquisition of the Microwave Components Division of Aydin Corporation that was also completed on October 6, 1998. Management believes that the Company will have adequate capital resources and liquidity to meet its obligations, fund all required capital expenditures and pursue its business strategy for the foreseeable future (and in any event for at least the next twelve months). Such capital resources and liquidity are expected to be available from the Company's cash flow provided by operations and borrowings under CPI's Senior Credit Agreement. -21- 23 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 the Acquisition, 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 $43.3 million at October 2, 1998, 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 and uses various short-term instruments. 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 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, but may enter into forward contracts if necessary. These efforts reduce, 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 approximately $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 result in a decrease in future earnings of less than $0.1 million. Actual results, however, could differ materially. Recent Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in the financial statements. It requires classification of other comprehensive income, as defined by the standard, by their nature (e.g., unrealized gains or losses on securities) in a financial statement, but does not require a specific format for that statement. The accumulated balance of other comprehensive income is to be displayed separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997 and reclassification of financial statements for earlier periods provided for comparative purposes is required. Adoption of this pronouncement in Fiscal 1999 is not expected to have a material impact on the Company's financial statements as the Company has no items of other comprehensive income at this time. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997 and will be adopted by the Company in Fiscal 1999. Adoption of this pronouncement is not expected to have a material effect on the Company's financial statements except that there may be certain modifications in -22- 24 segment disclosures. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that derivatives be recognized in the statement of financial position at fair value. If certain conditions are met, a derivative may be specifically designated and accounted for as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. For a derivative not designated as a hedging instrument, changes in the fair value of the derivative are recognized in earnings in the period of change. This statement will be effective for all fiscal quarters of fiscal years beginning after June 15, 1999 and will be adopted by the Company beginning the first quarter of Fiscal 2000. Management does not believe the adoption of SFAS No. 133 will have a material effect on the financial position of the Company. Year 2000 The Company has conducted a comprehensive review of its computer systems and applications to identify systems that could be affected by the "Year 2000" issue and has developed a remediation plan. All systems that are considered to be mission critical have been identified and addressed in this plan. The Company has also reviewed its products, process equipment and facilities systems as part of its overall Year 2000 readiness. The Company's focus is first on products and business critical systems and equipment. Evaluation of products is substantially complete as only a few CPI products contain microprocessors or microcode. To date, no significant problems have been found in existing CPI products. Also, CPI is contacting its suppliers to ensure that they have appropriate plans in place to adequately address the century change issue. CPI's goals for the Year 2000 project are to have all business critical process Year 2000 conversions, corrective actions, work arounds and tests completed by October 31, 1999. To date, two of the Company's six Divisions have successfully modified or replaced Enterprise Resource Planning ("ERP") systems. The other four are scheduled to "go-live" on a new ERP system starting in February 1999 and being completed in June 1999. Timely completion of its Year 2000 project is a priority of the Company and the remediation plan, along with the timetable for its completion and budgeted remediation costs, have been approved by the Company's Year 2000 project team, management, and the Board of Directors. Management currently estimates that it will spend approximately $5.0 million primarily through a capital lease program to replace outdated Varian legacy systems. To date, approximately $3.9 million has been incurred. Other remediation efforts completed in Fiscal 1998 have included a mix of capital expenditures and operating expense costs totaling $0.8 million and an estimated $1.5 million is planned for Fiscal 1999. The Company's estimated timetable and budgeted remediation costs are based on assumptions which management believes are reasonable and appropriate. Management is committing and will continue to commit necessary human and financial resources to complete its remediation plans on a timely basis. To date, based on both written and verbal discussions, management has no information that indicates a significant vendor or service provider may be unable to sell goods or provide services to the Company or that any significant customer may be unable to purchase from the Company because of Year 2000 issues. Further, the Company has not received any notifications from regulatory agencies to which it is subject indicating that the Company must achieve compliance by a specific date or significant regulatory -23- 25 action will be taken. The Company presently believes that, with modifications to existing software and conversion to new software, the Year 2000 problem will not pose significant operational problems for the Company's systems as modified and converted. However, if such modifications and conversions are not completed timely, the Year 2000 problem could have a material impact on the operations of the Company. Management is still in the process of developing contingency plans but expects that manual processing procedures to maintain accurate processing of information and data are available. Contingency plans are expected to be completed by June 1999. Forward-Looking Information Except for historical information, this Management's Discussion and Analysis contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include: product demand and market acceptance risks; the effect of general economic conditions; the impact of competitive products and pricing; new product development and commercialization; technological difficulties and the ability to increase margins; the timing of renewed growth in the Far East; U.S. Government export policies; and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. -24- 26 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information called for by this item is set forth in the consolidated financial statements of CPI and Holding contained in this report. Specific financial statements can be found at the pages listed in the following index:
COMMUNICATIONS & POWER INDUSTRIES, INC. Page ---- Index to Financial Statements..............................................................F-1 Independent Auditors' Report...............................................................F-3 Consolidated Balance Sheets as of October 2, 1998 and October 3, 1997......................F-4 Consolidated Statements of Operations for the 52-week period ended October 2, 1998 the 53-week period ended October 3, 1997 and the 52-week period ended September 27, 1996.....................................................................F-5 Consolidated Statements of Stockholders' Equity for the 52-week period ended October 2, 1998, the 53-week period ended October 3, 1997 and the 52-week period ended September 27, 1996........................................................F-6 Consolidated Statements of Cash Flows for the 52-week period ended October 2, 1998, the 53-week period ended October 3, 1997 and the 52-week period ended September 27, 1996.....................................................................F-7 Notes to the Consolidated Financial Statements.............................................F-9 Financial Statement Schedule..............................................................F-50 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION Page Independent Auditor's Report..............................................................F-28 Consolidated Balance Sheets as of October 2, 1998 and October 3, 1997.....................F-29 Consolidated Statements of Operations for the 52-week period ended October 2, 1998, the 53-week period ended October 3, 1997 and the 52-week period ended September 27, 1996....................................................................F-30 Consolidated Statements of Stockholders' Equity (Deficit) for the 52-week period ended October 2, 1998, the 53-week period ended October 3, 1997 and the 52-week period ended September 27, 1996.......................................................F-31 Consolidated Statements of Cash Flows for the 52-week period ended October 2, 1998, the 53-week period ended October 3, 1997 and the 52-week period ended September 27, 1996....................................................................F-32 Notes to the Consolidated Financial Statements............................................F-34 Financial Statement Schedule..............................................................F-51
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. In connection with the audit of the financial statements for the 52-weeks ended October 2, 1998, the 53-weeks ended October 3, 1997 and the 52-weeks ended September 27, 1996, there were no disagreements with KPMG Peat Marwick LLP on accounting or financial disclosure. -25- 27 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS DIRECTORS AND EXECUTIVE OFFICERS OF HOLDING The following is a table setting forth certain information with respect to the directors and executive officers of Holding. All directors serve for a period of one year or until their successors are duly elected and qualified.
Name Age Position Al D. Wilunowski........... 52 Chief Executive Officer, President and Director Alvin J. Ferreira.......... 54 Vice President and Assistant Secretary Lynn E. Harvey............. 43 Chief Financial Officer, Treasurer and Secretary Leonard I. Green........... 65 Director John G. Danhakl............ 42 Director Gregory J. Annick.......... 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 Al D. Wilunowski........... 52 Chief Executive Officer, President and Director Lynn E. Harvey............. 43 Chief Financial Officer John R. Beighley........... 45 Vice President O. Joseph Caldarelli....... 48 Vice President Alvin J. Ferreira.......... 54 Vice President Robert A. Fickett.......... 38 Vice President Dennis J. Gleason.......... 45 Vice President H. Frederick Koehler....... 63 Vice President Richard A. Schaffzin....... 54 Vice President Leonard I. Green........... 65 Director John G. Danhakl............ 42 Director Gregory J. Annick.......... 34 Director
-26- 28 Al D. Wilunowski became Chief Executive Officer, President and a Director of Holding and CPI in August 1995. Mr. Wilunowski was an Executive Vice President of Varian and the Chief Operating Officer of the Predecessor from 1990 until August 1995. Prior to May 1990, Mr. Wilunowski was a Corporate Vice President of Varian and President of the Electron Devices Group since 1989. From 1986 until April 1989, he was General Manager of Varian's Nuclear Magnetic Resonance Instrument business. Mr. Wilunowski has also served as General Manager of three of Varian's Semiconductor Equipment business units. Prior to joining Varian, Mr. Wilunowski was Vice President and General Manager of Searle Analytic, a division of G.D. Searle. Mr. Wilunowski received a B.S.B.A. degree from Northwestern University and an M.B.A. from the University of Chicago. 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 an MBA from Santa Clara University. O. Joseph Caldarelli became a Vice President of CPI and Division President of the Communications and Medical Products ("CMP") Division in August 1995. 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. Alvin J. Ferreira became a Vice President of CPI, Vice President and Assistant Secretary of Holding and Division President of the Traveling Wave Technology ("TWT") Division in August 1995. Mr. Ferreira was Vice President and General Manager of this same operating unit under the Predecessor from 1992 to August 1995. From 1990 until 1992, Mr. Ferreira was Corporate Vice President of Operations for Varian and in 1989 served as manufacturing manager of Varian's Instrument Division. Mr. Ferreira began his career with Varian in 1965 and, between 1965 and 1989, held a number of positions in production. Robert A. Fickett became a Vice President of CPI in April 1998 and currently heads the Company's Microwave Power Tube Products ("MPTP") Division. From January 1996 to April 1998, Mr. Fickett was Vice President of Operations for MPTP. 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 CPI's predecessor, 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 University of California, Berkeley. Dennis J. Gleason became a Vice President of CPI and Division President of the Beverly Microwave Division ("BMD") in August 1995. Mr. Gleason was Vice President and General Manager of this same operating unit under the Predecessor from 1989 until August 1995. From 1987 until 1989, Mr. Gleason served as Assistant General Manager of BMD. From 1982 until 1987, Mr. Gleason held a number of positions with the Predecessor, including serving as Manufacturing Engineering Manager and Product Assurance Manager at the then-Electro-Optical Sensors unit of the Predecessor. Prior to being employed by Varian, Mr. Gleason served as an officer in the U.S. Navy Nuclear Submarine Program. Mr. Gleason received B.S. and M.S. degrees in Aerospace Engineering from the University of Notre Dame. -27- 29 Lynn E. Harvey became Chief Financial Officer of Holding and CPI in August 1995. Ms. Harvey was the Business Support Process Manager and Controller of the Power Grid Tube Products unit of the Predecessor from 1993 to August 1995. From 1984 until 1993, Ms. Harvey held various finance, supervisory and management positions with Varian Associates. Ms. Harvey received a B.S. degree from the University of California, Berkeley. H. Frederick Koehler became Vice President of CPI and Division President of the Eimac Division in August 1995. Mr. Koehler was Vice President and General Manager of this same operating unit under the Predecessor from 1992 to August 1995. From 1989 until 1991, Mr. Koehler was President and Chief Executive Officer of Trio-Tech International, an electronic test equipment manufacturer. From 1985 until 1989, he served as President of Leach Relay Group of Leach Corporation and from 1979 until 1985, he was a Vice President at Memorex Corporation. Mr. Koehler received a B.S. from the U.S. Military Academy, West Point and an M.S.E.E. from Syracuse University. Richard A. Schaffzin became a Vice President of CPI in April 1998 and currently heads the Company's Satcom Division. Dr. Schaffzin was President and CEO of Paradise Electronics Corporation, a start-up company developing a single chip interface between CPUs and flat panel displays, beginning in 1997. From 1990 to 1996, Dr. Schaffzin served as Chairman, President and CEO of IC Sensors, Inc., a silicon micromachining sensor company serving the medical, automotive, military and commercial markets. He orchestrated the sale of IC Sensors to a Fortune 500 company in 1994. Prior to that, Dr. Schaffzin has held various operations, business development and engineering positions at EG&G Reticon, National Semiconductor and Fairchild Semiconductor. Dr. Schaffzin holds a B.S.E.E. and an M.E.E degree from Cornell University, an M.S.E.E. degree from MIT and a Ph.D. degree in Finance and Business Management from Santa Clara University. Leonard I. Green has been an executive officer and an equity owner of LGP, a merchant banking firm which manages GEI II, since the formation of LGP and GEI II in 1994 by the principals of Leonard Green & Associates, L.P. ("LGA"). Mr. Green has also been, individually or through a corporation, a partner in LGA, a merchant banking firm, since its inception in 1989. Before forming LGA, Mr. Green had been a partner of Gibbons, Green, van Amerongen for more than five years. Mr. Green is also a director of Rite Aid Corporation, Carr-Gottstein Foods Co., Hechinger Company, and Liberty Group Publishing, Inc. John G. Danhakl has been an executive officer and an equity owner of LGP, a merchant banking firm that manages GEI II, since 1995. Mr. Danhakl had previously been a Managing Director at Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and had been with DLJ since 1990. Prior to 1990, Mr. Danhakl was a Vice President at Drexel Burnham Lambert from 1985 to 1990. Mr. Danhakl is also a director of The Arden Group, Inc., Twin Laboratories, Inc., Leslie's Poolmart, Inc., Big 5 Corp., Hechinger Company and Liberty Group Publishing, Inc. Gregory J. Annick has been an executive officer and an equity owner, through a trust, of LGP, a merchant banking firm that manages GEI II, since the formation of LGP and GEI II in 1994 by the principals of LGA. He joined LGA as an associate in 1989, became a principal in 1993, and through a corporation became a partner of LGA in 1994. From 1988 to 1989, he was an associate with the merchant banking firm of Gibbons, Green, van Amerongen. Before that time, Mr. Annick was a financial analyst in mergers and acquisitions with Goldman, Sachs & Co. Mr. Annick is also a director of Carr-Gottstein Foods Co., Leslie's Poolmart, Inc., Hechinger Company, and Liberty Group Publishing, Inc. -28- 30 ITEM 11: EXECUTIVE COMPENSATION The information set forth in the following table relates to the Chief Executive Officer and President of both Holding and CPI and the next four most highly compensated executive officers of Holding and CPI (collectively, the "Named Executive Officers") for Fiscal 1998, Fiscal 1997 and Fiscal 1996.
SUMMARY COMPENSATION TABLE ANNUAL LONG TERM COMPENSATION COMPENSATION ----------------------------------- ------------ NAME AND OTHER LTIP ALL OTHER PRINCIPAL POSITION FISCAL BONUS($) ANNUAL COMP- PAYOUTS($) COMPENSATION WITH THE COMPANY YEAR SALARY($) (A) ENSATION (B) (C) ($) (D) - ------------------------ ------ --------- --------- ------------ ---------- ------------- Al D. Wilunowski 1998 $302,744 $ -- $ 35,482 $ -- $ 48,866 Chief Executive Officer and President 1997 302,744 186,821 38,041 409,568 71,467 1996 302,744 376,591 34,672 541,613 39,302 John R. Beighley 1998 $119,677 14,463 13,621 -- 6,799 Vice President 1997 116,717 48,738 1,851 -- 5,982 1996 104,358 33,103 486 -- 5,164 Alvin J. Ferreira 1998 128,700 -- 11,901 -- 9,255 Vice President 1997 128,700 43,818 12,055 34,823 10,642 1996 128,700 55,539 2,756 69,178 10,751 Dennis J. Gleason 1998 127,452 -- 14,449 -- 9,334 Vice President 1997 127,452 81,390 12,843 66,697 9,328 1996 127,452 118,993 2,582 73,368 9,338 H. Frederick Koehler 1998 127,378 -- 11,603 -- 9,544 Vice President 1997 126,695 16,006 13,553 29,569 9,934 1996 129,688 55,587 2,575 59,343 9,931
(a) Consists of awards paid in Fiscal 1998 and Fiscal 1997 under CPI's Management Incentive Plan for Fiscal 1997 and Fiscal 1996, respectively. No awards are to be paid in Fiscal 1999 under CPI's Management Incentive Plan for Fiscal 1998. For Mr. Beighley, consists of awards paid in Fiscal 1999, Fiscal 1998 and Fiscal 1997 under CPI's Sales Incentive Plan for Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. (b) Consists of amounts reimbursed for the payment of taxes on certain perquisites and personal benefits. (c) Consists of cash payouts (1) in Fiscal 1998 under the long-term incentive feature of CPI's Management Incentive Plan for the three year period ended Fiscal 1997; and (2) in Fiscal 1997 under the long-term incentive feature of CPI's Management Incentive Plan for the two year period ended Fiscal 1996. No awards are to be paid in Fiscal 1999 under this plan for Fiscal 1998. (d) Consists of (1) Company contributions to CPI's 401(k) plan and Non-Qualified Deferred Compensation Plan and (2) Company paid premiums for group life insurance for Fiscal 1998, Fiscal 1997 and Fiscal 1996. The Company generally provides its executives with compensation (including cash compensation and employee benefits) reasonably comparable to the compensation provided to them as executives of the Predecessor, except that the Company does not at this time contemplate that any of its executives will be provided with stock options, restricted stock, SARs, phantom stock or similar equity benefits, other than the shares purchased by the Management Investors (as defined below) under Holding's 1995 Management Equity Plan, although the Company may consider implementing plans or arrangements providing for one or more of such benefits in the future. Employee benefit plans offered to the Company's Named Executive Officers and the Company's other executives include health, life and disability insurance and both a qualified 401(k) investment plan and a non-qualified deferred compensation plan. -29- 31 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 50,000 shares of Holding Common Stock for issuance under the Holding Equity Plan, 45,870 of which were issued to the Company's Chief Executive Officer, certain executive officers and key employees (collectively, any executive officers and key employees who may acquire Management Shares are referred to as the "Management Investors") in Fiscal 1995. No additional shares were issued in Fiscal 1996 and 650 shares were repurchased in Fiscal 1997. In Fiscal 1998, based on retirements and changes in management, 5,850 shares were repurchased and 2,920 shares were sold. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Neither Holding nor CPI has a Compensation Committee. None of the directors of Holding or CPI are officers or employees or former officers or employees of Holding, CPI or any of their respective subsidiaries, other than Mr. Wilunowski, or had any relationships which would require disclosure by the Company pursuant to Item 404 of Regulation S-K ("Certain Relationships and Related Transactions"), except as described below. LGP is investment adviser to, and an affiliate of the general partner of, GEI II, which holds approximately 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 Annick, who are directors of Holding and CPI, are also stockholders of the general partner of LGP. See "Directors and Executive Officers." In connection with the Acquisition, Holding and CPI entered into a Management Services Agreement with LGP pursuant to which LGP will receive an annual fee of approximately $362,000 plus reasonable expenses for providing management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analysis, negotiating and structuring financing, and exploring, negotiating and arranging expansion and capital market opportunities, in the future. The Management Services Agreement has a term of up to twelve years. Holding and CPI believe that the contacts and expertise provided by LGP in these areas enhance the Company's opportunities and management's expertise in these matters and that the fees to be paid to LGP fairly reflect the value of the services provided by LGP. In Fiscal 1998, LGP received $375,000 pursuant to the terms of the Management Service Agreement. In addition to an annual fee for such management consulting services, the Management Services Agreement provides that LGP may receive reasonable and customary fees and expenses from time to time for providing financial advisory and investment banking services in connection with major financial transactions that may be undertaken in the future. The Senior Credit Agreement and the indenture governing the Notes (the "Indenture") also include certain provisions regarding approval of affiliate transactions. COMPENSATION OF DIRECTORS Individuals who are officers of Holding and CPI, as well as Messrs. Green, Danhakl and Annick, will not receive any compensation directly for their service on Holding's and CPI's Boards of Directors. Holding and CPI have entered into a management services agreement pursuant to which LGP will receive an annual fee plus reasonable expenses for providing management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analyses, negotiating and structuring financing and exploring expansion opportunities, in the future. See "ITEM 13 - Certain Relationships and Related Transactions." It is anticipated that other directors, if any, will -30- 32 receive customary fees for service on Holding's and CPI's respective Boards of Directors. 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 1, 1998 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).............. 143,630 73.12% 11111 Santa Monica Boulevard, Suite 2000 Los Angeles, California 90025 Leonard I. Green (b)............................ 143,630 73.12% 11111 Santa Monica Boulevard, Suite 2000 Los Angeles, California 90025 John G. Danhakl (b)............................. 143,630 73.12% 11111 Santa Monica Boulevard, Suite 2000 Los Angeles, California 90025 Gregory J. Annick (b)........................... 143,630 73.12% 11111 Santa Monica Boulevard, Suite 2000 Los Angeles, California 90025 Al D. Wilunowski (c)............................ 21,400 10.90% 607 Hansen Way Palo Alto, California 94303 H. Frederick Koehler (d)........................ 3,000 1.53% Alvin J. Ferreira............................... 2,500 1.27% Dennis J. Gleason............................... 2,000 1.02% John R. Beighley................................ 450 .23% Directors and Executive Officers as a group (12 persons)(b) .................................... 180,500 91.89%
- -------- (a) Addresses are given only for persons listed as beneficial owners of 5% or more of Holding Common Stock. (b) GEI II is a Delaware limited partnership managed by LGP, which is an affiliate of the general partner of GEI II. Each of Mr. Green, Jonathan D. Sokoloff, Mr. Danhakl, Mr. Annick, Jennifer Holden Dunbar and Peter J. Nolan, either directly (whether through ownership interest or position) or through one or more intermediaries, may be deemed to control LGP and such general partner. LGP and such general partner may be deemed to control the voting and disposition of the shares of Holding Common Stock owned by GEI II. Accordingly, for certain purposes, Messrs. Green, Sokoloff, Danhakl, Annick and Nolan and Ms. Holden Dunbar may be deemed to be beneficial owners of the shares of Holding Common Stock held by GEI II. All of the shares of Holding Common Stock shown in the table as being beneficially owned by Messrs. Green, Danhakl and Annick are owned by GEI II. (c) Includes 800 shares originally acquired by Mr. Wilunowski and subsequently transferred to his child. (d) Includes 800 shares originally acquired by Mr. Koehler and subsequently transferred to his children. -31- 33 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 Annick, who are directors of Holding and CPI, are also stockholders of the general partner of LGP. In connection with the Acquisition, Holding and CPI entered into a Management Services Agreement with LGP pursuant to which LGP will receive an annual fee of approximately $362,000 plus reasonable expenses for providing management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analysis, negotiating and structuring financing, and exploring, negotiating and arranging expansion and capital market opportunities, in the future. The Management Services Agreement has a term of up to twelve years. Holding and CPI believe that the contacts and expertise provided by LGP in these areas enhance the Company's opportunities and management's expertise in these matters and that the fees to be paid to LGP fairly reflect the value of the services provided by LGP. In Fiscal 1998, LGP received $375,000 pursuant to the terms of the Management Services Agreement. In addition to an annual fee for such management consulting services, the Management Services Agreement provides that LGP may receive reasonable and customary fees and expenses from time to time for providing financial advisory and investment banking services in connection with major financial transactions that may be undertaken in the future. The Senior Credit Agreement and the Indenture also include certain provisions regarding approval of affiliate transactions. -32- 34 Exhibit No. Description PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K (a) Financial Statement Schedule of CPI and Holding Schedule II - Valuation and Qualifying Accounts (b) Reports on Form 8-K None. (c) Schedule of Exhibits
Exhibit No. Description - --------- ----------- 2.1(1) Stock Sale Agreement between CPI (as successor by merger to CPII Acquisition Corp., then known as Communications & Power Industries Holding Corporation) and Varian dated as of June 9 ,1995. 2.2(1) First Amendment to Stock Sale Agreement among Holding, CPI (as successor by merger to CPII Acquisition) and Varian dated as of August 11, 1995. 2.3(1) Second Amendment to Stock Sale Agreement among Holding, CPI (as successor by merger to CPII Acquisition) and Varian dated as of August 11, 1995. 3.1(1) Restated Certificate of Incorporation of CPI filed with the Delaware Secretary of State on August 11, 1995. 3.2(1) Bylaws of CPI. 3.3(1) Certificate of Incorporation of Holding. 3.4(1) Bylaws of Holding. 4.1(1) Indenture among CPII Acquisition, Holding, the other guarantors of the Notes (the "Guarantors") and U.S. Trust Company of California, N.A., relating to the Notes dated as of August 11, 1995. 4.2(1) First Supplemental Indenture among CPI, Holding, the other Guarantors and U.S. Trust Company of California, N.A., relating to the Notes dated as of August 11, 1995. 4.3(1) Form of Notes (included in Exhibit 4.1, Exhibit A). 4.4(1) Form of Indenture between CPI and Shawmut Bank Connecticut, National Association, relating to the Exchange Notes. 4.5(1) Form of Exchange Note (included in Exhibit 4.5, Exhibit A). 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.
-33- 35
Exhibit No. Description - --------- ----------- 10.1(1) Credit Agreement among CPI, Holding, CPII Acquisition, the other obligors named therein, the lenders named therein and Bankers Trust Company, as Agent, dated as of August 11, 1995 (including Annex A (Definitions; Rules of Construction) and Annex F (Financial Covenants)). 10.1.1(4) First Amendment to Credit Agreement among CPI, Holding, the other obligors named therein, the lenders named therein and Bankers Trust Company, as Agent, dated as of December 31, 1996. 10.1.2(4) Second Amendment to Credit Agreement among CPI, Holding, the other obligors named therein, the lenders named therein and Bankers Trust Company, as Agent, dated as of April 1, 1997. 10.1.3(4) Third Amendment to Credit Agreement among CPI, Holding, the other obligors named therein, the lenders named therein and Bankers Trust Company, as Agent, dated as of June 27, 1997. 10.1.4 Fourth Amendment to Credit Agreement among CPI, Holding, the other obligors named therein, the lenders named therein and Bankers Trust Company as Agent, dated as of October 6, 1998. 10.2(1) Term A Notes in the amounts of $8,333,333.32, $4,166,666.67, $4,166,666.67, $4,166,666.67 and $4,166,666.76 made by CPI in favor of Bankers Trust Company, Dresdner Bank AG, First Bank National Association, The Nippon Credit Bank, Ltd. and Union Bank, respectively, dated as of August 11, 1995. 10.3(1) Term B Notes in the amounts of $11,666,666.68 and $5,666,666.67 made by CPI in favor of Bankers Trust Company and Crescent/Mach I Partners, respectively, dated as of August 11, 1995. 10.4(1) Revolving Credit Notes in the amounts of $11,666,666.68, $5,833,333.33, $5,833,333.33, $5,833,333.33 and $5,833,333.33 made by CPI in favor of Bankers Trust Company, Dresdner Bank AG, First Bank National Association, The Nippon Credit Bank, LTD, and Union Bank, respectively, dated as of August 11, 1995. 10.5(1) Swingline Note in the amount of $5,000,000 made by CPI in favor of Bankers Trust Company dated as of August 11, 1995. 10.6(1) Security Agreement among CPI, CPII Acquisition, the other assignors named therein and Bankers Trust Company, as Agent, dated as of August 11, 1995. 10.7(1) Pledge Agreement made by CPI, Holding, CPII Acquisition, and CPI Subsidiary Holdings, Inc. in favor of Bankers Trust Company, as Agent, dated as of August 11, 1995. 10.8(1) Continuing Guaranty made by each of the Guarantors in favor of the Lenders and Agent under the Senior Credit Agreement, dated as of August 11, 1995. 10.10(3)(+) Key Components Supply Agreement between CPI and Varian dated as of August 10, 1995. 10.11(1) Cross License Agreement between CPI and Varian dated as of August 10, 1995.
-34- 36
Exhibit No. Description - --------- ----------- 10.13(1) Assignment and Assumption of Lessee's Interest in Lease (Units 1-4, Palo Alto) and Covenants, Conditions and Restrictions on Leasehold Interests (Units 1-12, Palo Alto) dated as of August 10, 1995 between Varian Realty Inc., Varian Associates, Inc. and CPI. 10.14(1) Sublease (Portion of Building 2 Located on Unit 5, Palo Alto) dated as of August 10, 1995 between Varian Realty Inc. and CPI. 10.15(1) Sublease (Unit 8, Palo Alto) dated as of August 10, 1995 between Varian Realty Inc. and CPI. 10.16(1) Sublease (Building 4, Palo Alto) dated as of August 10, 1995 between CPI, as Sublessee, Varian Associates, Inc., as Sublessor, and Varian Realty Inc., as Adjacent Property Sublessor. 10.17(1) Assignment and Assumption of Tenant's Interest in Lease (Santa\ Clara, California) dated as of August 10, 1995 between Varian and CPI. 10.19(1) Shared Use Agreement dated as of August 11, 1995 between Varian (on behalf of itself and its subsidiaries) and CPI (as successor by merger to CPII Acquisition Corp.) (on behalf of itself and its subsidiaries). 10.20(1) Purchase Agreement among CPII Acquisition, Holding, the other Guarantors and the initial purchasers of the Series A Senior Subordinated Notes (the "Initial Notes Purchasers") dated as of August 11, 1995. 10.21(1) Purchase Agreement among CPII Acquisition, Holding and the initial purchaser of the Series A Senior Preferred Stock (the "Initial Senior Preferred Stock Purchaser") dated as of August 11, 1995. 10.22(1) A/B Exchange Registration Rights agreement among CPI (as successor by merger to CPII Acquisition), Holding, the other Guarantors and the Initial Notes Purchasers dated as of August 11, 1995. 10.23(1) Amendment to A/B Exchange Registration Rights Agreement among CPI, Holding, the other Guarantors and the Initial Notes Purchasers dated as of August 11,1995. 10.24(1) A/B Exchange Registration Rights Agreement between CPI (as successor by merger to CPII Acquisition) and the Initial Senior Preferred Stock Purchaser dated as of August 11, 1995. 10.25(1) Amendment to A/B Exchange Registration Rights Agreement between CPI and the Initial Senior Preferred Stock Purchaser dated as of August 11, 1995. 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.
-35- 37
Exhibit No. Description - --------- ----------- 10.28(1) Stock Subscription Agreement among Holding, CPII Acquisition Corp. and GEI II dated as of August 11, 1995. 10.29(1) Management Services Agreement among CPI, Holding and Leonard Green & Partners, L.P. dated as of August 11, 1995. 10.30(1) 1995 Holding Management Equity Plan (including Form of Management Subscription and Stockholders Agreement). 10.31(1) Letter from Holding to Al D. Wilunowski dated June 9, 1995 relating to terms of employment. 10.32(1) Letter from Holding to Alvin J. Ferreira dated June 9, 1995 relating to terms of employment. 10.33(1) Letter from Holding to Dennis J. Gleason dated June 9, 1995 relating to terms of employment. 10.34(1) Letter from Holding to H. Frederick Koehler dated June 9, 1995 relating to terms of employment. 21(1) Subsidiaries of CPI and Holding. 27.1 Financial Data Schedule (Communications & Power Industries, Inc.) 27.2 Financial Data Schedule (Communications & Power Industries Holding Corporation)
- ------------- (1) Incorporated by reference to CPI's Registration Statement on Form S-1 (Registration No. 33-96858), filed on September 12, 1995. (2) Incorporated by reference to Amendment No. 3 to CPI's Registration Statement on Form S-1 (Registration No. 33-96858), filed on November 9, 1995. (3) Incorporated by reference to Amendment No. 1 to CPI's Registration Statement on Form S-1 (Registration Statement No. 33-96858), filed on October 25, 1995. (4) Incorporated by reference to CPI's Annual Report on Form 10-K, filed on January 2, 1998. (+) Certain portions of this Exhibit have been omitted and filed separately under an application for confidential treatment with the Securities and Exchange Commission. -36- 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMUNICATIONS & POWER INDUSTRIES, INC. By: /s/ Al D. Wilunowski ---------------------------------------- Al D. Wilunowski Chief Executive Officer and President Date: December 23, 1998 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 23, 1998 - ----------------------- ---------------------- /s/ John G. Danhakl Director December 23, 1998 - ----------------------- ---------------------- /s/ Gregory J. Annick Director December 23, 1998 - ----------------------- ---------------------- Chief Financial Officer, Treasurer and /s/ Lynn E. Harvey Secretary (Principal Financial and December 23, 1998 Accounting Officer) - ----------------------- ---------------------- Director, Chief Executive Officer and /s/ Al D. Wilunowski President (Principal Executive Officer) December 23, 1998 - ----------------------- ----------------------
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- 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION By: /s/ Al D. Wilunowski ---------------------------------------- Al D. Wilunowski Chief Executive Officer and President Date: December 23, 1998 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 23, 1998 - ----------------------- ---------------------- /s/ John G. Danhakl Director December 23, 1998 - ----------------------- ---------------------- /s/ Gregory J. Annick Director December 23, 1998 - ----------------------- ---------------------- Chief Financial Officer, Treasurer /s/ Lynn E. Harvey and Secretary (Principal Financial December 23, 1998 and Accounting Officer) - ----------------------- ---------------------- Director, Chief Executive Officer and /s/ Al D. Wilunowski President (Principal Executive December 23, 1998 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. -38- 40 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS COMMUNICATIONS & POWER INDUSTRIES, INC.
Page ---- Independent Auditors' Report..............................................................F-3 Consolidated Balance Sheets as of October 2, 1998 and October 3, 1997 ....................F-4 Consolidated Statements of Operations for the 52-week period ended October 2, 1998 , the 53-week period ended October 3, 1997 and the 52-week period ended September 27, 1996 ............................F-5 Consolidated Statements of Stockholders' Equity for the 52-week period ended October 2, 1998, the 53-week period ended October 3, 1997 and the 52-week period ended September 27, 1996 ............................................F-6 Consolidated Statements of Cash Flows for the 52-week period ended October 2, 1998, the 53-week period ended October 3, 1997 and the 52-week period ended September 27, 1996..................................................................F-7 Notes to the Consolidated Financial Statements............................................F-9
-F-1- 41 INDEX TO FINANCIAL STATEMENTS, CONTINUED COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION Independent Auditors' Report.......................................................F-28 Consolidated Balance Sheets as of October 2, 1998 and October 3, 1997 .............F-29 Consolidated Statements of Operations for the 52-week period ended October 2, 1998, the 53-week period ended October 3, 1997 and the 52-week period ended September 27, 1996 ........................F-30 Consolidated Statements of Stockholders' Equity (Deficit) for the 52-week period ended October 2, 1998, the 53-week period ended October 3, 1997 and the 52-week period ended September 27, 1996..............F-31 Consolidated Statements of Cash Flows for the 52-week period ended October 2, 1998, the 53-week period ended October 3, 1997 and the 52-week period ended September 27, 1996 ........................F-32 Notes to the Consolidated Financial Statements.....................................F-34 FINANCIAL STATEMENT SCHEDULES Communications & Power Industries, Inc.............................................F-50 Communications & Power Industries Holding Corporation..............................F-51
-F-2- 42 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 October 2, 1998 and October 3, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for the 52-week period ended October 2, 1998, the 53-week period ended October 3, 1997 and the 52-week period ended September 27, 1996. In connection with our audits of the consolidated financial statements for the periods indicated above, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of CPI's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Communications & Power Industries, Inc. and subsidiaries as of October 2, 1998 and October 3, 1997, the results of their operations and their cash flows for the 52- week period ended October 2, 1998, the 53-week period ended October 3, 1997 and the 52-week period ended September 27, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. s/KPMG PEAT MARWICK LLP Mountain View, California November 13, 1998 -F-3- 43 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
October 2, October 3, ASSETS 1998 1997 ------ --------- ------- CURRENT ASSETS Cash and cash equivalents $ 448 2,027 Accounts receivable, net 49,484 52,326 Inventories 52,923 50,750 Deferred taxes 6,981 7,133 Other current assets 1,440 1,221 --------- ------- Total current assets 111,276 113,457 Property, plant, and equipment, net 78,099 79,994 Goodwill and other intangibles, net 25,147 24,144 Debt issue costs, net 6,522 7,893 Deferred taxes 8,168 11,908 --------- ------- Total assets $ 229,212 237,396 ========= ======= LIABILITIES, SENIOR REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - ----------------------------------------------------------------------- CURRENT LIABILITIES Revolving credit facility $ 13,300 22,800 Current portion of term loans 6,200 5,700 Current portion of capital leases 541 -- Accounts payable - trade 13,140 10,419 Accrued expenses 15,612 15,088 Product warranty 3,734 4,211 Income taxes payable 10,259 11,975 Advance payments from customers 2,533 2,797 --------- ------- Total current liabilities 65,319 72,990 Senior term loans 23,750 29,950 Senior subordinated notes 100,000 100,000 Obligations under capital leases 2,548 1,584 --------- ------- Total liabilities 191,617 204,524 --------- ------- SENIOR REDEEMABLE PREFERRED STOCK ($.01 par value, 325,000 shares authorized; 225,808 and 196,779 shares issued and outstanding as of 1998 and 1997, respectively, liquidation preference $100 per share) 20,683 17,566 --------- ------- Commitments and contingencies STOCKHOLDERS' EQUITY Junior Preferred Stock ($.01 par value, 525,000 shares authorized; 150,540 and 131,186 shares issued and outstanding as of 1998 and 1997, respectively, liquidation preference $100 per share) 1 1 Common stock ($.01 par value, 400,000 shares authorized; 1 share issued and outstanding as of 1998 and 1997) -- -- Additional paid-in capital 33,582 32,143 Accumulated deficit (15,614) (15,738) Stockholder loans (1,057) (1,100) --------- ------- Net stockholders' equity 16,912 15,306 --------- ------- Total liabilities, senior redeemable preferred stock and stockholders' equity $ 229,212 237,396 ========= =======
See accompanying notes to the consolidated financial statements. - F-4 - 44 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
52-Week 53-Week 52-Week period ended period ended period ended October 2, October 3, September 27, 1998 1997 1996 -------- -------- -------- Sales $260,688 253,439 257,449 Cost of sales 194,410 183,678 184,482 -------- -------- -------- Gross profit 66,278 69,761 72,967 -------- -------- -------- Operating costs and expenses: Research and development 7,455 7,681 8,308 Selling and marketing 19,168 19,701 19,886 General and administrative 12,935 12,568 15,468 -------- -------- -------- Total operating costs and expenses 39,558 39,950 43,662 -------- -------- -------- Operating income 26,720 29,811 29,305 Interest expense 17,793 19,039 18,894 -------- -------- -------- Earnings before taxes 8,927 10,772 10,411 Income tax expense (benefit) 3,750 (3,000) 2,068 -------- -------- -------- Net earnings 5,177 13,772 8,343 Preferred dividends: Senior Redeemable Preferred Stock 2,904 2,530 2,148 Junior Preferred Stock 1,935 1,686 1,432 -------- -------- -------- Net earnings attributable to Common Stock $ 338 9,556 4,763 ======== ======== ========
See accompanying notes to the consolidated financial statements. -F-5- 45 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data)
Total Junior Additional Stockholders' Preferred Common Paid-in Accumulated Stockholder Equity Stock Stock Capital Deficit Loans (Deficit) -------- -------- -------- ----------- ----------- ------------- Balances, September 29, 1995 1 -- 29,088 (29,627) (1,000) (1,538) Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) (214) Payment of dividends on Senior Redeemable Preferred Stock (2,149) (2,149) Payment of dividends on Junior Preferred Stock 1,433 (1,433) -- Net earnings 8,343 8,343 Repayment of stockholder loans 25 25 Interest accrued on stockholder loans (67) (67) -------- -------- -------- -------- -------- -------- Balances, September 27, 1996 1 -- 30,521 (25,080) (1,042) 4,400 Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) (214) Payment of dividends on Senior Redeemable Preferred Stock (2,530) (2,530) Payment of dividends on Junior Preferred Stock 1,686 (1,686) -- Net earnings 13,772 13,772 Interest accrued on stockholder loans (58) (58) Purchase of Treasury Stock (64) (64) -------- -------- -------- -------- -------- -------- Balances, October 3, 1997 1 -- 32,143 (15,738) (1,100) 15,306 Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) (214) Payment of dividends on Senior Redeemable Preferred Stock (2,904) (2,904) Payment of dividends on Junior Preferred Stock 1,935 (1,935) -- Net earnings 5,177 5,177 Repayment of stockholder loans 80 80 Interest accrued on stockholder loans (37) (37) Issuance of Treasury Stock 696 696 Purchase of Treasury Stock (1,192) (1,192) -------- -------- -------- -------- -------- -------- Balances, October 2, 1998 $ 1 -- 33,582 (15,614) (1,057) 16,912 ======== ======== ======== ======== ======== ========
See accompanying notes to the consolidated financial statements. -F-6- 46 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 53-Week 52-Week period ended period ended period ended October 2, October 3, September 27, 1998 1997 1996 ------------ ------------ ------------ OPERATING ACTIVITIES Net cash provided by operating activities $ 23,309 5,320 11,290 -------- -------- -------- INVESTING ACTIVITIES Proceeds from sale of property, plant and equipment 61 2,545 -- Purchase of property, plant, and equipment (6,565) (9,183) (12,472) Product line acquisitions (2,730) -- -- Other investing activities -- -- (114) -------- -------- -------- Net cash used in investing activities (9,234) (6,638) (12,586) -------- -------- -------- FINANCING ACTIVITIES Repayments on capital leases (38) -- -- Net (Repayments)/Proceeds from revolving credit facility (9,500) 5,800 (2,600) Repayments on Senior term loans (5,700) (3,950) (2,400) Payment of debt issuance costs -- (194) (243) Issuance of treasury stock 696 -- -- Purchases of treasury stock (1,192) (64) -- Repayments of stockholder loans 80 -- 25 -------- -------- -------- Net cash provided by (used in) financing activities (15,654) 1,592 (5,218) -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,579) 274 (6,514) Cash and cash equivalents at beginning of period 2,027 1,753 8,267 -------- -------- -------- Cash and cash equivalents at end of period $ 448 2,027 1,753 ======== ======== ========
See accompanying notes to the consolidated financial statements. -F-7- 47 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 53-Week 52-Week period ended period ended period ended October 2, October 3, September 27, 1998 1997 1996 ------------ ------------ ------------- DETAIL OF NET CASH PROVIDED BY OPERATING ACTIVITIES Net earnings $ 5,177 13,772 8,343 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 9,981 8,572 6,670 Amortization of deferred debt issue costs 1,372 1,952 1,962 Amortization of goodwill and intangibles 1,316 1,058 1,061 Deferred taxes 3,892 (6,363) (9,752) Interest accrued on stockholder loans (37) (58) (67) (Gain)/Loss on the disposition of assets 32 (471) -- Changes in operating assets and liabilities: Accounts receivable 2,842 (1,946) (5,637) Inventories (1,863) (4,279) (1,706) Other current assets (219) 913 433 Accounts payable - trade 2,721 (108) (5,947) Accrued expenses 552 (7,283) 2,585 Product warranty (477) (116) (363) Income tax payable (1,716) 1,415 10,560 Advance payments from customers (264) (1,738) 3,148 -------- -------- -------- Net cash provided by operating activities $ 23,309 5,320 11,290 ======== ======== ========
See accompanying notes to the consolidated financial statements. -F-8- 48 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") 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 locations 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's) Electron Device business ("the Acquisition") 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. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Cash and Cash Equivalents Currency on hand, demand deposits, and all highly liquid investments with an original maturity of three months or less are considered to be cash and cash equivalents. -F-9- 49 COMMUNICATIONS & POWER INDUSTRIES , INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Revenue Recognition Sales and related cost of sales are recognized primarily upon shipment of products. Sales and related cost of sales under long-term contracts to commercial customers and the U. S. Government are recognized primarily as units are delivered. The estimated sales values of performance under certain 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. Property, Plant, and Equipment Property, plant, and equipment acquired by CPI at the date of the Acquisition are carried at fair value as of the date of acquisition. 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. Accounting for Long-Lived Assets In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, 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 -F-10- 50 COMMUNICATIONS & POWER INDUSTRIES , INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED lives ranging from 15 to 25 years. Accumulated amortization was $3.6 million and $2.3 million as of October 2, 1998 and October 3, 1997, respectively. During Fiscal 1998, CPI acquired two product lines with net assets of approximately $0.4 million for a purchase price of approximately $2.7 million. The $2.3 million difference between the purchase price and the fair value of the net assets acquired was allocated to goodwill and other intangibles and will be amortized over estimated useful lives ranging from 3 to 15 years. These product line acquisitions were accounted for as a purchase. Warranty CPI's products are generally warranted for a variety of periods, typically one to five 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. 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 1998, Fiscal 1997 or Fiscal 1996. Varian retained the environmental liabilities existing at the time of the Acquisition. Deferred Debt Issue Costs Costs incurred related to the issuance of CPI's long-term debt and other credit facilities are capitalized and amortized over the estimated time the obligations are expected to be outstanding using the effective interest method. The amortization period used for the deferred costs associated with the revolving credit facility, the Senior Term Loans, and the Senior Subordinated Notes is 3 years, 7 years and 10 years, respectively. Senior Redeemable Preferred Stock CPI's Senior Redeemable Preferred Stock was issued in units with an aggregate of 10,500 shares of common stock of Holding. The fair value of the shares of Holding's common stock issued, and the issue costs associated with the issuance of the Senior Redeemable Preferred Stock, have been reflected as a reduction of the Senior Redeemable Preferred Stock issued and is being amortized via a charge to accumulated deficit over the period until mandatory redemption, 12 years, using the effective interest method. Income Taxes Income taxes are accounted for under the asset and liability method. CPI's deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis and the financial reporting basis of assets and liabilities. The provision for income taxes is -F-11- 51 COMMUNICATIONS & POWER INDUSTRIES , INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 CPI's sales. The U.S. defense budget has been declining since the mid-1980s. Although management believes that CPI has successfully responded to shrinking defense budgets by refocusing its operations on commercial and other non-defense applications, a significant further decline in U.S. or global military spending could have a material adverse effect on CPI's sales and earnings. Additionally, companies engaged in supplying defense-related equipment and services to government agencies are subject to certain business risks, including the ability of the U.S. government to suspend them from receiving new contracts or to terminate existing contracts for the U.S. government's convenience or for the default of the contractor. In addition, the U.S. government could terminate contracts due to insufficient or terminated congressional appropriations. CPI's contracts with foreign governmental defense agencies are subject to similar limitations and risks as those encountered with U.S. government contracts. CPI believes that both its customer and industry base is well diversified, however, changes in the marketplace of any of the above named industries and/or volatility in the world's industrial economies may significantly affect management's estimates and CPI's performance. 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. 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 income. The aggregate transaction and exchange gains and losses were a $263,000 gain, a $463,000 loss and a $296,000 loss for Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. Fair Value of Financial Instruments Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The carrying value of CPI's cash and cash equivalents, accounts receivable, -F-12- 52 COMMUNICATIONS & POWER INDUSTRIES , INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED and accounts payable approximate their fair values due to the relatively short period to maturity of the instruments. The fair value of CPI's Senior Subordinated Notes, based on quoted market prices or pricing models using current market rates, has been quoted at a level of 105 1/4 as of December 1998. Change in Accounting Estimate During Fiscal 1998, CPI reviewed and revised downward its estimate of disposal costs used in its calculation of lower of cost or market write-downs for long-term contracts to more closely reflect its cost structure versus the assumptions carried forward from the predecessor's operations for sales related expenses. The change resulted in an increase to net income of approximately $1 million. 3. BALANCE SHEET COMPONENTS Accounts Receivable Accounts receivable are stated net of allowances for doubtful accounts of $636,000 and $282,000 as of October 2, 1998 and October 3, 1997, respectively. Inventories Inventories are stated at the lower of average cost or market (net realizable value). The main components of inventories are as follows:
Fiscal Year ----------------------- (Dollars in thousands) 1998 1997 ------- ------- Raw materials and parts $38,327 $36,814 Work in process 13,572 12,274 Finished goods 1,024 1,662 ------- ------- Total inventories $52,923 $50,750 ======= =======
-F-13- 53 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 The main components of property, plant, and equipment are as follows:
Fiscal Year ---------------------------- (Dollars in thousands) 1998 1997 --------- --------- Land and land leaseholds $ 36,408 $ 36,284 Buildings 18,732 17,989 Machinery and equipment 42,556 38,121 Leased equipment 3,129 1,584 Construction in progress 2,808 1,736 --------- --------- Subtotal 103,633 95,714 Less accumulated depreciation and amortization (25,534) (15,720) --------- --------- Net property, plant and equipment $ 78,099 $ 79,994 ========= =========
Accumulated amortization of equipment under capital lease arrangements was $547,000 and $33,000 as of October 2, 1998 and October 3, 1997, respectively, and is included in depreciation expense on the statement of cash flows. Accrued Expenses Accrued expenses are comprised of the following:
Fiscal Year ----------------------- (Dollars in thousands) 1998 1997 ------- ------- Taxes $ 818 $ 586 Payroll and employee benefits 9,417 9,939 Accrued interest 2,520 2,483 Other 2,857 2,080 ------- ------- Total accrued expenses $15,612 $15,088 ======= =======
4. SENIOR CREDIT AGREEMENT The Senior Credit Agreement provides for two term loans in the aggregate amount of $42.0 million, comprised of a $25.0 million "Term Loan A" tranche and a $17.0 million "Term Loan B" tranche, and a $35.0 million revolving credit facility which includes a sub-facility for letters of credit. This sub-facility was increased from $5.0 million to $7.5 million effective June 27, 1997. Availability of advances under the Revolving Credit Facility is subject to a borrowing base test. CPI's obligations -F-14- 54 COMMUNICATIONS & POWER INDUSTRIES , INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED under the Senior Credit Agreement are secured by substantially all of its assets (including the issued and outstanding capital stock of its direct and indirect subsidiaries) and are guaranteed by Holding and all of CPI's subsidiaries. As of October 2, 1998, CPI had $16.4 million available under the Revolving Credit Facility of which $2.2 million was available for issuance of letters of credit. As of October 6, 1998, the Company amended this Agreement and increased the Revolving Credit Facility by $10.0 million to allow CPI to operate with a similar level of liquidity as it had prior to its acquisition of the Microwave Components Division of Aydin Corporation that was also completed on October 6, 1998. Borrowings under the Revolving Credit Facility and Term Loan A bear interest at a rate equal to the Eurodollar Rate (approximately 5.65% as of October 2, 1998) plus 2.5% per annum or the Base Rate (8.25% as of October 2, 1998) plus 1.0% per annum and borrowings under Term Loan B bear interest at a rate equal to the Eurodollar Rate plus 3.0% per annum or Base Rate plus 1.5% per annum, in each case as selected by CPI. Applicable interest rates on Term Loan A and the Revolving Credit Facility will be reduced by up to 0.5% per annum if CPI meets and continues to meet certain financial tests. In addition to customary fronting and other fees, CPI will pay a fee equal to 1.5% per annum on undrawn amounts of letters of credit and a commitment fee of 0.5% per annum on unused facilities under the Revolving Credit Facility. The Term Loans are subject to quarterly payments in the aggregate annual amounts as follows (in thousands):
Term Term Fiscal Year Loan A Loan B ----------- ------- ------- 1999 $ 6,000 $ 200 2000 7,500 200 2001 -- 6,050 2002 -- 10,000 2003 -- -- ------- ------- $13,500 $16,450 ======= =======
As of October 2, 1998, CPI had made payments of $11.5 million against Term Loan A and $0.55 million against Term Loan B, of which, $5.5 million and $0.2 million were paid in Fiscal 1998 against Term Loan A and Term Loan B, respectively. The Revolving Credit Facility matures on August 11, 2000. CPI is required to make prepayments on the Senior Facility with 75% of Excess Cash Flow (as defined in the Senior Credit Agreement), 75% of the net proceeds of certain stock issuances and 100% of the net proceeds from certain asset sales. Such prepayments will be applied to remaining principal installments of the Term Loans allocated on a pro rata basis and following repayment of the Term Loans, to reduce permanently the Revolving Credit Facility. In addition, CPI is subject to certain affirmative and negative covenants customarily contained in agreements of this type, including, without limitation, covenants that restrict, subject to specified exceptions: (i) incurrence of additional indebtedness and other obligations; (ii) mergers or -F-15- 55 COMMUNICATIONS & POWER INDUSTRIES , INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED consolidations; (iii) asset sales; (iv) changes of control and corporate structure; (v) granting or incurrence of liens to secure any other indebtedness (including the Notes or the notes for which the Senior Preferred Stock is exchangeable (the "Exchange Notes")); (vi) prepayment or modification of the terms of other indebtedness (including the Notes and the Exchange Notes); (vii) engaging in transactions with affiliates; (viii) declaration or payment of dividends or distributions on CPI's capital stock; (ix) capital expenditures; and (x) other acquisition and investment activities. In addition, the Senior Credit Agreement requires that CPI, on a consolidated basis, maintain certain specified financial covenants, including a minimum fixed charge coverage ratio, minimum net worth and minimum EBITDA. As of October 2, 1998, CPI was in compliance with all covenants. 5. SENIOR SUBORDINATED NOTES The $100 million principal amount of Senior Subordinated Notes mature in 2005 and bear interest at 12% per annum, payable semiannually. The payment of principal of, premium and interest on, and other obligations evidenced by the Notes is subordinated in right of payment, as set forth in the indenture governing the Senior Subordinated Notes (the "Indenture"), to the prior payment in full of all senior indebtedness (as defined), including indebtedness under the Senior Credit Agreement, whether outstanding on the date of the Indenture or thereafter incurred. CPI's payment obligations under the Notes are jointly and severally guaranteed by Holding and CPI's subsidiaries. The Notes are not redeemable at CPI's option prior to August 1, 2000. Thereafter, the Notes are subject to redemption at the option of CPI, in whole or in part, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, thereon to the applicable redemption date, if redeemed during the 12-month period beginning on August 1 of the years indicated below:
Year Percentage ---- ---------- 2000 106.0% 2001 104.5% 2002 103.0% 2003 101.5% 2004 and thereafter 100.0%
Upon the occurrence of a change of control, each holder of Notes will have the right to require CPI to offer to repurchase all or any part of such holder's Notes. The Senior Credit Agreement currently prohibits CPI from making such an offer. In addition, the Indenture covering the Notes provides for various restrictions, including restrictions on mergers or the sales of CPI's assets, dividend payments, purchase, redemption, acquisition or retirement of equity interests of CPI or its affiliates, principal payment on any indebtedness of CPI or guarantors that is subordinated to the Notes, the incurrence of certain indebtedness, or the making of any restricted investment, as defined. -F-16- 56 COMMUNICATIONS & POWER INDUSTRIES , INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 due 2007 (the "Senior Preferred Stock"), including shares of Senior Preferred Stock which may be used to pay dividends on the Senior Preferred Stock if CPI so elects. Dividends on the Senior Preferred Stock accrue at the rate of 14% per annum and are payable quarterly, commencing on November 1, 1995. On or before August 1, 2000, CPI may, at its option and subject to debt covenant restrictions, pay dividends in cash or in shares of Senior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. After August 1, 2000, dividends may be paid only in cash. During the year ended October 2, 1998, CPI paid preferred dividends through the issuance of 29,029 shares of its Senior Redeemable Preferred Stock at a value of $100 per share. The Senior Preferred Stock is not redeemable prior to August 1, 2000. Thereafter, the Senior Preferred Stock will be redeemable at the option of CPI, in whole or in part from time to time, initially at 107% of the liquidation preference thereof and at decreasing prices thereafter to and including August 1, 2004 and thereafter at 100% of the liquidation preference thereof, together in each case with accumulated and unpaid dividends thereon. The Senior Preferred Stock is subject to mandatory redemption in whole on August 1, 2007 at a price equal to the liquidation preference thereof, plus accumulated and unpaid dividends. In the event of a change of control, CPI will be required to make an offer to each holder of shares of Senior Preferred Stock to repurchase all or a portion of such holder's Senior Preferred Stock at a price equal to 101% of the liquidation preference thereof, plus accumulated and unpaid dividends. The Senior Credit Agreement currently prohibits and the Indenture currently restricts CPI from making such an offer. In addition, CPI will be required to use the proceeds from certain asset sales to permanently reduce senior indebtedness of CPI, to invest in certain related assets or businesses or to offer to repurchase Senior Preferred Stock. Any such repurchases shall be effected at an offer price equal to 100% of the liquidation preference of the shares of Senior Preferred Stock purchased, plus accumulated and unpaid dividends. The Certificate of Designation covering the Senior Preferred Stock contains certain provisions that, among other things, limit the ability of CPI to incur indebtedness, pay dividends, incur liens, make loans or investments, transact with affiliates and engage in mergers and consolidations. CPI may, at its option, on any dividend payment date, exchange all, but not less than all, of the outstanding shares of Senior Preferred Stock into 14% Junior Subordinated Notes due 2007 (the "Exchange Notes"), so long as such exchange is permitted by the Senior Credit Agreement and the Indenture, in an aggregate principal amount not to exceed the aggregate liquidation preference, plus accumulated and unpaid dividends on the date of exchange. The Exchange Notes will be general unsecured obligations of CPI and will be subordinated to all existing and future senior indebtedness of CPI, including indebtedness under the Senior Credit Agreement and the Indenture. Except for terms relating to these subordination provisions, payment of interest on a quarterly basis, the option -F-17- 57 COMMUNICATIONS & POWER INDUSTRIES , INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED to issue additional Exchange Notes on or prior to August 1, 2000 in lieu of paying cash interest, optional redemption and the date on which repayment is mandatory (all of which terms would be similar to the terms of Senior Preferred Stock), the terms of the Exchange Notes will be generally identical to the Notes. 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 consummation of the Acquisition was $10.0 million. Dividends on the Junior Preferred Stock accrue at the rate of 14% per annum and are payable quarterly, commencing on November 1, 1995. On or before the redemption of the Senior Preferred Stock or the exchange of Senior Preferred Stock into Exchange Notes, CPI is required to pay dividends on the Junior Preferred Stock in additional fully paid and non-assessable shares of Junior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. After such redemption or exchange, CPI may, at its option and subject to debt and senior preferred stock covenant restrictions, pay dividends on the Junior Preferred Stock in cash or in additional fully paid and non-assessable shares of Junior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. During the year ended October 2, 1998, CPI paid preferred dividends through the issuance of 19,354 shares of its Junior Preferred Stock at a value of $100 per share . 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 $16.4 million, $17.1 million, and $16.9 million in Fiscal 1998, Fiscal 1997, and Fiscal 1996, respectively. Cash paid for taxes was $1.1 million, $1.7 million, and $524,000 in Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. Non-cash financing activities included the payment of preferred dividends by CPI on its Senior Redeemable Preferred Stock and its Junior Preferred Stock through the issuance of 29,029, 25,297 and 21,482 additional shares of its Senior Redeemable Preferred Stock and 19,354, 16,865 and 14,321 additional shares of its Junior Preferred Stock during Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. Amortization of discount and issue costs on the Senior Redeemable Preferred Stock was $214,000 for each of the three years Fiscal 1998, Fiscal 1997, and Fiscal 1996. -F-18- 58 COMMUNICATIONS & POWER INDUSTRIES , INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Equipment of $1.5 million and $1.6 million was acquired under capital leases for Fiscal 1998 and Fiscal 1997, respectively. 9. LEASE COMMITMENTS At October 2, 1998, CPI was committed to minimum rentals under noncancellable operating lease agreements primarily for land and facility space. CPI also leases certain computer equipment under capital leases that expire in 2003. As collateral for these capital leases, CPI has issued letters of credit totalling $1.5 million. A summary of future minimum lease payments (in thousands) follows:
Capital Operating Sublease Fiscal Year Leases Leases Income ----------- ------- --------- -------- 1999 $972 1,053 $ 487 2000 989 376 - 2001 989 296 - 2002 841 147 - 2003 104 62 - Thereafter - 5 - ------- --------- -------- Total future minimum lease payments 3,895 $ 1,939 $ 487 ======= ========= ======== Less amount representing interest, sales tax and additional obligations 806 ------- Present value of future minimum lease 3,089 payments Less current portion of obligations under capital leases 541 ------- Obligations under capital leases, less current portion $2,548 ======
Real estate taxes, insurance, and maintenance are also obligations of CPI. Rental expense under noncancellable operating leases amounted to $721,000, $734,000, and $777,000 for Fiscal 1998, Fiscal 1997, and Fiscal 1996, respectively. 10. CONTINGENCIES The amount of outstanding letters of credit provided for under CPI's Senior Credit Agreement was approximately $5.3 million as of October 2, 1998. These outstanding obligations are comprised of the following: $2.0 million to one foreign customer related to an advance payment guarantee, $1.5 million to two lenders related to capital lease arrangements and $1.8 million to various other beneficiaries related primarily to insurance needs and performance bond guarantees. Varian is currently a defendant in certain legal actions relating to the Predecessor and could incur an uninsured liability in one or more of them. The agreement for the sale of the Predecessor provides for Varian's retention of liability arising out of the above referenced litigation. Accordingly, in the -F-19- 59 COMMUNICATIONS & POWER INDUSTRIES , INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED opinion of management, the outcome of that litigation will not have a material adverse effect on the financial condition, results of operations or cash flows of CPI. Varian has also been named by the Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at sites to which Varian (including in some cases the Predecessor) is alleged to have shipped manufacturing waste for disposal. Varian is also involved in various stages of environmental investigation and/or remediation under the direction of, or in consultation with, local and/or state agencies at certain facilities of CPI. Uncertainty as to (a) the extent to which Varian caused, if at all, the conditions being investigated; (b) the extent of environmental contamination and risks; (c) the applicability of changing and complex environmental laws; (d) the number and financial viability of other potentially responsible parties; (e) the stage of the investigation and/or remediation; (f) the unpredictability of investigation and/or remediation costs (including as to when they will be incurred); (g) applicable clean-up standards; (h) the remediation (if any) which will ultimately be required; and (i) available technology make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. The agreement for the sale of the Predecessor provides for Varian's retention of liability arising out of investigative and remedial action and environmental claims for conditions existing as of the closing date at the above-referenced facilities. Accordingly, based on information currently available, management believes that the costs of these matters are not likely to have a material adverse effect on the financial condition, results of operations and cash flows of CPI. From time to time, CPI may be subject to other claims that arise in the ordinary course of business. In the opinion of management, all such matters involve amounts which would not have a material adverse effect on the Company's consolidated financial position if unfavorably resolved. 11. SEGMENTS AND RELATED INFORMATION CPI operates in a single business segment under the guidance of SFAS No. 14. CPI covers and is engaged in the development, manufacture and sale of a broad line of electron devices used in broadcasting, communications, and other commercial and military applications. CPI's North American operations (in the United States and Canada) are responsible for the design and development of all products as well as manufacturing and shipping to meet worldwide customer commitments. CPI's operations outside of North America consist of sales offices in certain foreign countries. Accordingly, for financial statement purposes, it is not meaningful to segregate operating profits for the foreign operations. Identifiable assets outside of North America are less than 10% of total consolidated assets. Information about CPI's sales to geographical regions are presented in the table below. Sales to unaffiliated customers is based on the location of the customer. -F-20- 60 COMMUNICATIONS & POWER INDUSTRIES , INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Net Sales ------------------------------------------ (Dollars in thousands) Fiscal Fiscal Fiscal 1998 1997 1996 -------- -------- -------- United States & Canada $163,472 $173,593 $171,656 Europe & Territories (1) 70,811 57,368 54,733 Other 26,405 22,478 31,060 -------- -------- -------- Total CPI Sales $260,688 $253,439 $257,449 ======== ======== ========
(1) Includes primarily Europe, Russia, Middle East and India. Export sales to unaffiliated customers located outside of North America, including Japan, Asia, Australia and South America, were $31.5 million, $24.2 million, and $27.6 million for Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. The U.S. Government is the only customer who accounted for 10% or more of consolidated net sales in Fiscal 1998, Fiscal 1997 and Fiscal 1996. Sales under prime contracts to the U.S. Government accounted for approximately $35.5 million, $34.0 million and $41.9 million of the Company's consolidated revenues for Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. 12. RESEARCH AND DEVELOPMENT CPI-sponsored research and development costs related to both present and future products are expensed currently. Customer-sponsored research and developments costs are charged to cost of sales to match revenue received. Total expenditures incurred by CPI on research and development are summarized as follows:
CPI Customer Total (Dollars in thousands) Sponsored Sponsored Incurred --------- --------- --------- 52-week period ended October 2, 1998 $ 7,455 $ 5,973 $13,428 53-week period ended October 3, 1997 7,681 5,897 13,578 52-week period ended September 27, 1996 8,308 7,250 15,558
-F-21- 61 COMMUNICATIONS & POWER INDUSTRIES , INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 13. PROVISION FOR INCOME TAXES Earnings (loss) before income taxes for domestic and non-U.S. operations is as follows:
52-week 53-week 52-week period ended period ended period ended October 2, October 3, September 27, (Dollars in thousands) 1998 1997 1996 ------------ ------------ ------------- Domestic $ 3,360 $ 7,381 $ 7,750 Non-U.S 5,567 3,391 2,661 ------- ------- ------- Total $ 8,927 $10,772 $10,411 ======= ======= =======
The provision (benefit) for income taxes is comprised of the following:
52-week 53-week 52-week period ended period ended period ended October 2, October 3, September 27, (Dollars in thousands) 1998 1997 1996 ------------ ------------ ------------- CURRENT U.S. federal $ 80 $ 1,677 $ 9,257 State (571) 573 1,957 Non-U.S 632 1,113 606 -------- -------- -------- Total Current 141 3,363 11,820 -------- -------- -------- DEFERRED U.S. federal 3,677 (5,699) (8,844) State (545) (1,098) (1,154) Non-U.S 477 434 246 -------- -------- -------- Total Deferred 3,609 (6,363) (9,752) -------- -------- -------- Provision (benefit) for income taxes $ 3,750 $ (3,000) $ 2,068 ======== ======== ========
-F-22- 62 COMMUNICATIONS & POWER INDUSTRIES , INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The significant components of the CPI's deferred tax assets and liabilities are as follows:
Fiscal Year (Dollars in thousands) 1998 1997 -------- -------- DEFERRED TAX ASSETS: Inventory $ 4,724 $ 4,770 Product warranty 3,945 2,523 Accrued vacation 2,193 1,999 Deferred compensation 62 525 Excess purchase price 10,359 10,426 Foreign tax credits 1,193 -- Other -- 2,124 -------- -------- Total deferred tax assets 22,476 22,367 DEFERRED TAX LIABILITIES: Accelerated depreciation (4,983) (2,645) Foreign jurisdictions, net (1,158) (681) Other (1,186) -- -------- -------- Total deferred tax liabilities (7,327) (3,326) Net deferred tax asset $ 15,149 $ 19,041 ======== ========
CPI has unutilized U.S. Federal foreign tax credits of $1,193,000 at the end of Fiscal 1998. The Federal foreign tax credits may be carried back two years and forward five years. Based upon the level of historical taxable income and projections for future taxable income, management believes that no valuation allowance is necessary at the end of Fiscal 1998 and Fiscal 1997. -F-23- 63 COMMUNICATIONS & POWER INDUSTRIES , INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The differences between the effective income tax rate and the statutory federal income tax rate are as follows:
52-week 53-week 52-week period ended period ended period ended October 2, October 3, September 27, 1998 1997 1996 ------------ ------------ ------------- Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income tax, net of federal tax benefit -- 6.4% 4.9% Rate differential on foreign income tax expense (benefit) and withholding tax 2.0% 3.0% .2% Foreign sales corporation -- -- (2.8%) Change to the beginning of year valuation allowance -- (74.3%) (19.2%) Other 5.0% 2.0% 1.8% ------ ------ ------ Effective tax rate 42.0% (27.9%) 19.9% ====== ====== ======
14. RETIREMENT AND PROFIT SHARING PLANS CPI provides a qualified 401(k) investment plan covering substantially all of its domestic and Canadian employees. The plan provides 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 $434,000 and $314,000 as of October 2, 1998 and October 3, 1997, respectively. Total contributions to these plans by CPI was $2.6 million for Fiscal 1998, $2.5 million for Fiscal 1997, and $2.6 million for Fiscal 1996. CPI's bonus program provides incentive bonuses to senior management if certain performance goals are achieved and to employees if these goals are exceeded. Such performance goals are measured based upon earnings before interest, taxes, depreciation and amortization, return on sales and asset utilization. -F-24- 64 COMMUNICATIONS & POWER INDUSTRIES , INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 15. TRANSACTIONS WITH VARIAN Sales to, and purchases from, Varian lines of business were as follows:
52-week 53-week 52-week period ended period ended period ended (Dollars in thousands) October 2, 1998 October 3, 1997 September 27, 1996 --------------- --------------- ------------------ Sales to Varian $9,652 $9,234 $12,809 Purchases from Varian 5,054 5,742 5,171
In connection with the Acquisition, CPI entered into various agreements with Varian that provide for various services to be performed by or for Varian or for products to be purchased from or provided to Varian. A summary of the significant agreements still in effect at the end of Fiscal 1998 are as follows: Supply Agreements. CPI and Varian entered into four product supply agreements which contain certain customary provisions pertaining to, among other things, pricing, shipment, delivery, acceptance and payment of certain products. Such terms will vary to a certain degree among the Supply Agreements in order to reflect differences in the types of products subject to the particular Supply Agreement and the arrangements between the parties with respect to such products. These agreements cover periods ranging from one to five years from the date of the Acquisition and, in the case of certain "Key Components," Varian has the right to extend the term of the agreement for an additional five years. The supply agreements generally impose upon CPI and Varian certain minimum purchase quantities and generally restrict CPI's ability to market certain specific products to third parties. Management believes that the terms of these supply agreements are no less favorable to CPI than that which would be obtained from independent third parties for the purchase or supply of similar products. Trademark License Agreement Generally, under the terms of the Trademark License Agreement, CPI is licensed to identify its products as "formerly made by Varian" for a period of ten years from the closing of the Acquisition. At the expiration of the 10-year period, CPI will not be permitted to utilize any Varian trademarks. CPI and Varian have also entered into certain other agreements covering access to certain of CPI's facilities as well as subleased and shared facilities. 16. RELATED PARTY TRANSACTIONS Holding and CPI have entered into an agreement to pay $362,000, plus out-of-pocket expenses, annually to an advisor group of Holding's majority shareholder. Certain individuals of the investor's advisor group are members of Holding's and CPI's respective Boards of Directors. -F-25- 65 COMMUNICATIONS & POWER INDUSTRIES , INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED In connection with Holding's 1995 Management Equity Plan, certain executive officers of CPI and Holding elected to pay a portion of the purchase price for their Management Shares by delivery of a secured promissory note to Holding. The aggregate principle amount of such Management Notes was $895,376 as of October 2, 1998. Of this amount, $700,000 is secured by a pledge of a portion (from 50% to 75%) of the Management Shares issued to each executive officer and is guaranteed by Varian. The balance of $195,376 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. 17. PARENT COMPANY DATA Holding has guaranteed CPI's senior debt obligations. Holding has no operations other than its ownership of CPI. The consolidated balance sheets of Holding as of October 2, 1998 and October 3, 1997 are substantially identical to that of CPI and its subsidiaries, other than the presentation of CPI's preferred stock as minority interest and the components of stockholders' equity of Holding and is summarized as follows (in thousands, except per share amounts):
October 2, October 3, ASSETS 1998 1997 --------- --------- Current Assets $ 111,276 113,457 Long-term Assets 117,936 123,939 --------- --------- Total assets $ 229,212 237,396 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities $ 65,319 72,990 Long-term debt and deferred taxes 126,298 131,534 --------- --------- Total liabilities 191,617 204,524 Senior Redeemable Preferred Stock of subsidiary 20,683 17,566 Junior Preferred Stock of subsidiary 14,400 12,465 Stockholders' Equity: Common stock ($.01 par value, 400,000 shares authorized, 197,270 and 199,350 shares issued and outstanding as of 1998 and 1997 2 2 Additional paid-in capital 19,181 19,677 Accumulated deficit (15,614) (15,738) Less stockholder loans (1,057) (1,100) --------- --------- Total Liabilities and stockholders' equity $ 229,212 237,396 ========= =========
-F-26- 66 COMMUNICATIONS & POWER INDUSTRIES , INC. and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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. 18. SUBSEQUENT EVENTS On October 6, 1998, CPI completed the acquisition of the Microwave Components Division ("MCD") of Aydin Corporation for approximately $8.8 million. The purchase was based on MCD net assets of approximately $2.4 million and is subject to adjustment based on a final closing balance sheet. In the future, this acquisition will be identified as the Solid State Products Division of CPI. -F-27- 67 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 October 2, 1998 and October 3, 1997, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the 52-week period ended October 2, 1998, the 53-week period ended October 3, 1997 and the 52-week period ended September 27, 1996. In connection with our audits of the consolidated financial statements for the periods indicated above, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of Holding's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Communications & Power Industries Holding Corporation and subsidiaries as of October 2, 1998 and October 3, 1997, the results of their operations and their cash flows for the 52-week period ended October 2, 1998, the 53-week period ended October 3, 1997, and the 52-week period ended September 27, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. s/KPMG PEAT MARWICK LLP Mountain View, California November 13, 1998 -F-28- 68 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
October 2, October 3, ASSETS 1998 1997 --------- --------- CURRENT ASSETS Cash and cash equivalents $ 448 2,027 Accounts receivable, net 49,484 52,326 Inventories 52,923 50,750 Deferred taxes 6,981 7,133 Other current assets 1,440 1,221 --------- --------- Total current assets 111,276 113,457 Property, plant, and equipment, net 78,099 79,994 Goodwill and other intangibles, net 25,147 24,144 Debt issue costs, net 6,522 7,893 Deferred taxes 8,168 11,908 --------- --------- Total assets $ 229,212 237,396 ========= ========= LIABILITIES, SENIOR REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Revolving credit facility $ 13,300 22,800 Current portion of term loans 6,200 5,700 Current portion of capital leases 541 -- Accounts payable - trade 13,140 10,419 Accrued expenses 15,612 15,088 Product warranty 3,734 4,211 Income taxes payable 10,259 11,975 Advance payments from customers 2,533 2,797 --------- --------- Total current liabilities 65,319 72,990 Senior term loans 23,750 29,950 Senior subordinated notes 100,000 100,000 Obligations under capital leases 2,548 1,584 --------- --------- Total liabilities 191,617 204,524 --------- --------- SENIOR REDEEMABLE PREFERRED STOCK ($.01 par value, 325,000 shares authorized; 225,808 and 196,779 shares issued and outstanding as of 1998 an 1997, respecively, liquidiation preference $100 per share) 20,683 17,566 --------- --------- JUNIOR PREFERRED STOCK OF SUBSIDIARY ($.01 par value, 525,000 shares authorized: 150,540 and 131,186 shares issued and outstanding as of 1998 and 1997, respectively, liquidiation preference $100 per share) Commitments and contingencies 14,400 12,465 --------- --------- STOCKHOLDERS' EQUITY Common stock ($.01 par value, 400,000 shares authorized; 197,270 and 199,350 shares issued and outstanding as of 1998 and 1997, respectively) 2 2 Additional paid-in capital 19,181 19,677 Accumulated deficit (15,614) (15,738) Stockholder loans (1,057) (1,100) --------- --------- Net stockholders' equity 2,512 2,841 Total liabilities, senior redeemable preferred stock and stockholders' equity $ 229,212 237,396 ========= =========
See accompanying notes to the consolidated financial statements. -F-29- 69 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
52-Week 53-Week 52-Week period ended period ended period ended October 2, October 3, September 27, 1998 1997 1996 -------- -------- -------- Sales $260,688 253,439 257,449 Cost of sales 194,410 183,678 184,482 -------- -------- -------- Gross profit 66,278 69,761 72,967 -------- -------- -------- Operating costs and expenses: Research and development 7,455 7,681 8,308 Selling and marketing 19,168 19,701 19,886 General and administrative 12,935 12,568 15,468 -------- -------- -------- Total operating costs and expenses 39,558 39,950 43,662 -------- -------- -------- Operating income 26,720 29,811 29,305 Interest expense 17,793 19,039 18,894 -------- -------- -------- Earnings before taxes 8,927 10,772 10,411 Income tax expense (benefit) 3,750 (3,000) 2,068 -------- -------- -------- Net earnings before preferred stock dividends 5,177 13,772 8,343 of subsidiary Preferred dividends: Senior Redeemable Preferred Stock 2,904 2,530 2,148 Junior Preferred Stock 1,935 1,686 1,432 -------- -------- -------- Net earnings attributable to Common Stock $ 338 9,556 4,763 -------- -------- --------
See accompanying notes to the consolidated financial statements. -F-30- 70 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, September 29, 1995 2 19,741 (29,627) (1,000) (10,884) Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) (214) Payment of dividends on Senior Redeemable Preferred Stock (2,149) (2,149) Payment of dividends on Junior Preferred Stock (1,433) (1,433) Net earnings 8,343 8,343 Repayment of stockholder loans 25 25 Interest accrued on stockholder loans (67) (67) -------- -------- -------- -------- -------- Balances, September 27, 1996 2 19,741 (25,080) (1,042) (6,379) Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) (214) Payment of dividends on Senior Redeemable Preferred Stock (2,530) (2,530) Payment of dividends on Junior Preferred Stock (1,686) (1,686) Net earnings 13,772 13,772 Interest accrued on stockholder loans (58) (58) Purchase of Treasury Stock (64) (64) -------- -------- -------- -------- -------- Balances, October 3, 1997 2 19,677 (15,738) (1,100) 2,841 Amortization of discount and issue costs on Senior Redeemable Preferred Stock (214) (214) Payment of dividends on Senior Redeemable Preferred Stock (2,904) (2,904) Payment of dividends on Junior Preferred Stock (1,935) (1,935) Net earnings 5,177 5,177 Repayment of stockholder loans 80 80 Interest accrued on stockholder loans (37) (37) Issuance of Treasury Stock 696 696 Purchase of Treasury Stock (1,192) (1,192) -------- -------- -------- -------- -------- Balances, October 2, 1998 $ 2 19,181 (15,614) (1,057) 2,512 ======== ======== ======== ======== ========
See accompanying notes to the consolidated financial statements -F-31- 71 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
52-Week 53-Week 52-Week period ended period ended period ended October 2, October 3, September 27, 1998 1997 1996 -------- -------- -------- OPERATING ACTIVITIES Net cash provided by operating activities $ 23,309 5,320 11,290 -------- -------- -------- INVESTING ACTIVITIES Proceeds from sale of property, plant and equipment 61 2,545 -- Purchase of property, plant, and equipment (6,565) (9,183) (12,472) Product line acquisitions (2,730) -- -- Other investing activities -- -- (114) -------- -------- -------- Net cash used in investing activities (9,234) (6,638) (12,586) -------- -------- -------- FINANCING ACTIVITIES Repayments on capital leases (38) -- -- Net (Repayments)/Proceeds from revolving credit facility (9,500) 5,800 (2,600) Repayments on Senior term loans (5,700) (3,950) (2,400) Repayments on debt issuance costs -- (194) (243) Issuance of treasury stock 696 -- -- Purchases on treasury stock (1,192) (64) -- Repayments of stockholder loans 80 -- 25 -------- -------- -------- Net cash provided by (used in) financing activities (15,654) 1,592 (5,218) -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,579) 274 (6,514) Cash and cash equivalents at beginning of period 2,027 1,753 8,267 -------- -------- -------- Cash and cash equivalents at end of period $ 448 2,027 1,753 ======== ======== ========
See accompanying notes to the consolidated financial statements. -F-32- 72 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (in thousands)
52-Week 53-Week 52-Week period ended period ended period ended October 2, October 3, September 27, 1998 1997 1996 -------- -------- -------- DETAIL OF NET CASH PROVIDED BY OPERATING ACTIVITIES Net earnings before preferred $ 5,177 13,772 8,343 dividends of subsidiary Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 9,981 8,572 6,670 Amortization of deferred debt issue costs 1,372 1,952 1,962 Amortization of goodwill and intangibles 1,316 1,058 1,061 Deferred taxes 3,892 (6,363) (9,752) Interest accrued on stockholder loans (37) (58) (67) (Gain)/Loss on the disposition of assets 32 (471) -- Changes in operating assets and liabilities: Accounts receivable 2,842 (1,946) (5,637) Inventories (1,863) (4,279) (1,706) Other current assets (219) 913 433 Accounts payable - trade 2,721 (108) (5,947) Accrued expenses 552 (7,283) 2,585 Product warranty (477) (116) (363) Income tax payable (1,716) 1,415 10,560 Advance payments from customers (264) (1,738) 3,148 -------- -------- -------- Net cash provided by operating activities $ 23,309 5,320 11,290 ======== ======== ========
See accompanying notes to the consolidated financial statements. -F-33- 73 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 locations 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's") Electron Device business ("the Acquisition") 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. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Cash and Cash Equivalents Currency on hand, demand deposits, and all highly liquid investments with an original maturity of three months or less are considered to be cash and cash equivalents. -F-34- 74 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Revenue Recognition Sales and related cost of sales are recognized primarily upon shipment of products. Sales and related cost of sales under long-term contracts to commercial customers and the U.S. government are recognized primarily as units are delivered. The estimated sales values of performance under certain 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. Property, Plant, and Equipment Property, plant, and equipment acquired by the Company at the date of the Acquisition are carried at fair value as of the date of acquisition. 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. Accounting for Long-Lived Assets In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, 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 -F-35- 75 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED lives ranging from 15 to 25 years. Accumulated amortization was $3.6 million and $2.3 million as of October 2, 1998 and October 3, 1997, respectively. During Fiscal 1998, CPI acquired two product lines with net assets of approximately $0.4 million for a purchase price of approximately $2.7 million. The $2.3 million difference between the purchase price and the fair value of the net assets acquired was allocated to goodwill and other intangibles and will be amortized over estimated useful lives ranging from 3 to 15 years. These product line acquisitions were accounted for as a purchase. Warranty The Company's products are generally warranted for a variety of periods, typically one to five 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. 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 1998, Fiscal 1997 or Fiscal 1996. Varian retained the environmental liabilites existing at the time of the Acquisition Deferred Debt Issue Costs Costs incurred related to the issuance of CPI's long-term debt and other credit facilities are capitalized and amortized over the estimated time the obligations are expected to be outstanding using the effective interest method. The amortization period used for the deferred costs associated with the revolving credit facility, the Senior Term Loans, and the Senior Subordinated Notes is 3 years, 7 years and 10 years, respectively. Senior Redeemable Preferred Stock CPI's Senior Redeemable Preferred Stock was issued in units with an aggregate of 10,500 shares of common stock of Holding. The fair value of the shares of Holding's common stock issued, and the issue costs associated with the issuance of the Senior Redeemable Preferred Stock, have been reflected as a reduction of the Senior Redeemable Preferred Stock issued and is being amortized via a charge to accumulated deficit over the period until mandatory redemption, 12 years, using the effective interest method. Income Taxes Income taxes are accounted for under the asset and liability method. Holding's deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis and the financial reporting basis of assets and liabilities. The 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. -F-36- 76 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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. The U.S. defense budget has been declining since the mid-1980s. Although management believes that the Company has successfully responded to shrinking defense budgets by refocusing its operations on commercial and other non-defense applications, a significant further decline in U.S. or global military spending could have a material adverse effect on the Company's sales and earnings. Additionally, companies engaged in supplying defense-related equipment and services to government agencies are subject to certain business risks, including the ability of the U.S. Government to suspend them from receiving new contracts or to terminate existing contracts for the U.S. Government's convenience or for the default of the contractor. In addition, the U.S. Government could terminate contracts due to insufficient or terminated congressional appropriations. The Company's contracts with foreign governmental defense agencies are subject to similar limitations and risks as those encountered with U.S. Government contracts. The Company believes that both its customer and industry base is well diversified, however, changes in the marketplace of any of the above named industries and/or volatility in the world's industrial economies may significantly affect management's estimates and the Company's performance. 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. 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 income. The aggregate transaction and exchange gains and losses were a $263,000 gain, a $463,000 loss and a $296,000 loss for Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. Fair Value of Financial Instruments Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The carrying value of the Company's cash and cash equivalents, accounts receivable and accounts payable approximate their fair values due to the relatively short period to maturity of the instruments. The fair value of CPI's Senior Subordinated Notes, based on quoted market prices or pricing models using current market rates, has been quoted at a level of 105 1/4 as of December 1998. -F-37- 77 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Change in Accounting Estimate During Fiscal 1998, the Company reviewed and revised downward its estimate of disposal costs used in its calculation of lower of cost or market write-downs for long-term contracts to more closely reflect its cost structure versus the assumptions carried forward from the predecessor's operations for sales related expenses. The change resulted in an increase to net income of approximately $1 million. 3. BALANCE SHEET COMPONENTS Accounts Receivable Accounts receivable are stated net of allowances for doubtful accounts of $636,000 and $282,000 as of October 2, 1998 and October 3, 1997, respectively. Inventories Inventories are stated at the lower of average cost or market (net realizable value). The main components of inventories are as follows:
Fiscal Year (Dollars in thousands) 1998 1997 ------- ------- Raw materials and parts $38,327 $36,814 Work in process 13,572 12,274 Finished goods 1,024 1,662 ------- ------- Total inventories $52,923 $50,750 ======= =======
Property, Plant, and Equipment The main components of property, plant, and equipment are as follows:
Fiscal Year (Dollars in thousands) 1998 1997 --------- --------- Land and land leaseholds $ 36,408 36,284 Buildings 18,732 17,989 Machinery and equipment 42,556 38,121 Leased equipment 3,129 1,584 Construction in progress 2,808 1,736 --------- --------- Subtotal 103,633 95,714 Less accumulated depreciation and amortization (25,534) (15,720) --------- --------- Net property, plant and equipment $ 78,099 79,994 ========= =========
F-38 78 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Accumulated amortization of equipment under capital lease arrangements was $547,000 and $33,000 as of October 2, 1998 and October 3, 1997, respectively, and is included in depreciation expense on the statement of cash flows. Accrued Expenses Accrued expenses are comprised of the following:
Fiscal Year (Dollars in thousands) 1998 1997 ------- ------- Taxes $ 818 $ 586 Payroll and employee benefits 9,417 9,939 Accrued interest 2,520 2,483 Other 2,857 2,080 ------- ------- Total accrued expenses $15,612 $15,088 ======= =======
4. SENIOR CREDIT AGREEMENT The Senior Credit Agreement provides for two term loans in the aggregate amount of $42.0 million, comprised of a $25.0 million "Term Loan A" tranche and a $17.0 million "Term Loan B" tranche, and a $35.0 million revolving credit facility which includes a sub-facility for letters of credit. This sub-facility was increased from $5.0 million to $7.5 million effective June 27, 1997. Availability of advances under the Revolving Credit Facility is subject to a borrowing base test. CPI's obligations under the Senior Credit Agreement are secured by substantially all of its assets (including the issued and outstanding capital stock of its direct and indirect subsidiaries) and are guaranteed by Holding and all of CPI's subsidiaries. As of October 2, 1998, CPI had $16.4 million available under the Revolving Credit Facility of which $2.2 million was available for issuance of letters of credit. As of October 6, 1998, the Company amended this Agreement and increased the Revolving Credit Facility by $10.0 million to allow CPI to operate with a similar level of liquidity as it had prior to its acquisition of the Microwave Components Division of Aydin Corporation that was also completed on October 6, 1998. Borrowings under the Revolving Credit Facility and Term Loan A bear interest at a rate equal to the Eurodollar Rate (approximately 5.65% as of October 2, 1998) plus 2.5% per annum or the Base Rate (8.25% as of October 2, 1998) plus 1.0% per annum and borrowings under Term Loan B bear interest at a rate equal to the Eurodollar Rate plus 3.0% per annum or Base Rate plus 1.5% per annum, in each case as selected by CPI. Applicable interest rates on Term Loan A and the Revolving Credit Facility will be reduced by up to 0.5% per annum if CPI meets and continues to meet certain financial tests. In addition to customary fronting and other fees, CPI will pay a fee equal to 1.5% per annum on undrawn amounts of letters of credit and a commitment fee of 0.5% per annum on unused facilities under the Revolving Credit Facility. -F-39- 79 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The Term Loans are subject to quarterly payments in the aggregate annual amounts as follows (in thousands):
Term Term Fiscal Year Loan A Loan B ----------- ------- ------- 1999 $ 6,000 $ 200 2000 7,500 200 2001 -- 6,050 2002 -- 10,000 2003 -- -- ------- ------- $13,500 $16,450 ======= =======
As of October 2, 1998, CPI had made payments of $11.5 million against Term Loan A and $0.55 million against Term Loan B, of which, $5.5 million and $0.2 million were paid in Fiscal 1998 against Term Loan A and Term Loan B, respectively. The Revolving Credit Facility matures on the date five years after the closing of the Acquisition. CPI is required to make prepayments on the Senior Facility with 75% of Excess Cash Flow (as defined in the Senior Credit Agreement), 75% of the net proceeds of certain stock issuances and 100% of the net proceeds from certain asset sales. Such prepayments will be applied to remaining principal installments of the Term Loans allocated on a pro rata basis and following repayment of the Term Loans, to reduce permanently the Revolving Credit Facility. In addition, CPI is subject to certain affirmative and negative covenants customarily contained in agreements of this type, including, without limitation, covenants that restrict, subject to specified exceptions: (i) incurrence of additional indebtedness and other obligations; (ii) mergers or consolidations; (iii) asset sales; (iv) changes of control and corporate structure; (v) granting or incurrence of liens to secure any other indebtedness (including the Notes or the notes for which the Senior Preferred Stock is exchangeable (the "Exchange Notes")); (vi) prepayment or modification of the terms of other indebtedness (including the Notes and the Exchange Notes); (vii) engaging in transactions with affiliates; (viii) declaration or payment of dividends or distributions on CPI's capital stock; (ix) capital expenditures; and (x) other acquisition and investment activities. In addition, the Senior Credit Agreement requires that CPI, on a consolidated basis, maintain certain specified financial covenants, including a minimum fixed charge coverage ratio, minimum net worth and minimum EBITDA. As of October 2, 1998, CPI was in compliance with all covenants. 5. SENIOR SUBORDINATED NOTES The $100 million principal amount of Senior Subordinated Notes mature in 2005 and bear interest at 12% per annum, payable semiannually. The payment of principal of, premium and interest on, and other obligations evidenced by the Notes is subordinated in right of payment, as set forth in the indenture governing the Senior Subordinated Notes (the "Indenture"), to the prior payment in full of all senior indebtedness (as defined), including indebtedness under the Senior Credit Agreement, -F-40- 80 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED whether outstanding on the date of the Indenture or thereafter incurred. CPI's payment obligations under the Notes are jointly and severally guaranteed by Holding and CPI's subsidiaries. The Notes are not redeemable at CPI's option prior to August 1, 2000. Thereafter, the Notes are subject to redemption at the option of CPI, in whole or in part, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, thereon to the applicable redemption date, if redeemed during the 12-month period beginning on August 1 of the years indicated below:
Year Percentage ---- ---------- 2000 106.0% 2001 104.5% 2002 103.0% 2003 101.5% 2004 and thereafter 100.0%
Upon the occurrence of a change of control, each holder of Notes will have the right to require CPI to offer to repurchase all or any part of such holder's Notes. The Senior Credit Agreement currently prohibits CPI from making such an offer. In addition, the Indenture covering the Notes provides for various restrictions, including restrictions on mergers or the sales of CPI's assets, dividend payments, purchase, redemption, acquisition or retirement of equity interests of CPI or its affiliates, principal payment on any indebtedness of CPI or guarantors that is subordinated to the Notes, the incurrence of certain indebtedness, or the making of any restricted investment, as defined. 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 due 2007 (the "Senior Preferred Stock"), including shares of Senior Preferred Stock which may be used to pay dividends on the Senior Preferred Stock if CPI so elects. Dividends on the Senior Preferred Stock accrue at the rate of 14% per annum and are payable quarterly, commencing on November 1, 1995. On or before August 1, 2000, CPI may, at its option and subject to debt covenant restrictions, pay dividends in cash or in shares of Senior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. After August 1, 2000, dividends may be paid only in cash. During the year ended October 2, 1998, CPI paid preferred dividends through the issuance of 29,029 shares of its Senior Redeemable Preferred Stock at a value of $100 per share. The Senior Preferred Stock is not redeemable prior to August 1, 2000. Thereafter, the Senior Preferred Stock will be redeemable at the option of CPI, in whole or in part from time to time, initially at 107% of the liquidation preference thereof and at decreasing prices thereafter to and including August 1, 2004 and thereafter at 100% of the liquidation preference thereof, together in each case with accumulated and unpaid dividends thereon. 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. -F-41- 81 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED In the event of a change of control, CPI will be required to make an offer to each holder of shares of Senior Preferred Stock to repurchase all or a portion of such holder's Senior Preferred Stock at a price equal to 101% of the liquidation preference thereof, plus accumulated and unpaid dividends. The Senior Credit Agreement currently prohibits and the Indenture currently restricts CPI from making such an offer. In addition, CPI will be required to use the proceeds from certain asset sales to permanently reduce senior indebtedness of CPI, to invest in certain related assets or businesses or to offer to repurchase Senior Preferred Stock. Any such repurchases shall be effected at an offer price equal to 100% of the liquidation preference of the shares of Senior Preferred Stock purchased, plus accumulated and unpaid dividends. The Certificate of Designation covering the Senior Preferred Stock contains certain provisions that, among other things, limit the ability of CPI to incur indebtedness, pay dividends, incur liens, make loans or investments, transact with affiliates and engage in mergers and consolidations. CPI may, at its option, on any dividend payment date, exchange all, but not less than all, of the outstanding shares of Senior Preferred Stock into 14% Junior Subordinated Notes due 2007 (the "Exchange Notes"), so long as such exchange is permitted by the Senior Credit Agreement and the Indenture, in an aggregate principal amount not to exceed the aggregate liquidation preference, plus accumulated and unpaid dividends on the date of exchange. The Exchange Notes will be general unsecured obligations of CPI and will be subordinated to all existing and future senior indebtedness of CPI, including indebtedness under the Senior Credit Agreement and the Indenture. Except for terms relating to these subordination provisions, payment of interest on a quarterly basis, the option to issue additional Exchange Notes on or prior to August 1, 2000 in lieu of paying cash interest, optional redemption and the date on which repayment is mandatory (all of which terms would be similar to the terms of Senior Preferred Stock), the terms of the Exchange Notes will be generally identical to the Notes. 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 consummation of the Acquisition was $10.0 million. Dividends on the Junior Preferred Stock accrue at the rate of 14% per annum and are payable quarterly, commencing on November 1, 1995. On or before the redemption of the Senior Preferred Stock or the exchange of Senior Preferred Stock into Exchange Notes, CPI is required to pay dividends on the Junior Preferred Stock in additional fully paid and non-assessable shares of Junior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. After such redemption or exchange, CPI may, at its option and subject to debt and senior preferred stock covenant restrictions, pay dividends on the Junior Preferred Stock in cash or in additional fully paid and non-assessable shares of Junior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. During the year ended October 2, 1998, CPI paid preferred dividends through the issuance of 19,354 shares of its Junior Preferred Stock at a value of $100 per share. -F-42- 82 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 $16.4 million, $17.1 million, and $16.9 million in Fiscal 1998, Fiscal 1997, and Fiscal 1996, respectively. Cash paid for taxes was $1.1 million, $1.7 million, and $524,000 in Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. Non-cash financing activities included the payment of preferred dividends by CPI on its Senior Redeemable Preferred Stock and its Junior Preferred Stock through the issuance of 29,029, 25,297 and 21,482 additional shares of its Senior Redeemable Preferred Stock and 19,354, 16,865 and 14,321 additional shares of its Junior Preferred Stock during Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. Amortization of discount and issue costs on the Senior Redeemable Preferred Stock was $214,000 for each of the three years Fiscal 1998, Fiscal 1997 and Fiscal 1996. Equipment of $1.5 million and $1.6 million was acquired under capital leases for Fiscal 1998 and Fiscal 1997, respectively. 9. LEASE COMMITMENTS At October 2, 1998, the Company was committed to minimum rentals under noncancellable operating lease agreements primarily for land and facility space. The Company also leases certain computer equipment under capital leases that expire in 2003. As collateral for these capital leases, the Company has issued letters of credit totalling $1.5 million. A summary of future minimum lease payments (in thousands) follows:
Capital Operating Sublease Fiscal Year Leases Leases Income ----------- ------ ------ ------ 1999 $972 $1,053 $487 2000 989 376 -- 2001 989 296 -- 2002 841 147 -- 2003 104 62 -- Thereafter -- 5 -- ---------- ----------- ---------- Total future minimum lease payments 3,895 $1,939 $487 =========== ========== Less amount representing interest, sales tax and additional obligations 806 --------- Present value of future minimum lease payments 3,089 Less current portion of obligations under capital leases 541 --------- Obligations under capital leases, less current portion $ 2,548 =========
-F-43- 83 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Real estate taxes, insurance, and maintenance are also obligations of the Company. Rental expense under noncancellable operating leases amounted to $721,000, $734,000, and $777,000 for Fiscal 1998, Fiscal 1997, and Fiscal 1996, respectively. 10. CONTINGENCIES The amount of outstanding letters of credit provided for under CPI's Senior Credit Agreement was approximately $5.3 million as of October 2, 1998. These outstanding obligations are comprised of the following: $2.0 million to one foreign customer related to an advance payment guarantee, $1.5 million to two lenders related to capital lease arrangements and $1.8 million to various other beneficiaries related primarily to insurance needs and performance bond guarantees. Varian is currently a defendant in certain legal actions relating to the Predecessor and could incur an uninsured liability in one or more of them. The agreement for the sale of the Predecessor provides for Varian's retention of liability arising out of the above referenced litigation. Accordingly, in the opinion of management, the outcome of that litigation will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. Varian has also been named by the Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at sites to which Varian (including in some cases the Predecessor) is alleged to have shipped manufacturing waste for disposal. Varian is also involved in various stages of environmental investigation and/or remediation under the direction of, or in consultation with, local and/or state agencies at certain facilities of the Company. Uncertainty as to (a) the extent to which Varian caused, if at all, the conditions being investigated; (b) the extent of environmental contamination and risks; (c) the applicability of changing and complex environmental laws; (d) the number and financial viability of other potentially responsible parties; (e) the stage of the investigation and/or remediation; (f) the unpredictability of investigation and/or remediation costs (including as to when they will be incurred); (g) applicable clean-up standards; (h) the remediation (if any) which will ultimately be required; and (i) available technology make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. The agreement for the sale of the Predecessor provides for Varian's retention of liability arising out of investigative and remedial action and environmental claims for conditions existing as of the closing date at the above-referenced facilities. Accordingly, based on information currently available, management believes that the costs of these matters are not likely to have a material adverse effect on the financial condition, results of operations and cash flows of CPI. From time to time, the Company may be subject to other claims that arise in the ordinary course of business. In the opinion of management, all such matters involve amounts which would not have a material adverse effect on the Company's consolidated financial position if unfavorably resolved. -F-44- 84 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 11. SEGMENTS AND RELATED INFORMATION The Company operates in a single business segment under the guidance of SFAS No. 14. The Company covers and is engaged in the development, manufacture and sale of a broad line of electron devices used in broadcasting, communications, and other commercial and military applications. CPI's North American operations (in the United States and Canada) are responsible for the design and development of all products as well as manufacturing and shipping to meet worldwide customer commitments. CPI's operations outside of North America consist of sales offices in certain foreign countries. Accordingly, for financial statement purposes, it is not meaningful to segregate operating profits for the foreign operations. Identifiable assets outside of North America are less than 10% of total consolidated assets. Information about CPI's sales to geographical regions are presented in the table below. Sales to unaffiliated customers is based on the location of the customer.
(Dollars in thousands) Net Sales - ---------------------- --------------------------------------- 1998 1997 1996 --------- ---------- --------- United States & Canada $ 163,472 $ 173,593 $ 171,656 Europe & Territories(1) 70,811 57,368 54,733 Other 26,405 22,478 31,060 ========= ========== ========= Total CPI Sales $ 260,688 $ 253,439 $ 257,449 ========= ========== =========
(1) Includes primarily Europe, Russia, Middle East and India. Export sales to unaffiliated customers located outside of North America, including Japan, Asia, Australia and South America, were $ 31.5 million, $24.2 million, and $27.6 million for Fiscal 1998, Fiscal 1997, Fiscal 1996, respectively. The U.S. Government is the only customer who accounted for 10% or more of consolidated net sales in Fiscal 1998, Fiscal 1997 and Fiscal 1996. Sales under prime contracts to the U.S. Government accounted for approximately $35.5 million, $34.0 million and $41.9 million of the Company's consolidated revenues for Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. 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:
CPI Customer Total (Dollars in thousands) Sponsored Sponsored Incurred ---------------------- --------- ------------ ----------- 52-week period ended October 2, 1998 $7,455 $5,973 $13,428 53-week period ended October 3, 1997 7,681 5,897 13,578 52-week period ended September 27, 1996 8,308 7,250 15,558
-F-45- 85 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 13. PROVISION FOR INCOME TAXES Earnings (loss) before income taxes for domestic and non-U.S. operations is as follows:
52-week 53-week 52-week period ended period ended period ended (Dollars in thousands) October 2, October 3, September 27, ---------------------- 1998 1997 1996 --------------- --------------- ---------------- Domestic $ 3,360 $ 7,381 $ 7,750 Non-U.S. 5,567 3,391 2,661 --------------- --------------- ---------------- Total $ 8,927 $ 10,772 $ 10,411 =============== =============== ================
The provision (benefit) for income taxes is comprised of the following:
52-week 53-week 52-week period ended period ended Period ended (Dollars in thousands) October 2, October 3, September 27, - ---------------------- 1998 1997 1996 ------- ------- ------- CURRENT U.S. federal $ 80 $ 1,677 $ 9,257 State (571) 573 1,957 Non-U.S. 632 1,113 606 ------- ------- ------- Total Current 141 3,363 11,820 DEFERRED U.S. federal 3,677 (5,699) (8,844) State (545) (1,098) (1,154) Non-U.S. 477 434 246 ------- ------- ------- Total Deferred 3,609 (6,363) (9,752) ------- ------- ------- Provision (benefit) for income taxes $ 3,750 $(3,000) $ 2,068 ======= ======= =======
-F-46- 86 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Significant items making up deferred tax assets and liabilities are as follows:
Fiscal Year -------------------------- (Dollars in thousands) 1998 1997 ---------------------- -------- -------- DEFERRED TAX ASSETS: Inventory $ 4,724 $ 4,770 Product warranty 3,945 2,523 Accrued vacation 2,193 1,999 Deferred compensation 62 525 Excess purchase price 10,359 10,426 Foreign tax credits 1,193 -- Other -- 2,124 -------- -------- 22,476 22,367 DEFERRED TAX LIABILITIES: Accelerated depreciation (4,983) (2,645) Foreign jurisdictions, net (1,158) (681) Other (1,186) -- -------- -------- Total deferred tax (7,327) (3,326) liabilities Net deferred tax asset $ 15,149 $ 19,041 ======== ========
CPI has unutilized U.S. Federal foreign tax credits of $1,193,000 at the end of Fiscal 1998. The Federal foreign tax credits may be carried back two years and forward five years. Based upon the level of historical taxable income and projections for future taxable income, management believes that no valuation allowance is necessary at the end of Fiscal 1998 and Fiscal 1997. The differences between the effective income tax rate and the statutory federal income tax rate is as follows:
52-week 53-week 52-week period ended period ended period ended October 2, October 3, September 27, 1998 1997 1996 ------------- ---------- ----------- Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income tax, net of federal tax benefit -- 6.4% 4.9% Rate differential on foreign income tax expense (benefit) and withholding tax 2.0% 3.0% .2% Foreign sales corporation -- -- (2.8%) Change to the beginning of year valuation allowance -- (74.3%) (19.2%) Other 5.0% 2.0% 1.8% ------ ------ ------ Effective tax rate 42.0% (27.9%) 19.9% ====== ====== ======
-F-47- 87 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries 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 and Canadian employees. The plan provides 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 $434,000 and $314,000 as of October 2, 1998 and October 3, 1997, respectively. Total contributions to these plans by CPI was $2.6 million for Fiscal 1998, $2.5 million for Fiscal 1997, and $2.6 million for Fiscal 1996 . 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. TRANSACTIONS WITH VARIAN Sales to, and purchases from, Varian lines of business were as follows:
52-week 53-week 52-week period ended period ended period ended (Dollars in thousands) October 2, 1998 October 3, 1997 September 27, 1996 ---------------------- --------------- --------------- ------------------ Sales to Varian $9,652 $9,234 $12,809 Purchases from Varian 5,054 5,742 5,171
In connection with the Acquisition, CPI entered into various agreements with Varian that provide for various services to be performed by or for Varian or for products to be purchased from or provided to Varian. A summary of the significant agreements are as follows: Supply Agreements. CPI and Varian entered into four product supply agreements which contain certain customary provisions pertaining to, among other things, pricing, shipment, delivery, acceptance and payment of certain products. Such terms will vary to a certain degree among the Supply Agreements in order to reflect differences in the types of products subject to the particular Supply Agreement and the arrangements between the parties with respect to such products. These agreements cover periods ranging from one to five years from the date of the Acquisition and, in the case of certain "Key Components," Varian has the right to extend the term of the agreement for an additional five years. The supply agreements generally impose upon CPI and Varian certain minimum purchase quantities and generally restrict CPI's ability to market certain specific products to third parties. Management believes that the terms of these supply agreements are no less favorable to CPI than that which would be obtained from independent third parties for the purchase or supply of similar products. -F-48- 88 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Trademark License Agreement Generally, under the terms of the Trademark License Agreement, CPI is licensed to identify its products as "formerly made by Varian" for a period of ten years from the closing of the Acquisition. At the expiration of the 10-year period, CPI will not be permitted to utilize any Varian trademarks. CPI and Varian have also entered into certain other agreements covering access to certain of CPI's facilities as well as subleased and shared facilities. 16. RELATED PARTY TRANSACTIONS Holding and CPI have entered into an agreement to pay $362,000, plus out-of-pocket expenses, annually to an advisor group of Holding's majority shareholder. Certain individuals of the investor's advisor group are members of Holding's and CPI's respective Boards of Directors. In connection with Holding's 1995 Management Equity Plan, certain executive officers of CPI and Holding elected to pay a portion of the purchase price for their Management Shares by delivery of a secured promissory note to Holding. The aggregate principle amount of such Management Notes was $895,376 as of October 2, 1998. Of this amount, $700,000 is secured by a pledge of a portion (from 50% to 75%) of the Management Shares issued to each executive officer and is guaranteed by Varian. The balance of $195,376 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. 17. GUARANTEES Holding has guaranteed CPI's senior debt obligations. Holding has no operations other than its ownership of CPI. The consolidated balance sheets of CPI as of October 2, 1998 and October 3, 1997 are substantially identical to that of Holding and its subsidiaries. 18. SUBSEQUENT EVENTS On October 6, 1998, CPI completed the acquisition of the Microwave Components Division ("MCD") of Aydin Corporation for approximately $8.8 million. The purchase was based on MCD net assets of approximately $2.4 million and is subject to adjustment based on a final closing balance sheet. Going forward, this acquisition will be identified as the Solid State Products Division of CPI. -F-49- 89 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 September 27, 1996: Allowance for doubtful accounts receivable 200 -- (4) 196 53-week period ended October 3, 1997: Allowance for doubtful accounts receivable 196 178 (92) 282 52-week period ended October 2, 1998: Allowance for doubtful accounts receivable 282 383 (29) 636
-F-50- 90 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 September 27, 1996: Allowance for doubtful accounts receivable 200 -- (4) 196 53-week period ended October 3, 1997: Allowance for doubtful accounts receivable 196 178 (92) 282 53-week period ended October 2, 1998: Allowance for doubtful accounts receivable 282 383 (29) 636
-F-51- 91 INDEX TO EXHIBITS
Exhibit No. Description - ----------- ----------- 10.1.4 Fourth Amendment to Credit Agreement among CPI, Holding, the other obligors named therein, the lenders named therein and Bankers Trust Company as Agent, dated as of October 6, 1998. 27.1 Financial Data Schedule (Communications & Power Industries, Inc.) 27.2 Financial Data Schedule (Communications & Power Industries Holding Corporation)
EX-10.1.4 2 FOURTH AMENDMENT TO CREDIT AGREEMENT 1 AMENDMENT NO. 4 TO CREDIT AGREEMENT This AMENDMENT No. 4 TO CREDIT AGREEMENT (this "Amendment"), is made and entered into as of October 6 , 1998, among COMMUNICATIONS & POWER INDUSTRIES, INC. (the "Borrower"), COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION, CPI SUBSIDIARY HOLDINGS INC., COMMUNICATIONS & POWER INDUSTRIES INTERNATIONAL INC., COMMUNICATIONS & POWER INDUSTRIES ASIA INC., COMMUNICATIONS & POWER INDUSTRIES ITALIA S.R.L., COMMUNICATIONS & POWER INDUSTRIES EUROPE LIMITED, COMMUNICATIONS & POWER INDUSTRIES CANADA INC., COMMUNICATIONS & POWER INDUSTRIES AUSTRALIA PTY LIMITED, CPI SALES CORP. (collectively, the "Obligors"), BANKERS TRUST COMPANY, as agent (the "Agent"), and the various lenders (the "Lenders") from time to time party to the Credit Agreement, dated as of August 11, 1995 (as the same has been amended and modified through the date hereof, the "Agreement"), among the Obligors, the Agent and the Lenders. W I T N E S S E T H: WHEREAS, the Obligors, the Agent and the Lenders desire (i) to amend certain provisions of the Agreement, (ii) to increase the Revolving Credit Commitments by $10,000,000 (the "Facility Increase"); and (iii) that the Facility Increase (and Revolving Credit Loans made thereunder) constitute "senior bank indebtedness" (as such term is defined in the Indenture); NOW, THEREFORE, in consideration of the foregoing, the premises and mutual covenants contained herein and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings given thereto in the Agreement. 2. Effectiveness of this Amendment. This Amendment shall become effective and the Agreement shall be amended as provided herein on the first date (the "Effective Date") on which each of the following conditions shall be satisfied or waived: (a) Execution of Amendment. Each Obligor, each Lender and the Agent shall have executed a copy of this Amendment (whether the same or different copies) and shall have delivered the same to the Agent. (b) Reaffirmation. Each Guarantor shall have executed and delivered to the Agent a counterpart to the Reaffirmation of Guaranty in substantially the form attached hereto as Exhibit A (the "Reaffirmation of Guaranty"). Each Pledgor (as such term is defined in the Pledge Agreement) shall have executed and delivered to the Agent a counterpart to the Reaffirmation of Pledge Agreement in substantially the form attached hereto as Exhibit B (the "Reaffirmation of Pledge Agreement"). 1 2 (c) Assignment Agreement. The Agent shall have received an executed counterpart to the Assignment Agreement in substantially the form attached hereto as Exhibit C (the "Assignment Agreement") (i) from each Lender that is increasing its Revolving Credit Commitment as part of the Facility Increase (each, an "Increasing Lender") and each Person (other than a Lender) that is to make a Revolving Credit Commitment on the Effective Date (each, a "New Lender"; together with each Increasing Lender, an "Assignee") and (ii) from each Lender that is not increasing its Revolving Credit Commitment as part of the Facility Increase (each, an "Assignor"). By no later than 10:00 a.m. New York City time on the Settlement Date (as such term is defined in the Assignment Agreement), the Agent shall have received from each Assignee, by wire transfer of immediately available funds to the Settlement Account (as such term is defined in the Assignment Agreement), an amount equal to the amount set forth opposite such Assignee's name in Annex A to the Assignment Agreement under the caption "Amount to be Paid (Received)". (d) Revolving Credit Notes. The Borrower shall have executed and delivered to the Agent a Revolving Credit Note in the name of each New Lender and in the principal amount of such New Lender's Revolving Credit Commitment as set forth in Schedule 1.1(a) to this Amendment (each, a New Lender Note"). (e) Opinion of Counsel. The Lenders and the New Lenders shall have received from Irell & Manella LLP, special US counsel to certain of the Obligors, the Guarantors and the Pledgors, an opinion addressed to the Agent and each of the Lenders and dated the Effective Date covering the matters set forth in Exhibit D. (f) Governing Documents; Proceedings. (i) The Lenders and the New Lenders shall have received a certificate of the Secretary or an Assistant Secretary of each Obligor, Guarantor and Pledgor, dated the Effective Date, certifying (A) that the Articles or Certificate of Incorporation (or similar organizational document) and Bylaws of such Obligor, Guarantor or Pledgor, as the case may be, previously delivered to the Lenders are true, correct and complete, have not been amended and remain in effect on the Effective Date, (B) that attached thereto is a true, complete and correct and complete copy of resolutions duly adopted by the Board of Directors of such Obligor, Guarantor or Pledgor, as the case may be, which resolutions remain in full force and effect without amendment or modification and which authorize the execution, delivery and performance by such Obligor, Guarantor or Pledgor, as the case may be, of the Loan Documents to which it is a party (as such Loan Documents are amended, modified and supplemented by this Amendment, the Reaffirmation of Guaranty and the Reaffirmation of Pledge Agreement) and the consummation of the transactions contemplated hereby and thereby, (C) that no proceedings have been commenced for the dissolution or liquidation of such Obligor, Guarantor or Pledgor, as the case may be, and (D) the incumbency, signature and authority of the officer of such Obligor, Guarantor or Pledgor, as the 2 3 case may be, who will execute and deliver this Amendment, the Reaffirmation of Guaranty and/or the Reaffirmation of Pledge Agreement. (ii) The Lenders and the New Lenders shall have received a certificate, dated the Effective Date, of an officer of each Obligor, Guarantor and Pledgor certifying that the representations and warranties of such Person contained in the Loan Documents to which such Person is a party are true and correct in all material respects as of the Effective Date with the same effect as though such representations and warranties had been made on and as of the Effective Date (except for such representations and warranties made as of a specified date, which shall be true and correct in all material respects as of such specified date). (g) No Litigation. The Lenders and the New Lenders shall be satisfied that, on the Effective Date, no judgment, order, injunction or other restraint shall have been issued or filed which restrains, and no hearing seeking injunctive relief or other restraint is pending or has been noticed which seeks to restrain, the Obligors, the Guarantors and the Pledgors from consummating the transactions described in the Loan Documents. (h) No Default; Representations and Warranties. The Lenders and the New Lenders shall be satisfied that, on the Effective Date and after giving effect to this Amendment, the Reaffirmation of Guaranty and the Reaffirmation of Pledge Agreement, (i) there shall exist no Default or Event of Default and (ii) the representations and warranties of each Obligor, each Guarantor and each Pledgor contained in the Loan Documents to which such Person is a party are true and correct in all material respects as of the Effective Date with the same effect as though such representations and warranties had been made on and as of the Effective Date (except for such representations and warranties made as of a specified date, which shall be true and correct in all material respects as of such specified date). (i) Consent Fee. For consenting to the Facility Increase and the amendments contained in this Amendment, each Lender that executes this Amendment shall have received on the Effective Date a fee in immediately available funds equal to the product of (i) 0.15% and (ii) the aggregate amount of such Lender's Commitments. (j) Facility Increase Fee. For participating in the Facility Increase, (i) each Increasing Lender shall have received on the Effective Date a fee in immediately available funds equal to the product of (x) 0.50% and (y) the difference obtained by subtracting the Revolving Credit Commitment of such Increasing Lender immediately prior to the effectiveness of this Amendment from the Revolving Credit Commitment of such Increasing Lender set forth in Schedule 1.1(a) to this Amendment; and (ii) each New Lender shall have received on the Effective Date, a fee in immediately available funds equal to the product of (x) 0.50% and (y) the Revolving Credit Commitment of such New Lender as set forth in Schedule 1.1(a) to this Amendment. 3 4 (k) Other Payments. The Agent and each Lender shall have received all other amounts, if any, amounts owing from the Obligors to such Person through and including the Effective Date. 3. Amendments. As of the Effective Date: (a) The references to "$77,000,000" contained on the cover page of the Agreement and Recital B of the Agreement shall be amended to read "$87,000,000". (b) The reference to "$35,000,000" contained in Section 1.1(a) of the Agreement shall be amended to read "$45,000,000". (c) Section 3 of the Agreement shall be amended by adding the following Section after Section 3.23 and before Section 4: "3.24 Year 2000 Problem. On the basis of a comprehensive review and assessment of each Obligor's systems and equipment and inquiry made of each Obligor's material suppliers, vendors and customers, each Obligor reasonably believes that the Year 2000 Problem, including the costs of remediation thereof, will not result in a Material Adverse Effect. Each Obligor has developed feasible contingency plans to ensure uninterrupted and unimpaired business operation in the event of failure of its own or a third party's systems and/or equipment due to the Year 2000 Problem, including those of vendors, customers and suppliers, as well as a general failure of or interruption in its communications and delivery infrastructure.". (d) Section 5 of the Agreement shall be amended by adding the following Section after Section 5.14 and before Section 6: "5.15 Year 2000 Problem. By September 30, 1999, the Borrower shall, and shall cause each other Obligor to, (a) renovate all systems and equipment affected by the Year 2000 Problem to cause them to perform correctly date-sensitive functions for the relevant date data from before and after December 31, 1999 ("Year 2000 Compliance"), or replace them with technology not so affected; and (b) complete testing and installation of all material systems and equipment to ensure timely Year 2000 Compliance.". (e) The reference to "$35,000,000" contained in the defined term "Maximum Revolving Credit Commitment" set forth in Annex A to the Agreement shall be amended to read "$45,000,000". 4 5 (f) Annex A to the Agreement shall be amended by deleting subclause (B) of clause (g) of the defined term "Permitted Investments" and substituting the following therefor: "(B) such investments (including the amount of any assumed liabilities thereunder but excluding the amount of the Borrower's investment in Aydin Corporation's West Coast Microwave Division) do not exceed $5,000,000 in the aggregate;". (g) Annex A to the Agreement shall be amended by adding the following term after the defined term "Working Capital": "Year 2000 Problem" shall mean the inability of computer hardware, computer software and embedded microchips in non-computing devices to perform properly date-sensitive functions with respect to certain dates prior to, on and after December 31, 1999.". (h) Annex D to the Agreement shall be amended by adding the following parenthetical after the word "report" contained in clause (i) of Section 4 of Annex D: "(which report shall not be qualified as to (A) going concern, (B) any limitation in the scope of the audit or (C) possible errors generated by financial reporting and related systems due to the Year 2000 Problem)". (i) Annex D to the Agreement shall be further amended by adding the following Section after Section 4 of Annex D: "11. Promptly, upon the request of the Agent, a copy of the Borrower's and each Obligor's plan, timetable and budget to address Year 2000 Problems, together with periodic updates thereof and expenses incurred to date, any third party assessment of the Borrower's and any Obligor's Year 2000 remediation efforts, any Year 2000 contingency plans and any estimates of the Borrowers' and any Obligor's potential litigation exposure (if any) to the Year 2000 Problem.". (j) Annex F shall be amended by deleting the table set forth therein and substituting the following therefor: 5 6
"Fiscal Quarter Consolidated EBITDA --------------- ------------------- Q4, 1998 $38,000,000 Q1, 1999 $38,000,000 Q2, 1999 $38,000,000 Q3, 1999 $39,000,000 Q4, 1999 $39,000,000 Q1, 2000 $39,000,000 Q2, 2000 $39,000,000 Q3, 2000 $40,000,000 Q4, 2000 $40,000,000 Q1, 2001 $40,000,000 Q2, 2001 $40,000,000 Q3, 2001 $41,000,000 Q4, 2001 $41,000,000 Q1, 2002 $41,000,000 Q2, 2002 $41,000,000 Q3, 2002 $42,000,000 Q4, 2002 $42,000,000".
(k) Schedule 1.1(a) to the Agreement shall be deleted in its entirety and Schedule 1.1(a) to this Amendment shall be substituted therefor. 4. Aydin Purchase. The Borrower has acquired Aydin Corporation's West Coast Microwave Division ("Aydin") for a purchase price of approximately $9,000,000. By way of clarification, the purchase price paid for Aydin assets shall be excluded from the definition of "Capital Expenditures" contained in Paragraph 4 of Annex F of the Credit Agreement. 5. Settlement. On the Effective Date, the Assignees shall purchase from the Assignors the Assigned Shares (as such term is defined in the Assignment Agreement) in accordance with the terms of the Assignment Agreement. The Borrower agrees that the reallocation of Revolving Credit Loans caused by the Facility Increase requested by the Borrower shall constitute a prepayment for purposes of Section 1.9(e) of the Agreement and, accordingly, agrees to pay all breakage costs, if any, which may be incurred as a result of such reallocation. The parties hereto hereby agree to use reasonable efforts to minimize breakage costs which may result from the reallocation of Revolving Credit Loans. By no later than 3:00 p.m. New York City time on the Settlement Date (as such term is defined in the Assignment Agreement), the Agent shall, so long as it has received the same from the Assignees, wire transfer to each Assignor, an amount equal to the amount set forth opposite such Assignor's name in Annex A to the Assignment Agreement under the caption "Amount to be Paid (Received)". 6 7 6. Revolving Credit Notes. Promptly following the Effective Date, the Agent shall deliver to each New Lender its New Lender Note. Promptly following the Effective Date, each Lender with a Revolving Credit Commitment (an "Existing Lender") shall deliver to the Borrower its Revolving Credit Note or, in lieu thereof, a certificate of lost instrument together with indemnification in substance reasonably satisfactory to the Borrower, against receipt from the Borrower of a new Revolving Credit Note in the name of such Existing Lender and in the principal amount of such Existing Lender's Revolving Credit Commitment as set forth in Schedule 1.1(a) to this Amendment. 7. Representations and Warranties. Each Obligor makes, as of the Effective Date, each of the representations and warranties set forth in Section 3 of the Agreement, and such representations and warranties are, by this reference, incorporated herein as if set forth herein in their entirety, provided that references to "Loan Documents" shall, for purposes of this paragraph, be deemed to include this Amendment, the Reaffirmation of Guaranty and the Reaffirmation of Pledge Agreement. Each Obligor represents and warrants that the Facility Increase (and Revolving Credit Loans made thereunder) constitute "senior bank indebtedness" (as such term is defined in the Indenture). 8. Miscellaneous. (a) Except as expressly modified by this Amendment, the Agreement and Schedules and Annexes thereto shall continue to be and remain in full force and effect in accordance with their terms. Any future reference to the Agreement and Schedules and Annexes thereto shall, from and after the Effective Date, be deemed to be a reference to the Agreement and Schedules and Annexes thereto as amended by this Amendment. (b) This Amendment may be executed in any number of counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument. (c) THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO CONFLICTS OF LAW RULES. (d) This Amendment may be executed by facsimile signature and each such signature shall be treated in all respects as having the same effect as an original signature. 7 8 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. COMMUNICATIONS & POWER INDUSTRIES, INC. By /s/ LYNN E HARVEY ---------------------------------------- Name Lynn E. Harvey Title: Chief Financial Officer, Treasurer and Secretary COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION By /s/ LYNN E HARVEY ---------------------------------------- Name Lynn E. Harvey Title: Chief Financial Officer, Treasurer and Secretary CPI SUBSIDIARY HOLDINGS INC. By /s/ LYNN E. HARVEY ---------------------------------------- Name: Lynn E. Harvey Title: Secretary 8 9 COMMUNICATIONS & POWER INDUSTRIES INTERNATIONAL INC. By /s/ LYNN E. HARVEY ---------------------------------------- Name: Lynn E. Harvey Title: Secretary COMMUNICATIONS & POWER INDUSTRIES ASIA INC. By /s/ LYNN E. HARVEY ---------------------------------------- Name: Lynn E. Harvey Title: Treasurer COMMUNICATIONS & POWER INDUSTRIES ITALIA S.R.L. By /s/ LYNN E. HARVEY ---------------------------------------- Name: Lynn E. Harvey Title: (Per Power of Attorney) COMMUNICATIONS & POWER INDUSTRIES EUROPE LIMITED By /s/ LYNN E. HARVEY ---------------------------------------- Name: Lynn E. Harvey Title: Secretary 9 10 COMMUNICATIONS & POWER INDUSTRIES CANADA INC. By /s/ LYNN E. HARVEY ---------------------------------------- Name: Lynn E. Harvey Title: Vice President COMMUNICATIONS & POWER INDUSTRIES AUSTRALIA PTY LIMITED By /s/ LYNN E. HARVEY ---------------------------------------- Name: Lynn E. Harvey Title: (Per Power of Attorney) CPI SALES CORP. By /s/ LYNN E. HARVEY ---------------------------------------- Name: Lynn E. Harvey Title: Secretary and Treasurer BANKERS TRUST COMPANY, as Lender and as Agent By /s/ MARY JO JOLLY ---------------------------------------- Name: Mary Jo Jolly Title: Assistant Vice President 10 11 DRESDNER BANK AG, New York Branch and Grand Cayman Branch By /s/ BRIGITTE SAGIN ---------------------------------------- Name: Brigitte Sagin Title: Assistant Treasurer By /s/ BEVERLY G. CASON ---------------------------------------- Name: Beverly G. Cason Title: Vice President U.S. BANK NATIONAL ASSOCIATION (f/k/a FIRST BANK NATIONAL ASSOCIATION) By /s/ KURT D. EGERTSON ---------------------------------------- Name: Kurt D. Egertson Title: Vice President MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. By /s/ GILLES MARCHAND ---------------------------------------- Name: Gilles Marchand, CFA Title: Authorized Signatory PAMCO CAYMAN LTD. By HIGHLAND CAPITAL MANAGEMENT, LP, as Collateral Manager By /s/ MARK K. OKADA ---------------------------------------- Name: Mark K. Okada CFA Title: Executive Vice President 11 12 ROYALTON COMPANY By PACIFIC INVESTMENT MANAGEMENT COMPANY, as Investment Adviser By /s/ RAYMOND KENNEDY ---------------------------------------- Name: Raymond Kennedy Title: Sr. Vice President SENIOR DEBT PORTFOLIO By BOSTON MANAGEMENT AND RESEARCH, as Investment Adviser By /s/ SCOTT H. PAGE ---------------------------------------- Name: Scott H. Page Title: Vice President UNION BANK OF CALIFORNIA, N.A. By /s/ STEPHEN R. SWEENEY ---------------------------------------- Name: Stephen R. Sweeney Title: Vice President 12 EX-27.1 3 FDS FOR COMMUNICATIONS & POWER INDUSTRIES, INC.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K COMMUNICATIONS & POWER INDUSTRIES, INC. FOR YEAR ENDED OCTOBER 2, 1998. 0001000564 COMMUNICATIONS & POWER INDUSTRIES, INC. 1,000 YEAR OCT-02-1998 OCT-04-1997 OCT-02-1998 448 0 49,484 0 52,923 111,276 78,099 0 229,212 65,319 126,298 20,683 1 0 16,911 229,212 260,688 260,688 194,410 194,410 7,455 0 17,793 8,927 3,750 5,177 0 0 0 5,177 0 0
EX-27.2 4 FDS FOR COMMUNICATIONS & POWER INDUSTRIES HOLDING
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION FOR YEAR ENDED OCTOBER 2, 1998 0001000654 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION 1,000 YEAR OCT-02-1998 OCT-04-1997 OCT-02-1998 448 0 49,484 0 52,923 111,276 78,099 0 229,212 65,319 126,298 20,683 0 2 2,510 229,212 260,688 260,688 194,410 194,410 7,455 0 17,793 8,927 3,750 5,177 0 0 0 5,177 0 0
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