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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 29, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 33-96858-01 Commission File Number: 33-96858
COMMUNICATIONS &
POWER INDUSTRIES COMMUNICATIONS &
HOLDING CORPORATION POWER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter)
DELAWARE DELAWARE
(State of Incorporation) (State of Incorporation)
77-0407395 77-0405693
(I.R.S. employer identification number) (I.R.S. employer identification number)
607 HANSEN WAY 607 HANSEN WAY
PALO ALTO, CALIFORNIA 94303-1110 PALO ALTO, CALIFORNIA 94303-1110
(415) 846-2900 (415) 846-2900
(Address, including zip code, and telephone number, (Address, including zip code, and telephone number,
including area code, of registrant's principal including area code, of registrant's principal
executive offices) executive offices)
Securities registered pursuant to Securities registered pursuant to
Section 12(b) of the Act: Section 12(b) of the Act:
NONE NONE
Securities registered pursuant to Securities registered pursuant to
Section 12(g) of the Act: Section 12(g) of the Act:
NONE NONE
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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: 200,000 SHARES OF COMMON STOCK, $.01 PAR VALUE,
AT FEBRUARY 1, 1996. COMMUNICATIONS & POWER INDUSTRIES, INC.: 1 SHARE OF COMMON
STOCK, $.01 PAR VALUE, AT FEBRUARY 1, 1996.
DOCUMENTS INCORPORATED BY REFERENCE:
(None)
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PART 1
ITEM 1: BUSINESS
GENERAL
Communications & Power Industries Holding Corporation, Inc. ("Holding"), through
its wholly-owned subsidiary, Communications & Power Industries, Inc. ("CPI",
both companies together referred to as the "Company"), is a world leader in the
development, manufacture and distribution of components for systems used
primarily to generate, amplify and transmit high-power/high-frequency microwave
and radio frequency signals. End-use applications of these systems include the
transmission and amplification of voice, data and video signals for broadcasting
and telecommunications, transmission of radar signals for navigation and
location, transmission of false signals for electronic countermeasures (e.g.,
decoys and signal "jammers") and various other uses in the industrial, medical
and scientific markets.
The Company's products include microwave and power grid tubes, microwave
amplifiers, modulators, and various other power supply equipment and devices.
These products are consumables 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. The principal executive offices of Holding
and CPI are located at 607 Hansen Way, Palo Alto, California 94304 and their
telephone number is (415) 846-2900.
THE ACQUISITION
Prior to August 11, 1995, the Company's operations were part of the Electron
Devices Business division (the "Predecessor") of Varian Associates, Inc.
("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 tubes, microwave amplifiers, modulators and various other power
supply equipment and devices through the Predecessor. Pursuant to the terms of a
Stock Sale Agreement dated June 9, 1995, as amended, among Holding, CPII
Acquisition, and Varian (the "Acquisition Agreement"), prior to the consummation
of the Acquisition, Varian and its affiliates contributed the assets of the
Predecessor that were located in the United States to CPI, which was a
newly-formed, wholly-owned Varian subsidiary. Subsequently, upon the
consummation of the Acquisition, Varian transferred all of the outstanding
capital stock of CPI to CPII Acquisition. The assets of the Predecessor that
were located in foreign jurisdictions were transferred from Varian or its
affiliates to newly-formed direct or indirect subsidiaries of CPI. In
consideration of the transfer of such capital stock and assets, CPII Acquisition
(including its affiliates) paid Varian (including its affiliates) an aggregate
purchase price of $196.2 million, subject to a post-closing adjustment (the
"Purchase Price"). Holding, CPII Acquisition and CPI's subsidiaries also assumed
certain specified liabilities of the Predecessor. The liabilities assumed by
Holding (with respect to which CPI has agreed to perform any necessary services)
included certain balance sheet liabilities of the Predecessor, which aggregated
approximately $24.1 million as of
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August 11, 1995, and certain contingent liabilities (such as for certain product
warranty claims) (the "Assumed Liabilities"). Upon the merger of CPII
Acquisition with and into CPI immediately following the consummation of the
Acquisition, CPI became a wholly-owned subsidiary of Holding.
In connection with the consummation of the Acquisition, the Company also entered
into the following transactions:
(1) Two senior term loans of CPI in the aggregate amount of $42.0 million
and a revolving credit facility in a principal amount of up to $35.0
million (including a $5.0 million sub-facility for letters of credit)
pursuant to a senior credit agreement (the "Senior Credit
Agreement"), of which approximately $23.0 million was drawn in
connection with the consummation of the Acquisition,
(2) Issuance of 12% Series A Senior Subordinated Notes due 2005 (the
"Series A Senior Subordinated Notes") of CPI in the aggregate
principal amount of $100.0 million (guaranteed by Holding and all of
the Company's direct and indirect subsidiaries),
(3) Issuance of units (the "Units") consisting of 150,000 shares of
Series A 14% Senior Redeemable Exchangeable Cumulative Preferred
Stock due 2007 (the "Series A Senior Preferred Stock") of CPI and
10,500 shares of common stock of Holding ("Holding Common Stock") for
$15.0 million,
(4) Issuance of 100,000 shares of 14% Junior Cumulative Preferred Stock
(the "Junior Preferred Stock") of CPI to Green Equity Investors II,
L.P., a Delaware limited partnership ("GEI II") for $10.0 million,
and
(5) Issuance of shares of Holding Common Stock to GEI II and certain
members of the senior management of CPI for $20.0 million (including
$0.8 million paid by notes from members of senior management).
CPI subsequently exchanged the Series A Senior Subordinated Notes and Series A
Senior Preferred Stock, in exchange offers 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 71.8% of the
outstanding shares of Holding Common Stock. Holding, in turn, owns all of the
outstanding common stock of CPI. Accordingly, GEI II is able to elect all of the
members of the board of directors of Holding and thus to exercise control over
Holding's and CPI's business and affairs. Leonard Green & Partners, L.P., a
Delaware limited partnership, is an investment advisor to, and an affiliate of
the general partner of, GEI II. See "Security Ownership of Certain Beneficial
Owners and Management" and "Certain Relationships and Related Transactions."
Except as the context may otherwise require, the term the "Company" as used in
this Form 10-K refers to both the Company and the Predecessor.
PRODUCTS
The Company offers a comprehensive range of microwave and power grid tubes,
microwave amplifiers,
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modulators and various other power supply equipment and devices for use in the
communication, radar, electronic countermeasures, industrial, medical and
scientific markets. The Company offers over 6,600 products which generally have
selling prices from $2,000 to $50,000, with certain products ranging in price up
to $1,000,000. These products are consumables 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 tube will be located.
Specific products which the Company offers include:
- TUBES. Helix traveling wave tubes, klystron amplifiers, klystron
oscillators, gyrotrons, coupled cavity traveling wave tubes,
magnetrons, ring loop traveling wave tubes, cross field
amplifiers, extended interaction klystrons, power grid tubes,
Klystrodes(R) and inductive output tubes.
- AMPLIFIERS. Satellite communication amplifiers, instrumentation
amplifiers, traveling wave tube transmitters, FET modulators,
magnetron modulators, test sets, X-ray generators, Heat WaveTM
products, microwave power modules, microwave power boosters,
traveling wave tube amplifiers and millimeter wave subsystems.
- RELATED DEVICES. Diode switches, waveguide assemblies, pressure
windows, receiver protectors, hermetic seals, high voltage power
supplies and radio frequency cavities.
MARKETS
The Company's products are used primarily to generate, amplify and transmit
high-power/high-frequency microwave, electronic and radio frequency signals.
End-use applications of these devices include the transmission and amplification
of voice, data, and video signals for broadcasting and telecommunications,
transmission of radar signals for navigation and location, transmission of false
radar signals for electronic countermeasures (e.g., decoys and signal "jammers")
and various other uses in the industrial, medical and scientific markets.
In Fiscal 1995, on a pro-forma basis (see Item 6 - Selected Historical and Pro
Forma Financial Data elsewhere in this Form 10K), commercial sales, which
represent sales for which a U.S. Government entity is not the end-user,
represented approximately 74.0% of the Company's total sales. Direct and OEM
sales to the U.S. Government represented approximately 26.0% of the Company's
total sales. These percentages reflect the Company's development of products for
the commercial marketplace. Prior to 1990, the Company's primary customers were
U.S. Government agencies and OEMs manufacturing defense-related products. In
Fiscal 1989, U.S. Government sales represented approximately 48% of the
Company's sales. Since the late 1980s, the United States defense budget has been
shrinking; however, in Fiscal 1995, the Company's U.S. Government-related orders
showed a slight increase. Management expects that U.S. Government and
defense-related end-users will continue to provide a steady source of revenue.
In Fiscal 1995, approximately 69% of sales were derived from U.S. customers,
while approximately 31% were derived from international customers. Many domestic
OEMs, primarily those in the satellite communications market, export their
products, and management estimates that approximately 15% of the Company's sales
to U.S. customers ultimately have international end-users. Accordingly,
management believes that approximately 42% of Fiscal 1995 sales represent sales
to international end-
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users and approximately 58% of such sales represent sales to U.S. 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 1995.
The Company operates in six different markets:
- - Communications Market - The communications market is comprised of
applications for satellite communications ("SatCom") and broadcast sectors.
In this market, the Company's products generate, amplify and transmit
signals and data within an overall communication system. Sales(1) in the
communication market were $110.5 million in Fiscal 1995 compared to $101.8
million for Fiscal 1994 and $101.3 million in Fiscal 1993.
- - Radar Market - The radar market includes microwave and power grid tubes,
amplifiers and related equipment for air, ground and shipboard radar
systems. The Company's tubes have been an integral component of radar
systems for over four decades. Sales1 in the radar market were $76.9
million for Fiscal 1995, $87.3 million for Fiscal 1994 and $94.9 million in
Fiscal 1993.
- - Electronic Countermeasures Market - The electronic countermeasures market
utilizes microwave tubes for systems that provide protection for ships,
aircraft and high-value land targets against radar-guided munitions.
Sales(1) in the electronic countermeasures market were $20.1 million, $18.8
million and $22.0 million in Fiscal 1995, Fiscal 1994 and Fiscal 1993,
respectively.
- - Industrial Market - The industrial market includes applications for a wide
range of systems used for materials processing, instrumentation and voltage
generation. On a pro-forma basis, sales in this market were $22.6 million
in Fiscal 1995 versus $15.9 million in Fiscal 1994. Industrial sales on a
historical combined basis were $22.0 million, $15.6 million and $15.2
million in Fiscal 1995, Fiscal 1994 and Fiscal 1993, 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. Pro forma
sales in this market were $17.4 million in Fiscal 1995, compared to $17.8
million in Fiscal 1994. On a historical basis, sales in this market were
$15.8 million, $15.9 million and $14.6 million in Fiscal 1995, Fiscal 1994
and Fiscal 1993, 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(1) in the scientific
market were $5.7 million, $7.6 million and $7.2 million in Fiscal 1995,
Fiscal 1994 and Fiscal 1993, respectively.
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(1) Represents sales on a historical basis of the combined Predecessor and
Successor for Fiscal 1995. Pro-forma adjustments have no effect on this
comparison, as there are no sales to Varian in this market.
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SALES, MARKETING AND SERVICE
As of September 30, 1995, the Company's 123 direct marketing and sales
professionals represent 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 eight factory service centers for
the SatCom replacement market. These service centers are located in California,
New Jersey, Amsterdam, Moscow, Tokyo, Singapore, Nanjing and Jakarta.
MANUFACTURING
The Company manufactures over 6,600 products in its six manufacturing locations
in North America. The Company has implemented modern manufacturing methodologies
based upon "continuous improvement," including JIT materials handling, Demand
Flow Technology, Statistical Process Control and Value Managed Relationships
with suppliers and customers. The Company has achieved the ISO-9000
international certification standard utilized in the European Community.
The Company's manufacturing process for power supplies, amplifiers and
transmitters consists of purchasing, high level assembly, and test. The Company
utilizes contract manufacturers whenever possible for subassembly. In the
manufacture of tubes, multiple steps are required. The process starts with
procurement of raw material and sub-assemblies from qualified suppliers, who
often deliver on a JIT basis. Raw materials are then formed, primarily by
machining, cleaning and plating certain parts. These steps utilize statistical
process control techniques to assure quality and high production yields.
Subassembly is then performed to produce a vacuum envelope, the essential part
of a tube. 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.
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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 Hughes Electronics Corporation, Litton
Industries, Inc., English Electric Valve Company (General Electric Company plc),
NEC Corporation and Thomson CSF), some of which have resources substantially
greater than those of the Company. Some of these competitors are also customers
of the Company. The Company's ability to compete in its markets depends to a
large extent on its ability to provide high quality products with shorter lead
times at a lower price than its competitors, and its readiness in facilities,
equipment and personnel.
The Company must also continually engage in effective research and development
efforts in order to introduce innovative new products for technologically
sophisticated customers and markets. There is an inherent risk that advances in
existing technology, including solid state technology, or the development of new
technology could adversely effect 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 tubes, only
microwave tubes currently serve high-power/high-frequency demands. The laws of
physics limit the ability of solid state technology to efficiently or cost
effectively serve the high-power/high-frequency applications of the Company's
customers. These applications' extreme operating parameters necessitate heat
dissipation capabilities which are satisfied by the Company's products. The
Company's management believes that each technology serves its own niche without
significant overlap.
BACKLOG
As of September 29, 1995, the Company had an order backlog of $138.9 million,
representing over six months of sales. 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. The Company's backlog has been relatively stable from year to year, with
orders of $136.1 million and $134.0 million outstanding at the end of Fiscal
1994 and Fiscal 1993, respectively.
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INTELLECTUAL PROPERTY
The Company owns a number of United States and foreign patents having various
expiration dates (collectively, the "Patents"). The Patents are directed to
various aspects of the technologies used by the Company in many of its
operations. In addition to the Patents, the Company has certain trade secrets,
know-how, trademarks and copyrights related to its technology and products. The
Company also has acquired certain intellectual property rights and incurred
certain obligations through license and research and development agreements with
third parties. These agreements may include royalty bearing licenses, technology
cross licenses and manufacturing supply agreements. Management does not believe
that any single patent or license is material to the success of the Company as a
whole. As a result of contracts with the U.S. Government which contain patent
and/or data rights clauses, the U.S. Government also has acquired royalty-free
licenses or other rights in inventions and technology resulting from certain
work done by the Company on behalf of the U.S. Government. The Company also has
certain software license agreements with vendors and suppliers which affect the
Company's intellectual property rights. The Company generally enters into
confidentiality agreements with its employees, consultants and vendors, and
generally limits access to and distribution of its proprietary information. The
Company maintains an intellectual property protection program designed to
preserve the intellectual property assets for the Company's future products.
This program includes the filing of new domestic and foreign patent
applications, copyright and trademark applications and the pursuit of
enforcement of its intellectual property rights. Nevertheless, there can be no
assurance that the steps taken by the Company will prevent misappropriation or
loss of its technology.
As part of the Acquisition, six United States patents and one United States
patent application, and their foreign counterparts, are jointly owned by the
Company and Varian along with related trade secrets and know-how, including
drawings, manufacturing and testing processes and designs (the "Key Component
Technology"). The Key Component Technology relates to the manufacture and
testing of certain key electron beam guns and key medical klystrons, and any
improvements thereto. Upon the consummation of the Acquisition, the Company and
Varian entered into a Cross License Agreement to allocate the rights to the Key
Component Technology between the Company and Varian.
In addition, in connection with the consummation of the Acquisition, the Company
and Varian entered into a Trademark License Agreement to permit the Company to
continue to market, advertise, distribute and sell its products using Varian's
trademarks on its products for a period of three years and may identify its
products as "formerly made by Varian" for a period of ten years.
EMPLOYEES
As of September 29, 1995, the Company had approximately 1,768 employees. 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.
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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 88% of the Company's U.S. Government sales in Fiscal 1995.
Approximately 12% was performed under cost-plus contracts.
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.
Holding and Varian submitted the appropriate documentation requests and have
agreed to use commercially reasonable efforts to enter into novation agreements
with the U.S. Government, as required by federal procurement regulations
applicable to contracts between or relating to the Predecessor and the U.S.
Government (the "Acquired Government Contracts") which were acquired by the
Company in connection with the Acquisition. Such novation agreements are
expected to provide, among other things, that the Company assumes all
obligations under the Acquired Government
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Contracts and that the U.S. Government recognizes the transfer to the Company of
the Acquired Government Contracts and related assets. Because a significant
portion of the Company's sales are made pursuant to the Acquired Government
Contracts, failure by the Company to obtain the required novations could have a
material adverse effect on the Company's financial condition and results of
operations.
Due to its business with the U.S. Government, the Company may also be subject to
"qui tam" (whistle blower) suits brought by private plaintiffs in the name of
the U.S. Government upon the allegation that the Company submitted a false claim
to the U.S. Government, as well as to false claim suits brought by the U.S.
Government. A judgment against the Company in a qui tam or false claim suit
could cause the Company to be liable for substantial damages and could carry
penalties of suspension or debarment which would make the Company ineligible to
be awarded any U.S. Government contracts for a period of up to three years and,
thereby, could potentially have a material adverse effect on the Company's
financial condition and results of operations.
Similar to other companies which derive a substantial portion of their sales
from contracts with the U.S. Government for defense-related products, the
Company is subject to business risks, including changes in governmental
appropriations, national defense policies or regulations and availability of
funds. Any of these factors could adversely affect the Company's business with
the U.S. Government in the future.
ENVIRONMENTAL MATTERS
The Company is subject to a wide variety of federal, state and local
environmental laws and regulations which are subject to change and utilizes in
its operations a number of chemicals which are classified as hazardous or
similar substances. It is difficult to predict what impact these environmental
laws and regulations may have on the Company in the future. Restrictions on
chemical uses or certain manufacturing processes could restrict the ability of
the Company to operate in the manner in which the Company is currently operated
or is permitted to be operated. Although Varian is currently involved in a
substantial long-term remediation program relating to the past operations of the
Predecessor, management believes that the Company's current operations are in
substantial compliance with current 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
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assurance that material costs or liabilities will not be incurred by the Company
in connection with proceedings or claims related to environmental conditions
arising from the Company's operations. In addition, although Varian will retain
financial and other responsibility for certain environmental liabilities of the
Predecessor, including those for which, under law, the Company would otherwise
be responsible, there can be no assurance that Varian will reimburse the Company
for any particular environmental costs or do so in a timely manner. Although the
Company believes that Varian currently has sufficient financial resources to
satisfy its environmental indemnification obligations to the Company, because of
the long-term nature of many of Varian's remediation obligations, there can be
no assurance that Varian will continue to have the financial resources to comply
fully with its indemnification obligations to the Company. Unreimbursed
liabilities arising from environmental claims, if significant, could have a
material adverse effect on the Company's results of operations and financial
condition.
The Company is aware that Varian is engaged in certain ongoing environmental
investigatory and remedial work, which is in various stages of completion.
Varian has indemnified the Company, to the extent permissible by law, for
environmental claims arising from the operation of the Predecessor prior to the
consummation of the Acquisition, subject to certain exceptions and limitations.
Based on information currently available to the Company, the following provides
a summary of the investigatory and remedial work being undertaken at the various
properties owned or utilized by the Predecessor with respect to its operations.
PALO ALTO, CALIFORNIA. As a result of actual and threatened claims brought by
other property owners and the State of California with regard to contamination
present under and emanating from the Company's facilities located at the Palo
Alto, California property (which facilities are leased by way of assignment and
subleased by the Company and which serves as the Company's headquarters and one
of its principal manufacturing complexes containing two manufacturing
facilities), Varian has entered into a consent order (the "Palo Alto Consent
Order") with the California Environmental Protection Agency. In accordance with
the Palo Alto Consent Order, Varian has submitted, and the regulatory agencies
have approved, a Remedial Action Plan to investigate and remediate groundwater
and soil vapor contamination at the affected property to acceptable levels.
Varian has entered into an agreement with the master lessor of the property
pursuant to which it is obligated to comply with the remediation obligations
under the Palo Alto Consent Order. As a sublessee or assignee of the property,
the Company's right to continued occupancy of these premises will be dependent
upon Varian's fulfillment of its responsibilities to the master lessor,
including its obligation to comply with the Palo Alto Consent Order.
The Palo Alto, California facilities are also known to be within areas of
regional groundwater contamination, which contamination is being addressed by
federal and state environmental regulatory agencies. The Palo Alto, California
property is adjacent to the Hewlett-Packard 640 Page Mill Road National
Priorities List Site (the "HP Site") listed pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"). As a result of allegations that contamination resulting from
Varian's historical operations, including its operations of the Predecessor, has
migrated from that property to the HP Site and elsewhere, the Company is aware
that Varian, as well as Hewlett-Packard and Stanford University, has been named
in an order issued by the San Francisco Bay Regional Water Quality Control
Board, and that Varian, together with Hewlett-Packard, is remediating a portion
of the HP Site known as the California-Olive-Emerson Operable Unit, principally
through the use of a groundwater treatment system, in response to that order.
The Palo Alto, California property is also adjacent to the Hillview-Porter
State Study Area ("Hillview-
- 10 -
<PAGE> 12
Porter State Study Area ("Hillview-Porter Site") identified by the California
Environmental Protection Agency. Varian has not been named as a potentially
responsible party in connection with the Hillview-Porter Site, although the
Company is aware that allegations have been made that this property has
impacted, and been impacted by, the Hillview-Porter Site.
Although liability under environmental laws such as CERCLA is strict, there
often are a number of parties responsible for regional contamination, and such
parties often will allocate the remedial action costs among themselves, taking
into consideration equitable and other factors. Several potentially responsible
parties, including Hewlett-Packard and Varian, have been identified by the
United States Environmental Protection Agency with respect to the HP Site, and
several potentially responsible parties, currently not including Varian, have
been identified by the California Environmental Protection Agency with respect
to the Hillview-Porter Site.
SALT LAKE CITY, UTAH. Prior to the acquisition and use by Varian of the Salt
Lake City, Utah property, such property was used for other industrial purposes,
including the manufacturing of munitions. As a result of actual and threatened
claims brought by other property owners and the State of Utah with regard to
groundwater contamination present under and emanating from the Salt Lake City
facility, Varian has entered into a consent order (the "Salt Lake City Consent
Order") with the State of Utah. Pursuant to the terms of the Salt Lake City
Consent Order, Varian has installed a groundwater remediation system to address
the groundwater and soil contamination conditions.
OTHER FACILITIES. The Company's other main manufacturing facilities, which are
located in San Carlos and Santa Clara, California, Beverly, Massachusetts, and
Georgetown, Ontario, Canada, all have soil and groundwater contamination which
either may or does require remediation. Pursuant to legal requirements, Varian
has installed a groundwater remediation system which is presently in operation
at the Beverly property. In addition, the Company is aware that an action has
been commenced against Varian by adjoining property owners and others, and that
other claims may be made, with respect to off-site contamination allegedly
emanating from the Beverly, Massachusetts facility.
The Company recently identified the need to obtain, amend and/or update certain
environmental permits and authorizations and to incur certain necessary costs in
connection with facility modifications to comply with such permits and
authorizations. The Company does not believe that the costs of achieving such
compliance or making such modifications will be material.
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 10K.
Acquisition Agreement. The Acquisition Agreement contains customary
representations, warranties and covenants. The Company and Varian agreed to
indemnify one another for breaches of representations and warranties contained
in the Acquisition Agreement or the ancillary agreements executed in connection
therewith (the "Ancillary Agreements"), provided claims with respect thereto are
asserted on or before December 31, 1996. With respect to such breaches of
representations and warranties, no claims under the indemnity may be asserted
against the Company or Varian by the other party unless such claims exceed $2.0
million in the aggregate, but the indemnitor is obligated to
- 11 -
<PAGE> 13
indemnify the indemnitee for the full amount of all such claims once the $2.0
million threshold is satisfied, up to a maximum liability of ten percent (10%)
of the Purchase Price.
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
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
- 12 -
<PAGE> 14
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.
Transitional Services Agreement. Pursuant to the terms of the Transitional
Services Agreement (the "Transitional Services Agreement") between Varian and
the Company, Varian provides certain services to the Company in order to
facilitate the transition of the Company to a stand-alone operation. Such
services include, among other things, training with respect to international
product orders, export license applications and general financial services,
certain management information services, payroll processing, and monitoring of
security systems and fire alarms. In addition, the Company provides transitional
services to Varian related to certain of Varian's non-United States operations.
Services will generally be provided for a period of two years following the
closing of the Acquisition (with shorter periods for certain services), subject
to the right of the party who receives such service to terminate any service it
receives upon 30 days' notice. In addition, in connection with the separation
and creation of independent utilities and systems at the Company's facilities,
the Transitional Services Agreement requires Varian to pay or reimburse the
Company (in some cases), subject to certain limitation.
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
- 13 -
<PAGE> 15
preceding provisions are effective as to all Key Components for a period of five
years following the closing of the Acquisition and, at Varian's election with
respect to any one or more of the Key Components, for a period of five years
thereafter.
Varian has the right to elect to purchase Key Components from sources other than
the Company and to enforce certain rights under the Cross License Agreement (as
defined below) in the event of failures in the quality, quantity or timely
delivery of Key Components produced by the Company or the obsolescence of the
Company's Key Components.
Cross License Agreement. Pursuant to the Cross License Agreement (the "Cross
License Agreement"), for a period of 10 years from the closing of the
Acquisition, Varian has exclusive rights relating to the Key Component
Technology as it relates to medical and industrial linear accelerators (the
"Varian Field of Use"). In all other areas, the Company retains the exclusive
right to utilize the Key Component Technology. At the end of the term of the
Cross License Agreement, Varian is obligated to transfer its entire interest in
the Key Component Technology to the Company, with Varian retaining only a
non-exclusive license to make, use or sell Key Component Technology for use in
the Varian Field of Use. The Company has the unrestricted and exclusive right to
utilize the Key Component Technology in fields other than the Varian Field of
Use and the right to utilize Key Component Technology in order to supply Key
Components to Varian for use within the Varian Field of Use pursuant to the Key
Component Agreement. See "- Key Component Agreement" The Cross License Agreement
also grants mutual non-exclusive licenses under Varian's and the Company's
intellectual property rights to the extent necessary to permit both the Company
and Varian to continue to conduct their respective businesses as they did as of
the closing date.
Trademark License Agreement. Generally, under the terms of the Trademark License
Agreement, the Company is licensed to use Varian trademarks on its products for
a period of three years from the closing of the Acquisition (although during the
third year Varian trademarks may only be used in connection with the Company's
own trademarks), provided that such products either were manufactured by the
Predecessor as of the date of consummation of the Acquisition or are derivatives
or improvements thereof. After the third year, the Company may not use any
Varian trademarks alone, but for an additional seven years may identify such
products as "formerly made by Varian". At the expiration of ten year period, the
Company will not be permitted to utilize any Varian trademarks.
- 14 -
<PAGE> 16
ITEM 2: PROPERTIES
The Company owns, leases or subleases manufacturing, assembly, warehouse,
service and office properties having an aggregate floor space of approximately
1,306,000 square feet, of which approximately 121,000 are leased or subleased to
third parties. The table below provides summary information regarding principal
properties owned or leased by the Company:
<TABLE>
<CAPTION>
(square footage)
Property(a) Owned Leased/Subleased
---------- ----- ----------------
<S> <C> <C>
San Carlos, California................ 320,000(b)
Beverly, Massachusetts................ 251,000(c)
Georgetown, Ontario, Canada........... 126,000
Santa Clara, California............... - 107,000(d)
Palo Alto, California................. - 429,000(e)
Various locations..................... - 24,000(f)
</TABLE>
(a) In addition to the properties listed, the Company also utilizes
approximately 49,000 square feet of space at Varian's Salt Lake City,
Utah facility, whose primary occupant is Varian's Healthcare Systems
business. The Company has subleased its Salt Lake City facility from
Varian for a period not to extend beyond August 11, 1997.
(b) The San Carlos, California square footage includes approximately 41,000
square feet leased to a tenant which provides services to the Company
and others.
(c) The Beverly, Massachusetts square footage includes approximately 46,000
square feet leased to two tenants.
(d) This facility is leased by way of assignment of Varian's lessee
interest. The Santa Clara, California footage includes approximately
4,000 square feet initially subleased back to Varian.
(e) This facility is primarily leased by way of assignment of Varian's
lessee interest with the remainder subleased from Varian. The Palo
Alto, California footage includes approximately 33,000 square feet
initially subleased back to Varian.
(f) Includes 5 leased facilities (aggregating approximately 8,000 square
feet) to be occupied entirely by the Company and 13 foreign shared use
facilities which the Company is sharing for varying periods of time
with Varian pursuant to a shared use agreement.
These facilities are currently not utilized to their full capacity. The Company
believes its properties are adequate for the needs of the Company. The Company's
lenders under the Senior Credit Agreement have the right to a security interest
in all of the Company's interest in the real property that it owns and leases,
and have taken a security interest in the Company's real property located in
Beverly, Massachusetts and Georgetown, Ontario, Canada.
The Company's right to continued occupancy of the leased and subleased premises
is dependent upon Varian's compliance with its obligations to the master lessor.
In particular, the Company's headquarters and one principal complex, including
two of the Company's manufacturing facilities, located at the Palo Alto,
California site adjacent to Varian's world headquarters and primary
manufacturing facilities, are leased by way of assignment or subleased from
Varian. Therefore, the Company's occupancy rights are dependent on Varian's
fulfillment of its responsibilities to the master lessor, including its
obligation to continue environmental remediation activities under a consent
order with the California Environmental Protection Agency. The consequences of
the loss by the Company of such occupancy rights could include the loss of
valuable improvements and favorable lease terms, the incurrence of substantial
relocation expenses and the disruption of the Company's business operations.
- 15 -
<PAGE> 17
ITEM 3: LEGAL PROCEEDINGS
The Company is involved from time to time in various legal proceedings and is
the subject of various cost accounting and other government pricing claims.
Pursuant to the Acquisition Agreement, Varian has agreed to indemnify the
Company against liabilities arising from litigation and governmental claims
pertaining to the operation of the Predecessor prior to the consummation of the
Acquisition. Accordingly, management believes that litigation and governmental
claims pending against Varian and relating to the operation of the Predecessor
prior to the Acquisition will not have a material adverse effect on the
Company's financial condition or results of operations. See "Business
Environmental Matters."
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 29, 1995.
- 16 -
<PAGE> 18
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 period ended September 29, 1995. Restrictive
covenants in the Senior Credit Agreement generally restrict the declaration or
payment of dividends on the Company's common stock. The Notes also restrict the
declaration and payment of dividends unless the Company satisfies certain
financial covenants, among other things.
ITEM 6: SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The historical and pro forma financial data set forth below for Fiscal 1993 and
Fiscal 1994 have been derived from the historical audited financial statements
of the Predecessor audited by Coopers & Lybrand L.L.P., independent public
accountants, and for Fiscal 1995 by KPMG Peat Marwick LLP, independent public
accountants, whose reports appear elsewhere in this Form 10-K. The information
contained in this table should be read in conjunction with the information set
forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" as well as the historical audited financial statements of
Holding and CPI (and the Predecessor) included elsewhere in this 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 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.
- 17 -
<PAGE> 19
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Predecessor Successor
---------------------------------------------------------------------------------------------
(Dollars in Thousands) 52 Weeks 53 Weeks 52 Weeks 52 Weeks 45 Weeks 7 Weeks
Ended Ended Ended Ended Ended Ended
October 3, October 2, October 1, September 30, August 12, September 29,
1991 1992 1993 1994 1995 1995
----------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
CPI AND HOLDING STATEMENT
OF OPERATIONS DATA:
Sales $ 311,450 270,160 255,295 246,890 214,677 36,398
Cost of sales 238,433 222,137 198,625 186,996 160,156 27,634
----------- ------------ ------------- ------------- ------------- -------------
Gross profit 73,017 48,023 56,670 59,894 54,521 8,764
Marketing, general and
administrative before
corporate allocations 31,183 28,997 27,068 25,583 26,071 6,013
Research and development 9,641 7,796 7,565 7,619 7,429 1,198
Corporate allocations 14,150 11,961 11,776 11,273 11,160 0
Write-off of acquired in-process
research and development - - - - - 31,363
----------- ------------ ------------- ------------- ------------- -------------
Operating income (loss) 18,043 (731) 10,261 15,419 9,861 (29,810)
Interest expense - - - - - 2,497
Income tax expense (benefit) 6,856 (278) 3,899 5,859 3,649 (2,709)
----------- ------------ ------------- ------------- ------------- -------------
Net earnings (loss) $ 11,187 (453) 6,362 9,560 6,212 (29,598)
=========== ============ ============= ============= ============= =============
Depreciation and amortization 9,874 10,134 11,545 12,395 11,165 941
Capital expenditures* 12,392 8,173 7,278 10,698 6,063 880
Non-recurring capital
expenditures* - 1,653 2,536 4,115 - -
Predecessor Successor
-------------------------------------------------------------- -------------
October 3, October 2, October 1, September 30, September 29,
1991 1992 1993 1994 1995
------------ ------------ ------------- ------------- -------------
CPI BALANCE SHEET DATA:
Working capital $ 97,138 82,348 67,302 60,421 35,204
Total assets 205,078 180,135 169,619 162,149 214,902
Total equity (deficit) 152,861 137,115 125,657 119,854 (1,538)
Long-term debt and
redeemable preferred stock - - - - 151,260
HOLDING BALANCE SHEET DATA:
Working capital $ 97,138 82,348 67,302 60,421 35,204
Total assets 205,078 180,135 169,619 162,149 214,902
Total equity (deficit) 152,861 137,115 125,657 119,854 (10,884)
Long-term debt and
redeemable preferred stock - - - - 151,260
</TABLE>
- --------------
* 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".
- 18 -
<PAGE> 20
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENTS
The unaudited pro forma consolidated condensed income statements of Holding and
CPI have been prepared by the Company's management from historical income
statements included in this Form 10-K. The unaudited pro-forma consolidated
condensed income statements for Fiscal 1995 and Fiscal 1994 reflect adjustments
as if the Acquisition had occurred on September 30, 1994 and October 1, 1993,
respectively.
These unaudited pro forma financial statements should be read in conjunction
with the notes included herewith, the Predecessor's audited financial statements
and notes thereto for Fiscal 1995 and Fiscal 1994 and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." included
elsewhere in this Form 10-K. These unaudited pro forma financial statements do
not purport to represent what Holding's or CPI's results of operations would
have been had the Acquisition and the financing therefor occurred on the date
specified, or to project Holding's or CPI's results of operations for any future
period or date. The pro forma adjustments described in the accompanying notes
are based upon certain assumptions that management of the Company believes are
reasonable in such circumstances. In the opinion of management, all adjustments
have been made that are necessary to present fairly the pro forma data.
- 19 -
<PAGE> 21
Unaudited Pro Forma Consolidated Condensed Income Statements
<TABLE>
<CAPTION>
For the 52 Weeks Ended September 29, 1995
------------------------------------------------------------------------------
Predecessor Successor ProForma
45 Weeks Ended 7 Weeks Ended 52 Weeks Ended
August 11, September 29, Pro Forma September 29,
1995 1995 Adjustments 1995 (c)
------------ ------------- ------------------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS OF CPI:
Sales $ 214,677 36,398 2,170 (i) 253,245
Cost of sales 160,156 27,634 591 (i) 180,144
(5,837)(ii)
(2,400)(iii)
------------ ------------- ------------ -------------
Gross profit 54,521 8,764 9,816 73,101
Research and development 7,429 1,198 8,627
Marketing 17,506 2,763 20,269
General and administrative 19,725 3,250 (10,532) (iv) 13,162
885 (v)
(166) (vi)
Write-off of acquired in-process
research and development 31,363 (31,363) (viii)
------------ ------------- ------------ -------------
Operating income (loss) 9,861 (29,810) 50,992 31,043
Interest expense - 2,497 15,240 (vii) 19,077
1,340 (vii)
------------ ------------- ------------ -------------
Earnings (loss) before income taxes 9,861 (32,307) 34,412 11,966
Provision (benefit) for income taxes 3,649 (2,709) 3,846 (ix) 4,786
------------ ------------- ------------ -------------
Net earnings (loss) 6,212 (29,598) 30,566 7,180
Dividends on preferred stock - - 3,776 (x) 3,776
------------ ------------- ------------ -------------
Earnings attributable to Common
Stock $ 6,212 (29,598) 26,790 3,404
============ ============= ============ =============
CERTAIN CONSOLIDATED STATEMENT OF OPERATIONS
INFORMATION OF HOLDING:
Operating income (loss) of Holding 9,861 (29,810) 50,992 31,043
Interest expense - 2,497 16,580 (vii) 19,077
Preferred dividends of
consolidated subsidiary - - 3,776 (x) 3,776
------------ ------------- ------------ -------------
Earnings (loss) before income taxes 9,861 (32,307) 30,636 8,190
Provision (benefit) for income taxes 3,649 (2,709) 3,846 (ix) 4,786
------------ ------------- ------------ -------------
Net earnings (loss) 6,212 (29,598) 26,790 3,404
============ ============= ============ =============
OTHER FINANCIAL DATA OF CPI AND HOLDING:
Depreciation and amortiza$ion(a) $ 11,165 941 6,988
EBITDA (b) (c) 21,026 2,494 38,031
Cash interest expense (a) - 2,497 17,737
Ratio of EBITDA to
cash interest expense (b) N/A N/A 2.14x
</TABLE>
- ----------------
(a) Excludes amortization of deferred debt issuance costs.
(b) EBITDA represents earnings before provision for income taxes, interest
expense, depreciation and amortization and the write-off of acquired
in-process research and development. EBITDA and the ratio of EBITDA to cash
interest expense are presented because they may be used by some investors
as a financial indicator of the ability to service or incur indebtedness.
EBITDA should not be considered as an alternative to net income, as a
measure of operating results or cash flows as a measure of liquidity.
(c) As described in more detail in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this Form 10-K, certain
events occurred during the fourth quarter of Fiscal 1995 which may not be
indicative of future operating results.
- 20 -
<PAGE> 22
Unaudited Pro Forma Consolidated Condensed Income Statements, continued
The following pro forma financial statements were included by CPI in the
Registration Statement for the Exchange Offers filed in November, 1995, and were
based upon preliminary estimates of the fair values of the net assets acquired.
These pro forma statements have not been adjusted to reflect final values
because the effect of the finalization of the estimates does not materially
affect the amounts previously presented.
<TABLE>
<CAPTION>
For the 52 Weeks Ended September 30, 1994
--------------------------------------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
------------- -------------------------- -------------
(Dollars in thousands)
CONSOLIDATED STATEMENT OF OPERATIONS OF CPI:
<S> <C> <C> <C>
Sales $ 246,890 2,145 (i) 249,035
Cost of sales 186,996 412 (i) 182,038
(5,370)(ii)
------------ ------------- -------------
Gross profit 59,894 7,103 66,997
Research and development 7,619 7,619
Marketing 19,476 19,476
General and administrative 17,380 (6,356)(iv) 12,457
1,627 (v)
(194)(vi)
------------ ------------- -------------
Operating income 15,419 12,026 27,445
Interest expense - 17,737(vii) 19,233
1,496(vii)
------------ ------------- -------------
Earnings before income taxes 15,419 (7,207) 8,212
Provision for income taxes 5,859 (2,574)(ix) 3,285
------------ ------------- -------------
Net earnings 9,560 (4,633) 4,927
Dividends on preferred stock - 3,776 (x) 3,776
------------ ------------- -------------
Earnings attributable to
Common Stock $ 9,560 (8,409) 1,151
============ ============= =============
CERTAIN CONSOLIDATED STATEMENT OF OPERATIONS
INFORMATION OF HOLDING:
Operating income (loss) of Holding 15,419 12,026 27,445
Interest expense - 19,233 (vii) 19,233
Preferred dividends of
consolidated subsidiary - 3,776 (x) 3,776
------------ ------------- -------------
Earnings (loss) before income taxes 15,419 (10,983) 4,436
Provision (benefit) for income taxes 5,859 (2,574)(ix) 3,285
------------ ------------- -------------
Net earnings 9,560 (8,409) 1,151
============ ============= =============
OTHER FINANCIAL DATA OF HOLDING AND CPI:
Depreciation and amortiza$ion(a) 12,395 8,458
EBITDA (b) 27,814 35,903
Cash interest expense (a) - 17,737
Ratio of EBITDA to
cash interest expense (b) N/A 2.02x
</TABLE>
- --------------------------
(a) Excludes amortization of deferred debt issuance costs.
(b) EBITDA represents earnings before provision for income taxes, interest
expense, depreciation and amortization. EBITDA and the ratio of EBITDA to
cash interest expense are presented because they may be used by some
investors as a financial indicator of the ability to service or incur
indebtedness. EBITDA should not be considered as an alternative to net
income, as a measure of operating results or cash flows as a measure of
liquidity.
- 21 -
<PAGE> 23
Notes to Unaudited Pro Forma Consolidated Condensed Income Statements
(i) Reflects the pro forma increase, under the terms of the product supply
agreements between CPI and Varian entered into in connection with the
consummation of the Acquisition, in the historical pricing of sales and
purchases between CPI and Varian.
(ii) Represents an adjustment to depreciation for the 45 week period ending
August 11, 1995 and the 52 week period ending September 30, 1994 based on
the estimated fair values of fixed assets acquired.
(iii) Represents the portion of the purchase price allocated to inventory which
was charged to cost of sales for the 7 week period ending September 29,
1995.
(iv) Reflects pro forma adjustments relating to:
(a) the reduction in facility costs as a result of (i) the difference
between previously allocated corporate rent and the estimated
depreciation and facility cost on owned facilities, and (ii) a purchase
accounting adjustment to reflect management's plan to eliminate certain
excess space which is currently vacant.
(b) the elimination of previously allocated costs for corporate services no
longer required on a stand alone basis, principally representing
allocations for environmental remediation costs to be retained by
Varian and for office space at Varian's corporate headquarters.
(c) cost reductions from outsourcing corporate services calculated as the
difference between the amounts previously allocated for management
information systems, group insurance and legal counsel and the agreed
amounts with outside providers for these services on a stand alone
basis.
(d) the reduction of executive management compensation expense as a result
of the replacement of Varian management compensation plans with revised
compensation programs. This reduction is primarily due to lower
management bonuses as a result of increased management ownership.
(e) non-recurring expenses incurred during the seven week period ended
September 29, 1995 as a direct result of the Acquisition.
The adjustments for each component are as follows:
<TABLE>
<CAPTION>
52 weeks ended 52 weeks ended
September 29, 1995 September 30, 1994
-------------------------------------------------------------------
<S> <C> <C>
(a) $ 3,279 $ 2,152
(b) 1,176 772
(c) 1,882 1,235
(d) 3,347 2,197
(e) 848 -
------------ -------------
$ 10,532 $ 6,356
============ =============
</TABLE>
(v) Represents the amortization of goodwill resulting from the Acquisition,
calculated for the 45 week period ending August 11, 1995 and the 52 week
period ending September 30, 1994, over an estimated life of 25 years.
(vi) Represents the reduction in amortization due to the elimination of
purchased goodwill.
- 22 -
<PAGE> 24
Notes to Unaudited Pro Forma Consolidated Condensed Income
Statements, continued
(vii) Represents the estimated interest expense from the use of borrowings to
finance the Acquisition and future working capital requirements, plus the
amortization of deferred debt issuance costs.
(viii) Represents the one-time write-off of acquired in-process research and
development.
(ix) The tax effect of using a 40% rate on pro forma income before taxes.
(x) Preferred stock dividends include all dividends paid on the Senior
Preferred Stock and Junior Preferred Stock.
- ----------------
- 23 -
<PAGE> 25
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company serves the communication, radar, electronic countermeasures,
industrial, medical and scientific markets. In addition, the Company divides the
communication market into applications for ground-based satellite uplinks for
military and commercial uses ("SatCom") and broadcast sectors. While most of the
Company's sales to these markets have been relatively stable during the Fiscal
1992 through Fiscal 1994 timeframe, significant weakness in sales from the
Company's radar market resulted in an 8.6% decline in total sales, from $270.2
million to $246.9 million in this time period. This decrease was caused by the
U.S. Department of Defense's ("DoD") reduction in procurement of spare tubes for
U.S. Government inventories to support existing systems, including the HAWK,
Phalanx and HADR programs. In addition, a decline in the level of government
funds available for the development and installation of new radar and electronic
countermeasures systems also adversely affected sales. However, during Fiscal
1995, due to growth in the Company's communication, electronic countermeasures
and industrial markets, the Company generated a 2.6% increase in total sales, to
$253.2 million on a pro forma basis.
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 government sector represents direct sales and original
equipment manufacturers ("OEM") sales to the U.S. Government, including sales to
the DoD, the Department of Energy, the Federal Aviation Administration (the
"FAA") and the National Aeronautics and Space Administration. The commercial
sector contributed $185.9 million, or 74.0% ($188.0 million or 74.2% on a pro
forma basis), of the Company's total sales for Fiscal 1995. The Company's sales
to the commercial sector increased by approximately $25.2 million between Fiscal
1992 and Fiscal 1995, representing a 5.0% compound annual growth rate. In
contrast, the Company's sales to the U.S. Government sector during the same
period experienced a 15.9% annual compounded rate of decline due primarily to
the aforementioned trends in the radar and electronic countermeasures markets.
From Fiscal 1992 to Fiscal 1995, the Company demonstrated substantial increases
in profitability and EBITDA, as net earnings increased from a net loss of $0.5
million in Fiscal 1992 to net earnings of $6.2 million for the 45 week period
ending August 11, 1995, and EBITDA increased over four times from $9.4 million
in Fiscal 1992 to $38.0 million on a pro forma basis in Fiscal 1995, despite the
decline in total sales. The Company experienced a loss of $29.6 million during
the seven weeks ended September 29, 1995, due primarily to the write-off of
acquired in-process research and development expenses. Net earnings as a
percentage of sales grew from a net loss in Fiscal 1992 to 3.9% in Fiscal 1994
and 2.9% for the 45 weeks ended August 11, 1995.
The Fiscal 1995 pro forma results reflect certain events which negatively
impacted the fourth quarter of Fiscal 1995 operating results:
- - Operations at the Company's Salt Lake City plant were negatively
impacted by the announcement that the Company's operations were being
relocated to San Carlos, California,
- 24 -
<PAGE> 26
and that employees were either being relocated or terminated,
and
- - The Company experienced a higher than normal rate of incoming orders
and, as a result, commissions earned by certain salespeople and sales
representatives upon the receipt of the order increased without a
corresponding increase in sales and gross profit.
The Company believes that these two items negatively impacted pro forma EBITDA
by approximately $2.0 million.
EFFECT OF ACQUISITION ON RESULTS OF OPERATIONS
The consummation of the Acquisition has affected the Company's results of
operations in certain significant respects. As a result of the Acquisition, the
Company adjusted upwards the historical book value of certain assets in
accordance with GAAP relating to purchase accounting rules, which will
significantly impact the Company's results of operations subsequent to the
Acquisition and their comparability to operations of the Predecessor:
- - The write-up of the inventory by $4.1 million is expensed to cost of
goods sold during the periods following the Acquisition, which
significantly affects gross margins. During the seven week period ended
September 29, 1995, $2.4 million was expensed to cost of sales, which
also negatively impacted working capital, and $1.7 million will be
expensed during Fiscal 1996.
- - The purchase accounting allocation of certain assets, such as
property, plant and equipment, will significantly affect depreciation
and amortization in the future. The portion of the purchase price
allocated to in-process research and development was charged to
operations immediately after consummation of the Acquisition. The
in-process research and development activity of the Company involves
the development of various classes of microwave tubes and microwave
tube 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 tubes, 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. The Company anticipates that it will incur in
excess of $12,000,000 in future development costs to develop
commercially feasible products from such projects.
- - 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.
- 25 -
<PAGE> 27
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.
<TABLE>
<CAPTION>
Predecessor
--------------------------------------------------------------- Proforma
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
October 1, 1993 September 30, 1994 September 29, 1995
------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 77.8 75.7 71.1
------------------------- ------------------------- -------------------------
Gross profit 22.2 24.3 28.9
Research and development 3.0 3.1 3.4
Marketing 7.9 7.9 8.0
General and administrative 7.3 7.0 5.2
------------------------- ------------------------- -------------------------
Operating income 4.0 6.3 12.3
Interest expense 0.0 0.0 7.6
------------------------- ------------------------- -------------------------
Earnings before taxes 4.0 6.3 4.7
Provision for income taxes 1.5 2.4 1.9
------------------------- ------------------------- -------------------------
Net earnings 2.5% 3.9% 2.8%
========================= ========================= =========================
Other Data:
EBITDA 8.5% 11.3% 15.0%
</TABLE>
Pro forma Fiscal 1995 Compared to Fiscal 1994
SALES. On a pro forma basis, sales for Fiscal 1995 were approximately $253.2
million, an increase of approximately $4.2 million, or 1.7% as compared to
Fiscal 1994. On a historical basis during fiscal 1995, communication(1),
electronic countermeasures(1) and industrial sales(2) increased while radar
sales(2) declined. Communication sales(1) increased approximately $8.7 million,
or 8.5%, in Fiscal 1995 over Fiscal 1994, primarily as a result of increased
demand for new international and domestic SatCom uplinks. Electronic
countermeasures sales(1) increased approximately $1.3 million, or 6.9%, over
Fiscal 1994, primarily as a result of DoD initiatives in low-cost decoys,
transmitters and unmanned aerial vehicle systems. Industrial sales(2) rose
approximately $6.4 million, or 41.0%, over Fiscal 1994, primarily as a result of
increased demand for power supplies used in semiconductor manufacturing
equipment and increased demand for tubes used for instrumentation purposes in
test equipment and process control equipment. Offsetting these sales gains was a
decline in radar sales(1) of approximately $10.4 million, or 11.9%, below Fiscal
1994, due primarily to an overall decline in defense-related spending.
COST OF SALES. On a pro forma basis, cost of sales was $180.1 million in Fiscal
1995, a decrease of $1.9 million, as compared to $182.0 million for Fiscal 1994.
Pro forma cost of sales were 71.1% of sales for Fiscal 1995, which represents a
reduction in cost of sales margin of 2.0% of total pro forma sales below Fiscal
1994. Cost of sales of the Predecessor on a historical basis was 74.6% and 75.7%
for the 45
- ---------------------
(1) As there were no sales to Varian in these markets, pro forma sales
comparisons do not differ from the historical sales comparisons.
(2) This comparison is not significantly different than the comparison of the
sales in this market on a pro forma basis.
- 26 -
<PAGE> 28
weeks ended August 11, 1995 and the 52 weeks ended September 30, 1994,
respectively. The continued reduction in cost of sales margin was largely due to
the Company's strong focus on reducing its "cost of quality" (defined as the
amount of scrap, rework, manufacturing variance costs, warranty costs, inventory
write-offs, quality assistance and quality control costs and unscheduled
downtime) as a percentage of sales including significant reductions in the
levels of rework, scrap and warranty costs.
RESEARCH AND DEVELOPMENT. Research and development expenses increased in Fiscal
1995 to approximately $8.6 million, or 3.4% of total pro forma sales, as
compared to $7.6 million, or 3.1% of total pro forma sales, during Fiscal 1994.
The increase in research and development expenses during Fiscal 1995 was
primarily due to increased levels of research and development spending related
to the development of the Company's microwave power module and a new product
introduction into the UHF broadcast market.
MARKETING, GENERAL AND ADMINISTRATIVE. On a pro forma basis, marketing, general
and administrative expenses were $33.4 million in Fiscal 1995, an increase of
$1.5 million, or 4.7%, as compared to $31.9 million for Fiscal 1994. On a
historical basis, marketing, general and administrative expenses were 17.3% and
14.9% of total sales for the 45 weeks ended August 11, 1995 and the 52 weeks
ended September 30, 1994, respectively. This increase in marketing, general and
administrative expenses from Fiscal 1994 to Fiscal 1995 was primarily due to
increased costs resulting from a higher allocation of Varian corporate
administrative costs, including accruals for performance-based incentive
programs, related to higher sales volume and improved profitability. For the
seven weeks ending September 29, 1995, marketing, general and administrative
expenses were 16.5% of sales and, on a pro forma basis for Fiscal 1995 were
13.2% of sales. These percentages reflect the reduced overhead structure of the
Successor.
EBITDA. On a pro forma basis, EBITDA was $38.0 million for Fiscal 1995, an
increase of $2.1 million, or 5.9%, as compared to $35.9 million for Fiscal 1994.
The Fiscal 1995 pro forma results reflect certain events which negatively
impacted the fourth quarter of Fiscal 1995 operating results:
- - Operations at the Company's Salt Lake City plant were negatively
impacted by the announcement that the Company's operations were being
relocated to San Carlos, California, and that employees were either
being relocated or terminated, and
- - The Company experienced a higher than normal rate of incoming orders
and, as a result, commissions earned by certain salespeople and sales
representatives upon the receipt of the order increased without a
corresponding increase in sales and gross profit.
The Company believes that these two items negatively impacted pro forma EBITDA
by approximately $2.0 million. Pro forma EBITDA was 15.0% of total sales in
Fiscal 1995 which represents an improvement from Fiscal 1994 pro forma EBITDA
margin of 14.4% of total pro forma sales. The increase in EBITDA for Fiscal 1995
was primarily due to the Company's ability to reduce its "cost of quality,"
offset by higher research and development and general and administrative
expenses. Historical EBITDA, as a percentage of sales, for the 45 weeks ended
August 11, 1995 and the 52 weeks ended September 29, 1994 was 9.8% and 11.3%,
respectively, which was affected by the significant increases in corporate
allocations from Varian.
NET EARNINGS. Net earnings of the Predecessor were $6.2 million for the 45 weeks
ended August 12, 1995 compared to $9.6 million for Fiscal 1994. In connection
with the Acquisition, the Company wrote off $31.4 million of acquired in-process
research and development, which significantly affected net income for the seven
weeks ended September 29, 1995. On a pro forma basis, net earnings would have
- 27 -
<PAGE> 29
been $7.2 million for Fiscal 1995, an improvement of $2.3 million over pro forma
Fiscal 1994. Pro forma net income would have been 2.8% of total pro forma sales
in Fiscal 1995, which represents an improvement from pro forma Fiscal 1994 of
0.8%.
Fiscal 1994 Compared to Fiscal 1993
SALES. Total sales for Fiscal 1994 were $246.9 million, a decrease of
approximately $8.4 million, or 3.3%, as compared to total sales of $255.3
million in Fiscal 1993. Total sales in Fiscal 1994 were primarily impacted by a
decline in radar and electronic countermeasures sales and relatively flat
performance in each of the other end-user markets. Radar sales decreased $7.7
million, or 8.1%, as compared to Fiscal 1993. This decline was primarily due to
the continued reductions in the level of DoD spending for new military platforms
and initiatives by the DoD to reduce the levels of spare parts in military
inventories. The Company's electronic countermeasures sales declined
approximately $3.2 million, or 14.5%, from Fiscal 1993. The decline was
primarily caused by the termination of, or substantial reduction in funding for,
several U.S. military programs.
COST OF SALES. Cost of sales were $187.0 million in Fiscal 1994, a decrease of
$11.6 million, or 5.9%, as compared to $198.6 million for Fiscal 1993. Cost of
sales were 75.7% of total sales for Fiscal 1994 compared to 77.8% of total sales
during Fiscal 1993. The decrease in cost of sales was substantially due to a
decline in sales volume at the Company and manufacturing process improvements
which served to reduce the Company's "cost of quality."
RESEARCH AND DEVELOPMENT. Research and development expenses were $7.6 million
for Fiscal 1994, approximately the same level as in Fiscal 1993. Research and
development expenses were 3.1% of total sales for Fiscal 1994 as compared to
3.0% of total sales for Fiscal 1993. The increase in research and development
expense margin was primarily due to the Company's lower total sales and the
Company's decision not to reduce new product development despite lower total
sales.
MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and administrative
expenses were $36.9 million in Fiscal 1994, a decrease of $1.9 million, or 5.1%,
as compared to $38.8 million in Fiscal 1993. Marketing, general and
administrative expenses were 14.9% of total sales in Fiscal 1994 as compared to
15.2% in Fiscal 1993. The decrease in marketing, general and administrative
expenses was primarily due to the Company's cost reduction efforts commensurate
with anticipated declines in sales in selected markets in order to maintain the
Company's overall operating margins. Many of these savings were the result of
cost reduction actions taken by the Company in Fiscal 1993.
EBITDA. EBITDA was $27.8 million in Fiscal 1994, an increase of $6.0 million or
27.6% compared to $21.8 million for Fiscal 1993. EBITDA margin increased to
11.3% of total sales in 1994 as compared to 8.5% of total sales in Fiscal 1993.
The increase in EBITDA was primarily due to a reduction in the Company's cost of
sales from reduced "cost of quality" and lower general and administrative
expenses.
NET EARNINGS. Net earnings were $9.6 million for Fiscal 1994, an increase of
$3.2 million or 50.3% as compared to $6.4 million for Fiscal 1993. Net earnings
were 3.9% of total sales in Fiscal 1994 which represents an improvement from
Fiscal 1993 net earnings margin of 2.5%.
- 28 -
<PAGE> 30
Fiscal 1993 Compared to Fiscal 1992
SALES. Total sales for Fiscal 1993 were $255.3 million, a decrease of $14.9
million, or 5.5%, as compared to total sales of $270.2 million in Fiscal 1992.
Total sales for Fiscal 1993 was primarily impacted by a decline in radar and
communication sales which was slightly offset by modest increases in electronic
countermeasures, medical and industrial sales. Radar sales declined $18.3
million, or 16.2%, as compared to Fiscal 1992. The decline in radar sales was
primarily due to the continued decline in the level of DoD spending for new
military platforms. Communication sales experienced a decrease of $2.1 million,
or 2.0%, below Fiscal 1992 sales. The decline in communication sales was due
primarily to a decline in the sales of products for military communications
systems and commercial broadcast systems offset by increases in sales of
products for commercial SatCom systems. Offsetting the declines in the Company's
radar and communication markets was an increase in sales of $1.8 million, or
9.1%, in electronic countermeasures. This increase was due primarily to an
increased focus by the DoD to provide funding for new devices in the wake of the
successful performance achieved by new electronic countermeasure platforms
during the Gulf War. Medical sales similarly gained $1.8 million, or 13.7%, as
compared to Fiscal 1992. The increase in medical sales was due primarily to the
strong demand for advanced medical diagnostic and treatment equipment, including
X-ray machinery, in both the domestic and international health care markets.
Industrial sales increased $1.1 million, or 8.1%, as compared to Fiscal 1992,
due primarily to stronger sales of products which serve industrial heating
applications.
COST OF SALES. Cost of sales were $198.6 million in Fiscal 1993, a decrease of
$23.5 million, or 10.6%, as compared to $222.1 million for Fiscal 1992. Cost of
sales were 77.8% of total sales for Fiscal 1993 compared to 82.2% of total sales
during Fiscal 1992. The decrease in cost of sales was substantially due to a
decline in sales volume and manufacturing process improvements which have
lowered the Company's "cost of quality," through reductions in manufacturing
variances, scrap levels, rework costs, and warranty costs.
RESEARCH AND DEVELOPMENT. Research and development expenses were $7.6 million
for Fiscal 1993, a decrease of $0.2 million, or 3.0%, as compared to $7.8
million for Fiscal 1992. Research and development expenses were 3.0% of total
sales for Fiscal 1993 as compared to 2.9% of sales for Fiscal 1992. The increase
in research and development expense margin was primarily due to the Company's
lower total sales and its decision not to reduce new product development despite
lower total sales.
MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and administrative
expenses were $38.8 million in Fiscal 1993, a decrease of $2.2 million, or 5.2%,
as compared to $41.0 million in Fiscal 1992. Marketing, general and
administrative expenses were 15.2% and 15.1% of total sales in Fiscal 1993 and
Fiscal 1992, respectively. The decrease in marketing, general and administrative
expenses was primarily due to decreases in marketing expenses as a result of the
realization of operating savings which were implemented in the Company's
restructuring of its worldwide marketing operations. These restructuring
measures included the reduction of field offices and support personnel and
reduced levels of administrative activities in Europe.
EBITDA. EBITDA was $21.8 million in Fiscal 1993, an increase of $12.4 million,
or 131.9%, compared to $9.4 million for Fiscal 1992. EBITDA margin increased to
8.5% of total sales in Fiscal 1993 as compared to 3.5% of total sales in Fiscal
1992. The increase in EBITDA was primarily due to a reduction in the Company's
cost of sales due to the introduction of advanced manufacturing process controls
and lower marketing expenses.
- 29 -
<PAGE> 31
NET EARNINGS. Net earnings were $6.4 million for Fiscal 1993, an increase of
$6.8 million as compared to a net loss of approximately $0.5 million for Fiscal
1992. Net earnings were 2.5% of total sales in Fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's continuing operating activities have provided adequate capital and
liquidity for the Company for the periods presented. Prior to the Acquisition,
the Predecessor's short-term cash requirements were provided by Varian through
an intercompany credit facility arrangement.
Cash flows provided by operating activities decreased to $4.1 million for the 45
weeks ending August 11, 1995 from $31.4 million in Fiscal 1994 due principally
to working capital changes resulting from the Acquisition. Cash flows provided
by operating activities decreased to $31.4 million in Fiscal 1994 from $33.7
million in Fiscal 1993. Working capital at September 29, 1995 was $35.2 million
as compared to $60.4 million at September 30, 1994 and $67.3 million at October
1, 1993, primarily as a result of the $22.8 million current portion of long term
debt resulting from the Acquisition. The reduced requirement for working capital
from October 1, 1993 to September 29, 1995 has primarily been due to the
implementation of inventory reduction programs, including outsourcing of
selected manufacturing functions which generated a total reduction in
inventories from October 2, 1992 to September 29, 1995 of $15.1 million
(excluding the effect of purchase accounting).
Net cash used in investing activities increased to $197.1 million in Fiscal 1995
as a result of the Acquisition. The cash used in investing activities for the 45
week period ended August 11, 1995 was $5.3 million, compared to $12.9 million
and $15.1 million used in investing activities for the 52 week periods ending
September 30, 1994 and October 1, 1993. These usages primarily reflect higher
levels of purchases of property, plant and equipment during Fiscal 1994 and
1993, principally resulting from seismic retrofitting of the Company's
facilities completed during Fiscal 1994. Net cash used in investing activities
decreased to $12.9 million in Fiscal 1994 from $15.1 million in Fiscal 1993. The
decrease is primarily due to the Company's acquisition of M/A COM's high-power
products operation in Fiscal 1993 for $3.9 million and the transfer of $1.5
million of property, plant and equipment into the Company in Fiscal 1993.
The Company's continuing operations typically do not have large capital
requirements. Disregarding the one-time costs of seismic retrofits at certain of
the Company's manufacturing facilities, which are substantially completed and
totaled $8.3 million from Fiscal 1993 through Fiscal 1995, capital expenditures
have generally been less than $9.0 million in each fiscal year. Capital
expenditures are generally made to replace existing assets, increase
productivity, facilitate cost reductions or meet regulatory requirements.
Management believes that the Company's future capital spending requirements will
be funded by the Company's cash generated from operating activities.
Disregarding the one-time costs of seismic retrofits, expenditures for the
purchase of property, plant and equipment would have been $7.3 million, $10.7
million and $7.0 million in Fiscal 1993, Fiscal 1994 and Fiscal 1995,
respectively.
Cash flow from financing activities of the Predecessor consisted entirely of
repayment of intercompany funding to Varian during the periods presented. During
the 45 weeks ended August 11, 1995, the Company repaid $4.5 million of
intercompany funding as compared to $15.4 million in Fiscal 1994 and $17.8
million in Fiscal 1993. Cash flow from financing activities of the Successor
relate almost entirely to the financing raised in connection with the
Acquisition.
- 30 -
<PAGE> 32
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, $11.4 million
was available for CPI to draw upon as of September 29, 1995. The Senior Credit
Agreement does not require CPI, at any time, to exchange any of its
floating-rate obligations under the Senior Credit Agreement into fixed-rate
obligations.
Management believes that the operations of the Company will have adequate
capital resources and liquidity to meet its obligations, fund all required
capital expenditures and pursue its business strategy for the foreseeable future
(and in any event for at least the next twelve months). Such capital resources
and liquidity are expected to be available from the Company's cash flow provided
by operations and borrowings under CPI's Senior Credit Agreement.
Impact of Inflation
Generally, the Company has been able to pass on inflation-related cost
increases; consequently, inflation has not had a material impact on the
Company's historical operations or profitability.
Foreign Currency Exposure
Although the majority of the Company's net sales, including international sales,
are made pursuant to contracts denominated in U.S. dollars, a varying portion of
the Company's net sales are denominated in foreign currencies. In general, the
most significant foreign currencies for the Company are the British pound, the
German mark and the French franc. Although a decrease in the value of any of
these currencies compared to the U.S. dollar would have the effect of reducing
the Company's net sales (which are reported in U.S. dollars), the Company does
not believe that its exposure to such foreign currency rate fluctuations is
significant.
- 31 -
<PAGE> 33
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information called for by this item is set forth in the consolidated financial
statements of Holding and CPI contained in this report. Specific financial
statements can be found at the pages listed in the following index:
<TABLE>
<CAPTION>
COMMUNICATIONS & POWER INDUSTRIES, INC. Page
- -------------------------------------- ----
<S> <C>
Index to Financial Statements............................................................................ F-1
Consolidated Balance Sheets as of September 29, 1995 (Successor) and September 30, 1994
(Predecessor)....................................................................................... F-5
Consolidated Statements of Operations for the 7-week period ended September 29,
1995 (Successor), the 45-week period ended August 11, 1995 (Predecessor),
the 52-week period ended September 30, 1994 (Predecessor) and the 52-week
period ended October 1, 1993 (Predecessor) ......................................................... F-6
Consolidated Statements of Stockholders' Equity (Deficit) for the 7-week period
ended September 29, 1995 (Successor), the 45-week period ended August 11,
1995 (Predecessor), the 52-week period ended September 30, 1994
(Predecessor) and the 52-week period ended October 1, 1993
(Predecessor) ...................................................................................... F-7
Consolidated Statements of Cash Flows for the 7-week period ended September 29,
1995 (Successor), the 45-week period ended August 11, 1995 (Predecessor),
the 52-week period ended September 30, 1994 (Predecessor) and the 52-week
period ended October 1, 1993 (Predecessor) ......................................................... F-8
Notes to the Consolidated Financial Statements........................................................... F-10
Financial Statement Schedule............................................................................. F-61
</TABLE>
- 32 -
<PAGE> 34
<TABLE>
<CAPTION>
COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION Page
- -------------------------------------- ----
<S> <C>
Consolidated Balance Sheets as of September 29, 1995 (Successor) and September 30, 1994
(Predecessor)....................................................................................... F-34
Consolidated Statements of Operations for the 7-week period ended September 29,
1995 (Successor), the 45-week period ended August 11, 1995 (Predecessor),
the 52-week period ended September 30, 1994 (Predecessor) and the 52-week
period ended October 1, 1993 (Predecessor) ......................................................... F-35
Consolidated Statements of Stockholders' Equity (Deficit) for the 7-week period
ended September 29, 1995 (Successor), the 45-week period ended August 11,
1995 (Predecessor), the 52-week period ended September 30, 1994
(Predecessor) and the 52-week period ended October 1, 1993
(Predecessor) ...................................................................................... F-36
Consolidated Statements of Cash Flows for the 7-week period ended September 29,
1995 (Successor), the 45-week period ended August 11, 1995 (Predecessor),
the 52-week period ended September 30, 1994 (Predecessor) and the 52-week
period ended October 1, 1993 (Predecessor) ......................................................... F-37
Notes to the Consolidated Financial Statements........................................................... F-39
Financial Statement Schedule............................................................................. F-62
</TABLE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In connection with the audits of the financial statements for the seven weeks
ended September 29, 1995, the 45 weeks ended August 11, 1995 and the 52 weeks
ended September 30, 1994 and October 1, 1993, there were no disagreements with
either KPMG Peat Marwick LLP or Coopers & Lybrand, L.L.P. on accounting or
financial disclosure.
- 33 -
<PAGE> 35
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.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Al D. Wilunowski................. 49 Chief Executive Officer,
President and Director
Alvin J. Ferreira................ 51 Vice President and Assistant
Secretary
Lynn E. Harvey................... 40 Chief Financial Officer,
Treasurer and Secretary
Chester G. Lob................... 69 Vice President and Assistant
Treasurer
Leonard I. Green................. 62 Director
John G. Danhakl.................. 39 Director
Gregory J. Annick................ 31 Director
</TABLE>
- 34 -
<PAGE> 36
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.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Al D. Wilunowski................. 49 Chief Executive Officer,
President and Director
Joseph Caldarelli................ 45 Vice President
James J. Commendatore............ 52 Vice President
Alvin J. Ferreira................ 51 Vice President
Dennis J. Gleason................ 42 Vice President
Lynn E. Harvey................... 40 Chief Financial Officer
H. Frederick Koehler............. 60 Vice President
Chester G. Lob................... 69 Vice President
Armand Staprans.................. 64 Vice President
Leonard I. Green................. 62 Director
John G. Danhakl.................. 39 Director
Gregory J. Annick................ 31 Director
</TABLE>
Al D. Wilunowski became Chief Executive Officer, President and a Director of
Holding and CPI in August, 1995. Mr. Wilunowski was an Executive Vice President
of Varian and the Chief Operating Officer of the Predecessor from 1990 until
August 1995. Prior to May 1990, Mr. Wilunowski was a Corporate Vice President of
Varian and President of the Electron Devices Group since 1989. From 1986 until
April 1989, he was General Manager of Varian's Nuclear Magnetic Resonance
Instrument business. Mr. Wilunowski has also served as General Manager of three
of Varian's Semiconductor Equipment business units. Prior to joining Varian, Mr.
Wilunowski was Vice President and General Manager of Searle Analytic, a division
of G.D. Searle. Mr. Wilunowski received a B.S.B.A. degree from Northwestern
University and an M.B.A. from the University of Chicago.
Joseph Caldarelli became a Vice President of CPI in August, 1995. Mr. Caldarelli
was Vice President and General Manager for Canada Microwave Products ("CMP"), an
operating unit of the Predecessor, from 1985 until August 1995 and has been
President and a director of Varian Canada, Inc. from 1992 until August, 1995.
From 1982 until 1985, Mr. Caldarelli was Marketing Manager of CMP and served as
its Equipment Operations Manager from 1979 until 1982. Prior to joining Varian,
Mr. Caldarelli served as Manufacturing Engineering Manager for Medtronic Canada,
Inc. Mr. Caldarelli holds a B.S. in Mechanical Engineering from the University
of Toronto.
James J. Commendatore became a Vice President of CPI in August 1995. Mr.
Commendatore was Vice President and General Manager of the Predecessor's
Microwave Equipment Products ("MEP") business unit from December 1994 until
August 1995. From October 1993 until December 1994, he served as MEP's Business
Support Process Manager, responsible for operations and administration, and as
Controller. He also served the Microwave Power Tube Products unit of the
- 35 -
<PAGE> 37
Predecessor as Controller from August 1989 until October 1993. Mr.
Commendatore's background also includes various finance, supervisory, and
management posts with United Technology Center, Litton Industries, Inc.,
National Semiconductor, Advanced Memory Systems, and Amdahl Corporation. Mr.
Commendatore holds B.S. degrees in Business and Industrial Management and an
M.B.A. degree, all from California State University, San Jose.
Alvin J. Ferreira became a Vice President of CPI and Vice President and
Assistant Secretary of Holding in August 1995. Mr. Ferreira was Vice President
and General Manager of the Traveling Wave Tubes Products business unit of the
Predecessor from 1992 to August 1995. From 1990 until 1992, Mr. Ferreira was
Corporate Vice President of Operations for Varian and in 1989 served as
manufacturing manager of Varian's Instrument Division. Mr. Ferreira began his
career with Varian in 1965 and between 1965 and 1989, held a number of positions
in production.
Dennis J. Gleason became a Vice President of CPI in August 1995. Mr. Gleason was
Vice President and General Manager of the Crossed Field & Receiver Protector
Products ("CFRPP") unit of the Predecessor from 1989 until August, 1995. From
1987 until 1989, Mr. Gleason served as Assistant General Manager of CFRPP. From
1982 until 1987, Mr. Gleason held a number of positions with the Predecessor,
including serving as Manufacturing Engineering Manager and Product Assurance
Manager at the then-Electro-Optical Sensors unit of the Predecessor. Prior to
being employed by Varian, Mr. Gleason served as an officer in the U.S. Navy
Nuclear Submarine Program. Mr. Gleason received B.S. and M.S. degrees in
Aerospace Engineering from the University of Notre Dame.
Lynn E. Harvey became Chief Financial Officer of Holding and CPI in August 1995.
Ms. Harvey was the Business Support Process Manager of the Power Grid Tube
Products unit of the Predecessor from 1993 to August 1995. From 1991 until 1993,
Ms. Harvey served as Controller of the Coupled Cavity Tube Products unit of the
Predecessor. From 1988 until 1991, Ms. Harvey served first as Cost Accounting
Manager and subsequently Budget Manager of the Power Grid Tube Products business
unit. Ms. Harvey was also an analyst at Varian's Nuclear Magnetic Resonance
Instrument business from 1986 until 1988. Ms. Harvey joined Varian in 1984. Ms.
Harvey received a B.S. degree from the University of California, Berkeley.
H. Frederick Koehler became Vice President of CPI in August 1995. Mr. Koehler
was Vice President and General Manager of the Power Grid Tube Products unit of
the Predecessor from 1992 to August 1995. From 1989 until 1991, Mr. Koehler was
President and Chief Executive Officer of Trio-Tech International, an electronic
test equipment manufacturer. From 1985 until 1989, he served as President of
Leach Relay Group of Leach Corporation and from 1979 until 1985, he was a Vice
President at Memorex Corporation. Mr. Koehler received a B.S. from the U.S.
Military Academy, West Point and an M.S.E.E. from Syracuse University.
Chester G. Lob became Vice President of CPI and Vice President and Assistant
Treasurer of Holding in August 1995. Dr. Lob was Sales Manager of the
Predecessor from 1989 until August 1995. From 1986 until 1989, Dr. Lob was
manager of business development of the Predecessor. Previously, he served as
Vice President and Chief Engineer of the Predecessor from 1980 until 1986. Dr.
Lob joined Varian in 1965 with Varian's acquisition of the General Electric
Company's Microwave Laboratory at Stanford University, where Dr. Lob served as
General Manager. Dr. Lob holds a B.S. degree in electrical engineering from
Tulane University and was awarded M.S. and Ph.D. degrees in the same field from
the University of Illinois.
Armand Staprans became Vice President of CPI in August 1995. Dr. Staprans was
Vice
- 36 -
<PAGE> 38
President and General Manager of the Microwave Power Tube Products unit of the
Predecessor from 1991 until August 1995. Previously, he was Operations Manager
of the then-Coupled Cavity Tube unit of the Predecessor from 1986 until 1989,
and became General Manager of that unit in 1989. From 1978 until 1986, Dr.
Staprans served as Chief Engineer for the then-Microwave Tube Division unit of
the Predecessor. Dr. Staprans joined Varian in 1957 as an engineer in its
microwave tube operations. He has held various other positions with Varian and
the Predecessor in engineering, development and management. Dr. Staprans
received his B.S., M.S. and Ph.D. degrees from the University of California,
Berkeley, and has been named as an inventor on seven patents.
Leonard I. Green has been an executive officer and an equity owner of LGP, a
merchant banking firm which manages GEI II, since the formation of LGP and GEI
II in 1994 by the principals of Leonard Green & Associates, L.P. ("LGA"). Mr.
Green has also been, individually or through a corporation, a partner in LGA, a
merchant banking firm, since its inception in 1989. Before forming LGA, Mr.
Green had been a partner of Gibbons, Green, van Amerongen for more than five
years. Mr. Green is also a director of Thrifty PayLess Holdings, Inc., Thrifty
PayLess, Inc., Foodmaker, Inc., Horace Mann Educators Corp., Carr-Gottstein
Foods Co. and Big 5 Holdings, Inc.
John G. Danhakl has been an executive officer and an equity owner of LGP, a
merchant banking firm which manages GEI II, since 1995. Mr. Danhakl had
previously been a Managing Director at Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") and had been with DLJ since 1990. Prior to 1990, Mr. Danhakl
was a Vice President at Drexel Burnham Lambert from 1985 to 1990. Mr. Danhakl is
also a director of The Arden Group, Inc.
Gregory J. Annick has been an executive officer and an equity owner, through a
trust, of LGP, a merchant banking firm which manages GEI II, since the formation
of LGP and GEI II in 1994 by the principals of LGA. He joined LGA as an
associate in 1989, became a principal in 1993, and through a corporation became
a partner of LGA in 1994. From 1988 to 1989, he was an associate with the
merchant banking firm of Gibbons, Green, van Amerongen. Before that time, Mr.
Annick was a financial analyst in mergers and acquisitions with Goldman, Sachs &
Co. Mr. Annick is also a director of Carr-Gottstein Foods Co.
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 who formerly served as the
Predecessor's Chief Operating Officer) (the "Named Executive Officer"). The
compensation shown was paid by Varian in Fiscal 1993 and Fiscal 1994 and is
being provided pursuant to the rules and regulations of the Securities and
Exchange Commission. The amounts presented for the Company, below, are for the
seven-week period ending September 29, 1995:
- 37 -
<PAGE> 39
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long Term Compensation Awards
---------------------------------- -----------------------------
Securities
Restricted Underlying
Name and Other Annual Stock Options/ LTIP All Other
Principal Position Fiscal Bonus($) Compensation Awards($) SARs(#) Payouts($) Compensation
with the Company Year Salary($) (a) (b) (c) (d) (e) ($)(f)
- --------------------- --------- --------- ---------- ------------- ------------ --------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMPANY (Seven weeks
ending September 29,
1995):
Al D. Wilunowski $ 40,754 $ 68,365 2,314 -- -- 78,062 --
Chief Executive
Officer and President
PREDECESSOR (PAID BY VARIAN)
Al D. Wilunowski 1994 $291,594 $ 385,980 18,359 258,563 30,000 550,785 53,800
Chief Executive Officer 1993 $282,370 $ 203,844 19,323 -- 30,000 401,959 50,758
and President
</TABLE>
(a) Consists of awards under Varian's Management Incentive Plan and Cash
Profit-Sharing Plan allocations. Data for the 7-week period ending
September 29, 1995 represents the amount paid by the Company relating to
the Varian plan for Fiscal 1995.
(b) Consists of amounts reimbursed for the payment of taxes on certain
perquisites and personal benefits.
(c) 1994 grants consist of two separate grants, one in November 1993
before Varian established a performance-based measure (return on equity)
for restricted stock grants, and a performance-based grant in November 1994
based on Varian's actual return on equity in Fiscal 1994. The November 1994
grant was made in Fiscal 1995, but was reported by Varian above for Fiscal
1994 as compensation relating to services rendered in that year. Reflects
the value of Varian restricted stock awards granted during the year.
Restricted stock awards are released from restrictions over a three-year
period (approximately one-third of the award on each anniversary date of
grant), the principal restriction being continued employment until the
respective release dates. Restrictions relating to such Varian stock lapsed
upon consummation of the Acquisition. Dividends are paid on Varian's
restricted stock. The number and value (at $36.50 per share) of Mr.
Wilunowski's restricted stock holdings in Varian as of the end of Fiscal
1995 was 11,600 shares, $423,400. The shares reported are adjusted to
reflect Varian's 2-for-1 stock split in March 1994.
(d) All grants were of options to purchase Varian common stock under Varian's
Omnibus Stock Plan. Unvested options became vested upon consummation of the
Acquisition. No stock appreciation rights were granted. The shares reported
are adjusted to reflect Varian's 2-for-1 stock split in March 1994.
(e) Consists of cash payouts (a) in Fiscal 1995 under the long-term incentive
feature of Varian's Omnibus Stock Plan for a three-year period ended with
Fiscal 1994, paid by the Company for the 7-weeks ended September 29, 1995;
(b) in Fiscal 1994 under the long-term incentive feature of Varian's
Omnibus Stock Plan for a three-year period ended with Fiscal 1993; and (c)
for Fiscal 1993 under Varian's former Long Term Incentive Plan for a
two-year period ended with Fiscal 1992.
(f) Consists of (a) Varian contributions (including interest) to Varian's
Retirement and Profit-Sharing Program and Supplemental Retirement Plan
accounts for Fiscal 1994 and Fiscal 1993 ($52,579 and $49,362) and (b) for
Varian-paid premiums for group term life insurance for Fiscal 1994 and
Fiscal 1993, respectively ($1,221 and $1,396).
- 38 -
<PAGE> 40
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 a defined contribution retirement plan and, in Mr. Wilunowski's
case, a supplemental executive retirement plan.
THE HOLDING EQUITY PLAN
The Named Executive Officer and certain of Holding's and CPI's other executive
officers are participants in Holding's 1995 Management Equity Plan (the "Holding
Equity Plan"). Under the Holding Equity Plan, participants may purchase shares
of Holding Common Stock ("Management Shares") at a price determined by Holding's
board of directors to be the fair market value of such Holding Common Stock on
the date the participant executes an agreement to purchase the shares. Holding
has reserved a total of 50,000 shares of Holding Common Stock for issuance under
the Holding Equity Plan,45,870 of which have been issued.
In connection with consummation of the Acquisition, Holding issued an aggregate
of 35,000 Management Shares (the "Initial Management Share Issuance") to the
Chief Executive Officer of Holding and CPI, Mr. Wilunowski, and the six vice
presidents of CPI, Messrs. Caldarelli, Commendatore, Ferreira, Gleason, Koehler
and Staprans (together with Mr. Wilunowski, the "Senior Management Investors"),
at a price of $100 per share. On September 25, 1995, Holding issued an aggregate
of 10,870 additional Management Shares (the "September Management Share
Issuance") to certain executive officers and key employees, including Mr.
Wilunowski and Mr. Koehler but none of the other Senior Management Investors, at
a price of $100 per share (collectively, any executive officers and key
employees who may acquire Management Shares, including the Senior Management
Investors, are referred to as the "Management Investors").
The Management Shares were sold pursuant to Management Subscription and
Stockholders Agreements among Holding, GEI II and the respective Management
Investor (each such agreement, a "Management Share Agreement"). Pursuant to the
Management Share Agreements, transfers of the Management Shares (other than
transfers to certain related transferees) are subject to various restrictions,
including a right of first refusal in favor of Holding. Each Management Share
Agreement also contains a "call" option exercisable by Holding upon termination
of the Management Investor's employment with Holding, the Company and their
subsidiaries. The Management Share Agreements also contain certain "piggyback"
registration rights, "tag-along" sale rights and "drag-along" sale obligations.
These rights and obligations lapse upon the occurrence of certain events.
In the Initial Management Share Issuance, each Senior Management Investor
elected to pay a portion of the purchase price for his Management Shares by
delivery of a secured promissory note to Holding (a "Management Note"). The
aggregate principal amount of such Management Notes is $800,000. Each such
Management Note is secured by a pledge of a portion (from 50% to 75%) of the
Senior Management Investor's Management Shares and guaranteed by Varian. In
certain circumstances following an event of default under a Management Note,
Varian may have the right under such guaranty
- 39 -
<PAGE> 41
to succeed to Holding's rights under the Note and the related pledge of
Management Shares and to acquire all or a portion of the defaulting Senior
Management Investor's Management Shares in a foreclosure sale or otherwise. In
the September Management Share Issuance, Mr. Wilunowski elected to pay $199,980
of the purchase price for the Management Shares then issued to him by delivery
of a Management Note to Holding. Such Management Note is not guaranteed by
Varian, but is secured by a pledge of approximately 91% of the Management Shares
issued to Mr. Wilunowski in the September Management Share Issuance. All other
Management Investors to whom shares were issued in the September Management
Share Issuance paid the full purchase price for such Management Shares in cash.
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 71.8% 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." Upon consummation of the Acquisition, LGP received a fee of
approximately $3.3 million pursuant to a management agreement between LGP and
GEI II for its services in arranging and structuring the Acquisition and related
financing, including, among other things, structuring and negotiating the
Acquisition Agreement and the Ancillary Agreements (as defined below), obtaining
senior credit financing and arranging the terms of the Senior Credit Agreement
and related documents, negotiating the terms of the Notes and the Units,
financial and market analysis and other similar consulting and investment
banking services. In addition, 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 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.
In connection with Mr. Wilunowski's purchase of 20,000 Management Shares in the
Initial Management Share Issuance, Holding made a limited recourse loan to Mr.
Wilunowski in a principal amount of $500,000. This loan is evidenced by a
Management Note delivered by Mr. Wilunowski to Holding. The Management Note has
a term of nine years, is secured by a pledge of 75% of the Management Shares
issued to Mr. Wilunowski in the Original Management Shares Issuance and is
guaranteed by Varian. In
- 40 -
<PAGE> 42
connection with Mr. Wilunowski's purchase of 2,200 Management Shares in the
September Management Share Issuance, Holding made a limited recourse loan to Mr.
Wilunowski in the principal amount of $199,980. This loan is evidenced by a
Management Note delivered by Mr. Wilunowski to Holding. This second Management
Note has a term of nine years and is secured by a pledge of approximately 91% of
the Management Shares issued to Mr. Wilunowski in the September Management Share
Issuance, but is not guaranteed by Varian. Outstanding principal under each
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 Management Notes is limited to the Management
Shares pledged to secure the applicable note.
On September 25, 1995, Holding repurchased 10,870 shares of Holding Common Stock
from GEI II at a purchase price of $100 per share (the same price at which the
10,870 Management Shares were issued in the September Management Share Issuance)
pursuant to an understanding between Holding and GEI II under which Holding
would repurchase shares of Holding Common Stock owned by GEI II on a
share-for-share basis concurrently with any additional purchases of Holding
Common Stock by Management Investors within a limited period of time after
consummation of the Acquisition.
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's Boards of Directors. Holding and CPI have entered into
a management services agreement pursuant to which LGP will receive an annual fee
plus reasonable expenses for providing management, consulting and financial
planning services, including assistance in strategic planning, providing market
and financial analyses, negotiating and structuring financing and exploring
expansion opportunities, in the future. See "ITEM 13 - Certain Relationships and
Related Transactions." It is anticipated that other directors, if any, will
receive customary fees for service on Holding's and CPI's respective Boards of
Directors.
- 41 -
<PAGE> 43
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 February 1, 1996, certain information with respect to the beneficial
ownership of Holding Common Stock by (i) each person known by Holding to own
beneficially 5% or more of the outstanding shares of Holding Common Stock, (ii)
each director of Holding and CPI, (iii) the person named in the summary
compensation table, and (iv) all executive officers and directors as a group.
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address of Beneficial Owner (a) Beneficial Ownership Shares Outstanding
- ------------------------------------------------------------ ------------------------- --------------------
<S> <C> <C>
Green Equity Investors II, L.P.(b)........................ 143,630 71.82%
333 S. Grand Avenue, Suite 5400
Los Angeles, California 90071
Leonard I. Green(b)....................................... 143,630 71.82%
333 S. Grand Avenue, Suite 5400
Los Angeles, California 90071
John G. Danhakl(b)........................................ 143,630 71.82%
333 S. Grand Avenue, Suite 5400
Los Angeles, California 90071
Gregory J. Annick(b)...................................... 143,630 71.82%
333 S. Grand Avenue, Suite 5400
Los Angeles, California 90071
Al D. Wilunowski (c)...................................... 22,000 11.10%
607 Hansen Way
Palo Alto, California 94304
Directors and Executive Officers as a group (12 persons).. 38,250 19.13%
</TABLE>
- ---------
(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 and Jennifer Holden Dunbar, 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 and
Annick 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 200 shares originally acquired by Mr. Wilunowski and
subsequently transferred to his child.
- 42 -
<PAGE> 44
Terms of Subscription and Stockholder Agreements
Holding Common Stock and Junior Preferred Stock purchased by GEI II was
purchased pursuant to a Stock Subscription Agreement between Holding, CPI and
GEI II. GEI II was also granted certain demand and "piggyback" registration
rights for any shares of Holding Common Stock it may own pursuant to the Holding
Common Stock Registration Rights Agreement dated as of August 11, 1995 among
Holding, GEI II and the initial purchaser of CPI's Series A Senior Preferred
Stock.
Holders of Holding Common Stock issued to qualified institutional buyers and/or
institutional accredited investors are entitled to the benefit of agreements
with Holding and CPI which contain certain demand and "piggyback" registration
rights, customary "tag-along" sale rights exercisable by the investor, and
customary "drag-along" sale rights exercisable by GEI II in certain
circumstances. In addition, the Management Investors have been granted certain
registration rights and "tag-along" rights and are subject to certain
"drag-along" obligations.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Agreements
LGP is investment adviser to, and an affiliate of the general partner of, GEI
II, which holds approximately 71.8% 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. Upon consummation of the
Acquisition, LGP received a fee of approximately $3.3 million pursuant to a
management agreement between LGP and GEI II for its services in arranging and
structuring the Acquisition and related financing, including, among other
things, structuring and negotiating the Acquisition Agreement and the Ancillary
Agreements, obtaining senior credit financing and arranging the terms of the
Senior Credit Agreement and related documents, negotiating the terms of the
Notes and Units, financial and market analysis and other similar consulting and
investment banking services. In addition, in connection with the Acquisition,
Holding and CPI have 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 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.
- 43 -
<PAGE> 45
Management Share Agreement
In connection with Mr. Wilunowski's purchases of 22,200 Management Shares,
pursuant to Management Shares agreements, Holding and CPI made limited recourse
loans to Mr. Wilunowski in the principal amounts of $500,00 and $199,980,
respectively. These loans are evidenced by Management Notes delivered by Mr.
Wilunowski to Holding. The Management Note given in connection with Mr.
Wilunowski's acquisition of 20,000 Management Shares in the Original Management
Share Issuance has a term of nine years, is secured by a pledge of 75% of such
Management Shares and is guaranteed by Varian. The Management Note given in
connection with Mr. Wilunowski's acquisition of 2,200 Management Shares in the
September Management Share Issuance also has a term of nine years and is secured
by a pledge of approximately 91% of such Management Shares, but is not
guaranteed by Varian. Outstanding principal under each 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 under the Management
Notes is limited to the Management Shares pledged to secure the applicable note.
Share Repurchase
On September 25, 1995, Holding repurchased 10,870 shares of Holding Common Stock
from GEI II at a purchase price of $100 per share (the same price at which the
10,870 Management Shares were issued in the September Management Share Issuance)
pursuant to an understanding between Holding and GEI II under which Holding
would repurchase shares of Holding Common Stock owned by GEI II on a
share-for-share basis concurrently with any additional purchases of Holding
Common Stock by Management Investors within a limited period of time after
consummation of the Acquisition.
Registration Rights Agreement
Pursuant to the Holding Common Stock Registration Rights Agreement dated August
11, 1995 among Holding, GEI II and the initial purchaser of CPI's Series A
Senior Preferred Stock, GEI II was granted certain demand and "piggyback"
registration rights with regard to the shares of Holding Common Stock it may own
from time to time.
- 44 -
<PAGE> 46
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).
- 45 -
<PAGE> 47
Exhibit No. Description
4.6(2) Form of Second Supplemental Indenture among CPI, Holding, the
other Guarantors and U.S. Trust Company of California, N.A.,
relating to the Notes.
10.1(1) Credit Agreement among CPI, Holding, CPII Acquisition, the other
obligors named therein, the lenders named therein and Bankers
Trust Company, as Agent, dated as of August 11, 1995 (including
Annex A (Definitions; Rules of Construction) and Annex F
(Financial Covenants)).
10.2(1) Term A Notes in the amount of $8,333,333.32, $4,166,666.67,
$4,166,666.67, $4,166,666.67 and $4,166,666.76 made by CPI in
favor of Bankers Trust Company, Dresdner Bank AG, First Bank
National Association, The Nippon Credit Bank, Ltd. and Union Bank,
respectively, dated as of August 11, 1995.
10.3(1) Term B Notes in the amount of $11,666,666.68 and $5,666,666.67
made by CPI in favor of Bankers Trust Company and Crescent/Mach I
Partners, respectively, dated as of August 11, 1995.
10.4(1) Revolving Credit Notes in the amount of $11,666,666.68,
$5,833,333.33, $5,833,333.33, $5,833,333.33 and $5,833,333.33 made
by CPI in favor of Bankers Trust Company, Dresdner Bank AG, First
Bank National Association, The Nippon Credit Bank, Ltd, and Union
Bank, respectively, dated as of August 11, 1995.
10.5(1) Swingline Note in the amount of $5,000,000 made by CPI in favor of
Bankers Trust Company dated as of August 11, 1995.
10.6(1) Security Agreement among CPI, CPII Acquisition, the other
assignors named therein and Bankers Trust Company, as Agent, dated
as of August 11, 1995.
10.7(1) Pledge Agreement made by CPI, Holding, CPII Acquisition, and CPI
Subsidiary Holdings, Inc. in favor of Bankers Trust Company, as
Agent, dated as of August 11, 1995.
10.8(1) Continuing Guaranty made by each of the Guarantors in favor of the
Lenders and Agent under the Senior Credit Agreement, dated as of
August 11, 1995.
10.9(1) Transitional Services Agreement between CPI and Varian dated as
of August 10, 1995.
10.10(3)(+) Key Components Supply Agreement between CPI and Varian dated as of
August 10, 1995.
10.11(1) Cross License Agreement between the CPI and Varian dated as of
August 10, 1995.
10.12(1) Trademark License Agreement between CPI and Varian dated as of
August 10, 1995.
- 46 -
<PAGE> 48
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.
10.18(1) Lease (Salt Lake City, Utah) dated as of August 10, 1995 between
CPI and Varian Associates, Inc.
10.19(1) Shared Use Agreement dated as of August 11, 1995 between
Varian (on behalf of itself and its subsidiaries) and CPI (as
successor by merger to CPII Acquisition Corp.) (on behalf of
itself and its subsidiaries).
10.20(1) Purchase Agreement among CPII Acquisition, Holding, the other
Guarantors and the initial purchasers of the Series A Senior
Subordinated Notes (the "Initial Notes Purchasers") dated as of
August 11, 1995.
10.21(1) Purchase Agreement among CPII Acquisition, Holding and the initial
purchaser of the Series A Senior Preferred Stock (the "Initial
Senior Preferred Stock Purchaser") dated as of August 11, 1995.
10.22(1) A/B Exchange Registration Rights agreement among CPI (as successor
by merger to CPII Acquisition), Holding, the other Guarantors and
the Initial Notes Purchasers dated as of August 11, 1995.
10.23(1) Amendment to A/B Exchange Registration Rights Agreement among CPI,
Holding, the other Guarantors and the Initial Notes Purchasers
dated as of August 11,1995.
10.24(1) A/B Exchange Registration Rights Agreement between CPI (as
successor by merger to CPII Acquisition) and the Initial Senior
Preferred Stock Purchaser dated as of August 11, 1995.
10.25(1) Amendment to A/B Exchange Registration Rights Agreement between
CPI and the Initial Senior Preferred Stock Purchaser dated as of
August 11, 1995.
- 47 -
<PAGE> 49
Exhibit No. Description
10.26(1) Holding Common Stock Registration Rights Agreement by and among
Holding, GEI II and the Initial Senior Preferred Stock Purchaser
dated as of August 11, 1995 relating to the Holding Common Stock
sold with the Series A Senior Preferred Stock.
10.27(1) Stockholders Agreement by and among Holding, GEI II and the
Initial Senior Preferred Stock Purchaser dated as of August 11,
1995 relating to the Holding Common Stock sold with the Series A
Senior Preferred Stock.
10.28(1) Stock Subscription Agreement among Holding, CPII Acquisition
Corp. and GEI II dated as of August 11, 1995.
10.29(1) Management Services Agreement among CPI, Holding and Leonard
Green & Partners, L.P. dated as of August 11, 1995.
10.30(1) 1995 Holding Management Equity Plan (including Form of Management
Subscription and Stockholders Agreement).
10.31(1) Letter from Holding to Al D. Wilunowski dated June 9, 1995
relating to terms of employment.
10.32(1) Letter from Holding to Alvin J. Ferreira dated June 9, 1995
relating to terms of employment.
10.33(1) Letter from Holding to Dennis J. Gleason dated June 9, 1995
relating to terms of employment.
10.34(1) Letter from Holding to H. Frederick Koehler dated June 9, 1995
relating to terms of employment.
10.35(1) Letter from Holding to Armand Staprans dated June 9, 1995 relating
to terms of employment.
21(1) Subsidiaries of CPI and Holding.
- --------------
(1) Incorporated by reference to CPI's Registration Statement
on Form S-1 (Registration No. 33-96858), filed on September 12,
1995.
(2) Incorporated by reference to Amendment No.3 to CPI's
Registration Statement on Form S-1 (Registration No.33-96858),
filed on November 9, 1995.
(3) Incorporated by reference to Amendment No.1 to CPI's
Registration Statement on Form S-1 (Registration Statement No.
33-96858), filed on October 25, 1995.
(+) Certain portions of this Exhibit have been omitted and filed
separately under an application for confidential treatment with
the Securities and Exchange Commission.
- 48 -
<PAGE> 50
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
By: /s/ Al D. Wilunowski
--------------------
Al D. Wilunowski
Chief Executive Officer and President
Date: [September 12, 1996]
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:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Leonard I. Green Director 9-12-96
- -------------------------
/s/ John G. Danhakl Director 9-12-96
- -------------------------
/s/ Gregory J. Annick Director 9-12-96
- -------------------------
/s/ Lynn E. Harvey Chief Financial Officer, Treasurer and Secretary
- ------------------------- (Principal Financial and Accounting Officer) 9-12-96
/s/ Al D. Wilunowski Director, Chief Executive Officer and President
- ------------------------- (Principal Executive Officer) 9-12-96
</TABLE>
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.
- 49 -
<PAGE> 51
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: [September 12, 1996]
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:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Leonard I. Green Director 9-12-96
- -------------------------
/s/ John G. Danhakl Director 9-12-96
- -------------------------
/s/ Gregory J. Annick Director 9-12-96
- -------------------------
/s/ Lynn E. Harvey Chief Financial Officer, Treasurer and Secretary
- ------------------------- (Principal Financial and Accounting Officer) 9-12-96
/s/ Al D. Wilunowski Director, Chief Executive Officer and President
- ------------------------- (Principal Executive Officer) 9-12-96
</TABLE>
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.
- 50 -
<PAGE> 52
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiary
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
INDEX TO FINANCIAL STATEMENTS
COMMUNICATIONS AND POWER INDUSTRIES, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants................................................. F-3
Consolidated Balance Sheets as of September 29, 1995 (Successor) and September
30, 1994 (Predecessor)....................................................... F-5
Consolidated Statements of Operations for the 7-week period ended September 29,
1995 (Successor), the 45-week period ended August 11, 1995 (Predecessor),
the 52-week period ended September 30, 1994 (Predecessor) and the 52-week
period ended October 1, 1993 (Predecessor)................................... F-6
Consolidated Statements of Stockholders' Equity (Deficit) for the 7-week period
ended September 29, 1995 (Successor), the 45-week period ended August 11,
1995 (Predecessor), the 52-week period ended September 30, 1994
(Predecessor) and the 52-week period ended October 1, 1993
(Predecessor)................................................................ F-7
Consolidated Statements of Cash Flows for the 7-week period ended September 29,
1995 (Successor), the 45-week period ended August 11, 1995 (Predecessor),
the 52-week period ended September 30, 1994 (Predecessor) and the 52-week
period ended October 1, 1993
(Predecessor)................................................................ F-8
Notes to the Consolidated Financial Statements.................................... F-10
</TABLE>
- F-1 -
<PAGE> 53
INDEX TO FINANCIAL STATEMENTS, CONTINUED
COMMUNICATIONS AND POWER INDUSTRIES HOLDING CORPORATION
<TABLE>
<S> <C>
Report of Independent Accountants................................................. F-32
Consolidated Balance Sheets as of September 29, 1995 (Successor) and September
30, 1994 (Predecessor)....................................................... F-34
Consolidated Statements of Operations for the 7-week period ended September 29,
1995 (Successor), the 45-week period ended August 11, 1995 (Predecessor),
the 52-week period ended September 30, 1994 (Predecessor) and the 52-week
period ended October 1, 1993 (Predecessor)................................... F-35
Consolidated Statements of Stockholders' Equity (Deficit) for the 7-week period
ended September 29, 1995 (Successor), the 45-week period ended August 11,
1995 (Predecessor), the 52-week period ended September 30, 1994
(Predecessor) and the 52-week period ended October 1, 1993
(Predecessor)................................................................ F-36
Consolidated Statements of Cash Flows for the 7-week period ended September 29,
1995 (Successor), the 45-week period ended August 11, 1995 (Predecessor),
the 52-week period ended September 30, 1994 (Predecessor) and the 52-week
period ended October 1, 1993
(Predecessor)................................................................ F-37
Notes to the Consolidated Financial Statements.................................... F-39
FINANCIAL STATEMENT SCHEDULES
Communications & Power Industries, Inc............................................ F-61
Communications & Power Industries Holding Corporation............................. F-62
</TABLE>
- F-2 -
<PAGE> 54
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Communications & Power Industries, Inc.:
We have audited the accompanying consolidated balance sheet of Communications &
Power Industries, Inc. (a wholly owned subsidiary of Communications & Power
Industries Holding Corporation) and subsidiaries ( "CPI" or the "Successor") as
of September 29, 1995, and the related consolidated statements of operations,
stockholders' deficit, and cash flows for the 7-week period ended September 29,
1995. We have also audited the related consolidated statements of operations,
stockholders' equity, and cash flows of CPI's predecessor, the Electron Devices
Business of Varian Associates, Inc. (the "Predecessor") for the 45-week period
ended August 11, 1995. In connection with our audits of the consolidated
financial statements for the periods indicated above, we have also audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of CPI's management. Our responsibility is to express an opinion
on these consolidated financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in the notes to the consolidated financial statements, CPI acquired
assets and assumed liabilities on August 11, 1995 in a transaction which was
accounted for as a purchase. Accordingly, the consolidated financial statements
of the Successor are presented on a different cost basis than the consolidated
financial statements of the Predecessor and, therefore, are not comparable.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Successor as of
September 29, 1995, the results of their operations and their cash flows for the
7-week period ended September 29, 1995, and the results of operations and cash
flows of the Predecessor for the 45-week period ended August 11, 1995, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
s/KPMG PEAT MARWICK, LLP
San Jose, California
November 21, 1995
- F-3 -
<PAGE> 55
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Communications & Power Industries, Inc.:
We have audited the accompanying balance sheets of the Electron Devices
Business, a segment of Varian Associates, Inc. (excluding the segment's Tempe,
Arizona operations) (the "Predecessor") as of September 30, 1994 and the related
statements of operations, stockholders' equity and cash flows for each of the
two fiscal years in the period ended September 30, 1994. 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 financial statements are the responsibility of CPI's
management. Our responsibility is to express an opinion on these financial
statements 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 financial statements referred to above present fairly, in
all material respects, the financial position of the Predecessor as of September
30, 1994 and the results of its operations and its cash flows for each of the
two fiscal years in the period ended September 30, 1994 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/COOPERS & LYBRAND, L.L.P
San Jose, California
April 30, 1995
- F-4 -
<PAGE> 56
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Successor Predecessor
------------- -------------
September 29, September 30,
ASSETS 1995 1994
------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 8,267 5,713
Accounts receivable, net 44,743 39,817
Inventories 44,765 39,137
Deferred taxes -- 11,897
Other current assets 2,566 981
--------- ---------
Total current assets 100,341 97,545
Property, plant, and equipment, net 74,071 61,429
Goodwill, net 26,098 --
Debt issue costs, net 11,371 --
Deferred taxes 2,969 --
Other assets 52 3,175
--------- ---------
Total assets $ 214,902 162,149
========= =========
LIABILITIES, REDEEMABLE
PREFERRED STOCK AND EQUITY (DEFICIT)
------------------------------------
CURRENT LIABILITIES
Revolving credit facility $ 19,600 --
Accounts payable - trade 16,474 6,169
Accrued expenses 19,786 22,128
Product warranty 4,690 4,635
Current portion of term loans 3,200 --
Advance payments from customers 1,387 4,192
--------- ---------
Total current liabilities 65,137 37,124
Senior term loans 38,800 --
Senior subordinated notes 100,000 --
Deferred taxes 43 5,171
--------- ---------
Total liabilities 203,980 42,295
--------- ---------
SENIOR REDEEMABLE PREFERRED STOCK ($.01 par value,
325,000 shares authorized; 150,000 shares issued and
outstanding, liquidation preference $100 per share) 12,460 --
--------- ---------
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIT):
Junior Preferred Stock ($.01 par value, 525,000 shares
authorized; 100,000 shares issued and outstanding,
liquidation preference $100 per share) 1 --
Common stock ($.01 par value, 400,000 shares authorized;
1 share issued and outstanding) -- --
Additional paid-in capital 29,088
Accumulated deficit (29,627) --
Business equity -- 119,854
Less stockholder loans (1,000) --
--------- ---------
Net stockholders' equity (deficit) (1,538) 119,854
--------- ---------
Total liabilities, redeemable preferred
stock and equity (deficit) $ 214,902 162,149
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
- F-5 -
<PAGE> 57
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Successor Predecessor
------------- ------------------------------------------
7-Week 45-Week 52-Week 52-Week
period ended period ended period ended period ended
September 29, August 11, September 30, October 1,
1995 1995 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 36,398 214,677 246,890 255,295
Cost of sales 27,634 160,156 186,996 198,625
-------- -------- -------- --------
Gross Profit 8,764 54,521 59,894 56,670
-------- -------- -------- --------
Operating costs and expenses:
Research and development 1,198 7,429 7,619 7,565
Marketing 2,763 17,506 19,476 20,122
General and administrative 3,250 19,725 17,380 18,722
Write-off of acquired in-process
research and development 31,363 -- -- --
-------- -------- -------- --------
Total operating costs and expenses 38,574 44,660 44,475 46,409
-------- -------- -------- --------
Operating income (loss) (29,810) 9,861 15,419 10,261
Interest expense 2,497 -- -- --
-------- -------- -------- --------
Earnings (loss) before taxes (32,307) 9,861 15,419 10,261
Income tax expense (benefit) (2,709) 3,649 5,859 3,899
-------- -------- -------- --------
Net earnings (loss) $(29,598) 6,212 9,560 6,362
======== ======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
- F-6 -
<PAGE> 58
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Total
Junior Additional Stockholders'
Preferred Common Paid-in Accumulated Stockholder Business Equity
Stock Stock Capital Deficit Loans Equity (deficit)
--------- --------- ---------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR:
Balances, October 2, 1992 $ 137,115 137,115
Net repayments to Varian (17,820) (17,820)
Net earnings 6,362 6,362
--------- --------- --------- --------- --------- --------- ---------
Balances, October 1, 1993 -- -- -- -- -- 125,657 125,657
Net repayments to Varian (15,363) (15,363)
Net earnings 9,560 9,560
--------- --------- --------- --------- --------- --------- ---------
Balances, September 30, 1994 -- -- -- -- -- 119,854 119,854
Net repayments to Varian (4,475) (4,475)
Net earnings 6,212 6,212
--------- --------- --------- --------- --------- --------- ---------
Balances, August 11, 1995 -- -- -- -- -- 121,591 121,591
SUCCESSOR:
Elimination of business equity (121,591) (121,591)
Issuance of stock in connection
with the Acquisition:
10,500 shares of common
stock of Holding issued
in connection with the
issuance of the Senior
Redeemable Preferred Stock 1,050 1,050
Issuance of 100,000 shares
of Junior Preferred Stock 1 9,999
Less issue costs -- (654) 9,346
Issuance of 1 share of
Common stock to Holding -- 20,000
Less issue costs (1,307)
Less stockholder loans (1,000) 17,693
Amortization of discount and
issue costs on Senior
Redeemable Preferred Stock (29) (29)
Net loss for the period from
August 12, 1995 through
September 29, 1995 (29,598) (29,598)
--------- --------- --------- --------- --------- --------- ---------
Balances,
September 29, 1995 $ 1 -- 29,088 (29,627) (1,000) -- (1,538)
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
- F-7 -
<PAGE> 59
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Successor Predecessor
------------- ----------------------------------------------
7-Week 45-Week 52-Week 52-Week
period ended period ended period ended period ended
September 29, August 11, September 30, October 1,
1995 1995 1994 1993
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 14,823 4,083 31,351 33,721
--------- --------- --------- ---------
INVESTING ACTIVITIES
Purchase of businesses, net of cash acquired (196,200) -- 250 (3,909)
Proceeds from sale of
property, plant and equipment -- -- 655 236
Purchase of property, plant, and equipment (880) (6,063) (14,813) (9,814)
Property, plant and equipment transfers out (in) -- -- 106 (1,470)
(Increase) decrease in other non current assets (27) 742 911 (171)
--------- --------- --------- ---------
Net cash used in investing activities (197,107) (5,321) (12,891) (15,128)
--------- --------- --------- ---------
FINANCING ACTIVITIES
Repayment of intercompany funding to Varian -- (4,475) (15,363) (17,820)
Proceeds from revolving credit facility 19,600 -- -- --
Proceeds from the issuance of debt:
Senior term loans 42,000 -- -- --
Senior subordinated notes 100,000 -- -- --
Debt issue costs (11,570) -- -- --
Proceeds from the sale of stock:
Senior Redeemable Preferred Stock 15,000 -- -- --
Junior Preferred Stock 10,000 -- -- --
Common stock 20,000 -- -- --
Common and preferred stock issue costs (3,479)
Stockholder loans (1,000) -- -- --
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 190,551 (4,475) (15,363) (17,820)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 8,267 (5,713) 3,097 773
Cash and cash equivalents at beginning of period -- 5,713 2,616 1,843
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 8,267 -- 5,713 2,616
========= ========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
- F-8 -
<PAGE> 60
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)
<TABLE>
<CAPTION>
Successor Predecessor
------------- ---------------------------------------------
7-Week 45-Week 52-Week 52-Week
period ended period ended period ended period ended
September 29, August 11, September 30, October 1,
1995 1995 1994 1993
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
DETAIL OF NET CASH PROVIDED
BY OPERATING ACTIVITIES
Net earnings (loss) $(29,598) 6,212 9,560 6,362
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Write-off of acquired in-process
research and development 31,363 -- -- --
Depreciation 803 10,999 12,191 11,384
Deferred taxes (2,926) 6,726 (255) 4,105
Loss from sale of assets -- -- 165 138
Amortization of deferred debt issue costs 199 -- -- --
Amortization of intangibles 138 166 204 161
Changes in operating assets and liabilities:
Accounts receivable (7,977) 3,051 3,413 (2,024)
Inventories 4,581 (6,109) 7,240 11,748
Other current assets 7 (1,592) (247) 762
Accounts payable - trade 9,843 462 (551) 1,525
Accrued expenses 9,024 (13,716) (252) 1,759
Product warranty 95 (40) (537) (1,582)
Advance payments from customers (729) (2,076) 420 (617)
-------- -------- -------- --------
Net cash provided by operating activities $ 14,823 4,083 31,351 33,721
======== ======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
- F-9 -
<PAGE> 61
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BACKGROUND AND THE ACQUISITION
Prior to August 11, 1995, Communication and Power Industries Inc.'s ("CPI" or
"Successor") operations were the principal operations of the Electron Devices
Business (the "Predecessor"), a segment of Varian Associates, Inc. ("Varian"),
except they exclude the Tempe, Arizona operations. The Predecessor consisted of
substantially all of the assets of Varian and its affiliates that were used
primarily in developing, manufacturing and distributing microwave and power grid
tubes, microwave amplifiers, modulators and various other power supply equipment
and devices. On August 11, 1995, CPI acquired these assets (the "Acquisition")
from Varian and was then merged with a wholly owned subsidiary of Communications
& Power Industries Holding Corporation ("Holding"), a corporation newly formed
by a group of investors, including management of Holding and CPI. References to
CPI or its business for periods prior to August 11, 1995 shall be references to
the Predecessor and its buisness, unless the context otherwise requires.
A summary of the assets acquired and liabilities assumed at their fair values is
as follows (in thousands):
<TABLE>
<S> <C>
ASSETS ACQUIRED:
Accounts receivable $ 36,766
Inventories 49,346
Other current assets 2,573
Property, plant and equipment 73,994
Goodwill 26,235
Other assets 27
--------
Total assets acquired 188,941
--------
LIABILITIES ASSUMED:
Accounts payable - trade 6,631
Accrued expenses 10,762
Advance payments from customers 2,116
Product warranty 4,595
--------
Total liabilities assumed 24,104
--------
Purchase price allocated to in-process
research and development 31,363
--------
Purchase price paid to Varian $196,200
========
</TABLE>
The Acquisition has been accounted for as a purchase, and, accordingly, the
purchase price was allocated based upon the fair values of assets acquired and
liabilities assumed as of August 11, 1995.
- F-10 -
<PAGE> 62
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 the Acquisition, CPI entered into two senior term loans in
the aggregate amount of $42.0 million (the "Senior Term Loans") and a revolving
credit facility in a principal amount of up to $35.0 million (including a $5.0
million sub-facility for letters of credit) pursuant to the Credit Agreement
with Bankers Trust Company, as agent, and the lenders thereunder (the "Senior
Credit Agreement"), of which approximately $23.0 million was drawn in connection
with the consummation of the Acquisition. Additional financing for the
Acquisition was obtained through the issuance of 12% Senior Subordinated Notes
due 2005 (the "Senior Subordinated Notes") of CPI in the aggregate principal
amount of $100.0 million, the issuance of Series A 14% Senior Redeemable
Exchangeable Cumulative Preferred Stock due 2007 (the "Senior Redeemable
Preferred Stock") of CPI and the issuance of Series A 14% Junior Cumulative
Preferred Stock (the "Junior Preferred Stock") of CPI and common stock of
Holding.
A summary of the Acquisition financing is as follows (in thousands):
<TABLE>
<S> <C>
Bank borrowings $ 9,200
Senior term loans 42,000
Senior subordinated debt 100,000
Senior Redeemable Preferred Stock 15,000
Junior Preferred Stock 10,000
Holding common stock 20,000
--------
$196,200
========
</TABLE>
The accompanying consolidated financial statements include the results of the
Predecessor for the 45-week period ended August 11, 1995 and for the 52-week
periods ended September 30, 1994 and October 1, 1993. The accompanying
consolidated financial statements for the 7-week period ended September 29, 1995
include the results of CPI and its direct and indirect wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. In addition, significant intercompany balances and
transactions within the Predecessor have been eliminated.
In connection with the Acquisition, Varian retained certain assets and
liabilities of the Predecessor. The retention of these assets and liabilities
reduced the Predecessor's cash flow from operating activities during the 45-week
period ending August 11, 1995. This was partially offset by an increase in CPI's
cash flow from operating activities during the 7-week period ended September 29,
1995.
The Predecessor's and Successor's fiscal years are the 52- or 53-week periods
which end on the Friday nearest September 30.
- F-11 -
<PAGE> 63
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Currency on hand, demand deposits, and all highly liquid investments with an
original maturity of three months or less are considered to be cash and cash
equivalents. No cash was paid for interest or taxes by the Predecessor (all cash
payments relating to such matters were made by Varian) or the Successor during
the periods presented.
Goodwill
The excess of the purchase price over the fair value of the net assets acquired
is classified as goodwill and is being amortized over its estimated useful life
of 25 years on a straight-line basis. CPI periodically evaluates the ongoing
profitability of the business to determine if impairment in the value of this
asset has occurred.
Warranty
CPI's products are generally warranted for a variety of periods, typically one
to five years or a predetermined product usage life. Estimated future costs of
repair, replacement or customer accommodations are reflected in the accompanying
consolidated financial statements.
Environmental Liabilities
Liabilities for environmental expenditures are recorded when it is probable that
obligations have been incurred and the amounts can be reasonably estimated.
Environmental costs of the Predecessor were accumulated at the corporate level
within Varian and charged to the Predecessor through corporate allocations. In
connection with the Acquisition, Varian retained the environmental liabilities
of the Predecessor existing as of the closing date at the Predecessor's
facilities.
Deferred Debt Issue Costs
Costs incurred related to the issuance of CPI's long-term debt 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 5 years, 7 years and 10 years,
respectively.
- F-12 -
<PAGE> 64
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Senior Redeemable Preferred Stock
CPI's Senior Redeemable Preferred Stock was issued in units with an aggregate of
10,500 shares of common stock of Holding. The fair value of the shares of
Holding's common stock issued, and the issue costs associated with the issuance
of the Senior Redeemable Preferred Stock, have been reflected as a reduction of
the Senior Redeemable Preferred Stock issued and is being amortized via a charge
to retained earnings over the period until mandatory redemption, 12 years, on a
straight-line basis.
Income Taxes
Income taxes are accounted for under the asset and liability method. CPI's
deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax basis and the financial
reporting basis of assets and liabilities. The Predecessor's operations were
included in the consolidated income tax returns filed by Varian. However, for
purposes of the financial statements of the Predecessor, the provision for
income taxes was prepared using the effective tax rate of Varian's consolidated
financial statements on a separate entity basis. The provision for income taxes
of CPI and the Predecessor is based upon the differences between financial
reporting and tax basis of assets and liabilities measured using the enacted tax
rates and laws in effect when the differences are expected to reverse. The
effect on deferred tax assets and liabilities from a change in tax rates is
recognized in income in the period that includes the enactment date. The
computed amount of the current provision for income taxes of the Predecessor was
recorded to business equity.
Revenue Recognition
Sales and related cost of sales are recognized primarily upon shipment of
products. Sales and related cost of sales under long-term contracts to
commercial customers and the U. S. government are recognized primarily as units
are delivered.
The estimated sales values of performance under certain U. S. government
fixed-price and fixed-price incentive contracts in process are recognized under
the percentage of completion method of accounting where the sales value is
determined on the basis of costs incurred. Provisions for anticipated losses are
made in the period in which they first become determinable. Sales under
cost-reimbursement contracts, primarily research and development contracts, are
recorded as costs are incurred and include estimated earned fees in the
proportion that costs incurred to date bear to total estimated costs. The fees
under certain U.S. government contracts may be increased or decreased in
accordance with cost or performance incentive provisions which measure actual
performance against established targets or other criteria. Such incentive fee
awards or penalties are included in revenue at the time the amounts can be
reasonably determined.
- F-13 -
<PAGE> 65
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Business Risks and Credit Concentrations
CPI develops, manufactures and distributes components for systems used to
generate, amplify and transmit high-power/high frequency microwave and radio
frequency signals. End use applications of these systems include the
transmission and amplification of voice, data and video signals for broadcasting
and telecommunications, transmission of radar signals for navigation and
location, transmission of false signals for electronic countermeasures and
various other uses in the industrial, medical and scientific markets.
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 CPI from receiving new contracts or to terminate
existing contracts for the U.S. government's convenience or for the default of
the contractor. In addition, the U.S. government could terminate contracts due
to insufficient or terminated congressional appropriations. CPI's contracts with
foreign governmental defense agencies are subject to similar limitations and
risks as those encountered with U.S. government contracts.
CPI believes that both its customer and industry base is well diversified,
however, changes in the marketplace of any of the above named industries may
significantly effect management's estimates and CPI's performance.
CPI's customers are located throughout the United States, Europe and Asia. No
single customer accounted for more than 5% of CPI's sales in either of the
Successor or Predecessor periods and no accounts receivable balance from any
customer exceeded 5% of net accounts receivable. 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 effect CPI's estimate of its bad debts.
Foreign Currency Translation
Assets and liabilities of subsidiaries of CPI and the Predecessor outside of the
United States representing cash, inventory and amounts receivable or payable are
translated into U.S. dollars at the exchange rates in effect at year-end. Other
accounts including property, plant and equipment are translated at historical
exchange rates, which for assets acquired in connection with the Acquisition
represent the rate as of August 11, 1995. Revenue and expense items are
translated
- F-14 -
<PAGE> 66
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
at effective rates of exchange prevailing during each year, except that
depreciation is expensed at historical exchange rates.
Varian entered into forward exchange contracts to mitigate the effects of the
Predecessor's balance sheet exposures to fluctuations in foreign currency
exchange rates. Because the impact of movements in currency exchange rates on
foreign exchange contracts generally offset the related impact on the underlying
items being hedged, these instruments did not subject Varian to risk that would
otherwise result from changes in currency exchange rates. The aggregate exchange
gain or loss, net of the gain or loss from the forward exchange contracts, was
accumulated at the corporate level within Varian and allocated to the
Predecessor based on its estimated proportionate share of international sales,
and is included in the corporate allocations described later in these notes.
During the 7-week period ended September 29, 1995, CPI did not enter into
foreign exchange contracts. The aggregate translation and exchange gains and
losses were not significant for the 7-week period ending September 29, 1995.
Fair Value of Financial Instruments
The carrying value of CPI's debt obligations approximate their fair values based
upon current rates available to CPI for debt of the same maturities.
Use of Estimates
Management of CPI has made a number of estimates and assumptions relating to the
reporting of assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
ACCOUNTS RECEIVABLE
Accounts receivable are stated net of allowances for doubtful accounts of $.2
million as of September 29, 1995 for CPI and $1.0 million at the end of fiscal
1994 for the Predecessor.
The reduction in the allowance account is principally due to the retention of
certain accounts receivable and their related allowances in accordance with the
Acquisition Agreement.
- F-15 -
<PAGE> 67
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INVENTORIES
Inventories are stated at the lower of average cost or market (net realizable
value). The main components of inventories are as follows:
<TABLE>
<CAPTION>
(Successor) (Predecessor)
(Dollars in thousands) 1995 1994
------- ------
<S> <C> <C>
Raw materials and parts $30,369 31,637
Work in process 8,220 6,700
Finished goods 6,176 800
------- ------
Total inventories $44,765 39,137
======= =======
</TABLE>
In connection with the acquisition, CPI recorded inventory purchased at its
estimated fair value, which was $4.1 million in excess of the historical cost to
the Predecessor. Of this amount, approximately $1.7 million of finished goods
remains on the consolidated balance sheet as of September 29, 1995.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at historical cost, which, for the
Successor, represents the fair value at the date following the Acquisition,
August 12, 1995. 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 for financial reporting
purposes and accelerated methods for tax purposes. Leasehold improvements are
amortized using the straight-line method over their estimated useful lives, or
the remaining term of the lease, whichever is less.
- F-16 -
<PAGE> 68
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Estimated useful lives of property, plant, and equipment are:
<TABLE>
<CAPTION>
Land leaseholds Life of the lease
<S> <C>
Buildings 40 years
Machinery and equipment 5 to 7 years
</TABLE>
The main components of property, plant, and equipment are as follows:
<TABLE>
<CAPTION>
Successor Predecessor
--------- -----------
(Dollars in thousands) 1995 1994
-------- --------
<S> <C> <C>
Land and land leaseholds $ 36,544 1,600
Buildings 7,817 66,700
Machinery and equipment 28,363 114,587
Construction in progress 2,118 2,300
-------- --------
Subtotal 74,842 185,187
Less accumulated depreciation
and amortization (771) (123,758)
-------- --------
Net property, plant, and equipment $ 74,071 61,429
======== ========
</TABLE>
ACCRUED EXPENSES
Accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
Successor Predecessor
--------- -----------
(Dollars in thousands) 1995 1994
------- -------
<S> <C> <C>
Taxes, including taxes on earnings $ 200 500
Payroll and employee benefits 11,900 14,900
Estimated loss contingencies -- 2,700
Accrued exit costs 1,259 --
Accrued interest 2,497 --
Other 3,930 4,028
------- -------
Total accrued expenses $19,786 22,128
======= =======
</TABLE>
COSTS TO EXIT AN ACTIVITY OF THE PREDECESSOR
Prior to consummation of the Acquisition, management of the Predessor had begun
to formulate plans to exit certain activities of the Predecessor, which were
finalized shortly after the Acquisition. These plans included two principal
costs: (a) the costs associated with the contractually required closing and
consolidating of CPI's Salt Lake City, Utah, operation into CPI's San Carlos,
California, facility, and (b) the costs associated with disposing of certain
excess plant capacity, which includes the consolidation, expected to be
- F-17 -
<PAGE> 69
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
completed by late 1996, of one of its leased manufacturing facilities into its
Palo Alto, California, facility.
In connection with the Acquisition, CPI has accrued $1,259,000 for the costs of
completing these plans, which costs are comprised principally of additional
severance cost, relocation expenses, and lease cost associated with excess
space.
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 $5.0 million sub-facility for letters of credit)(the
"Revolving Credit Facility"). 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
September 29, 1995, CPI had $4.0 million available under the sub-facility for
issuance of letters of credit.
Borrowings under the Revolving Credit Facility and Term Loan A bear interest at
a rate equal to the Eurodollar Rate (5.88% as of September 29, 1995) plus 2.5%
per annum or the Base Rate plus 1.0% per annum (8.75% as of September 29, 1995),
and borrowings under Term Loan B bear interest at a rate equal to the Eurodollar
Rate plus 3.0% per annum or Base Rate plus 1.5% per annum, in each case as
selected by CPI. Applicable interest rates on Term Loan A and the Revolving
Credit Facility will be reduced after the first anniversary of the consummation
of the Acquisition by up to 0.5% per annum if CPI meets and continues to meet
certain financial tests. In addition to customary fronting and other fees, CPI
will pay a fee equal to 1.5% per annum on undrawn amounts of letters of credit
and a commitment fee of 0.5% per annum on unused facilities under the Revolving
Credit Facility. The Senior Credit Agreement also provides for a prepayment
premium in the event that it is voluntarily prepaid within two years of the
establishment of the Senior Credit Agreement unless such prepayment is made with
funds raised through an initial public offering of Holding's stock.
- F-18 -
<PAGE> 70
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Term Loans are subject to quarterly amortization payments in the aggregate
annual amounts as follows (in thousands):
<TABLE>
<CAPTION>
Term Term
Loan A Loan B
------- -------
<S> <C> <C>
1996 $ 3,000 200
1997 4,000 200
1998 6,000 200
1999 6,000 200
2000 6,000 200
2001 -- 8,000
2002 -- 8,000
------- -------
$25,000 17,000
======= =======
</TABLE>
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.
SENIOR SUBORDINATED NOTES
The $100 million principal amount of Senior Subordinated Notes mature in 2005
and bear interest at 12% per annum, payable semiannually. On or before August 1,
2000, interest may, at the option of CPI, be paid in cash or by issuing
additional notes in a principal amount equal to the amount of such interest. 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
- F-19 -
<PAGE> 71
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, upon not less than 30 nor more than 60 days' notice, 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:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2000 106.0%
2001 104.5%
2002 103.0%
2003 101.5%
2004 and thereafter 100.0%
</TABLE>
Notwithstanding the foregoing, prior to August 1, 1998, CPI may redeem up to 35%
of the aggregate principal amount of the Notes originally outstanding at a
redemption price of 112% of the principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the redemption date, with the net proceeds
of one or more public offerings of common stock of Holding.
Upon the occurrence of a change of control, each holder of Notes will have the
right to require CPI to offer to repurchase all or any part of such holder's
Notes. The Senior Credit Agreement currently prohibits CPI from making such an
offer. In addition, the Indenture covering the Notes provides for various
restrictions, including restrictions on mergers or the sales of CPI's assets,
dividend payments, purchase, redemption, acquisition or retirement of equity
interests of CPI or its affiliates, principal payment on any indebtedness of CPI
or guarantors that is subordinated to the Notes, the incurrence of certain
indebtedness, or the making of any restricted investment, as defined.
SENIOR REDEEMABLE PREFERRED STOCK
CPI is authorized to issue up to 325,000 shares of nonvoting Series A 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
- F-20 -
<PAGE> 72
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
The Senior Preferred Stock is not redeemable prior to August 1, 2000.
Thereafter, the Senior Preferred Stock will be redeemable at the option of CPI,
in whole or in part from time to time, initially at 107% of the liquidation
preference thereof and at decreasing prices thereafter to and including August
1, 2004 and thereafter at 100% of the liquidation preference thereof, together
in each case with accumulated and unpaid dividends thereon. In addition, on or
prior to August 1, 1998, CPI may, on one or more occasions, redeem any or all of
the shares of Senior Preferred Stock then outstanding at a redemption price
equal to 114% of the liquidation preference thereof plus accumulated and unpaid
dividends thereon, with the proceeds of one or more public offerings of
Holding's common stock. The Senior Preferred Stock is subject to mandatory
redemption in whole on August 1, 2007 at a price equal to the liquidation
preference thereof, plus accumulated and unpaid dividends.
In the event of a change of control, CPI will be required to make an offer to
each holder of shares of Senior Preferred Stock to repurchase all or a portion
of such holder's Senior Preferred Stock at a price equal to 101% of the
liquidation preference thereof, plus accumulated and unpaid dividends. The
Senior Credit Agreement currently prohibits and the Indenture currently
restricts CPI from making such an offer. In addition, CPI will be required to
use the proceeds from certain asset sales to permanently reduce senior
indebtedness of CPI, to invest in certain related assets or businesses or to
offer to repurchase Senior Preferred Stock. Any such repurchases shall be
effected at an offer price equal to 100% of the liquidation preference of the
shares of Senior Preferred Stock purchased, plus accumulated and unpaid
dividends.
The Certificate of Designation covering the Senior Preferred Stock contains
certain provisions that, among other things, limit the ability of CPI to incur
indebtedness, pay dividends, incur liens, make loans or investments, transact
with affiliates and engage in mergers and consolidations.
CPI may, at its option, on any dividend payment date, exchange all, but not less
than all, of the outstanding shares of Senior Preferred Stock into 14% Junior
Subordinated Notes due 2007 (the "Exchange Notes"), so long as such exchange is
permitted by the Senior Credit Agreement and the Indenture, in an aggregate
principal amount not to exceed the aggregate liquidation preference, plus
accumulated and unpaid dividends on the date of exchange. The Exchange Notes
will be general unsecured obligations of CPI and will be subordinated to all
existing and future senior indebtedness of CPI, including indebtedness under the
Senior Credit Agreement and the Indenture. Except for terms relating to these
subordination provisions, payment of interest on a quarterly basis, the option
to issue
- F-21 -
<PAGE> 73
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
additional Exchange Notes on or prior to August 1, 2000 in lieu of
paying cash interest, optional redemption and the date on which repayment is
mandatory (all of which terms would be similar to the terms of Senior Preferred
Stock), the terms of the Exchange Notes will be generally identical to the
Notes.
JUNIOR PREFERRED STOCK
CPI is authorized to issue up to 525,000 shares of nonvoting Series A 14% Junior
Cumulative Preferred Stock (the "Junior Preferred Stock") including shares of
Junior Preferred Stock which may be used to pay dividends on the Junior
Preferred Stock if CPI elects to pay dividends in shares of Junior Preferred
Stock. The aggregate liquidation preference of the Junior Preferred Stock issued
in connection with the consummation of the Acquisition was $10.0 million.
Dividends on the Junior Preferred Stock accrue at the rate of 14% per annum and
are payable quarterly, commencing on November 1, 1995. On or before the
redemption of the Senior Preferred Stock or the exchange of Senior Preferred
Stock into Exchange Notes, CPI is required to pay dividends on the Junior
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.
The Junior Preferred Stock ranks junior in right of payment to all liabilities
of CPI and to any preferred stock, including Senior Preferred Stock, that is
senior in right of payment to the Junior Preferred Stock and ranks senior in
right of payment to any additional preferred stock which does not expressly
provide that it ranks senior to or on a parity with the Junior Preferred Stock
and CPI's common stock.
LEASE COMMITMENTS
At September 29, 1995, CPI was committed to minimum rentals under noncancellable
operating leases as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1996 $1,473
1997 1,255
1998 1,143
1999 549
2000 359
Thereafter $5,462
</TABLE>
- F-22 -
<PAGE> 74
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Rental expense of the Successor for the U. S. and Canadian operations for the
7-week period ended September 29, 1995 amounted to $257,000. Rental expense of
the Predecessor for the 45-week period ended August 11, 1995 and for fiscal
years 1994 and 1993 was $1,242,000, $1,900,000 and $3,000,000, respectively.
Rental expense of the Predecessor for overseas operations was included within a
corporate allocation (as described later in these notes) and is not separately
identified.
CONTINGENCIES
Varian is currently a defendant in certain legal actions relating to the
Predecessor and could incur an uninsured liability in one or more of them. The
agreement for the sale of the Predecessor provides for Varian's retention of
liability arising out of the above referenced litigation. Accordingly, in the
opinion of management, the outcome of that litigation will not have a material
adverse effect on the financial condition, results of operations or cash flows
of CPI.
Varian has also been named by the Environmental Protection Agency or third
parties as a potentially responsible party under the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended, at sites to which
Varian (including in some cases the Predecessor) is alleged to have shipped
manufacturing waste for disposal. Varian is also involved in various stages of
environmental investigation and/or remediation under the direction of, or in
consultation with, local and/or state agencies at certain facilities of CPI.
Uncertainty as to (a) the extent to which Varian caused, if at all, the
conditions being investigated; (b) the extent of environmental contamination and
risks; (c) the applicability of changing and complex environmental laws; (d) the
number and financial viability of other potentially responsible parties; (e) the
stage of the investigation and/or remediation; (f) the unpredictability of
investigation and/or remediation costs (including as to when they will be
incurred); (g) applicable clean-up standards; (h) the remediation (if any) which
will ultimately be required; and (i) available technology make it difficult to
assess the likelihood and scope of further investigation or remediation
activities or to estimate the future costs of such activities if undertaken.
The agreement for the sale of the Predecessor provides for Varian's retention of
liability arising out of investigative and remedial action and environmental
claims for conditions existing as of the closing date at the above-referenced
facilities. Accordingly, based on information currently available, management
believes that the costs of these matters are not likely to have a material
adverse effect on the financial condition, results of operations and cash flows
of CPI.
INDUSTRY SEGMENTS AND SALES
CPI operates in a single business segment. CPI covers and is engaged in the
development, manufacture and sale of a broad line of electron devices used in
broadcasting, communications, and other commercial and military applications.
CPI operates a Canadian manufacturing plant. No single country outside the
United States accounts for more than 10% of total sales or total assets. Sales
between geographic areas are
- F-23 -
<PAGE> 75
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
accounted for at cost plus prevailing markups arrived at through negotiations
between independent profit centers. Related inter-business profits are
eliminated. The following table summarizes export sales as well as sales under
prime contracts from the U.S. government for the periods presented in the
accompanying consolidated financial statements:
<TABLE>
<CAPTION>
Sales under prime
Export contracts from the
(Dollars in thousands) Sales U.S. Government
-------- ------------------
<S> <C> <C>
SUCCESSOR:
7-week period ended September 29, 1995 $ 3,204 5,915
PREDECESSOR:
45-week period ended August 11, 1995 16,300 34,700
52-week period ended September 30, 1994 17,500 42,700
52-week period ended October 1, 1993 19,400 54,500
</TABLE>
RESEARCH AND DEVELOPMENT
CPI-sponsored research and development costs related to both present and future
products are expensed currently. Total expenditures incurred by CPI on research
and development are summarized as follows:
<TABLE>
<CAPTION>
Total Funded by
(Dollars in thousands) Incurred Customers
-------- ---------
<S> <C> <C>
SUCCESSOR:
7-week period ended September 29, 1995 $ 2,551 1,353
PREDECESSOR:
45-week period ended August 11, 1995 16,200 8,800
52-week period ended September 30, 1994 18,400 10,800
52-week period ended October 1, 1993 16,600 8,900
</TABLE>
In connection with the Acquisition, a portion of the purchase price was
allocated to the value of in-process research and development projects. These
projects involved the research and development of new products and significant
extensions and improvements to existing products which had not demonstrated
their technological feasibility as of the acquisition date and did not have an
alternative future use. Accordingly, immediately upon consummation of the
acquisition, the value associated with these projects were charged to expense in
accordance with Statement of Financial Accounting Standards No.2.
- F-24 -
<PAGE> 76
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
PROVISION FOR INCOME TAXES
Earnings (loss) before income taxes for domestic and non-U.S. operations is as
follows:
<TABLE>
<CAPTION>
Successor Predecessor
------------- -----------------------------------------
7-week 45-week 52-week 52-week
period ended period ended period ended period ended
September 29, August 11, September 30 October 1,
(Dollars in thousands) 1995 1995 1994 1993
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Domestic $(32,713) 6,867 13,372 9,084
Non-U.S 406 2,994 2,047 1,177
-------- ----- ------ ------
Total $(32,307) 9,861 15,419 10,261
======== ===== ====== ======
</TABLE>
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Successor Predecessor
------------- -----------------------------------------
7-week 45-week 52-week 52-week
period ended period ended period ended period ended
September 29, August 11, September 30, October 1,
(Dollars in thousands) 1995 1995 1994 1993
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Current
U.S. federal $ -- 2,934 3,363 (64)
State 5 545 856 (126)
Non-U.S 212 712 1,895 (16)
Deferred
U.S. federal (2,926) (531) (270) 3,407
Non-U.S -- (11) 15 698
------- ----- ----- -----
Provision (benefit) for income taxes $(2,709) 3,649 5,859 3,899
======= ===== ===== =====
</TABLE>
Management has provided for U. S. federal income taxes payable on non-U.S.
earnings as it believes that it is not currently practicable to determine
whether such earnings are to be permanently reinvested in such foreign
countries.
- F-25 -
<PAGE> 77
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Significant items making up deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
Successor Predecessor
--------- -----------
(Dollars in thousands) 1995 1994
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Product warranty $ 214 1,568
Deferred compensation 10 1,111
Special provisions -- 495
Inventory adjustments 242 5,002
Accrued vacation 35 2,123
Workers' compensation -- 1,068
Foreign tax credits 142 --
Depreciation 163 --
Federal net operating loss carryforward 10,561 --
State taxes, net of federal benefits 1,514 --
Other 88 530
-------- --------
12,969 11,897
Less: Valuation allowance (10,000) --
-------- --------
2,969 11,897
DEFERRED TAX LIABILITIES:
Goodwill amortization (43) --
Accelerated depreciation -- (5,171)
-------- --------
Net deferred tax asset $ 2,926 6,726
======== ========
</TABLE>
CPI's federal net operating loss carryforward of $30.2 million will expire in
2010 and foreign tax credits of $142,000 will expire in 2000. Management has
established a valuation allowance based on the uncertainty of the amount and
timing of taxable income in future accounting periods.
- F-26 -
<PAGE> 78
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The reconciliation between the effective tax rates and the statutory federal
income tax rates applicable to the Predecessor and the Successor is shown in the
following schedule:
<TABLE>
<CAPTION>
Successor Predecessor
------------- ---------------------------------------
7-week 45-week 52-week 52-week
period ended period ended period ended period ended
September 29, August 11, September 30, October 1,
1995 1995 1994 1993
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Statutory federal income tax rate (35.0%) 35.0% 35.0% 34.8%
State and local taxes, net of
federal tax benefit (4.7%) 5.0% 4.0% 1.7%
Foreign taxes, net .2% (.1%) (.6%) 2.7%
Foreign sales corporation -- (1.9%) (1.8%) (3.7%)
Losses and credits for which no
benefit has been recorded 31.0% -- -- --
Other .1% (1.0%) 1.4% 2.5%
---- ---- ---- ----
Effective tax rate (8.4%) 37.0% 38.0% 38.0%
==== ==== ==== ====
</TABLE>
The effective tax rate experienced by the Predecessor reflects the tax effect of
being included in the consolidated tax return of Varian and may not be
representative of effective tax rates to be experienced by the Successor in the
future.
RETIREMENT AND PROFIT SHARING PLANS
The Predecessor participated in defined contribution retirement plans sponsored
by Varian covering substantially all of CPI's domestic and Canadian employees.
Upon completion of the Acquisition, these plans were replaced with company
sponsored defined contribution plans with substantially similar benefits. CPI's
major obligation is to contribute an amount based on a percentage of each
participant's base pay.
The Predecessor also made a contribution for its share of Varian's retirement
plan profit sharing based on a percentage of consolidated earnings from
continuing operations before taxes, as adjusted for discretionary items. Upon
consummation of the Acquisition, participants received their portion of the
retirement fund assets which were held by a third-party trustee. In addition, a
number of CPI's foreign employees participated in Varian's defined benefit
retirement plans for regular full-time employees.
Total pension expense of the Predecessor for all plans amounted to $4.3 million,
$4.6 million and $4.5 million for the 45-week period ended August 11, 1995 and
the 52-week period ended September 30, 1994 and October 1, 1993, respectively.
Pension expense of the Successor for the 7-week period ended September 29, 1995
was $247,000.
- F-27 -
<PAGE> 79
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CPI has instituted a bonus program that 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.
TRANSACTIONS WITH VARIAN
The Predecessor made sales to, and purchases from, other Varian lines of
business as follows:
<TABLE>
<CAPTION>
Successor Predecessor
------------- -----------------------------------------------
7-week 45-week 52-week 52-week
period ended period ended period ended period ended
September 29, August 11, September 30, October 1,
(Dollars in thousands) 1995 1995 1994 1993
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Sales to Varian $1,014 8,800 7,700 7,900
Purchases from Varian $ 315 3,700 2,700 2,000
</TABLE>
Sales and purchases of the Predecessor have been recorded at cost to the
originating business unit, so that no profit margin is recognized on transfer.
In connection with the Acquisition, CPI entered into various agreements with
Varian that provide for various services to be performed by or for Varian or for
products to be purchased from or provided to Varian. These agreements are as
follows:
Transitional Services Agreement. Under the Transitional Services Agreement,
Varian provides certain services to CPI in order to facilitate the transition of
CPI to a stand-alone operation. In addition, CPI provides transitional services
to Varian related to certain of Varian's non-United States operations. Services
will generally be provided through August 12, 1997 (with shorter periods for
certain services), subject to the right of the party who receives such service
to terminate any service it receives upon 30 days' notice. In addition, in
connection with the separation and creation of independent utilities and systems
at CPI's facilities, the Transitional Services Agreement requires Varian to pay
or reimburse CPI (in some cases), subject to certain limitations.
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
- F-28 -
<PAGE> 80
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
certain minimum purchase quantities and generally restrict CPI's ability to
market certain specific products to third parties. Management believes that the
terms of these supply agreements are no less favorable to CPI than that which
would be obtained from independent third parties for the purchase or supply of
similar products.
Trademark License Agreement Generally, under the terms of the Trademark License
Agreement, CPI is licensed to use Varian trademarks on its products for a period
of three years (although during the third year Varian trademarks may only be
used in connection with CPI's own trademarks). After the third year, CPI may not
use any Varian trademarks alone, but for an additional seven years may identify
its products as "formerly made by Varian". At the expiration of the 10-year
period, CPI will not be permitted to utilize any Varian trademarks.
CPI and Varian have also entered into certain other agreements covering access
to certain of CPI's facilities as well as subleased and shared facilities.
CORPORATE ALLOCATIONS
Operating earnings of the Predecessor include allocations of costs accumulated
at the corporate level within Varian. Where it was possible to specifically
identify corporate amounts with the activities of the Predecessor, these amounts
have been charged or credited directly to the Predecessor without allocation or
apportionment. Costs of a wholly corporate nature (i.e. those that are
considered to relate purely to the support of Varian's centralized corporate
structure) are not allocated. Shared or common costs have been allocated to the
Predecessor on the basis which is considered to most fairly and reasonably
reflect the utilization of benefit obtained by, the Predecessor. Typical
measures and activity indicators used for apportionment purposes include sales
revenues, headcount and facility area measurements. Management believes that the
cost allocations are reasonable and reflect the costs incurred to support the
operations of the Predecessor. Additionally, management believes that the costs
for such services would have been less on a stand alone basis, although
determination as to specific amounts is not practicable.
Allocations of corporate expenses included in the consolidated statements of
operations for the 45-week period ended August 11, 1995 and for fiscal years
1994 and 1993 were $11.2 million, $11.3 million and $11.8 million, respectively.
RELATED PARTY TRANSACTIONS
Holding and CPI have entered into an agreement to pay $362,000, plus
out-of-pocket expenses, annually to an advisor group of Holding's majority
shareholder. Certain individuals of the investor's advisor group are members of
Holding's and CPI's respective Boards of Directors. In addition, on August 11,
1995, CPI paid this advisor group a fee of $3,330,000 for services rendered in
connection with the Acquisition.
- F-29 -
<PAGE> 81
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
PARENT COMPANY DATA
Holding has guaranteed CPI's senior debt obligations. Holding has no operations
other than its ownership of CPI. The consolidated balance sheet of Holding as of
September 29, 1995 is 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):
<TABLE>
<S> <C>
ASSETS
------
Current Assets $ 100,341
Long-term Assets 114,561
---------
$ 214,902
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities $ 65,137
Long-term debt and deferred taxes 138,843
---------
203,980
Senior Redeemable Preferred Stock of subsidiary 12,460
Junior Preferred Stock of subsidiary 9,346
Stockholders' Equity:
Common stock ($.01 par value, 400,000 shares
authorized, 200,000 shares issued and outstanding) 2
Additional paid-in capital 19,741
Accumulated deficit (29,627)
Less stockholder loans (1,000)
---------
$ 214,902
=========
</TABLE>
Separate financial statements of CPI's direct and indirect subsidiaries, all of
which guarantee the Notes, are not included because (i) these subsidiaries are
jointly and severally liable and (ii) the separate financial statements and
other disclosures concerning these subsidiaries are not deemed by CPI to be
material to investors.
- F-30 -
<PAGE> 82
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power
Industries Holding Corporation)
BUSINESS EQUITY
Business equity is comprised of intercompany balances arising in the ordinary
course of business between the Predecessor and other Varian entities, together
with various adjustments resulting from the carve-out of the Predecessor as
presented in these consolidated financial statements.
Average equity balances of the Predecessor based on a simple average of opening
and closing amounts were $123 million and $131 million for the 52-week period
ending September 30, 1994 and October 1, 1993, respectively.
PRO FORMA COMBINED STATEMENT OF OPERATIONS INFORMATION (UNAUDITED)
Pro forma operating results give effect to the acquisition and related financing
as if consummated at the beginning of the 1995 and 1994 fiscal year. Significant
adjustments include (a) increase in sales and cost of sales in the historical
pricing of purchases from and sales to Varian resulting from the terms of the
product supply agreements; (b) adjustment to cost of sales, depreciation and
amortization relating to the write-up of assets in connection with the
application of purchase accounting; (c) reduction in certain overhead and other
costs as a result of being a stand-alone entity rather than a subsidiary of
Varian; and (d) interest cost associated with the borrowings resulting from the
Acquisition. Such information is not fully comparable to the historical
statement of earnings.
<TABLE>
<CAPTION>
Pro forma results
--------------------------
Fiscal 1995 Fiscal 1994
----------- -----------
<S> <C> <C>
Sales $253,245 249,035
Gross profit 73,101 66,997
Interest expense 19,077 19,233
Net income 7,180 4,927
</TABLE>
- F-31 -
<PAGE> 83
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Communications & Power Industries Holding Corporation:
We have audited the accompanying consolidated balance sheet of Communications &
Power Industries Holding Corporation and subsidiaries ("Holding" or the
"Successor") as of September 29, 1995, and the related consolidated statements
of operations, stockholders' deficit, and cash flows for the 7-week period ended
September 29, 1995. We have also audited the related consolidated statements of
operations, stockholders' equity, and cash flows of Holding's predecessor, the
Electron Devices Business of Varian Associates, Inc. (the "Predecessor") for the
45-week period ended August 11, 1995. In connection with our audits of the
consolidated financial statements for the periods indicated above, we have also
audited the financial statement schedule as listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of Holding's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in the notes to the consolidated financial statements, Holding
acquired assets and assumed liabilities on August 11, 1995 in a transaction
which was accounted for as a purchase. Accordingly, the consolidated financial
statements of the Successor are presented on a different cost basis than the
consolidated financial statements of the Predecessor and, therefore, are not
comparable.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Successor as of
September 29, 1995, the results of their operations and their cash flows for the
7-week period ended September 29, 1995, and the results of operations and cash
flows of the Predecessor for the 45-week period ended August 11, 1995, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
s/KPMG PEAT MARWICK, LLP
San Jose, California
November 21, 1995
- F-32 -
<PAGE> 84
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Communications & Power Industries Holding Corporation:
We have audited the accompanying balance sheets of the Electron Devices
Business, a segment of Varian Associates, Inc. (excluding the segment's Tempe,
Arizona operations) (the "Predecessor") as of September 30, 1994 and the related
statements of operations, stockholders' equity and cash flows for each of the
two fiscal years in the period ended September 30, 1994. 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 financial statements are the responsibility of
Holding's management. Our responsibility is to express an opinion on these
financial statements 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 financial statements referred to above present fairly, in
all material respects, the financial position of the Predecessor as of September
30, 1994 and the results of its operations and its cash flows for each of the
two fiscal years in the period ended September 30, 1994 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/COOPERS & LYBRAND, L.L.P
San Jose, California
April 30, 1995
- F-33 -
<PAGE> 85
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION> Successor Predecessor
------------- -------------
September 29, September 30,
ASSETS 1995 1994
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 8,267 5,713
Accounts receivable, net 44,743 39,817
Inventories 44,765 39,137
Deferred taxes -- 11,897
Other current assets 2,566 981
--------- ---------
Total current assets 100,341 97,545
Property, plant, and equipment, net 74,071 61,429
Goodwill, net 26,098 --
Debt issue costs, net 11,371 --
Deferred taxes 2,969 --
Other assets 52 3,175
--------- ---------
Total assets $ 214,902 162,149
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK,
PREFERRED STOCK OF SUBSIDIARY AND EQUITY (DEFICIT)
CURRENT LIABILITIES
Revolving credit facility $ 19,600 --
Accounts payable - trade 16,474 6,169
Accrued expenses 19,786 22,128
Product warranty 4,690 4,635
Current portion of term loans 3,200 --
Advance payments from customers 1,387 4,192
--------- ---------
Total current liabilities 65,137 37,124
Senior term loans 38,800 --
Senior subordinated notes 100,000 --
Deferred taxes 43 5,171
--------- ---------
Total liabilities 203,980 42,295
--------- ---------
SENIOR REDEEMABLE PREFERRED STOCK OF SUBSIDIARY
($.01 par value, 325,000 shares authorized;150,000 shares
issued and outstanding,liquidation preference $100 per share) 12,460 --
--------- ---------
JUNIOR PREFERRED STOCK OF SUBSIDIARY 9,346
--------- ---------
($.01 par value, 525,000 shares authorized;100,000 shares issued
and outstanding,liquidation preference $100 per share
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock ($.01 par value, 400,000 shares authorized;
200,000 shares issued and outstanding) 2 --
Additional paid-in capital 19,741
Accumulated deficit (29,627) --
Business equity -- 119,854
Less stockholder loans (1,000) --
--------- ---------
Net Stockholders' equity (deficit) (10,884) 119,854
--------- ---------
Total liabilities, redeemable preferred
stock, preferred stock of subsidiary and equity (deficit) $ 214,902 162,149
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
- F-34 -
<PAGE> 86
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Successor Predecessor
------------ -------------------------------------------
7-week 45-week 52-week 52-week
period ended period ended period ended period ended
September 29, August 11, September 30, October 1,
1995 1995 1994 1993
------------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Sales $ 36,398 214,677 246,890 255,295
Cost of sales 27,634 160,156 186,996 198,625
-------- -------- -------- --------
Gross Profit 8,764 54,521 59,894 56,670
-------- -------- -------- --------
Operating costs and expenses:
Research and development 1,198 7,429 7,619 7,565
Marketing 2,763 17,506 19,476 20,122
General and administrative 3,250 19,725 17,380 18,722
Write-off of acquired in-process
research and development 31,363 -- -- --
-------- -------- -------- --------
Total operating costs and expenses 38,574 44,660 44,475 46,409
-------- -------- -------- --------
Operating income (loss) (29,810) 9,861 15,419 10,261
Interest expense 2,497 -- -- --
-------- -------- -------- --------
Earnings (loss) before taxes (32,307) 9,861 15,419 10,261
Income tax expense (benefit) (2,709) 3,649 5,859 3,899
-------- -------- -------- --------
Net earnings (loss) $(29,598) 6,212 9,560 6,362
======== ======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
- F-35 -
<PAGE> 87
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
<TABLE>
<CAPTION>
Total
Additional Stockholders'
Common Paid-in Accumulated Stockholder Business Equity
Stock Capital Deficit Loans Equity (deficit)
--------- ---------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR:
Balances, October 2, 1992 $ 137,115 137,115
Net repayments to Varian (17,820) (17,820)
Net earnings 6,362 6,362
--------- --------- --------- --------- --------- ---------
Balances, October 1, 1993 -- -- -- -- 125,657 125,657
Net repayments to Varian (15,363) (15,363)
Net earnings 9,560 9,560
--------- --------- --------- --------- --------- ---------
Balances, September 30, 1994 -- -- -- -- 119,854 119,854
Net repayments to Varian (4,475) (4,475)
Net earnings 6,212 6,212
--------- --------- --------- --------- --------- ---------
Balances, August 11, 1995 -- -- -- -- 121,591 121,591
SUCCESSOR:
Elimination of business equity (121,591) (121,591)
Issuance of stock in connection
with the Acquisition:
10,500 shares of Common Stock
issued in connection with the
issuance of the Senior Redeemable
Preferred Stock of subsidiary 1,050 1,050
Issuance of 200,000 shares
of Common Stock 2 19,998
Less issue costs (1,307)
Less stockholder loans (1,000) 17,693
Amortization of discount and
issue costs on Senior Redeemable
Preferred Stock of subsidiary (29) (29)
Net loss for the period from
August 12, 1995 through
September 29, 1995 (29,598) (29,598)
--------- --------- --------- --------- --------- ---------
Balances,
September 29, 1995 $ 2 19,741 (29,627) (1,000) -- (10,884)
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
- F-36 -
<PAGE> 88
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Successor Predecessor
------------- --------------------------------------------
7-Week 45-Week 52-Week 52-Week
period ended period ended period ended period ended
September 29, August 11, September 30, October 1,
1995 1995 1994 1993
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 14,823 4,083 31,351 33,721
--------- --------- --------- ---------
INVESTING ACTIVITIES
Purchase of businesses, net of cash acquired (196,200) -- 250 (3,909)
Proceeds from sale of
property, plant and equipment -- -- 655 236
Purchase of property, plant, and equipment (880) (6,063) (14,813) (9,814)
Property, plant and equipment transfers out (in) -- -- 106 (1,470)
(Increase) decrease in other non current assets (27) 742 911 (171)
--------- --------- --------- ---------
Net cash used in investing activities (197,107) (5,321) (12,891) (15,128)
--------- --------- --------- ---------
FINANCING ACTIVITIES
Repayment of intercompany funding to Varian -- (4,475) (15,363) (17,820)
Proceeds from revolving credit facility 19,600 -- -- --
Proceeds from the issuance of debt:
Senior term loans 42,000 -- -- --
Senior subordinated notes 100,000 -- -- --
Debt issue costs (11,570) -- -- --
Proceeds from the sale of stock:
Senior Redeemable Preferred Stock 15,000 -- -- --
Junior Preferred Stock 10,000 -- -- --
Common stock 20,000 -- -- --
Common and preferred stock issue costs (3,479)
Stockholder loans (1,000) -- -- --
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 190,551 (4,475) (15,363) (17,820)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 8,267 (5,713) 3,097 773
Cash and cash equivalents at beginning of period -- 5,713 2,616 1,843
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 8,267 -- 5,713 2,616
========= ========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
- F-37 -
<PAGE> 89
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)
<TABLE>
<CAPTION>
Successor Predecessor
------------- -------------------------------------------
7-Week 45-Week 52-Week 52-Week
period ended period ended period ended period ended
September 29, August 11, September 30, October 1,
1995 1995 1994 1993
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
DETAIL OF NET CASH PROVIDED
BY OPERATING ACTIVITIES
Net earnings (loss) $(29,598) 6,212 9,560 6,362
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Write-off of acquired in-process
research and development 31,363 -- -- --
Depreciation 803 10,999 12,191 11,384
Deferred taxes (2,926) 6,726 (255) 4,105
Loss from sale of assets -- -- 165 138
Amortization of deferred debt issue costs 199 -- -- --
Amortization of intangibles 138 166 204 161
Changes in operating assets and liabilities:
Accounts receivable (7,977) 3,051 3,413 (2,024)
Inventories 4,581 (6,109) 7,240 11,748
Other current assets 7 (1,592) (247) 762
Accounts payable - trade 9,843 462 (551) 1,525
Accrued expenses 9,024 (13,716) (252) 1,759
Product warranty 95 (40) (537) (1,582)
Advance payments from customers (729) (2,076) 420 (617)
-------- -------- -------- --------
Net cash provided by operating activities $ 14,823 4,083 31,351 33,721
======== ======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
- F-38 -
<PAGE> 90
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BACKGROUND AND THE ACQUISITION
Prior to August 11, 1995, Communication and Power Industries Inc.'s ("CPI")
operations were the principal operations of the Electron Devices Business (the
"Predecessor"), a segment of Varian Associates, Inc. ("Varian"), except they
exclude the Tempe, Arizona operations. The Predecessor consisted of
substantially all of the assets of Varian and its affiliates that were used
primarily in developing, manufacturing and distributing microwave and power grid
tubes, microwave amplifiers, modulators and various other power supply equipment
and devices. On August 11, 1995, CPI acquired these assets (the "Acquisition")
from Varian and was then merged with a wholly owned subsidiary of Communications
& Power Industries Holding Corporation ("Holding"or "Successor"), a corporation
newly formed by a group of investors, including management of Holding and CPI.
Holding and its consolidated subsidiaries is sometimes referred to herein as the
"Company". References to the Company or its business for periods prior to August
11, 1995 shall be references to the Predecessor and its business, unless the
context otherwise requires.
A summary of the assets acquired and liabilities assumed at their fair values is
as follows (in thousands):
- F-39 -
<PAGE> 91
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
ASSETS ACQUIRED:
Accounts receivable $ 36,766
Inventories 49,346
Other current assets 2,573
Property, plant and equipment 73,994
Goodwill 26,235
Other assets 27
--------
Total assets acquired 188,941
--------
LIABILITIES ASSUMED:
Accounts payable - trade 6,631
Accrued expenses 10,762
Advance payments from customers 2,116
Product warranty 4,595
--------
Total liabilities assumed 24,104
--------
Purchase price allocated to in-process
research and development 31,363
--------
Purchase price paid to Varian $196,200
========
</TABLE>
The Acquisition has been accounted for as a purchase, and, accordingly, the
purchase price was allocated based upon the fair values of assets acquired and
liabilities assumed as of August 11, 1995.
In connection with the Acquisition, CPI, a wholly-owned subsidiary of Holding,
entered into two senior term loans in the aggregate amount of $42.0 million (the
"Senior Term Loans") and a revolving credit facility in a principal amount of up
to $35.0 million (including a $5.0 million sub-facility for letters of credit)
pursuant to the Credit Agreement with Bankers Trust Company, as agent, and the
lenders thereunder (the "Senior Credit Agreement"), of which approximately $23.0
million was drawn in connection with the consummation of the Acquisition.
Additional financing for the Acquisition was obtained through the issuance of
12% Senior Subordinated Notes due 2005 (the "Senior Subordinated Notes") of CPI
in the aggregate principal amount of $100.0 million, the issuance of Series A
14% Senior Redeemable Exchangeable Cumulative Preferred Stock due 2007 (the
"Senior Redeemable Preferred Stock") of CPI and the issuance of Series A 14%
Junior Cumulative Preferred Stock (the "Junior Preferred Stock") of CPI and
common stock of Holding.
- F-40 -
<PAGE> 92
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
A summary of the Acquisition financing is as follows (in thousands):
<TABLE>
<S> <C>
Bank borrowings $ 9,200
Senior term loans 42,000
Senior subordinated debt 100,000
Senior Redeemable Preferred Stock of subsidiary 15,000
Junior Preferred Stock of subsidiary 10,000
Holding common stock 20,000
-------------
$ 196,200
=============
</TABLE>
The accompanying consolidated financial statements include the results of the
Predecessor for the 45-week period ended August 11, 1995 and for the 52-week
periods ended September 30, 1994 and October 1, 1993. The accompanying
consolidated financial statements for the 7-week period ended September 29, 1995
include the results of Holding and its direct and indirect wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. In addition, significant intercompany balances and
transactions within the Predecessor have been eliminated.
In connection with the Acquisition, Varian retained certain assets and
liabilities of the Predecessor. The retention of these assets and liabilities
reduced the Predecessor's cash flow from operating activities during the 45-week
period ending August 11, 1995. This was partially offset by an increase in
Holding's cash flow from operating activities during the 7-week period ended
September 29, 1995.
The Predecessor's and Successor's fiscal years are the 52-or 53-week periods
which end on the Friday nearest September 30.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Currency on hand, demand deposits, and all highly liquid investments with an
original maturity of three months or less are considered to be cash and cash
equivalents. No cash was paid for interest or taxes by the Predecessor (all cash
payments relating to such matters were made by Varian) or the Successor during
the periods presented.
Goodwill
The excess of the purchase price over the fair value of the net assets acquired
is classified as goodwill and is being amortized over its estimated useful life
of 25 years on a straight-line basis. The Company periodically evaluates the
ongoing profitability of the business to determine if impairment in the value of
this asset has occurred.
- F-41 -
<PAGE> 93
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Warranty
The Company's products are generally warranted for a variety of periods,
typically one to five years or a predetermined product usage life. Estimated
future costs of repair, replacement or customer accommodations are reflected in
the accompanying consolidated financial statements.
Environmental Liabilities
Liabilities for environmental expenditures are recorded when it is probable that
obligations have been incurred and the amounts can be reasonably estimated.
Environmental costs of the Predecessor were accumulated at the corporate level
within Varian and charged to the Predecessor through corporate allocations. In
connection with the Acquisition, Varian retained the environmental liabilities
of the Predecessor existing as of the closing date at the Predecessor's
facilities.
Deferred Debt Issue Costs
Costs incurred related to the issuance of the CPI's long-term debt 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 5 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 retained earnings over the period until mandatory redemption, 12 years, on a
straight-line basis.
Income Taxes
Income taxes are accounted for under the asset and liability method. Holding's
deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax basis and the financial
reporting basis of assets and liabilities. The Predecessor's operations were
included in the consolidated income tax returns filed by Varian. However, for
purposes of the financial statements of the Predecessor, the provision for
income taxes was prepared using the effective tax rate of Varian's consolidated
financial statements on a separate entity basis. The provision for income taxes
of Holding and the Predecessor is based upon the differences between financial
reporting and tax basis of assets and liabilities measured using the enacted tax
rates and laws in effect when the differences are expected to reverse. The
- F-42 -
<PAGE> 94
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
effect on deferred tax assets and liabilities from a change in tax rates is
recognized in income in the period that includes the enactment date. The
computed amount of the current provision for income taxes of the Predecessor was
recorded to business equity.
Revenue Recognition
Sales and related cost of sales are recognized primarily upon shipment of
products. Sales and related cost of sales under long-term contracts to
commercial customers and the U. S. government are recognized primarily as units
are delivered.
The estimated sales values of performance under certain U. S. government
fixed-price and fixed-price incentive contracts in process are recognized under
the percentage of completion method of accounting where the sales value is
determined on the basis of costs incurred. Provisions for anticipated losses are
made in the period in which they first become determinable. Sales under
cost-reimbursement contracts, primarily research and development contracts, are
recorded as costs are incurred and include estimated earned fees in the
proportion that costs incurred to date bear to total estimated costs. The fees
under certain U.S. government contracts may be increased or decreased in
accordance with cost or performance incentive provisions which measure actual
performance against established targets or other criteria. Such incentive fee
awards or penalties are included in revenue at the time the amounts can be
reasonably determined.
Business Risks and Credit Concentrations
The Company develops, manufactures and distributes components for systems used
to generate, amplify and transmit high-power/high frequency microwave and radio
frequency signals. End use applications of these systems include the
transmission and amplification of voice, data and video signals for broadcasting
and telecommunications, transmission of radar signals for navigation and
location, transmission of false signals for electronic countermeasures and
various other uses in the industrial, medical and scientific markets.
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 the Company 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.
- F-43 -
<PAGE> 95
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Company believes that both its customer and industry base is well
diversified, however, changes in the marketplace of any of the above named
industries may significantly effect management's estimates and the Company's
performance.
The Company's customers are located throughout the United States, Europe and
Asia. No single customer accounted for more than 5% of the Company's sales in
either of the Successor or Predecessor periods and no accounts receivable
balance from any customer exceeded 5% of net accounts receivable. The Company
estimates an allowance for doubtful accounts based on the credit worthiness of
its customers as well as general economic conditions. Consequently, an adverse
change in those factors could effect the Company's estimate of its bad debts.
Foreign Currency Translation
Assets and liabilities of subsidiaries of Holding and the Predecessor outside of
the United States representing cash, inventory and amounts receivable or payable
are translated into U.S. dollars at the exchange rates in effect at year-end.
Other accounts including property, plant and equipment are translated at
historical exchange rates, which for assets acquired in connection with the
Acquisition represent the rate as of August 11, 1995. Revenue and expense items
are translated at effective rates of exchange prevailing during each year,
except that depreciation is expensed at historical exchange rates.
Varian entered into forward exchange contracts to mitigate the effects of the
Predecessor's balance sheet exposures to fluctuations in foreign currency
exchange rates. Because the impact of movements in currency exchange rates on
foreign exchange contracts generally offset the related impact on the underlying
items being hedged, these instruments did not subject Varian to risk that would
otherwise result from changes in currency exchange rates. The aggregate exchange
gain or loss, net of the gain or loss from the forward exchange contracts, was
accumulated at the corporate level within Varian and allocated to the
Predecessor based on its estimated proportionate share of international sales,
and is included in the corporate allocations described later in these notes.
During the 7-week period ended September 29, 1995, the Company did not enter
into foreign exchange contracts. The aggregate translation and exchange gains
and losses were not significant for the 7-week period ending September 29, 1995.
Fair Value of Financial Instruments
The carrying value of the Company's debt obligations approximate their fair
values based upon current rates available to the Company for debt of the same
maturities.
Use of Estimates
Management of Holding has made a number of estimates and assumptions relating to
the reporting of assets and liabilities to prepare these consolidated financial
statements in
- F-44 -
<PAGE> 96
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
ACCOUNTS RECEIVABLE
Accounts receivable are stated net of allowances for doubtful accounts of $.2
million as of September 29, 1995 for the Company and $1.0 million at the end of
fiscal 1994 for the Predecessor.
The reduction in the allowance account is principally due to the retention of
certain accounts receivable and their related allowances in accordance with the
Acquisition Agreement.
INVENTORIES
Inventories are stated at the lower of average cost or market (net realizable
value). The main components of inventories are as follows:
<TABLE>
<CAPTION>
(Successor) (Predecessor)
(Dollars in thousands) 1995 1994
------------- --------------
<S> <C> <C>
Raw materials and parts $ 30,369 31,637
Work in process 8,220 6,700
Finished goods 6,176 800
------------- --------------
Total inventories $ 44,765 39,137
============= ==============
</TABLE>
In connection with the acquisition, Holding recorded inventory purchased at its
estimated fair value, which was $4.1 million in excess of the historical cost to
the Predecessor. Of this amount, approximately $1.7 million of finished goods
remains on the consolidated balance sheet as of September 29, 1995.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at historical cost, which, for the
Successor, represents the fair value at the date following the Acquisition,
August 12, 1995. 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 for financial reporting
purposes and accelerated methods for tax purposes. Leasehold improvements are
amortized using the straight-line method over their estimated useful lives, or
the remaining term of the lease, whichever is less.
- F-45 -
<PAGE> 97
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Estimated useful lives of property, plant, and equipment are:
Land leaseholds Life of the lease
Buildings 40 years
Machinery and equipment 5 to 7 years
The main components of property, plant, and equipment are as follows:
<TABLE>
<CAPTION>
Successor Predecessor
------------- -------------
(Dollars in thousands) 1995 1994
------------- -------------
<S> <C> <C>
Land and land leaseholds $ 36,544 1,600
Buildings 7,817 66,700
Machinery and equipment 28,363 114,587
Construction in progress 2,118 2,300
------------- -------------
Subtotal 74,842 185,187
Less accumulated depreciation
and amortization (771) (123,758)
------------- -------------
Net property, plant, and equipment $ 74,071 61,429
============= =============
</TABLE>
- F-46 -
<PAGE> 98
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
ACCRUED EXPENSES
Accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
Successor Predecessor
-------------- -------------
(Dollars in thousands) 1995 1994
-------------- -------------
<S> <C> <C>
Taxes, including taxes on earnings $ 200 500
Payroll and employee benefits 11,900 14,900
Estimated loss contingencies - 2,700
Accrued exit costs 1,259 -
Accrued interest 2,497 -
Other 3,930 4,028
-------------- -------------
Total accrued expenses $ 19,786 22,128
============== =============
</TABLE>
COSTS TO EXIT AN ACTIVITY OF THE PREDECESSOR
Prior to consummation of the Acquisition, management of the Company had begun to
formulate plans to exit certain activities of the Predecessor, which were
finalized shortly after the Acquisition. These plans included two principal
costs: (a) the costs associated with the contractually required closing and
consolidating of the Company's Salt Lake City, Utah, operation into the
Company's San Carlos, California, facility, and (b) the costs associated with
disposing of certain excess plant capacity, which includes the consolidation,
expected to be completed by late 1996, of one of its leased manufacturing
facilities into its Palo Alto, California, facility.
In connection with the Acquisition, the Company has accrued $1,259,000 for the
costs of completing these plans, which costs are comprised principally of
additional severance cost, relocation expenses, and lease cost associated with
excess space.
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 $5.0 million sub-facility for letters of credit)(the
"Revolving Credit Facility"). 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
September 29, 1995, CPI had $4.0 million available under the sub-facility for
issuance of letters of credit.
Borrowings under the Revolving Credit Facility and Term Loan A bear interest at
a rate equal to the Eurodollar Rate (5.88% as of September 29, 1995) plus 2.5%
per annum or the Base Rate plus 1.0% per annum (8.75% as of September 29, 1995),
and borrowings under Term Loan B bear interest at a
- F-47 -
<PAGE> 99
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
rate equal to the Eurodollar Rate plus 3.0% per annum or Base Rate plus 1.5% per
annum, in each case as selected by CPI. Applicable interest rates on Term Loan A
and the Revolving Credit Facility will be reduced after the first anniversary of
the consummation of the Acquisition by up to 0.5% per annum if CPI meets and
continues to meet certain financial tests. In addition to customary fronting and
other fees, CPI will pay a fee equal to 1.5% per annum on undrawn amounts of
letters of credit and a commitment fee of 0.5% per annum on unused facilities
under the Revolving Credit Facility. The Senior Credit Agreement also provides
for a prepayment premium in the event that it is voluntarily prepaid within two
years of the establishment of the Senior Credit Agreement unless such prepayment
is made with funds raised through an initial public offering of Holding's stock.
The Term Loans are subject to quarterly amortization payments in the aggregate
annual amounts as follows (in thousands):
<TABLE>
<CAPTION>
Term Term
Loan A Loan B
---------- ----------
<S> <C> <C>
1996 $ 3,000 200
1997 4,000 200
1998 6,000 200
1999 6,000 200
2000 6,000 200
2001 - 8,000
2002 - 8,000
---------- ----------
$ 25,000 17,000
========== ==========
</TABLE>
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
Holding and 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
- F-48 -
<PAGE> 100
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
consolidated basis, maintain certain specified financial covenants, including a
minimum fixed charge coverage ratio, minimum net worth and minimum EBITDA.
SENIOR SUBORDINATED NOTES OF CPI
The $100 million principal amount of Senior Subordinated Notes mature in 2005
and bear interest at 12% per annum, payable semiannually. On or before August 1,
2000, interest may, at the option of CPI, be paid in cash or by issuing
additional notes in a principal amount equal to the amount of such interest. 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, upon not less than 30 nor more than 60 days' notice, 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:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2000 106.0%
2001 104.5%
2002 103.0%
2003 101.5%
2004 and thereafter 100.0%
</TABLE>
Notwithstanding the foregoing, prior to August 1, 1998, CPI may redeem up to 35%
of the aggregate principal amount of the Notes originally outstanding at a
redemption price of 112% of the principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the redemption date, with the net proceeds
of one or more public offerings of common stock of Holding.
Upon the occurrence of a change of control, each holder of Notes will have the
right to require CPI to offer to repurchase all or any part of such holder's
Notes. The Senior Credit Agreement currently prohibits CPI from making such an
offer. In addition, the Indenture covering the Notes provides for various
restrictions, including restrictions on mergers or the sales of CPI's assets,
dividend payments, purchase, redemption, acquisition or retirement of equity
interests of CPI or its affiliates, principal payment on any indebtedness of CPI
or guarantors that is subordinated to the Notes, the incurrence of certain
indebtedness, or the making of any restricted investment, as defined.
- F-49 -
<PAGE> 101
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
SENIOR REDEEMABLE PREFERRED STOCK OF CPI
CPI is authorized to issue up to 325,000 shares of nonvoting Series A 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 the Company so elects.
Dividends on the Senior Preferred Stock accrue at the rate of 14% per annum and
are payable quarterly, commencing on November 1, 1995. On or before August 1,
2000, CPI may, at its option and subject to debt covenant restrictions, pay
dividends in cash or in shares of Senior Preferred Stock having an aggregate
liquidation preference equal to the amount of such dividends. After August 1,
2000, dividends may be paid only in cash.
The Senior Preferred Stock is not redeemable prior to August 1, 2000.
Thereafter, the Senior Preferred Stock will be redeemable at the option ofCPI,
in whole or in part from time to time, initially at 107% of the liquidation
preference thereof and at decreasing prices thereafter to and including August
1, 2004 and thereafter at 100% of the liquidation preference thereof, together
in each case with accumulated and unpaid dividends thereon. In addition, on or
prior to August 1, 1998, CPI may, on one or more occasions, redeem any or all of
the shares of Senior Preferred Stock then outstanding at a redemption price
equal to 114% of the liquidation preference thereof plus accumulated and unpaid
dividends thereon, with the proceeds of one or more public offerings of
Holding's common stock. The Senior Preferred Stock is subject to mandatory
redemption in whole on August 1, 2007 at a price equal to the liquidation
preference thereof, plus accumulated and unpaid dividends.
In the event of a change of control, CPI will be required to make an offer to
each holder of shares of Senior Preferred Stock to repurchase all or a portion
of such holder's Senior Preferred Stock at a price equal to 101% of the
liquidation preference thereof, plus accumulated and unpaid dividends. The
Senior Credit Agreement currently prohibits and the Indenture currently
restricts CPI from making such an offer. In addition, CPI will be required to
use the proceeds from certain asset sales to permanently reduce senior
indebtedness of CPI, to invest in certain related assets or businesses or to
offer to repurchase Senior Preferred Stock. Any such repurchases shall be
effected at an offer price equal to 100% of the liquidation preference of the
shares of Senior Preferred Stock purchased, plus accumulated and unpaid
dividends.
The Certificate of Designation covering the Senior Preferred Stock contains
certain provisions that, among other things, limit the ability of CPI to incur
indebtedness, pay dividends, incur liens, make loans or investments, transact
with affiliates and engage in mergers and consolidations.
CPI may, at its option, on any dividend payment date, exchange all, but not less
than all, of the outstanding shares of Senior Preferred Stock into 14% Junior
Subordinated Notes due 2007 (the "Exchange Notes"), so long as such exchange is
permitted by the Senior Credit Agreement and the Indenture, in an aggregate
principal amount not to exceed the aggregate liquidation preference, plus
accumulated and unpaid dividends on the date of exchange. The Exchange Notes
will be general unsecured obligations of CPI and will be
- F-50 -
<PAGE> 102
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
subordinated to all existing and future senior indebtedness of CPI, including
indebtedness under the Senior Credit Agreement and the Indenture. Except for
terms relating to these subordination provisions, payment of interest on a
quarterly basis, the option to issue additional Exchange Notes on or prior to
August 1, 2000 in lieu of paying cash interest, optional redemption and the date
on which repayment is mandatory (all of which terms would be similar to the
terms of Senior Preferred Stock), the terms of the Exchange Notes will be
generally identical to the Notes.
JUNIOR PREFERRED STOCK OF CPI
CPI is authorized to issue up to 525,000 shares of nonvoting Series A 14% Junior
Cumulative Preferred Stock (the "Junior Preferred Stock") including shares of
Junior Preferred Stock which may be used to pay dividends on the Junior
Preferred Stock if CPI elects to pay dividends in shares of Junior Preferred
Stock. The aggregate liquidation preference of the Junior Preferred Stock issued
in connection with the 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.
The Junior Preferred Stock ranks junior in right of payment to all liabilities
of CPI and to any preferred stock, including Senior Preferred Stock, that is
senior in right of payment to the Junior Preferred Stock and ranks senior in
right of payment to any additional preferred stock which does not expressly
provide that it ranks senior to or on a parity with the Junior Preferred Stock
and CPI's common stock.
LEASE COMMITMENTS
At September 29, 1995, the Company was committed to minimum rentals under
noncancellable operating leases as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1996 $ 1,473
1997 1,255
1998 1,143
1999 549
2000 359
Thereafter $ 5,462
</TABLE>
- F-51 -
<PAGE> 103
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Rental expense of the Successor for the U. S. and Canadian operations for the
7-week period ended September 29, 1995 amounted to $257,000. Rental expense of
the Predecessor for the 45-week period ended August 11, 1995 and for fiscal
years 1994 and 1993 was $1,242,000, $1,900,000 and $3,000,000, respectively.
Rental expense of the Predecessor for overseas operations was included within a
corporate allocation (as described later in these notes) and is not separately
identified.
CONTINGENCIES
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 the Company.
INDUSTRY SEGMENTS AND SALES
The Company operates in a single business segment. The Company covers and is
engaged in the development, manufacture and sale of a broad line of electron
devices used in broadcasting, communications, and other commercial and military
applications.
The Company operates a Canadian manufacturing plant. No single country outside
the United States accounts for more than 10% of total sales or total assets.
Sales between geographic areas are accounted for at cost plus prevailing markups
arrived at through negotiations between independent
- F-52 -
<PAGE> 104
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
profit centers. Related inter-business profits are eliminated. The following
table summarizes export sales as well as sales under prime contracts from the
U.S. government for the periods presented in the accompanying consolidated
financial statements:
<TABLE>
<CAPTION>
Sales under prime
Export contracts from the
(Dollars in thousands) Sales U.S. Government
------------------ -------------------
<S> <C> <C>
SUCCESSOR:
7-week period ended September 29, 1995 $ 3,204 5,915
PREDECESSOR:
45-week period ended August 11, 1995 16,300 34,700
52-week period ended September 30, 1994 17,500 42,700
52-week period ended October 1, 1993 19,400 54,500
</TABLE>
RESEARCH AND DEVELOPMENT
Company-sponsored research and development costs related to both present and
future products are expensed currently. Total expenditures incurred by the
Company on research and development are summarized as follows:
<TABLE>
<CAPTION>
Total Funded by
(Dollars in thousands) Incurred Customers
-------------- --------------
<S> <C> <C>
SUCCESSOR:
7-week period ended September 29, 1995 $ 2,551 1,353
PREDECESSOR:
45-week period ended August 11, 1995 16,200 8,800
52-week period ended September 30, 1994 18,400 10,800
52-week period ended October 1, 1993 16,600 8,900
</TABLE>
In connection with the Acquisition, a portion of the purchase price was
allocated to the value of in-process research and development projects. These
projects involved the research and development of new products and significant
extensions and improvements to existing products which had not demonstrated
their technological feasibility as of the acquisition date and did not have an
alternative future use. Accordingly, immediately upon consummation of the
acquisition, the value associated with these projects were charged to expense in
accordance with Statement of Financial Accounting Standards No.2.
- F-53 -
<PAGE> 105
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
PROVISION FOR INCOME TAXES
Earnings (loss) before income taxes for domestic and non-U.S. operations is as
follows:
<TABLE>
<CAPTION>
Successor Predecessor
---------------- ---------------------------------------------------
7-week 45-week 52-week 52-week
period ended period ended period ended period ended
September 29, August 11, September 30 October 1,
(Dollars in thousands) 1995 1995 1994 1993
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Domestic $ (32,713) 6,867 13,372 9,084
Non-U.S. 406 2,994 2,047 1,177
---------------- ---------------- ---------------- ----------------
Total $ (32,307) 9,861 15,419 10,261
================ ================ ================ ================
</TABLE>
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Successor Predecessor
--------------- -------------------------------------------------
7-week 45-week 52-week 52-week
period ended period ended period ended period ended
September 29, August 11, September 30, October 1,
(Dollars in thousands) 1995 1995 1994 1993
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Current
U.S. federal $ - 2,934 3,363 (64)
State 5 545 856 (126)
Non-U.S. 212 712 1,895 (16)
Deferred
U.S. federal (2,926) (531) (270) 3,407
Non-U.S. - (11) 15 698
--------------- --------------- --------------- ---------------
Provision (benefit) for income taxes $ (2,709) 3,649 5,859 3,899
=============== =============== =============== ===============
</TABLE>
Management has provided for U. S. federal income taxes payable on non-U.S.
earnings as it believes that it is not currently practicable to determine
whether such earnings are to be permanently reinvested in such foreign
countries.
- F-54 -
<PAGE> 106
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:
<TABLE>
<CAPTION>
Successor Predecessor
---------------- ----------------
(Dollars in thousands) 1995 1994
---------------- ----------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Product warranty $ 214 1,568
Deferred compensation 10 1,111
Special provisions - 495
Inventory adjustments 242 5,002
Accrued vacation 35 2,123
Workers' compensation - 1,068
Foreign tax credits 142 -
Depreciation 163 -
Federal net operating loss carryforward 10,561 -
State taxes, net of federal benefits 1,514 -
Other 88 530
---------------- ----------------
12,969 11,897
Less: Valuation allowance (10,000) -
---------------- ----------------
2,969 11,897
DEFERRED TAX LIABILITIES:
Goodwill amortization (43) -
Accelerated depreciation - (5,171)
---------------- ----------------
Net deferred tax asset $ 2,926 6,726
================ ================
</TABLE>
Holding's federal net operating loss carryforward of $30.2 million will expire
in 2010 and foreign tax credits of $142,000 will expire in 2000. Management has
established a valuation allowance based on the uncertainty of the amount and
timing of taxable income in future accounting periods.
- F-55 -
<PAGE> 107
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The reconciliation between the effective tax rates and the statutory federal
income tax rates applicable to the Predecessor and the Successor is shown in the
following schedule:
<TABLE>
<CAPTION>
Successor Predecessor
--------------- --------------------------------------------------
7-week 45-week 52-week 52-week
period ended period ended period ended period ended
September 29, August 11, September 30, October 1,
1995 1995 1994 1993
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Statutory federal income tax rate (35.0%) 35.0% 35.0% 34.8%
State and local taxes, net of
federal tax benefit (4.7%) 5.0% 4.0% 1.7%
Foreign taxes, net .2% (.1%) (.6%) 2.7%
Foreign sales corporation - (1.9%) (1.8%) (3.7%)
Losses and credits for which no
benefit has been recorded 31.0% - - -
Other .1% (1.0%) 1.4% 2.5%
--------------- -------------- --------------- ---------------
Effective tax rate (8.4%) 37.0% 38.0% 38.0%
=============== ============== =============== ===============
</TABLE>
The effective tax rate experienced by the Predecessor reflects the tax effect of
being included in the consolidated tax return of Varian and may not be
representative of effective tax rates to be experienced by the Successor in the
future.
RETIREMENT AND PROFIT SHARING PLANS
The Predecessor participated in defined contribution retirement plans sponsored
by Varian covering substantially all of the Company's domestic and Canadian
employees. Upon completion of the Acquisition, these plans were replaced with
company sponsored defined contribution plans with substantially similar
benefits. The Company's major obligation is to contribute an amount based on a
percentage of each participant's base pay.
The Predecessor also made a contribution for its share of Varian's retirement
plan profit sharing based on a percentage of consolidated earnings from
continuing operations before taxes, as adjusted for discretionary items. Upon
consummation of the Acquisition, participants received their portion of the
retirement fund assets which were held by a third-party trustee. In addition, a
number of the Company's foreign employees participated in Varian's defined
benefit retirement plans for regular full-time employees.
Total pension expense of the Predecessor for all plans amounted to $4.3 million,
$4.6 million and $4.5 million for the 45-week period ended August 11, 1995 and
the 52-week period ended September 30, 1994 and October 1, 1993, respectively.
Pension expense of the Successor for the 7-week period ended September 29, 1995
was $247,000.
CPI has instituted a bonus program that provides incentive bonuses to senior
management if certain performance goals are achieved and to employees if these
goals are
- F-56 -
<PAGE> 108
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
exceeded. Such performance goals are measured based upon earnings before
interest, taxes, depreciation and amortization, return on sales and asset
utilization.
TRANSACTIONS WITH VARIAN
The Predecessor made sales to, and purchases from, other Varian lines of
business as follows:
<TABLE>
<CAPTION>
Successor Predecessor
---------------- ----------------------------------------------------
7-week 45-week 52-week 52-week
period ended period ended period ended period ended
September 29, August 11, September 30, October 1,
(Dollars in thousands) 1995 1995 1994 1993
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Sales to Varian $ 1,014 8,800 7,700 7,900
Purchases from Varian $ 315 3,700 2,700 2,000
</TABLE>
Sales and purchases of the Predecessor have been recorded at cost to the
originating business unit, so that no profit margin is recognized on transfer.
In connection with the Acquisition, CPI entered into various agreements with
Varian that provide for various services to be performed by or for Varian or for
products to be purchased from or provided to Varian. These agreements are as
follows:
Transitional Services Agreement. Under the Transitional Services Agreement,
Varian provides certain services to CPI in order to facilitate the transition of
CPI to a stand-alone operation. In addition, CPI provides transitional services
to Varian related to certain of Varian's non-United States operations. Services
will generally be provided through August 12, 1997 (with shorter periods for
certain services), subject to the right of the party who receives such service
to terminate any service it receives upon 30 days' notice. In addition, in
connection with the separation and creation of independent utilities and systems
at CPI's facilities, the Transitional Services Agreement requires Varian to pay
or reimburse CPI (in some cases), subject to certain limitations.
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
- F-57 -
<PAGE> 109
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
agreements are no less favorable to CPI than that which would be obtained from
independent third parties for the purchase or supply of similar products.
Trademark License Agreement Generally, under the terms of the Trademark License
Agreement, CPI is licensed to use Varian trademarks on its products for a period
of three years (although during the third year Varian trademarks may only be
used in connection with CPI's own trademarks). After the third year, CPI may not
use any Varian trademarks alone, but for an additional seven years may identify
its products as "formerly made by Varian". At the expiration of the 10-year
period, CPI will not be permitted to utilize any Varian trademarks.
CPI and Varian have also entered into certain other agreements covering access
to certain of CPI's facilities as well as subleased and shared facilities.
CORPORATE ALLOCATIONS
Operating earnings of the Predecessor include allocations of costs accumulated
at the corporate level within Varian. Where it was possible to specifically
identify corporate amounts with the activities of the Predecessor, these amounts
have been charged or credited directly to the Predecessor without allocation or
apportionment. Costs of a wholly corporate nature (i.e. those that are
considered to relate purely to the support of Varian's centralized corporate
structure) are not allocated. Shared or common costs have been allocated to the
Predecessor on the basis which is considered to most fairly and reasonably
reflect the utilization of the services provided to, or benefit obtained by, the
Predecessor. Typical measures and activity indicators used for apportionment
purposes include sales revenues, headcount and facility area measurements.
Management believes that the cost allocations are reasonable and reflect the
costs incurred to support the operations of the Predecessor. Additionally,
management believes that the costs for such services would have been less on a
stand alone basis, although determination as to specific amounts is not
practicable.
Allocations of corporate expenses included in the consolidated statements of
operations for the 45-week period ended August 11, 1995 and for fiscal years
1994 and 1993 were $11.2 million, $11.3 million and $11.8 million, respectively.
RELATED PARTY TRANSACTIONS
Holding and CPI have entered into an agreement to pay $362,000, plus
out-of-pocket expenses, annually to an advisor group of Holding's majority
shareholder. Certain individuals of the investor's advisor group are members of
Holding's and CPI's respective Boards of Directors. In addition, on August 11,
1995, CPI paid this advisor group a fee of $3,330,000 for services rendered in
connection with the Acquisition.
- F-58 -
<PAGE> 110
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
GUARANTEES
Holding has guaranteed CPI's senior debt obligations. Holding has no operations
other than its ownership of CPI. The consolidated balance sheet of CPI as of
September 29, 1995 is substantially identical to that of Holding and its
subsidiaries.
BUSINESS EQUITY
Business equity is comprised of intercompany balances arising in the ordinary
course of business between the Predecessor and other Varian entities, together
with various adjustments resulting from the carve-out of the Predecessor as
presented in these consolidated financial statements.
- F-59 -
<PAGE> 111
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Average equity balances of the Predecessor based on a simple average of opening
and closing amounts were $123 million and $131 million for the 52-week period
ending September 30, 1994 and October 1, 1993, respectively.
PRO FORMA COMBINED STATEMENT OF OPERATIONS INFORMATION (UNAUDITED)
Pro forma operating results give effect to the acquisition and related financing
as if consummated at the beginning of the 1995 and 1994 fiscal year. Significant
adjustments include (a) increase in sales and cost of sales in the historical
pricing of purchases from and sales to Varian resulting from the terms of the
product supply agreements; (b) adjustment to cost of sales, depreciation and
amortization relating to the write-up of assets in connection with the
application of purchase accounting; (c) reduction in certain overhead and other
costs as a result of being a stand-alone entity rather than a subsidiary of
Varian; and (d) interest cost associated with the borrowings resulting from the
Acquisition. Such information is not fully comparable to the historical
statement of earnings.
<TABLE>
<CAPTION>
Pro forma results
----------------------------------
Fiscal 1995 Fiscal 1994
---------------- ----------------
<S> <C> <C>
Sales $ 253,245 249,035
Gross profit 73,101 66,997
Interest expense 19,077 19,233
Net income 7,180 4,927
</TABLE>
- F-60 -
<PAGE> 112
SCHEDULE II
COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries
Holding Corporation)
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
DESCRIPTION PERIOD EXPENSES DEDUCTIONS
----------- ------ -------- ----------
<S> <C> <C> <C>
PREDECESSOR:
Year ended October 1, 1993:
Allowance for doubtful accounts receivable $1,000 214 (214)
Year ended September 30, 1994:
Allowance for doubtful accounts receivable 1,000 177 (177)
45-week period ended August 11, 1995:
Allowance for doubtful accounts receivable 1,000 80 (880)(1)
SUCCESSOR:
7-week period ended September 29, 1995:
Allowance for doubtful accounts receivable 200 - -
</TABLE>
- -------------
(1) The reduction in the allowance account is principally due to the retention
of certain accounts receivable by Varian and their related allowances in
accordance with the Acquisition Agreement.
- F-61 -
<PAGE> 113
SCHEDULE II
COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
DESCRIPTION PERIOD EXPENSES DEDUCTIONS
----------- ------ -------- ----------
<S> <C> <C> <C>
PREDECESSOR:
Year ended October 1, 1993:
Allowance for doubtful accounts receivable $1,000 214 (214)
Year ended September 30, 1994:
Allowance for doubtful accounts receivable 1,000 177 (177)
45-week period ended August 11, 1995:
Allowance for doubtful accounts receivable 1,000 80 (880)(1)
SUCCESSOR:
7-week period ended September 29, 1995:
Allowance for doubtful accounts receivable 200 - -
</TABLE>
- -------------
(1) The reduction in the allowance account is principally due to the retention
of certain accounts receivable by Varian and their related allowances in
accordance with the Acquisition Agreement.
- F-62 -
