ITEM 1: BUSINESS
GENERAL
Communications & Power Industries Holding Corporation, Inc. ("Holding"), through its wholly-owned subsidiary, Communications & Power Industries, Inc. ("CPI", both companies together referred to as the "Company"), is a world leader in the development, manufacture and distribution of components for systems used primarily to generate, amplify and transmit high-power/high-frequency microwave and radio frequency signals. End-use applications of these systems include the transmission and amplification of voice, data and video signals for broadcasting and telecommunications, transmission of radar signals for navigation and location, transmission of false signals for electronic countermeasures (e.g., decoys and signal "jammers") and various other uses in the industrial, medical and scientific markets.
The Company's products include microwave and power grid vacuum electronic devices, microwave amplifiers, modulators, and various other power supply equipment and devices. These products are 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 vacuum electronic devices, microwave amplifiers, modulators and various other power supply equipment and devices through the Predecessor. Pursuant to the terms of a Stock Sale Agreement dated June 9, 1995, as amended, among Holding, CPII Acquisition, and Varian (the "Acquisition Agreement"), prior to the consummation of the Acquisition, Varian and its affiliates contributed the assets of the Predecessor that were located in the United States to CPI, which was a newly-formed, wholly-owned Varian subsidiary. Subsequently, upon the consummation of the Acquisition, Varian transferred all of the outstanding capital stock of CPI to CPII Acquisition. The assets of the Predecessor that were located in foreign jurisdictions were transferred from Varian or its affiliates to newly-formed direct or indirect subsidiaries of CPI. In consideration of the transfer of such capital stock and assets, CPII Acquisition (including its affiliates) paid Varian (including its affiliates) an aggregate purchase price of $196.2 million, subject to a post-closing adjustment (the "Purchase Price"). Holding, CPII Acquisition and CPI's subsidiaries also assumed certain specified liabilities of the Predecessor. The liabilities assumed by Holding (with respect to which CPI has agreed to perform any necessary services) included certain balance sheet liabilities of the Predecessor, which aggregated approximately $24.1 million as of August 11, 1995, and certain contingent liabilities (such as for certain product warranty claims) (the "Assumed Liabilities"). Upon
the merger of CPII Acquisition with and into CPI immediately following the consummation of the Acquisition, CPI became a wholly-owned subsidiary of Holding.
In connection with the consummation of the Acquisition, the Company also entered into the following transactions:
(1) Two senior term loans of CPI in the aggregate amount of $42.0 million and a revolving credit facility in a principal amount of up to $35.0 million (including a $5.0 million sub-facility for letters of credit) 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 (the "Exchange Offers") registered under the Securities Act of 1933, for otherwise identical 12% Series B Senior Subordinated Notes due 2005 (the "Notes") and Series B 14% Senior Redeemable Exchangeable Cumulative Preferred Stock due 2007 (the "Senior Preferred Stock"), respectively.
GEI II initiated the Acquisition and currently owns approximately 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 vacuum electronic devices, microwave amplifiers, modulators and various other power supply equipment and devices for use in the communication, radar,
electronic countermeasures, industrial, medical and scientific markets. The Company offers over 6,600 products which generally have selling prices from $2,000 to $50,000, with certain products ranging in price up to $1,000,000. These products are 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 vacuum electronic device will be located.
Specific products which the Company offers include:
- VACUUM ELECTRONIC DEVICES. Helix traveling wave vacuum electronic devices, klystron amplifiers, klystron oscillators, gyrotrons, coupled cavity traveling wave vacuum electronic devices, magnetrons, ring loop traveling wave vacuum electronic devices, cross field amplifiers, extended interaction klystrons, power grid vacuum electronic devices, Klystrodes(R) and inductive output vacuum electronic devices.
- 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 vacuum electronic devices 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 1996, commercial sales, which represent sales for which a U.S. Government entity is not the end-user, represented approximately 73.0% of the Company's total sales. Direct and OEM sales to the U.S. Government represented approximately 27.0% 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 and Fiscal 1996, 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 1996, approximately 66% of sales were derived from U.S. customers, while approximately 34% 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 44% of Fiscal 1996 sales represent sales to international end-users which is an increase from 42% in Fiscal 1995 and approximately 56% of Fiscal 1996 sales represent sales to U.S. end-users which is a decrease from 58% in Fiscal 1995. Excluding sales to the U.S. Government, no single customer accounted for more than 5% of the Company's total sales in Fiscal
1996 or Fiscal 1995.
The Company operates in six different markets:
- - - - Communications Market - The communications market is comprised of applications for satellite communications ("SatCom") and broadcast sectors. In this market, the Company's products generate, amplify and transmit signals and data within an overall communication system. Sales(1) in the communication market were $118.4 million in Fiscal 1996 compared to $110.5 million in Fiscal 1995 and $101.8 million for Fiscal 1994.
- - - - Radar Market - The radar market includes microwave and power grid vacuum electronic devices, amplifiers and related equipment for air, ground and shipboard radar systems. The Company's vacuum electronic devices have been an integral component of radar systems for over four decades. Sales(1) in the radar market were $74.6 million for Fiscal 1996, $76.9 million for Fiscal 1995 and $87.3 million for Fiscal 1994.
- - - - Electronic Countermeasures Market - The electronic countermeasures market utilizes microwave vacuum electronic devices for systems that provide protection for ships, aircraft and high-value land targets against radar-guided munitions. Sales(1) in the electronic countermeasures market were $17.2 million, $20.1 million, and $18.8 million in Fiscal 1996, Fiscal 1995, and Fiscal 1994, respectively.
- - - - Industrial Market - The industrial market includes applications for a wide range of systems used for materials processing, instrumentation and voltage generation. Sales in this market were $27.2 million for Fiscal 1996. On a pro-forma basis, sales were $22.6 million in Fiscal 1995 and $15.9 million in Fiscal 1994. Industrial sales on a historical combined basis were $22.0 million and $15.6 million in Fiscal 1995 and Fiscal 1994, respectively.
- - - - Medical Market - The Company participates in the diagnostic and treatment sectors of the medical market. In the diagnostic market, the Company provides X-ray generators, including state-of-the-art, high-efficiency, lightweight power supplies and modern digital-based consoles for diagnostic equipment. In the treatment market, the Company provides microwave generators (klystrons) for high-end cancer therapy machines. Sales in this market were $16.3 million for Fiscal 1996. On a pro forma basis, sales were $17.4 million in Fiscal 1995 and $17.8 million in Fiscal 1994. Medical sales on a historical basis were $15.8 million and $15.9 million in Fiscal 1995 and Fiscal 1994, 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 $3.7 million, $5.7 million and $7.6 million in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively.
- - - ----------------------- (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.
SALES, MARKETING AND SERVICE
As of September 27, 1996, 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 vacuum electronic device. This subassembly process is performed utilizing Demand Flow Technology, which helps to minimize inventory. Vacuum assemblies are processed by pumping the atmosphere from the assemblies while heating the assemblies in a furnace and simultaneously charging them with an electrical current. When this step is complete, final assembly and testing is performed on each product before shipment. The Company has developed sophisticated test programs to assure that each product meets operating specifications.
Certain materials necessary for the manufacture of the Company's products, such as molybdenum, OFHC copper, and some cathodes, are obtained from sole, or a limited group of, suppliers. In addition, prices of these raw materials and key components are subject to fluctuation.
COMPETITION
The industries and markets in which the Company operates are highly competitive. The Company encounters intense competition in most of its business areas from numerous other companies (such as 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 vacuum electronic devices, only microwave vacuum electronic devices currently serve high-power/high-frequency demands. The laws of physics limit the ability of solid state technology to efficiently or cost effectively serve the high-power/high-frequency applications of the Company's customers. These applications' extreme operating parameters necessitate heat dissipation capabilities which are satisfied by the Company's products. The Company's management believes that each technology serves its own niche without significant overlap.
BACKLOG
As of September 27, 1996, the Company had an order backlog of $153.4 million, representing over seven months of sales compared to order backlog of $138.9 million as of September 29, 1995 and $136.1 million as of September 30, 1994. Although the backlog consists of firm orders for which goods and services are yet to be provided, these orders can be and sometimes are modified or terminated. However, the amount of modifications and terminations has historically not been material compared to total contract volume.
INTELLECTUAL PROPERTY
The Company owns a number of United States and foreign patents having various expiration dates (collectively, the "Patents"). The Patents are directed to various aspects of the technologies used by the Company in many of its operations. In addition to the Patents, the Company has certain trade secrets, know-how, trademarks and copyrights related to its technology and products. The Company also has acquired certain intellectual property rights and incurred certain obligations through license and research and development agreements with third parties. These agreements may include royalty bearing licenses, technology cross licenses and manufacturing supply agreements. Management does not believe that any single patent or license is material to the success of the Company as a whole. As a result of contracts with the U.S. Government which contain patent and/or data rights clauses, the U.S. Government also has acquired royalty-free licenses or other rights in inventions and technology resulting from certain work done by the Company on behalf of the U.S. Government. The Company also has certain software license agreements with vendors and suppliers which affect the Company's intellectual property rights. The Company generally enters into confidentiality agreements with its employees, consultants and vendors, and generally limits access to and distribution of its proprietary information. The Company maintains an intellectual property protection program designed to preserve the intellectual property assets for the Company's future products. This program includes the filing of new domestic and foreign patent applications, copyright and trademark applications and the pursuit of enforcement of its intellectual property rights. Nevertheless, there can be no assurance that the steps taken by the Company will prevent misappropriation or loss of its technology.
As part of the Acquisition, six United States patents and one United States patent application, and their foreign counterparts, are jointly owned by the Company and Varian along with related trade secrets and know-how, including drawings, manufacturing and testing processes and designs (the "Key Component Technology"). The Key Component Technology relates to the manufacture and testing of certain key electron beam guns and key medical klystrons, and any improvements thereto. Upon the consummation of the Acquisition, the Company and Varian entered into a Cross License Agreement to allocate the rights to the Key Component Technology between the Company and Varian.
In addition, in connection with the consummation of the Acquisition, the Company and Varian entered into a Trademark License Agreement to permit the Company to continue to market, advertise, distribute and sell its products using Varian's trademarks on its products for a period of three years and may identify its products as "formerly made by Varian" for a period of ten years.
EMPLOYEES
As of September 27, 1996, the Company had approximately 1,763 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.
U.S. GOVERNMENT CONTRACTS AND REGULATIONS
Management expects that a decreasing but significant portion of the Company's sales will continue in the foreseeable future to result from contracts with the U.S. Government, either directly or through prime contractors or subcontractors. The Company's business with the U.S. Government is performed under fixed-price and, to a lesser degree, cost-plus contracts. Fixed-price contracts accounted for approximately 92% of the Company's U.S. Government sales in Fiscal 1996. Approximately 8% 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 entered into a novation agreement with the U.S. Government, as required by federal procurement regulations, applicable to all contracts between or relating to the Predecessor and the U.S. Government (the "Acquired Government Contracts") which were acquired by the Company in connection with the Acquisition. This novation agreement provides, among other things, that the Company assumes all obligations under the Acquired Government Contracts and that the U.S. Government recognizes the transfer to the Company of the Acquired Government Contracts and related assets.
Due to its business with the U.S. Government, the Company may also be subject to "qui tam" (whistle blower) suits brought by private plaintiffs in the name of the U.S. Government upon the allegation that the Company submitted a false claim to the U.S. Government, as well as to false claim suits brought by the U.S. Government. A judgment against the Company in a qui tam or false claim suit could cause the Company to be liable for substantial damages and could carry penalties of suspension or debarment which would make the Company ineligible to be awarded any U.S. Government contracts for a period of up to three years and, thereby, could potentially have a material adverse effect on the Company's financial condition and results of operations.
Similar to other companies which derive a substantial portion of their sales from contracts with the U.S. Government for defense-related products, the Company is subject to business risks, including changes in governmental appropriations, national defense policies or regulations and availability of funds. Any of these factors could adversely affect the Company's business with the U.S. Government in the future.
ENVIRONMENTAL MATTERS
The Company is subject to a wide variety of federal, state and local environmental laws and regulations which are subject to change and utilizes in its operations a number of chemicals which are classified as hazardous or similar substances. It is difficult to predict what impact these environmental laws and regulations may have on the Company in the future. Restrictions on chemical uses or certain manufacturing processes could restrict the ability of the Company to operate in the manner in which the Company is currently operated or is permitted to be operated. Although Varian is currently involved in a substantial long-term remediation program relating to the past operations of the Predecessor, management believes that the Company's current operations are in substantial compliance with current environmental laws and regulations. Nevertheless, it is possible that the Company may experience releases of certain chemicals to environmental media, either from its own operations or properties or from third-party operations or properties (such as off-site landfills), which could constitute violations of environmental law (and have an impact on its operations) or which could cause the incurrence of material cleanup costs or other damages. For these reasons, the Company is involved from time to time in legal proceedings involving compliance with environmental requirements applicable to its ongoing operations, and may be involved in legal proceedings involving exposure to chemicals or the remediation of environmental contamination from past or present operations. Because certain environmental laws impose joint, several, strict and retroactive liability upon current owners or operators of facilities from which there have been releases of hazardous substances, the Company could be held liable for remedial measures or other damages (such as liability for personal injury actions) at properties it owns or utilizes in its operations, even if the contamination was not caused by the Company's operations.
Varian has agreed to indemnify the Company, to the extent permissible by law, for environmental claims arising from the Predecessor's operations prior to the consummation of the Acquisition, subject to certain exceptions and limitations. See "Business - Relationship with Varian - Acquisition Agreement." With certain limited exceptions, the Company is not indemnified by Varian for environmental claims arising from the Company's operations after the consummation of the Acquisition. There can be no assurance that material costs or liabilities will not be incurred by the Company in connection with proceedings or claims related to environmental conditions arising from the Company's operations. In addition, although Varian will retain financial and other responsibility for certain environmental liabilities of the Predecessor, including those for which, under law, the Company would otherwise be responsible, there can be no assurance that Varian will reimburse the Company for any particular environmental costs or do so in a timely manner. Although the Company believes that Varian currently has sufficient financial resources to satisfy its environmental indemnification obligations to the
Company, because of the long-term nature of many of Varian's remediation obligations, there can be no assurance that Varian will continue to have the financial resources to comply fully with its indemnification obligations to the Company. Unreimbursed liabilities arising from environmental claims, if significant, could have a material adverse effect on the Company's results of operations and financial condition.
The Company is aware that Varian is engaged in certain ongoing environmental investigatory and remedial work, which is in various stages of completion. Varian has indemnified the Company, to the extent permissible by law, for environmental claims arising from the operation of the Predecessor prior to the consummation of the Acquisition, subject to certain exceptions and limitations. Based on information currently available to the Company, the following provides a summary of the investigatory and remedial work being undertaken at the various properties owned or utilized by the Predecessor with respect to its operations.
PALO ALTO, CALIFORNIA. As a result of actual and threatened claims brought by other property owners and the State of California with regard to contamination present under and emanating from the Company's facilities located at the Palo Alto, California property (which facilities are leased by way of assignment and subleased by the Company and which serves as the Company's headquarters and one of its principal manufacturing complexes containing two manufacturing facilities), Varian has entered into a consent order (the "Palo Alto Consent Order") with the California Environmental Protection Agency. In accordance with the Palo Alto Consent Order, Varian has submitted, and the regulatory agencies have approved, a Remedial Action Plan to investigate and remediate groundwater and soil vapor contamination at the affected property to acceptable levels. Varian has entered into an agreement with the master lessor of the property pursuant to which it is obligated to comply with the remediation obligations under the Palo Alto Consent Order. As a sublessee or assignee of the property, the Company's right to continued occupancy of these premises will be dependent upon Varian's fulfillment of its responsibilities to the master lessor, including its obligation to comply with the Palo Alto Consent Order.
The Palo Alto, California facilities are also known to be within areas of regional groundwater contamination, which contamination is being addressed by federal and state environmental regulatory agencies. The Palo Alto, California property is adjacent to the Hewlett-Packard 640 Page Mill Road National Priorities List Site (the "HP Site") listed pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"). As a result of allegations that contamination resulting from Varian's historical operations, including its operations of the Predecessor, has migrated from that property to the HP Site and elsewhere, the Company is aware that Varian, as well as Hewlett-Packard and Stanford University, has been named in an order issued by the San Francisco Bay Regional Water Quality Control Board, and that Varian, together with Hewlett-Packard, is remediating a portion of the HP Site known as the California-Olive-Emerson Operable Unit, principally through the use of a groundwater treatment system, in response to that order.
The Palo Alto, California property is also adjacent to the Hillview-Porter State Study Area ("Hillview-Porter Site") identified by the California Environmental Protection Agency. Varian has not been named as a potentially responsible party in connection with the Hillview-Porter Site, although the Company is aware that allegations have been made that this property has impacted, and been impacted by, the Hillview-Porter Site.
Although liability under environmental laws such as CERCLA is strict, there often are a number of parties responsible for regional contamination, and such parties often will allocate the remedial action costs among themselves, taking into consideration equitable and other factors. Several potentially
responsible parties, including Hewlett-Packard and Varian, have been identified by the United States Environmental Protection Agency with respect to the HP Site, and several potentially responsible parties, currently not including Varian, have been identified by the California Environmental Protection Agency with respect to the Hillview-Porter Site.
SALT LAKE CITY, UTAH. Prior to the acquisition and use by Varian of the Salt Lake City, Utah property, such property was used for other industrial purposes, including the manufacturing of munitions. As a result of actual and threatened claims brought by other property owners and the State of Utah with regard to groundwater contamination present under and emanating from the Salt Lake City facility, Varian has entered into a consent order (the "Salt Lake City Consent Order") with the State of Utah. Pursuant to the terms of the Salt Lake City Consent Order, Varian has installed a groundwater remediation system to address the groundwater and soil contamination conditions.
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.
RELATIONSHIP WITH VARIAN
The Company continues to maintain certain relationships with Varian arising from the Predecessors' previous relationship with Varian and arising under the Acquisition Agreement and the Ancillary Agreements (as defined below). The descriptions of certain of such relationships set forth below are qualified in their entirety by reference to the full texts of documents relating thereto, copies of which are included as exhibits to this Annual Report on Form 10-K.
Acquisition Agreement. The Acquisition Agreement contains customary representations, warranties and covenants. The Company and Varian agreed to indemnify one another for breaches of representations and warranties contained in the Acquisition Agreement or the ancillary agreements executed in connection therewith (the "Ancillary Agreements"), provided claims with respect thereto are asserted on or before December 31, 1996. With respect to such breaches of representations and warranties, no claims 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 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 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 conduct. In the event of post-closing releases, the Company is required to respond to and remediate certain types of such releases at its expense. However, in the event of post-closing releases which contribute to existing groundwater contamination which is otherwise being remediated by Varian, Varian agreed to treat such contaminated groundwater, to the extent required and if it is feasible to do so, using its own treatment systems. The Company will be required to reimburse Varian for Varian's incremental costs related thereto.
With respect to Varian's duty to repair certain items identified by the Company within six months following the closing, the Company reached an agreement and settlement with Varian, effective October 1996, on such items identified. The Company has, in turn, provided Varian with a release from its obligation to handle the actual repair and a release from any fines and/or penalties which may result from the Company's failure to complete the identified repairs.
Pursuant to the Acquisition Agreement, Varian's environmental indemnification obligations do not extend to the following: (i) liabilities for certain building materials, such as asbestos, and hazardous
materials that are lawfully present, used or stored at the acquired properties as of the closing (other than liabilities for personal injuries related thereto), (ii) claims asserted by the Company or its successors for diminution in property value or consequential damages caused by the presence of hazardous materials at the acquired properties, or (iii) environmental response actions other than those required by the Acquisition Agreement, governmental order or self-executing environmental laws.
If a dispute arises as to whether and the extent to which a release of hazardous materials occurred before or after the closing, Varian has agreed to bear the burden of proof as to such matter by a preponderance of the evidence. In the event that both Varian and the Company are partly responsible for a particular environmental liability, such liability will be allocated between the parties in accordance with their respective contributions to such liability.
If there is a dispute concerning the indemnification of only a portion of a claim, the indemnitor is required to immediately assume full responsibility for the undisputed portion of the claim. Any dispute between Varian and the Company will be settled by arbitration. The arbitrator is authorized to allocate fees and costs based upon the respective merits of the parties' respective positions in the dispute.
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 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.
ITEM 2:
ITEM 2: PROPERTIES
The Company owns, leases or subleases manufacturing, assembly, warehouse, service and office properties having an aggregate floor space of approximately 1,300,000 square feet, of which approximately 123,000 are leased or subleased to third parties. The table below provides summary information regarding principal properties owned or leased by the Company:
(a) In addition to the properties listed, the Company also utilizes approximately 44,000 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 21,000 square feet leased to a tenant which provides services to the Company and others. (c) The Beverly, Massachusetts square footage includes approximately 82,000 square feet leased to five 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 subleased to one tenant. (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 10,000 square feet subleased back to Varian and approximately 6,000 square feet subleased to another tenant. (f) Includes both leased facilities occupied entirely by the Company's field sales and service organizations and 5 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. However, consolidation efforts, expected to be completed in the first half of Fiscal 1997, will bring these facilities close to full capacity and will eliminate approximately 150,000 square feet of leased space. Overall, 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.
ITEM 3:
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:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fiscal year ended September 27, 1996.
PART II
ITEM 5:
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 27, 1996. 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:
ITEM 6: SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The historical and pro forma financial data set forth below for Fiscal 1992 through Fiscal 1994 has been derived from the historical audited financial statements of the Predecessor audited by Coopers & Lybrand L.L.P., independent public accountants, and for Fiscal 1995 and Fiscal 1996 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 decreases in operating expenses relating to Corporate allocations, incremental depreciation and amortization relating to the purchase method adjustments referred to above and other interest charges relating to new indebtedness related to the Acquisition.
SELECTED FINANCIAL DATA
(a) EBITDA represents earnings before provision for income taxes, interest expense, depreciation and amortization, the charge related to the purchase accounting write-up of inventory and the write-off of acquired in-process research and development.
(b) Capital expenditures exclude the one-time costs of seismic retrofits, which are substantially completed, at certain of the Company's manufacturing facilities. These costs are presented separately as "Non-recurring Capital Expenditures".
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.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENTS
The following pro forma financial statements were included by CPI in the Registration Statement for the Exchange Offers filed in November, 1995, and were based upon preliminary estimates of the fair values of the net assets acquired. These pro forma statements have not been adjusted to reflect final values because the effect of the finalization of the estimates does not materially affect the amounts previously presented.
(a) Excludes amortization of deferred debt issuance costs. (b) EBITDA represents earnings before provision for income taxes, interest expense, depreciation and amortization and the write-off of acquired in-process research and development. EBITDA and the ratio of EBITDA to cash interest expense are presented because they may be used by some investors as a financial indicator of the ability to service or incur indebtedness. EBITDA should not be considered as an alternative to net income, as a measure of operating results, cash flows or liquidity. (c) As described in more detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-K, certain events occurred during the fourth quarter of Fiscal 1995 which may not be indicative of future operating results.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENTS, continued
- - - ---------------------- (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, cash flows or liquidity.
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:
(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.
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.
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ITEM 7:
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 vacuum electronic devices 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, for the two year period ended in Fiscal 1996, due to growth in the Company's communication and industrial markets, the Company generated a 4.3% increase in total sales, to $257.4 million.
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 $187.9 million, or 73.0%, of the Company's total sales for Fiscal 1996. The Company's sales to the commercial sector increased by approximately $24.0 million between Fiscal 1993 and Fiscal 1996, representing a 4.7% compound annual growth rate. In contrast, the Company's sales to the U.S. Government sector during the same period experienced a 8.7% annual compounded rate of decline due primarily to the aforementioned trends in the radar and electronic countermeasures markets. However, comparing Fiscal 1996 to Fiscal 1995, sales to the U.S. Government sector did increase for the first time since Fiscal 1989 from $65.2 million in Fiscal 1995 to $69.5 million in Fiscal 1996 or 6.6% growth. This increase reflects an increase in U.S. Government procurement of communication products.
From Fiscal 1992 to Fiscal 1995, the Company demonstrated substantial increases in profitability and EBITDA, as net earnings increased from a net loss $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 a pro forma $9.4 million in Fiscal 1992 to a pro forma $38.0 million 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. Fiscal 1996 reflects the Company's first fiscal year on a stand-alone basis. Net earnings were $8.3 million and EBITDA improved to $38.7 million, excluding the $1.7 million charge related to the purchase accounting write-up of inventory.
During Fiscal 1996, the Company began the process of relocating its Salt Lake City, Utah plant to San Carlos, California. Costs associated with this consolidation including travel and training expenses, temporary duplication of labor and facility resources, and poor manufacturing yields on the moved product lines negatively impacted EBITDA by approximately $2.4 million.
During the second half of Fiscal 1996, the Company also began to prepare its Palo Alto, California facility to allow for relocation of one of its manufacturing plants from a leased facility in Santa Clara, California. This relocation is expected to be completed in the first quarter of Fiscal 1997. With the exception of higher capital expenditures, this consolidation effort had minimal impact on the Fiscal 1996 operating results.
EFFECT OF ACQUISITION ON RESULTS OF OPERATIONS
The consummation of the Acquisition has affected the Company's results of operations in certain significant respects. As a result of the Acquisition, the Company adjusted upwards the historical book value of certain assets in accordance with GAAP relating to purchase accounting rules, which will significantly impact the Company's results of operations subsequent to the Acquisition and their comparability to operations of the Predecessor:
* The write-up of the inventory by $4.1 million was expensed to cost of goods sold during the periods following the Acquisition, which significantly affects gross margins. During the seven week period ended September 29, 1995, $2.4 million was expensed to cost of sales, which also impacted working capital, and $1.7 million was expensed in the first quarter of Fiscal 1996.
* The purchase accounting allocation of certain assets, such as property, plant and equipment, will significantly affect depreciation and amortization in the future. The portion of the purchase price allocated to in-process research and development was charged to operations immediately after consummation of the Acquisition. The in-process research and development activity of the Company involves the development of various classes of microwave vacuum electronic devices and microwave vacuum electronic device systems for communications and power applications, including significant extensions and improvements to existing products through fundamental physical and electrical research necessary to design new microwave vacuum electronic devices, control and power elements, and related systems. Projects are classified as in-process research and development if they have not demonstrated technological feasibility and have not resulted in commercial products and have no alternative future use. As of the date of the consummation of the Acquisition, the outcomes of these research and development projects were uncertain and involved technological risk.
* Certain corporate overhead and corporate services, including an allocation for occupied facilities, historically charged to the Predecessor by Varian, have been reduced due to outsourcing of certain services, elimination of services no longer required on a stand-alone basis, or eliminated due to the Company's ownership of certain of its facilities and the application of purchase accounting following the Acquisition. In addition, management compensation plans have been modified at a reduced cost. The structure of the transaction has also created certain tax benefits because of the Company's ability to write-up inventory, property, plant and equipment and intangible assets for tax purposes.
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.
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(a) EBITDA represents earnings before provision for income taxes, interest expense, depreciation and amortization, the charge related to the purchase accounting write-up of inventory and the write-off of acquired in-process research and development.
Fiscal 1996 Compared to Pro forma Fiscal 1995
SALES. Sales for Fiscal 1996 were approximately $257.4 million, an increase of approximately $4.2 million, or 1.7%, as compared to pro forma sales of $253.2 million in Fiscal 1995 and an increase of approximately $6.4 million, or 2.5%, as compared to historical sales of $251.1 million in Fiscal 1995. In terms of markets, communication(1), and industrial sales(2) increased while CPI's four other markets showed some decline. Communication sales(1) increased approximately $7.9 million, or 7.1%, in Fiscal 1996 over pro forma Fiscal 1995, primarily as a result of continued growth in Direct Broadcast Satellite (DBS) requirements as well as growth in wireless communication product and small terminal applications for private networks and emerging countries telephony requirements. Industrial sales(2) rose approximately $4.6 million, or 20.4%, over pro forma Fiscal 1995, primarily as a result of growth in the industrial microwave market as well as an increase in demand for high power amplifiers used for instrumentation. Offsetting these sales gains were a decline in electronic countermeasures(1) and medical(2) sales of approximately $2.9 million, or 14.4%, and $1.1 million, or 6.3%, respectively below pro forma Fiscal 1995, due primarily to the timing of customer shipment schedules. Radar(1) sales declined approximately $2.3 million, or 3.0%, below pro forma Fiscal 1995, due to DoD Acquisition Reform Initiatives reducing logistic inventory levels. Scientific sales(1) declined approximately $2.0 million, or 35.1%, due to the slow down in development programs from the U.S. Department of Energy.
COST OF SALES. Cost of sales, excluding a $1.7 million charge related to the purchase accounting write-up of inventory, was $182.8 million in Fiscal 1996, an increase of $2.7 million, as compared to pro forma cost of sales of $180.1 million for Fiscal 1995. Cost of sales, excluding the $1.7 million inventory charge, was 71.0% of sales for Fiscal 1996 compared to the pro forma 71.1% margin for Fiscal 1995. Cost of sales of the Predecessor on a historical basis was 74.6% for the 45 weeks ended August 11, 1995. The Company's ongoing efforts to reduce "cost of quality" (defined as the amount of scrap, rework, manufacturing variance costs, warranty costs, inventory write-offs, quality assistance and quality control costs and unscheduled downtime) were slowed in Fiscal 1996 by the negative impact of efforts to consolidate its Salt Lake City, Utah facility into its San Carlos, California facility.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased in Fiscal 1996 to $8.3 million, or 3.2% of total sales, as compared to $8.6 million, or 3.4% of total pro forma sales, during Fiscal 1995. The decrease in research and development expenses during Fiscal 1996 was primarily due to the Company's focus on several customer-funded research and development projects. Overall, the Company continues its emphasis on delivering new products to the marketplace.
MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and administrative expenses were $35.4 million in Fiscal 1996, or 13.7% of sales, as compared to a pro forma $33.4 million, or 13.2% of pro forma sales, for Fiscal 1995. Fiscal 1996 reflects the actual costs of CPI operating on a stand-alone basis. On a historical basis, marketing, general and administrative expenses were 17.3% of total sales for the 45 weeks ended August 11, 1995. The lower percentages in Fiscal 1996 reflect the reduced overhead structure of the Successor.
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(1) As there were no sales to Varian in these markets, pro forma sales comparisons do not differ from the historical sales comparisons.
(2) There were sales to Varian in these markets. Pro forma Fiscal 1995 is used in this comparison so that both years appropriately reflect the markup agreed to under the terms of the product supply agreements between CPI and Varian.
EBITDA. EBITDA, excluding the $1.7 million charge related to the purchase accounting write-up of inventory, was $38.7 million for Fiscal 1996, an increase of $0.7 million, or 1.8%, as compared to $38.0 million on a pro forma basis for Fiscal 1995. Both Fiscal 1996 and pro forma Fiscal 1995 were negatively impacted by the Company's efforts to consolidate its Salt Lake City, Utah operation into its San Carlos, California operation. In Fiscal 1996, costs associated with this consolidation, including travel and training expenses, temporary duplication of labor and facility resources, and poor manufacturing yields on the moved product lines, negatively impacted EBITDA by approximately $2.4 million. In the fourth quarter of Fiscal 1995, the initial relocation announcement had a significant impact on the morale and productivity of the Salt Lake City employees. The Company believes that the impact of the relocation announcement, along with higher commissions earned by certain salespeople and sales representatives as a result of a higher than normal rate of incoming orders in the fourth quarter (which commissions are earned prior to the generation of sales), negatively impacted pro forma Fiscal 1995 EBITDA by approximately $2.0 million.
EBITDA was 15.0% of sales in Fiscal 1996 which is flat compared to Fiscal 1995 pro forma EBITDA margin of 15.0% of total pro forma sales, but reflects the earnings of the Company on a stand alone basis. Historical EBITDA, as a percentage of sales, for the 45 weeks ended August 11, 1995 was 9.8%.
NET EARNINGS. Net earnings before preferred dividends were $8.3 for Fiscal 1996 an increase of $1.1 million, or 16.2%, as compared to pro forma net earnings of $7.2 million for Fiscal 1995. In Fiscal 1995, in connection with the Acquisition, the Company wrote off $31.4 million of acquired in-process research and development, which significantly affected net income for the seven weeks ended September 29, 1995.
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(1) 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 vacuum electronic devices 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 compared to pro forma cost of sales margin of 73.1% for Fiscal 1994. Cost of sales of the Predecessor on a historical basis was 74.6% and 75.7% for the 45 weeks ended August 11, 1995 and the
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(1) As there were no sales to Varian in these markets, pro forma sales comparisons do not differ from the historical sales comparisons.
(2) In terms of dollars and percentage, comparison of historical sales in this market, from Fiscal 1995 to Fiscal 1994, is not significantly different than the comparison of pro forma sales during the same time periods.
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 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%.
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 $11.3 million for the 52-week period ending September 27, 1996 from $14.8 million for the 7 weeks ending September 29, 1995 and $4.1 million for the 45 weeks ending August 11, 1995 due principally to payment of interest on the Company's long term debt. 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.
Working capital at September 27, 1996 was $34.6 million as compared to $35.2 million at September 29, 1995. Excluding the impact of taxes, working capital was $38.0 million at September 27, 1996 as compared to $35.2 million at September 29, 1995. This increase of $3.4 million was due to an increase in accounts receivable related to the high volume of shipments in the fourth quarter and an increase in inventory related to the build-up of transition stock during consolidation efforts, offset partially by advanced payments from customers and higher accrued expenses. Reductions in cash during Fiscal 1996 were used to paydown both short term and long term debt and to reduce outstanding accounts payable balances. Working capital, excluding the impact of taxes, decreased from $48.5 million at September 30, 1994 to $35.2 million at September 29, 1995, primarily as a result of the $22.8 million current portion of long term debt resulting from the Acquisition.
Net cash used in investing activities was comprised principally of capital expenditures for property, plant and equipment which amounted to $12.5 million in Fiscal 1996, $6.9 million in Fiscal 1995 and $14.1 million in Fiscal 1994. Investments in property, plant and equipment increased $5.6 million in Fiscal 1996, as compared to Fiscal 1995, primarily as a result of consolidation efforts in the Company's San Carlos and Palo Alto facilities. Investments in property, plant and equipment decreased $7.1 million in Fiscal 1995 as compared to Fiscal 1994 primarily due to the completion of seismic retrofitting of the Company's facilities. In Fiscal 1995, net cash of $196.2 million was used as a result of the Acquisition.
The Company's continuing operations typically do not have large capital requirements. Excluding the one-time improvements made in connection with consolidation activities, which will be completed during Fiscal 1997, expenditures for the purchase of property plant and equipment in Fiscal 1996 would have been $8.7 million. Expenditures for Fiscal 1995 and Fiscal 1994, excluding costs of seismic retrofits, were $6.9 million and $10.7 million, respectively. Capital expenditures are generally made to replace existing assets, increase productivity, facilitate cost reductions or meet regulatory requirements.
During Fiscal 1996, cash used in financing activities related almost entirely to repayments made against the Company's Senior Credit Agreement and during the 7 weeks ended September 29, 1995, cash flow was related almost entirely to the financing raised in connection with the Acquisition. 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.
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, $14.7 million was available for CPI to draw upon as of September 27, 1996. The Senior Credit Agreement does not require CPI, at any time, to exchange any of its floating-rate obligations under the Senior Credit Agreement into fixed-rate obligations.
Management believes that the Company will have adequate capital resources and liquidity to meet its obligations, fund all required capital expenditures and pursue its business strategy for the foreseeable future (and in any event for at least the next twelve months). Such capital resources and liquidity are expected to be available from the Company's cash flow provided by operations and borrowings under CPI's Senior Credit Agreement.
Impact of Inflation
Generally, the Company has been able to pass on inflation-related cost increases; 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.
ITEM 8:
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:
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
In connection with the audit of the financial statements for the 52 weeks ended September 27, 1996, the 7 weeks ended September 29, 1995, the 45 weeks ended August 11, 1995 and the 52 weeks ended September 30, 1994, there were no disagreements with either KPMG Peat Marwick LLP or Coopers & Lybrand, L.L.P. on accounting or financial disclosure.
PART III
ITEM 10:
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.
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.
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 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 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 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. and Twin Laboratories, 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:
ITEM 11: EXECUTIVE COMPENSATION
The information set forth in the following table relates to the Chief Executive Officer and President of both Holding and CPI (who formerly served at the Predecessor's Chief Operating Officer) and the next four most highly compensated executive officers of Holding and CPI (collectively, the "Named Executive Officers"for Fiscal 1996 end for the 7-week period ending September 29, 1995. For Fiscal 1994, the compensation shown was paid by Varian and is being provided pursuant to the rules and regulations of the Securities and Exchange Commission.
1 COMPANY (52-weeks ending September 27, 1996):
2 COMPANY (7-weeks ending September 29, 1995):
3 PREDECESSOR (paid by Varian)
(a) Consists of awards paid in Fiscal 1997 under CPI's Management Incentive Plan for Fiscal 1996. 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. Data for Fiscal 1994 includes Varian's Management Incentive Plan and Cash Profit-Sharing Plan allocations.
(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. Restrictions relating to such Varian stock lapsed upon consummation of the Acquisition.
(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 (1) in Fiscal 1997 under the long-term incentive feature of CPI's Management Incentive Plan for a two year period ended Fiscal 1996; (2) in Fiscal 1996 under the long-term incentive feature of Varian's Omnibus Stock Plan for a three-year period ended with Fiscal 1995, paid by the Company for the 7-weeks ended September 29, 1995; (3) in Fiscal 1995 under the long-term incentive feature of Varian's Omnibus Stock Plan for a three-year period ended with Fiscal 1994.
(f) Consists of CPI paid premiums for group life insurance for Fiscal 1996 and, for Fiscal 1994, Varian contributions (including interest) of $52,579 to Varian's Retirement and Profit-Sharing Program and Supplemental Retirement Plan accounts and Varian-paid premiums for group term life insurance of $1,221.
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 had reserved a total of 50,000 shares of Holding Common Stock for issuance under the Holding Equity Plan, 45,870 of which were issued to the Company's Chief Executive Officer, certain executive officers and key employees in Fiscal 1995 and none in Fiscal 1996.
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." In connection with the Acquisition, Holding and CPI entered into a Management Services Agreement with LGP pursuant to which LGP will receive an annual fee of approximately $362,000 plus reasonable expenses for providing management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analysis, negotiating and structuring financing, and exploring, negotiating and arranging expansion and capital market opportunities, in the future. The Management Services Agreement has a term of up to twelve years. Holding and CPI believe that the contacts and expertise provided by LGP in these areas enhance the Company's opportunities and management's expertise in these matters and that the fees to be paid to LGP fairly reflect the value of the services provided by LGP. In Fiscal 1996, LGP received $397,000 pursuant to the terms of the Management Service Agreement. In addition to an annual fee for such management consulting services, the Management Services Agreement provides that LGP may receive reasonable and customary fees and expenses from time to time for providing financial advisory and investment banking services in connection with major financial transactions that may be undertaken in the future. The Senior Credit Agreement and the indenture governing the Notes (the "Indenture") also include certain provisions regarding approval of affiliate transactions.
COMPENSATION OF DIRECTORS
Individuals who are officers of Holding and CPI, as well as Messrs. Green, Danhakl and Annick, will not receive any compensation directly for their service on Holding's and CPI's Boards of Directors. Holding and CPI have entered into a management services agreement pursuant to which LGP will receive an annual fee plus reasonable expenses for providing management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analyses, negotiating and structuring financing and exploring expansion opportunities, in the future. See "ITEM 13 - Certain Relationships and Related Transactions." It is anticipated that other directors, if any, will receive customary fees for service on Holding's and CPI's respective Boards of Directors.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All of CPI's common stock is owned by Holding. The following table sets forth, as of December 20, 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.
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(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 400 shares originally acquired by Mr. Wilunowski and subsequently transferred to his child.
(d) Includes 800 shares originally acquired by Mr. Koehler and subsequently transferred to his children.
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:
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. In connection with the Acquisition, Holding and CPI entered into a Management Services Agreement with LGP pursuant to which LGP will receive an annual fee of approximately $362,000 plus reasonable expenses for providing management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analysis, negotiating and structuring financing, and exploring, negotiating and arranging expansion and capital market opportunities, in the future. The Management Services Agreement has a term of up to twelve years. Holding and CPI believe that the contacts and expertise provided by LGP in these areas enhance the Company's opportunities and management's expertise in these matters and that the fees to be paid to LGP fairly reflect the value of the services provided by LGP. In Fiscal 1996, LGP received $397,000 pursuant to the terms of the Management Services Agreement. In addition to an annual fee for such management consulting services, the Management Services Agreement provides that LGP may receive reasonable and customary fees and expenses from time to time for providing financial advisory and investment banking services in connection with major financial transactions that may be undertaken in the future. The Senior Credit Agreement and the Indenture also include certain provisions regarding approval of affiliate transactions.
PART IV
ITEM 14:
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).
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.
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.
Exhibit No. Description - - - ----------- -----------
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.
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.
Exhibit No. Description - - - ----------- -----------
10.29(1) Management Services Agreement among CPI, Holding and Leonard Green & Partners, L.P. dated as of August 11, 1995.
10.30(1) 1995 Holding Management Equity Plan (including Form of Management Subscription and Stockholders Agreement).
10.31(1) Letter from Holding to Al D. Wilunowski dated June 9, 1995 relating to terms of employment.
10.32(1) Letter from Holding to Alvin J. Ferreira dated June 9, 1995 relating to terms of employment.
10.33(1) Letter from Holding to Dennis J. Gleason dated June 9, 1995 relating to terms of employment.
10.34(1) Letter from Holding to H. Frederick Koehler dated June 9, 1995 relating to terms of employment.
10.35(1) Letter from Holding to Armand Staprans dated June 9, 1995 relating to terms of employment.
21(1) Subsidiaries of CPI and Holding.
27 Financial Data Schedule - - - --------------
(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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COMMUNICATIONS & POWER INDUSTRIES, INC.
By: /s/ Al D. Wilunowski ------------------------------------- Al D. Wilunowski Chief Executive Officer and President Date: December 20, 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:
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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION
By: /s/ Al D. Wilunowski ------------------------------------- Al D. Wilunowski Chief Executive Officer and President Date: December 20, 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:
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.
COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries
COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
COMMUNICATIONS & POWER INDUSTRIES, INC.
-F-1- INDEX TO FINANCIAL STATEMENTS, continued
COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION
-F-2- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders Communications & Power Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Communications & Power Industries, Inc. (a wholly owned subsidiary of Communications & Power Industries Holding Corporation) and subsidiaries ( "CPI" or the "Successor") as of September 27, 1996 and September 29, 1995, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the 52-week period ended September 27, 1996 and the 7-week period ended September 29, 1995. We have also audited the related consolidated statements of operations, stockholders' equity, and cash flows of CPI's predecessor, the Electron Devices Business of Varian Associates, Inc. (the "Predecessor") for the 45-week period ended August 11, 1995. In connection with our audits of the consolidated financial statements for the periods indicated above, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of CPI's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in the notes to the consolidated financial statements, CPI acquired assets and assumed liabilities on August 11, 1995 in a transaction that was accounted for as a purchase. Accordingly, the consolidated financial statements of the Successor are presented on a different cost basis than the consolidated financial statements of the Predecessor and, therefore, are not comparable.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Communications & Power Industries, Inc. and subsidiaries as of September 27, 1996 and September 29, 1995, the results of their operations and their cash flows for the 52-week period ended September 27, 1996 and the 7-week period ended September 29, 1995, and the results of operations and cash flows of the Electron Devices Business of Varian Associates, Inc. for the 45-week period ended August 11, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
s/KPMG Peat Marwick, LLP
San Jose, California November 22, 1996
-F-3- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Communications & Power Industries, Inc.:
We have audited the accompanying statements of operations, stockholders' equity and cash flows of the Electron Devices Business, a segment of Varian Associates, Inc. (excluding the segment's Tempe, Arizona operations) (the "Predecessor") for fiscal year ended of September 30, 1994. In connection with our audit of the consolidated financial statements for the year 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 audit.
We conducted our audit 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 the results of the Predecessor's operations and its cash flows for the fiscal year 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 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
See accompanying notes to the consolidated financial statements.
-F-5- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
See accompanying notes to the consolidated financial statements.
-F-6- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (in thousands, except share data)
See accompanying notes to the consolidated financial statements
-F-7- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See accompanying notes to the consolidated financial statements.
-F-8- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (in thousands)
See accompanying notes to the consolidated financial statements.
-F-9- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Background and the Acquisition
Prior to August 11, 1995, Communication and Power Industries Inc.'s ("CPI" or "Successor") operations were the principal operations of the Electron Devices Business (the "Predecessor"), a segment of Varian Associates, Inc. ("Varian"), excluding the Tempe, Arizona operations. The Predecessor consisted of substantially all of the assets of Varian and its affiliates that were used primarily in developing, manufacturing and distributing microwave and power grid vacuum electronic devices, microwave amplifiers, modulators and various other power supply equipment and devices. On August 11, 1995, CPI acquired these assets (the "Acquisition") from Varian and was then merged with a wholly owned subsidiary of Communications & Power Industries Holding Corporation ("Holding"), a corporation newly formed by a group of investors, including management of Holding and CPI. References to CPI or its business for periods prior to August 11, 1995 shall be references to the Predecessor and its business, unless the context otherwise requires.
A summary of the assets acquired and liabilities assumed at their fair values is as follows (in thousands):
The Acquisition has been accounted for as a purchase, and, accordingly, the purchase price was allocated based upon the fair values of assets acquired and liabilities assumed as of August 11, 1995.
In connection with the Acquisition, CPI entered into two senior term loans in the aggregate amount of $42.0 million (the "Senior Term Loans") and a revolving credit facility in a principal amount of up to $35.0 million (including a $5.0 million sub-facility for letters of credit) pursuant to the Credit
-F-10- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 was as follows (in thousands):
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 period ended September 30, 1994. The accompanying consolidated financial statements for the 52-week period ended September 27, 1996 and the 7-week period ended September 29, 1995 include the results of CPI and its direct and indirect wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, significant intercompany balances and transactions within the Predecessor have been eliminated.
In connection with the Acquisition, Varian retained certain assets and liabilities of the Predecessor. The retention of these assets and liabilities reduced the Predecessor's cash flow from operating activities during the 45-week period ending August 11, 1995. This was partially offset by an increase in CPI's cash flow from operating activities during the 7-week period ended September 29, 1995.
The Predecessor's and Successor's fiscal years are the 52- or 53-week periods which end on the Friday nearest September 30.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Currency on hand, demand deposits, and all highly liquid investments with an original maturity of three months or less are considered to be cash and cash equivalents.
-F-11- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Goodwill
The excess of the purchase price over the fair value of the net assets acquired is classified as goodwill and is being amortized over its estimated useful life of 25 years on a straight-line basis. In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121, which the Company adopted in Fiscal Year 1996, requires long-lived assets to be evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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. There were no environmental liabilities established by CPI during the 52-week period ended September 27, 1996 or the 7-week period ended September 29, 1995. Environmental costs of the Predecessor were accumulated at the corporate level within Varian and charged to the Predecessor through corporate allocations. In connection with the Acquisition, Varian retained the environmental liabilities of the Predecessor existing as of the closing date at the Predecessor's facilities.
Deferred Debt Issue Costs
Costs incurred related to the issuance of CPI's long-term debt and other credit facilities are capitalized and amortized over the estimated time the obligations are expected to be outstanding using the effective interest method. The amortization period used for the deferred costs associated with the revolving credit facility, the Senior Term Loans, and the Senior Subordinated Notes is 3 years, 7 years and 10 years, respectively.
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, using the effective interest method.
-F-12- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
Supplemental Cash Flow Information
For the 52-week period ended September 27, 1996, cash was paid for interest and taxes in the amount of $16,932,000 and $524,000, respectively. There were no interest payments or taxes paid during the 7-week period ended September 29, 1995, nor were there any cash payments made for interest or taxes by the Predecessor (all cash payments relating to such matters were made by Varian) during the period presented. Non-cash financing during the 52-week period ended September 27, 1996 included the payment of preferred dividends by CPI on its Senior Redeemable Preferred Stock and its Junior Preferred Stock through the issuance of 21,482 additional shares of its Senior Redeemable Preferred Stock and 14,321 shares of its Junior Preferred Stock, respectively. No dividends were issued during the 7-week period ended September 29, 1995. Amortization of discount and issue costs on the Senior Redeemable Preferred Stock was $214,000 and $29,000 during the 52-week period ending September 27, 1996 and the 7-week period ended September 29, 1995, repectively.
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
-F-13- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
against established targets or other criteria. Such incentive fee awards or penalties are included in revenue at the time the amounts can be reasonably determined.
Business Risks and Credit Concentrations
CPI develops, manufactures and distributes components for systems used to generate, amplify and transmit high-power/high frequency microwave and radio frequency signals. End use applications of these systems include the transmission and amplification of voice, data and video signals for broadcasting and telecommunications, transmission of radar signals for navigation and location, transmission of false signals for electronic countermeasures and various other uses in the industrial, medical and scientific markets.
Defense-related applications such as certain radar, electronic countermeasures and military communications constitute a significant portion of CPI's sales. The U.S. defense budget has been declining since the mid-1980s. Although management believes that CPI has successfully responded to shrinking defense budgets by refocusing its operations on commercial and other non-defense applications, a significant further decline in U.S. or global military spending could have a material adverse effect on CPI's sales and earnings. Additionally, companies engaged in supplying defense-related equipment and services to government agencies are subject to certain business risks, including the ability of the U.S. government to suspend them from receiving new contracts or to terminate existing contracts for the U.S. government's convenience or for the default of the contractor. In addition, the U.S. government could terminate contracts due to insufficient or terminated congressional appropriations. CPI's contracts with foreign governmental defense agencies are subject to similar limitations and risks as those encountered with U.S. government contracts.
CPI believes that both its customer and industry base is well diversified, however, changes in the marketplace of any of the above named industries may significantly affect management's estimates and CPI's performance.
CPI's customers are located throughout the United States, 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
The functional currency of the CPI's foreign subsidiaries is the U.S. dollar. Accordingly, assets and liabilities of subsidiaries 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,
-F-14- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 52-week period ended September 27, 1996, CPI entered into one foreign exchange contract for 2,998,600 German Marks which is related to a specific customer order. Gains or losses on this contract will be recorded consistent with the hedged transaction. 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 was $296,000 loss for the 52-week period ending September 27, 1996.
Fair Value of Financial Instruments
Financial instruments consist of accounts receivable, accounts payable and debt. The carrying value of CPI's accounts receivable, accounts payable and debt obligations approximate their fair values which, for debt, is based upon current rates available to CPI for debt of the same maturities.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable are stated net of allowances for doubtful accounts of $0.2 million as of September 27, 1996 and September 29, 1995.
-F-15- 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:
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, none of the finished goods remains on the balance sheet as of September 27, 1996 and approximately $1.7 million of finished goods remained 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 of Acquisition. 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- COMMUNICATIONS & POWER INDUSTRIES and subsidiaries
VALUATION AND QUALIFYING ACCOUNTS COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated useful lives of property, plant, and equipment are:
Land leaseholds Life of the lease Buildings 40 years Machinery and equipment 3 to 7 years
The main components of property, plant, and equipment are as follows:
ACCRUED EXPENSES
Accrued expenses are comprised of the following:
COSTS TO EXIT AN ACTIVITY OF THE PREDECESSOR
Prior to consummation of the Acquisition, management of the Predecessor had begun to formulate plans to exit certain activities of the Predecessor, which were finalized shortly after the Acquisition. These plans included two principal costs: (a) the costs associated with the contractually required closing and 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 completed during the first quarter of Fiscal 1997, of one of its leased manufacturing facilities into its Palo Alto, California, facility.
-F-17- 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 accrued $1,259,000, of which $775,000 remains on the balance sheet as of September 27, 1996, for the costs of completing these plans. These 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 27, 1996, CPI had $1.7 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 (approximately 5.50% as of September 27, 1996) plus 2.5% per annum or the Base Rate (8.25% as of September 27, 1996) plus 1.0% per annum and borrowings under Term Loan B bear interest at a rate equal to the Eurodollar Rate plus 3.0% per annum or Base Rate plus 1.5% per annum, in each case as selected by CPI. Applicable interest rates on Term Loan A and the Revolving Credit Facility will be reduced after the first anniversary of the consummation of the Acquisition by up to 0.5% per annum if CPI meets and continues to meet certain financial tests. In addition to customary fronting and other fees, CPI will pay a fee equal to 1.5% per annum on undrawn amounts of letters of credit and a commitment fee of 0.5% per annum on unused facilities under the Revolving Credit Facility. The Senior Credit Agreement also provides for a prepayment premium in the event that it is voluntarily prepaid within two years of the establishment of the Senior Credit Agreement unless such prepayment is made with funds raised through an initial public offering of Holding's stock.
-F-18- 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 payments in the aggregate annual amounts as follows (in thousands):
As of September 27, 1996, CPI had made payments of $2,250,000 against Term Loan A and $150,000 against Term Loan B.
The Revolving Credit Facility matures on the date five years after the closing of the Acquisition. CPI is required to make prepayments on the Senior Facility with 75% of Excess Cash Flow (as defined in the Senior Credit Agreement), 75% of the net proceeds of certain stock issuances and 100% of the net proceeds from certain asset sales. Such prepayments will be applied to remaining principal installments of the Term Loans allocated on a pro rata basis and following repayment of the Term Loans, to reduce permanently the Revolving Credit Facility.
In addition, CPI is subject to certain affirmative and negative covenants customarily contained in agreements of this type, including, without limitation, covenants that restrict, subject to specified exceptions: (i) incurrence of additional indebtedness and other obligations; (ii) mergers or consolidations; (iii) asset sales; (iv) changes of control and corporate structure; (v) granting or incurrence of liens to secure any other indebtedness (including the Notes or the notes for which the Senior Preferred Stock is exchangeable (the "Exchange Notes")); (vi) prepayment or modification of the terms of other indebtedness (including the Notes and the Exchange Notes); (vii) engaging in transactions with affiliates; (viii) declaration or payment of dividends or distributions on CPI's capital stock; (ix) capital expenditures; and (x) other acquisition and investment activities. In addition, the Senior Credit Agreement requires that CPI, on a consolidated basis, maintain certain specified financial covenants, including a minimum fixed charge coverage ratio, minimum net worth and minimum EBITDA. As of September 27, 1996, CPI was in compliance with all covenants except that related to capital expenditures, for which a waiver has been obtained.
SENIOR SUBORDINATED NOTES
The $100 million principal amount of Senior Subordinated Notes mature in 2005 and bear interest at 12% per annum, payable semiannually. 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
-F-19- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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:
Year Percentage
2000 106.0% 2001 104.5% 2002 103.0% 2003 101.5%
2004 and thereafter 100.0%
Notwithstanding the foregoing, prior to August 1, 1998, CPI may redeem up to 35% of the aggregate principal amount of the Notes originally outstanding at a redemption price of 112% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the redemption date, with the net proceeds of one or more public offerings of common stock of Holding.
Upon the occurrence of a change of control, each holder of Notes will have the right to require CPI to offer to repurchase all or any part of such holder's Notes. The Senior Credit Agreement currently prohibits CPI from making such an offer. In addition, the Indenture covering the Notes provides for various restrictions, including restrictions on mergers or the sales of CPI's assets, dividend payments, purchase, redemption, acquisition or retirement of equity interests of CPI or its affiliates, principal payment on any indebtedness of CPI or guarantors that is subordinated to the Notes, the incurrence of certain indebtedness, or the making of any restricted investment, as defined.
SENIOR REDEEMABLE PREFERRED STOCK
CPI is authorized to issue up to 325,000 shares of nonvoting Series 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 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.
-F-20- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
During the year ended September 27, 1996, CPI paid preferred dividends through the issuance of 21,482 shares of its Senior Redeemable Preferred Stock.
The Senior Preferred Stock is not redeemable prior to August 1, 2000. Thereafter, the Senior Preferred Stock will be redeemable at the option of CPI, in whole or in part from time to time, initially at 107% of the liquidation preference thereof and at decreasing prices thereafter to and including August 1, 2004 and thereafter at 100% of the liquidation preference thereof, together in each case with accumulated and unpaid dividends thereon. In addition, on or prior to August 1, 1998, CPI may, on one or more occasions, redeem any or all of the shares of Senior Preferred Stock then outstanding at a redemption price equal to 114% of the liquidation preference thereof plus accumulated and unpaid dividends thereon, with the proceeds of one or more public offerings of Holding's common stock. The Senior Preferred Stock is subject to mandatory redemption in whole on August 1, 2007 at a price equal to the liquidation preference thereof, plus accumulated and unpaid dividends.
In the event of a change of control, CPI will be required to make an offer to each holder of shares of Senior Preferred Stock to repurchase all or a portion of such holder's Senior Preferred Stock at a price equal to 101% of the liquidation preference thereof, plus accumulated and unpaid dividends. The Senior Credit Agreement currently prohibits and the Indenture currently restricts CPI from making such an offer. In addition, CPI will be required to use the proceeds from certain asset sales to permanently reduce senior indebtedness of CPI, to invest in certain related assets or businesses or to offer to repurchase Senior Preferred Stock. Any such repurchases shall be effected at an offer price equal to 100% of the liquidation preference of the shares of Senior Preferred Stock purchased, plus accumulated and unpaid dividends.
The Certificate of Designation covering the Senior Preferred Stock contains certain provisions that, among other things, limit the ability of CPI to incur indebtedness, pay dividends, incur liens, make loans or investments, transact with affiliates and engage in mergers and consolidations.
CPI may, at its option, on any dividend payment date, exchange all, but not less than all, of the outstanding shares of Senior Preferred Stock into 14% Junior Subordinated Notes due 2007 (the "Exchange Notes"), so long as such exchange is permitted by the Senior Credit Agreement and the Indenture, in an aggregate principal amount not to exceed the aggregate liquidation preference, plus accumulated and unpaid dividends on the date of exchange. The Exchange Notes will be general unsecured obligations of CPI and will be subordinated to all existing and future senior indebtedness of CPI, including indebtedness under the Senior Credit Agreement and the Indenture. Except for terms relating to these subordination provisions, payment of interest on a quarterly basis, the option to issue additional Exchange Notes on or prior to August 1, 2000 in lieu of paying cash interest, optional redemption and the date on which repayment is mandatory (all of which terms would be similar to the terms of Senior Preferred Stock), the terms of the Exchange Notes will be generally identical to the Notes.
-F-21- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JUNIOR PREFERRED STOCK
CPI is authorized to issue up to 525,000 shares of nonvoting Series A 14% Junior Cumulative Preferred Stock (the "Junior Preferred Stock") including shares of Junior Preferred Stock which may be used to pay dividends on the Junior Preferred Stock if CPI elects to pay dividends in shares of Junior Preferred Stock. The aggregate liquidation preference of the Junior Preferred Stock issued in connection with the consummation of the Acquisition was $10.0 million. Dividends on the Junior Preferred Stock accrue at the rate of 14% per annum and are payable quarterly, commencing on November 1, 1995. On or before the redemption of the Senior Preferred Stock or the exchange of Senior Preferred Stock into Exchange Notes, CPI is required to pay dividends on the Junior Preferred Stock in additional fully paid and non-assessable shares of Junior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. After such redemption or exchange, CPI may, at its option and subject to debt and senior preferred stock covenant restrictions, pay dividends on the Junior Preferred Stock in cash or in additional fully paid and non-assessable shares of Junior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends.
During the year ended September 27, 1996, CPI paid preferred dividends through the issuance of 14,321 shares of its Junior Preferred Stock.
The Junior Preferred Stock ranks junior in right of payment to all liabilities of CPI and to any preferred stock, including Senior Preferred Stock, that is senior in right of payment to the Junior Preferred Stock and ranks senior in right of payment to any additional preferred stock which does not expressly provide that it ranks senior to or on a parity with the Junior Preferred Stock and CPI's common stock.
LEASE COMMITMENTS
At September 27, 1996, CPI was committed to minimum rentals under noncancellable operating leases as follows (in thousands):
Rental expense for the 52-week period ended September 27, 1996 amounted to $777,000 and for the 7-week period ended September 29, 1995 amounted to $257,000. Rental expense of the Predecessor
-F-22- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for the 45-week period ended August 11, 1995 and for the 52-week period ended September 30, 1994 was $1,242,000 and $1,900,000, respectively.
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.
From time to time, the Company may be subject to other claims that arise in the ordinary course of business. In the opinion of management, all such matters involve amounts which would not have a material adverse effect on the Company's consolidated financial position if unfavorably resolved. There are currently no such matters.
INDUSTRY SEGMENTS AND SALES
CPI operates in a single business segment. CPI covers and is engaged in the development, manufacture and sale of a broad line of electron devices used in broadcasting, communications, and other commercial and military applications.
CPI's operations outside of North America consist of sales offices in certain foreign countries. North America operations are responsible for the design and development of all products as well as
-F-23- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
shipping to meet worldwide customer commitments. Accordingly, for financial statement purposes, it is not meaningful to segregate revenues or operating profits for the foreign operations. Identifiable assets outside of North America are less than 10% of total consolidated assets. Export sales to unaffiliated customers located outside of North America, mainly in South America and Asia are as follows:
The following table summarizes sales under prime contracts from the U.S. government for the periods presented in the accompanying consolidated financial statements:
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:
-F-24- 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, 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.
PROVISION FOR INCOME TAXES
Earnings (loss) before income taxes for domestic and non-U.S. operations is as follows:
The provision (benefit) for income taxes is comprised of the following:
-F-25- 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:
Foreign tax credits of $1,184,000 in 1996 and $142,000 in 1995 will expire beginning in 2000 and are dependent on the company earning sufficient foreign source income. Management has established a valuation allowance based on the uncertainty of the amount and timing of taxable income in future accounting periods. California manufacturing investment tax credits of $130,000 expire in 2004.
-F-26- 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:
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
Effective August 12, 1995, CPI adopted a qualified 401(k) plan covering substantially all its domestic and Canadian employees. CPI's major obligation is to contribute an amount based on a percentage of each participant's base pay.
The Predecessor participated in defined contribution plans sponsored by Varian covering substantially all of CPI's domestic and Canadian employees with substantially similar benefits. 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 contributions to these plans by the CPI was $2.6 million for the 52-week period ended September 27, 1996 and $247,000 for the 7-week period ended September 29, 1995. Total
-F-27- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
contributions of the Predecessor for all plans amounted to $4.3 million and $4.6 million for the 45-week period ended August 11, 1995 and the 52-week period ended September 30, 1994, respectively.
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
Sales to, and purchases from, other Varian lines of business as follows:
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
-F-28- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
years. The supply agreements generally impose upon CPI and Varian certain minimum purchase quantities and generally restrict CPI's ability to market certain specific products to third parties. Management believes that the terms of these supply agreements are no less favorable to CPI than that which would be obtained from independent third parties for the purchase or supply of similar products.
Trademark License Agreement Generally, under the terms of the Trademark License Agreement, CPI is licensed to use Varian trademarks on its products for a period of three years (although during the third year Varian trademarks may only be used in connection with CPI's own trademarks). After the third year, CPI may not use any Varian trademarks alone, but for an additional seven years may identify its products as "formerly made by Varian". At the expiration of the 10-year period, CPI will not be permitted to utilize any Varian trademarks.
CPI and Varian have also entered into certain other agreements covering access to certain of CPI's facilities as well as subleased and shared facilities.
CORPORATE ALLOCATIONS
Operating earnings of the Predecessor include allocations of costs accumulated at the corporate level within Varian. Where it was possible to specifically identify corporate amounts with the activities of the Predecessor, these amounts have been charged or credited directly to the Predecessor without allocation or apportionment. Costs of a wholly corporate nature (i.e. those that are considered to relate purely to the support of Varian's centralized corporate structure) were not allocated. Shared or common costs have been allocated to the Predecessor on the basis which is considered to most fairly and reasonably reflect the utilization of the services provided to, or benefit obtained by, the Predecessor. Typical measures and activity indicators used for apportionment purposes include sales revenues, headcount and facility area measurements. Management believes that the cost allocations are reasonable and reflect the costs incurred to support the operations of the Predecessor. Additionally, management believes that the costs for such services would have been less on a stand alone basis, although determination as to specific amounts is not practicable.
Allocations of corporate expenses included in the consolidated statements of operations for the 45-week period ended August 11, 1995 and for fiscal year 1994 were $11.2 million and $11.3 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.
PARENT COMPANY DATA
Holding has guaranteed CPI's senior debt obligations. Holding has no operations other than its ownership of CPI. The consolidated balance sheets of Holding as of September 27, 1996 and
-F-29- COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
September 29, 1995 are substantially identical to that of CPI and its subsidiaries, other than the presentation of CPI's preferred stock as minority interest and the components of stockholders' equity of Holding and is summarized as follows (in thousands, except per share amounts):
Separate financial statements of CPI's direct and indirect subsidiaries, all of which guarantee the Notes, are not included because (i) these subsidiaries are jointly and severally liable and (ii) the separate financial statements and other disclosures concerning these subsidiaries are not deemed by CPI to be material to investors.
BUSINESS EQUITY
Business equity is comprised of intercompany balances arising in the ordinary course of business between the Predecessor and other Varian entities, together with various adjustments resulting from the carve-out of the Predecessor as presented in these consolidated financial statements.
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
COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
-F-31- COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders Communications & Power Industries Holding Corporation:
We have audited the accompanying consolidated balance sheets of Communications & Power Industries Holding Corporation and subsidiaries ("Holding" or the "Successor") as of September 27, 1996 and September 29, 1995, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the 52-week period ended September 27, 1996 and the 7-week period ended September 29, 1995. We have also audited the related consolidated statements of operations, stockholders' equity, and cash flows of Holding's predecessor, the Electron Devices Business of Varian Associates, Inc. (the "Predecessor") for the 45-week period ended August 11, 1995. In connection with our audits of the consolidated financial statements for the periods indicated above, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of Holding's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in the notes to the consolidated financial statements, Holding acquired assets and assumed liabilities on August 11, 1995 in a transaction 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 Communications & Power Industries Holding Corporation and subsidiaries as of September 27, 1996 and September 29, 1995, the results of their operations and their cash flows for the 52-week period ended September 27, 1996 and the 7-week period ended September 29, 1995, and the results of operations and cash flows of the Electron Devices Business of Varian Associates, Inc. for the 45-week period ended August 11, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK, LLP San Jose, California November 22, 1996
-F-32- COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Communications & Power Industries Holding Corporation:
We have audited the accompanying statements of operations, stockholders' equity and cash flows of the Electron Devices Business, a segment of Varian Associates, Inc. (excluding the segment's Tempe, Arizona operations) (the "Predecessor") for the fiscal year ended September 30, 1994. In connection with our audit 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 audit.
We conducted our audit 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 results of the Predecessor's operations and its cash flows for the fiscal year 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- COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying notes to the consolidated financial statements.
-F-34- COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
See accompanying notes to the consolidated financial statements.
-F-35- COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying Notes to the Consolidated Financial Statements.
-F-36- COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See accompanying notes to the consolidated financial statements.
-F-37- COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (in thousands)
See accompanying notes to the consolidated financial statements.
-F-38- 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"), excluding the Tempe, Arizona operations. The Predecessor consisted of substantially all of the assets of Varian and its affiliates that were used primarily in developing, manufacturing and distributing microwave and power grid vacuum electronic devices, microwave amplifiers, modulators and various other power supply equipment and devices. On August 11, 1995, CPI acquired these assets (the "Acquisition") from Varian and was then merged with a wholly owned subsidiary of Communications & Power Industries Holding Corporation ("Holding" 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):
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
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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 was as follows (in thousands):
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 period ended September 30, 1994. The accompanying consolidated financial statements for the 52-week period ended September 27, 1996 and 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.
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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. In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121, which the Company adopted in Fiscal Year 1996, requires long-lived assets to be evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company periodically evaluates the ongoing profitability of the business to determine if impairment in the value of this asset has occurred.
Warranty
The Company's products are generally warranted for a variety of periods, typically one to five years or a predetermined product usage life. Estimated future costs of repair, replacement or customer accommodations are reflected in the accompanying consolidated financial statements.
Environmental Liabilities
Liabilities for environmental expenditures are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. There were no environmental liabilities established by CPI during the 52-week period ended September 27, 1996 or the 7-week period ended September 29, 1995. 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 and other credit facilities are capitalized and amortized over the estimated time the obligations are expected to be outstanding using the effective interest method. The amortization period used for the deferred costs associated with the revolving credit facility, the Senior Term Loans, and the Senior Subordinated Notes is 3 years, 7 years and 10 years, respectively.
Senior Redeemable Preferred Stock
CPI's Senior Redeemable Preferred Stock was issued in units with an aggregate of 10,500 shares of common stock of Holding. The fair value of the shares of Holding's common stock issued, and the issue costs associated with the issuance of the Senior Redeemable Preferred Stock, have been reflected as a reduction of the Senior Redeemable Preferred Stock issued and is being amortized via a charge to retained earnings over the period until mandatory redemption, 12 years, using the effective interest method.
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Income Taxes
Income taxes are accounted for under the asset and liability method. Holding's deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis and the financial reporting basis of assets and liabilities. The Predecessor's operations were included in the consolidated income tax returns filed by Varian. However, for purposes of the financial statements of the Predecessor, the provision for income taxes was prepared using the effective tax rate of Varian's consolidated financial statements on a separate entity basis. The provision for income taxes of Holding and the Predecessor is based upon the differences between financial reporting and tax basis of assets and liabilities measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. The computed amount of the current provision for income taxes of the Predecessor was recorded to business equity.
Supplemental Cash Flow Information
For the 52-week period ended September 27, 1996, cash was paid for interest and taxes in the amount of $16,932,000 and $524,000, respectively. There were no interest payments or taxes paid during the 7-week period ended September 29, 1995, nor were there any cash payments made for interest or taxes by the Predecessor (all cash payments relating to such matters were made by Varian) during the period presented. Non-cash financing during the 52-week period ended September 27, 1996 included the payment of preferred dividends by CPI on its Senior Redeemable Preferred Stock and its Junior Preferred Stock through the issuance of 21,482 additional shares of its Senior Redeemable Preferred Stock and 14,321 shares of its Junior Preferred Stock, respectively. No dividends were issued during the 7-week period ended September 29, 1995. Amortization of discount and issue costs on the Senior Redeemable Preferred Stock was $214,000 and $29,000 during the 52-week period ending September 27, 1996 and the 7-week period ended September 29, 1995, respectively.
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
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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 them from receiving new contracts or to terminate existing contracts for the U.S. government's convenience or for the default of the contractor. In addition, the U.S. government could terminate contracts due to insufficient or terminated congressional appropriations. The Company's contracts with foreign governmental defense agencies are subject to similar limitations and risks as those encountered with U.S. government contracts.
The Company believes that both its customer and industry base is well diversified, however, changes in the marketplace of any of the above named industries may significantly affect management's estimates and the Company's performance.
The Company's customers are located throughout the United States, 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
The functional currency of the Company's foreign subsidiaries is the U.S. dollar. Accordingly, assets and liabilities of subsidiaries outside of the United States representing cash, inventory and 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
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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 year ended September 27, 1996, CPI entered into one foreign exchange contract for 2,998,600 German Marks which is related to a specific customer order. Gains or losses on this contract will be recorded consistent with the hedged transaction. 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 was $296,000 loss for the 52-week period ending September 27, 1996.
Fair Value of Financial Instruments
Financial instruments consist of accounts receivable, accounts payable and debt. The carrying value of the Company's accounts receivable, accounts payable and debt obligations approximate their fair values which, for debt, is based upon current rates available to the Company for debt of the same maturities.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
ACCOUNTS RECEIVABLE
Accounts receivable are stated net of allowances for doubtful accounts of $0.2 million as of September 27, 1996 and September 29, 1995.
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INVENTORIES
Inventories are stated at the lower of average cost or market (net realizable value). The main components of inventories are as follows:
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, none of the finished goods remains on the balance sheet as of September 27, 1996 and 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 of Acquisition. 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.
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Estimated useful lives of property, plant, and equipment are:
Land leaseholds Life of the lease Buildings 40 years Machinery and equipment 3 to 7 years
The main components of property, plant, and equipment are as follows:
ACCRUED EXPENSES
Accrued expenses are comprised of the following:
COSTS TO EXIT AN ACTIVITY OF THE PREDECESSOR
Prior to consummation of the Acquisition, management of the Predecessor had begun to formulate plans to exit certain activities of the Predecessor, which were finalized shortly after the Acquisition. These plans included two principal costs: (a) the costs associated with the contractually required closing and 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 in the first quarter of Fiscal 1997, of one of its leased manufacturing facilities into its Palo Alto, California, facility.
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In connection with the Acquisition, CPI accrued $1,259,000, of which $775,000 remains on the balance sheet as of September 27, 1996, for the costs of completing these plans. These 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 27, 1996, CPI had $1.70 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 (approximately 5.50%, as of September 27, 1996) plus 2.5% per annum or the Base Rate (8.25% as of September 27, 1996) plus 1.0% per annum and borrowings under Term Loan B bear interest at a rate equal to the Eurodollar Rate plus 3.0% per annum or Base Rate plus 1.5% per annum, in each case as selected by CPI. Applicable interest rates on Term Loan A and the Revolving Credit Facility will be reduced after the first anniversary of the consummation of the Acquisition by up to 0.5% per annum if CPI meets and continues to meet certain financial tests. In addition to customary fronting and other fees, CPI will pay a fee equal to 1.5% per annum on undrawn amounts of letters of credit and a commitment fee of 0.5% per annum on unused facilities under the Revolving Credit Facility. The Senior Credit Agreement also provides for a prepayment premium in the event that it is voluntarily prepaid within two years of the establishment of the Senior Credit Agreement unless such prepayment is made with funds raised through an initial public offering of Holding's stock.
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The Term Loans are subject to quarterly payments in the aggregate annual amounts as follows (in thousands):
As of September 27, 1996, CPI had made payments of $2,250,000 against Term Loan A and $150,000 against Term Loan B.
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 consolidated basis, maintain certain specified financial covenants, including a minimum fixed charge coverage ratio, minimum net worth and minimum EBITDA. As of September 27, 1996, CPI was in compliance with all covenants except that related to capital expenditures, for which a waiver has been obtained.
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
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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:
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 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.
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During the year ended September 27, 1996, CPI paid preferred dividends through the issuance of 21,482 shares of its Senior Redeemable Preferred Stock.
The Senior Preferred Stock is not redeemable prior to August 1, 2000. Thereafter, the Senior Preferred Stock will be redeemable at the option of CPI, in whole or in part from time to time, initially at 107% of the liquidation preference thereof and at decreasing prices thereafter to and including August 1, 2004 and thereafter at 100% of the liquidation preference thereof, together in each case with accumulated and unpaid dividends thereon. In addition, on or prior to August 1, 1998, CPI may, on one or more occasions, redeem any or all of the shares of Senior Preferred Stock then outstanding at a redemption price equal to 114% of the liquidation preference thereof plus accumulated and unpaid dividends thereon, with the proceeds of one or more public offerings of Holding's common stock. The Senior Preferred Stock is subject to mandatory redemption in whole on August 1, 2007 at a price equal to the liquidation preference thereof, plus accumulated and unpaid dividends.
In the event of a change of control, CPI will be required to make an offer to each holder of shares of Senior Preferred Stock to repurchase all or a portion of such holder's Senior Preferred Stock at a price equal to 101% of the liquidation preference thereof, plus accumulated and unpaid dividends. The Senior Credit Agreement currently prohibits and the Indenture currently restricts CPI from making such an offer. In addition, CPI will be required to use the proceeds from certain asset sales to permanently reduce senior indebtedness of CPI, to invest in certain related assets or businesses or to offer to repurchase Senior Preferred Stock. Any such repurchases shall be effected at an offer price equal to 100% of the liquidation preference of the shares of Senior Preferred Stock purchased, plus accumulated and unpaid dividends.
The Certificate of Designation covering the Senior Preferred Stock contains certain provisions that, among other things, limit the ability of CPI to incur indebtedness, pay dividends, incur liens, make loans or investments, transact with affiliates and engage in mergers and consolidations.
CPI may, at its option, on any dividend payment date, exchange all, but not less than all, of the outstanding shares of Senior Preferred Stock into 14% Junior Subordinated Notes due 2007 (the "Exchange Notes"), so long as such exchange is permitted by the Senior Credit Agreement and the Indenture, in an aggregate principal amount not to exceed the aggregate liquidation preference, plus accumulated and unpaid dividends on the date of exchange. The Exchange Notes will be general unsecured obligations of CPI and will be subordinated to all existing and future senior indebtedness of CPI, including indebtedness under the Senior Credit Agreement and the Indenture. Except for terms relating to these subordination provisions, payment of interest on a quarterly basis, the option to issue additional Exchange Notes on or prior to August 1, 2000 in lieu of paying cash interest, optional redemption and the date on which repayment is mandatory (all of which terms would be similar to the terms of Senior Preferred Stock), the terms of the Exchange Notes will be generally identical to the Notes.
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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.
During the year ended September 27, 1996, CPI paid preferred dividends through the issuance of 14,321 shares of its Junior Preferred Stock.
The Junior Preferred Stock ranks junior in right of payment to all liabilities of CPI and to any preferred stock, including Senior Preferred Stock, that is senior in right of payment to the Junior Preferred Stock and ranks senior in right of payment to any additional preferred stock which does not expressly provide that it ranks senior to or on a parity with the Junior Preferred Stock and CPI's common stock.
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LEASE COMMITMENTS
At September 27, 1996, the Company was committed to minimum rentals under noncancellable operating leases as follows (in thousands):
Rental expense for the 52-week period ended September 27, 1996 amounted to $777,000 and 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 the 52-week period ending September 30, 1994 was $1,242,000 and $1,900,000, respectively.
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.
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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.
From time to time, the Company may be subject to other claims that arise in the ordinary course of business. In the opinion of management, all such matters involve amounts which would not have a material adverse effect on the Company's consolidated financial position if unfavorably resolved. There are currently no such matters.
INDUSTRY SEGMENTS AND SALES
The Company operates in a single business segment. The Company covers and is engaged in the development, manufacture and sale of a broad line of electron devices used in broadcasting, communications, and other commercial and military applications.
CPI's operations outside of North America consist of sales offices in certain foreign countries. North America operations are responsible for the design and development of all products as well as shipping to meet worldwide customer commitments. Accordingly, for financial statement purposes, it is not meaningful to segregate revenues or operating profits for the foreign operations. Identifiable assets outside of North America are less than 10% of total consolidated assets. Export sales to unaffiliated customers located outside of North America, mainly in South America and Asia are as follows:
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The following table summarizes sales under prime contracts from the U.S. government for the periods presented in the accompanying consolidated financial statements:
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:
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.
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PROVISION FOR INCOME TAXES
Earnings (loss) before income taxes for domestic and non-U.S. operations is as follows:
The provision (benefit) for income taxes is comprised of the following:
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Significant items making up deferred tax assets and liabilities are as follows:
Foreign tax credits of $1,184,000 in 1996 and $142,000 in 1995 will expire beginning in 2000 and are dependent on the company earning sufficient foreign source income. Management has established a valuation allowance based on the uncertainty of the amount and timing of taxable income in future accounting periods. California manufacturing investment tax credits of $130,000 expire in 2004.
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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:
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
Effective August 12, 1995, CPI adopted a qualified 401(k) plan covering substantially all its domestic and Canadian employees. CPI's major obligation is to contribute an amount based on a percentage of each participant's base pay.
The Predecessor participated in defined retirement plans sponsored by Varian covering substantially all of the Company's domestic and Canadian employees with substantially similar benefits. 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.
-F-57- COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Total contributions to these plans by the Company was $2.6 million for the 52-week period ended September 27, 1996 and $247,000 for the 7-week period ended September 29, 1995. Total contributions of the Predecessor for all plans amounted to $4.3 million and $4.6 million for the 45-week period ended August 11, 1995 and the 52-week period ended September 30, 1994, respectively.
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
Sales to, and purchases from, other Varian lines of business as follows:
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
-F-58- COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
case of certain "Key Components," Varian has the right to extend the term of the agreement for an additional five years. The supply agreements generally impose upon CPI and Varian certain minimum purchase quantities and generally restrict CPI's ability to market certain specific products to third parties. Management believes that the terms of these supply agreements are no less favorable to CPI than that which would be obtained from independent third parties for the purchase or supply of similar products.
Trademark License Agreement Generally, under the terms of the Trademark License Agreement, CPI is licensed to use Varian trademarks on its products for a period of three years (although during the third year Varian trademarks may only be used in connection with CPI's own trademarks). After the third year, CPI may not use any Varian trademarks alone, but for an additional seven years may identify its products as "formerly made by Varian". At the expiration of the 10-year period, CPI will not be permitted to utilize any Varian trademarks.
CPI and Varian have also entered into certain other agreements covering access to certain of CPI's facilities as well as subleased and shared facilities.
CORPORATE ALLOCATIONS
Operating earnings of the Predecessor include allocations of costs accumulated at the corporate level within Varian. Where it was possible to specifically identify corporate amounts with the activities of the Predecessor, these amounts have been charged or credited directly to the Predecessor without allocation or apportionment. Costs of a wholly corporate nature (i.e. those that are considered to relate purely to the support of Varian's centralized corporate structure) were not allocated. Shared or common costs have been allocated to the Predecessor on the basis which is considered to most fairly and reasonably reflect the utilization of the services provided to, or benefit obtained by, the Predecessor. Typical measures and activity indicators used for apportionment purposes include sales revenues, headcount and facility area measurements. Management believes that the cost allocations are reasonable and reflect the costs incurred to support the operations of the Predecessor. Additionally, management believes that the costs for such services would have been less on a stand alone basis, although determination as to specific amounts is not practicable.
Allocations of corporate expenses included in the consolidated statements of operations for the 45-week period ended August 11, 1995 and for fiscal year 1994 were $11.2 million and $11.3 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-59- COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
GUARANTEES
Holding has guaranteed CPI's senior debt obligations. Holding has no operations other than its ownership of CPI. The consolidated balance sheets of CPI as of September 27, 1996 and September 29, 1995 are substantially identical to that of Holding and its subsidiaries.
BUSINESS EQUITY
Business equity is comprised of intercompany balances arising in the ordinary course of business between the Predecessor and other Varian entities, together with various adjustments resulting from the carve-out of the Predecessor as presented in these consolidated financial statements.
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.
-F-60- SCHEDULE II
COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation)
VALUATION AND QUALIFYING ACCOUNTS (in thousands)
- - - ----------
(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- SCHEDULE II COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries
VALUATION AND QUALIFYING ACCOUNTS (in thousands)
- - - ----------
(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- EXHIBIT INDEX
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).
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.
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.
Exhibit No. Description - - - ----------- -----------
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.
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.
Exhibit No. Description - - - ----------- -----------
10.29(1) Management Services Agreement among CPI, Holding and Leonard Green & Partners, L.P. dated as of August 11, 1995.
10.30(1) 1995 Holding Management Equity Plan (including Form of Management Subscription and Stockholders Agreement).
10.31(1) Letter from Holding to Al D. Wilunowski dated June 9, 1995 relating to terms of employment.
10.32(1) Letter from Holding to Alvin J. Ferreira dated June 9, 1995 relating to terms of employment.
10.33(1) Letter from Holding to Dennis J. Gleason dated June 9, 1995 relating to terms of employment.
10.34(1) Letter from Holding to H. Frederick Koehler dated June 9, 1995 relating to terms of employment.
10.35(1) Letter from Holding to Armand Staprans dated June 9, 1995 relating to terms of employment.
21(1) Subsidiaries of CPI and Holding.
27 Financial Data Schedule - - - --------------
(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.