1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended July 2, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission File Number: 33-96858-01 Commission File Number: 33-96858 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION COMMUNICATIONS & POWER INDUSTRIES, INC. (Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter) DELAWARE DELAWARE (State of Incorporation) (State of Incorporation) 77-0407395 77-0405693 (I.R.S. employer identification number) (I.R.S. employer identification number) 607 HANSEN WAY 607 HANSEN WAY PALO ALTO, CALIFORNIA 94303-1110 PALO ALTO, CALIFORNIA 94303-1110 (415) 846-2900 (415) 846-2900 (Address, including zip code, and telephone number, (Address, including zip code, and telephone number, including area code, of registrant's principal executive including area code, of registrant's principal offices) executive offices) Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(b) of the Act: NONE NONE Securities registered pursuant to Section 12(g) of the Act: Securities registered pursuant to Section 12(g) of the Act: NONE NONE Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No . APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding for each of the Registrant's classes of Common Stock, as of the latest practicable date: COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION: 196,420 SHARES OF COMMON STOCK, $.01 PAR VALUE, AT JULY 2, 1999. COMMUNICATIONS & POWER INDUSTRIES, INC.: 1 SHARE OF COMMON STOCK, $.01 PAR VALUE, AT JULY 2, 1999. 2 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) PART 1: FINANCIAL INFORMATION COMMUNICATIONS & POWER INDUSTRIES, INC. Consolidated Condensed Balance Sheets, July 2, 1999 and October 2, 1998.............................2 Consolidated Condensed Statements of Operations, 13-week period ended July 2, 1999 and 13-week period ended July 3, 1998...........................................................................3 Consolidated Condensed Statements of Operations, 39-week period ended July 2, 1999 and 39-week period ended July 3, 1998...........................................................................4 Consolidated Condensed Statements of Cash Flows, 39-week period ended July 2, 1999 and 39-week period ended July 3, 1998...........................................................................5 Notes to Consolidated Condensed Financial Statements................................................6 Management's Discussion and Analysis of Financial Condition and Results of Operations..............14 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION Consolidated Condensed Balance Sheets, July 2, 1999 and October 2, 1998.............................8 Consolidated Condensed Statements of Operations, 13-week period ended July 2, 1999 and 13-week period ended July 3, 1998...........................................................................9 Consolidated Condensed Statements of Operations, 39-week period ended July 2, 1999 and 39-week period ended July 3, 1998..........................................................................10 Consolidated Condensed Statements of Cash Flows, 39-week period ended July 2, 1999 and 39-week period ended July 3, 1998..........................................................................11 Notes to Consolidated Condensed Financial Statements...............................................12 Management's Discussion and Analysis of Financial Condition and Results of Operations..............14 PART II: OTHER INFORMATION Other Information .................................................................................18 SIGNATURES..............................................................................................19 3 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands-unaudited) July 2, October 2, ASSETS 1999 1998 ------ --------- --------- CURRENT ASSETS Cash and cash equivalents $ 7,041 $ 448 Accounts receivable, net 43,685 49,484 Inventories 55,329 52,923 Deferred taxes 6,981 6,981 Other current assets 1,240 1,440 --------- --------- Total current assets 114,276 111,276 Property, plant, and equipment, net 77,184 78,099 Goodwill and other intangibles, net 29,351 25,147 Debt issue costs, net 5,886 6,522 Deferred taxes 8,154 8,168 --------- --------- Total assets $ 234,851 $ 229,212 ========= ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND EQUITY CURRENT LIABILITIES Revolving credit facility $ 32,500 $ 13,300 Current portion of term loans 6,200 6,200 Current portion of capital leases 774 541 Accounts payable 10,444 13,140 Accrued expenses 22,370 15,612 Product warranty 3,692 3,734 Income taxes payable 8,543 10,259 Advance payments from customers 2,786 2,533 --------- --------- Total current liabilities 87,309 65,319 Senior term loans 18,999 23,750 Senior subordinated notes 100,000 100,000 Obligations under capital leases 2,216 2,548 --------- --------- Total liabilities 208,524 191,617 --------- --------- SENIOR REDEEMABLE PREFERRED STOCK 23,298 20,683 --------- --------- Commitments and contingencies STOCKHOLDERS' EQUITY: Junior Preferred Stock 1 1 Common Stock -- -- Additional paid-in capital 35,220 33,582 Accumulated deficit (31,098) (15,614) Less stockholder loans (1,094) (1,057) --------- --------- Net stockholders' equity 3,029 16,912 --------- --------- Total liabilities, redeemable preferred stock and equity $ 234,851 $ 229,212 ========= ========= See accompanying notes to the unaudited interim consolidated condensed financial statements. -2- 4 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (in thousands - unaudited) 13-Week 13-Week period ended period ended July 2, July 3, 1999 1998 -------- -------- Sales $ 62,292 $ 64,450 Cost of sales 54,034 48,702 -------- -------- Gross profit 8,258 15,748 -------- -------- Operating costs and expenses: Research and development 2,332 1,687 Marketing 4,987 5,065 General and administrative 6,012 3,261 -------- -------- Total operating costs and expenses 13,331 10,013 -------- -------- Operating(loss) income (5,073) 5,735 Foreign currency (loss) gain (203) 69 Interest expense (4,386) (4,399) -------- -------- (Loss) earnings before taxes (9,662) 1,405 Income tax expense 422 527 -------- -------- Net (loss) earnings (10,084) 878 Preferred dividends: Senior Redeemable Preferred Stock 847 738 Junior Preferred Stock 565 492 -------- -------- Loss earnings attributable to common stock $(11,496) $ (352) ======== ======== See accompanying notes to the unaudited consolidated condensed financial statements. -3- 5 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (in thousands - unaudited) 39-Week 39-Week period ended period ended July 2, July 3, 1999 1998 --------- --------- Sales $ 187,192 $ 190,625 Cost of sales 148,647 142,181 --------- --------- Gross profit 38,545 48,444 --------- --------- Operating costs and expenses: Research and development 7,092 5,406 Marketing 14,573 14,397 General and administrative 14,231 10,545 --------- --------- Total operating costs and expenses 35,896 30,348 --------- --------- Operating income 2,649 18,096 Foreign currency (loss) gain (644) 24 Interest expense (13,237) (13,520) --------- --------- (Loss) earnings before taxes (11,232) 4,600 Income tax expense -- 1,725 --------- --------- Net (loss) earnings (11,232) 2,875 Preferred dividends: Senior Redeemable Preferred Stock 2,455 2,140 Junior Preferred Stock 1,637 1,426 --------- --------- Loss attributable to common stock $ (15,324) $ (691) ========= ========= See accompanying notes to the unaudited consolidated condensed financial statements. -4- 6 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands - unaudited) 39-Week 39-Week period ended period ended July 2, July 3, 1999 1998 -------- -------- OPERATING ACTIVITIES Net cash provided by operating activities $ 7,801 $ 18,592 -------- -------- INVESTING ACTIVITIES Proceeds from sale of property, plant and equipment 13 29 Purchase of property, plant and equipment, net (6,681) (4,388) Product lines acquisitions (8,910) (2,730) -------- -------- Net cash used in investing activities (15,578) (7,089) -------- -------- FINANCING ACTIVITIES Net Proceeds/(Repayments) from revolving credit facility 19,200 (7,100) Net Repayments on senior term loans (4,830) (4,150) Net Proceeds from stockholder loans -- 30 Purchase of treasury stock -- (723) Issuance of treasury stock -- 696 -------- -------- Net cash provided by (used in) financing activities 14,370 (11,247) -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 6,593 256 Cash and cash equivalents at beginning of period 448 2,027 -------- -------- Cash and cash equivalents at end of period $ 7,041 $ 2,283 ======== ======== See accompanying notes to the unaudited consolidated condensed financial statements. -5- 7 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) The accompanying unaudited consolidated condensed financial statements of Communications & Power Industries, Inc. ("CPI") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted and, accordingly, these financial statements should be read in conjunction with the financial statements and the notes thereto contained in CPI's October 2, 1998 Annual Report on Form 10-K. Management believes that these unaudited interim condensed financial statements contain all adjustments, all of which are of a normal, recurring nature (except as described below), necessary to present fairly the financial position of CPI, and its results of operations and cash flows, for the interim period presented. The results for the interim periods reported are not necessarily indicative of the results for the full fiscal year 1999. Results for the quarter and the nine months ending July 2, 1999 reflect an aggregate $7.6 million in non-recurring charges, of which $6.0 million was charged to cost of goods sold and $1.6 million was charged to general and administrative expenses. These non-recurring charges were principally related to the Company's Traveling Wave Technology (TWT) Division and changes in estimated costs to complete certain customer contracts and the write-off of certain inventory which the Company believes is not realizable. In addition, certain charges for the discontinuation of a Satcom Division product line are reflected. The TWT business, historically conducted as a separate Palo Alto division, is in the process of being integrated into the Company's Microwave Power Products (MPP) Division, also headquartered in Palo Alto. The non-recurring charges also include a provision for severance expenses in connection with the integration of the TWT Division and estimated settlement costs with a customer. The Company is currently involved in a dispute with a customer involving performance and functionality of a particular type of product that is sold to this customer. The parties are presently negotiating a settlement to resolve this matter. The Company has recorded a reserve for the minimum level of its estimate of the range of exposure. The Company's third quarter performance resulted in its failure to meet certain financial covenants contained in the Company's senior bank credit facility. CPI has obtained a limited waiver of the defaults from 100% of its lenders. This waiver is effective until the earlier of October 1, 1999, or the completion of a more comprehensive restructuring amendment to the credit facility. CPI expects to shortly begin working on the terms of such a restructuring amendment with the lenders' representatives. During the quarter ended July 2, 1999, CPI paid preferred stock dividends on its Senior Redeemable Preferred Stock and its Junior Preferred Stock through the issuance of 8,466 additional shares of its Senior Redeemable Preferred Stock and 5,644 shares of its Junior Preferred Stock, respectively. During the nine months ended July 2, 1999, the Company paid preferred dividends through the issuance of 24,549 shares of its Senior Redeemable Preferred Stock and 16,366 shares of its Junior Preferred Stock. At the beginning of fiscal year 1999, CPI completed the acquisition of the Microwave Components Division ("MCD") of Aydin Corporation for approximately $8.9 million with net assets of approximately $2.4 million. The $6.5 million difference between the purchase price and the fair value of the net assets acquired was allocated to goodwill and other intangibles and will be amortized over estimated useful lives ranging from 1 to 15 years. This acquisition was accounted for as a purchase. -6- 8 COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) Inventories are stated at the lower of average cost or market (net realizable value). The main components of inventories are as follows: (Dollars in thousands) July 2, October 2, 1999 1998 ------- ------- Raw materials and parts $41,868 $38,327 Work in process 10,796 13,572 Finished goods 2,665 1,024 ------- ------- Total inventories $55,329 $52,923 ======= ======= -7- 9 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands-unaudited) July 2, October 2, ASSETS 1999 1998 ------ --------- --------- CURRENT ASSETS Cash and cash equivalents $ 7,041 $ 448 Accounts receivable, net 43,685 49,484 Inventories 55,329 52,923 Deferred taxes 6,981 6,981 Other current assets 1,240 1,440 --------- --------- Total current assets 114,276 111,276 Property, plant, and equipment, net 77,184 78,099 Goodwill and other intangibles, net 29,351 25,147 Debt issue costs, net 5,886 6,522 Deferred taxes 8,154 8,168 --------- --------- Total assets $ 234,851 $ 229,212 ========= ========= LIABILITIES, REDEEMABLE PREFERRED STOCK, PREFERRED STOCK OF SUBSIDIARY AND EQUITY CURRENT LIABILITIES Revolving credit facility $ 32,500 $ 13,300 Current Portion of term loans 6,200 6,200 Current Portion of capital leases 774 541 Accounts payable 10,444 13,140 Accrued expenses 22,370 15,612 Product warranty 3,692 3,734 Income taxes payable 8,543 10,259 Advance payments from customers 2,786 2,533 --------- --------- Total current liabilities 87,309 65,319 Senior term loans 18,999 23,750 Senior subordinated notes 100,000 100,000 Obligations under capital leases 2,216 2,548 --------- --------- Total liabilities 208,524 191,617 --------- --------- SENIOR REDEEMABLE PREFERRED STOCK OF SUBSIDIARY 23,298 20,683 --------- --------- JUNIOR PREFERRED STOCK OF SUBSIDIARY 16,038 14,400 --------- --------- STOCKHOLDERS' (DEFICIT) EQUITY: Common Stock 2 2 Additional paid-in capital 19,181 19,181 Accumulated deficit (31,098) (15,614) Less stockholder loans (1,094) (1,057) --------- --------- Net stockholders' (deficit) equity (13,009) 2,512 --------- --------- Total liabilities, redeemable preferred stock, preferred stock of subsidiary and equity $ 234,851 $ 229,212 ========= ========= See accompanying notes to the unaudited consolidated condensed financial statements. -8- 10 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (in thousands - unaudited) 13-Week 13-Week period ended period ended July 2, July 3, 1999 1998 -------- -------- Sales $ 62,292 $ 64,450 Cost of sales 54,034 48,702 -------- -------- Gross profit 8,258 15,748 -------- -------- Operating costs and expenses: Research and development 2,332 1,687 Marketing 4,987 5,065 General and administrative 6,012 3,261 -------- -------- Total operating costs and expenses 13,331 10,013 -------- -------- Operating (loss) income (5,073) 5,735 Foreign currency (loss) gain (203) 69 Interest expense (4,386) (4,399) -------- -------- (Loss) earnings before taxes (9,662) 1,405 Income tax expense 422 527 -------- -------- Net (loss) earnings (10,084) 878 Preferred dividends: Senior Redeemable Preferred Stock 847 738 Junior Preferred Stock 565 492 -------- -------- Loss earnings attributable to common stock $(11,496) $ (352) ======== ======== See accompanying notes to the unaudited consolidated condensed financial statements. -9- 11 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (in thousands - unaudited) 39-Week 39-Week period ended period ended July 2, July 3, 1999 1998 --------- --------- Sales $ 187,192 $ 190,625 Cost of sales 148,647 142,181 --------- --------- Gross profit 38,545 48,444 --------- --------- Operating costs and expenses: Research and development 7,092 5,406 Marketing 14,573 14,397 General and administrative 14,231 10,545 --------- --------- Total operating costs and expenses 35,896 30,348 --------- --------- Operating income 2,649 18,096 Foreign currency (loss) gain (644) 24 Interest expense (13,237) (13,520) --------- --------- (Loss) earnings before taxes (11,232) 4,600 Income tax expense -- 1,725 --------- --------- Net (loss) earnings (11,232) 2,875 Preferred dividends: Senior Redeemable Preferred Stock 2,455 2,140 Junior Preferred Stock 1,637 1,426 --------- --------- Loss attributable to common stock $ (15,324) $ (691) ========= ========= See accompanying notes to the unaudited consolidated condensed financial statements. -10- 12 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands - unaudited) 39-Week 39-Week period ended period ended July 2, July 3, 1999 1998 -------- -------- OPERATING ACTIVITIES Net cash provided by operating activities $ 7,801 $ 18,592 -------- -------- INVESTING ACTIVITIES Proceeds from sale of property, plant and equipment 13 29 Purchase of property, plant and equipment, net (6,681) (4,388) Product line acquisitions (8,910) (2,730) -------- -------- Net cash used in investing activities (15,578) (7,089) -------- -------- FINANCING ACTIVITIES Net Proceeds from stockholder loans -- 30 Net Proceeds/(Repayments) from revolving credit facility 19,200 (7,100) Net Repayments on senior term loans (4,830) (4,150) Purchase of treasury stock -- (723) Issuance of treasury stock -- 696 -------- -------- Net cash provided by (used in) financing activities 14,370 (11,247) -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 6,593 256 Cash and cash equivalents at beginning of period 448 2,027 -------- -------- Cash and cash equivalents at end of period $ 7,041 $ 2,283 ======== ======== See accompanying notes to the unaudited consolidated condensed financial statements. -11- 13 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) The accompanying unaudited condensed consolidated financial statements of Communications & Power Industries Holding Corporation ("Holding") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted and, accordingly, these financial statements should be read in conjunction with the financial statements and the notes thereto contained in Holding's October 2, 1998 Annual Report on Form 10-K. Management believes that these unaudited interim condensed financial statements contain all adjustments, all of which are of a normal, recurring nature (except as described below), necessary to present fairly the financial position of Holding, and its results of operations and cash flows, for the interim period presented. The results for the interim periods reported are not necessarily indicative of the results for the full fiscal year 1999. Results for the quarter and the nine months ending July 2, 1999 reflect an aggregate $7.6 million in non-recurring charges, of which $6.0 million was charged to cost of goods sold and $1.6 million was charged to general and administrative expenses. These non-recurring charges were principally related to the Company's Traveling Wave Technology (TWT) Division and changes in estimated costs to complete certain customer contracts and the write-off of certain inventory which the Company believes is not realizable. In addition, certain charges for the discontinuation of a Satcom Division product line are reflected. The TWT business, historically conducted as a separate Palo Alto division, is in the process of being integrated into the Company's Microwave Power Products (MPP) Division, also headquartered in Palo Alto. The non-recurring charges also include a provision for severance expenses in connection with the integration of the TWT Division and estimated settlement costs with a customer. The Company is currently involved in a dispute with a customer involving performance and functionality of a particular type of product that is sold to this customer. The parties are presently negotiating a settlement to resolve this matter. The Company has recorded a reserve for the minimum level of its estimate of the range of exposure. The Company's third quarter performance resulted in its failure to meet certain financial covenants contained in the Company's senior bank credit facility. CPI has obtained a limited waiver of the defaults from 100% of its lenders. This waiver is effective until the earlier of October 1, 1999, or the completion of a more comprehensive restructuring amendment to the credit facility. CPI expects to shortly begin working on the terms of such a restructuring amendment with the lenders' representatives. During the quarter ended July 2, 1999, CPI paid preferred stock dividends on its Senior Redeemable Preferred Stock and its Junior Preferred Stock through the issuance of 8,466 additional shares of its Senior Redeemable Preferred Stock and 5,644 shares of its Junior Preferred Stock, respectively. During the nine months ended July 2, 1999, the Company paid preferred dividends through the issuance of 24,549 shares of its Senior Redeemable Preferred Stock and 16,366 shares of its Junior Preferred Stock. At the beginning of fiscal year 1999, CPI completed the acquisition of the Microwave Components Division ("MCD") of Aydin Corporation for approximately $8.9 million with net assets of approximately $2.4 million. The $6.5 million difference between the purchase price and the fair value of the net assets acquired was allocated to goodwill and other intangibles and will be amortized over estimated useful lives ranging from 1 to 15 years. This acquisition was accounted for as a purchase. -12- 14 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries Inventories are stated at the lower of average cost or market (net realizable value). The main components of inventories are as follows: (Dollars in thousands) July 2, October 2, 1999 1998 ------- ------- Raw materials and parts $41,868 $38,327 Work in process 10,796 13,572 Finished goods 2,665 1,024 ------- ------- Total inventories $55,329 $52,923 ======= ======= -13- 15 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Orders during the third quarter of Fiscal 1999 were $65.6 million as compared to $53.4 million for the third quarter of Fiscal 1998, bringing orders for the first nine months of Fiscal 1999 to a level of $180.7 million as compared to $197.2 million during the same time period in Fiscal 1998. This year-to-date decline of $16.5 million, or 8.3%, was primarily due to continued softness from the Company's satellite communications ("satcom") market where orders were down $10.9 million and to order receipt delays from the Company's medical market where orders were down $6.8 million. Order receipts for sole-source medical products have been delayed due to a customer's change from an annual procurement process to a quarterly procurement process but this is not expected to impact shipments. Overall, incoming order levels fluctuate significantly on a quarterly basis and a particular quarter's order rate may not be indicative of future order levels. In addition, the Company's sales are highly dependent upon manufacturing scheduling, performance and shipments and, accordingly, it is not possible to accurately predict when these orders will be recognized as sales. As of July 2, 1999, the Company had order backlog of $156.5 million, representing approximately seven months of sales, compared to order backlog of $168.5 million, or approximately eight months of sales as of July 3, 1998. Sales for the third quarter of Fiscal 1999 were $62.3 million compared to $64.5 million for the same period in Fiscal 1998 and were $187.2 million for the first nine months of Fiscal 1999 compared to $190.6 million during the same time period in Fiscal 1998. The nine month decline of $3.4 million, or 1.8%, is a relatively small decline attributable to the challenging global economic conditions impacting order receipts, but there has been a significant change in product mix. Sales of products to the communications, radar and industrial markets for the first nine months of Fiscal 1999 were down by $7.7 million, $2.5 million and $1.9 million, respectively, compared to the first nine months of Fiscal 1998. The communications market has been unfavorable impacted by softness in demands for satcom products in spite of the Company's recent acquisition (completed in October 1998) of solid state products that added $4.7 million of new sales during the first nine months of Fiscal 1999. The radar market has been impacted slightly by U.S. sanctions against India and the industrial market has been impacted by softness in demands from the semiconductor products. Partially offsetting these declines are increased sales to the electronic countermeasures, scientific and medical markets of $4.4 million, $2.2 million and $2.1 million, respectively. Both electronic countermeasures and scientific sales have been favorably impacted by new product development efforts. Gross profit for the third quarter of Fiscal 1999 was $8.3 million, or 13.3% of sales, compared to $15.7 million, or 24.4% of sales, in the third quarter of Fiscal 1998. Gross profit for the first nine months of Fiscal 1999 was $38.5 million, or 20.6% of sales, compared to $48.4 million, or 25.4% of sales, during the comparable period in Fiscal 1998. This decline of $7.5 million for the third quarter and $9.9 million -14- 16 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) for the nine months ending July 2, 1999 was primarily due to non-recurring charges of $6.0 million (described below). Absent this charge, gross margins were down in Fiscal 1999 compared to Fiscal 1998 due to slightly lower sales volume and shifts in product mix to more technically challenging products in new applications as well as new product introductions that have higher costs. Operating costs and expenses were $13.3 million, or 21.4% of sales, for the third quarter of Fiscal 1999, as compared to $10.0 million, or 15.5%, for the third quarter of Fiscal 1998. Operating costs and expenses for the first nine months of Fiscal 1999 were $35.9 million, or 19.2% of sales, compared to $30.3 million, or 15.9% of sales, for the first nine months of Fiscal 1998. This increase of $3.3 million for the third quarter and $5.5 million for the nine months ending July 2, 1999 was due to non-recurring charges of $1.6 million (described below), higher research and development spending primarily in the satcom product area as well as higher marketing, administrative and amortization costs related to the Company's recent acquisition. Results for the quarter and the nine months ending July 2, 1999 reflect an aggregate $7.6 million in non-recurring charges principally related to the Company's Traveling Wave Technology (TWT) Division and changes in estimated costs to complete certain customer contracts and the write-off of certain inventory which the Company believes is not realizable. In addition, certain charges for the discontinuation of a Satcom Division product line are reflected. The TWT business, historically conducted as a separate Palo Alto division, is in the process of being integrated into the Company's Microwave Power Products (MPP) Division, also headquartered in Palo Alto. The non-recurring charges also include a provision for severance expenses in connection with the integration of the TWT Division and estimated settlement costs with a customer in connection with a product performance dispute. Earnings before interest, income taxes, depreciation and amortization ("EBITDA")(1) for the third quarter of Fiscal 1999 were a negative $1.8 million, or (2.9%) of sales, compared to $8.8 million, or 13.6% of sales, for the third quarter of Fiscal 1998. EBITDA for the first nine months of Fiscal 1999 was $12.2 million, or 6.5% of sales, compared to $26.6 million, or 13.9% of sales, for the same time period in Fiscal 1998. Excluding the non-recurring charges of $7.6 million, EBITDA for the third quarter was $5.8 million, or 9.3% of sales, and $19.8 million, or 10.6% of sales, for the nine months ending July 2, 1999. This decrease in EBITDA of $3.0 million for the third quarter and $6.8 million for the first nine months of Fiscal 1999 was due primarily to shifts in product mix that, because of a number of new product development contracts, have lower margins, higher research and development spending and higher general and administrative costs associated with unfavorable currency fluctuations, information system replacement efforts and adding a new operating division. - -------- (1) EBITDA is presented because some investors may use it as a financial indicator of the ability to service or incur indebtedness. EBITDA should not be considered as an alternative to net earnings (loss), as a measure of operating results, cash flows or liquidity. -15- 17 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) FINANCIAL CONDITION Cash flows provided by operating activities for the first nine months of Fiscal 1999 were $7.8 million, a decrease of $10.8 million from the $18.6 million provided by operating activities during the first nine months of Fiscal 1998. Cash flow decreased due primarily to lower earnings and higher levels of accounts payable payments partially offset by a decrease in operating assets, an increase in accrued liabilities and an increase in advanced payments from customers. Investing activities increased to $15.6 million in the first nine months of Fiscal 1999 compared to $7.1 million in the first nine months of Fiscal 1998. This increase of $8.5 million was due to the acquisition of the Microwave Components Division of Aydin Corporation, which was completed in October 1998, and to slightly higher spending on production equipment. The Company's current primary source of liquidity, other than funds generated from operations, is the $45.0 million revolving credit facility provided under its senior credit agreement (of which $10.3 million was available as of July 30, 1999). In the first nine months of Fiscal 1999, the Company borrowed $19.2 million under this facility to repay $4.8 million of term loans and to complete the acquisition mentioned above. The Company's third quarter performance resulted in its failure to meet certain financial covenants contained in the Company's senior bank credit facility. CPI has obtained a limited waiver of the defaults from 100% of its lenders. This waiver is effective until the earlier of October 1, 1999, or the completion of a more comprehensive restructuring amendment to the credit facility. CPI expects to shortly begin working on the terms of such a restructuring amendment with the lenders' representatives. Among other things, CPI expects that the restructuring amendment will reflect the Company's reduced expectations for financial results in upcoming quarters. Market Risk The Company's market risk disclosures set forth in its Annual Report on Form 10-K for the fiscal year ended October 2, 1998 have not changed significantly. Year 2000 The Company has conducted a comprehensive review of its computer systems and applications to identify systems that could be affected by the "Year 2000" issue and has developed a remediation plan. All systems that are considered to be mission critical have been identified and addressed in this plan. The Company has also reviewed its products, process equipment and facilities systems as part of its overall Year 2000 readiness. The Company's focus is first on products and business critical systems and equipment. Evaluation of products is substantially complete as only a few CPI products contain microprocessors or microcode. To date, no significant problems have been found in existing CPI products. Also, CPI is contacting its suppliers to ensure that they have appropriate plans in place to adequately address the century change issue. CPI's goals for the Year 2000 project are to have all business critical process Year 2000 -16- 18 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) conversions, corrective actions, work arounds and tests completed by October 31, 1999. To date, four of the Company's six Divisions have successfully modified or replaced Enterprise Resource Planning ("ERP") systems. The other two are scheduled to "go-live" on a new ERP system during the next three months. Timely completion of its Year 2000 project is a priority of the Company and the remediation plan, along with the timetable for its completion and budgeted remediation costs, have been approved by the Company's Year 2000 project team, management, and the Board of Directors. Management currently estimates that it will spend approximately $5.6 million primarily through a capital lease program to replace outdated Varian legacy systems. To date, approximately $5.2 million has been incurred. Other remediation efforts include a mix of capital expenditures and operating expense and an estimated $1.5 million is planned for Fiscal 1999. The Company's estimated timetable and budgeted remediation costs are based on assumptions which management believes are reasonable and appropriate. Management is committing and will continue to commit necessary human and financial resources to complete its remediation plans on a timely basis. To date, based on both written and verbal discussions, management has no information that indicates a significant vendor or service provider may be unable to sell goods or provide services to the Company or that any significant customer may be unable to purchase from the Company because of Year 2000 issues. Further, the Company has not received any notifications from regulatory agencies to which it is subject indicating that the Company must achieve compliance by a specific date or significant regulatory action will be taken. The Company presently believes that, with modifications to existing software and conversion to new software, the Year 2000 problem will not pose significant operational problems for the Company's systems as modified and converted. However, if such modifications and conversions are not completed timely, the Year 2000 problem could have a material impact on the operations of the Company. Management is still in the process of developing contingency plans but expects that manual processing procedures to maintain accurate processing of information and data are available. Contingency plans are in process but completion of these plans has been delayed until October 31, 1999 to coincide with converting the last Division to Y2K compliant information systems. Forward-Looking Information Except for historical information, this Management's Discussion and Analysis contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include: product demand and market acceptance risks; the effect of general economic conditions; the impact of competitive products and pricing; new product development and commercialization; technological difficulties and the ability to increase margins; the timing of renewed growth in the Far East; U.S. Government export policies; and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. -17- 19 COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION and subsidiaries COMMUNICATIONS & POWER INDUSTRIES, INC., and subsidiaries (A wholly owned subsidiary of Communications & Power Industries Holding Corporation) PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. See the discussion above under "Management's Discussion and Analysis of Financial Condition and Results of Operation Financial Condition" for a discussion of the Company's senior bank credit facility. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) The following exhibits are being filed as part of this report: 10.1.6 Sixth Amendment to Credit Agreement among CPI, Holding, the other obligors named therein, the lenders named therein and Bankers Trust Company, as Agent, dated as of July 26, 1999. 27.1 Financial Data Schedule (Communications & Power Industries, Inc.) 27.2 Financial Data Schedule (Communications & Power Industries Holding Corporation) (b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter ended July 2, 1999. -18- 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMUNICATIONS & POWER INDUSTRIES, INC. By: /s/ William P. Rutledge ------------------------------------------------ William P. Rutledge Chief Executive Officer and President Date: August 12, 1999 By: /s/ Lynn E. Harvey ------------------------------------------------ Lynn E. Harvey Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) Date: August 12, 1999 -19- 21 INDEX TO EXHIBITS Exhibit Number Description - ------- ------------ 10.1.6 Sixth Amendment to Credit Agreement among CPI, Holding, the other obligors named therein, the lenders named therein and Bankers Trust Company, as Agent, dated as of July 26, 1999. 27.1 Financial Data Schedule (Communications & Power Industries, Inc.) 27.2 Financial Data Schedule (Communications & Power Industries Holding Corporation)