##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended April 1, 2005 or o
    
    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:
333-11387-04 CPI HOLDCO, INC. Delaware   75-3142681   811 Hansen Way
Palo Alto, California 94303-1110
(650) 846-2900
 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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes o No þ 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: 4,275,566 shares of Common Stock, $.01 par value, at May 13, 2005.




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CPI Holdco, Inc.
and Subsidiaries Cautionary Statements Regarding Forward-Looking Statements This document contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, that relate to future events or the future financial performance of CPI Holdco, Inc.
(collectively, with its subsidiaries, the Company). In some cases, readers can identify
forward-looking statements by terminology such as may, will, should, expect, plan,
anticipate, believe, estimate, predict, potential or continue, the negative of such
terms or other comparable terminology. These statements are only predictions. Actual events or
results may differ materially. Although the Company believes that the expectations reflected in the forward-looking statements are
reasonable, the Company cannot guarantee future results, levels of activity, performance or
achievements. Moreover, neither the Company nor any other person assumes responsibility for the
accuracy and completeness of the forward-looking statements. All written and oral forward-looking
statements made in connection with this report that are attributable to the Company or persons
acting on the Companys behalf are expressly qualified in their entirety by the risk factors, and
other cautionary statements included herein and in the other filings with the Securities and
Exchange Commission (SEC) made by the Company and its predecessor, Communications & Power
Industries Holding Corporation. The Company is under no duty to update any of the forward-looking
statements after the date of this report to conform such statements to actual results or to changes
in the Companys expectations. The information in this report is not a complete description of the Companys business or the risks
and uncertainties associated with an investment in the Companys securities. You should carefully
consider the various risks and uncertainties that impact the Companys business and the other
information in this report and the Companys other filings with the SEC before you decide to invest
in the Company or to maintain or increase your investment. Such risks and uncertainties include,
but are not limited to, the following:  
    the Companys indebtedness is substantial;  
    the agreements and instruments governing the Companys debt have restrictions that could limit its flexibility in
operating its business;  
    the Companys ability to generate the significant amount of cash needed to service its debt and to fund capital
expenditures or other liquidity needs depends on many factors beyond its control;  
    the Company has had historical losses;  
    the Company may be unable to retain and/or recruit key management and other personnel;  
    the markets in which the Company sells its products are competitive;  
    the end markets in which the Company operates are subject to technological change;  
    a significant portion of the Companys sales is, and is expected to continue to be, from contracts with the U.S.
Government;  
    the Company generates sales from contracts with foreign governments;  
    the Companys international operations subject it to social, political and economic risks of doing business in foreign
countries;  
    the Company may not be successful in obtaining the necessary export licenses and technical assistance agreements to
conduct operations abroad and the U.S. Congress may prevent proposed sales to foreign customers;  
    the Companys results of operations and financial condition may be adversely affected by increased or unexpected costs
incurred by it on its contracts and sales orders;  
    environmental regulation and legislation, liabilities relating to contamination and changes in the Companys ability to
recover under Varian Medical Systems Inc.s indemnity obligations could adversely affect its business;  
    the Company has only a limited ability to protect its intellectual property rights;  
    the Companys inability to obtain certain necessary raw materials and key components could disrupt the manufacture of
its products and cause its financial condition and results of operations to suffer;  
    the relocation of the Companys San Carlos, California operating division to Palo Alto, California could result in
disruption to the Companys operations;  
    the Company may not be able to timely comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002; and  
    the Company is controlled by affiliates of The Cypress Group L.L.C. Any of the foregoing factors could cause the Companys business, results of operations, or
financial condition to suffer, and actual results could differ materially from those expected. 2




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CPI Holdco, Inc.
and Subsidiaries INDEX PART I: FINANCIAL INFORMATIONITEM 1: UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSCondensed Consolidated Balance Sheets
    
    
    4Condensed Consolidated Statements of Operations and Comprehensive Income
    
    
    5Condensed Consolidated Statements of Cash Flows
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    8ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    28ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    38ITEM 4: CONTROLS AND PROCEDURES
    
    
    38PART II: OTHER INFORMATIONITEM 6: EXHIBITS
    
    
    39SIGNATURES
    
    
    40EXHIBIT 31EXHIBIT 32
  3




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CPI Holdco, Inc.
and Subsidiaries 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands-unaudited) April 1
    
    
    October 1,2005
    
    
    2004AssetsCash and cash equivalents
    
    $
    12,481
    
    
    $
    40,476Restricted cash
    
    
    1,849
    
    
    
    2,279Accounts receivable, net
    
    
    44,602
    
    
    
    35,914Inventories
    
    
    47,229
    
    
    
    38,074Deferred tax assets
    
    
    13,037
    
    
    
    12,285Prepaids and other current assets
    
    
    5,538
    
    
    
    3,796Total current assets
    
    
    124,736
    
    
    
    132,824Property, plant and equipment, net
    
    
    74,691
    
    
    
    70,127Debt issue costs, net
    
    
    11,685
    
    
    
    8,910Intangible assets, net
    
    
    79,168
    
    
    
    78,481Goodwill
    
    
    145,822
    
    
    
    139,614Other long-term assets
    
    
    744
    
    
    
    1,251Total assets
    
    $
    436,846
    
    
    $
    431,207Liabilities and stockholders equityCurrent portion of long-term debt
    
    $
    
    
    
    $
    3,944Accounts payable
    
    
    18,550
    
    
    
    15,790Accrued expenses
    
    
    21,555
    
    
    
    20,939Product warranty
    
    
    5,666
    
    
    
    6,074Income taxes payable
    
    
    2,735
    
    
    
    1,661Advance payments from customers
    
    
    10,975
    
    
    
    12,031Total current liabilities
    
    
    59,481
    
    
    
    60,439Deferred income taxes
    
    
    37,692
    
    
    
    39,118Advance payments from sale of San Carlos property
    
    
    13,450
    
    
    
    13,450Long-term debt
    
    
    284,205
    
    
    
    210,606Total liabilities
    
    
    394,828
    
    
    
    323,613Common stock
    
    
    43
    
    
    
    43Additional paid-in capital
    
    
    28,157
    
    
    
    103,534Accumulated other comprehensive income
    
    
    1,752
    
    
    
    1,369Retained earnings
    
    
    12,066
    
    
    
    2,648Net stockholders equity
    
    
    42,018
    
    
    
    107,594Total liabilities and stockholders equity
    
    $
    436,846
    
    
    $
    431,207
 See accompanying notes to the condensed consolidated financial statements. 4




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CPI Holdco, Inc.
and Subsidiaries 
 CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands - unaudited) Fiscal Year2005
    
    
    200413-Week
    
    
    January 23, 2004
    
    
    
    January 3, 2004Period Ended
    
    
    to
    
    
    
    toApril 1, 2005
    
    
    April 2, 2004
    
    
    
    January 22, 2004(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)Sales
    
    $
    84,463
    
    
    $
    65,641
    
    
    
    $
    11,606Cost of sales
    
    
    55,386
    
    
    
    41,807
    
    
    
    
    9,049Amortization of acquisition-related
inventory write-up
    
    
    
    
    
    
    4,220
    
    
    
    
    Gross profit
    
    
    29,077
    
    
    
    19,614
    
    
    
    
    2,557Operating costs and expenses:Research and development
    
    
    1,858
    
    
    
    1,464
    
    
    
    
    467Selling and marketing
    
    
    4,585
    
    
    
    3,138
    
    
    
    
    728General and administrative
    
    
    5,850
    
    
    
    3,512
    
    
    
    
    2,332Merger expenses
    
    
    
    
    
    
    
    
    
    
    
    5,944Amortization of acquisition-related
intangible assets
    
    
    1,486
    
    
    
    3,396
    
    
    
    
    Acquired in-process research and development
    
    
    
    
    
    
    11,500
    
    
    
    
    Total operating costs and expenses
    
    
    13,779
    
    
    
    23,010
    
    
    
    
    9,471Operating income (loss)
    
    
    15,298
    
    
    
    (3,396
    )
    
    
    
    (6,914
    )Interest expense, net
    
    
    4,732
    
    
    
    2,950
    
    
    
    
    5,343Income (loss) before income taxes
    
    
    10,566
    
    
    
    (6,346
    )
    
    
    
    (12,257
    )Income tax expense (benefit)
    
    
    4,246
    
    
    
    487
    
    
    
    
    (2,848
    )Net income (loss)
    
    
    6,320
    
    
    
    (6,833
    )
    
    
    
    (9,409
    )Preferred dividends:Senior redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    
    2,252Junior preferred stock
    
    
    
    
    
    
    
    
    
    
    
    1,334Net income (loss) attributable to common stock
    
    $
    6,320
    
    
    $
    (6,833
    )
    
    
    $
    (12,995
    )Other comprehensive income, net of tax:Unrealized (loss) gain on cash flow hedges
    
    
    (433
    )
    
    
    365
    
    
    
    
    Comprehensive income (loss)
    
    $
    5,887
    
    
    $
    (6,468
    )
    
    
    $
    (12,995
    )
 See accompanying notes to the condensed consolidated financial statements. 5




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CPI Holdco, Inc.
and Subsidiaries CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands - unaudited) Fiscal Year2005
    
    
    200426-Week
    
    
    January 23, 2004
    
    
    
    October 4, 2003Period Ended
    
    
    to
    
    
    
    toApril 1, 2005
    
    
    April 2, 2004
    
    
    
    January 22, 2004(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)Sales
    
    $
    158,196
    
    
    $
    65,641
    
    
    
    $
    79,919Cost of sales
    
    
    105,064
    
    
    
    41,807
    
    
    
    
    56,189Amortization of acquisition-related
inventory write-up
    
    
    351
    
    
    
    4,220
    
    
    
    
    Gross profit
    
    
    52,781
    
    
    
    19,614
    
    
    
    
    23,730Operating costs and expenses:Research and development
    
    
    3,306
    
    
    
    1,464
    
    
    
    
    2,200Selling and marketing
    
    
    8,653
    
    
    
    3,138
    
    
    
    
    4,352General and administrative
    
    
    9,875
    
    
    
    3,512
    
    
    
    
    6,033Merger expenses
    
    
    
    
    
    
    
    
    
    
    
    6,374Amortization of acquisition-related
intangible assets
    
    
    6,392
    
    
    
    3,396
    
    
    
    
    Acquired in-process research and development
    
    
    
    
    
    
    11,500
    
    
    
    
    Total operating costs and expenses
    
    
    28,226
    
    
    
    23,010
    
    
    
    
    18,959Operating income (loss)
    
    
    24,555
    
    
    
    (3,396
    )
    
    
    
    4,771Interest expense, net
    
    
    8,812
    
    
    
    2,950
    
    
    
    
    8,902Income (loss) before income taxes
    
    
    15,743
    
    
    
    (6,346
    )
    
    
    
    (4,131
    )Income tax expense
    
    
    6,325
    
    
    
    487
    
    
    
    
    439Net income (loss)
    
    
    9,418
    
    
    
    (6,833
    )
    
    
    
    (4,570
    )Preferred dividends:Senior redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    
    3,861Junior preferred stock
    
    
    
    
    
    
    
    
    
    
    
    2,382Net income (loss) attributable to common stock
    
    $
    9,418
    
    
    $
    (6,833
    )
    
    
    $
    (10,813
    )Other comprehensive income, net of tax:Unrealized gain on cash flow hedges
    
    
    383
    
    
    
    365
    
    
    
    
    Comprehensive income (loss)
    
    $
    9,801
    
    
    $
    (6,468
    )
    
    
    $
    (10,813
    )
 See accompanying notes to the condensed consolidated financial statements. 6




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CPI Holdco, Inc.
and Subsidiaries 
 CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands - unaudited) Fiscal Year2005
    
    
    200426-Week
    
    
    January 23, 2004
    
    
    
    October 4, 2003period ended
    
    
    to
    
    
    
    toApril 1, 2005
    
    
    April 2, 2004
    
    
    
    January 22, 2004(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)OPERATING ACTIVITIESNet cash provided by (used in) operating activities
    
    $
    5,247
    
    
    $
    (5,750
    )
    
    
    $
    8,213INVESTING ACTIVITIESExpenses relating to sale of San Carlos property
    
    
    (203
    )
    
    
    
    
    
    
    
    Purchase of Predecessors net assets, net of
cash acquired
    
    
    
    
    
    
    (113,760
    )
    
    
    
    Purchase of Econcos net assets, net of cash acquired
    
    
    (18,685
    )
    
    
    
    
    
    
    
    Purchases of property, plant and equipment
    
    
    (4,428
    )
    
    
    (298
    )
    
    
    
    (459
    )Net cash used in investing activities
    
    
    (23,316
    )
    
    
    (114,058
    )
    
    
    
    (459
    )FINANCING ACTIVITIESRetirement of debt and preferred stock:Senior subordinated notes
    
    
    
    
    
    
    (74,000
    )
    
    
    
    (26,000
    )Senior redeemable preferred stock
    
    

    
    
    
    
    (29,735
    )
    
    
    
    Junior preferred stock
    
    
    
    
    
    
    (32,336
    )
    
    
    
    Dividends on senior preferred stock
    
    
    
    
    
    
    (19,310
    )
    
    
    
    Mortgage financing
    
    
    
    
    
    
    (17,500
    )
    
    
    
    Proceeds from/(payments for) the issuance of debt:Floating rate senior notes
    
    
    79,200
    
    
    
    
    
    
    
    
    Senior subordinated notes
    
    
    
    
    
    
    125,000
    
    
    
    
    Senior term loans
    
    
    
    
    
    
    90,000
    
    
    
    
    Debt issue costs
    
    
    (3,375
    )
    
    
    (9,577
    )
    
    
    
    Repayments on senior term loans
    
    
    (9,550
    )
    
    
    
    
    
    
    
    Proceeds from the repayment of Predecessor
management loans
    
    
    
    
    
    
    1,266
    
    
    
    
    Net proceeds from the issuance of common stock
    
    
    
    
    
    
    98,075
    
    
    
    
    Stockholder distribution payments
    
    
    (75,809
    )
    
    
    
    
    
    
    
    Repayments on capital leases
    
    
    (20
    )
    
    
    
    
    
    
    
    Net (repayments) proceeds from bank overdraft
    
    
    (372
    )
    
    
    1,907
    
    
    
    
    (1,639
    )Net cash (used in) provided by financing activities
    
    
    (9,926
    )
    
    
    133,790
    
    
    
    
    (27,639
    )NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS
    
    
    (27,995
    )
    
    
    13,982
    
    
    
    
    (19,885
    )Cash and cash equivalents at beginning of period
    
    
    40,476
    
    
    
    
    
    
    
    
    33,751Cash and cash equivalents at end of period
    
    $
    12,481
    
    
    $
    13,982
    
    
    
    $
    13,866Supplemental Disclosures of Cash Flow InformationCash paid for interest
    
    $
    7,066
    
    
    $
    5,662
    
    
    
    $
    1,637Cash paid for taxes, net of refunds
    
    $
    7,699
    
    
    $
    168
    
    
    
    $
    2,376Supplemental Disclosures of Non-cash Investing and
Financing ActivitiesDividends on senior preferred stock
    
    $
    
    
    
    $
    
    
    
    
    $
    3,861
 See accompanying notes to the condensed consolidated financial statements. 7




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CPI Holdco, Inc.
and Subsidiaries 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) 1. Basis of Presentation For periods ending prior to January 23, 2004, the accompanying condensed consolidated financial
statements represent the consolidated results and financial position of Communications & Power
Industries Holding Corporation (Holding or the Predecessor). On January 23, 2004, the
Predecessor merged (the Merger) with CPI Merger Sub Corp. (Merger Sub), a wholly-owned
subsidiary of CPI Holdco, Inc. (CPI Holdco or the Successor), a Delaware corporation formerly
known as CPI Acquisition Corp., controlled by affiliates of The Cypress Group L.L.C. (Cypress) as
more fully described in Note 2. As a result of the Merger, the Predecessor became a wholly-owned
subsidiary of CPI Holdco. The financial statements for periods subsequent to January 22, 2004
represent the condensed consolidated financial statements of CPI Holdco after giving effect to the
Merger. References to the Company refer to the Predecessor prior to the Merger and the Successor
post-Merger. CPI Holdcos fiscal years are the 52- or 53-week periods that end on the Friday nearest September
30. The Successors fiscal year did not change from that of the Predecessor. Fiscal year 2005
comprises the 52-week period ending September 30, 2005, and fiscal year 2004 comprised the 52-week
period ended October 1, 2004. Management believes that these unaudited interim condensed consolidated financial statements
contain all adjustments, all of which are of a normal, recurring nature, necessary to present
fairly the financial position of the Company and its results of operations and cash flows for the
interim periods presented. The results for the interim periods reported are not necessarily
indicative of the results for the complete fiscal year 2005. 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 the Companys Annual Report on Form 10-K for the fiscal year
ended October 1, 2004. There is currently no public market for CPI Holdcos common stock. Stock-based Compensation As allowed by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure, the Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Under this method, compensation expense is recorded only
if the current market price of the underlying stock exceeded the exercise price at the measurement
date. All stock options issued by the Successor were issued at, or above, the current market price
of the underlying stock. The Company charges stock-based compensation expense against income under
the caption General and administrative in the Condensed Consolidated Statements of Operations and
Comprehensive Income. In fiscal year 2005, stock-based compensation determined under the intrinsic value-based method was
recorded for performance stock options that vest in fiscal years 2005 through 2008. Stock-based
compensation expense is charged to income over the stock option vesting period that corresponds
with the performance measurement period. Stock-based compensation expense is determined based on an
estimate of the number of performance stock options expected to vest multiplied by the difference
between a) the estimated stock price at the performance measurement date and b) the option exercise
price. The estimated stock price at the performance measurement date was based on the fair value
of CPI Holdcos common stock at the end of the most recent quarter. The Company expects to meet
the performance targets for all outstanding performance stock options. During fiscal year 2003, the Company issued stock options to employees that were subsequently
determined to have been issued below the fair value of the stock on the date of grant. The
compensation cost associated with the 2003 stock options was amortized as a charge against income
on a straight-line basis over the four-year vesting period until the stock options became fully
vested at the time of the Merger. If compensation
cost for the
Companys
stock-based
compensation plan
had been determined
using the fair
value-based method
of accounting ,
then the Companys
net income (loss)
would have changed
to the pro forma
amounts indicated
below (in
thousands): 8




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##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) Fiscal Year2005
    
    
    200413-Week
    
    
    January 23, 2004
    
    
    
    January 3, 2004Period ended
    
    
    to
    
    
    
    toApril 1, 2005
    
    
    April 2, 2004
    
    
    
    January 22, 2004(Successor)
    
    
    (Successor)

    

    (Predecessor)Net income (loss) as reported
    
    $
    6,320
    
    
    $
    (6,833
    )
    
    
    $
    (9,409
    )Add:
    
    Stock-based compensation included
in net income (loss)
determined under intrinsic value-based method,
net of tax
    
    
    387
    
    
    
    
    
    
    
    
    1,195Deduct:
    
    Stock-based compensation determined under fair value-based method, net of tax
    
    
    (187
    )
    
    
    (43
    )
    
    
    
    (24
    )Pro forma net income (loss)
    
    $
    6,520
    
    
    $
    (6,876
    )
    
    
    $
    (8,238
    )
 Fiscal Year2005
    
    
    200426-Week
    
    
    January 23, 2004
    
    

    
    October 4, 2003Period ended
    
    
    to
    
    
    
    toApril 1, 2005
    
    
    April 2, 2004
    
    
    
    January 22, 2004(Successor)
    
    
    (Successor)
    
    (Predecessor)Net income (loss) as reported
    
    $
    9,418
    
    
    $
    (6,833
    )
    
    
    $
    (4,570
    )Add:
    
    Stock-based compensation included in net income (loss) determined under intrinsic
value-based method, net of tax
    
    
    432
    
    
    
    
    
    
    
    
    1,289Deduct:
    
    Stock-based
compensation
determined under
fair value-based
method, net of tax
    
    
    (405
    )
    
    
    (43
    )
    
    
    
    (227
    )Pro forma net income (loss)
    
    $
    9,445
    
    
    $
    (6,876
    )
    
    
    $
    (3,508
    )
 2. Issuance of Floating Rate Senior Notes As more fully described in Note 6 Long-term Debt, on February 22, 2005, the Company issued $80.0
million of Floating Rate Senior Notes due 2015 (the FR Notes). The FR Notes were issued at a 1%
discount; the gross cash proceeds from the issuance of the FR Notes were $79.2 million. The
proceeds from the issuance of FR Notes were used to make a distribution to stockholders of CPI
Holdco of approximately $75.8 million and to pay fees and expenses of approximately $3.4 million
associated with the issuance of FR Notes. The FR Notes require interest payments at an annual interest rate, reset at the beginning of each
semi-annual period, equal to the then six-month LIBOR plus 5.75%, payable semiannually. The Company
may, at its option, elect to pay interest through the issuance of additional FR Notes for any
interest payment date on or after August 1, 2006 and on or before February 1, 2010. If the Company
elects to pay interest through the issuance of additional FR Notes, the annual interest rate on the
FR Notes will increase by an additional 1% increment, with the increment increasing by an
additional 1% for each interest payment made through the issuance of additional FR Notes (up to a
maximum of 4%). 3. Mergers Cypress Merger On January 23, 2004, CPI Holdcos wholly-owned subsidiary, Merger Sub, merged with and into Holding
pursuant to the terms of the Agreement and Plan of Merger (the Merger Agreement), dated as of
November 17, 2003, by and among Holding, CPI Holdco, Merger Sub and Green Equity Investors II,
L.P., as the representative of the security holders of Holding, under which CPI Holdco, Merger
Subs parent corporation and a corporation controlled by affiliates of Cypress, agreed to acquire
Holding. In the Merger, each share of Holdings common stock and stock options outstanding
immediately prior to the Merger, other than a portion of stock options held by certain members of
management (which were converted into options to purchase shares of CPI Holdco) and other than any
shares of common stock owned by Holding or CPI Holdco, were converted into the right to receive a pro rata
portion of the 9




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##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) aggregate merger consideration of $131.7 million. In connection with the Merger, CPI
Holdco received an equity contribution of $100.0 million before expenses from affiliates of Cypress
in exchange for 4,251,122 shares of common stock of CPI Holdco. Members of management of Holding,
as a result of rolling over their options to purchase common stock of Holding, received stock
options to purchase 167,513 shares of common stock of CPI Holdco (Rollover Options). The fair
value of Rollover Options was $5.0 million and was accounted for as Merger purchase price as of
January 23, 2004. Members of Holding management that were residents of Canada received 1,485
stock options to purchase shares of common stock of CPI Holdco as payment of Merger escrow proceeds
in respect of their options to purchase shares of Holding. In connection with the Merger, Holding and Communications & Power Industries, Inc. (CPI)
refinanced all of their outstanding indebtedness. As part of the refinancing, CPI effected a
covenant defeasance of $74.0 million outstanding aggregate principal amount of its 12% Senior
Subordinated Notes (12% Notes) and redeemed the 12% Notes in full, each pursuant to the terms of
the Indenture governing the 12% Notes. In addition, CPI terminated its credit facility, and Holding
paid off all amounts owing under, and terminated, the loan agreement related to its San Carlos
property. CPI also redeemed all of the outstanding shares of its 14% Junior Cumulative Preferred
Stock and its Series B 14% Senior Redeemable Exchangeable Cumulative Preferred Stock. The Merger transaction was accounted for using the purchase method of accounting as required by the
SFAS 141, Business Combinations. Accordingly, the assets acquired and liabilities assumed were
recorded at fair value, and the excess of the purchase price over the fair value of the assets
acquired was recorded as goodwill. The allocation of the purchase price to specific assets and
liabilities was based, in part, upon independent appraisals and internal estimates of cash flow and
recoverability. The following table summarizes the final estimates of fair value of the assets
acquired and liabilities assumed at January 23, 2004 (in thousands): Cash
    
    $
    13,866Accounts receivable
    
    
    29,587Inventory, including $5.5 million of fair value write-up
    
    
    43,608Other current assets
    
    
    3,241Property, plant and equipment
    
    
    70,079Identifiable intangible assets
    
    
    92,160Acquired in-process research and development
    
    
    2,500Goodwill
    
    
    139,614Debt and preferred stock
    
    
    (172,881
    )Deferred tax liabilities, net
    
    
    (33,169
    )Other liabilities
    
    
    (56,934
    )Total
    
    $
    131,671
 The $2.5 million of acquired in-process research and development represents the estimated fair
value of acquired in-process research and development projects that had not yet reached
technological feasibility on January 23, 2004 and had no alternative future use. Accordingly, this
amount was written off at the Merger date. The value assigned to acquired in-process research and
development is related to technology application projects involving development of Vacuum Electron
Devices (VEDs) for communications, scientific and military applications and development of power
supplies, x-ray generators and transmitters for industrial, medical and military applications. The following unaudited pro forma summary presents information as if the Merger had taken place at
the beginning of each period presented. The pro forma amounts include certain adjustments,
including depreciation based on the allocated purchase price of property and equipment,
amortization of finite lived intangible assets acquired, interest expense and taxes. One-time
charges for the inventory write-up, merger expenses, acquired in-process research and development
and backlog amortization, net of applicable taxes, are excluded from the pro forma net income
amounts (in thousands): 10




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##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) 13-Week
    
    
    13-Weekperiod ended
    
    
    period endedApril 1, 2005
    
    
    April 2, 2004Sales
    
    $
    84,463
    
    
    $
    77,247Pro forma net income
    
    $
    6,883
    
    
    $
    6,594
 26-Week
    
    
    26-Weekperiod ended
    
    
    period endedApril 1, 2005
    
    
    April 2, 2004Sales
    
    $
    158,196
    
    
    $
    145,560Pro forma net income
    
    $
    12,599
    
    
    $
    11,420
 Corporate Reorganization On March 12, 2004, Holding was merged with and into its wholly-owned subsidiary, CPI, with CPI as
the surviving corporation (the Intercompany Merger). As a result of the Intercompany Merger, the
corporate structure of the Company and its subsidiaries consists of one parent holding corporation,
CPI Holdco, and all of the obligations of Holding existing prior to the Intercompany Merger became
obligations of CPI. 4. Inventories Inventories are stated at the lower of average cost or market (net realizable value). The main
components of inventories were as follows (in thousands): April 1,
    
    
    October 1,2005
    
    
    2004Raw materials and parts
    
    $
    30,043
    
    
    $
    23,500Work in process
    
    
    11,524
    
    
    
    10,067Finished goods
    
    
    5,662
    
    
    
    4,507Total
    
    $
    47,229
    
    
    $
    38,074
 5. Accrued Warranty The Companys products are generally warranted for a variety of periods, typically one to three
years or a predetermined product usage life. The Company assesses the adequacy of its preexisting
warranty liabilities and adjusts the balance based on actual experience and changes in future
expectations. The following table reconciles the changes in the Companys accrued warranty (in
thousands): Fiscal Year2005
    
    
    200413-Week
    
    
    January 23, 2004
    
    
    
    January 3, 2004Period ended
    
    
    to
    
    
    
    toApril 1, 2005
    
    
    April 2, 2004
    
    
    
    January 22, 2004(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)Beginning accrued warranty
    
    $
    6,064
    
    
    $
    5,839
    
    
    
    $
    6,086Cost of warranty claims
    
    
    (1,735
    )
    
    
    (826
    )
    
    
    
    (269
    )Accruals for product warranty
    
    
    1,337
    
    
    
    876
    
    
    
    
    22Ending accrued warranty
    
    $
    5,666
    
    
    $
    5,889
    
    
    
    $
    5,839
 11




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##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) Fiscal Year2005
    
    
    200426-Week
    
    
    January 23, 2004
    
    
    
    October 4, 2003Period ended
    
    
    to
    
    
    
    toApril 1, 2005
    
    
    April 2, 2004
    
    
    
    January 22, 2004(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)Beginning accrued warranty
    
    $
    6,074
    
    
    $
    5,839
    
    
    
    $
    5,401Amount acquired from Econco
    
    
    112
    
    
    
    
    
    
    
    
    Cost of warranty claims
    
    
    (2,476
    )
    
    
    (826
    )
    
    
    
    (1,241
    )Accruals for product warranty
    
    
    1,956
    
    
    
    876
    
    
    
    
    1,679Ending accrued warranty
    
    $
    5,666
    
    
    $
    5,889
    
    
    
    $
    5,839
 6. Long-Term Debt Long-term debt comprises the following (in thousands): April 1, 2005
    
    
    October 1, 2004Term loan, expiring 2010
    
    $
    80,000
    
    
    $
    89,5508% Senior subordinated notes, due 2012
    
    
    125,000
    
    
    
    125,000Floating rate senior notes, due 2015, net
of issue discount of $795
    
    
    79,205
    
    
    
    284,205
    
    
    
    214,550Less: Current portion
    
    
    
    
    
    
    3,944$
    284,205
    
    
    $
    210,606
 Senior Credit Facility In connection with the Merger, CPI entered into a $130.0 million credit agreement (the Senior
Credit Facility), which was amended and restated on November 29, 2004, and further amended on
February 16, 2005 and April 13, 2005. The Senior Credit Facility consists of a $40.0 million
revolving commitment, with a sub-facility of $15.0 million for letters of credit and $5.0 million
for swingline loans (Revolver), which expires on January 23, 2010, and an original $90.0 million
term loan (Term Loan), which expires on July 23, 2010, of which $80.0 million was outstanding as
of April 1, 2005. The Senior Credit Facility is guaranteed by CPI Holdco and all of CPIs domestic
subsidiaries and is secured by substantially all of their assets. The Senior Credit
Facility provides that upon specified conditions, CPI may seek commitments for a new class of term
loans, not to exceed $75 million. The Revolver borrowings currently bear interest at a rate equal to LIBOR plus 2.75% per annum or
the Alternate Base Rate (ABR) plus 1.75% per annum. The Term Loan borrowings currently bear
interest at a rate equal to LIBOR plus 2.25% per annum or the ABR plus 1.25% per annum. The ABR is
the greater of (a) the Prime Rate and (b) the Federal Funds Rate plus 0.50%. As of April 1, 2005,
the Term Loan borrowings comprises two interest rates on $40 million each; the first rate is
payable on May 11, 2005 at 5.03% per annum and the second rate is payable on August 11, 2005 at
5.25% per annum. In addition to customary fronting and administrative fees under the Senior Credit
Facility, CPI pays letter of credit participation fees equal to the applicable Revolver LIBOR
margin per annum on the average daily amount of the letter of credit exposure, and a commitment fee
of 0.50% per annum on the average daily unused amount of revolving commitment. As of April 1, 2005, CPI was in compliance with all Senior Credit Facility financial covenants. The Term Loan requires 1.0% of the loan amount to be repaid annually in quarterly installments of
0.25% beginning June 30, 2004 and continuing for five years, with the remainder due in equal
quarterly installments thereafter. The Term Loan also requires an annual prepayment to be made
within 90 days after the end of the fiscal year based on a calculation of Excess Cash Flow (ECF),
as defined in the Senior Credit Facility, multiplied by a factor of 25%, 50% or 75% depending on
the leverage ratio at the end of the fiscal year, less optional prepayments made during the fiscal
year. On December 30, 2004, CPI made an ECF payment of $3.9 million. The ECF payment is applied
pro rata, in accordance with the provisions of the Term Loan, against the remaining scheduled
installments of principal due up to, but not including, the September 30, 2009 scheduled principal
installment. On March 30, 2005, CPI made an optional prepayment of $5.7 million, in addition to
the quarterly scheduled amortization payment. The optional prepayment was applied pro rata, in
accordance with the 12




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##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) provisions of the Term Loan, against the remaining scheduled installments of
principal due up to June 30, 2009, with the balance applied to the September 30, 2009 installment.
Based on a forecasted calculation of ECF, CPI does not anticipate that it will be required to make
an ECF payment for the fiscal year ending September 30, 2005. On February 16, 2005, in connection with the offering of the $80 million FR Notes, CPI Holdco and
its wholly owned subsidiary, CPI, entered into Amendment No.1 of the Senior Credit Facility.
Amendment No.1 permitted CPI Holdco to
consummate the offering of the FR Notes. In addition, among other things, Amendment No.1 (1)
permits (subject to certain conditions) CPI to pay dividends to CPI Holdco to fund cash interest
payments on the FR Notes, (2) amends the definition of Excess Cash Flow in CPIs credit facility to
decrease Excess Cash Flow by the amount of dividends paid by CPI to CPI Holdco to fund cash
interest payments on the FR Notes, (3) subjects CPI Holdco to minimum interest coverage ratio,
minimum fixed charge coverage ratio and maximum leverage ratio financial maintenance covenants,
calculated on a consolidated basis for CPI Holdco and its subsidiaries and (4) permits CPI to pay
up to $1.0 million annually in management fees to The Cypress Group L.L.C. and its affiliates
(subject to certain conditions), in each case, subject to the qualifications set forth in the
Amendment. On April 13, 2005, CPI Holdco and its wholly owned subsidiary, CPI, entered into Amendment No. 2 of
the Senior Credit Facility. Amendment No. 2 permits CPI Holdco to enter into agreements to hedge
its interest rate exposure with respect to CPI Holdcos $80 million FR Notes and provide cash
collateral to the hedging counterparty to secure its obligations under any such hedging agreement.
The agreement also permits, among other things, CPI to pay cash dividends to CPI Holdco to allow
CPI Holdco to satisfy its obligations under any such hedge agreement. 8% Senior Subordinated Notes In connection with the Merger, CPI issued an aggregate principal amount of $125.0 million of its 8%
Senior Subordinated Notes due 2012 (8% Notes), which will mature in their entirety on February 1,
2012; there are no sinking fund requirements. CPI is required to pay interest on the 8% Notes
semiannually, beginning on August 1, 2004. Floating Rate Senior Notes On February 22, 2005, CPI Holdco issued $80.0 million of FR Notes with a 1% discount. There are no
sinking fund requirements associated with the FR Notes which will mature in their entirety on
February 1, 2015. The FR Notes require interest payments at an annual interest rate, reset at the
beginning of each semi-annual period, equal to the then six-month LIBOR plus 5.75%, payable
semiannually, beginning on August 1, 2005. CPI Holdco may, at its option, elect to pay interest
through the issuance of additional FR Notes for any interest payment date on or after August 1,
2006 and on or before February 1, 2010. If CPI Holdco elects to pay interest through the issuance
of additional FR Notes, the annual interest rate on the FR Notes will increase by an additional 1%
step-up, with the step-up increasing by an additional 1% for each interest payment made through the
issuance of additional FR Notes (up to a maximum of 4%). The FR Notes are general unsecured obligations of CPI Holdco. The FR Notes are not guaranteed by
any of CPI Holdcos subsidiaries and are structurally subordinated to all existing and future
indebtedness and other liabilities of CPI Holdcos subsidiaries. The FR Notes are senior in right
of payment to CPI Holdcos existing and future indebtedness that is expressly subordinated to the
FR Notes. The indenture governing the FR Notes (the FR Indenture) contains certain covenants
that, among other things, limit the ability of CPI Holdco and its restricted subsidiaries (as
defined in the FR Indenture) to incur additional indebtedness, sell assets, consolidate or merge
with or into other companies, pay dividends or repurchase or redeem capital stock, make certain
investments, issue capital stock of their subsidiaries, incur liens and enter into certain types of
transactions with their affiliates. In addition, the FR Indenture provides that upon a change of
control (as defined in the FR Indenture), subject to certain conditions and restrictions, the
holders of the FR Notes will be entitled to require CPI Holdco to purchase all or a portion of
their FR Notes at a purchase price equal to 101% the principal amount of the FR Notes, plus accrued
and unpaid interest. At any time or from time to time prior to February 1, 2007, CPI Holdco, at its option, may redeem
the FR Notes at a make whole premium, plus accrued and unpaid interest to the date of redemption.
At any time or from time to time after February 1, 2007, CPI Holdco, at its option, may redeem the
FR Notes in whole or in part at the redemption prices (expressed as percentages of principal
amount) set forth below, in each case, plus accrued and unpaid interest to the date of redemption,
if redeemed during the 12-month period beginning on February 1 of the years indicated: 13




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##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) Optional RedemptionDates
    
    Prices2007
    
    
    103
    %2008
    
    
    102
    %2009
    
    
    101
    %2010 and thereafter
    
    
    100
    %
 At any time or from time to time prior to February 1, 2007, and subject to certain conditions, CPI
Holdco, at its option, may redeem up to 35% of the aggregate principal amount of the FR Notes at a
redemption price equal to 100% of the principal amount of the FR Notes to be redeemed, plus a
premium equal to the interest rate per annum on the FR Notes
applicable on the date on which the notice of redemption is given, plus accrued and unpaid interest
to the date of redemption, with the net cash proceeds of one or more qualified equity offerings. Events of default under the FR Indenture include (1) failure to make payments on the FR Notes when
due, (2) failure to comply with covenants in the FR Indenture, (3) failure to pay other
indebtedness of CPI Holdco or any of its restricted subsidiaries in an aggregate amount of $25
million or more, or any default under such indebtedness resulting in the acceleration of the
maturity of such indebtedness or commencement of judicial proceedings to foreclose upon or to
exercise remedies to take ownership of any assets securing such indebtedness, (4) failure to pay or
discharge any final judgment in excess of $25 million (net of insurance) that has not been
satisfied, stayed, annulled or rescinded within 60 days of having been entered against CPI Holdco
or any of the restricted subsidiaries, and (5) the occurrence of certain insolvency events. On April 7, 2005, the Company filed a registration statement on Form S-4 with the Securities and
Exchange Commission to offer to exchange all outstanding FR Notes due 2015 for FR Notes due 2015
that have been registered under the Securities Act of 1933, as amended. 7. Financial Instruments The Company continues to use forward exchange contracts to address the foreign currency risk
associated with anticipated manufacturing costs in Canada. As of April 1, 2005, CPI had
outstanding forward contract commitments to purchase Canadian dollars for an aggregate U.S.
notional amount of $25.1 million; the last forward contract expires on March 10, 2006. The
Companys foreign currency forward contracts are designated as a cash flow hedge and are considered
highly effective, as defined by SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. At April 1, 2005, the fair value of unrealized foreign currency forward contracts was
$2.7 million and the unrealized gain was approximately $1.5 million, net of related tax expense.
The unrealized gains from these forward contracts are included in Accumulated Other Comprehensive
Income in the Condensed Consolidated Balance Sheet, and the Company anticipates recognizing the
entire unrealized gain in operating earnings within the next twelve months. In April 2005, the Company expanded its use of derivatives to address the interest rate risk
associated with the recently issued FR Notes. On April 15, 2005, the Company entered into an $80
million interest rate swap contract (the Swap) to receive variable rate 6-month LIBOR interest
and pay 4.15% fixed rate interest. The Swap is for semi-annual interest payments, beginning with
interest payments due on February 1, 2006, and the contract matures on January 31, 2008. The Swap
is designated as a cash flow hedge under SFAS No. 133 and the gain and loss from changes in fair
value is expected to be highly effective at offsetting the gain or loss from changes in fair value
of the FR Notes attributable to changes in interest rates over the contract period. 8. Segments and Related Information The Company has two reportable segments: VEDs and satcom equipment. Management evaluates
performance and allocates resources based on earnings before provision for interest expense, income
taxes, depreciation and amortization (EBITDA). Summarized financial information concerning the Companys reportable segments is shown in the
following table (in thousands): 14




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##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) Fiscal Year
    
    
    Fiscal Year2005
    
    
    200413-Week
    
    
    January 23, 2004
    
    
    
    January 3, 2004Period ended
    
    
    to
    
    
    
    toApril 1, 2005
    
    
    April 2, 2004
    
    
    
    January 22, 2004(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)Revenues from external customersVEDs
    
    $
    68,675
    
    
    $
    55,962
    
    
    
    $
    10,544Satcom equipment
    
    
    15,788
    
    
    
    9,679
    
    
    
    
    1,062Total
    
    $
    84,463
    
    
    $
    65,641
    
    
    
    $
    11,606Intersegment product transfersVEDs
    
    $
    7,032
    
    
    $
    3,588
    
    
    
    $
    777Satcom equipment
    
    
    11
    
    
    
    18
    
    
    
    
    Total
    
    $
    7,043
    
    
    $
    3,606
    
    
    
    $
    777EBITDAVEDs
    
    $
    19,345
    
    
    $
    17,851
    
    
    
    $
    1,496Satcom equipment
    
    
    2,411
    
    
    
    958
    
    
    
    
    (457
    )Other
    
    
    (3,308
    )
    
    
    (17,787
    )
    
    
    
    (7,599
    )Total
    
    $
    18,448
    
    
    $
    1,022
    
    
    
    $
    (6,560
    )
 Fiscal Year
    
    
    Fiscal Year2005
    
    
    200426-Week
    
    
    January 23, 2004
    
    
    
    October 4, 2003Period ended
    
    
    to
    
    
    
    toApril 1, 2005
    
    
    April 2, 2004
    
    
    
    January 22, 2004(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)Revenues from
external customersVEDs
    
    $
    130,943
    
    
    $
    55,962
    
    
    
    $
    69,048Satcom equipment
    
    
    27,253
    
    
    
    9,679
    
    
    
    
    10,871Total
    
    $
    158,196
    
    
    $
    65,641
    
    
    
    $
    79,919Intersegment
product transfersVEDs
    
    $
    12,784
    
    
    $
    3,588
    
    
    
    $
    4,070Satcom equipment
    
    
    13
    
    
    
    18
    
    
    
    
    Total
    
    $
    12,797
    
    
    $
    3,606
    
    
    
    $
    4,070EBITDAVEDs
    
    $
    35,887
    
    
    $
    17,851
    
    
    
    $
    15,889Satcom equipment
    
    
    3,789
    
    
    
    958
    
    
    
    
    (229
    )Other
    
    
    (5,752
    )
    
    
    (17,787
    )
    
    
    
    (9,111
    )Total
    
    $
    33,924
    
    
    $
    1,022
    
    
    
    $
    6,549
 Included in the Other category of EBITDA are unallocated corporate operating expenses and
amortization of acquisition-related inventory write-up. Intersegment product transfers are
recorded at cost. EBITDA represents earnings before interest expense, provision for income taxes, depreciation and
amortization. EBITDA is presented because the Company believes that EBITDA is used by some
investors as a financial indicator of a companys ability to service indebtedness. While
management considers EBITDA to be an important measure of comparative operating performance, it
should be considered in addition to, but not as a substitute for or superior to, operating income,
net earnings (loss), cash flow and other measures of financial performance prepared in accordance
with accounting principles generally accepted in the United States. EBITDA does not reflect cash
available to fund cash requirements, and the items excluded from EBITDA, such as depreciation and
amortization, are significant components in assessing the Companys financial performance. Other
significant uses of cash flows are required before cash will be available to the Company including
debt service, taxes and cash expenditures for various long-term assets. The Companys calculation
of EBITDA may be different from the calculation used by other companies and, therefore,
comparability may be limited. A reconciliation of EBITDA from reportable segments to income before
taxes is as follows (in thousands): 15




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##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) Fiscal Year2005
    
    
    200413-Week
    
    
    January 23, 2004
    
    
    
    January 3, 2004Period ended
    
    
    to
    
    
    
    toApril 1, 2005
    
    
    April 2, 2004
    
    
    
    January 22, 2004(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)EBITDA
    
    $
    18,448
    
    
    $
    1,022
    
    
    
    $
    (6,560
    )Less:Depreciation and amortization
    
    
    3,150
    
    
    
    4,418
    
    
    
    
    354Interest expense, net
    
    
    4,732
    
    
    
    2,950
    
    
    
    
    5,343Income (loss) before income taxes
    
    $
    10,566
    
    
    $
    (6,346
    )
    
    
    $
    (12,257
    )
 Fiscal Year2005
    
    
    200426-Week
    
    
    January 23, 2004
    
    
    
    October 4, 2003Period ended
    
    
    to
    
    
    
    toApril 1, 2005
    
    
    April 2, 2004
    
    
    
    January 22, 2004(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)EBITDA
    
    $
    33,924
    
    
    $
    1,022
    
    
    
    $
    6,549Less:Depreciation and amortization
    
    
    9,369
    
    
    
    4,418
    
    
    
    
    1,778Interest expense, net
    
    
    8,812
    
    
    
    2,950
    
    
    
    
    8,902Income (loss) before income taxes
    
    $
    15,743
    
    
    $
    (6,346
    )
    
    
    $
    (4,131
    )
 Sales by geographic area to unaffiliated customers (based on the location of customer) were as
follows (in thousands): Fiscal Year2005
    
    
    200413-Week
    
    
    January 23, 2004
    
    
    
    January 3, 2004Period ended
    
    
    to
    
    
    
    toApril 1, 2005
    
    
    April 2, 2004
    
    
    
    January 22, 2004(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)United States
    
    $
    55,845
    
    
    $
    47,400
    
    
    
    $
    7,657All foreign countries
    
    
    28,618
    
    
    
    18,241
    
    
    
    
    3,949Total sales
    
    $
    84,463
    
    
    $
    65,641
    
    
    
    $
    11,606
 Fiscal Year2005
    
    
    200426-Week
    
    
    January 23, 2004
    
    
    
    October 4, 2003Period ended
    
    
    to
    
    
    
    toApril 1, 2005
    
    
    April 2, 2004
    
    
    
    January 22, 2004(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)United States
    
    $
    106,478
    
    
    $
    47,400
    
    
    
    $
    52,417All foreign countries
    
    
    51,718
    
    
    
    18,241
    
    
    
    
    27,502Total sales
    
    $
    158,196
    
    
    $
    65,641
    
    
    
    $
    79,919
 The Company had one customer, the United States Government, that accounted for 10% or more of
consolidated sales. Sales to this customer were $16.0 million, $13.8 million and $2.0 million of
the Companys consolidated sales for the 13-week period ended April 1, 2005, the period from
January 23, 2004 to April 2, 2004, and the period from January 3, 2004 to January 22, 2004,
respectively. Sales to this customer were $29.6 million, $13.8 million and $17.0 million of the
Companys consolidated sales for the 26-week period ended April 1, 2005, the period from January
23, 2004 to April 2, 2004, and the period from October 4, 2003 to January 22, 2004, respectively.
A substantial majority of these sales were VED segment products, but this customer also purchased
satcom equipment products. 16




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##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) 9.Goodwill and Other Intangible Assets Goodwill The following table presents the changes in goodwill by reportable segment during the six months
ended April 1, 2005 (in thousands): October 1,
    
    
    
    
    
    
    April 1,2004
    
    
    Acquired
    
    
    2005VEDs
    
    $
    125,769
    
    
    $
    6,208
    
    
    $
    131,977Satcom Equipment
    
    
    13,845
    
    
    
    
    
    
    
    13,845Total
    
    $
    139,614
    
    
    $
    6,208
    
    
    $
    145,822
 As more fully described in Note 10 Econco Acquisition, goodwill acquired is comprised of the
excess of the purchase price for Econco Broadcast Service, Inc. over the fair value of the assets
acquired. Intangible Assets The following table presents the details of the Companys total purchased intangible assets (in
thousands): AccumulatedApril 1, 2005
    
    Cost
    
    
    Amortization
    
    
    NetTechnology
    
    $
    58,500
    
    
    $
    (2,319
    )
    
    $
    56,181Customer backlog
    
    
    17,450
    
    
    
    (17,450
    )
    
    
    Land lease
    
    
    11,810
    
    
    
    (313
    )
    
    
    11,497Trade name
    
    
    5,800
    
    
    
    
    
    
    
    5,800Customer list and programs
    
    
    5,700
    
    
    
    (103
    )
    
    
    5,597Noncompete agreement
    
    
    110
    
    
    
    (17
    )
    
    
    93Net identifiable intangible assets
    
    $
    99,370
    
    
    $
    (20,202
    )
    
    $
    79,168
 AccumulatedOctober 1, 2004
    
    Cost
    
    
    Amortization
    
    
    NetTechnology
    
    $
    58,500
    
    
    $
    (1,350
    )
    
    $
    57,150Customer backlog
    
    
    17,450
    
    
    
    (12,148
    )
    
    
    5,302Land lease
    
    
    11,810
    
    
    
    (181
    )
    
    
    11,629Trade name
    
    
    4,400
    
    
    
    
    
    
    
    4,400Net identifiable intangible assets
    
    $
    92,160
    
    
    $
    (13,679
    )
    
    $
    78,481
 The estimated future amortization expense of purchased intangibles as of April 1, 2005 was as
follows (in thousands): Fiscal Year
    
    Amount2005 (remaining six months)
    
    $
    1,2262006
    
    
    2,4522007
    
    
    2,4522008
    
    
    2,4522009
    
    
    2,452Thereafter
    
    
    68,134Total
    
    $
    79,168
 10.Econco Acquisition On October 8, 2004, the Company purchased all of the outstanding stock of Econco Broadcast Service,
Inc. (Econco) of Woodland, California for cash consideration of approximately $18.7 million.
Econco is a provider of rebuilding service for VEDs, allowing broadcasters and other users of these
critical products to extend the life of their devices at a cost that is lower than buying a new
VED. In addition, under the Econco purchase agreement, the Company is required to reimburse 17




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##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) the
selling shareholders of Econco for certain costs associated with a tax election to treat the
transaction as an asset sale. As of April 1, 2005, the Condensed Consolidated Balance Sheet
reflects an accrued liability of $0.5 million, which is the estimated amount of this reimbursement.
The estimated payment associated with the tax election has been accounted for as additional
purchase price and is subject to change as a result of obtaining additional information regarding
the actual payment to be made. For segment reporting, Econco is included in the VED segment. The Econco acquisition was accounted for using the purchase method of accounting as required by
FASB Statement No. 141, Business Combinations. Accordingly, the assets and liabilities of Econco
were adjusted to their fair values and the excess of the purchase price over the fair value of the
assets acquired was recorded as goodwill. The allocation of the purchase price to specific assets
and liabilities was based, in part, upon independent appraisals and internal estimates of cash
flow and recoverability. The following table summarizes the preliminary estimates of fair value of
the Econco assets acquired and liabilities assumed (in thousands): Cash
    
    $
    21Accounts receivable
    
    
    1,346Inventory, including $351 of fair value write-up
    
    
    1,919Property, plant and equipment
    
    
    3,239Identifiable intangible assets
    
    
    7,210Goodwill
    
    
    6,208Current liabilities
    
    
    (1,237
    )Total
    
    $
    18,706
 The following table presents details of the purchased intangible assets acquired (dollars in
thousands): EstimatedUseful Life
    
    AmountNon-compete agreement
    
    5 years
    
    $
    110Tradename
    
    indefinite
    
    
    1,400Customer list and program
    
    25 years
    
    
    5,700Total
    
    
    
    $
    7,210
 The Condensed Consolidated Financial Statements include Econcos financial results from the
acquisition date. Pro forma results of operations have not been presented because the effect of
the Econco acquisition was not material to the Companys results. 11. Stockholders Equity As more fully described in Note 2, in February 2005, the Board of Directors declared a special cash
distribution to stockholders of approximately $75.8 million which was essentially a return of
capital. The special cash distribution was made on the basis of the stockholders relative
ownership in CPI Holdcos outstanding common stock with the proceeds from the FR Notes of $80
million. As a result of the special cash distribution to stockholders, CPI Holdco adjusted the options
outstanding under the Predecessors 2000 Stock Option Plan and CPI Holdcos 2004 Stock Incentive
Plan pursuant to the terms of those plans to reflect the distribution made to the stockholders of
CPI Holdco. As a result of these adjustments, the exercise price of the options outstanding under
these plans was adjusted by dividing the prior exercise price of such options by 1.781, the number
of shares issuable upon exercise of those options was adjusted by multiplying the number of shares
previously issuable pursuant to the options by 1.781, and the total number of shares reserved for
issuance under each such plan was also increased by a factor of 1.781. These adjustments increased
the number of options outstanding from approximately 526,000 to 937,000 and reduced the range of
exercise prices of the options outstanding from $1.10 to $36.00 down to $0.62 to $20.21. In accordance with FASB Interpretation 44, Accounting for Certain Transactions involving Stock
Compensation, the Company determined that there were no accounting consequences for the
adjustments made to the number of options issued and exercise prices. It was determined that the
aggregate intrinsic value of the stock options immediately after the adjustment was not greater
that aggregate intrinsic value of the stock options immediately before the adjustment and the ratio
of exercise price per share to the market value was not reduced. 18




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##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) 12. Recent Accounting Pronouncements In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-01, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF
03-01). EITF 03-01 provides guidance on other-than-temporary impairment models for marketable debt
and equity securities accounted for under SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities and non-marketable equity securities accounted for under the cost method.
The EITF developed a basic three-step model to evaluate whether an investment is
other-than-temporarily impaired. The Financial Accounting Standards Board (FASB) issued EITF
03-01-1 in September 2004, which delayed the effective date of the recognition and measurement
provisions of EITF 03-01. The Company does not
expect the adoption of EITF 03-01 to have a material impact on our results of operations or
financial condition. In November 2004, the FASB issued SFAS No. 151, Inventory Costsan amendment of ARB No. 43,
Chapter 4, which is the result of the FASBs project to reduce differences between U.S. and
international accounting standards. SFAS No. 151 requires idle facility costs, abnormal freight,
handling costs, and amounts of wasted materials (spoilage) be treated as current-period costs.
Under this concept, if the costs associated with the actual level of spoilage or production defects
are greater than the costs associated with the range of normal spoilage or defects, the difference
would be charged to current-period expense, not included in inventory costs. SFAS No. 151 will be
effective for inventory costs incurred during fiscal years beginning after June 15, 2005, or for
our fiscal year 2006. The Company has not yet determined the impact of applying the provisions of
SFAS No. 151. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets  An amendment of
APB Opinion No. 29, which eliminates the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary assets that do not
have commercial substance. The Company is required to adopt SFAS No. 153 for nonmonetary asset
exchanges occurring in the first quarter of 2006 and its adoption is not expected to have a
significant impact on the results of operations or financial condition. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No.
123R). SFAS No. 123R requires companies to recognize in the income statement the grant-date fair
value of stock options and other equity-based compensation issued to employees, but expresses no
preference for a type of valuation model. SFAS No. 123R eliminates the intrinsic value-based method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, that the Company currently uses. SFAS No. 123R requires
the Company to adopt the new accounting provisions beginning in the first annual reporting period
that begins after December 15, 2005, or for our fiscal year 2007, as a nonpublic entity as defined
by SFAS No. 123R. The Company has not yet determined the impact of applying the provisions of SFAS
No. 123R. In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations, which clarifies that an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair value can be reasonably estimated
even though uncertainty exists about the timing and (or) method of settlement. The Company is
required to adopt Interpretation No. 47 by the end of 2006. The Company has not yet determined the
impact of applying the provisions of Interpretation No. 47. 13.Supplemental Guarantors Condensed Consolidating Financial Information (Unaudited) On January 23, 2004, CPI issued $125.0 million of 8% Notes that are guaranteed by CPI Holdco and
all of CPIs domestic subsidiaries. Separate financial statements of the guarantors are not
presented because (i) the guarantors are wholly-owned and have fully and unconditionally guaranteed
the 8% Notes on a joint and several basis, and (ii) the Companys management has determined that
such separate financial statements are not material to investors. Instead, presented below are the
consolidating condensed financial statements of: (a) the parent, CPI Holdco or Holding, (b) the
issuer, CPI, (c) the guarantor subsidiaries, our domestic subsidiaries (d) the non-guarantor
subsidiaries, (e) the consolidating elimination entries, and (f) the consolidated total. The
Predecessor parent is Holding while the Successor parent is CPI Holdco. The accompanying
consolidating condensed financial statements should be read in connection with the consolidated
financial statements of CPI Holdco. Investments in subsidiaries are accounted for on the equity method. The principal elimination
entries eliminate investments in subsidiaries, intercompany balances, intercompany transactions and
intercompany sales. 19




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##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) CONDENSED CONSOLIDATING BALANCE SHEET
As of April 1, 2005 (Successor)
(in thousands) Parent(CPI
    
    
    Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedHoldco)
    
    
    (CPI)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalAssetsCash and cash equivalents
    
    $
    243
    
    
    
    10,799
    
    
    
    278
    
    
    
    1,161
    
    
    
    
    
    
    
    12,481Restricted cash
    
    
    
    
    
    
    
    
    
    
    1,738
    
    
    
    111
    
    
    
    
    
    
    
    1,849Accounts receivable, net
    
    
    
    
    
    
    23,748
    
    
    
    6,811
    
    
    
    14,043
    
    
    
    
    
    
    
    44,602Inventories
    
    
    
    
    
    
    31,409
    
    
    
    1,544
    
    
    
    14,276
    
    
    
    
    
    
    
    47,229Deferred tax assets
    
    
    
    
    
    
    13,000
    
    
    
    
    
    
    
    37
    
    
    
    
    
    
    
    13,037Prepaids and other current assets
    
    
    
    
    
    
    4,166
    
    
    
    405
    
    
    
    967
    
    
    
    
    
    
    
    5,538Intercompany receivable
    
    
    
    
    
    
    29,066
    
    
    
    
    
    
    
    
    
    
    
    (29,066
    )
    
    
    Total current assets
    
    
    243
    
    
    
    112,188
    
    
    
    10,776
    
    
    
    30,595
    
    
    
    (29,066
    )
    
    
    124,736Property, plant and equipment, net
    
    
    
    
    
    
    63,549
    
    
    
    3,200
    
    
    
    7,942
    
    
    
    
    
    
    
    74,691Debt issue costs, net
    
    
    3,354
    
    
    
    8,331
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,685Intangible assets, net
    
    
    
    
    
    
    62,299
    
    
    
    7,090
    
    
    
    9,779
    
    
    
    
    
    
    
    79,168Goodwill
    
    
    
    
    
    
    92,041
    
    
    
    6,208
    
    
    
    47,573
    
    
    
    
    
    
    
    145,822Other long term assets
    
    
    
    
    
    
    744
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    744Intercompany notes receivable
    
    
    
    
    
    
    9,535
    
    
    
    
    
    
    
    
    
    
    
    (9,535
    )
    
    
    Investment in subsidiaries
    
    
    146,408
    
    
    
    44,835
    
    
    
    
    
    
    
    
    
    
    
    (191,243
    )
    
    
    Total assets
    
    $
    150,005
    
    
    
    393,522
    
    
    
    27,274
    
    
    
    95,889
    
    
    
    (229,844
    )
    
    
    436,846Liabilities and stockholders equityCurrent portion of long-term debt
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accounts payable
    
    
    
    
    
    
    11,752
    
    
    
    342
    
    
    
    6,456
    
    
    
    
    
    
    
    18,550Accrued expenses
    
    
    1,012
    
    
    
    16,330
    
    
    
    1,058
    
    
    
    3,155
    
    
    
    
    
    
    
    21,555Product warranty
    
    
    
    
    
    
    3,236
    
    
    
    112
    
    
    
    2,318
    
    
    
    
    
    
    
    5,666Income taxes payable
    
    
    
    
    
    
    221
    
    
    
    201
    
    
    
    2,313
    
    
    
    
    
    
    
    2,735Advance payments from customers
    
    
    
    
    
    
    5,677
    
    
    
    1,494
    
    
    
    3,804
    
    
    
    
    
    
    
    10,975Intercompany payable
    
    
    27,770
    
    
    
    
    
    
    
    396
    
    
    
    900
    
    
    
    (29,066
    )
    
    
    Total current liabilities
    
    
    28,782
    
    
    
    37,216
    
    
    
    3,603
    
    
    
    18,946
    
    
    
    (29,066
    )
    
    
    59,481Deferred income taxes
    
    
    
    
    
    
    31,836
    
    
    
    
    
    
    
    5,856
    
    
    
    
    
    
    
    37,692Advance payments from sale of
San Carlos property
    
    
    
    
    
    
    13,450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,450Long-term debt
    
    
    79,205
    
    
    
    205,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    284,205Intercompany notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,535
    
    
    
    (9,535
    )
    
    
    Total liabilities
    
    
    107,987
    
    
    
    287,502
    
    
    
    3,603
    
    
    
    34,337
    
    
    
    (38,601
    )
    
    
    394,828Common stock
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Additional paid-in capital
    
    
    28,157
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,157Parent investment
    
    
    
    
    
    
    91,716
    
    
    
    22,588
    
    
    
    57,216
    
    
    
    (171,520
    )
    
    
    Accumulated other comprehensive income
    
    
    1,752
    
    
    
    1,752
    
    
    
    
    
    
    
    299
    
    
    
    (2,051
    )
    
    
    1,752Retained earnings
    
    
    12,066
    
    
    
    12,552
    
    
    
    1,083
    
    
    
    4,037
    
    
    
    (17,672
    )
    
    
    12,066Net stockholders equity
    
    
    42,018
    
    
    
    106,020
    
    
    
    23,671
    
    
    
    61,552
    
    
    
    (191,243
    )
    
    
    42,018Total liabilities and stockholders equity
    
    $
    150,005
    
    
    
    393,522
    
    
    
    27,274
    
    
    
    95,889
    
    
    
    (229,844
    )
    
    
    436,846
 20




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##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) CONDENSED CONSOLIDATING BALANCE SHEET
As of October 1, 2004 (Successor)
(in thousands) Parent(CPI
    
    
    Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedHoldco)
    
    
    (CPI)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalAssetsCash and cash equivalents
    
    $
    
    
    
    
    38,131
    
    
    
    113
    
    
    
    2,232
    
    
    
    
    
    
    
    40,476Restricted cash
    
    
    
    
    
    
    
    
    
    
    2,188
    
    
    
    91
    
    
    
    
    
    
    
    2,279Accounts receivable, net
    
    
    
    
    
    
    21,424
    
    
    
    3,806
    
    
    
    10,684
    
    
    
    
    
    
    
    35,914Inventories
    
    
    
    
    
    
    28,916
    
    
    
    99
    
    
    
    9,059
    
    
    
    
    
    
    
    38,074Deferred tax assets
    
    
    
    
    
    
    12,285
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,285Prepaids and other current assets
    
    
    
    
    
    
    3,066
    
    
    
    168
    
    
    
    570
    
    
    
    (8
    )
    
    
    3,796Intercompany receivable
    
    
    
    
    
    
    26,841
    
    
    
    
    
    
    
    1,730
    
    
    
    (28,571
    )
    
    
    Total current assets
    
    
    
    
    
    
    130,663
    
    
    
    6,374
    
    
    
    24,366
    
    
    
    (28,579
    )
    
    
    132,824Property, plant and equipment, net
    
    
    
    
    
    
    62,162
    
    
    
    22
    
    
    
    7,943
    
    
    
    
    
    
    
    70,127Debt issue costs, net
    
    
    
    
    
    
    8,910
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,910Intangible assets, net
    
    
    
    
    
    
    67,847
    
    
    
    
    
    
    
    10,634
    
    
    
    
    
    
    
    78,481Goodwill
    
    
    
    
    
    
    92,041
    
    
    
    
    
    
    
    47,573
    
    
    
    
    
    
    
    139,614Other long term assets
    
    
    
    
    
    
    1,251
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,251Intercompany notes receivable
    
    
    
    
    
    
    13,335
    
    
    
    
    
    
    
    
    
    
    
    (13,335
    )
    
    
    Investment in subsidiaries
    
    
    135,688
    
    
    
    21,073
    
    
    
    
    
    
    
    
    
    
    
    (156,761
    )
    
    
    Total assets
    
    $
    135,688
    
    
    
    397,282
    
    
    
    6,396
    
    
    
    90,516
    
    
    
    (198,675
    )
    
    
    431,207Liabilities and stockholders equityCurrent portion of long-term debt
    
    $
    
    
    
    
    3,944
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,944Accounts payable
    
    
    
    
    
    
    11,556
    
    
    
    99
    
    
    
    4,135
    
    
    
    
    
    
    
    15,790Accrued expenses
    
    
    
    
    
    
    17,449
    
    
    
    561
    
    
    
    2,929
    
    
    
    
    
    
    
    20,939Product warranty
    
    
    
    
    
    
    3,877
    
    
    
    
    
    
    
    2,197
    
    
    
    
    
    
    
    6,074Income taxes payable
    
    
    
    
    
    
    1,274
    
    
    
    
    
    
    
    395
    
    
    
    (8
    )
    
    
    1,661Advance payments from customers
    
    
    
    
    
    
    6,463
    
    
    
    1,012
    
    
    
    4,556
    
    
    
    
    
    
    
    12,031Intercompany payable
    
    
    28,094
    
    
    
    
    
    
    
    477
    
    
    
    
    
    
    
    (28,571
    )
    
    
    Total current liabilities
    
    
    28,094
    
    
    
    44,563
    
    
    
    2,149
    
    
    
    14,212
    
    
    
    (28,579
    )
    
    
    60,439Deferred income taxes
    
    
    
    
    
    
    32,936
    
    
    
    
    
    
    
    6,182
    
    
    
    
    
    
    
    39,118Advance payments from sale of
San Carlos property
    
    
    
    
    
    
    13,450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,450Long-term debt
    
    
    
    
    
    
    210,606
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    210,606Intercompany notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,335
    
    
    
    (13,335
    )
    
    
    Total liabilities
    
    
    28,094
    
    
    
    301,555
    
    
    
    2,149
    
    
    
    33,729
    
    
    
    (41,914
    )
    
    
    323,613Common stock
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Additional paid-in capital
    
    
    103,534
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103,534Parent investment
    
    
    
    
    
    
    91,710
    
    
    
    3,882
    
    
    
    56,790
    
    
    
    (152,382
    )
    
    
    Accumulated other comprehensive income
    
    
    1,369
    
    
    
    1,369
    
    
    
    
    
    
    
    54
    
    
    
    (1,423
    )
    
    
    1,369Retained earnings (deficit)
    
    
    2,648
    
    
    
    2,648
    
    
    
    365
    
    
    
    (57
    )
    
    
    (2,956
    )
    
    
    2,648Net stockholders equity
    
    
    107,594
    
    
    
    95,727
    
    
    
    4,247
    
    
    
    56,787
    
    
    
    (156,761
    )
    
    
    107,594Total liabilities and stockholders equity
    
    $
    135,688
    
    
    
    397,282
    
    
    
    6,396
    
    
    
    90,516
    
    
    
    (198,675
    )
    
    
    431,207
 21




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##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the 13-Week Period Ended April 1, 2005 (Successors)
(in thousands) Parent(CPI
    
    
    Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedHoldco)
    
    
    (CPI)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalSales
    
    $
    
    
    
    
    59,433
    
    
    
    11,682
    
    
    
    30,708
    
    
    
    (17,360
    )
    
    
    84,463Cost of sales
    
    
    
    
    
    
    41,672
    
    
    
    9,575
    
    
    
    21,499
    
    
    
    (17,360
    )
    
    
    55,386Gross profit
    
    
    
    
    
    
    17,761
    
    
    
    2,107
    
    
    
    9,209
    
    
    
    
    
    
    
    29,077Operating costs and expenses:Research and development
    
    
    
    
    
    
    773
    
    
    
    
    
    
    
    1,085
    
    
    
    
    
    
    
    1,858Selling and marketing
    
    
    
    
    
    
    1,973
    
    
    
    814
    
    
    
    1,798
    
    
    
    
    
    
    
    4,585General and administrative
    
    
    
    
    
    
    3,459
    
    
    
    567
    
    
    
    1,824
    
    
    
    
    
    
    
    5,850Amortization of acquisition-related
intangible assets
    
    
    
    
    
    
    1,175
    
    
    
    62
    
    
    
    249
    
    
    
    
    
    
    
    1,486Total operating costs and expenses
    
    
    
    
    
    
    7,380
    
    
    
    1,443
    
    
    
    4,956
    
    
    
    
    
    
    
    13,779Operating income
    
    
    
    
    
    
    10,381
    
    
    
    664
    
    
    
    4,253
    
    
    
    
    
    
    
    15,298Interest expense (income), net
    
    
    811
    
    
    
    3,674
    
    
    
    (10
    )
    
    
    257
    
    
    
    
    
    
    
    4,732(Loss) income before income tax expense
and equity in income of subsidiaries
    
    
    (811
    )
    
    
    6,707
    
    
    
    674
    
    
    
    3,996
    
    
    
    
    
    
    
    10,566Income tax (benefit) expense
    
    
    (324
    )
    
    
    3,025
    
    
    
    229
    
    
    
    1,316
    
    
    
    
    
    
    
    4,246Equity in income of subsidiaries
    
    
    6,807
    
    
    
    3,125
    
    
    
    
    
    
    
    
    
    
    
    (9,932
    )
    
    
    Net income
    
    $
    6,320
    
    
    
    6,807
    
    
    
    445
    
    
    
    2,680
    
    
    
    (9,932
    )
    
    
    6,320
 22




---



##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
From January 23, 2004 to April 2, 2004 (Successor)
(in thousands  unaudited) Parent(CPI
    
    
    Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedHoldco)
    
    
    (CPI)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalSales
    
    $
    
    
    
    
    48,969
    
    
    
    6,678
    
    
    
    22,228
    
    
    
    (12,234
    )
    
    
    65,641Cost of sales
    
    
    
    
    
    
    31,654
    
    
    
    5,945
    
    
    
    16,442
    
    
    
    (12,234
    )
    
    
    41,807Amortization of acquisition-related
inventory write-up
    
    
    
    
    
    
    4,220
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,220Gross profit
    
    
    
    
    
    
    13,095
    
    
    
    733
    
    
    
    5,786
    
    
    
    
    
    
    
    19,614Operating costs and expenses:Research and development
    
    
    
    
    
    
    378
    
    
    
    
    
    
    
    1,086
    
    
    
    
    
    
    
    1,464Selling and marketing
    
    
    
    
    
    
    1,491
    
    
    
    499
    
    
    
    1,181
    
    
    
    (33
    )
    
    
    3,138General and administrative
    
    
    
    
    
    
    2,148
    
    
    
    316
    
    
    
    1,061
    
    
    
    (13
    )
    
    
    3,512Amortization of acquisition -related
intangible assets
    
    
    
    
    
    
    3,096
    
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    3,396Acquired in-process R&D
    
    
    
    
    
    
    5,900
    
    
    
    
    
    
    
    5,600
    
    
    
    
    
    
    
    11,500Intercompany income
    
    
    
    
    
    
    (13
    )
    
    
    (33
    )
    
    
    
    
    
    
    46
    
    
    
    Total operating costs and expenses
    
    
    
    
    
    
    13,000
    
    
    
    782
    
    
    
    9,228
    
    
    
    
    
    
    
    23,010Operating income (loss)
    
    
    
    
    
    
    95
    
    
    
    (49
    )
    
    
    (3,442
    )
    
    
    
    
    
    
    (3,396
    )Interest expense (income), net
    
    
    
    
    
    
    2,616
    
    
    
    (1
    )
    
    
    335
    
    
    
    
    
    
    
    2,950(Loss) income before income tax expense
and equity in loss of subsidiaries
    
    
    
    
    
    
    (2,521
    )
    
    
    (48
    )
    
    
    (3,777
    )
    
    
    
    
    
    
    (6,346
    )Income tax expense (benefit)
    
    
    
    
    
    
    611
    
    
    
    7
    
    
    
    (131
    )
    
    
    
    
    
    
    487Equity in loss of subsidiaries
    
    
    (6,833
    )
    
    
    (3,701
    )
    
    
    
    
    
    
    
    
    
    
    10,534
    
    
    
    Net (loss) income
    
    $
    (6,833
    )
    
    
    (6,833
    )
    
    
    (55
    )
    
    
    (3,646
    )
    
    
    10,534
    
    
    
    (6,833
    )
 CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
From January 2, 2004 to January 22, 2004 (Predecessor)
(in thousands  unaudited) Parent(CPI
    
    
    Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedHolding)
    
    
    (CPI)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalSales
    
    $
    
    
    
    
    8,501
    
    
    
    1,687
    
    
    
    3,969
    
    
    
    (2,551
    )
    
    
    11,606Cost of sales
    
    
    
    
    
    
    6,939
    
    
    
    1,504
    
    
    
    3,179
    
    
    
    (2,573
    )
    
    
    9,049Gross profit
    
    
    
    
    
    
    1,562
    
    
    
    183
    
    
    
    790
    
    
    
    22
    
    
    
    2,557Operating costs and expenses:Research and development
    
    
    
    
    
    
    130
    
    
    
    
    
    
    
    337
    
    
    
    
    
    
    
    467Selling and marketing
    
    
    
    
    
    
    341
    
    
    
    13
    
    
    
    374
    
    
    
    
    
    
    
    728General and administrative
    
    
    498
    
    
    
    2,146
    
    
    
    136
    
    
    
    (311
    )
    
    
    (137
    )
    
    
    2,332Merger Expenses
    
    
    4,644
    
    
    
    1,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,944Intercompany (income) expense
    
    
    (143
    )
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    Total operating costs and expenses
    
    
    4,999
    
    
    
    3,936
    
    
    
    149
    
    
    
    400
    
    
    
    (13
    )
    
    
    9,471Operating (loss) income
    
    
    (4,999
    )
    
    
    (2,374
    )
    
    
    34
    
    
    
    390
    
    
    
    35
    
    
    
    (6,914
    )Interest expense, net
    
    
    109
    
    
    
    5,098
    
    
    
    
    
    
    
    136
    
    
    
    
    
    
    
    5,343(Loss) income before income tax expense
and equity in (loss) income of subsidiaries
    
    
    (5,108
    )
    
    
    (7,472
    )
    
    
    34
    
    
    
    254
    
    
    
    35
    
    
    
    (12,257
    )Income tax expense (benefit)
    
    
    43
    
    
    
    (3,008
    )
    
    
    55
    
    
    
    62
    
    
    
    
    
    
    
    (2,848
    )Equity in (loss) income of subsidiaries
    
    
    (4,258
    )
    
    
    193
    
    
    
    
    
    
    
    
    
    
    
    4,065
    
    
    
    Net (loss) income
    
    $
    (9,409
    )
    
    
    (4,271
    )
    
    
    (21
    )
    
    
    192
    
    
    
    4,100
    
    
    
    (9,409
    )
 23




---



##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the 26-Week Period Ended April 1, 2005 (Successors)
(in thousands) Parent(CPI
    
    
    Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedHoldco)
    
    
    (CPI)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalSales
    
    $
    
    
    
    
    113,566
    
    
    
    21,255
    
    
    
    55,818
    
    
    
    (32,443
    )
    
    
    158,196Cost of sales
    
    
    
    
    
    
    79,791
    
    
    
    17,293
    
    
    
    40,423
    
    
    
    (32,443
    )
    
    
    105,064Amortization of acquisition-related

inventory write-up
    
    
    
    
    
    
    
    
    
    
    351
    
    
    
    
    
    
    
    
    
    
    
    351Gross profit
    
    
    
    
    
    
    33,775
    
    
    
    3,611
    
    
    
    15,395
    
    
    
    
    
    
    
    52,781Operating costs and expenses:Research and development
    
    
    
    
    
    
    1,191
    
    
    
    
    
    
    
    2,115
    
    
    
    
    
    
    
    3,306Selling and marketing
    
    
    
    
    
    
    3,695
    
    
    
    1,646
    
    
    
    3,312
    
    
    
    
    
    
    
    8,653General and administrative
    
    
    
    
    
    
    6,292
    
    
    
    837
    
    
    
    2,746
    
    
    
    
    
    
    
    9,875Amortization of acquisition-related
intangible assets
    
    
    
    
    
    
    5,417
    
    
    
    120
    
    
    
    855
    
    
    
    
    
    
    
    6,392Total operating costs and expenses
    
    
    
    
    
    
    16,595
    
    
    
    2,603
    
    
    
    9,028
    
    
    
    
    
    
    
    28,226Operating income
    
    
    
    
    
    
    17,180
    
    
    
    1,008
    
    
    
    6,367
    
    
    
    
    
    
    
    24,555Interest expense (income), net
    
    
    811
    
    
    
    7,444
    
    
    
    (15
    )
    
    
    572
    
    
    
    
    
    
    
    8,812Income (loss) before income tax expense
and equity in income of subsidiaries
    
    
    (811
    )
    
    
    9,736
    
    
    
    1,023
    
    
    
    5,795
    
    
    
    
    
    
    
    15,743Income tax (benefit) expense
    
    
    (324
    )
    
    
    4,331
    
    
    
    305
    
    
    
    2,013
    
    
    
    
    
    
    
    6,325Equity in income of subsidiaries
    
    
    9,905
    
    
    
    4,500
    
    
    
    
    
    
    
    
    
    
    
    (14,405
    )
    
    
    Net income
    
    $
    9,418
    
    
    
    9,905
    
    
    
    718
    
    
    
    3,782
    
    
    
    (14,405
    )
    
    
    9,418
 24




---



##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
From January 23, 2004 to April 2, 2004 (Successor)
(in thousands - unaudited) Parent(CPI
    
    
    Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedHoldco)
    
    
    (CPI)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalSales
    
    $
    
    
    
    
    48,969
    
    
    
    6,678
    
    
    
    22,228
    
    
    
    (12,234
    )
    
    
    65,641Cost of sales
    
    
    
    
    
    
    31,654
    
    
    
    5,945
    
    
    
    16,442
    
    
    
    (12,234
    )
    
    
    41,807Amortization of acquisition-related
inventory write-up
    
    
    
    
    
    
    4,220
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,220Gross profit
    
    
    
    
    
    
    13,095
    
    
    
    733
    
    
    
    5,786
    
    
    
    
    
    
    
    19,614Operating costs and expenses:Research and development
    
    
    
    
    
    
    378
    
    
    
    
    
    
    
    1,086
    
    
    
    
    
    
    
    1,464Selling and marketing
    
    
    
    
    
    
    1,491
    
    
    
    499
    
    
    
    1,181
    
    
    
    (33
    )
    
    
    3,138General and administrative
    
    
    
    
    
    
    2,148
    
    
    
    316
    
    
    
    1,061
    
    
    
    (13
    )
    
    
    3,512Amortization of acquisition -related
intangible assets
    
    
    
    
    
    
    3,096
    
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    3,396Acquired in-process R&D
    
    
    
    
    
    
    5,900
    
    
    
    
    
    
    
    5,600
    
    
    
    
    
    
    
    11,500Intercompany income
    
    
    
    
    
    
    (13
    )
    
    
    (33
    )
    
    
    
    
    
    
    46
    
    
    
    Total operating costs and expenses
    
    
    
    
    
    
    13,000
    
    
    
    782
    
    
    
    9,228
    
    
    
    
    
    
    
    23,010Operating income (loss)
    
    
    
    
    
    
    95
    
    
    
    (49
    )
    
    
    (3,442
    )
    
    
    
    
    
    
    (3,396
    )Interest expense (income), net
    
    
    
    
    
    
    2,616
    
    
    
    (1
    )
    
    
    335
    
    
    
    
    
    
    
    2,950(Loss) income before income tax expense
and equity in (loss) of subsidiaries
    
    
    
    
    
    
    (2,521
    )
    
    
    (48
    )
    
    
    (3,777
    )
    
    
    
    
    
    
    (6,346
    )Income tax expense (benefit)
    
    
    
    
    
    
    611
    
    
    
    7
    
    
    
    (131
    )
    
    
    
    
    
    
    487Equity in loss of subsidiaries
    
    
    (6,833
    )
    
    
    (3,701
    )
    
    
    
    
    
    
    
    
    
    
    10,534
    
    
    
    Net (loss) income
    
    $
    (6,833
    )
    
    
    (6,833
    )
    
    
    (55
    )
    
    
    (3,646
    )
    
    
    10,534
    
    
    
    (6,833
    )
 CONSOLIDATING CONDENSED
STATEMENT OF OPERATIONSFrom October 4, 2003 to January 22, 2004 (Predecessor)
(in thousands - unaudited) Parent(CPI
    
    
    Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedHolding)
    
    
    (CPI)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalSales
    
    $
    
    
    
    
    60,721
    
    
    
    10,673
    
    
    
    26,470
    
    
    
    (17,945
    )
    
    
    79,919Cost of sales
    
    
    
    
    
    
    43,551
    
    
    
    9,448
    
    
    
    21,223
    
    
    
    (18,033
    )
    
    
    56,189Gross profit
    
    
    
    
    
    
    17,170
    
    
    
    1,225
    
    
    
    5,247
    
    
    
    88
    
    
    
    23,730Operating costs and expenses:Research and development
    
    
    
    
    
    
    607
    
    
    
    
    
    
    
    1,593
    
    
    
    
    
    
    
    2,200Selling and marketing
    
    
    
    
    
    
    2,136
    
    
    
    591
    
    
    
    1,678
    
    
    
    (53
    )
    
    
    4,352General and administrative
    
    
    355
    
    
    
    4,973
    
    
    
    236
    
    
    
    1,508
    
    
    
    (1,039
    )
    
    
    6,033Merger expenses
    
    
    5,074
    
    
    
    1,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,374Intercompany income
    
    
    (755
    )
    
    
    (215
    )
    
    
    (53
    )
    
    
    
    
    
    
    1,023
    
    
    
    Total operating costs and expenses
    
    
    4,674
    
    
    
    8,801
    
    
    
    774
    
    
    
    4,779
    
    
    
    (69
    )
    
    
    18,959Operating (loss) income
    
    
    (4,674
    )
    

    
    8,369
    
    
    
    451
    
    
    
    468
    
    
    
    157
    
    
    
    4,771Interest expense (income), net
    
    
    590
    
    
    
    7,731
    
    
    
    (3
    )
    
    
    584
    
    
    
    
    
    
    
    8,902(Loss) income before income tax expense
and equity in income of subsidiaries
    
    
    (5,264
    )
    
    
    638
    
    
    
    454
    
    
    
    (116
    )
    
    
    157
    
    
    
    (4,131
    )Income tax expense
    
    
    
    
    
    
    334
    
    
    
    55
    
    
    
    50
    
    
    
    
    
    
    
    439Equity in income of subsidiaries
    
    
    694
    
    
    
    321
    
    
    
    
    
    
    
    
    
    
    
    (1,015
    )
    
    
    Net (loss) income
    
    $
    (4,570
    )
    
    
    625
    
    
    
    399
    
    
    
    (166
    )
    
    
    (858
    )
    
    
    (4,570
    )
 25




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##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the 26-Week Period Ended April 1, 2005 (Successor)
(in thousands) Parent(CPI
    
    
    Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedHoldco)
    
    
    (CPI)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalOPERATING ACTIVITIESNet cash provided by (used in)
operating activities
    
    $
    227
    
    
    
    5,570
    
    
    
    258
    
    
    
    (808
    )
    
    
    
    
    
    
    5,247INVESTING ACTIVITIESExpenses relating to sale of
San Carlos property
    
    
    
    
    
    
    (203
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (203
    )Purchase of Econco, net of cash acquired
    
    
    
    
    
    
    (18,685
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,685
    )Purchase of property, plant, and equipment
    
    
    
    
    
    
    (4,092
    )
    
    
    (73
    )
    
    
    (263
    )
    
    
    
    
    
    
    (4,428
    )Net cash used in investing activities
    
    
    
    
    
    
    (22,980
    )
    
    
    (73
    )
    
    
    (263
    )
    
    
    
    
    
    
    (23,316
    )FINANCING ACTIVITIESProceeds from issuance of floating
rate senior notes
    
    
    79,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,200Payments for debt issuance costs
    
    
    (3,375
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,375
    )Repayments of senior term loan
    
    
    
    
    
    
    (9,550
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,550
    )Stockholder distribution payments
    
    
    (75,809
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (75,809
    )Repayments on capital leases
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    (20
    )Net repayments from bank overdraft
    
    
    
    
    
    
    (372
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (372
    )Net cash provided by (used in) financing activities
    
    
    16
    
    
    
    (9,922
    )
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    (9,926
    )NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    243
    
    
    
    (27,332
    )
    
    
    165
    
    
    
    (1,071
    )
    
    
    
    
    
    
    (27,995
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    38,131
    
    
    
    113
    
    
    
    2,232
    
    
    
    
    
    
    
    40,476Cash and cash equivalents at end of period
    
    $
    243
    
    
    
    10,799
    
    
    
    278
    
    
    
    1,161
    
    
    
    
    
    
    
    12,481
 26




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##### Table of Contents



CPI Holdco, Inc.
and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
From January 23, 2004 to April 2, 2004 (Successor)
(in thousands - unaudited) Parent(CPI
    
    
    Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedHoldco)
    
    
    (CPI)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalOPERATING ACTIVITIESNet cash provided by (used in) operating activities
    
    $
    15,685
    
    
    
    (27,146
    )
    
    
    2,601
    
    
    
    3,110
    
    
    
    
    
    
    
    (5,750
    )INVESTING ACTIVITIESPurchase of predecessor net assets, net of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    cash acquired
    
    
    (113,760
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (113,760
    )Purchase of property, plant and equipment, net
    
    
    
    
    
    
    (255
    )
    
    
    (9
    )
    
    
    (34
    )
    
    
    
    
    
    
    (298
    )Net cash used in investing activities
    
    
    (113,760
    )
    
    
    (255
    )
    
    
    (9
    )
    
    
    (34
    )
    
    
    
    
    
    
    (114,058
    )FINANCING ACTIVITIESRetirement of debt and preferred stock:Senior subordinated notes
    
    
    
    
    
    
    (74,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74,000
    )Senior redeemable preferred stock
    
    
    
    
    
    
    (29,735
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,735
    )Junior preferred stock
    
    
    
    
    
    
    (32,336
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,336
    )Dividends on senior preferred stock
    
    
    
    
    
    
    (19,310
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,310
    )Mortgage financing
    
    
    
    
    
    
    (17,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,500
    )Proceeds from/(payments for) the issuance of debt:Senior subordinated notes
    
    
    
    
    
    
    125,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000Senior term loans
    
    
    
    
    
    
    90,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,000Debt issue costs
    
    
    
    
    
    
    (9,577
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,577
    )Proceeds from the repayment of Predecessor
management loans
    
    
    
    
    
    
    1,266
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,266Net proceeds from the issuance of common stock
    
    
    98,075
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,075Net proceeds from bank overdraft
    
    
    
    
    
    
    1,907
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,907Net cash provided by financing activities
    
    
    98,075
    
    
    
    35,715
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    133,790NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    
    
    
    
    8,314
    
    
    
    2,592
    
    
    
    3,076
    
    
    
    
    
    
    
    13,982Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash and cash equivalents at end of period
    
    $
    
    
    
    
    8,314
    
    
    
    2,592
    
    
    
    3,076
    
    
    
    
    
    
    
    13,982
 CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
From October 4, 2003 to January 22, 2004 (Predecessor)
(in thousands - unaudited) Parent(CPI
    
    
    Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedHolding)
    
    
    (CPI)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalOPERATING ACTIVITIESNet cash provided by (used in) operating activities
    
    $
    
    
    
    
    8,152
    
    
    
    206
    
    
    
    (145
    )
    
    
    
    
    
    
    8,213INVESTING ACTIVITIESPurchase of property, plant and equipment, net
    
    
    
    
    
    
    (416
    )
    
    
    (2
    )
    
    
    (41
    )
    
    
    
    
    
    
    (459
    )Retirement of senior subordinated notes
    
    
    
    
    
    
    (26,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,000
    )Net repayment of bank overdraft
    
    
    
    
    
    
    (1,639
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,639
    )Net cash used in financing activities
    
    
    
    
    
    
    (27,639
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,639
    )NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS
    
    
    
    
    
    
    (19,903
    )
    
    
    204
    
    
    
    (186
    )
    
    
    
    
    
    
    (19,885
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    30,561
    
    
    
    1,718
    
    
    
    1,472
    
    
    
    
    
    
    
    33,751Cash and cash equivalents at end of period
    
    $
    
    
    
    
    10,658
    
    
    
    1,922
    
    
    
    1,286
    
    
    
    
    
    
    
    13,866
 27




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##### Table of Contents



ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The following discussion and analysis should be read in conjunction with the Condensed consolidated
financial statements and notes thereto included elsewhere within this report and the Annual Report
on Form 10-K of CPI Holdco, Inc. (CPI Holdco or the Successor). References to the Company
refer to Communications & Power Industries Holding Corporation (Holding or the Predecessor) and
its subsidiaries prior to the Merger (defined below) and to the Successor and its subsidiaries
post-Merger. The Company is a leading designer, manufacturer and global marketer of vacuum electron devices
(VEDs), satellite communications amplifiers, medical x-ray generators and other related products
for critical defense and commercial applications. The Companys defense applications include radar,
electronic warfare and communications end markets and its commercial applications include
communications, medical, industrial and scientific end markets. Communications applications consist
of applications for military and commercial satellite communications uses and broadcast uses. The
Company defines and discusses its recorded orders and sales trends by these end markets in order to
more clearly relate its business to outside investors. Internally, however, the Company is
organized into six operating divisions that are differentiated based on products operating in two
segments. The Companys VED segment consists of five operating divisions. The Company also has a
satellite communications equipment segment that has one operating division. Segment data is
included in Note 8 of the Notes to Condensed Consolidated Financial Statements. Floating Rate Senior Notes On February 22, 2005, CPI Holdco issued $80.0 million of Floating Rate Senior Notes due 2015 (the
FR Notes). The FR Notes were issued at a 1% discount; the gross cash proceeds from the issuance
of FR Notes were $79.2 million. The proceeds from the issuance of FR Notes were used to make a
distribution to stockholders of CPI Holdco of approximately $75.8 million and to pay fees and
expenses of approximately $3.4 million associated with the issuance of FR Notes. The FR Notes require interest payments at an annual interest rate, reset at the beginning of each
semi-annual period, equal to the then six-month LIBOR plus 5.75%, payable semiannually. CPI Holdco
may, at its option, elect to pay interest through the issuance of additional FR Notes for any
interest payment date on or after August 1, 2006 and on or before February 1, 2010. If CPI Holdco
elects to pay interest through the issuance of additional FR Notes, the annual interest rate on the
FR Notes will increase by an additional 1% increment, with the increment increasing by an
additional 1% for each interest payment made through the issuance of additional FR Notes (up to a
maximum of 4%). The FR Notes are general unsecured obligations of CPI Holdco. The FR Notes are not guaranteed by
any of CPI Holdcos subsidiaries and are structurally subordinated to all existing and future
indebtedness and other liabilities of CPI Holdcos subsidiaries. The FR Notes are senior in right
of payment to the Companys existing and future indebtedness that is expressly subordinated to the
FR Notes. See Note 6 to the Condensed Consolidated Financial Statements. Econco Acquisition On October 8, 2004, the Company purchased all of the outstanding stock of Econco Broadcast Service,
Inc. (Econco) of Woodland, California for cash consideration of approximately $18.7 million.
Econco is a provider of rebuilding service for VEDs, allowing broadcasters and other users of these
critical products to extend the life of their devices at a cost that is lower than buying a new
VED. See Note 10 to the Condensed Consolidated Financial Statements. Merger On January 23, 2004, CPI Holdcos wholly-owned subsidiary, CPI Merger Sub Corp. (Merger Sub),
merged with and into Holding pursuant to the terms of the Agreement and Plan of Merger (the Merger
Agreement), dated as of November 17, 2003, by and among Holding, CPI Holdco, Merger Sub and Green
Equity Investors II, L.P., as the representative of the security holders of Holding, under which
CPI Holdco, Merger Subs parent corporation and a corporation controlled by affiliates of The
Cypress Group L.L.C. (Cypress), agreed to acquire Holding. In the Merger, each share of Holdings
common stock and stock options outstanding immediately prior to the Merger, other than a portion of
stock options held by certain members of management (which were converted into options to purchase
shares of CPI Holdco) and other than any shares of common stock owned by Holding or CPI Holdco,
were converted into the right to receive a pro rata portion of the aggregate merger consideration
of $131.7 million. In connection with the Merger, CPI Holdco received an equity contribution of
$100.0 million before expenses from affiliates of Cypress in exchange for 4,251,122 shares of
common stock of CPI Holdco. Members of management of Holding, as a result of rolling over their
options to purchase common stock of Holding, received stock options to purchase 167,513 shares of
common stock of CPI Holdco (Rollover Options). The fair value of Rollover Options was $5.0
million and was accounted for as Merger purchase price as of January 23, 2004. Members of Holding
management that were residents of Canada received 1,485 stock options to purchase shares of common
stock of CPI 28




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##### Table of Contents



Holdco as payment of Merger escrow proceeds in respect of their options to purchase shares of
Holding. Although the Merger, which essentially resulted in the recapitalization of the Company, triggered a
change in the basis of many of the Companys assets and liabilities, the underlying operations of
the Company were not impacted by the Merger. San Carlos Sale Agreement The Company entered into an agreement to sell the land and close its facilities located in San
Carlos, California. The purchase price is $23.8 million. Under the sale agreement, the buyer has
paid the Company a $13.0 million deposit on the purchase price, which the Company is using to
defray the costs of moving its San Carlos operations to its Palo Alto facility and to a new
location in the Palo Alto area. The $13.0 million deposit is nonrefundable unless the Company
breaches the sale agreement. In connection with the sale agreement, the Company entered into an
agreement regarding environmental conditions at the property and was named as an additional insured
on a pollution liability insurance policy obtained by the purchaser that is intended to fund the
remediation of the contamination of the San Carlos property to permit hospital and other
unrestricted uses under the direction of the applicable environmental regulatory agency. The closing of the sale is subject to a number of conditions, including the requirement that the
Company vacate its facilities and obtain regulatory closure of certain permitted equipment located
on the property. There can be no assurance that the sale of the San Carlos property will occur. Pursuant to the stock sale agreement by and between Varian Associates, Inc., the predecessor of
Varian Medical Systems, Inc. (Varian), and the Company dated June 9, 1995, as amended, the
Company had agreed to certain development restrictions affecting the San Carlos property. In
connection with the San Carlos property sale agreement, Varian agreed to waive certain of the
development restrictions on the San Carlos property in the event that the sale closes, subject to
certain conditions, and further agreed to pay the Company $1.0 million, of which $0.5 million was
paid as of April 1, 2005. In addition, the Company has agreed to relieve Varian of certain of its
indemnity obligations to the Company for certain environmental liabilities related to the San
Carlos property relating to periods prior to August 1995, and to reimburse Varian for certain
potential environmental costs related to the San Carlos property that are not covered by insurance.
The Company and Varian have also agreed to certain use restrictions and environmental cost-sharing
provisions related to the Companys property in Beverly, Massachusetts, and the Company has
relinquished its right to redevelop that property for residential or similar use. As of April 1, 2005, the San Carlos land and building was classified as held for use in property,
plant and equipment and the advance payments from the sale of the property, aggregating $13.5
million, are classified as a long-term liability in the accompanying Condensed Consolidated Balance
Sheet. As of April 1, 2005, the Company had deferred expenses of $0.7 million relating to the sale
of the San Carlos property and classified these amounts as other long-term assets in the
accompanying Condensed Consolidated Balance Sheet. As of April 1, 2005, the San Carlos land and
building had a net book value of $23.8 million and the building continues to be depreciated over
its remaining useful life. Based on current projections of costs, the Company does not expect to
recognize a loss on the sale of the San Carlos property. Critical Accounting Policies Management is required to make judgments, assumptions and estimates in preparing its financial
statements and related disclosures in conformity with accounting principles generally accepted in
the United States. The Companys significant accounting policies are described in Note 1 of the
Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the fiscal year
ended October 1, 2004. The following critical accounting policies are those policies that
management believes affect its more significant estimates and assumptions used in preparation of
its consolidated financial statements. Revenue Recognition The estimated sales values of performance under certain contracts to commercial customers and U. S.
Government fixed-price contracts are recognized under the percentage of completion method of
accounting. When applying the percentage of completion method, the Company relies on estimates of
total expected contract revenue and costs. Recognized revenues and profit are subject to revisions
as the contract progresses towards completion. Revisions in profit estimates are charged to income
in the period in which they become determinable. Allowance for Doubtful Accounts The Company monitors the creditworthiness of its customers based on a variety of factors including
the length of time the receivables are past due, the financial health of the customer, economic
conditions and historical experience. If collectibility is considered uncertain, then the Company
will record a reserve to reduce the receivable to the amount considered collectable. If
circumstances change, then further adjustments could be required. Warranty Obligations The Companys products are generally subject to warranties, and the Company provides for the
estimated future costs of repair, replacement or customer accommodation at the time of sale as an
additional cost of the sales. Managements estimates 29




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##### Table of Contents



are based on historical costs for warranty, and are adjusted when circumstances indicate that
future costs are expected to vary from historical levels. If actual product failure rates or
material usage incurred differ from the Companys estimates, then revisions to the estimated
warranty liability would be required. Inventory Valuation The Company reviews inventory quantities on hand and adjusts for excess and obsolete inventory
based primarily on historical usage rates and its estimates of product demand and production.
Actual demand may differ from our estimates, in which case the Company may have understated or
overstated the provision required for obsolete and excess inventory, which would have an impact on
the Companys operating results. The Company also reviews the carrying value of inventory for lower of cost or market on an
individual product or contract basis. Analyses are performed based on the estimated costs at
completion and if necessary, a provision is recorded to properly reflect the inventory value of the
products or contracts at the lower of cost or net realizable value (selling price less estimated
cost of disposal). If estimated costs are different than originally estimated, the provision
adjustment would have an impact on the Companys operating results. Impairment of Long-Lived Assets The Company reviews long-lived assets, excluding intangible assets that are covered by Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, for
impairment annually and whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by
comparison of an assets carrying amount to future net cash flows expected to be generated from the
operation and sale of such asset. If such asset is considered to be impaired, then the Companys
carrying value is reduced to its estimated fair value with a charge to general and administrative
at the time of the reduction. Adverse changes in the customers and markets served by the Company
could result in future impairments of long-lived assets. Impairment of Goodwill and Intangible Assets During the fourth quarter of the fiscal year, the Company makes an assessment as to the carrying
value of goodwill in accordance with SFAS 142. During this review, the Company determines whether
the fair value of its six reporting units, which represent the Companys operating divisions,
exceed their carrying value and thus do not require an impairment charge. The Company will continue
to make assessments of impairment on an annual basis or more frequently if certain indicators
suggest that impairment may have occurred. In assessing the value of goodwill, the Company must
make assumptions regarding the estimated future cash flows and other factors to determine the fair
value of the reporting units. If these estimates or their related assumptions change in the future,
then the Company may be required to record impairment charges, which would negatively impact
operating results. Effect of Merger on Financial Results As a result of the Merger, the assets acquired and liabilities assumed were adjusted to reflect
fair value, and the excess of the purchase price over the fair value was recorded as goodwill. The
revised fair values significantly impacted the Companys results of operations subsequent to the
Merger and their comparability to the results of operations of the Predecessor. The most
significant purchase accounting adjustments and their effect on results of operations are discussed
below:  
    Customer backlog was valued at $17.5 million. Customer backlog was amortized over the
12-month expected product delivery schedule of the contracts in backlog at the Merger
closing date. Customer backlog amortization was $12.1 million in fiscal year 2004 and
$4.4 million in the first quarter of fiscal year 2005, and the remaining $1.0 million was
amortized in the second quarter of fiscal year 2005.
    Property, plant and equipment valuation was increased by $38.7 million. Operating
income will be charged approximately $3.1 million per year for the next 4 years, and at a
reduced rate thereafter, for additional depreciation from the increased valuation of
property, plant and equipment. Property, plant and equipment are depreciated over useful
lives of 5 years to 25 years.
    Technology-related intangible assets were valued at $58.5 million. Operating income
will be charged approximately $1.9 million per year for the next 14 years and at a reduced
rate thereafter for the amortization of technology-related intangible assets.
Technology-related intangible assets have useful lives of 15 to 50 years.
    Land lease intangibles were valued at $11.8 million. Operating income will be charged
approximately $0.3 million per year for the remaining 44 years of the land lease. The
Predecessor had a land lease with a net book value of $20.3 million that was being
amortized over 55 years at a rate of $0.5 million per year. Thus, the effect on future
operating income is a reduction in amortization expense of $0.2 million per year.
    Deferred tax liabilities were increased by $46.5 million. Merger related deferred tax
liabilities were $37.7 million at April 1, 2005. As the revalued assets noted above are
charged to operating income, their expense is not deductible 30




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##### Table of Contents



for income tax purposes. The deferred tax liability is charged against the income tax
provision as the revalued assets are charged to operating income. In effect, revalued
assets are being charged to net income on an after-tax basis. Orders 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 orders will be recognized as sales. Market segment orders are summarized as follows (in millions): 26-Week Period EndedApril 1, 2005
    
    
    
    April 2, 2004Percentage of
    
    
    
    
    
    
    
    Percentage ofAmount
    
    
    Total Orders
    
    
    
    Amount
    
    
    Total OrdersRadar
    
    $
    53.4
    
    
    
    30
    %
    
    
    $
    52.8
    
    
    
    35
    %Electronic Warfare
    
    
    15.4
    
    
    
    9
    %
    
    
    
    12.8
    
    
    
    8
    %Communications
    
    
    59.0
    
    
    
    34
    %
    
    
    
    38.5
    
    
    
    26
    %Medical
    
    
    32.3
    
    
    
    18
    %
    
    
    
    26.0
    
    
    
    17
    %Industrial
    
    
    12.9
    
    
    
    7
    %
    
    
    
    12.3
    
    
    
    8
    %Scientific
    
    
    3.9
    
    
    
    2
    %
    
    
    
    8.3
    
    
    
    6
    %Total orders
    
    $
    176.9
    
    
    
    100
    %
    
    
    $
    150.7
    
    
    
    100
    %
 Orders recorded in the 26-week period ending April 1, 2005 were $176.9 million, an increase of
$26.2 million, or 17%, from $150.7 million in the comparable period of fiscal year 2004. The
increase primarily relates to increases in the communications, medical and electronic warfare
markets, partially offset by a decrease in the scientific market. Orders in the radar and
industrial markets did not change significantly from fiscal year 2004 to 2005. The Econco
acquisition represents $6.0 million of the orders increase, while the remaining increase of $20.2
million was due to growth from our existing business. Orders in the communications market for the 26-week period ending April 1, 2005 increased $20.5
million, or 53%, from the comparable period of fiscal year 2004. The increase in communications
orders was attributable to the continued strength in orders for the direct-to-home broadcast
market, the acceleration of orders for our Eimac division because of its upcoming relocation from
San Carlos, California to Palo Alto, California, a large order from an international customer for
traveling wave tubes used for terrestrial microwave relays and orders for Econco. Orders in the
medical market for the 26-week period ending April 1, 2005 increased $6.3 million, or 24%, from the
comparable period of fiscal year 2004. The increase in medical orders was due to the continued
strength in orders for VEDs used in cancer therapy and x-ray generator systems and power supply
products used in x-ray imaging systems; also contributing to the increase in medical orders was the
acceleration of orders for our Eimac division because of its upcoming relocation. Orders in the
electronic warfare market for the 26-week period ending April 1, 2005 increased $2.6 million, or
20%, from the comparable period of fiscal year 2004. The increase in electronic warfare orders was
primarily attributable to the receipt of a $3.8 million order from an international customer for
traveling wave tubes to support the Advanced Self Protection Integrated Suite program. Orders for
products sold in the scientific market for the 26-week period ending April 1, 2005 decreased $4.4
million, or 53%, from the comparable period of fiscal year 2004. The decrease in scientific orders
was primarily attributable to the receipt of a $3.8 million order in the first 26-week period of
fiscal year 2004 for a high frequency, high power gyrotrons for fusion research. Orders in the
scientific market, our smallest market, are historically one-time projects and can fluctuate
significantly from period to period. Although total orders for the radar and industrial markets
did not change significantly from the first 26-week period of fiscal year 2005 compared to the
first 26-week period of fiscal year 2004, there was an increase in orders for the radar and
industrial markets from the recently acquired Econco division that was partially offset by an
anticipated reduction in radar orders for VEDs from the Department of Defense and reduced
industrial orders due to lower orders from semiconductor equipment companies. Order backlog consists of firm orders for which goods and services are yet to be provided. As of
April 1, 2005, the Company had an order backlog of $200.0 million compared to an order backlog of
$179.4 million as of April 2, 2004. Order backlog increased during the second quarter of fiscal
year 2005 by $6.8 million from $193.2 million. Although orders can be and sometimes are modified
or terminated, the amount of modifications and terminations has historically not been material
compared to total contract volume. Results of Operations Fiscal Year CPI Holdcos fiscal years are the 52- or 53-week periods that end on the Friday nearest September
30. The Successors fiscal 31




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##### Table of Contents



year did not change from that of the Predecessor. Fiscal year 2005 comprises the 52-week period
ending September 30, 2005, and fiscal year 2004 comprised the 52-week period ended October 1, 2004. Quarter Ended April 1, 2005 Compared to Quarter Ended April 2, 2004 Operating results for the second quarter of fiscal year 2005 and 2004 were as follows (dollars in
millions): Quarter Ended
    
    
    
    Quarter EndedApril 1, 2005
    
    
    
    April 2, 2004 (b)Percentage
    
    
    
    
    
    
    
    PercentageAmount
    
    
    of Sales
    
    
    
    Amount
    
    
    of SalesSales
    
    $
    84.5
    
    
    
    100.0
    %
    
    
    $
    77.2
    
    
    
    100.0
    %Cost of sales
    
    
    55.4
    
    
    
    65.6
    
    
    
    
    50.9
    
    
    
    65.9Amortization of acquisition related
inventory write-up
    
    
    
    
    
    
    
    
    
    
    
    4.2
    
    
    
    5.4Gross profit
    
    
    29.1
    
    
    
    34.4
    
    
    
    
    22.2
    
    
    
    28.8Research and development
    
    
    1.9
    
    
    
    2.2
    
    
    
    
    1.9
    
    
    
    2.5Selling and marketing
    
    
    4.6
    
    
    
    5.4
    
    
    
    
    3.9
    
    
    
    5.1General and administrative
    
    
    5.9
    
    
    
    7.0
    
    
    
    
    5.8
    
    
    
    7.5Merger expenses
    
    
    
    
    
    
    
    
    
    
    
    5.9
    
    
    
    7.6Amortization of acquisition related intangibles
    
    
    1.5
    
    
    
    1.8
    
    
    
    
    3.4
    
    
    
    4.4Acquired
in-process research and development
    
    
    
    
    
    
    
    
    
    
    
    11.5
    
    
    
    14.9Operating income (loss)
    
    
    15.3
    
    
    
    18.1
    
    
    
    
    (10.3
    )
    
    
    (13.3
    )Interest expense, net
    
    
    4.7
    
    
    
    5.6
    
    
    
    
    8.3
    
    
    
    10.8Income (loss) before taxes
    
    
    10.6
    
    
    
    12.5
    
    
    
    
    (18.6
    )
    
    
    (24.1
    )Income tax expense (benefit)
    
    
    4.2
    
    
    
    5.0
    
    
    
    
    (2.4
    )
    
    
    (3.1
    )Net income (loss)
    
    $
    6.3
    
    
    
    7.5
    %
    
    
    
    (16.2
    )
    
    
    (21.0
    )%Other Data:EBITDA (a)
    
    $
    18.4
    
    
    
    21.8
    %
    
    
    $
    (5.5
    )
    
    
    (7.1
    )%
  (a)
    
    EBITDA represents earnings before provision for income taxes, interest expense,
depreciation and amortization. Other companies may define EBITDA differently and, as a
result, the Companys measure of EBITDA may not be directly comparable to EBITDA of other
companies. Management believes that the presentation of EBITDA provides useful information
to investors regarding the Companys results of operations because it assists in analyzing
and benchmarking the performance and value of the Companys business. Although management
uses EBITDA as a financial measure to assess the performance of the Companys business, the
use of EBITDA is limited because it does not include certain material costs, such as
interest and taxes, necessary to operate the Companys business. EBITDA should be
considered in addition to, and not as a substitute for, net income in accordance with GAAP
as a measure of performance or net cash provided by operating activities in accordance with
GAAP as a measure of liquidity. For reconciliation of EBITDA to Income before taxes, see
Note 8 of the Notes to Consolidated Condensed Financial Statements.(b)
    
    Represents the combined pro forma results of CPI Holdco for the 10-week period ended
April 2, 2004 and the Predecessor for the 3-week period ended January 22, 2004. Sales. The following table compares total sales by market segment for the quarter ended April 1, 2005 to
the quarter ended April 2, 2004 (dollars in millions): Quarter EndedApril 1, 2005
    
    
    
    April 2, 2004Percentage of
    
    
    
    
    
    
    
    Percentage ofAmount
    
    
    Total Sales
    
    
    
    Amount
    
    
    Total SalesRadar
    
    $
    28.5
    
    
    
    34
    %
    
    
    $
    31.8
    
    
    
    41
    %Electronic Warfare
    
    
    6.9
    
    
    
    8
    %
    
    
    
    6.2
    
    
    
    8
    %Communications
    
    
    26.4
    
    
    
    31
    %
    
    
    
    20.7
    
    
    
    27
    %Medical
    
    
    13.9
    
    
    
    16
    %
    
    
    
    10.4
    
    
    
    13
    %Industrial
    
    
    6.4
    
    
    
    8
    %
    
    
    
    5.4
    
    
    
    7
    %Scientific
    
    
    2.4
    
    
    
    3
    %
    
    
    
    2.7
    
    
    
    3
    %Total sales
    
    $
    84.5
    
    
    
    100
    %
    
    
    $
    77.2
    
    
    
    100
    %
 Sales for the second quarter of fiscal year 2005 of $84.5 million were $7.3 million, or 9%, higher
than the prior years level of $77.2 million. The sales increase was primarily related to
increases in the communications, industrial and medical markets, partially offset by decreases in
the radar market. The Econco acquisition represents $3.0 million of the sales increase, while the
remaining increase of $4.3 million was due to growth from our existing business. 32




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##### Table of Contents



Communications sales of $26.4 million in the second quarter of fiscal year 2005 were $5.7 million,
or 28%, higher than the second quarter of fiscal year 2004, primarily due to the increased shipment
of direct-to-home broadcast amplifiers, VED communication products and additional sales from the
Econco acquisition. Medical sales of $13.9 million for the second quarter of fiscal year 2005 were
$3.5 million, or 34%, higher than the second quarter of fiscal year 2004, primarily due to
increased shipments of VEDs used in cancer therapy and magnetic resonance imaging systems, and
x-ray generator systems and power supply products used in x-ray imaging systems. Industrial sales
of $6.4 million in the second quarter of fiscal year 2005 were $1.0 million, or 19% higher than the
second quarter of fiscal year 2004, primarily due to additional sales from Econco. Radar sales of
$28.5 million for the second quarter of fiscal year 2005 were $3.3 million, or 10%, lower than the
first quarter of fiscal year 2004, primarily due to the expected reduction of VED product
deliveries to the Department of Defense. Gross Profit. Gross profit of $29.1 million, or 34.4% of sales, in the second quarter of fiscal
year 2005 was $6.9 million higher than the prior years level of $22.2 million, or 28.8% of sales.
The increase in gross profit was primarily due to purchase accounting charges of $4.2 million in
the second quarter of fiscal year 2004 that did not occur in fiscal year 2005 and higher sales
volume and incremental gross profit from the Econco operation in the second quarter of fiscal year
2005. Research and Development Expenses. Research and development expenses of $1.9 million for the
second quarter of fiscal year 2005 were consistent with the $1.9 million expense in the second
quarter of fiscal year 2004. Selling and Marketing Expenses. Selling and marketing expenses of $4.6 million, or 5.4% of sales,
for the second quarter of fiscal year 2005 were $0.7 million higher than the $3.9 million, or 5.1%
of sales, for the second quarter of fiscal year 2004. The increase in selling and marketing
expenses in the second quarter of fiscal year 2005 was primarily due to additional costs to support
the increase in sales volume and incremental costs for the Econco operation. General and Administrative Expenses.Although general and administrative expenses of $5.9 million,
or 7.0% of sales, for the second quarter of fiscal year 2005 were generally consistent with the
$5.8 million, or 7.5% of sales, for the second quarter of fiscal year 2004, the composition of
these expenses changed. In the second quarter of fiscal year 2005, the Company incurred moving
and rearranging costs associated with the relocation of the San Carlos, California manufacturing
division to Palo Alto, California, higher currency loss and incremental costs for the Econco
operation as compared to in the second quarter of fiscal year 2004, offset by a $0.8 million
reduction in stock-based compensation expense primarily due to the accelerated vesting of CPI
Holding stock options in connection with the Merger in fiscal year 2004. Merger Expenses.Merger expenses of $5.9 million for the second quarter of fiscal year 2004
consisted of fees paid to investment bankers, legal expenses, transaction bonuses for management,
and transaction fees paid pursuant to the Management Services Agreement with Leonard, Green &
Partners, L.P., an affiliate of the former holder of a majority of the common stock of the
Predecessor. These expenses were incurred in connection with the sale of Holding. Amortization of Acquisition-Related Intangibles. Amortization of acquisition-related intangibles of
$1.5 million for the second quarter of fiscal year 2005 consists of purchase accounting charges of
$1.0 million for customer backlog and $0.5 million for other acquisition-related intangible assets.
Amortization of acquisition-related intangibles of $3.4 million for the second quarter of fiscal
year 2004 consists of purchase accounting charges for customer backlog. Customer backlog was fully
amortized in January 2005, while the other acquisition-related intangible assets will continue to
be amortized over the next 4 to 49 years. Amortization of acquisition-related intangibles is
expected to be approximately $0.6 million for the third quarter of fiscal year 2005 and per quarter
thereafter through fiscal year 2018. Acquired In-Process Research and Development. Acquired in-process research and development expense
of $11.5 million for the second quarter of fiscal year 2004 represents the estimated fair value of
acquired in-process research and development projects that had not yet reached technological
feasibility and had no alternative future use as of the Merger closing date. In the third quarter
of fiscal year 2004, the acquired in-process research and development expense was reduced by $9.0
million to $2.5 million because of the finalization of the Merger purchase price allocation. EBITDA. EBITDA for the second quarter of fiscal year 2005 was $18.4 million, an increase of $23.9
million compared to negative $5.5 million for the second quarter of fiscal year 2004. The increase
in EBITDA from fiscal year 2004 to 2005 resulted primarily from the write-off of acquired
in-process research and development and Merger expenses in fiscal year 2004 and higher gross profit
in fiscal year 2005. For a reconciliation of EBITDA to income (loss) before taxes, see Note 8 to
the Condensed Consolidated Financial Statements. Interest Expense, net. Interest expense, net of $4.7 million, or 5.6% of sales, for the second
quarter of fiscal year 2005 was $3.6 million lower than the $8.3 million, or 10.8% of sales, for
the second quarter of fiscal year 2004. The decrease in interest expense in fiscal year 2005 is
primarily due to fiscal year 2004 interest costs associated with the early redemption of the
Predecessors 12% Senior Subordinated Notes (the 12% Notes), and the write-off of capitalized
debt issue costs related to outstanding debt at the time of the Merger. Income Tax Expense (Benefit). The Company recorded income tax expense of $4.2 million for the
second quarter of fiscal 33




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##### Table of Contents



year 2005, an increase of $6.6 million, compared to the income tax benefit of $2.4 million for the
second quarter of fiscal year 2004. The effective tax rate for the second quarter of fiscal year
2005 was approximately 40%. The tax benefit of $2.4 million recorded in the second quarter of
fiscal year 2004 was primarily related to the Predecessors $12.3 million pre-tax loss for the
period from January 3, 2004 to January 22, 2004. Net Income. The Company recorded net income of $6.3 million for the second quarter of fiscal year
2005, an increase of $22.5 million compared to net loss of $16.2 million for the second quarter of
fiscal year 2004. Higher net income for the second quarter of fiscal year 2005 compared to the
second quarter of fiscal year 2004 is primarily due to purchase accounting charges in fiscal year
2004, and improved operating performance in fiscal year 2005. Six Months Ended April 1, 2005 Compared to the Six Months Ended April 2, 2004 Operating results for the first six-months of fiscal year 2005 and 2004 were as follows (dollars in
millions): Six-months Ended
    
    
    
    Six-months EndedApril 1, 2005
    
    
    
    April 2, 2004 (b)Amount
    
    
    Percentage of Sales
    
    
    
    Amount
    
    
    Percentage of SalesSales
    
    $
    158.2
    
    
    
    100.0
    %
    
    
    $
    145.6
    
    
    
    100.0
    %Cost of sales
    
    
    105.1
    
    
    
    66.4
    
    
    
    
    98.0
    
    
    
    67.3Amortization of acquisition related
inventory write-up
    
    
    0.4
    
    
    
    0.3
    
    
    
    
    4.2
    
    
    
    2.9Gross profit
    
    
    52.8
    
    
    
    33.4
    
    
    
    
    43.3
    
    
    
    29.7Research and development
    
    
    3.3
    
    
    
    2.1
    
    
    
    
    3.7
    
    
    
    2.5Selling and marketing
    
    
    8.7
    
    
    
    5.5
    
    
    
    
    7.5
    
    
    
    5.2General and administrative
    
    
    9.9
    
    
    
    6.3
    
    
    
    
    9.5
    
    
    
    6.5Merger expenses
    
    
    
    
    
    
    
    
    
    
    
    6.4
    
    
    
    4.4Amortization of acquisition related intangibles
    
    
    6.4
    
    
    
    4.0
    
    
    
    
    3.4
    
    
    
    2.3Acquired
in-process research and development
    
    
    
    
    
    
    
    
    
    
    
    11.5
    
    
    
    7.9Operating income (loss)
    
    
    24.6
    
    
    
    15.5
    
    
    
    
    1.4
    
    
    
    1.0Interest expense, net
    
    
    8.8
    
    
    
    5.6
    
    
    
    
    11.9
    
    
    
    8.2Income (loss) before taxes
    
    
    15.7
    
    
    
    9.9
    
    
    
    
    (10.5
    )
    
    
    (7.2
    )Income tax expense
    
    
    6.3
    
    
    
    4.0
    
    
    
    
    0.9
    
    
    
    0.6Net income (loss)
    
    $
    9.4
    
    
    
    5.9
    %
    
    
    $
    (11.4
    )
    
    
    (7.8
    )%Other Data:EBITDA (a)
    
    $
    33.9
    
    
    
    21.4
    %
    
    
    $
    7.6
    
    
    
    5.2
    %
  (a)
    
    EBITDA represents earnings before provision for income taxes, interest expense,
depreciation and amortization. Other companies may define EBITDA differently and, as a
result, the Companys measure of EBITDA may not be directly comparable to EBITDA of other
companies. Management believes that the presentation of EBITDA provides useful information
to investors regarding the Companys results of operations because it assists in analyzing
and benchmarking the performance and value of the Companys business. Although management
uses EBITDA as a financial measure to assess the performance of the Companys business, the
use of EBITDA is limited because it does not include certain material costs, such as
interest and taxes, necessary to operate the Companys business. EBITDA should be
considered in addition to, and not as a substitute for, net income in accordance with GAAP
as a measure of performance or net cash provided by operating activities in accordance with
GAAP as a measure of liquidity. For reconciliation of EBITDA to Income before taxes, see
Note 8 of the Notes to Consolidated Condensed Financial Statements.(b)
    
    Represents the combined pro forma results of CPI Holdco for the 10-week period ended
April 2, 2004 and the Predecessor for the 16-week period ended January 22, 2004. Sales. The following table compares total sales by market segment for the six-months ended April 1, 2005
to the six-months ended April 2, 2004 (dollars in millions): 34




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##### Table of Contents



Six-months EndedApril 1, 2005
    
    
    
    April 2, 2004Percentage of
    
    
    
    
    
    
    
    Percentage ofAmount
    
    
    Total Sales
    
    
    
    Amount
    
    
    Total SalesRadar
    
    $
    55.5
    
    
    
    35
    %
    
    
    $
    57.5
    
    
    
    39
    %Electronic Warfare
    
    
    12.8
    
    
    
    8
    %
    
    
    
    12.5
    
    
    
    9
    %Communications
    
    
    47.4
    
    
    
    30
    %
    
    
    
    38.8
    
    
    
    27
    %Medical
    
    
    25.7
    
    
    
    16
    %
    
    
    
    20.8
    
    
    
    14
    %Industrial
    
    
    11.9
    
    
    
    8
    %
    
    
    
    10.3
    
    
    
    7
    %Scientific
    
    
    4.9
    
    
    
    3
    %
    
    
    
    5.7
    
    
    
    4
    %Total sales
    
    $
    158.2
    
    
    
    100
    %
    
    
    $
    145.6
    
    
    
    100
    %
 Sales for the first six months of fiscal year 2005 of $158.2 million were $12.6 million, or 9%,
higher than the prior years level of $145.6 million. The sales increase was primarily related to
increases in the communications and medical markets, partially offset by a decrease in the radar
market. The Econco acquisition represents $5.8 million of the sales increase, while the remaining
increase of $6.8 million was due to growth from our existing business. Communications sales of $47.4 million in the first half of fiscal year 2005 were $8.6 million, or
22%, higher than the first half of fiscal year 2004, primarily due to increased shipment of
direct-to-home broadcast amplifiers, VED communication products and additional sales from the
Econco acquisition. Medical sales of $25.7 million for the first half of fiscal year 2005 were
$4.9 million, or 24%, higher than the first half of fiscal year 2004, primarily due to increased
shipments of VEDs used in cancer therapy and magnetic resonance imaging systems, and x-ray
generator systems and power supply products used in x-ray imaging systems. Radar sales of $55.5
million for the first half of fiscal year 2005 were $2.0 million, or 3%, lower than the first half
of fiscal year 2004, primarily due to the expected reduction of VED product deliveries to the
Department of Defense. Gross Profit. Gross profit of $52.8 million, or 33.4% of sales, in the first six months of fiscal
year 2005 was $9.5 million higher than the prior years level of $43.3 million, or 29.7% of sales.
The increase in gross profit was primarily due to merger purchase accounting charges of $4.2
million for amortization of acquisition-related inventory write-up in fiscal year 2004 and higher
sales volume in fiscal year 2005. Research and Development Expenses. Research and development expenses of $3.3 million, or 2.1% of
sales, for the first six months of fiscal year 2005 were $0.4 million lower than fiscal year 2004
due to additional engineering efforts on customer-funded development contracts rather than
Company-funded research and development programs. Selling and Marketing Expenses. Selling and marketing expenses of $8.7 million, or 5.5% of sales,
for the first half of fiscal year 2005 were $1.2 million higher than the $7.5 million, or 5.2% of
sales, for the first half of fiscal year 2004. The increase in selling and marketing expenses in
the first half of fiscal year 2005 was primarily due to additional costs to support the increase in
sales volume and incremental costs for the Econco operation. General and Administrative Expenses.Although general and administrative expenses of $9.9 million,
or 6.3% of sales, for the first half of fiscal year 2005 were generally consistent as a percentage
of sales with the $9.5 million, or 6.5% of sales, for the first half of fiscal year 2004, the
composition of these expenses changed. During the first half of fiscal year 2005, the Company
incurred moving and rearranging costs associated with the relocation of the San Carlos, California
manufacturing division to Palo Alto, California, higher currency loss and incremental costs for the
Econco operation as compared to in the first half of fiscal year 2004, offset by a $0.9 million
reduction in stock-based compensation expense primarily due to the accelerated vesting of CPI
Holding stock options in connection with the Merger in fiscal year 2004. Merger Expenses.Merger expenses of $6.4 million for the first half of fiscal year 2004 consisted
of fees paid to investment bankers, legal expenses, transaction bonuses for management, and
transaction fees paid pursuant to the Management Services Agreement with Leonard, Green & Partners,
L.P., an affiliate of the former holder of a majority of the common stock of the Predecessor.
These expenses were incurred in connection with the Merger. Amortization of Acquisition-Related Intangibles. Amortization of acquisition-related intangibles
of $6.4 million for the first half of fiscal year 2005 is $3.0 million higher than the first half
of fiscal year 2004. Amortization of acquisition-related intangibles consists of purchase
accounting charges, primarily for customer backlog and other intangible assets. Customer backlog
was fully amortized in January 2005 while the other acquisition-related intangible assets will
continue to be amortized over the next 4 to 49 years. Amortization of acquisition-related
intangibles is expected to be approximately $0.6 million per quarter through fiscal year 2018. Acquired In-Process Research and Development.Acquired in-process research and development expense
of $11.5 million for the first half of fiscal year 2004 represents the estimated fair value of
acquired in-process research and development projects that had not yet reached technological
feasibility and had no alternative future use as of the Merger closing date. In the third 35




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quarter of fiscal year 2004, the acquired in-process research and development expense was reduced
by $9.0 million to $2.5 million because of the finalization of the Merger purchase price
allocation. EBITDA. EBITDA for the first six months of fiscal year 2005 was $33.9 million, an increase of
$26.3 million compared to $7.6 million for the first six months of fiscal year 2004. The increase
in EBITDA from fiscal year 2004 to 2005 resulted primarily from the write-off of acquired
in-process research and development and Merger expenses in fiscal year 2004 and higher gross profit
in fiscal year 2005. For a reconciliation of EBITDA to income (loss) before taxes, see Note 8 to
the Condensed Consolidated Financial Statements. Interest Expense, net. Interest expense, net, of $8.8 million, or 5.6% of sales, for the first six
months of fiscal year 2005 was $3.1 million lower than the $11.9 million, or 8.2% of sales, for the
first six months of fiscal year 2004. The decrease in interest expense in fiscal year 2005 is
primarily due to fiscal year 2004 interest costs associated with the early redemption of the
Predecessors 12% Notes, and the write-off of capitalized debt issue costs related to outstanding
debt at the time of the Merger. Income Tax Expense. The Company recorded income tax expense of $6.3 million for the first six
months of fiscal year 2005, an increase of $5.4 million, compared to income tax expense of $0.9
million for the first six months of fiscal year 2004. The effective income tax rate was 40% for
the first six months of fiscal year 2005. Despite a pre-tax loss of $10.5 million for the first
six months of fiscal year 2004, tax expense was recorded as certain Merger and purchase accounting
related expenses were not deductible for income tax purposes. Net Income. The Company recorded net income of $9.4 million for the first six months of fiscal
year 2005, an increase of $20.8 million compared to a net loss of $11.4 million for the first six
months of fiscal year 2004. Higher net income for the first half of fiscal year 2005 compared to
fiscal year 2004 is primarily due to purchase accounting charges in fiscal year 2004 and improved
operating performance in fiscal year 2005. Financial Condition The Company generated net cash from operating activities of $5.2 million for the first half of
fiscal year 2005, compared to $2.5 million for the first half of fiscal year 2004. The $2.7
million increase in net cash from operating activities for the first half of fiscal year 2005
compared to the first half of fiscal year 2004 is primarily due to the increase in net income,
excluding non-cash charges, partially offset by increases in inventory and accounts receivable.
The increase in accounts receivable was due to increased sales and the increase in inventory was
due to increased product delivery requirements in fiscal year 2005 compared to fiscal year 2004. Investing activities used net cash of $23.3 million for the first half of fiscal year 2005,
compared to $114.5 million for the first half of fiscal year 2004. Investing activities for first
half of fiscal year 2005 include $18.7 million for the purchase of Econco and $4.4 million for the
purchases of property, plant and equipment, primarily in connection with the relocation of the San
Carlos production facility to Palo Alto, California. Investing activities for the first half of
fiscal year 2004 consists primarily of the purchase of the Predecessors net assets. The Companys continuing operations typically do not have large capital expenditure requirements.
Capital expenditures are generally made to replace existing assets, increase productivity,
facilitate cost reductions or meet regulatory requirements. Excluding fiscal year 2005 anticipated
capital expenditures of approximately $14 million related to the relocation of the San Carlos,
California facility to Palo Alto, California, the Company expects the level of capital expenditures
in fiscal year 2005 to be consistent with fiscal year 2004 levels. Financing activities used net cash of $9.9 million for the first half of fiscal year 2005, compared
to $106.2 million provided by financing activities for the first half of fiscal year 2004.
Financing activities for the first half of fiscal year 2005 consist primarily of a $75.8 million
distribution to stockholders of CPI Holdco, $9.6 million repayments on CPIs senior term loans and
$3.4 million incurred to issue the FR Notes, partially offset by the $79.2 million of gross
proceeds from the issuance of FR Notes. The term loan repayments included $3.9 million of required
annual repayments and an optional prepayment of $5.7 million. Working capital was $65.3 million at April 1, 2005 compared to $72.4 million at October 1, 2004,
representing a decrease of $7.1 million during the first two quarters of fiscal year 2005. The
decrease in working capital was primarily due to the $18.7 million purchase consideration for the
purchase of Econcos common stock, partially offset by cash generated from operating activities and
additional working capital from the Econco acquisition. On April 1, 2005, CPI had $12.5 million in cash and cash equivalents, compared to $40.5 million on
October 1, 2004. Cash balances in excess of operating requirements are invested daily in federal
securities. The following table summarizes future minimum principal payments on outstanding debt and minimum
rentals due for certain facilities and other leased assets under long-term non-cancelable operating
leases as of April 1, 2005 (in thousands): 36




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Due in Fiscal YearsDescription
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    TotalDebt obligations
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,044
    
    
    
    268,956
    
    
    
    285,000Noncancellable operating leases
    
    
    622
    
    
    
    610
    
    
    
    427
    
    
    
    356
    
    
    
    338
    
    
    
    3,838
    
    
    
    6,191Total cash obligations
    
    $
    622
    
    
    
    610
    
    
    
    427
    
    
    
    356
    
    
    
    16,382
    
    
    
    272,794
    
    
    
    291,191Standby letters of credit
    
    $
    4,092
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,092
 The Company continues to use forward exchange contracts to address the foreign currency risk
associated with anticipated manufacturing costs in Canada. As of April 1, 2005, CPI had
outstanding forward contract commitments to purchase Canadian dollars for an aggregate U.S.
notional amount of $27.1 million; the last forward contract expires on March 10, 2006. At April 1,
2005, the fair value of unrealized foreign currency forward contracts was $2.7 million and the
unrealized gain was approximately $1.8 million, net of related tax expense. The Company anticipates
recognizing the entire unrealized gain in operating earnings within the next twelve months. In April 2005, the Company expanded its use of derivatives to address the interest rate risk
associated with the recently issued FR Notes. On April 15, 2005, the Company entered into an $80
million interest rate swap contract to receive variable rate 6-month LIBOR interest and pay 4.15%
fixed rate interest. The interest rate swap contract is for semi-annual interest payments,
beginning with interest payments due on February 1, 2006, and the contract matures on January 31,
2008. The Companys liquidity is affected by many factors, some of which are based on normal ongoing
operations of our business and others related to uncertainties in the markets in which we compete
and global economies. We believe that cash and cash equivalents on hand, cash expected to be
generated from operations and borrowing capability under our Senior Credit Facility will be
sufficient to meet the Companys cash requirements for the next 12 months. Recent Accounting Pronouncements In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-01, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF
03-01). EITF 03-01 provides guidance on other-than-temporary impairment models for marketable debt
and equity securities accounted for under SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities and non-marketable equity securities accounted for under the cost method.
The EITF developed a basic three-step model to evaluate whether an investment is
other-than-temporarily impaired. The Financial Accounting Standards Board (FASB) issued EITF
03-01-1 in September 2004, which delayed the effective date of the recognition and measurement
provisions of EITF 03-01. The Company does not expect the adoption of EITF 03-01 to have a material
impact on our results of operations or financial condition. In November 2004, the FASB issued SFAS No. 151, Inventory Costsan amendment of ARB No. 43,
Chapter 4, which is the result of the FASBs project to reduce differences between U.S. and
international accounting standards. SFAS No. 151 requires idle facility costs, abnormal freight,
handling costs, and amounts of wasted materials (spoilage) be treated as current-period costs.
Under this concept, if the costs associated with the actual level of spoilage or production defects
are greater than the costs associated with the range of normal spoilage or defects, the difference
would be charged to current-period expense, not included in inventory costs. SFAS No. 151 will be
effective for inventory costs incurred during fiscal years beginning after June 15, 2005, or for
our fiscal year 2006. The Company has not yet determined the impact of applying the provisions of
SFAS No. 151. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets  An amendment of
APB Opinion No. 29, which eliminates the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary assets that do not
have commercial substance. The Company is required to adopt SFAS No. 153 for nonmonetary asset
exchanges occurring in the first quarter of 2006 and its adoption is not expected to have a
significant impact on the results of operations or financial condition. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No.
123R). SFAS No. 123R requires companies to recognize in the income statement the grant-date fair
value of stock options and other equity-based compensation issued to employees, but expresses no
preference for a type of valuation model. SFAS No. 123R eliminates the intrinsic value-based method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, that the Company currently uses. SFAS No. 123R requires
the Company to adopt the new accounting provisions beginning in the first annual reporting period
that begins after December 15, 2005, or for our fiscal year 2007, as a nonpublic entity as defined
by SFAS No. 123R. The Company has not yet determined the impact of applying the provisions of SFAS
No. 123R. In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations, which clarifies that an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair 37




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value can be reasonably estimated even though uncertainty exists about the timing and (or) method
of settlement. The Company is required to adopt Interpretation No. 47 by the end of 2006. The
Company has not yet determined the impact of applying the provisions of Interpretation No. 47. 
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company operates in a dynamic and rapidly changing environment that involves numerous risks and
uncertainties. The following section describes some, but not all, of these risks and uncertainties
that we believe may adversely affect our business, financial condition or results of operations.
This section should be read in conjunction with the unaudited Condensed Consolidated Financial
Statements and Notes thereto, and Managements Discussion and Analysis of Financial Condition and
Results of Operation contained elsewhere in the Form 10-Q. Interest Rate Risk The Company had fixed-rate debt of $125 million and variable-rate debt of $160 million as of April
1, 2005. The fair value of long-term variable interest rate debt is subject to interest rate risk.
Generally, the fair value of variable-rate debt will decrease as interest rates fall and increase
as interest rates rise. As of April 1, 2005, the fair value of the Companys long-term fixed rate
and floating-rate debt approximates the carrying value. In April 2005, the Company expanded its use of derivatives to address the interest rate risk
associated with the recently issued FR Notes. On April 15, 2005, the Company entered into an $80
million interest rate swap contract (the Swap) to receive variable rate 6-month LIBOR interest
and pay 4.15% fixed rate interest. The Swap is for semi-annual interest payments, beginning with
interest payments due on February 1, 2006, and the contract matures on January 31, 2008. The Swap
is designated as a cash flow hedge under SFAS No. 133 and the gain and loss from changes in fair
value is expected to be highly effective at offsetting the gain or loss from changes in fair value
of the FR Notes attributable to changes in interest rates over the contract period. Foreign Currency Exchange Rate Risk The majority of the Companys revenue and expense activities are transacted in U.S. dollars.
However, CPI incurs expenses, and receives limited revenue, in other currencies, primarily the
Canadian dollar, the British pound, the Euro, the Australian dollar and the Swiss franc. The
Companys results of operations can be impacted through foreign currency exchange rate risk (a) to
the balance sheet components (assets and liabilities) and (b) through its impact to foreign
denominated expenses, primarily in Canada. The Company limits its foreign currency exchange rate
risk to the balance sheet components primarily through natural hedging (offsetting foreign currency
payables with foreign currency receivables). The most significant exposure to foreign denominated
expenses is in Canada, where the Company enters into forward contracts in an effort to reduce, but
not eliminate, the impact of foreign currency rate movements. The fair value of forward contracts
is subject to foreign currency risk. 
 ITEM 4: CONTROLS AND PROCEDURES Management, including the Companys principal executive officer and principal financial officer,
has evaluated, as of the end of the period covered by this report, the effectiveness of the design
and operation of the Companys disclosure controls and procedures with respect to the information
generated for use in this report. Based upon, and as of the date of that evaluation, the principal
executive officer and principal financial officer concluded that the disclosure controls and
procedures were effective to provide reasonable assurances that information required to be
disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms. There have been no changes in the Companys internal control over financial reporting that occurred
during the Companys most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting. 38




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PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. 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: ExhibitNo.
    
    Description31
    
    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    Certifications of Chief Executive Officer and Chief Financial Officer pursuant
to Section 906 the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
 (b) Reports on Form 8-K A report on Form 8-K was filed on February 4, 2005, under Item 8.01, to report that CPI
Holdco, Inc. had proposed a private placement of floating rate senior notes. A report on Form 8-K was filed on February 10, 2005, under Item 5.02, to report that David
Sullivan resigned as director of each of CPI Holdco, Inc. and Communications & Power
Industries, Inc. A report on Form 8-K was filed on February 17, 2005, under Item 8.01, to report that CPI
Holdco, Inc. had agreed to issue and sell, through a private placement, $80 million of
floating rate senior notes. A report on Form 8-K was filed on February 23, 2005, under Items 1.01 and 2.03, to report
that CPI Holdco, Inc. issued $80 million of floating rate senior notes due 2015 and that
Communications & Power Industries, Inc. amended its senior credit facility. 39




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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. CPI HOLDCO, INC.By:
    
    /s/ O. Joe CaldarelliO. Joe CaldarelliChief Executive OfficerDate: May 13, 2005By:
    
    /s/ Joel LittmanJoel LittmanChief Financial Officer, Treasurer and Secretary(Principal Financial and Accounting Officer)Date: May 13, 2005
 40




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##### Table of Contents



Exhibit Index ExhibitNo.
    
    Description31
    
    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    Certifications of Chief Executive Officer and Chief Financial Officer pursuant
to Section 906 the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.