##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended April 2, 2004
 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:
333-11386-04 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 o No x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes o No x 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 7, 2004.




---



CPI HOLDCO, INC.
and subsidiaries PART I: FINANCIAL INFORMATIONITEM 1: CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)Consolidated Condensed Balance Sheets
    
    
    2Consolidated Condensed Statements of Operations and Comprehensive (Loss) Income
    
    
    3Consolidated Condensed Statements of Cash Flows
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    6ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    25ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
    
    
    39ITEM 4: CONTROLS AND PROCEDURES
    
    
    39PART II: OTHER INFORMATION
    
    
    40SIGNATURES
    
    
    41EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 31EXHIBIT 32
  -1-




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CPI HOLDCO, INC.
and subsidiaries 
 CONSOLIDATED CONDENSED BALANCE SHEETS  April 2,
    
    October 3,2004
    
    2003(Successor)
    
    (Predecessor)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    13,982
    
    
    $
    33,751Accounts receivable, net
    
    
    43,331
    
    
    
    33,128Inventories
    
    
    37,218
    
    
    
    37,358Other current assets
    
    
    3,111
    
    
    
    2,210Total current assets
    
    
    97,642
    
    
    
    106,447Property, plant, and equipment, net
    
    
    69,544
    
    
    
    32,551Goodwill
    
    
    165,507
    
    
    
    19,149Intangibles, net
    
    
    27,214
    
    
    
    21,536Debt issue costs, net
    
    
    9,395
    
    
    
    2,285Total assets
    
    $
    369,302
    
    
    $
    181,968LIABILITIES, PREFERRED STOCK ANDSTOCKHOLDERS EQUITY (DEFICIT)Current LiabilitiesCurrent portion of term loans
    
    $
    900
    
    
    $
    Mortgage financing
    
    
    
    
    
    
    17,500Accounts payable
    
    
    16,723
    
    
    
    15,624Accrued expenses
    
    
    20,270
    
    
    
    21,445Product warranty
    
    
    5,889
    
    
    
    5,401Income taxes payable
    
    
    2,976
    
    
    
    3,584Accrued dividends payable
    
    
    
    
    
    
    15,449Advance payments from customers
    
    
    7,830
    
    
    
    10,203Total current liabilities
    
    
    54,588
    
    
    
    89,206Senior term loans
    
    
    89,100
    
    
    
    Senior subordinated notes
    
    
    125,000
    
    
    
    100,000Deferred income taxes
    
    
    4,802
    
    
    
    Total liabilities
    
    
    273,490
    
    
    
    189,206Senior Redeemable Preferred Stock of CPI
    
    
    
    
    
    
    28,907Junior Preferred Stock of CPI
    
    
    
    
    
    
    29,300Commitments and contingenciesStockholders Equity (Deficit)Common stock
    
    
    43
    
    
    
    50Additional paid-in capital
    
    
    102,237
    
    
    
    21,519Deferred compensation
    
    
    
    
    
    
    (1,289
    )Accumulated deficit
    
    
    (6,833
    )
    
    
    (84,469
    )Stockholder loans
    
    
    
    
    
    
    (1,256
    )Other comprehensive income
    
    
    365
    
    
    
    Net stockholders equity (deficit)
    
    
    95,812
    
    
    
    (65,445
    )Total liabilities, preferred stock and
stockholders equity (deficit)
    
    $
    369,302
    
    
    $
    181,968
 See accompanying notes to the unaudited consolidated condensed financial
statements. -2-




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CPI HOLDCO, INC.
and subsidiaries 
 CONSOLIDATED CONDENSED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME  Fiscal Year2004
    
    2003January 23, 2004
    
    January 3, 2004
    
    13-Weekto
    
    to
    
    Period EndedApril 2, 2004
    
    January 22, 2004
    
    April 4, 2003(Successor)
    
    (Predecessor)
    
    (Predecessor)Sales
    
    $
    65,641
    
    
    $
    11,606
    
    
    $
    67,897Cost of sales
    
    
    46,027
    
    
    
    9,049
    
    
    
    47,213Gross profit
    
    
    19,614
    
    
    
    2,557
    
    
    
    20,684Operating costs and expenses:Research and development
    
    
    1,464
    
    
    
    467
    
    
    
    1,574Selling and marketing
    
    
    3,138
    
    
    
    728
    
    
    
    3,845General and administrative
    
    
    3,512
    
    
    
    2,332
    
    
    
    5,085Merger expenses
    
    
    
    
    
    
    5,944
    
    
    
    Amortization of acquisition-related
intangible assets
    
    
    3,396
    
    
    
    
    
    
    
    Acquired in-process research and
development
    
    
    11,500
    
    
    
    
    
    
    
    Total operating costs and expenses
    
    
    23,010
    
    
    
    9,471
    
    
    
    10,504Operating (loss) income
    
    
    (3,396
    )
    
    
    (6,914
    )
    
    
    10,180Interest expense
    
    
    2,950
    
    
    
    5,343
    
    
    
    3,576(Loss) income before taxes
    
    
    (6,346
    )
    
    
    (12,257
    )
    
    
    6,604Income tax expense (benefit)
    
    
    487
    
    
    
    (2,848
    )
    
    
    3,385Net (loss) income
    
    
    (6,833
    )
    
    
    (9,409
    )
    
    
    3,219Preferred dividends:Senior redeemable preferred stock
    
    
    
    
    
    
    2,252
    
    
    
    1,452Junior preferred stock
    
    
    
    
    
    
    1,334
    
    
    
    945Net (loss) income attributable to common stock
    
    $
    (6,833
    )
    
    $
    (12,995
    )
    
    $
    822Other comprehensive income, net of tax:Unrealized gain on cash flow hedges
    
    
    365
    
    
    
    
    
    
    
    Comprehensive (loss) income
    
    $
    (6,468
    )
    
    $
    (12,995
    )
    
    $
    822
 See accompanying notes to the unaudited consolidated condensed financial
statements. -3-




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CPI HOLDCO, INC.
and subsidiaries CONSOLIDATED CONDENSED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(in thousands - unaudited) Fiscal Year2004
    
    2003January 23, 2004
    
    October 4, 2003
    
    27-Weekto
    
    to
    
    Period EndedApril 2, 2004
    
    January 22, 2004
    
    April 4, 2003(Successor)
    
    (Predecessor)
    
    (Predecessor)Sales
    
    $
    65,641
    
    
    $
    79,919
    
    
    $
    129,523Cost of sales
    
    
    46,027
    
    
    
    56,189
    
    
    
    92,149Gross profit
    
    
    19,614
    
    
    
    23,730
    
    
    
    37,374Operating costs and expenses:Research and development
    
    
    1,464
    
    
    
    2,200
    
    
    
    3,019Selling and marketing
    
    
    3,138
    
    
    
    4,352
    
    
    
    7,769General and administrative
    
    
    3,512
    
    
    
    6,033
    
    
    
    8,963Merger expenses
    
    
    
    
    
    
    6,374
    
    
    
    Amortization of acquisition related
intangible assets
    
    
    3,396
    
    
    
    
    
    
    
    Acquired in-process research and
development
    
    
    11,500
    
    
    
    
    
    
    
    Total operating costs and expenses
    
    
    23,010
    
    
    
    18,959
    
    
    
    19,751Operating (loss) income
    
    
    (3,396
    )
    
    
    4,771
    
    
    
    17,623Other income
    
    
    
    
    
    
    
    
    
    
    (267
    )Interest expense
    
    
    2,950
    
    
    
    8,902
    
    
    
    7,246(Loss) income before taxes
    
    
    (6,346
    )
    
    
    (4,131
    )
    
    
    10,644Income tax expense
    
    
    487
    
    
    
    439
    
    
    
    4,889Net (loss) income
    
    
    (6,833
    )
    
    
    (4,570
    )
    
    
    5,755Preferred dividends:Senior redeemable preferred stock
    
    
    
    
    
    
    3,861
    
    
    
    2,854Junior preferred stock
    
    
    
    
    
    
    2,382
    
    
    
    1,859Net (loss) income attributable to common stock
    
    $
    (6,833
    )
    
    $
    (10,813
    )
    
    $
    1,042Other comprehensive income, net of tax:Unrealized gain on cash flow hedges
    
    
    365
    
    
    
    
    
    
    
    Comprehensive (loss) income
    
    $
    (6,468
    )
    
    $
    (10,813
    )
    
    $
    1,042
 See accompanying notes to the unaudited consolidated condensed financial
statements. -4-




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CPI HOLDCO, INC.
and subsidiaries 
 CONSOLIDATED CONDENSED
STATEMENTS OF CASH FLOWS
(in thousands - unaudited) Fiscal Year2004
    
    2003January 23, 2004
    
    October 4, 2003
    
    27-Weekto
    
    to
    
    period endedApril 2, 2004
    
    January 22, 2004
    
    April 4, 2003(Successor)
    
    (Predecessor)
    
    (Predecessor)OPERATING ACTIVITIESNet cash (used in) provided by operating activities
    
    $
    (5,750
    )
    
    $
    7,166
    
    
    $
    18,812INVESTING ACTIVITIESPurchase of Predecessor net assets, net of
cash acquired
    
    
    (113,760
    )
    
    
    
    
    
    
    Proceeds from the sale of SSPD division
    
    
    
    
    
    
    
    
    
    
    136Purchase of property, plant and equipment, net
    
    
    (298
    )
    
    
    (459
    )
    
    
    (918
    )Net cash used in investing activities
    
    
    (114,058
    )
    
    
    (459
    )
    
    
    (782
    )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:Senior subordinated notes
    
    
    125,000
    
    
    
    
    
    
    
    Senior term loans
    
    
    90,000
    
    
    
    
    
    
    
    Debt issue costs
    
    
    (9,577
    )
    
    
    
    
    
    
    Proceeds from the repayment of Predecessor
management loans
    
    
    1,266
    
    
    
    
    
    
    
    Net proceeds from the issuance of common stock
    
    
    98,075
    
    
    
    
    
    
    
    110Repayments on capital leases
    
    
    
    
    
    
    
    
    
    
    (45
    )Repayment of mortgage financing
    
    
    
    
    
    
    
    
    
    
    (250
    )Payment of debt issue refinancing costs
    
    
    
    
    
    
    
    
    
    
    (295
    )Net repayment from bank overdraft
    
    
    1,907
    
    
    
    (1,639
    )
    
    
    (1,007
    )Net cash provided by (used in) financing activities
    
    
    133,790
    
    
    
    (27,639
    )
    
    
    (1,487
    )NET INCREASE (DECREASE) IN CASH ANDCASH EQUIVALENTS
    
    
    13,982
    
    
    
    (20,932
    )
    
    
    16,543Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    33,751
    
    
    
    2,724Cash and cash equivalents at end of period
    
    $
    13,982
    
    
    $
    12,819
    
    
    $
    19,267
 See accompanying notes to the unaudited consolidated condensed financial
statements. -5-




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CPI HOLDCO, INC.
and subsidiaries 
 NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
(unaudited) 1. Basis of Presentation For periods prior to January 22, 2004, the accompanying consolidated condensed
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 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 (the Merger). 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
consolidated condensed 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 which end on the
Friday nearest September 30. The Successors fiscal year did not change from
that of the Predecessor. Fiscal year 2004 will be comprised of the 52-week
period ending October 1, 2004, and fiscal year 2003 was comprised of the
53-week period ended October 3, 2003. Both the second quarter of fiscal year
2004 and the second quarter of fiscal year 2003 were comprised of 13 weeks. Management believes that these unaudited interim condensed 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 2004. 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 year ended
October 3, 2003. There is currently no public market for the Companys common stock. The Company
is subject to the periodic reporting requirements of the Securities Exchange
Act of 1934, pursuant to Section 15(d) thereof, because it, along with
Communications & Power Industries, Inc. (CPI) and certain of its
subsidiaries, filed a registration statement on Form S-4 to register CPIs 8%
Senior Subordinated Notes due 2012 (8% Notes). The registration statement
became effective April 20, 2004 pursuant to the Securities Act of 1933, as
amended. 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. During fiscal year 2003,
the Company issued stock options to employees which 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 under the caption General and
administrative in the Consolidated Condensed Statement of Operations on a
straight-line basis over the four year vesting period until they became fully
vested at the time of the merger. If compensation cost for the Companys stock-based compensation plan had been
determined consistent -6-




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries with SFAS No. 123, the Companys net income would have changed to the pro forma
amounts indicated below: Fiscal Year2004
    
    2003January 23, 2004
    
    January 3, 2004
    
    13-Weekto
    
    to
    
    Period endedApril 2, 2004
    
    January 22, 2004
    
    April 4, 2003(In thousands)
    
    (Successor)
    
    (Predecessor)
    
    (Predecessor)Net (loss) income as reported
    
    $
    (6,833
    )
    
    $
    (9,409
    )
    
    $
    3,219Add:Stock-based compensation included in net
income determined under intrinsic value
method, net of tax
    
    
    
    
    
    
    1,195
    
    
    
    821Deduct:Stock-based compensation determined under
fair value based method, net of tax
    
    
    43
    
    
    
    24
    
    
    
    160Pro forma net (loss) income
    
    $
    (6,876
    )
    
    $
    (8,238
    )
    
    $
    3,880
 Fiscal Year2004
    
    2003January 23, 2004
    
    October 4, 2003
    
    27-Weekto
    
    to
    
    Period endedApril 2, 2004
    
    January 22, 2004
    
    April 4, 2003(In thousands)
    
    (Successor)
    
    (Predecessor)
    
    (Predecessor)Net (loss) income as reported
    
    $
    (6,833
    )
    
    $
    (4,570
    )
    
    $
    5,755Add:Stock-based compensation included in net
income determined under intrinsic value
method, net of tax
    
    
    
    
    
    
    1,289
    
    
    
    821Deduct:Stock-based compensation determined under
fair value based method, net of tax
    
    
    43
    
    
    
    227
    
    
    
    128Pro forma net (loss) income
    
    $
    (6,876
    )
    
    $
    (3,508
    )
    
    $
    6,448
 2. Mergers 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 -7-




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CPI HOLDCO, INC.
and subsidiaries pro rata portion of the aggregate merger consideration of $130.3 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 168,998 shares of common stock of
CPI Holdco. In connection with the Merger, Holding and CPI refinanced all of
their outstanding indebtedness. As part of the refinancing, CPI effected a
covenant defeasance of its 12% Senior Subordinated Notes (12% Notes) and
elected to redeem in full the remaining $74.0 million outstanding aggregate
principal amount of the 12% Notes pursuant to the terms of the Indenture
governing the 12% Notes (the 12% Indenture). 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 transaction described above is being accounted for using the purchase
method of accounting as required by the Financial Accounting Standards Board
(FASB) Statement No. 141, Business Combinations. Accordingly, the assets
and liabilities of Holding will be adjusted to their fair values and the excess
of the purchase price over the fair value of the assets acquired will be
recorded as goodwill. The allocation of the purchase price to specific assets
and liabilities is based, in part, upon independent appraisals and internal
estimates of cash flow and recoverability. The allocation of purchase price
has been completed for inventory, property, plant and equipment, and certain
intangibles, such as backlog, in-process research and development and land
leases. An independent appraisal of additional identifiable intangibles is in
process and is expected to be completed in the quarter ended July 2, 2004. It
is probable that additional adjustments to this allocation will be made in
future periods, which could adversely affect the Companys results of
operations. Based on the preliminary purchase price allocation, the following
table summarizes the fair values of the assets acquired and liabilities assumed
at January 23, 2004: Inventory
    
    $
    43,608Accounts receivable
    
    
    29,587Other current assets
    
    
    16,060Property, plant and equipment
    
    
    70,145Identifiable intangible assets
    
    
    30,733Acquired in-process research and development
    
    
    11,500Goodwill
    
    
    165,507Debt and preferred stock
    
    
    (172,881
    )Other liabilities
    
    
    (63,938
    )Total
    
    $
    130,321
 The acquired in-process research and development of $11.5 million 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. Accordingly, this amount was written off at the Merger
date. The value assigned to in-process technology relates to ten projects
involving development of VEDs for communications, scientific and military
applications and development of power supplies, x-ray generators and
transmitters for industrial, medical and military applications. See Note 12 for
description of identifiable intangible assets acquired. -8-




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries 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 are excluded from the adjustments to the
pro forma amounts. Fiscal Year2004
    
    200313-Week
    
    13-WeekPeriod ended
    
    Period ended(In thousands)
    
    April 2, 2004
    
    April 4, 2003Sales
    
    $
    77,247
    
    
    $
    67,897Pro forma net income
    
    $
    6,594
    
    
    $
    3,280
 Fiscal Year2004
    
    200326-Week
    
    27-WeekPeriod ended
    
    Period ended(In thousands)
    
    April 2, 2004
    
    April 4, 2003Sales
    
    $
    145,560
    
    
    $
    129,523Pro forma net income
    
    $
    11,420
    
    
    $
    5,792
 Intercompany Merger 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. 3. Inventories Inventories are stated at the lower of average cost or market (net realizable
value). The main components of inventories are as follows: April 2,
    
    October 3,(In thousands)
    
    2004
    
    2003Raw materials and parts
    
    $
    24,781
    
    
    $
    26,330Work in process
    
    
    9,868
    
    
    
    8,786Finished goods
    
    
    2,569
    
    
    
    2,242Inventories
    
    $
    37,218
    
    
    $
    37,358
 4. 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: -9-




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CPI HOLDCO, INC.
and subsidiaries Fiscal Year2004
    
    2003January 23, 2004
    
    January 3, 2004
    
    13-Weekto
    
    to
    
    Period endedApril 2, 2004
    
    January 22, 2004
    
    April 4, 2003(In thousands)
    
    (Successor)
    
    (Predecessor)
    
    (Predecessor)Beginning accrued warranty
    
    $
    5,839
    
    
    $
    6,086
    
    
    $
    5,081Cost of warranty claims
    
    
    (826
    )
    
    
    (269
    )
    
    
    (1,428
    )Accruals for product warranty
    
    
    876
    
    
    
    22
    
    
    
    1,420Ending accrued warranty
    
    $
    5,889
    
    
    $
    5,839
    
    
    $
    5,073
 Fiscal Year2004
    
    2003January 23, 2004
    
    October 4, 2003
    
    27-Weekto
    
    to
    
    Period endedApril 2, 2004
    
    January 22, 2004
    
    April 4, 2003(In thousands)
    
    (Successor)
    
    (Predecessor)
    
    (Predecessor)Beginning accrued warranty
    
    $
    5,839
    
    
    $
    5,401
    
    
    $
    4,823Cost of warranty claims
    
    
    (826
    )
    
    
    (1,241
    )
    
    
    (2,728
    )Accruals for product warranty
    
    
    876
    
    
    
    1,679
    
    
    
    2,978Ending accrued warranty
    
    $
    5,889
    
    
    $
    5,839
    
    
    $
    5,073
 5. Senior Credit Facility In connection with the Merger, CPI entered into a $130.0 million credit
agreement (Senior Credit Facility). This 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 a $90.0 million term loan (Term Loan), which
expires on July 23, 2010. 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 Senior Credit Facility is guaranteed by CPI
Holdco and all of CPIs domestic subsidiaries and collateralized with a
security agreement, which includes a security interest in certain property and
fixtures. The Revolver and Term Loan borrowings will initially bear interest at a rate
equal to LIBOR plus 3.00% per annum (the 3.00% being referred to as the
Applicable LIBOR Margin), or the Alternate Base Rate (ABR) plus 2.0% per
annum; the ABR is the greater of (a) the Prime Rate and (b) the Federal Funds
Rate plus 0.50%. In addition to customary fronting and administrative fees
under the Senior Credit Facility, CPI will pay Letter of Credit Participation
fees equal to the Applicable LIBOR Margin per annum on the average daily amount
of letter of credit exposure, and a commitment fee of 0.50% per annum on the
average daily unused amount of revolving commitment. The Senior Credit Facility contains a number of covenants that, among other
things, restrict the ability of CPI Holdco, CPI and certain of its subsidiaries
to sell assets; engage in mergers and acquisitions; pay dividends and
distributions or repurchase their capital stock; incur additional indebtedness
or issue equity interests; make investments and loans; create liens or further
negative pledges on assets; engage in certain transactions with affiliates;
enter into sale and leaseback transactions; change their business or ownership;
amend agreements or make prepayments relating to subordinated indebtedness;
amend -10-




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CPI HOLDCO, INC.
and subsidiaries or waive provisions of charter documents, agreements with respect to capital
stock or any other document related to the Merger Agreement or related
transaction documents in a manner that is materially adverse to the lenders;
and change their fiscal year. These covenants are subject to certain
exceptions. In addition, the Senior Credit Facility requires CPI and its subsidiaries to
maintain the following financial covenants: a minimum interest coverage ratio;
a maximum total leverage ratio; a minimum fixed charge coverage ratio; and a
maximum capital expenditures limitation. 6. 8% Senior Subordinated Notes In connection with the Merger, CPI issued an aggregate principal amount of
$125.0 million of 8% Notes which will mature on February 1, 2012. CPI is
required to pay interest on the 8% Notes semiannually, beginning on August 1,
2004. The indenture governing the terms of the 8% Notes (the 8% Indenture)
contains restrictive provisions which, among other things, limit CPI and
certain of its subsidiaries from incurring certain indebtedness, selling assets
or consolidating or merging with or into other companies, paying dividends or
repurchasing or redeeming capital stock, making certain investments and
entering into certain types of transactions with their affiliates. The payment
of principal, premium and interest on, and other obligations evidenced by the
8% Notes is subordinated in right of payment, as set forth in the 8% Indenture,
to the prior payment in full of all senior debt (as defined in the 8%
Indenture), including indebtedness under the Senior Credit Facility, whether
outstanding on the date of the 8% Indenture or thereafter incurred. CPIs
payment obligations under the 8% Notes are jointly and severally guaranteed by
CPI Holdco and all of CPIs domestic subsidiaries. The 8% Notes may be redeemed
as described in, and subject to the terms and conditions set forth in, the 8%
Indenture. In addition, the 8% Indenture requires the Company to make an offer
to purchase the 8% Notes in certain circumstances. 7. Financial Instruments The Company enters into foreign currency forward and option contracts with
financial institutions primarily to protect financial performance against the
effects of foreign currency fluctuations from certain firmly committed
transactions and probable but not firmly committed transactions. The Company
may also enter into foreign currency forward and option contracts to offset the
foreign exchange gains and losses generated by the re-measurement of certain
recorded assets and liabilities denominated in non-functional currencies of its
foreign subsidiaries. The Company entered into foreign currency forward contracts on March 2, 2004
for an aggregate notional amount of $25.1 million, expiring on February 25,
2005 to protect against foreign exchange risks associated with probable but not
firmly committed transactions. The Companys foreign exchange forward
contracts are designated as a cash flow hedge and are considered highly
effective, as defined by FASB Statement No. 133. At April 2, 2004, the fair
value of the foreign currency forward was a gain of approximately $0.4 million,
net of related tax expense. The unrealized gains from these forwards are
included in other comprehensive income and are shown as a component of
stockholders equity. 8. Change in Accounting Estimate As a result of an appraisal performed by an independent third party in
connection with the Merger purchase price allocation, the Company revised the
useful lives of its property, plant and equipment to reflect the current
economic useful life of its assets during the second quarter of fiscal year
2004. The -11-




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries change resulted in a decrease in depreciation expense for the period from
January 23, 2004 to April 2, 2004 of approximately $0.4 million. The following
table summarizes the historical and revised useful lives for the main
components of property, plant and equipment: Revised
    
    HistoricalUseful Life
    
    Useful LifeAsset Category
    
    (Years)
    
    (Years)Land improvements
    
    
    20
    
    
    
    20Buildings
    
    
    25
    
    
    
    20Machinery and equipment
    
    
    5 to 12
    
    
    
    3 to 7
 9. Supplemental Cash Flow Information Fiscal Year2004
    
    2003January 23, 2004
    
    October 4, 2003
    
    27-Weekto
    
    to
    
    Period endedApril 2, 2004
    
    January 22, 2004
    
    April 4, 2003(In thousands)
    
    (Successor)
    
    (Predecessor)
    
    (Predecessor)Cash paymentsInterest payments
    
    $
    5,662
    
    
    $
    1,637
    
    
    $
    6,769Income tax payments
    
    $
    168
    
    
    $
    2,376
    
    
    $
    1,931Non-cash financingUnpaid cash dividends on
senior preferred stock
    
    $
    
    
    
    $
    3,861
    
    
    $
    2,854
 10. Segments and Related Information The Company has two reportable segments: vacuum electronic devices (VEDs) and
satcom equipment. Management evaluates performance and allocates resources
based on earnings before provision for income taxes, interest expense,
depreciation and amortization (EBITDA). Summarized financial information concerning the Companys reportable segments
is shown in the following table. Intersegment product transfers are recorded
at cost. Included in the Other category of EBITDA are acquired in-process
research and development, merger expenses and certain unallocated
corporate-level operating expenses. -12-




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CPI HOLDCO, INC.
and subsidiaries Fiscal Year2004
    
    2003January 23, 2004
    
    January 3, 2004
    
    13-Weekto
    
    to
    
    Period endedApril 2, 2004
    
    January 22, 2004
    
    April 4, 2003(In thousands)
    
    (Successor)
    
    (Predecessor)
    
    (Predecessor)Revenues from external customersVEDs
    
    $
    55,962
    
    
    $
    10,544
    
    
    $
    57,130Satcom Equipment
    
    
    9,679
    
    
    
    1,062
    
    
    
    10,849Total
    
    $
    65,641
    
    
    $
    11,606
    
    
    $
    67,979Intersegment product
transfersVEDs
    
    $
    3,588
    
    
    $
    777
    
    
    $
    4,305Satcom Equipment
    
    
    18
    
    
    
    
    
    
    
    Total
    
    $
    3,606
    
    
    $
    777
    
    
    $
    4,305EBITDAVEDs
    
    $
    17,851
    
    
    $
    1,496
    
    
    $
    13,567Satcom Equipment
    
    
    958
    
    
    
    (457
    )
    
    
    1,086Other
    
    
    (17,787
    )
    
    
    (7,599
    )
    
    
    (2,876
    )Total
    
    $
    1,022
    
    
    $
    (6,560
    )
    
    $
    11,777Fiscal Year2004
    
    2003January 23, 2004
    
    October 4, 2003
    
    27-Weekto
    
    to
    
    Period endedApril 2, 2004
    
    January 22, 2004
    
    April 4, 2003(In thousands)
    
    (Successor)
    
    (Predecessor)
    
    (Predecessor)Revenues from external
customersVEDs
    
    $
    55,962
    
    
    $
    69,048
    
    
    $
    108,159Satcom Equipment
    
    
    9,679
    
    
    
    10,871
    
    
    
    21,364Total
    
    $
    65,641
    
    
    $
    79,919
    
    
    $
    129,523Intersegment product
transfersVEDs
    
    $
    3,588
    
    
    $
    4,070
    
    
    $
    6,512Satcom Equipment
    
    
    18
    
    
    
    
    
    
    
    Total
    
    $
    3,606
    
    
    $
    4,070
    
    
    $
    6,512EBITDAVEDs
    
    $
    17,851
    
    
    $
    15,889
    
    
    $
    23,175Satcom Equipment
    
    
    958
    
    
    
    (229
    )
    
    
    2,384Other
    
    
    (17,787
    )
    
    
    (9,111
    )
    
    
    (4,355
    )Total
    
    $
    1,022
    
    
    $
    6,549
    
    
    $
    21,204
 EBITDA represents earnings before provision for income taxes, interest expense,
depreciation and amortization. Other companies may define EBITDA differently
and, as a result, our measure of EBITDA may not be directly comparable to
EBITDA of other companies. A reconciliation of EBITDA from reportable segments
to (loss) income before taxes is as follows: -13-




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CPI HOLDCO, INC.
and subsidiaries Fiscal Year2004
    
    2003January 23, 2004
    
    January 3, 2004
    
    13-Weekto
    
    to
    
    Period endedApril 2, 2004
    
    January 22, 2004
    
    April 4, 2003(In thousands)
    
    (Successor)
    
    (Predecessor)
    
    (Predecessor)Segment EBITDA
    
    $
    1,022
    
    
    $
    (6,560
    )
    
    $
    11,777Less:Depreciation and amortization
    
    
    4,418
    
    
    
    354
    
    
    
    1,597Interest expense
    
    
    2,950
    
    
    
    5,343
    
    
    
    3,576(Loss) income before taxes
    
    $
    (6,346
    )
    
    $
    (12,257
    )
    
    $
    6,604
 Fiscal Year2004
    
    2003January 23, 2004
    
    October 4, 2003
    
    27-Weekto
    
    to
    
    Period endedApril 2, 2004
    
    January 22, 2004
    
    April 4, 2003(In thousands)
    
    (Successor)
    
    (Predecessor)
    
    (Predecessor)Segment EBITDA
    
    $
    1,022
    
    
    $
    6,549
    
    
    $
    21,204Less:Depreciation and amortization
    
    
    4,418
    
    
    
    1,778
    
    
    
    3,314Interest expense
    
    
    2,950
    
    
    
    8,902
    
    
    
    7,246(Loss) income before taxes
    
    $
    (6,346
    )
    
    $
    (4,131
    )
    
    $
    10,644
 Sales by geographic area to unaffiliated customers (based on the location of customer) are as follows: Fiscal Year2004
    
    2003January 23, 2004
    
    January 3, 2004
    
    13-Weekto
    
    to
    
    Period endedApril 2, 2004
    
    January 22, 2004
    
    April 4, 2003(In thousands)
    
    (Successor)
    
    (Predecessor)
    
    (Predecessor)United States
    
    $
    47,400
    
    
    $
    7,657
    
    
    $
    48,216All foreign countries
    
    
    18,241
    
    
    
    3,949
    
    
    
    19,681Total sales
    
    $
    65,641
    
    
    $
    11,606
    
    
    $
    67,897
 Fiscal Year2004
    
    2003January 23, 2004
    
    October 4, 2003
    
    27-Weekto
    
    to
    
    Period endedApril 2, 2004
    
    January 22, 2004
    
    April 4, 2003(In thousands)
    
    (Successor)
    
    (Predecessor)
    
    (Predecessor)United States
    
    $
    47,400
    
    
    $
    52,417
    
    
    $
    86,252All foreign countries
    
    
    18,241
    
    
    
    27,502
    
    
    
    43,271Total sales
    
    $
    65,641
    
    
    $
    79,919
    
    
    $
    129,523
 -14-




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CPI HOLDCO, INC.
and subsidiaries The Company had one customer, the US Government, that accounted for 10% or more
of consolidated sales. Sales to this customer were $13.8 million, $2.0
million, and $14.2 million, of the Companys consolidated sales for the period
January 23, 2004 to April 2, 2004, the period January 3, 2004 to January 22,
2004 and the 13-week period ended April 4, 2003, respectively. Sales to this
customer were $13.8 million, $17.0 million, and $25.7 million, of the Companys
consolidated sales for the period January 23, 2004 to April 2, 2004, October 4,
2003 to January 22, 2004 and the 27-week period ended April 4, 2003,
respectively. A substantial majority of these sales were VED segment products,
but this customer also purchased satcom equipment products. 11. Recent Accounting Pronouncements In December 2003, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition, which supersedes SAB
101, Revenue Recognition in Financial Statements. SAB 104 clarifies existing
guidance regarding revenue contracts that contain multiple deliverables to make
it consistent with Emerging Issues Task Force No. 00-21. The adoption of SAB
104 did not have a material impact on the Companys results of operations or
financial position. In January 2003, the Financial Accounting Standards Board (the FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, which
addresses consolidation by business enterprises of variable interest entities
which have one or both of the following characteristics: (1) The equity
investment at risk is not sufficient to permit the entity to finance its
activities without support from other parties and (2) the equity investors lack
one or more of the defined essential characteristics of a controlling financial
interest. This Interpretation requires existing unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among the participating parties.
This Interpretation applies immediately to variable interest entities created
after January 31, 2003 and to variable interest entities in which an enterprise
obtains an interest after that date. On October 9, 2003, FASB Staff Position
FIN 46-6, Effective Date of FASB Interpretation No. 46, Consolidation of
Variable Interest Entities was issued. This delayed the effective date of
this Interpretation for variable interest entities created before February 1,
2003 until January 3, 2004. The Company has evaluated the impact of the
provisions of Interpretation No. 46 and believes it will not have a material
impact on the Companys consolidated financial statements. 12.Goodwill and Other Intangible Assets As more fully described in Note 2, an independent appraisal is in process to
determine the value of the Merger purchase price to assign to additional
identifiable intangible assets. Any increase in value of intangible assets
will result in a decrease in the value assigned to goodwill, and may result in
an increase in intangible amortization expense. Goodwill The following table summarizes goodwill by reportable segment: (In thousands)VEDs
    
    $
    145,688Satcom Equipment
    
    
    19,819Total
    
    $
    165,507
 -15-




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries Intangible Assets The carrying amount of intangible assets is as follows: Useful Life(In thousands)
    
    (Years)
    
    April 2, 2004
    
    October 3, 2003Backlog
    
    
    1
    
    
    
    17,900
    
    
    
    Land Lease
    
    
    46
    
    
    
    11,810
    
    
    $
    23,915Other
    
    
    5
    
    
    
    1,023
    
    
    
    1,90030,733
    
    
    
    25,815Less accumulated amortization
    
    
    
    
    
    
    (3,519
    )
    
    
    (4,279
    )Net identifiable intangible assets
    
    
    
    
    
    $
    27,214
    
    
    $
    21,536
 Amortization of intangible assets for the period January 23, 2004 to April 2,
2004, the period January 3, 2004 to January 22, 2004 and the 13-week period
ended April 4, 2003 was approximately $3.5 million, $0 and $0.2 million,
respectively. The amounts allocated to identifiable intangible assets are
preliminary and may change based on the results of the independent appraisal of
additional identifiable intangible assets. 13.Redemption of 12% Senior Subordinated Notes of CPI On January 5, 2004, CPI redeemed $26.0 million in principal amount of the 12%
Notes, pursuant to and in accordance with the terms of the 12% Indenture. The
redemption occurred at a price equal to 101.5% of the principal amount of such
notes plus accrued and unpaid interest to January 5, 2004. In connection with
the redemption, CPI and Holding entered into an amendment to CPIs secured
credit facility that, among other things, permitted CPI to redeem up to an
aggregate maximum amount of $30.0 million of the 12% Notes in any fiscal year.
At the closing of the Merger described in Note 2 above, CPI issued a notice of
redemption for the remaining $74 million outstanding 12% Notes, and the 12%
Notes were subsequently redeemed on February 22, 2004. 14.Related Party Transactions On January 23, 2004, the Company paid Cypress a fee of $2.5 million for
services provided in connection with the Merger. The fee has been offset
against the investment proceeds from Cypress affiliates in the common stock of
CPI Holdco. On January 23, 2004, the Company paid Chris Toffales, a director of CPI and CPI
Holdco, a fee of $350,000 for services provided in connection with the Merger.
Prior to his January 23, 2004 appointment as a board director of CPI and CPI
Holdco, Mr. Toffales was a consultant to Cypress. In March 2004, CPI Holdco issued 24,444 shares of common stock to two members
of the Board of Directors of CPI Holdco for aggregate consideration of
$575,000. Such securities were sold at fair value as determined by the Board of
Directors. 15.Income Taxes In connection with the Merger, the Company recorded an increase in net deferred
income tax liabilities of $4.8 million. Except for the portion of goodwill for
which amortization is not deductible for tax purposes, and certain other items,
the Company recorded deferred income tax liabilities of $19.2 million for the
differences between the assigned values and the tax bases of assets and
liabilities acquired. A previously established deferred tax asset valuation
allowance of $13.3 million was also adjusted as a reduction to the amount of
goodwill acquired. -16-




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries Because of the change in ownership provisions of the Internal Revenue Code, a
portion of the Companys net operating loss and tax credit carryforwards may be
subject to annual limitation. The annual limitation may result in the
expiration of net operating loss and tax credit carryforwards before
utilization. The Company has not yet determined if a Section 382 change of
ownership has occurred, but the Company does not believe that net operating
losses and tax credit carryforwards will be subject to such annual limitation. 16.Supplemental Guarantors Consolidating Condensed Financial Information On January 23, 2004, CPI issued $125.0 million of 8% Notes as part of the
Merger discussed in Note 2. The consolidating condensed financial statements are presented below and should
be read in connection with the Consolidated Financial Statements of CPI Holdco.
Separate financial statements of the Guarantors are not presented because (i)
the Guarantors are wholly-owned and have fully and unconditionally guaranteed
the 8.0% 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. The following unaudited consolidating condensed financial information presents:
the consolidating condensed balance sheets as of April 2, 2004 and October 3,
2003, and the unaudited consolidating condensed statements of operations and
statements of cash flows for the period January 23, 2004 to April 2, 2004, the
period January 3, 2004 to January 22, 2004, the 13-week period ended April 4,
2003, the period October 4, 2003 to January 22, 2004 and the 27-week period
ended April 4, 2003 of (a) the parent; (b) the issuer, CPI; (c) the guarantor
subsidiaries; (d) the non-guarantor subsidiaries; (e) the elimination entries
necessary to consolidate parent with the guarantor subsidiaries and the
non-guarantor subsidiaries; and (f) the consolidated total. For periods ending prior to January 23, 2004, the accompanying consolidated
condensed financial statements represent the consolidated results and financial
position of the Predecessor. The Predecessor parent is Holding while the
Successor parent is 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. -17-




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CPI HOLDCO, INC.
and subsidiaries CONSOLIDATING CONDENSED BALANCE SHEET
As of April 2, 2004 (Successor)
(Unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    Consolidated(in thousands)
    
    Parent
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    TotalASSETSCurrent AssetsCash and
cash equivalents
    
    $
    
    
    
    
    8,314
    
    
    
    2,592
    
    
    
    3,076
    
    
    
    
    
    
    
    13,982Accounts receivable, net
    
    
    
    
    
    
    25,533
    
    
    
    4,966
    
    
    
    12,832
    
    
    
    
    
    
    
    43,331Inventories
    
    
    
    
    
    
    28,436
    
    
    
    (113
    )
    
    
    8,895
    
    
    
    
    
    
    
    37,218Intercompany
receivable
    
    
    
    
    
    
    31,195
    
    
    
    
    
    
    
    
    
    
    
    (31,195
    )
    
    
    Other current assets
    
    
    
    
    
    
    2,216
    
    
    
    301
    
    
    
    594
    
    
    
    
    
    
    
    3,111Total current assets
    
    
    
    
    
    
    95,694
    
    
    
    7,746
    
    
    
    25,397
    
    
    
    (31,195
    )
    
    
    97,642Intercompany notes
receivable
    
    
    
    
    
    
    14,335
    
    
    
    
    
    
    
    
    
    
    
    (14,335
    )
    
    
    Investments in
subsidiaries
    
    
    123,488
    
    
    
    17,010
    
    
    
    
    
    
    
    
    
    
    
    (140,498
    )
    
    
    Property under
capital lease, net
    
    
    
    
    
    
    61,562
    
    
    
    19
    
    
    
    7,963
    
    
    
    
    
    
    
    69,544Goodwill
    
    
    
    
    
    
    122,493
    
    
    
    
    
    
    
    43,014
    
    
    
    
    
    
    
    165,507Intangibles, net
    
    
    
    
    
    
    25,714
    
    
    
    
    
    
    
    1,500
    
    
    
    
    
    
    
    27,214Debt issue costs, net
    
    
    
    
    
    
    9,395
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,395Total assets
    
    $
    123,488
    
    
    
    346,203
    
    
    
    7,765
    
    
    
    77,874
    
    
    
    (186,028
    )
    
    
    369,302LIABILITIES, PREFERRED STOCK
AND STOCKHOLDERS EQUITYCurrent LiabilitiesCurrent portion of
term loan
    
    $
    
    
    
    
    900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    900Accounts payable
    
    
    
    
    
    
    11,528
    
    
    
    249
    
    
    
    4,946
    
    
    
    
    
    
    
    16,723Intercompany payable
    
    
    28,041
    
    
    
    
    
    
    
    1,525
    
    
    
    1,631
    
    
    
    (31,197
    )
    
    
    Accrued expenses
    
    
    
    
    
    
    16,395
    
    
    
    505
    
    
    
    3,368
    
    
    
    2
    
    
    
    20,270Product warranty
    
    
    
    
    
    
    3,458
    
    
    
    
    
    
    
    2,431
    
    
    
    
    
    
    
    5,889Income taxes payable
    
    
    
    
    
    
    2,390
    
    
    
    129
    
    
    
    457
    
    
    
    
    
    
    
    2,976Advance payments
from customers
    
    
    
    
    
    
    4,709
    
    
    
    1,530
    
    
    
    1,591
    
    
    
    
    
    
    
    7,830Total current
liabilities
    
    
    28,041
    
    
    
    39,380
    
    
    
    3,938
    
    
    
    14,424
    
    
    
    (31,195
    )
    
    
    54,588Intercompany
notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,335
    
    
    
    (14,335
    )
    
    
    Senior term loans
    
    
    
    
    
    
    89,100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,100Senior subordinated
notes
    
    
    
    
    
    
    125,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000Deferred taxes
    
    
    
    
    
    
    2,702
    
    
    
    
    
    
    
    2,100
    
    
    
    
    
    
    
    4,802Total liabilities
    
    
    28,041
    
    
    
    256,182
    
    
    
    3,938
    
    
    
    30,859
    
    
    
    (45,530
    )
    
    
    273,490Stockholders EquityCommon stock
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Parent investment
    
    
    
    
    
    
    96,489
    
    
    
    3,882
    
    
    
    50,661
    
    
    
    (151,032
    )
    
    
    Additional paid-in-capital
    
    
    102,237
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102,237Other
comprehensive income
    
    
    
    
    
    
    365
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    365Accumulated
(deficit) equity
    
    
    (6,833
    )
    
    
    (6,833
    )
    
    
    (55
    )
    
    
    (3,646
    )
    
    
    10,534
    
    
    
    (6,833
    )Net stockholders
equity
    
    
    95,447
    
    
    
    90,021
    
    
    
    3,827
    
    
    
    47,015
    
    
    
    (140,498
    )
    
    
    95,812Total liabilities,
preferred
stock and
stockholders equity
    
    $
    123,488
    
    
    
    346,203
    
    
    
    7,765
    
    
    
    77,874
    
    
    
    (186,028
    )
    
    
    369,302
 -18-




---



##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries CONSOLIDATING CONDENSED BALANCE SHEET
As of October 3, 2003 (Predecessor)
(Unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    Consolidated(in thousands)
    
    Parent
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    TotalASSETSCurrent AssetsCash and cash equivalents
    
    $
    
    
    
    
    30,561
    
    
    
    1,718
    
    
    
    1,472
    
    
    
    
    
    
    
    33,751Accounts receivable, net
    
    
    
    
    
    
    17,753
    
    
    
    4,502
    
    
    
    10,873
    
    
    
    
    
    
    
    33,128Inventories
    
    
    
    
    
    
    29,539
    
    
    
    261
    
    
    
    7,558
    
    
    
    
    
    
    
    37,358Intercompany receivable
    
    
    1,177
    
    
    
    1,068
    
    
    
    
    
    
    
    
    
    
    
    (2,245
    )
    
    
    Other current assets
    
    
    
    
    
    
    1,317
    
    
    
    221
    
    
    
    672
    
    
    
    
    
    
    
    2,210Total current assets
    
    
    1,177
    
    
    
    80,238
    
    
    
    6,702
    
    
    
    20,575
    
    
    
    (2,245
    )
    
    
    106,447Intercompany notes receivable
    
    
    
    
    
    
    20,085
    
    
    
    
    
    
    
    
    
    
    
    (20,085
    )
    
    
    Investment in subsidiaries
    
    
    (60,660
    )
    
    
    3,434
    
    
    
    
    
    
    
    
    
    
    
    57,226
    
    
    
    Property under capital lease, net
    
    
    19,818
    
    
    
    16,588
    
    
    
    13
    
    
    
    3,683
    
    
    
    (7,551
    )
    
    
    32,551Goodwill
    
    
    
    
    
    
    15,541
    
    
    
    
    
    
    
    27,316
    
    
    
    (23,708
    )
    
    
    19,149Intangibles, net
    
    
    
    
    
    
    21,536
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,536Debt issue costs, net
    
    
    22
    
    
    
    2,229
    
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    2,285Total assets
    
    $
    (39,643
    )
    
    
    159,651
    
    
    
    6,715
    
    
    
    51,608
    
    
    
    3,637
    
    
    
    181,968LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS DEFICITCurrent LiabilitiesMortgage financing
    
    $
    17,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,500Accounts payable
    
    
    
    
    
    
    10,844
    
    
    
    215
    
    
    
    4,565
    
    
    
    
    
    
    
    15,624Intercompany payable
    
    
    
    
    
    
    
    
    
    
    1,281
    
    
    
    719
    
    
    
    (2,000
    )
    
    
    Accrued expenses
    
    
    7
    
    
    
    18,704
    
    
    
    712
    
    
    
    2,434
    
    
    
    (412
    )
    
    
    21,445Product warranty
    
    
    
    
    
    
    3,225
    
    
    
    
    
    
    
    2,176
    
    
    
    
    
    
    
    5,401Income taxes payable
    
    
    
    
    
    
    2,730
    
    
    
    16
    
    
    
    1,092
    
    
    
    (254
    )
    
    
    3,584Accrued dividends payable
    
    
    
    
    
    
    15,449
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,449Advance payments from customers
    
    
    
    
    
    
    7,118
    
    
    
    1,008
    
    
    
    2,077
    
    
    
    
    
    
    
    10,203Total current liabilities
    
    
    17,507
    
    
    
    58,070
    
    
    
    3,232
    
    
    
    13,063
    
    
    
    (2,666
    )
    
    
    89,206Intercompany notes payable
    
    
    5,750
    
    
    
    
    
    
    
    
    
    
    
    14,335
    
    
    
    (20,085
    )
    
    
    Senior subordinated notes
    
    
    
    
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Deferred income
    
    
    
    
    
    
    6,887
    
    
    
    
    
    
    
    
    
    
    
    (6,887
    )
    
    
    Total liabilities
    
    
    23,257
    
    
    
    164,957
    
    
    
    3,232
    
    
    
    27,398
    
    
    
    (29,638
    )
    
    
    189,206Senior Redeemable Preferred Stock of CPI
    
    
    
    
    
    
    28,907
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,907Junior Preferred Stock of CPI
    
    
    
    
    
    
    29,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,300Stockholders (Deficit) EquityCommon stock
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Parent investment
    
    
    
    
    
    
    21,458
    
    
    
    1,161
    
    
    
    19,549
    
    
    
    (42,168
    )
    
    
    Additional paid-in capital
    
    
    21,519
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,519Deferred compensation
    
    
    
    
    
    
    (1,289
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,289
    )Accumulated (deficit) equity
    
    
    (84,469
    )
    
    
    (82,426
    )
    
    
    2,322
    
    
    
    4,661
    
    
    
    75,443
    
    
    
    (84,469
    )Stockholder loans
    
    
    
    
    
    
    (1,256
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,256
    )Net stockholders (deficit) equity
    
    
    (62,900
    )
    
    
    (63,513
    )
    
    
    3,483
    
    
    
    24,210
    
    
    
    33,275
    
    
    
    (65,445
    )Total liabilities, preferred stock and
stockholders (deficit) equity
    
    $
    (39,643
    )
    
    
    159,651
    
    
    
    6,715
    
    
    
    51,608
    
    
    
    3,637
    
    
    
    181,968
 -19-




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
From January 23, 2004 to April 2, 2004 (Successor)
(Unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    Consolidated(in thousands)
    
    Parent
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    TotalSales
    
    $
    
    
    
    
    48,969
    
    
    
    6,678
    
    
    
    22,228
    
    
    
    (12,234
    )
    
    
    65,641Cost of sales
    
    
    
    
    
    
    35,874
    
    
    
    5,945
    
    
    
    16,442
    
    
    
    (12,234
    )
    
    
    46,027Gross 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
(benefit) and equity in income 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)
(Unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    Consolidated(in thousands)
    
    Parent
    
    Issuer
    
    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 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
(benefit) and equity in 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
    )
 -20-




---



##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
For the 13-Week Period Ended April 4, 2003 (Predecessor)
(Unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    Consolidated(in thousands)
    
    Parent
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    TotalSales
    
    $
    
    
    
    
    51,875
    
    
    
    9,576
    
    
    
    23,382
    
    
    
    (16,936
    )
    
    
    67,897Cost of sales
    
    
    
    
    
    
    39,007
    
    
    
    8,388
    
    
    
    16,811
    
    
    
    (16,993
    )
    
    
    47,213Gross profit
    
    
    
    
    
    
    12,868
    
    
    
    1,188
    
    
    
    6,571
    
    
    
    57
    
    
    
    20,684Operating costs and expenses:Research and development
    
    
    
    
    
    
    480
    
    
    
    
    
    
    
    1,094
    
    
    
    
    
    
    
    1,574Selling and marketing
    
    
    
    
    
    
    1,796
    
    
    
    653
    
    
    
    1,464
    
    
    
    (68
    )
    
    
    3,845General and administrative
    
    
    287
    
    
    
    3,490
    
    
    
    289
    
    
    
    820
    
    
    
    199
    
    
    
    5,085Intercompany income (expense)
    
    
    (613
    )
    
    
    44
    
    
    
    (68
    )
    
    
    
    
    
    
    637
    
    
    
    Total operating costs and expenses
    
    
    (326
    )
    
    
    5,810
    
    
    
    874
    
    
    
    3,378
    
    
    
    768
    
    
    
    10,504Operating income
    
    
    326
    
    
    
    7,058
    
    
    
    314
    
    
    
    3,193
    
    
    
    (711
    )
    
    
    10,180Interest expense (income), net
    
    
    502
    
    
    
    2,215
    
    
    
    (1
    )
    
    
    860
    
    
    
    
    
    
    
    3,576(Loss) income before income tax expense
(benefit) and equity in income of subsidiaries
    
    
    (176
    )
    
    
    4,843
    
    
    
    315
    
    
    
    2,333
    
    
    
    (711
    )
    
    
    6,604Income tax (benefit) expense
    
    
    (55
    )
    
    
    3,397
    
    
    
    14
    
    
    
    29
    
    
    
    
    
    
    
    3,385Equity in income of subsidiaries
    
    
    3,340
    
    
    
    1,840
    
    
    
    
    
    
    
    
    
    
    
    (5,180
    )
    
    
    Net income
    
    $
    3,219
    
    
    
    3,286
    
    
    
    301
    
    
    
    2,304
    
    
    
    (5,891
    )
    
    
    3,219
 -21-




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
From October 4, 2003 to January 22, 2004 (Predecessor)
(Unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    Consolidated(in thousands)
    
    Parent
    
    Issuer
    
    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 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
(benefit) 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
    )
 CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
For the 27-Week Period Ended April 4, 2003 (Predecessor)
(Unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    Consolidated(in thousands)
    
    Parent
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    TotalSales
    
    $
    
    
    
    
    97,821
    
    
    
    17,914
    
    
    
    44,797
    
    
    
    (31,009
    )
    
    
    129,523Cost of sales
    
    
    
    
    
    
    74,901
    
    
    
    15,788
    
    
    
    32,571
    
    
    
    (31,111
    )
    
    
    92,149Gross profit
    
    
    
    
    
    
    22,920
    
    
    
    2,126
    
    
    
    12,226
    
    
    
    102
    
    
    
    37,374Operating costs and expenses:Research and development
    
    
    
    
    
    
    882
    
    
    
    
    
    
    
    2,137
    
    
    
    
    
    
    
    3,019Selling and marketing
    
    
    
    
    
    
    3,681
    
    
    
    1,207
    
    
    
    3,004
    
    
    
    (123
    )
    
    
    7,769General and administrative
    
    
    575
    
    
    
    6,067
    
    
    
    330
    
    
    
    2,389
    
    
    
    (398
    )
    
    
    8,963Intercompany (expense) income
    
    
    (1,224
    )
    
    
    80
    
    
    
    (123
    )
    
    
    
    
    
    
    1,267
    
    
    
    Total operating costs and expenses
    
    
    (649
    )
    
    
    10,710
    
    
    
    1,414
    
    
    
    7,530
    
    
    
    746
    
    
    
    19,751Operating income
    
    
    649
    
    
    
    12,210
    
    
    
    712
    
    
    
    4,696
    
    
    
    (644
    )
    
    
    17,623Other income
    
    
    
    
    
    
    (267
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (267
    )Interest expense (income), net
    
    
    1,048
    
    
    
    4,472
    
    
    
    (4
    )
    
    
    1,730
    
    
    
    
    
    
    
    7,246(Loss) income before income tax expense
(benefit) and equity in income of subsidiaries
    
    
    (399
    )
    
    
    8,005
    
    
    
    716
    
    
    
    2,966
    
    
    
    (644
    )
    
    
    10,644Income tax (benefit) expense
    
    
    (132
    )
    
    
    4,943
    
    
    
    24
    
    
    
    54
    
    
    
    
    
    
    
    4,889Equity in income of subsidiaries
    
    
    6,022
    
    
    
    2,885
    
    
    
    
    
    
    
    
    
    
    
    (8,907
    )
    
    
    Net income
    
    $
    5,755
    
    
    
    5,947
    
    
    
    692
    
    
    
    2,912
    
    
    
    (9,551
    )
    
    
    5,755
 -22-




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
From January 23, 2004 to April 2, 2004 (Successor)
(Unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    Consolidated(in thousands)
    
    Parent
    
    Issuer
    
    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 repayment of 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
 -23-




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
From October 4, 2003 to January 22, 2004 (Predecessor)
(Unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    Consolidated(in thousands)
    
    Parent
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    TotalOPERATING ACTIVITIESNet cash provided by (used in) operating activities
    
    $
    
    
    
    
    7,105
    
    
    
    206
    
    
    
    (145
    )
    
    
    
    
    
    
    7,166INVESTING ACTIVITIESPurchase of property, plant and equipment, net
    
    
    
    
    
    
    (416
    )
    
    
    (2
    )
    
    
    (41
    )
    
    
    
    
    
    
    (459
    )FINANCING ACTIVITIESRetirement 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 I (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS
    
    
    
    
    
    
    (20,950
    )
    
    
    204
    
    
    
    (186
    )
    
    
    
    
    
    
    (20,932
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    30,561
    
    
    
    1,718
    
    
    
    1,472
    
    
    
    
    
    
    
    33,751Cash and cash equivalents at end of period
    
    $
    
    
    
    
    9,611
    
    
    
    1,922
    
    
    
    1,286
    
    
    
    
    
    
    
    12,819
 CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the 27-Week Period Ended April 4, 2003 (Predecessor)
(Unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    Consolidated(In thousands)
    
    Parent
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    TotalOPERATING ACTIVITIESNet cash provided by operating activities
    
    $
    2,439
    
    
    
    15,935
    
    
    
    108
    
    
    
    330
    
    
    
    
    
    
    
    18,812INVESTING ACTIVITIESProceeds from sale of SSPD division
    
    
    
    
    
    
    136
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136Purchase of property, plant and equipment, net
    
    
    
    
    
    
    (826
    )
    
    
    (1
    )
    
    
    (91
    )
    
    
    
    
    
    
    (918
    )Net cash used in investing activities
    
    
    
    
    
    
    (690
    )
    
    
    (1
    )
    
    
    (91
    )
    
    
    
    
    
    
    (782
    )FINANCING ACTIVITIESProceeds from issuance of common stock
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110Repayments on capital leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    (45
    )Repayment of mortgage financing
    
    
    (250
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250
    )Payment of debt issue costs
    
    
    
    
    
    
    (295
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (295
    )Net repayment of bank overdraft
    
    
    
    
    
    
    (1,007
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,007
    )Net cash used in financing activities
    
    
    (140
    )
    
    
    (1,302
    )
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    (1,487
    )NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    2,299
    
    
    
    13,943
    
    
    
    107
    
    
    
    194
    
    
    
    
    
    
    
    16,543Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    1,077
    
    
    
    698
    
    
    
    949
    
    
    
    
    
    
    
    2,724Cash and cash equivalents at end of period
    
    $
    2,299
    
    
    
    15,020
    
    
    
    805
    
    
    
    1,143
    
    
    
    
    
    
    
    19,267
 -24-




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries 
 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
Communications and Power Industries Holding Corporation (Holding or the
Predecessor); references to the Company refer to the Predecessor prior to
the Merger (defined below) and to the Successor (defined below) 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 five operating divisions that are differentiated based on
products operating in two segments. Four of these operating divisions comprise
the Companys vacuum electronic device (VED) segment. The Company also has a
satellite communications equipment segment. Segment data is included in Note
10 of the Notes to Consolidated Condensed Financial Statements. CPI Holdcos fiscal years are the 52- or 53-week periods which end on the
Friday nearest September 30. The Successors fiscal year did not change from
that of the Predecessor. Fiscal year 2004 will be comprised of the 52-week
period ending October 1, 2004, and fiscal year 2003 was comprised of the
53-week period ended October 3, 2003. Both the second quarter of fiscal year
2004 and the second quarter of fiscal year 2003 were comprised of 13 weeks. On January 23, 2004, a wholly-owned subsidiary of CPI Holdco, Inc. (CPI
Holdco or the Successor), CPI Merger Sub Corp., a Delaware corporation
(Merger Sub), merged with and into Holding (Merger) 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 aggregate merger consideration of $130.3 million. In connection
with the merger, CPI Holdco received an equity contribution of $100.0 million
from affiliates of The Cypress Group, L.L.C. (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 options to purchase 168,998 shares of common stock of CPI
Holdco. 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 its 12% Senior
Subordinated Notes (12% Notes) and elected to redeem in full the remaining
$74.0 million outstanding aggregate principal amount of the 12% Notes pursuant
to the terms of the Indenture governing the 12% Notes. In addition, CPI
terminated its credit facility and -25-




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries 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. See Note 2 of the Notes to
Consolidated Condensed Financial Statements. Although the Merger, which essentially resulted in the recapitalization of the
Company, resulted in 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. Orders recorded during the second quarter of fiscal year 2004 were $77.3
million, as compared to $89.9 million for the second quarter of fiscal year
2003. The $12.6 million, or 14.0%, decrease relates primarily to the radar and
communications markets. The various increases and decreases within the markets
discussed below are primarily related to timing rather than to any material
changes in the Companys markets. Radar orders were $20.4 million for the
second quarter of fiscal year 2004, a decrease of $16.7 million, or 45.0%, from
the record high levels of the second quarter of fiscal year 2003. This decrease
was primarily due to fluctuations in the timing of order receipts, with several
significant orders received in the second quarter of fiscal year 2003 which
were not repeated in the second quarter of 2004. Communication orders were
$19.1 million for the second quarter of fiscal year 2004, a decrease of $5.9
million from the comparable period of fiscal year 2003. This decrease was
anticipated as the second quarter of fiscal year 2003 included two large orders
from direct-to-home suppliers versus only one such order in the current
quarter. Orders in the medical market increased by $2.3 million, or 13.4%,
from the second quarter of fiscal year 2003 due principally to additional
demand for x-ray generators and VED products used in cancer treatment
applications. Orders in the Companys scientific market were $6.0 million in
the second quarter of fiscal year 2004. This represents a $3.5 million, or
142.6%, increase over the previous fiscal year. A $3.8 million order for high
frequency, high power gyrotrons received in the second quarter for fusion
research was the main reason for the increased performance in this market. This
was an anticipated follow-on order to an ongoing program and production for
these gyrotrons will be completed over the next 36 months. Orders in the
electronic countermeasures and industrial markets also increased from the
comparable period of fiscal year 2003 by $1.4 million and $2.8 million,
respectively. Orders recorded in the six-month period ended April 2, 2004 were $150.7
million, a decrease of $14.5 million from $165.2 million in the comparable
period of fiscal year 2003. The decrease relates to the radar, electronic
countermeasures and communications markets offset by increases in the medical
industrial and scientific markets. The decreases in radar and communications
markets for the six-month period of fiscal year 2004 are the same as the second
quarter results discussed above. The decrease in electronic countermeasures for
the six-month period of fiscal year 2004 compared to the comparable period of
fiscal year 2003 is primarily related to timing of orders. Industrial orders
for the first six months of fiscal year 2004 were $12.3 million, an increase of
$6.1 million, or 100%, from the first six months of 2003. The substantial
improvement in this market can be attributed to increased demand for
semiconductor products from that of fiscal year 2003. For the first six months
of fiscal year 2004, orders in the medical and scientific markets increased by
$1.3 million and $5.1 million, respectively. Incoming order levels fluctuate
significantly on a quarterly basis and a particular quarters order rate may
not be indicative of future order levels. In addition, the Companys sales are
highly dependent upon manufacturing scheduling, performance and shipments and,
accordingly, it is not possible to accurately predict when these orders will be
recognized as sales. Order backlog consists of firm orders for which goods and services are yet to
be provided. As of April 2, 2004, the Company had an order backlog of $179.4
million, representing approximately eight months of sales, compared to an order
backlog of $180.5 million, representing approximately eight-and-a-half months
of sales, as of April 4, 2003. Order backlog increased to $179.4 million as of
April 2, 2004 from -26-




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CPI HOLDCO, INC.
and subsidiaries $172.1 million at the end of fiscal year 2003. 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. 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 2 of the Notes to
Consolidated Financial Statements in the Predecessors Annual Report on Form
10-K for the fiscal year ended October 3, 2003. 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 and fixed-price incentive 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. 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 Reserves 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 sales. Managements
estimates 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 differs from
the Companys estimates, then revisions to the estimated warranty liability
would be required. Inventory Valuation Inventories are stated at the lower of average cost or market (net realizable
value). The carrying value of inventory is reduced for estimated obsolescence
or unmarketability based upon assumptions about future demand, market
conditions, product lifecycles and product pricing. If the Companys
assumptions were to be substantially different than estimated, further
adjustments could be required. While these estimates require management to make
assumptions and judgments, management believes its understanding of the markets
and customers the Company serves, as well as the mature nature of many of the
products the Company manufactures, provides it with the ability to make
reliable estimates. Management also evaluates 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, based on these
analyses, for fixed-price contracts, which represent virtually all of the
Companys contracts, are significantly -27-




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries higher than originally estimated, provisions are also required, and in such a
case, the Company records a reserve that is charged to costs of goods sold. 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 whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of long-lived assets is measured by comparison
of its carrying amount to future net cash flows expected to be generated from
the operation and sale of long-lived assets. If such assets are considered to
be impaired, the Companys carrying value is reduced to its estimated fair
value 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. Goodwill Impairment The Company has a goodwill balance of $165.5 million as of April 2, 2004. This
amount is based on a preliminary allocation of the Merger purchase price and
will likely change when the independent appraisal of additional identifiable
intangibles is completed during the third quarter of fiscal year 2004. Goodwill
represents the excess of the purchase price over the fair value of the net
assets acquired. The Company performs an annual goodwill impairment test during
the fourth quarter of each fiscal year, or earlier if an event or circumstance
indicates that an impairment loss has occurred. Goodwill and certain other
corporate assets and liabilities are assigned to the reporting units which are
consistent with the Companys operating divisions. The fair value of the
reporting units are then compared to the carrying value to determine if there
is any potential impairment. The process of evaluating potential impairment is
subjective and requires judgments regarding revenue forecasts, discount rates,
and weighted average cost of capital among other things. Adverse changes in the
industries served by the Company, customer demand or other market conditions
could result in future impairments of goodwill. Merger and Acquisition Accounting The Company accounts for mergers and acquisitions under the purchase method of
accounting. Accordingly, the total costs of such transactions are allocated to
the tangible and intangible assets acquired and liabilities assumed based on
their respective fair values. The determination of fair values involves the use
of significant estimates and assumptions which could require adjustment in the
future. The allocation of the Merger purchase price has been completed for
inventory, property, plant and equipment, and certain intangibles, such as
backlog, in-process research and development and land leases. An independent
appraisal of additional identifiable intangibles is in process and is expected
to be completed in the quarter ended July 2, 2004. It is probable that
additional adjustments to this allocation will be made in future periods, which
could adversely affect the Companys results of operations. Effect of Acquisition on Results of Operations As a result of the Merger, the Company adjusted upward the historical book
value of certain assets in accordance with GAAP, which will significantly
impact the Companys results of operations subsequent to the Merger and their
comparability to operations of the Predecessor. The most significant purchase
accounting entries are discussed below: The write-up of inventory of $5.5 million will be expensed to cost of sales
during the period following the Merger and will significantly impact gross
margins. During the 10-week period ended April 2, 2004, $4.2 million was
expensed to cost of sales. The remainder is expected to be expensed in the
third quarter -28-




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CPI HOLDCO, INC.
and subsidiaries of fiscal year 2004. The write-up of property, plant and equipment including favorable leases as
well as recognition of certain finite lived intangible assets will
significantly increase depreciation and amortization in future periods. In
addition, $11.5 million of the purchase price was allocated to in-process
research and development and was charged to operations immediately after
consummation of the Merger. Projects are classified as in-process research and
development if they have not demonstrated technological feasibility, have not
resulted in commercial products and have no alternative future use. As of the
date of Merger, the outcomes of these research and development projects were
uncertain and involved technological risk. As more fully described in Note 2 of the Notes to Consolidated Condensed
Financial Statements, an independent appraisal is in process to determine the
value of the Merger purchase price to assign to additional identifiable
intangible assets. Any increase in value of amortizable intangible assets will
result in a decrease in the value assigned to goodwill, and will result in an
increase in intangible amortization expense, which could be material. Results of Operations Quarter Ended April 2, 2004 Compared to Quarter Ended April 4, 2003 The following table sets forth the historical results of operations as a
percentage of sales for the quarter ended April 2, 2004 (which combines the
3-week period of Predecessor and the 10-week period of Successor) and the
quarter ended April 4, 2003 (Predecessor). The Company believes this display
will enhance managements analysis of the results of operations. However, due
to the purchase accounting entries resulting from the Merger, the basis of
certain assets and liabilities of the Predecessor and the Successor are
different, and therefore comparisons to prior year may not be meaningful in
certain cases. See Note 2 of the Notes to Consolidated Condensed Financial
Statements for further information on purchase accounting related adjustments. 13-Week
    
    13-Weekperiod ended
    
    period endedApril 2,
    
    April 4,2004
    
    2003Sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    71.3
    
    
    
    69.5Gross profit
    
    
    28.7
    
    
    
    30.5Research and development
    
    
    2.5
    
    
    
    2.3Selling and marketing
    
    
    5.0
    
    
    
    5.7General and administrative
    
    
    7.6
    
    
    
    7.5Merger expenses
    
    
    7.7
    
    
    
    0.0Amortization of acquisition related intangibles
    
    
    4.4
    
    
    
    0.0Acquired
in-process research and development
    
    
    14.9
    
    
    
    0.0Operating (loss) income
    
    
    (13.3
    )
    
    
    15.0Interest expense
    
    
    10.7
    
    
    
    5.3(Loss) income before taxes
    
    
    (24.1
    )
    
    
    9.7Income tax (benefit) expense
    
    
    (3.1
    )
    
    
    5.0Net (loss) income
    
    
    (21.0
    )%
    
    
    4.7
    %Other Data:EBITDA (a)
    
    
    (7.2
    )%
    
    
    17.3
    %
  (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 -29-




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries  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
10 of the Notes to Consolidated Condensed Financial Statements. Sales. Sales for the second quarter of fiscal year 2004 were $77.2 million, an
increase of $9.3 million or 13.7%, from the same period in fiscal year 2003.
Radar sales were $31.8 million for the second quarter of fiscal year 2004 which
represents an increase of $4.8 million, or 18% from the second quarter of
fiscal year 2003. The increase was due to increased shipments of VEDs to the
Department of Defense. Sales into the industrial market were $5.4 million, an
increase of $3.3 million, or 162%, compared to $2.1 million in the second
quarter of fiscal year 2003. The increase can be attributed to strong demand
for semiconductor products in the second quarter of fiscal year 2004. Sales in
the medical market were $10.4 million compared to $9.1 million in the second
quarter of fiscal year 2003 as the customer requirements for x-ray generators
and VED products used in cancer treatment applications increased. Sales to the
Companys remaining markets were consistent with those in the second quarter of
fiscal year 2003. Gross Margin. Gross margins were 28.7% in the second quarter of fiscal year
2004, compared to 30.5% for the same period in fiscal year 2003. The decrease
can be attributed primarily to the $4.2 million charge to cost of sales in the
10-week period following the Merger related to the purchase accounting write-up
of inventory. Gross margins, excluding the purchase accounting adjustment for
inventory, were 34.1%. The inventory charge was offset in part by favorable mix
and pricing of products sold as well as volume efficiencies in the second
quarter of fiscal year 2004. Research and Development Expenses. Research and development expenses were $1.9
million, or 2.5% of sales, for the second quarter of fiscal year 2004, compared
to $1.6 million, or 2.3% of sales, for the second quarter of fiscal year 2003.
The increase is primarily attributable to additional development efforts on
products for the radar and medical markets. Selling and Marketing Expenses. Selling and marketing expenses were $3.9
million, or 5.0% of sales, for the second quarter of fiscal year 2004, compared
to $3.8 million, or 5.7% of sales, for the second quarter of fiscal year 2003.
The decrease in selling and marketing expenses as a percentage of sales
reflects the increase in sales during the period of 13.7%. General and Administrative Expenses.General and administrative expenses were
$5.8 million, or 7.6% of sales, for the second quarter of fiscal year 2004, an
increase of $0.8 million from $5.1 million, or 7.5%, in the second quarter of
fiscal year 2003. The increase can be attributed to higher stock compensation
expense as well as increased provisions for management incentives. During the
quarter ended April 2, 2004, the Company expensed the remaining $1.2 million of
deferred compensation related to the options to purchase common stock of
Holding granted in 2003, which became fully vested at the time of the Merger.
During the quarter ended April 4, 2003, the Company recorded stock compensation
of $0.8 million related to common stock purchased by certain executive officers
at a price subsequently determined to be less than fair value. Merger Expenses.Merger expenses of $5.9 million were made up of primarily 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. Amortization of Acquisition Related Intangibles.The Company recorded
identifiable intangible asset amortization for backlog of $3.4 million in the
10-week period from January 23, 2004 to April 2, 2004. The total intangible
asset recorded for backlog of $17.9 million is being amortized over a 12-month -30-




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CPI HOLDCO, INC.
and subsidiaries period. Acquired In-Process Research and Development.The Company recorded a write-off
of acquired in-process research and development of $11.5 million as a result of
the revaluation of the Company at the time of the Merger. Projects classified
as in-process research and development had not yet demonstrated technological
feasibility and had no alternative future use. EBITDA. EBITDA for the second quarter of fiscal year 2004 was negative $5.5
million, compared to $11.8 million for the second quarter of fiscal year 2003.
The decrease in EBITDA resulted primarily from the write-off of in-process
research and development at the date of the Merger of $11.5 million as well as
the Merger expenses of $5.9 million. For reconciliation of EBITDA to Loss
before taxes, see Note 10 of the Notes to Consolidated Condensed Financial
Statements. Interest Expense. Interest expense was $8.3 million, or 10.7% of sales, for
the second quarter of fiscal year 2004 as compared to $3.6 million, or 5.3% of
sales, for the second quarter of fiscal year 2003. The increase of $4.7
million relates primarily to costs associated with early redemption of the 12%
Notes, and the write-off of capitalized debt issuance costs related to
outstanding debt at the time of the Merger. Interest expense on a continuing
basis will include interest due on CPIs 8% Senior Subordinated Notes due 2012
(8% Notes) of approximately $2.5 million per quarter and interest on the Term
Loan (defined below) of approximately $1.0 million per quarter. Interest
expense will also include amortization of debt issuance costs and other
customary fees on the Revolver (defined below). Income Tax (Benefit) Expense. The Company recorded a net income tax benefit of
$2.4 million for the quarter ended April 2, 2004 compared to income tax expense
of $3.4 million for the quarter ended April 3, 2003. The tax benefit of $2.8
million recorded in the three-week period from January 3, 2004 to January 22,
2004 resulted from a pre-tax loss in that period of $12.3 million. Tax expense
of $0.5 million was recorded for the 10-week period ended April 2, 2004 despite
a pre-tax loss of $6.3 million due to the fact that certain purchase accounting
related expenses including acquired in-process research and development and
intangible amortization expense are not deductible for tax purposes. The tax
expense for the second quarter of fiscal year 2003 represents an effective tax
rate of approximately 46%. Net (Loss) Income. The Company recorded a net loss for the quarter ended April
2, 2004 of $16.2 million compared to net income of $3.2 million for the quarter
ended April 4, 2003. The net loss for the current quarter resulted from
purchase accounting related adjustments and transaction expenses related to the
Merger, as discussed above. Six-Months Ended April 2, 2004 Compared to Six-Months April 4, 2003 The following table sets forth the historical results of operations as a
percentage of sales for the six-month period ended April 2, 2004 (which
combines the 16-week period of Predecessor and the 10-week period of Successor)
and the six-month period ended April 4, 2003 (Predecessor). The Company
believes this display will enhance managements analysis of the results of
operations. However, due to the purchase accounting entries resulting from the
Merger, the basis of certain assets and liabilities of the Predecessor and the
Successor are different, and therefore comparisons to prior year may not be
meaningful in certain cases. See Note 2 of the Notes to Consolidated Condensed
Financial Statements for further information on purchase accounting related
adjustments. -31-




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CPI HOLDCO, INC.
and subsidiaries 26-Week
    
    27-Weekperiod ended
    
    period endedApril 2,
    
    April 4,2004
    
    2003Sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    70.2
    
    
    
    71.1Gross profit
    
    
    29.8
    
    
    
    28.9Research and development
    
    
    2.5
    
    
    
    2.3Selling and marketing
    
    
    5.1
    
    
    
    6.0General and administrative
    
    
    6.6
    
    
    
    6.9Merger expenses
    
    
    4.4
    
    
    
    0.0Amortization of acquisition related intangibles
    
    
    2.3
    
    
    
    0.0Acquired
in-process research and development
    
    
    7.9
    
    
    
    0.0Operating income
    
    
    0.9
    
    
    
    13.6Other income
    
    
    0.0
    
    
    
    0.2Interest expense
    
    
    8.1
    
    
    
    5.6(Loss) income before taxes
    
    
    (7.2
    )
    
    
    8.2Income tax expense
    
    
    0.6
    
    
    
    3.8Net (loss) income
    
    
    (7.8
    )%
    
    
    4.4
    %Other Data:EBITDA (a)
    
    
    5.2
    %
    
    
    16.4
    %
  (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 Loss before taxes, see Note 10 of the
Notes to Consolidated Condensed Financial Statements. Sales. Sales for the first six months of fiscal year 2004 were $145.6 million,
an increase of $16.0 million or 12.4%, from the same period in fiscal year
2003. Sales in all market segments except communications increased from the
comparable period of fiscal year 2003 by at least 10%. The majority of the
increase occurred in the Companys radar, industrial and medical markets. Radar
sales were $57.5 million for the first six months of fiscal year 2004 which
represents an increase of $7.1 million, or 14.2% from the first six months of
fiscal year 2003. The increase was due to increased shipments of VEDs to the
Department of Defense. Sales into the industrial market were $10.3 million, an
increase of $5.5 million, or 116.3%, compared to $4.8 million in the first six
months of fiscal year 2003. The increase can be attributed to strong demand for
semiconductor products in the first six months of fiscal year 2004. Sales in
the medical market were $20.8 million compared to $17.7 million in the first
six months of fiscal year 2003 as the demand for x-ray generators and VED
products used in cancer treatment applications continues to be robust. Sales in
the communications market in fiscal year 2004 decreased $3.0 million from the
comparable period of fiscal year 2003 due principally to a reduction in the
sale of VEDs and amplifiers for direct-to-home applications. Gross Margin. Gross margins were 29.8% in the first six months of fiscal year
2004, compared to 28.9% for the same period in fiscal year 2003. Excluding the
$4.2 million charge to cost of sales related to the purchase accounting
write-up of inventory, gross margins for the first six months of fiscal year
2004 were 32.7%. The improvement in gross margins can be attributed to
favorable mix and pricing of
products sold as well as volume efficiencies in the first six months of fiscal
year 2004. -32-




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CPI HOLDCO, INC.
and subsidiaries Research and Development Expenses. Research and development expenses were $3.7
million, or 2.5% of sales, for the first six months of fiscal year 2004,
compared to $3.0 million, or 2.3% of sales, for the first six months of fiscal
year 2003. The increase is primarily attributable to additional development
efforts on products for the radar and medical markets. Selling and Marketing Expenses. Selling and marketing expenses were $7.5
million, or 5.1% of sales, for the first six months of fiscal year 2004,
compared to $7.8 million, or 6.0% of sales, for the first six months of fiscal
year 2003. The decrease in selling and marketing expenses as a percentage of
sales reflects the increase in sales during the period of 12.4%. General and Administrative Expenses.General and administrative expenses were
$9.5 million, or 6.6% of sales, for the first six months of fiscal year 2004,
an increase of $0.6 million from the first six months of fiscal year 2003. The
increase can be attributed to higher stock compensation expense as well as
increased provisions for management incentives. Stock compensation expense for
the first six-months of fiscal year 2004 was $1.3 million, the majority of
which related to the write-off of all the remaining deferred compensation
related to the options to purchase the common stock of Holding granted in 2003,
which became fully vested at the time of the Merger. In the first six months of
fiscal year 2003, the Company recorded stock compensation of $0.8 million
related to common stock purchased by certain executive officers at a price
subsequently determined to be less than fair value. Merger Expenses.Merger expenses of $6.4 million for the first six months of
fiscal year 2004 were made up primarily of fees for 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. Amortization of Acquisition Related Intangibles.The Company recorded
identifiable intangible asset amortization for backlog of $3.4 million in the
10-week period from January 23, 2004 to April 2, 2004. The total intangible
asset recorded for backlog of $17.9 million is being amortized over a 12-month
period. Acquired In-Process Research and Development.The Company recorded a write-off
of acquired in-process research and development of $11.5 million as a result of
the revaluation of the Company at the time of the Merger. Projects classified
as in-process research and development had not yet demonstrated technological
feasibility and had no alternative future use. EBITDA. EBITDA for the first six-months of fiscal year 2004 was $7.6 million,
or 5.2% of sales, compared to $21.2 million, or 16.4% of sales, for the first
six-months of fiscal year 2003. The decrease in EBITDA resulted primarily from
the write-off of in-process research and development at the date of the Merger
of $11.5 million as well as the Merger expenses of $6.4 million. The effect of
these Merger-related items was offset in part by improved gross margins for the
six-month period ended April 2, 2004 compared to the six-month period ended
April 4, 2003. For reconciliation of EBITDA to Loss before taxes, see Note 10
of the Notes to Consolidated Condensed Financial Statements. Interest Expense. Interest expense was $11.9 million, or 8.1% of sales, for
the first six-months of fiscal year 2004 as compared to $7.2 million, or 5.6%
of sales, for the first six months of fiscal year 2003. The increase of $4.7
million relates primarily to costs associated with early redemption of the 12%
Notes, and write-off of capitalized debt issuance costs related to outstanding
debt at the time of the Merger. Interest expense on a continuing basis will
include interest due on the 8% Notes of approximately $2.5 million per quarter
and interest on the Term Loan of approximately $1.0 million per quarter.
Interest expense will also include amortization of debt issuance costs and
other customary fees on the Revolver. Income Tax Expense. The Company recorded income tax expense of $0.9 million
for the six months ended April 2, 2004 compared to income tax expense of $4.9
million for the six months April 3, 2003. -33-




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CPI HOLDCO, INC.
and subsidiaries Tax expense was recorded for the first six months of fiscal year 2004 despite a
pre-tax loss as certain merger related expenses and purchase accounting related
expenses are not deductible for tax purposes. The tax expense for the second
quarter of fiscal year 2003 represents an effective tax rate of approximately
43%. Net (Loss) Income. The Company recorded a net loss for the six month period
ended April 2, 2004 of $11.4 million, compared to net income of $5.8 million
for the six month period ended April 4, 2003. The net loss for the first six
months of fiscal year 2004 resulted from purchase accounting related
adjustments and transaction expenses related to the Merger, as discussed above. Liquidity and Capital Resources The following table presents selected financial information for each of the
periods indicated: Fiscal Year2004
    
    2003January 23, 2004
    
    October 4, 2003
    
    27-Weekto
    
    to
    
    Period endedApril 2, 2004
    
    January 22, 2004
    
    April 4, 2003(In
thousands)
    
    (Successor)
    
    (Predecessor)
    
    (Predecessor)Net increase (decrease) in cash and cash equivalents
    
    $
    13,982
    
    
    $
    (20,932
    )
    
    $
    16,543Cash (used in) provided by operating activities
    
    $
    (3,829
    )
    
    $
    7,166
    
    
    $
    17,941Cash used in investing activities
    
    $
    (114,072
    )
    
    $
    (459
    )
    
    $
    (918
    )Cash provided by (used in) financing activities
    
    $
    131,883
    
    
    $
    (27,639
    )
    
    $
    (480
    )
 As ofApril 2, 2004
    
    October 3, 2003Cash and cash equivalents
    $
    13,982
    
    
    $
    33,751Long-term debt and redeemable preferred stock
    $
    214,100
    
    
    $
    158,207Working capital
    $
    43,054
    
    
    $
    17,241
 For the period January 23, 2004 to April 2, 2004, cash and cash equivalents
increased by $14.0 million. The principal components of this increase were
related to the Merger and the associated financing and are summarized below: (in millions)Proceeds from the issuance of common stock, net
    
    
    
    
    $
    98.1Proceeds from the issuance of 8% Notes
    
    
    
    
    
    125.0Proceeds from Term Loan
    
    
    
    
    

    90.0Less:Debt issuance costs
    
    
    
    
    
    9.6Retirement of debt and preferred stock of Predecessor
    
    
    
    
    
    172.8Cash paid to shareholders and option holders of Holding, net of cash acquired.
    
    
    
    
    

    113.8Other

    
    
    
    
    

    2.9Net increase in cash and cash equivalents
    
    
    
    

    $
    14.0
 Cash and cash equivalents decreased from the period October 4, 2003 to January
22, 2004 by $20.9 -34-




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries million due principally to the redemption of $26.0 million in principal amount
of the 12% Notes on January 5, 2004, offset in part by $7.2 million of cash
generated from operating activities. For the period September 28, 2002 to April 4, 2003, cash and cash equivalents
increased by $16.5 million due principally to $17.9 million of cash generated
from operating activities, offset in part by $0.9 million net cash used in
investing activities for the purchase of property, plant and equipment and $0.5
million used in financing activities. Working capital increased by $25.8 million during the first six months of
fiscal year 2004 due principally to a $10.2 million increase in accounts
receivable and a $34.6 million decrease in current liabilities, offset in part
by a $19.8 million decrease in cash and cash equivalents. Accounts receivable
balances increased during the first six months of fiscal year 2004 as a result
of the increase in sales volume, while the quality of the Companys receivables
remained strong. The decrease in current liabilities can be attributed
primarily to the repayment of the mortgage financing and payment of dividends
payable on the senior preferred stock. The decrease in cash and cash
equivalents was discussed above. In connection with the Merger, CPI entered into a $130.0 million credit
agreement (Senior Credit Facility). 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 a $90.0 million term loan (Term Loan), which
expires on July 23, 2010. 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 Senior Credit Facility is guaranteed by CPI
Holdco, and all of CPIs domestic subsidiaries and is collateralized with a
security agreement, which includes a security interest in certain property and
fixtures. On April 2, 2004, the Company has $90.0 million outstanding under the
Term Loan and availability of $32.8 million under the Revolver. The Revolver and Term Loan borrowings that will initially bear interest at a
rate equal to LIBOR plus 3.00% per annum, or the Alternate Base Rate (ABR)
plus 2.0% per annum; the ABR is the greater of (a) the Prime Rate and (b) the
Federal Funds Rate plus 0.50%. In addition to customary fronting and
administrative fees, the Company will pay letter of credit participation fees
and a commitment fee on the unused amount of the Revolver. The Senior Credit Facility also contains customary covenants, including
financial covenants. See Note 5 of the Notes to Consolidated Condensed
Financial Statements. In addition to the Senior Credit Facility, and in connection with the Merger,
CPI issued an aggregate principal amount of $125.0 million of 8% Notes. CPI is
required to pay interest on the 8% Notes semiannually, beginning on August 1,
2004. The indenture governing the terms of the 8% Notes (8% Indenture)
contains restrictive provisions which limit, among other things, CPI and
certain of its subsidiaries from incurring certain indebtedness, selling assets
or consolidating or merging with or into other companies, paying dividends or
repurchasing or redeeming capital stock, making certain investments and
entering into certain types of transactions with their affiliates. The 8% Notes
are subordinate to all senior debt (as defined in the 8% Indenture), including
indebtedness under the Senior Credit Facility. CPIs payment obligations under
the 8% Notes are jointly and severally guaranteed by CPI Holdco and all of
CPIs domestic subsidiaries. The 8% Notes may be redeemed as described in, and
subject to the terms and conditions set forth in, the 8% Indenture. In
addition, the 8% Indenture requires the Company to make an offer to purchase
the 8% Notes in certain circumstances. The following table summarizes the Companys contractual obligations as of
April 2, 2004 and the effect these obligations have on the Companys liquidity
and cash flows in future periods: -35-




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CPI HOLDCO, INC.
and subsidiaries (dollars in thousands)
    
    Due in Fiscal YearsRemainingsix months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2009 andContractual
Obligations:
    
    of 2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TotalDebt obligations
    
    $
    450
    
    
    
    900
    
    
    
    900
    
    
    
    900
    
    
    
    900
    
    
    
    210,950
    
    
    $
    215,000Noncancellable operating leases
    
    
    564
    
    
    
    888
    
    
    
    268
    
    
    
    80
    
    
    
    71
    
    
    
    2,436
    
    
    
    4,307Total cash obligations
    
    $
    1,014
    
    
    
    1,788
    
    
    
    1,168
    
    
    
    980
    
    
    
    971
    
    
    
    213,386
    
    
    $
    219,307Standby letters of credit
    
    $
    2,855
    
    
    
    4,332
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,187
 The Company entered into foreign currency forward contracts on March 2, 2004
for an aggregate notional amount of $25.1 million, expiring on February 25,
2005, to protect against foreign exchange risks associated with probable but
not firmly committed transactions. The Companys foreign exchange forward
contracts are designated as a cash flow hedge and are considered highly
effective, as defined by FASB Statement No. 133. At April 2, 2004, the fair
value of the foreign currency forward was a gain of approximately $0.4 million,
net of related tax benefit. The unrealized gains from these forwards are
included in other comprehensive income and are shown as a component of
stockholders equity. Generally, there can be no assurance that the combination of cash generated by
operations, borrowing availability from the Senior Credit Facility and
additional financing will be sufficient to meet the Companys cash
requirements. If the Company is unable to satisfy such cash requirements from
these sources, the Company may adopt one or more alternatives, such as reducing
or delaying capital expenditures, reducing discretionary costs, and attempting
to negotiate an increase to the Companys borrowing capacity under its Senior
Credit Facility, although there can be no assurances that such alternatives
will be available on acceptable terms, if at all. Recent Accounting Pronouncements In December 2003, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition, which supersedes SAB
101, Revenue Recognition in Financial Statements. SAB 104 clarifies existing
guidance regarding revenue contracts that contain multiple deliverables to make
it consistent with Emerging Issues Task Force No. 00-21. The adoption of SAB
104 did not have a material impact on the Companys results of operations or
financial position. In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, which
addresses consolidation by business enterprises of variable interest entities
which have one or both of the following characteristics: (1) The equity
investment at risk is not sufficient to permit the entity to finance its
activities without support from other parties and (2) the equity investors lack
one or more of the defined essential characteristics of a controlling financial
interest. This Interpretation requires existing unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among the participating parties.
This Interpretation applies immediately to variable interest entities created
after January 31, 2003 and to variable interest entities in which an enterprise
obtains an interest after that date. On October 9, 2003, FASB Staff Position
FIN 46-6, Effective Date of FASB Interpretation No. 46, Consolidation of
Variable Interest Entities was issued. This delayed the effective date of
this Interpretation for variable interest entities created before February 1,
2003 until January 3, 2004. The Company has evaluated the impact of the
provisions of Interpretation No. 46 and believes it -36-




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CPI HOLDCO, INC.
and subsidiaries will not have a material impact on the Companys consolidated financial
statements. Cautionary Statements Regarding Forward-Looking Statements This document contains forward-looking statements that relate to future events
or the Companys future
financial performance. In some cases, readers can identify forward-looking
statements by terminology such as may, will, should, except, 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 Companys other filings with
the Securities and Exchange Commission (SEC). 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 Companys debt agreements have restrictions that 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 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;  
    
    the Companys business could be adversely affected by environmental regulation and legislation, liabilities relating to
contamination and changes in our ability to recover under Varian Medical Systems Inc.s obligations to indemnify the
Company for certain potential environmental liabilities; -37-




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CPI HOLDCO, INC.
and subsidiaries  
    
    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; 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. -38-




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CPI HOLDCO, INC.
and subsidiaries 
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Companys market risk disclosures set forth in the Predecessors Annual
Report on Form 10-K for the fiscal year ended October 3, 2003, have not changed
materially. 
 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
SEC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. -39-




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CPI HOLDCO, INC.
and subsidiaries 
 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES. In January 2004, CPI Holdco, Inc. (CPI Holdco) issued 4,251,122 shares of
common stock to affiliates of The Cypress Group L.L.C for consideration of $100
million. Such securities were sold in reliance on Section 4(2) of the
Securities Act of 1933, as amended. In March 2004, CPI Holdco issued 24,444 shares of common stock to two members
of the Board of Directors of CPI Holdco for aggregate consideration of
$575,000. Such securities were sold in reliance on Section 4(2) of the
Securities Act of 1933, as amended, at fair value as determined by the Board of
Directors. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. CPI Holdco submitted to its stockholders for approval by written consent an
amendment to the Restated Certificate of Incorporation of CPI Acquisition Corp,
to change its name to CPI Holdco, Inc. CPI Holdco received written consents
approving this item from the holders of 4,251,122 shares of common stock, and
such amendment was approved on March 11, 2004. 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.
    
    Description10.1
    
    The 2004 Stock Option Plan10.2
    
    Form of Option Agreement (Employees).10.3
    
    Form of Option Agreement (Directors).31
    
    Rule 13a-14 (a) /15d-14 (a) Certifications.32
    
    Section 1350 Certifications.
  (b)
    
    Reports on Form 8-K:A report on Form 8-K was filed on January 28, 2004 under Item 5 to report
the consummation of the merger of CPI Merger Sub Corp. with and into
Communications & Power Industries Holding Corporation on January 23, 2004
pursuant to the Agreement and Plan of Merger dated as of November 17, 2003. -40-




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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, INCBy:
    
    /s/ O. Joe CaldarelliO. Joe CaldarelliChief Executive OfficerDate: May 14, 2004By:
    
    /s/ Joel LittmanJoel LittmanChief Financial Officer, Treasurer and Secretary(Principal Financial and Accounting Officer)Date: May 14, 2004
 -41-




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EXHIBIT INDEX ExhibitNo.
    
    Description10.1
    
    The 2004 Stock Option Plan10.2
    
    Form of Option Agreement (Employees).10.3
    
    Form of Option Agreement (Directors).31
    
    Rule 13a-14 (a) /15d-14 (a) Certifications.32
    
    Section 1350 Certifications.