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UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 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. (Exact Name of Registrant as Specified in Its Charter)Delaware
(State or Other Jurisdiction of Incorporation or Organization)75-3142681
(I.R.S. Employer Identification No.)811 Hansen Way
Palo Alto, California 94303-1110
(650) 846-2900
(Address of Principal Executive Offices and Telephone Number,
Including Area Code) Indicate by check mark whether each registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes o No þ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding for each of the Registrants classes of Common Stock, as
of the latest practicable date: 4,275,566 shares of Common Stock, $.01 par value, at February 11,
2005.




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CPI HOLDCO, INC.
and subsidiaries Cautionary Statements Regarding Forward-Looking Statements This document contains forward-looking statements that relate to future events or the future
financial performance of CPI Holdco, Inc. (collectively, with its subsidiaries, the Company). In
some cases, readers can identify forward-looking statements by terminology such as may, will,
should, expect, plan, anticipate, believe, estimate, predict, potential or
continue, the negative of such terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially. Although the Company believes that the expectations reflected in the forward-looking statements are
reasonable, the Company cannot guarantee future results, levels of activity, performance or
achievements. Moreover, neither the Company nor any other person assumes responsibility for the
accuracy and completeness of the forward-looking statements. All written and oral forward-looking
statements made in connection with this report that are attributable to the Company or persons
acting on the Companys behalf are expressly qualified in their entirety by the risk factors, and
other cautionary statements included herein and in the other filings with the Securities and
Exchange Commission (SEC) made by the Company and its predecessor, Communications & Power
Industries Holding Corporation. The Company is under no duty to update any of the forward-looking
statements after the date of this report to conform such statements to actual results or to changes
in the Companys expectations. The information in this report is not a complete description of the Companys business or the risks
and uncertainties associated with an investment in the Companys securities. You should carefully
consider the various risks and uncertainties that impact the Companys business and the other
information in this report and the Companys other filings with the SEC before you decide to invest
in the Company or to maintain or increase your investment. Such risks and uncertainties include,
but are not limited to, the following:  
    the Companys indebtedness is substantial;
    the 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 the U.S. Congress may prevent proposed sales to foreign customers;
    the Companys results of operations and financial condition may be adversely affected by increased or unexpected costs
incurred by it on its contracts and sales orders;
    environmental regulation and legislation, liabilities relating to contamination and changes in the Companys ability to
recover under Varian Medical Systems Inc.s indemnity obligations could adversely affect its business;
    the Company has only a limited ability to protect its intellectual property rights;
    the Companys inability to obtain certain necessary raw materials and key components could disrupt the manufacture of
its products and cause its financial condition and results of operations to suffer;
    the relocation of the Companys San Carlos, California operating division to Palo Alto, California could result in
disruption to the Companys operations;
    the Company may not be able to timely comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002; and
    the Company is controlled by affiliates of The Cypress Group L.L.C. Any of the foregoing factors could cause the Companys business, results of operations, or
financial condition to suffer, and actual results could differ materially from those expected. 2




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CPI HOLDCO, INC.
and subsidiaries  
 PART I: FINANCIAL INFORMATIONITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)Condensed Consolidated Balance Sheets
    
    
    4Condensed Consolidated Statements of Operations and Comprehensive Income
    
    
    5Condensed Consolidated Statements of Cash Flows
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    21ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
    
    
    27ITEM 4: CONTROLS AND PROCEDURES
    
    
    27PART II: OTHER INFORMATION
    
    
    28SIGNATURES
    
    
    29EXHIBIT 31EXHIBIT 32
  
 PART I: FINANCIAL INFORMATION 
 ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3




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CPI HOLDCO, INC.
and subsidiaries 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands-unaudited) December 31,
    
    
    October 1,2004
    
    
    2004AssetsCurrent AssetsCash and cash equivalents
    
    $
    26,924
    
    
    $
    40,476Restricted cash
    
    
    2,458
    
    
    
    2,279Accounts receivable, net
    
    
    38,898
    
    
    
    35,914Inventories
    
    
    41,275
    
    
    
    38,074Deferred tax assets
    
    
    13,094
    
    
    
    12,285Prepaids and other current assets
    
    
    5,255
    
    
    
    3,796Total current assets
    
    
    127,904
    
    
    
    132,824Property, plant and equipment, net
    
    
    73,244
    
    
    
    70,127Debt issue costs, net
    
    
    8,623
    
    
    
    8,910Intangible assets, net
    
    
    80,721
    
    
    
    78,481Goodwill
    
    
    145,822
    
    
    
    139,614Other long-term assets
    
    
    1,070
    
    
    
    1,251Total assets
    
    $
    437,384
    
    
    $
    431,207Liabilities and Stockholders EquityCurrent LiabilitiesCurrent portion of term loan
    
    $
    88
    
    
    $
    3,944Accounts payable
    
    
    15,777
    
    
    
    15,790Accrued expenses
    
    
    23,948
    
    
    
    20,939Product warranty
    
    
    6,064
    
    
    
    6,074Income taxes payable
    
    
    5,197
    
    
    
    1,661Advance payments from customers
    
    
    11,860
    
    
    
    12,031Total current liabilities
    
    
    62,934
    
    
    
    60,439Deferred income taxes
    
    
    38,863
    
    
    
    39,118Advance payments from sale of San Carlos property
    
    
    13,450
    
    
    
    13,450Senior term loan
    
    
    85,584
    
    
    
    85,606Senior subordinated notes
    
    
    125,000
    
    
    
    125,000Total liabilities
    
    
    325,831
    
    
    
    323,613Stockholders EquityCommon stock
    
    
    43
    
    
    
    43Additional paid-in capital
    
    
    103,579
    
    
    
    103,534Accumulated other comprehensive income
    
    
    2,185
    
    
    
    1,369Retained earnings
    
    
    5,746
    
    
    
    2,648Net stockholders equity
    
    
    111,553
    
    
    
    107,594Total liabilities and stockholders equity
    
    $
    437,384
    
    
    $
    431,207
 See accompanying notes to the condensed consolidated financial statements. 4




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CPI HOLDCO, INC.
and subsidiaries 
 CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands  unaudited) Fiscal Year2005
    
    
    
    200413-Week
    
    
    
    13-WeekPeriod Ended
    
    
    
    Period EndedDecember 31, 2004
    
    
    
    January 2, 2004(Successor)
    
    
    
    (Predecessor)Sales
    
    $
    73,733
    
    
    
    $
    68,313Cost of sales
    
    
    49,678
    
    
    
    
    47,141Amortization of acquisition-related
inventory write-up
    
    
    351
    
    
    
    
    Gross profit
    
    
    23,704
    
    
    
    
    21,172Operating costs and expenses:Research and development
    
    
    1,448
    
    
    
    
    1,733Selling and marketing
    
    
    4,068
    
    
    
    
    3,624General and administrative
    
    
    4,025
    
    
    
    
    3,700Merger expenses
    
    
    
    
    
    
    
    430Amortization of acquisition-related
intangible assets
    
    
    4,906
    
    
    
    
    Total operating costs and expenses
    
    
    14,447
    
    
    
    
    9,487Operating income
    
    
    9,257
    
    
    
    
    11,685Interest expense, net
    
    
    4,080
    
    
    
    
    3,559Income before taxes
    
    
    5,177
    
    
    
    
    8,126Income tax expense
    
    
    2,079
    
    
    
    
    3,287Net income
    
    
    3,098
    
    
    
    
    4,839Preferred dividends:Senior redeemable preferred stock
    
    
    
    
    
    
    
    1,609Junior preferred stock
    
    
    
    
    
    
    
    1,048Net income attributable to common stock
    
    $
    3,098
    
    
    
    $
    2,182Other comprehensive income, net of tax:Unrealized gain on cash flow hedges
    
    
    816
    
    
    
    
    Comprehensive income
    
    $
    3,914
    
    
    
    $
    2,182
 See accompanying notes to the condensed consolidated financial statements. 5




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CPI HOLDCO, INC.
and subsidiaries 
 CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands  unaudited) Fiscal Year2005
    
    
    
    200413-Week
    
    
    
    13-Weekperiod ended
    
    
    
    period endedDecember 31, 2004
    
    
    
    January 2, 2004(Successor)
    
    
    
    (Predecessor)OPERATING ACTIVITIESNet cash provided by operating activities
    
    $
    10,112
    
    
    
    $
    6,194INVESTING ACTIVITIESExpenses relating to sale of San Carlos property
    
    
    (8
    )
    
    
    
    Purchase of Econco, net of cash acquired
    
    
    (18,685
    )
    
    
    
    Purchase of property, plant and equipment
    
    
    (1,194
    )
    
    
    
    (239
    )Net cash used in investing activities
    
    
    (19,887
    )
    
    
    
    (239
    )FINANCING ACTIVITIESRepayments of senior term loan
    
    
    (3,878
    )
    
    
    
    Repayments on capital leases
    
    
    (20
    )
    
    
    
    Net proceeds (repayments) from bank overdraft
    
    
    121
    
    
    
    
    (1,639
    )Net cash used in financing activities
    
    
    (3,777
    )
    
    
    
    (1,639
    )NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS
    
    
    (13,552
    )
    
    
    
    4,316Cash and cash equivalents at beginning of period
    
    
    40,476
    
    
    
    
    33,751Cash and cash equivalents at end of period
    
    $
    26,924
    
    
    
    $
    38,067Supplemental Disclosures of Cash Flow InformationCash paid for interest
    
    $
    1,410
    
    
    
    
    302Cash paid for taxes, net of refunds
    
    $
    120
    
    
    
    
    739Supplemental Disclosures of Noncash Investing and
Financing ActivitiesDividends on senior preferred stock
    
    $
    
    
    
    
    
    1,609
 See accompanying notes to the condensed consolidated financial statements. 6




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CPI HOLDCO, INC.
and subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) 1. Basis of Presentation For periods ending prior to January 23, 2004, the accompanying condensed consolidated financial
statements represent the consolidated results and financial position of Communications & Power
Industries Holding Corporation (Holding or the Predecessor). On January 23, 2004, the
Predecessor merged (the Merger) with CPI Merger Sub Corp. (Merger Sub), a wholly-owned
subsidiary of CPI Holdco, Inc. (CPI Holdco or the Successor), a Delaware corporation formerly
known as CPI Acquisition Corp., controlled by affiliates of The Cypress Group L.L.C. (Cypress) as
more fully described in Note 2. As a result of the Merger, the Predecessor became a wholly owned
subsidiary of CPI Holdco. The financial statements for periods subsequent to January 22, 2004
represent the condensed consolidated financial statements of CPI Holdco after giving effect to the
Merger. References to the Company refer to the Predecessor prior to the Merger and the Successor
post-Merger. CPI Holdcos fiscal years are the 52- or 53-week periods that end on the Friday nearest September
30. The Successors fiscal year did not change from that of the Predecessor. Fiscal year 2005
comprises the 52-week period ending September 30, 2005, and fiscal year 2004 comprised the 52-week
period ended October 1, 2004. Management believes that these unaudited interim condensed consolidated financial statements
contain all adjustments, all of which are of a normal recurring nature, necessary to present fairly
the financial position of the Company and its results of operations and cash flows for the interim
periods presented. The results for the interim periods reported are not necessarily indicative of
the results for the complete fiscal year 2005. Certain information and footnote disclosures
normally included in annual financial statements have been condensed or omitted and, accordingly,
these financial statements should be read in conjunction with the financial statements and the
notes thereto contained in the Companys Annual Report on Form 10-K for the fiscal year ended
October 1, 2004. There is currently no public market for the Companys common stock. As allowed by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure, the Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Under this method, compensation expense is recorded only
if the current market price of the underlying stock exceeded the exercise price at the measurement
date. All stock options issued by the Successor were issued at, or above, the current market price
of the underlying stock. During fiscal year 2003, the Company issued stock options to employees
that were subsequently determined to have been issued below the fair value of the stock on the date
of grant. The compensation cost associated with the 2003 stock options was amortized as a charge
against income under the caption General and administrative in the Condensed Consolidated
Statement of Operations and Comprehensive Income 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
with SFAS No. 123, the Companys net income would have changed to the pro forma amounts indicated
below (in thousands): 7




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CPI HOLDCO, INC.
and subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) 2005
    
    
    200413-Week
    
    
    13-WeekPeriod ended
    
    
    Period endedDecember 31, 2004
    
    
    January 2, 2004(Successor)
    
    
    (Predecessor)Net income as reported
    
    $
    3,098
    
    
    $
    4,839Add:Stock-based compensation
included in net income
determined under intrinsic value
method, net of tax
    
    
    45
    
    
    
    94Deduct:Stock-based compensation
determined under fair value
based method, net of tax
    
    
    218
    
    
    
    203Pro forma net income
    
    $
    2,925
    
    
    $
    4,730
 No options were granted during the 13-weeek period ending December 31, 2004 and January 2, 2004. 2. Mergers Cypress Merger On January 23, 2004, CPI Holdcos wholly-owned subsidiary, Merger Sub, merged with and into Holding
pursuant to the terms of the Agreement and Plan of Merger (the Merger Agreement), dated as of
November 17, 2003, by and among Holding, CPI Holdco, Merger Sub and Green Equity Investors II,
L.P., as the representative of the security holders of Holding, under which CPI Holdco, Merger
Subs parent corporation and a corporation controlled by affiliates of Cypress, agreed to acquire
Holding. In the Merger, each share of Holdings common stock and stock options outstanding
immediately prior to the Merger, other than a portion of stock options held by certain members of
management (which were converted into options to purchase shares of CPI Holdco) and other than any
shares of common stock owned by Holding or CPI Holdco, were converted into the right to receive a
pro rata portion of the aggregate merger consideration of $131.7 million. In connection with the
Merger, CPI Holdco received an equity contribution of $100.0 million before expenses from
affiliates of Cypress in exchange for 4,251,122 shares of common stock of CPI Holdco. Members of
management of Holding, as a result of rolling over their options to purchase common stock of
Holding, received stock options to purchase 167,513 shares of common stock of CPI Holdco (Rollover
Options). The fair value of Rollover Options was $5.0 million and was accounted for as Merger
purchase price as of January 23, 2004. Members of Holding management that were residents of
Canada received 1,485 stock options to purchase shares of common stock of CPI Holdco as payment of
Merger escrow proceeds in respect of their options to purchase shares of Holding. In connection with the Merger, Holding and Communications & Power Industries, Inc. (CPI)
refinanced all of their outstanding indebtedness. As part of the refinancing, CPI effected a
covenant defeasance of $74.0 million outstanding aggregate principal amount of its 12% Senior
Subordinated Notes (12% Notes) and redeemed the 12% Notes in full, each pursuant to the terms of
the Indenture governing the 12% Notes. In addition, CPI terminated its credit facility, and Holding
paid off all amounts owing under, and terminated, the loan agreement related to its San Carlos
Property. CPI also redeemed all of the outstanding shares of its 14% Junior Cumulative Preferred
Stock and its Series B 14% Senior Redeemable Exchangeable Cumulative Preferred Stock. The Merger transaction was accounted for using the purchase method of accounting as required by the
SFAS 141, Business Combinations. Accordingly, the assets acquired and liabilities assumed were
recorded at fair value and the excess of the purchase price over the fair value of the assets
acquired was recorded as goodwill. The allocation of the purchase price to specific assets and
liabilities was based, in part, upon independent appraisals and internal estimates of cash flow and
recoverability. The following table summarizes the final estimates of fair value of the assets
acquired and liabilities assumed at January 23, 2004 (in thousands): 8




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CPI HOLDCO, INC.
and subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) Cash
    
    $
    13,866Accounts receivable
    
    
    29,587Inventory, including $5.5 million of fair value write-up
    
    
    43,608Other current assets
    
    
    3,241Property, plant and equipment
    
    
    70,079Identifiable intangible assets
    
    
    92,160Acquired in-process research and development
    
    
    2,500Goodwill
    
    
    139,614Debt and preferred stock
    
    
    (172,881
    )Deferred tax liabilities, net
    
    
    (33,169
    )Other liabilities
    
    
    (56,934
    )Total
    
    $
    131,671
 The $2.5 million of acquired in-process research and development represents the estimated fair
value of acquired in-process research and development projects that had not yet reached
technological feasibility on January 23, 2004 and had no alternative future use. Accordingly, this
amount was written off at the Merger date. The value assigned to acquired in-process research and
development is related to technology application projects involving development of VEDs (Vacuum
Electron Devices) for communications, scientific and military applications and development of power
supplies, x-ray generators and transmitters for industrial, medical and military applications. The following unaudited pro forma summary presents information as if the Merger had taken place at
the beginning of each period presented. The pro forma amounts include certain adjustments,
including depreciation based on the allocated purchase price of property and equipment,
amortization of finite lived intangible assets acquired, interest expense and taxes. One-time
charges for the inventory write-up, merger expenses, acquired in-process research and development
and backlog amortization, net of applicable taxes, are excluded from the pro forma net income
amounts (in thousands): 13-Week
    
    
    13-Week(in thousands)
    
    period ended
    
    
    period endedDecember 31, 2004
    
    
    January 2, 2004Sales
    
    $
    73,733
    
    
    $
    68,313Pro forma net income
    
    $
    5,716
    
    
    $
    4,948
 Corporate Reorganization On March 12, 2004, Holding was merged with and into its wholly-owned subsidiary, CPI, with CPI as
the surviving corporation (the Intercompany Merger). As a result of the Intercompany Merger, the
corporate structure of the Company and its subsidiaries consists of one parent holding corporation,
CPI Holdco, and all of the obligations of Holding existing prior to the Intercompany Merger became
obligations of CPI. 3. Inventories Inventories are stated at the lower of average cost or market (net realizable value). The main
components of inventories are as follows (in thousands): December 31,
    
    
    October 1,2004
    
    
    2004Raw materials and parts
    
    $
    27,218
    
    
    $
    23,500Work in process
    
    
    9,484
    
    
    
    10,067Finished goods
    
    
    4,573
    
    
    
    4,507Total
    
    $
    41,275
    
    
    $
    38,074
 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 9




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CPI HOLDCO, INC.
and subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) experience and changes in future
expectations. The following table reconciles the changes in the Companys accrued warranty (in
thousands): 2005
    
    
    200413-Week
    
    
    13-WeekPeriod ended
    
    
    Period endedDecember 31, 2004
    
    
    January 2, 2004(Successor)
    
    
    (Predecessor)Beginning accrued warranty
    
    $
    6,074
    
    
    $
    5,401Cost of warranty claims
    
    
    (741
    )
    
    
    (972
    )Accruals for product warranty
    
    
    731
    
    
    
    1,701Ending accrued warranty
    
    $
    6,064
    
    
    $
    6,130
 5. Senior Credit Facility In connection with the Merger, CPI entered into a $130.0 million credit agreement, which was
amended and restated on November 29, 2004 (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 $89.6 million term loan (Term Loan), which expires on July 23, 2010, of which $85.7 million was
outstanding as of December 31, 2004. The Senior Credit Facility is guaranteed by CPI Holdco and
all of CPIs domestic subsidiaries and is secured by substantially all of their assets. The Revolver borrowings currently 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 Term Loan borrowings currently bear
interest at a rate equal to LIBOR plus 2.5% per annum or the ABR plus 1.5% 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 pays letter of
credit participation fees equal to the applicable LIBOR margin (discussed above) per annum on the
average daily amount of the letter of credit exposure, and a commitment fee of 0.50% per annum on
the average daily unused amount of revolving commitment. The Senior Credit Facility provides that upon specified conditions, CPI may seek commitments for a
new class of term loans, not to exceed $75 million. Such new term loans (a) may be part of the
existing tranche of term loans or may be part of new tranche of term loans and (b) subject to
certain exceptions, shall have
terms generally identical to the terms of the existing term loans, provided that the applicable
margins with respect to such new term loans shall not be greater than 50 basis points higher than
the highest possible margins on the existing term loans. 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 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. At December 31, 2004,
CPI was in compliance with all Senior Credit Facility covenants. The Term Loan requires 1.0% of the loan amount to be repaid annually in quarterly installments of
0.25% beginning June 30, 2004 and continuing for five years, with the remainder due in equal
quarterly installments thereafter. The Term Loan also requires an annual prepayment to be made
within 90 days after the end of the fiscal year based on a calculation of Excess Cash Flow (ECF),
as defined in the Senior Credit Facility, multiplied by a factor of 25%, 50% or 75% depending on
the leverage ratio at the end of the fiscal year, less optional prepayments made during the fiscal
year. On December 30, 2004, CPI made an ECF payment of $3.9 million. The ECF payment was applied
pro rata, in accordance with the provisions of the term loan, against the remaining scheduled
installments of principal due up to, but not including, the September 30, 2009 scheduled 10




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CPI HOLDCO, INC.
and subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) principal
installment. 6. 8% Senior Subordinated Notes In connection with the Merger, CPI issued an aggregate principal amount of $125.0 million of its 8%
Senior Subordinated Notes due 2012 (8% Notes), which will mature in their entirety on February 1,
2012; there are no sinking fund requirements. CPI is required to pay interest on the 8% Notes
semiannually, beginning on August 1, 2004. The indenture governing the terms of the 8% Notes (the
8% Indenture) contains restrictive covenants 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
Company is in compliance with the covenants contained in the 8% Indenture as of December 31, 2004.
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 As of December 31, 2004, CPI had outstanding forward contract commitments to purchase Canadian
dollars for an aggregate U.S. notional amount of $31.0 million; the last forward contract expires
on March 10, 2006. The Companys foreign currency forward contracts are designated as a cash flow
hedge and are considered highly effective, as defined by FASB Statement No. 133. At December 31,
2004, the fair value of unrealized foreign currency forward contracts was $3.1 million and the
unrealized gain was approximately $2.2 million, net of related tax expense. The unrealized gains
from these forward contracts are included in other comprehensive income and are shown as a
component of stockholders equity. 8. Segments and Related Information The Company has two reportable segments: VEDs and satcom equipment. Management evaluates
performance and allocates resources based on earnings before provision for interest expense, income
taxes, depreciation and amortization (EBITDA). Summarized financial information concerning the Companys reportable segments is shown in the
following table: Fiscal Year2005
    
    
    200413-Week
    
    
    13-WeekPeriod ended
    
    
    Period ended(In thousands)
    
    December 31, 2004
    
    
    January 2, 2004(Successor)
    
    
    (Predecessor)Revenues from external customersVEDs
    
    $
    62,268
    
    
    $
    58,594Satcom equipment
    
    
    11,465
    
    
    
    9,719Total
    
    $
    73,733
    
    
    $
    68,313Intersegment product transfersVEDs
    
    $
    5,752
    
    
    $
    3,293Satcom equipment
    
    
    2
    
    
    
    Total
    
    $
    5,754
    
    
    $
    3,293EBITDAVEDs
    
    $
    16,542
    
    
    $
    14,393Satcom equipment
    
    
    1,378
    
    
    
    228Other
    
    
    (2,444
    )
    
    
    (1,512
    )Total
    
    $
    15,476
    
    
    $
    13,109
 Included in the Other category of EBITDA are unallocated corporate operating
expenses and amortization of acquisition-related inventory write-up.
Intersegment product transfers are recorded at cost. 11




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CPI HOLDCO, INC.
and subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) EBITDA represents earnings before interest expense, provision for income taxes, depreciation and
amortization. EBITDA is presented because the Company believes that EBITDA is used by some
investors as a financial indicator of a companys ability to service indebtedness. While
management considers EBITDA to be an important measure of comparative operating performance, it
should be considered in addition to, but not as a substitute for or superior to, operating income,
net earnings (loss), cash flow and other measures of financial performance prepared in accordance
with accounting principles generally accepted in the United States. EBITDA does not reflect cash
available to fund cash requirements, and the items excluded from EBITDA, such as depreciation and
amortization, are significant components in assessing the Companys financial performance. Other
significant uses of cash flows are required before cash will be available to the Company including
debt service, taxes and cash expenditures for various long-term assets. The Companys calculation
of EBITDA may be different from the calculation used by other companies and, therefore,
comparability may be limited. A reconciliation of EBITDA from reportable segments to income before
taxes is as follows: Fiscal Year2005
    
    
    200413-Week
    
    
    13-WeekPeriod ended
    
    
    Period ended(In thousands)
    
    December 31, 2004
    
    
    January 2, 2004(Successor)
    
    
    (Predecessor)EBITDA
    
    $
    15,476
    
    
    $
    13,109Less:Depreciation and amortization
    
    
    6,219
    
    
    
    1,424Interest expense, net
    
    
    4,080
    
    
    
    3,559Income before taxes
    
    $
    5,177
    
    
    $
    8,126
 Sales by geographic area to unaffiliated customers (based on the location of customer) are as
follows: Fiscal Year2005
    
    
    200413-Week
    
    
    13-WeekPeriod ended
    
    
    Period ended(In thousands)
    
    December 31, 2004
    
    
    January 2, 2004(Successor)
    
    
    (Predecessor)United States
    
    $
    50,633
    
    
    $
    44,760All foreign countries
    
    
    23,100
    
    
    
    23,553Total sales
    
    $
    73,733
    
    
    $
    68,313
 The Company had one customer, the United States Government, that accounted for 10% or more of
consolidated sales. Sales to this customer were $13.6 million and $15.1 million of the Companys
consolidated sales for the 13-week periods ended December 31, 2004 and January 2, 2004,
respectively. A substantial majority of these sales were VED segment products, but this customer
also purchased satcom equipment products. 9. Recent Accounting Pronouncements In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-01, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. Issue No.
03-01 requires certain quantitative and qualitative disclosures be made for debt and marketable
equity securities classified as available-for-sale under SFAS No. 115 that are impaired at the
balance sheet date, but for which an other-than-temporary impairment has not been recognized.
Issue No. 03-01 was initially to be effective for reporting periods beginning after June 15, 2004.
In December 2004, the FASB decided to reconsider its guidance on this Issue. The Company does not
expect the adoption of EITF No. 03-01 to have a material impact on its consolidated financial
position, results of operations or cash flows. In November 2004, the FASB issued SFAS No. 151, Inventory Costsan amendment of ARB No. 43,
Chapter 4, which is the result of the FASBs project to reduce differences between U.S. and
international accounting standards. SFAS No. 151 requires idle facility costs, abnormal freight,
handling costs, and amounts of wasted materials (spoilage) be treated as current-period costs.
Under this concept, if the costs associated with the actual level of spoilage or production defects
are greater than the 12




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CPI HOLDCO, INC.
and subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) costs associated with the range of normal spoilage or defects, the difference
would be charged to current-period expense, not
included in inventory costs. SFAS No. 151 will be effective for inventory costs incurred during
fiscal years beginning after June 15, 2005, or for our fiscal year 2006. The Company has not yet
determined the impact of applying the provisions of SFAS No. 151. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No.
123R). SFAS No. 123R requires companies to recognize in the income statement the grant-date fair
value of stock options and other equity-based compensation issued to employees, but expresses no
preference for a type of valuation model. SFAS No. 123R eliminates the intrinsic value-based method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, that the Company currently uses. SFAS No. 123R requires
the Company to adopt the new accounting provisions beginning in the first annual reporting period
that begins after December 15, 2005, or for our fiscal year 2007, as a nonpublic entity as defined
by SFAS No. 123R. The Company has not yet determined the impact of applying the provisions of SFAS
No. 123R. 10.Goodwill and Other Intangible Assets Goodwill The following table presents the changes in goodwill by reportable segment during the three months
ended December 31, 2004 (in thousands): October 1,
    
    
    
    
    
    
    December 31,2004
    
    
    Acquired
    
    
    2004VEDs
    
    $
    125,769
    
    
    
    6,208
    
    
    
    131,977Satcom Equipment
    
    
    13,845
    
    
    
    
    
    
    
    13,845Total
    
    $
    139,614
    
    
    
    6,208
    
    
    
    145,822
 Intangible Assets The following table presents the details of the Companys total purchased intangible assets (in
thousands): December 31, 2004
    
    Cost
    
    
    Accumulated Amortization
    
    
    NetTechnology
    
    $
    58,500
    
    
    $
    (1,833
    )
    
    $
    56,667Customer backlog
    
    
    17,450
    
    
    
    (16,510
    )
    
    
    940Land lease
    
    
    11,810
    
    
    
    (248
    )
    
    
    11,562Trade name
    
    
    5,800
    
    
    
    
    
    
    
    5,800Customer list and program
    
    
    5,700
    
    
    
    (53
    )
    
    
    5,647Noncompete agreement
    
    
    110
    
    
    
    (5
    )
    
    
    105Net identifiable intangible assets
    
    $
    99,370
    
    
    $
    (18,649
    )
    
    $
    80,721
 October 1, 2004
    
    Cost
    
    
    Accumulated Amortization
    
    
    NetTechnology
    
    $
    58,500
    
    
    $
    (1,350
    )
    
    $
    57,150Customer backlog
    
    
    17,450
    
    
    
    (12,148
    )
    
    
    5,302Land lease
    
    
    11,810
    
    
    
    (181
    )
    
    
    11,629Trade name
    
    
    4,400
    
    
    
    
    
    
    
    4,400Net identifiable intangible assets
    
    $
    92,160
    
    
    $
    (13,679
    )
    
    $
    78,481
 The estimated future amortization expense of purchased intangibles as of December 31, 2004 is as
follows (in thousands): 13




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CPI HOLDCO, INC.
and subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) Fiscal Year
    
    Amount2005 (remaining nine months)
    
    $
    2,7792006
    
    
    2,4522007
    
    
    2,4522008
    
    
    2,4522009
    
    
    2,452Thereafter
    
    
    68,134Total
    
    $
    80,721
 11.Econco Acquisition On October 8, 2004, the Company purchased all of the outstanding stock of Econco Broadcast Service,
Inc. (Econco) of Woodland, California for purchase consideration of approximately $18.7 million.
Econco is a provider of rebuilding service for VEDs, allowing broadcasters and other users of these
critical products to extend the life of their devices at a cost that is lower than buying a new
VED. In addition, under the Econco purchase agreement, the Company is required to reimburse the
selling shareholders of Econco for certain costs associated with a tax election to treat the
transaction as an asset sale. As of December 31, 2004, the Condensed Consolidated Balance Sheet
reflects an accrued liability of $0.5 million, which is the estimated amount of this reimbursement.
The estimated payment associated with the tax election has been accounted for as additional
purchase price and is subject to change as a result of obtaining additional information regarding
the actual payment to be made. For segment reporting, Econco is included in the VED segment. The following table summarizes the preliminary estimates of fair value of the Econco assets
acquired and liabilities assumed (in thousands): Cash
    
    $
    21Accounts receivable
    
    
    1,346Inventory, including $351 of fair value write-up
    
    
    1,919Property, plant and equipment
    
    
    3,239Identifiable intangible assets
    
    
    7,210Goodwill
    
    
    6,208Current liabilities
    
    
    (1,237
    )Total
    
    $
    18,706
 The following table presents details of the purchased intangible assets acquired (in thousands,
except years): EstimatedUseful Life(in years)
    
    
    AmountNon-compete agreement
    
    
    5
    
    
    $
    110Tradename
    
    indefinite
    
    
    1,400Customer list and program
    
    
    25
    
    
    
    5,700Total
    
    
    
    
    
    $
    7,210
 The Condensed Consolidated Financial Statements include Econcos financial results from the
acquisition date. Pro forma results of operations have not been presented because the effect of
the Econco acquisition was not material to the Companys results. 12.Reclassifications In the prior years Condensed Consolidated Statements of Operations for the quarterly period ending
January 2, 2004, Merger expenses were reported as general and administrative expenses. Net
operating results have not been affected by this reclassification. The reclassification was made
to conform the classification of Merger expenses in the prior years unaudited Condensed
Consolidated Statements of Operations for the 13-week period ending January 2, 2004 to the audited
Consolidated Statement of Operations for the 16-week period ending January 22, 2004 as contained in
the Companys Annual Report on Form 14




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CPI HOLDCO, INC.
and subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) 10-K for the year ended October 1, 2004. 13.Supplemental Guarantors Condensed Consolidating Financial Information (Unaudited) On January 23, 2004, CPI issued $125.0 million of 8% Notes that are guaranteed by CPI Holdco and
all domestic subsidiaries. Separate financial statements of the Guarantors are not presented
because (i) the Guarantors are wholly-owned and have fully and unconditionally guaranteed the 8.0%
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. Instead, presented below are the
consolidating condensed financial statements of: (a) the parent, CPI Holdco or Holding, (b) the
issuer, CPI, (c) the guarantor subsidiaries, our domestic subsidiaries (d) the non-guarantor
subsidiaries, (e) the consolidating elimination entries, and (f) the consolidated total. The
Predecessor parent is Holding while the Successor parent is CPI Holdco. The accompanying
consolidating condensed financial statements should be read in connection with the consolidated
financial statements of CPI Holdco. Investments in subsidiaries are accounted for on the equity method. The principal elimination
entries eliminate investments in subsidiaries, intercompany balances, intercompany transactions and
intercompany sales. 15




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2004 (Successor)
(in thousands) Parent(CPI
    
    
    Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedHoldco)
    
    
    (CPI)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalASSETSCurrent AssetsCash and cash equivalents
    
    $
    
    
    
    
    22,079
    
    
    
    919
    
    
    
    3,926
    
    
    
    
    
    
    
    26,924Restricted cash
    
    
    
    
    
    
    
    
    
    
    2,344
    
    
    
    114
    
    
    
    
    
    
    
    2,458Accounts receivable, net
    
    
    
    
    
    
    20,412
    
    
    
    5,159
    
    
    
    13,327
    
    
    
    
    
    
    
    38,898Inventories
    
    
    
    
    
    
    28,262
    
    
    
    1,694
    
    
    
    11,319
    
    
    
    
    
    
    
    41,275Deferred tax assets
    
    
    
    
    
    
    13,056
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    13,094Prepaids and other current assets
    
    
    
    
    
    
    4,495
    
    
    
    207
    
    
    
    599
    
    
    
    (46
    )
    
    
    5,255Intercompany receivable
    
    
    
    
    
    
    29,481
    
    
    
    
    
    
    
    
    
    
    
    (29,481
    )
    
    
    Total current assets
    
    
    
    
    
    
    117,785
    
    
    
    10,323
    
    
    
    29,323
    
    
    
    (29,527
    )
    
    
    127,904Property, plant and equipment, net
    
    
    
    
    
    
    62,125
    
    
    
    3,236
    
    
    
    7,883
    
    
    
    
    
    
    
    73,244Debt issue costs, net
    
    
    
    
    
    
    8,623
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,623Intangible assets, net
    
    
    
    
    
    
    63,541
    
    
    
    7,152
    
    
    
    10,028
    
    
    
    
    
    
    
    80,721Goodwill
    
    
    
    
    
    
    92,041
    
    
    
    6,208
    
    
    
    47,573
    
    
    
    
    
    
    
    145,822Other long term assets
    
    
    
    
    
    
    1,070
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,070Intercompany notes receivable
    
    
    
    
    
    
    10,335
    
    
    
    
    
    
    
    
    
    
    
    (10,335
    )
    
    
    Investment in subsidiaries
    
    
    139,647
    
    
    
    42,992
    
    
    
    
    
    
    
    
    
    
    
    (182,639
    )
    
    
    Total assets
    
    $
    139,647
    
    
    
    398,512
    
    
    
    26,919
    
    
    
    94,807
    
    
    
    (222,501
    )
    
    
    437,384LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesCurrent portion of term loan
    
    $
    
    
    
    
    88
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88Accounts payable
    
    
    
    
    
    
    9,298
    
    
    
    396
    
    
    
    6,083
    
    
    
    
    
    
    
    15,777Accrued expenses
    
    
    
    
    
    
    19,175
    
    
    
    1,282
    
    
    
    3,462
    
    
    
    29
    
    
    
    23,948Product warranty
    
    
    
    
    
    
    3,635
    
    
    
    112
    
    
    
    2,317
    
    
    
    
    
    
    
    6,064Income taxes payable
    
    
    
    
    
    
    4,735
    
    
    
    
    
    
    
    508
    
    
    
    (46
    )
    
    
    5,197Advance payments from customers
    
    
    
    
    
    
    5,373
    
    
    
    1,203
    
    
    
    5,284
    
    
    
    
    
    
    
    11,860Intercompany payable
    
    
    28,094
    
    
    
    
    
    
    
    394
    
    
    
    1,022
    
    
    
    (29,510
    )
    
    
    Total current liabilities
    
    
    28,094
    
    
    
    42,304
    
    
    
    3,387
    
    
    
    18,676
    
    
    
    (29,527
    )
    
    
    62,934Deferred income taxes
    
    
    
    
    
    
    32,915
    
    
    
    
    
    
    
    5,948
    
    
    
    
    
    
    
    38,863Intercompany notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,335
    
    
    
    (10,335
    )
    
    
    Advance payments from sale of
San Carlos property
    
    
    
    
    
    
    13,450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,450Senior term loan
    
    
    
    
    
    
    85,584
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,584Senior subordinated notes
    
    
    
    
    
    
    125,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000Total liabilities
    
    
    28,094
    
    
    
    299,253
    
    
    
    3,387
    
    
    
    34,959
    
    
    
    (39,862
    )
    
    
    325,831Stockholders EquityCommon stock
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Additional paid-in capital
    
    
    103,579
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103,579Parent investment
    
    
    
    
    
    
    91,329
    
    
    
    22,818
    
    
    
    57,216
    
    
    
    (171,363
    )
    
    
    Accumulated other comprehensive income
    
    
    2,185
    
    
    
    2,185
    
    
    
    
    
    
    
    455
    
    
    
    (2,640
    )
    
    
    2,185Retained earnings
    
    
    5,746
    
    
    
    5,745
    
    
    
    714
    
    
    
    2,177
    
    
    
    (8,636
    )
    
    
    5,746Net stockholders equity
    
    
    111,553
    
    
    
    99,259
    
    
    
    23,532
    
    
    
    59,848
    
    
    
    (182,639
    )
    
    
    111,553Total liabilities and
stockholders equity
    
    $
    139,647
    
    
    
    398,512
    
    
    
    26,919
    
    
    
    94,807
    
    
    
    (222,501
    )
    
    
    437,384
 16




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CPI HOLDCO, INC.
and subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) CONDENSED CONSOLIDATING BALANCE SHEET
As of October 1, 2004 (Successor)
(in thousands) Parent(CPI
    
    
    Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedHoldco)
    
    
    (CPI)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalASSETSCurrent AssetsCash and cash equivalents
    
    $
    
    
    
    
    38,131
    
    
    
    113
    
    
    
    2,232
    
    
    
    
    
    
    
    40,476Restricted cash
    
    
    
    
    
    
    
    
    
    
    2,188
    
    
    
    91
    
    
    
    
    
    
    
    2,279Accounts receivable, net
    
    
    
    
    
    
    21,424
    
    
    
    3,806
    
    
    
    10,684
    
    
    
    
    
    
    
    35,914Inventories
    
    
    
    
    
    
    28,916
    
    
    
    99
    
    
    
    9,059
    
    
    
    
    
    
    
    38,074Deferred tax assets
    
    
    
    
    
    
    12,285
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,285Prepaids and other current assets
    
    
    
    
    
    
    3,066
    
    
    
    168
    
    
    
    570
    
    
    
    (8
    )
    
    
    3,796Intercompany receivable
    
    
    
    
    
    
    26,841
    
    
    
    
    
    
    
    1,730
    
    
    
    (28,571
    )
    
    
    Total current assets
    
    
    
    
    
    
    130,663
    
    
    
    6,374
    
    
    
    24,366
    
    
    
    (28,579
    )
    
    
    132,824Property, plant and equipment, net
    
    
    
    
    
    
    62,162
    
    
    
    22
    
    
    
    7,943
    
    
    
    
    
    
    
    70,127Debt issue costs, net
    
    
    
    
    
    
    8,910
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,910Intangible assets, net
    
    
    
    
    
    
    67,847
    
    
    
    
    
    
    
    10,634
    
    
    
    
    
    
    
    78,481Goodwill
    
    
    
    
    
    
    92,041
    
    
    
    
    
    
    
    47,573
    
    
    
    
    
    
    
    139,614Other long term assets
    
    
    
    
    
    
    1,251
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,251Intercompany notes receivable
    
    
    
    
    
    
    13,335
    
    
    
    
    
    
    
    
    
    
    
    (13,335
    )
    
    
    Investment in subsidiaries
    
    
    135,688
    
    
    
    21,073
    
    
    
    
    
    
    
    
    
    
    
    (156,761
    )
    
    
    Total assets
    
    $
    135,688
    
    
    
    397,282
    
    
    
    6,396
    
    
    
    90,516
    
    
    
    (198,675
    )
    
    
    431,207LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesCurrent portion of term loan
    
    $
    
    
    
    
    3,944
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,944Accounts payable
    
    
    
    
    
    
    11,556
    
    
    
    99
    
    
    
    4,135
    
    
    
    
    
    
    
    15,790Accrued expenses
    
    
    
    
    
    
    17,449
    
    
    
    556
    
    
    
    2,929
    
    
    
    5
    
    
    
    20,939Product warranty
    
    
    
    
    
    
    3,877
    
    
    
    
    
    
    
    2,197
    
    
    
    
    
    
    
    6,074Income taxes payable
    
    
    
    
    
    
    1,274
    
    
    
    
    
    
    
    395
    
    
    
    (8
    )
    
    
    1,661Advance payments from customers
    
    
    
    
    
    
    6,463
    
    
    
    1,012
    
    
    
    4,556
    
    
    
    
    
    
    
    12,031Intercompany payable
    
    
    28,094
    
    
    
    
    
    
    
    482
    
    
    
    
    
    
    
    (28,576
    )
    
    
    Total current liabilities
    
    
    28,094
    
    
    
    44,563
    
    
    
    2,149
    
    
    
    14,212
    
    
    
    (28,579
    )
    
    
    60,439Deferred income taxes
    
    
    
    
    
    
    32,936
    
    
    
    
    
    
    
    6,182
    
    
    
    
    
    
    
    39,118Intercompany notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,335
    
    
    
    (13,335
    )
    
    
    Advance payments from sale of
San Carlos property
    
    
    
    
    
    
    13,450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,450Senior term loan
    
    
    
    
    
    
    85,606
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,606Senior subordinated notes
    
    
    
    
    
    
    125,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000Total liabilities
    
    
    28,094
    
    
    
    301,555
    
    
    
    2,149
    
    
    
    33,729
    
    
    
    (41,914
    )
    
    
    323,613Stockholders EquityCommon stock
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Additional paid-in capital
    
    
    103,534
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103,534Parent investment
    
    
    
    
    
    
    91,710
    
    
    
    3,882
    
    
    
    56,790
    
    
    
    (152,382
    )
    
    
    Accumulated other comprehensive income
    
    
    1,369
    
    
    
    1,369
    
    
    
    
    
    
    
    54
    
    
    
    (1,423
    )
    
    
    1,369Retained earnings (deficit)
    
    
    2,648
    
    
    
    2,648
    
    
    
    365
    
    
    
    (57
    )
    
    
    (2,956
    )
    
    
    2,648Net stockholders equity
    
    
    107,594
    
    
    
    95,727
    
    
    
    4,247
    
    
    
    56,787
    
    
    
    (156,761
    )
    
    
    107,594Total liabilities and
stockholders equity
    
    $
    135,688
    
    
    
    397,282
    
    
    
    6,396
    
    
    
    90,516
    
    
    
    (198,675
    )
    
    
    431,207
 17




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CPI HOLDCO, INC.
and subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the 13-Week Period Ended December 31, 2004 (Succecessor)
(in thousands) Parent(CPI
    
    
    Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedHoldco)
    
    
    (CPI)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalSales
    
    $
    
    
    
    
    54,133
    
    
    
    9,573
    
    
    
    25,110
    
    
    
    (15,083
    )
    
    
    73,733Cost of sales
    
    
    
    
    
    
    38,119
    
    
    
    7,718
    
    
    
    18,924
    
    
    
    (15,083
    )
    
    
    49,678Amortization of acquisition-related
inventory write-up
    
    
    
    
    
    
    
    
    
    
    351
    
    
    
    
    
    
    
    
    
    
    
    351Gross profit
    
    
    
    
    
    
    16,014
    
    
    
    1,504
    
    
    
    6,186
    
    
    
    
    
    
    
    23,704Operating costs and expenses:Research and development
    
    
    
    
    
    
    418
    
    
    
    
    
    
    
    1,030
    
    
    
    
    
    
    
    1,448Selling and marketing
    
    
    
    
    
    
    1,722
    
    
    
    832
    
    
    
    1,514
    
    
    
    
    
    
    
    4,068General and administrative
    
    
    
    
    
    
    2,833
    
    
    
    270
    
    
    
    922
    
    
    
    
    
    
    
    4,025Amortization of acquisition-related
intangible assets
    
    
    
    
    
    
    4,242
    
    
    
    58
    
    
    
    606
    
    
    
    
    
    
    
    4,906Total operating costs and expenses
    
    
    
    
    
    
    9,215
    
    
    
    1,160
    
    
    
    4,072
    
    
    
    
    
    
    
    14,447Operating income
    
    
    
    
    
    
    6,799
    
    
    
    344
    
    
    
    2,114
    
    
    
    
    
    
    
    9,257Interest expense (income), net
    
    
    
    
    
    
    3,770
    
    
    
    (5
    )
    
    
    315
    
    
    
    
    
    
    
    4,080Income before income tax expense
and equity in income of subsidiaries
    
    
    
    
    
    
    3,029
    
    
    
    349
    
    
    
    1,799
    
    
    
    
    
    
    
    5,177Income tax expense (benefit)
    
    
    
    
    
    
    2,202
    
    
    
    
    
    
    
    (123
    )
    
    
    
    
    
    
    2,079Equity in income of subsidiaries
    
    
    3,098
    
    
    
    2,271
    
    
    
    
    
    
    
    
    
    
    
    (5,369
    )
    
    
    Net income
    
    $
    3,098
    
    
    
    3,098
    
    
    
    349
    
    
    
    1,922
    
    
    
    (5,369
    )
    
    
    3,098
 18




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CPI HOLDCO, INC.
and subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the 13-Week Period Ended January 2, 2004 (Predecessor)
(in thousands) Parent
    
    
    Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    Consolidated(Holding)
    
    
    (CPI)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalSales
    
    $
    
    
    
    
    52,220
    
    
    
    8,986
    
    
    
    22,501
    
    
    
    (15,394
    )
    
    
    68,313Cost of sales
    
    
    
    
    
    
    36,613
    
    
    
    7,944
    
    
    
    18,044
    
    
    
    (15,460
    )
    
    
    47,141Gross profit
    
    
    
    
    
    
    15,607
    
    
    
    1,042
    
    
    
    4,457
    
    
    
    66
    
    
    
    21,172Operating costs and expenses:Research and development
    
    
    
    
    
    
    477
    
    
    
    
    
    
    
    1,256
    
    
    
    
    
    
    
    1,733Selling and marketing
    
    
    
    
    
    
    1,787
    
    
    
    525
    
    
    
    1,312
    
    
    
    
    
    
    
    3,624General and administrative
    
    
    (325
    )
    
    
    2,170
    
    
    
    100
    
    
    
    1,811
    
    
    
    (56
    )
    
    
    3,700Merger expenses
    
    
    
    
    
    
    430
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    430Total operating costs and expenses
    
    
    (325
    )
    
    
    4,864
    
    
    
    625
    
    
    
    4,379
    
    
    
    (56
    )
    
    
    9,487Operating income
    
    
    325
    
    
    
    10,743
    
    
    
    417
    
    
    
    78
    
    
    
    122
    
    
    
    11,685Interest expense (income), net
    
    
    481
    
    
    
    2,633
    
    
    
    (3
    )
    
    
    448
    
    
    
    
    
    
    
    3,559Income before income tax expense
and equity in income of subsidiaries
    
    
    (156
    )
    
    
    8,110
    
    
    
    420
    
    
    
    (370
    )
    
    
    122
    
    
    
    8,126Income tax (benefit) expense
    
    
    (43
    )
    
    
    3,342
    
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    3,287Equity in income of subsidiaries
    
    
    4,952
    
    
    
    128
    
    
    
    
    
    
    
    
    
    
    
    (5,080
    )
    
    
    Net income (loss)
    
    $
    4,839
    
    
    
    4,896
    
    
    
    420
    
    
    
    (358
    )
    
    
    (4,958
    )
    
    
    4,839
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CPI HOLDCO, INC.
and subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the 13-Week Period Ended December 31, 2004 (Successor)
(in thousands) Parent(CPI
    
    
    Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedHoldco)
    
    
    (CPI)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalOPERATING ACTIVITIESNet cash provided by operating activities
    
    $
    
    
    
    
    7,488
    
    
    
    864
    
    
    
    1,760
    
    
    
    
    
    
    
    10,112INVESTING ACTIVITIESExpenses relating to sale
of San Carlos property
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )Purchase of Econco, net of cash acquired
    
    
    
    
    
    
    (18,685
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,685
    )Purchase of property, plant, and equipment
    
    
    
    
    
    
    (1,090
    )
    
    
    (38
    )
    
    
    (66
    )
    
    
    
    
    
    
    (1,194
    )Net cash used in investing activities
    
    
    
    
    
    
    (19,783
    )
    
    
    (38
    )
    
    
    (66
    )
    
    
    
    
    
    
    (19,887
    )FINANCING ACTIVITIESRepayments of senior term loan
    
    
    
    
    
    
    (3,878
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,878
    )Repayments on capital leases
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    (20
    )Net proceeds from bank overdraft
    
    
    
    
    
    
    121
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121Net cash used in financing activities
    
    
    
    
    
    
    (3,757
    )
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    (3,777
    )NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS
    
    
    
    
    
    
    (16,052
    )
    
    
    806
    
    
    
    1,694
    
    
    
    
    
    
    
    (13,552
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    38,131
    
    
    
    113
    
    
    
    2,232
    
    
    
    
    
    
    
    40,476Cash and cash equivalents at end of period
    
    $
    
    
    
    
    22,079
    
    
    
    919
    
    
    
    3,926
    
    
    
    
    
    
    
    26,924
 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the 13-Week Period Ended January 2, 2004 (Predecessor)
(in thousands) Parent
    
    
    Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    Consolidated(Holding)
    
    
    (CPI)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalOPERATING ACTIVITIESNet cash provided by (used in) operating activities
    
    $
    
    
    
    
    5,055
    
    
    
    1,247
    
    
    
    (108
    )
    
    
    
    
    
    
    6,194INVESTING ACTIVITIESPurchase of property, plant and equipment
    
    
    
    
    
    
    (203
    )
    
    
    (2
    )
    
    
    (34
    )
    
    
    
    
    
    
    (239
    )Net cash used in investing activities
    
    
    
    
    
    
    (203
    )
    
    
    (2
    )
    
    
    (34
    )
    
    
    
    
    
    
    (239
    )FINANCING ACTIVITIESNet repayment of bank overdraft
    
    
    
    
    
    
    (1,639
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,639
    )Net cash used in financing activities
    
    
    
    
    
    
    (1,639
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,639
    )NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    
    
    
    
    3,213
    
    
    
    1,245
    
    
    
    (142
    )
    
    
    
    
    
    
    4,316Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    30,561
    
    
    
    1,718
    
    
    
    1,472
    
    
    
    
    
    
    
    33,751Cash and cash equivalents at end of period
    
    $
    
    
    
    
    33,774
    
    
    
    2,963
    
    
    
    1,330
    
    
    
    
    
    
    
    38,067
 20




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##### Table of Contents



ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The following discussion and analysis should be read in conjunction with the Condensed consolidated
financial statements and notes thereto included elsewhere within this report and the Annual Report
on Form 10-K of CPI Holdco, Inc. (CPI Holdco or the Successor). References to the Company
refer to Communications & Power Industries Holding Corporation (Holding or the Predecessor) and
its subsidiaries prior to the Merger (defined below) and to the Successor and its subsidiaries
post-Merger. The Company is a leading designer, manufacturer and global marketer of vacuum electron devices
(VEDs), satellite communications amplifiers, medical x-ray generators and other related products
for critical defense and commercial applications. The Companys defense applications include radar,
electronic warfare and communications end markets and its commercial applications include
communications, medical, industrial and scientific end markets. Communications applications consist
of applications for military and commercial satellite communications uses and broadcast uses. The
Company defines and discusses its recorded orders and sales trends by these end markets in order to
more clearly relate its business to outside investors. Internally, however, the Company is
organized into six operating divisions that are differentiated based on products operating in two
segments. The Companys vacuum electron device (VED) segment consists of five operating
divisions. The Company also has a satellite communications equipment segment that has one
operating division. Segment data is included in Note 8 of the Notes to Condensed Consolidated
Financial Statements. 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 The Cypress Group L.L.C.
(Cypress), agreed to acquire Holding. In the Merger, each share of Holdings common stock and
stock options outstanding immediately prior to the Merger, other than a portion of stock options
held by certain members of management (which were converted into options to purchase shares of CPI
Holdco) and other than any shares of common stock owned by Holding or CPI Holdco, were converted
into the right to receive a pro rata portion of the aggregate merger consideration of $131.7
million. In connection with the Merger, CPI Holdco received an equity contribution of $100.0
million before expenses from affiliates of Cypress in exchange for 4,251,122 shares of common stock
of CPI Holdco. Members of management of Holding, as a result of rolling over their options to
purchase common stock of Holding, received stock options to purchase 167,513 shares of common stock
of CPI Holdco. The fair value of Rollover Options was $5.0 million and was accounted for as Merger
purchase price as of January 23, 2004. Members of Holding management that were residents of
Canada received 1,485 stock options to purchase shares of common stock of CPI Holdco as payment of
Merger escrow proceeds in respect of their options to purchase shares of Holding. Although the Merger, which essentially resulted in the recapitalization of the Company, triggered a
change in the basis of many of the Companys assets and liabilities, the underlying operations of
the Company were not impacted by the Merger. Orders Incoming order levels fluctuate significantly on a quarterly basis and a particular quarters order
rate may not be indicative of future order levels. In addition, the Companys sales are highly
dependent upon manufacturing scheduling, performance and shipments and, accordingly, it is not
possible to accurately predict when these orders will be recognized as sales. The following table compares total order receipts for the quarter ended December 31, 2004 to the
quarter ended January 2, 2004 (in millions): 13-Week Period EndedDecember 31, 2004
    
    
    
    January 2, 2004Percentage of
    
    
    
    
    
    
    
    Percentage ofAmount
    
    
    Total Orders
    
    
    
    Amount
    
    
    Total OrdersRadar
    
    $
    31.4
    
    
    
    36
    %
    
    
    $
    32.4
    
    
    
    44
    %Electronic Warfare
    
    
    11.1
    
    
    
    13
    %
    
    
    
    7.9
    
    
    
    11
    %Communications
    
    
    28.3
    
    
    
    33
    %
    
    
    
    19.4
    
    
    
    26
    %Medical
    
    
    8.1
    
    
    
    9
    %
    
    
    
    6.2
    
    
    
    8
    %Industrial
    
    
    5.1
    
    
    
    6
    %
    
    
    
    5.2
    
    
    
    7
    %Scientific
    
    
    2.2
    
    
    
    3
    %
    
    
    
    2.3
    
    
    
    3
    %Total orders
    
    $
    86.2
    
    
    
    100
    %
    
    
    $
    73.4
    
    
    
    100
    %
 21




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Orders recorded in the first quarter of fiscal year 2005 were $86.2 million, an increase of $12.8
million, or 17%, from $73.4 million in the first quarter of fiscal year 2004. The increase relates
to the communications, electronic warfare, and medical markets, partially offset by a decrease in
the radar market. Orders in the communications market for the first quarter of fiscal year 2005
increased $8.9 million, or 46%, from the comparable period of fiscal year 2004. The increase in
communications orders was attributable to the continued strength in orders for the direct-to-home
broadcast market, a large order from an international customer for traveling wave tubes used for
terrestrial microwave relays and orders from the recently acquired Econco Broadcast Service, Inc.
(Econco). Orders in the electronic warfare market for the first quarter of fiscal year 2005
increased $3.2 million, or 41%, from the comparable period of fiscal year 2004. The increase in
electronic warfare orders was attributable to the receipt of a $3.8 million order from an
international customer for traveling wave tubes to support the Advanced Self Protection Integrated
Suite program. Orders in the medical market for the first quarter of fiscal year 2005 increased
$1.9 million, or 31%, from the comparable period of fiscal year 2004. The increase in medical
orders was primarily due to the continued strength in orders for VEDs used in x-ray generator
systems and power supply products used in x-ray imaging systems. The increase in medical orders
was also due to the acceleration of orders for our Eimac division because of its upcoming
relocation from San Carlos, California to Palo Alto, California. Orders in the radar market for
the first quarter of fiscal year 2005 declined from the first quarter of fiscal year 2004 by $1.0
million, or 3%, due principally to fluctuations in the timing of order receipts. Orders in the
industrial and scientific markets were essentially the same in the first quarter of fiscal years
2005 and 2004. Although total orders for the industrial market did not change significantly from
the first quarter of fiscal year 2004 compared to the first quarter of fiscal year 2005, there was
an increase in orders from the recently acquired Econco division that was offset by reduced orders
from semiconductor equipment companies. Order backlog consists of firm orders for which goods and services are yet to be provided. As of
December 31, 2004, the Company had an order backlog of $193.2 million compared to an order backlog
of $178.1 million as of January 2, 2004. Order backlog increased during the first quarter of
fiscal year 2005 by $13.5 million from $179.7 million at the end of fiscal year 2004. 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. San Carlos Sale Agreement The Company entered into an agreement to sell the land and close its facilities located in San
Carlos, California. The purchase price is $23.8 million. Under the sale agreement, the buyer has
paid the Company a $13.0 million deposit on the purchase price, which the Company is using to
defray the costs of moving its San Carlos operations to its Palo Alto facility and to a new
location in the Palo Alto area. The $13.0 million deposit is nonrefundable unless the Company
breaches the sale agreement. In connection with the sale agreement, the Company entered into an
agreement regarding environmental conditions at the property and was named as an additional insured
on a pollution liability insurance policy obtained by the purchaser that is intended to fund the
remediation of the contamination of the San Carlos property to permit hospital and other
unrestricted uses under the direction of the applicable environmental regulatory agency. The closing of the sale is subject to a number of conditions, including the requirement that the
Company vacate its facilities and obtain regulatory closure of certain permitted equipment located
on the property. There can be no assurance that the sale of the San Carlos property will occur. Pursuant to the stock sale agreement by and between Varian Associates, Inc., the predecessor of
Varian Medical Systems, Inc. (Varian), and the Company dated June 9, 1995, as amended (the Varian Agreement), the Company
had agreed to certain development restrictions affecting the San Carlos property. In connection
with the San Carlos property sale agreement, Varian agreed to a waiver of certain of the
development restrictions on the San Carlos property in the event that the sale closes, subject to
certain conditions, and further agreed to pay the Company $1.0 million, of which $0.5 million was
paid as of December 31, 2004. In addition, the Company has agreed to relieve Varian of certain of
its indemnity obligations to the Company for certain environmental liabilities related to the San
Carlos property relating to periods prior to August 1995, and to reimburse Varian for certain
potential environmental costs related to the San Carlos property that are not covered by insurance.
The Company and Varian have also agreed to certain use restrictions and environmental cost-sharing
provisions related to the Companys property in Beverly, Massachusetts, and the Company has
relinquished its right to redevelop that property for residential or similar use. As of December 31, 2004, the San Carlos land and building is classified as held for use in
property, plant and equipment and the advance payments from the sale of the property, aggregating
$13.5 million are classified as a long-term liability in the accompanying Condensed Consolidated
Balance Sheet. As of December 31, 2004, the Company has also deferred expenses of $0.5 million
relating to the sale of the San Carlos property and has classified these amounts as other long-term
assets in the accompanying Condensed Consolidated Balance Sheet. As of December 31, 2004, the San
Carlos land and building had a net book value of $24.0 million and the building continues to be
depreciated over its remaining useful life. The Company does not expect to recognize a loss on the
sale of the San Carlos property. 22




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Critical Accounting Policies Management is required to make judgments, assumptions and estimates in preparing its financial
statements and related disclosures in conformity with accounting principles generally accepted in
the United States. The Companys significant accounting policies are described in Note 1 of the
Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the fiscal year
ended October 1, 2004. The following critical accounting policies are those policies that
management believes affect its more significant estimates and assumptions used in preparation of
its consolidated financial statements. Revenue Recognition The estimated sales values of performance under certain contracts to commercial customers and U. S.
Government fixed-price contracts are recognized under the percentage of completion method of
accounting. When applying the percentage of completion method, the Company relies on estimates of
total expected contract revenue and costs. Recognized revenues and profit are subject to revisions
as the contract progresses towards completion. Revisions in profit estimates are charged to income
in the period in which they become determinable. Allowance for Doubtful Accounts The Company monitors the creditworthiness of its customers based on a variety of factors including
the length of time the receivables are past due, the financial health of the customer, economic
conditions and historical experience. If collectibility is considered uncertain, then the Company
will record a reserve to reduce the receivable to the amount considered collectable. If
circumstances change, then further adjustments could be required. Warranty Obligations The Companys products are generally subject to warranties, and the Company provides for the
estimated future costs of repair, replacement or customer accommodation at the time of sale as an
additional cost of the sales. Managements estimates are based on historical costs for warranty,
and are adjusted when circumstances indicate that future costs are expected to vary from historical
levels. If actual product failure rates or material usage incurred differ from the Companys
estimates, then revisions to the estimated warranty liability would be required. Inventory Valuation The Company reviews inventory quantities on hand and adjusts for excess and obsolete inventory
based primarily on historical usage rates and its estimates of product demand and production.
Actual demand may differ from our estimates, in which case the Company may have understated or
overstated the provision required for obsolete and excess inventory, which would have an impact on
the Companys operating results. The Company also reviews the carrying value of inventory for lower of cost or market on an
individual product or contract basis. Analyses are performed based on the estimated costs at
completion and if necessary, a provision is recorded to properly reflect the inventory value of the
products or contracts at the lower of cost or net realizable value (selling price less estimated
cost of disposal). If estimated costs are different than originally estimated, the provision
adjustment would have an impact on the Companys operating results. Impairment of Long-Lived Assets The Company reviews long-lived assets, excluding intangible assets that are covered by Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, for
impairment annually and whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets is measured by comparison of an assets carrying amount to
future net cash flows expected to be generated from the operation and sale of such asset. If such
asset is considered to be impaired, then the Companys carrying value is reduced to its estimated
fair value with a charge to general and administrative at the time of the reduction. Adverse
changes in the customers and markets served by the Company could result in future impairments of
long-lived assets. Impairment of Goodwill and Intangible Assets During the fourth quarter of the fiscal year, the Company makes an assessment as to the carrying
value of goodwill in accordance with SFAS 142. During this review, the Company determines whether
the fair value of its six reporting units, which represent the Companys operating divisions,
exceed their carrying value and thus do not require an impairment charge. The Company will continue
to make assessments of impairment on an annual basis or more frequently if certain indicators
suggest that impairment may have occurred. In assessing the value of goodwill, the Company must
make assumptions regarding the estimated future cash flows and other factors to determine the fair
value of the reporting units. If these estimates or their related assumptions change in the future,
then the Company may be required to record impairment charges, which would negatively impact
operating results. Effect of Merger on Results of Operations As a result of the Merger, the assets acquired and liabilities assumed were adjusted to reflect
fair value, and the excess of the 23




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purchase price over the fair value was recorded as goodwill. The
revised fair values significantly impacted the Companys results of operations subsequent to the
Merger and their comparability to the results of operations of the Predecessor. The most
significant purchase accounting adjustments and their effect on results of operations are discussed
below:  
    Customer backlog was valued at $17.5 million. Customer backlog is being amortized over
the 12-month expected product delivery schedule of the contracts in backlog at the Merger
closing date. Customer backlog amortization was $12.1 million in fiscal year 2004 and
$4.4 million in the first quarter of fiscal year 2005; the remaining $0.9 million is
expected to be amortized in the second quarter of fiscal year 2005.
    Property, plant and equipment valuation was increased by $38.7 million. Operating
income will be charged $3.1 million per year for the next 5 years, and at a reduced rate
thereafter, for additional depreciation from the increased valuation of property, plant
and equipment. Property, plant and equipment are depreciated over useful lives of 5 years
to 25 years.
    Technology-related intangible assets were valued at $58.5 million. Operating income
will be charged $1.9 million per year for the next 15 years and at a reduced rate
thereafter for the amortization of technology-related intangible assets.
Technology-related intangible assets have useful lives of 15 to 50 years.
    Land lease intangibles were valued at $11.8 million. Operating income will be charged
$0.3 million per year for the remaining 45 years of the land lease. The Predecessor had a
land lease with a net book value of $20.3 million that was being amortized over 55 years
at a rate of $0.5 million per year. Thus, the effect on future operating income is a
reduction in amortization expense of $0.2 million per year.
    Deferred tax liabilities were increased by $46.5 million. Deferred tax liabilities are
$38.9 million at the end of first quarter of fiscal year 2005. As the revalued assets
noted above are charged to operating income, their expense is not deductible for income
tax purposes. The deferred tax liability is charged against the income tax provision as
the revalued assets are charged to operating income. In summary, revalued assets are
being charged to net income on an after tax basis. Results of Operations Fiscal Year CPI Holdcos fiscal years are the 52- or 53-week periods that end on the Friday nearest September
30. The Successors fiscal year did not change from that of the Predecessor. Fiscal year 2005
comprises the 52-week period ending September 30, 2005, and fiscal year 2004 comprised the 52-week
period ended October 1, 2004. Sales. The following table compares total sales by market segment for the quarter ended December 31, 2004
to the quarter ended January 2, 2004 (in millions): 13-Week Period EndedDecember 31, 2004
    
    
    
    January 2, 2004(In thousands)
    
    
    
    
    
    Percentage of
    
    
    
    
    
    
    
    Percentage ofAmount
    
    
    Total Sales
    
    
    
    Amount
    
    
    Total SalesRadar
    
    $
    27.0
    
    
    
    37
    %
    
    
    $
    25.7
    
    
    
    38
    %Electronic Warfare
    
    
    5.9
    
    
    
    8
    %
    
    
    
    6.3
    
    
    
    9
    %Communications
    
    
    21.1
    
    
    
    29
    %
    
    
    
    18.1
    
    
    
    27
    %Medical
    
    
    11.8
    
    
    
    16
    %
    
    
    
    10.3
    
    
    
    15
    %Industrial
    
    
    5.4
    
    
    
    7
    %
    
    
    
    4.9
    
    
    
    7
    %Scientific
    
    
    2.5
    
    
    
    3
    %
    
    
    
    3.0
    
    
    
    4
    %Total sales
    
    $
    73.7
    
    
    
    100
    %
    
    
    $
    68.3
    
    
    
    100
    %
 Sales for the first quarter of fiscal year 2005 of $73.7 million were $5.4 million, or 8%, higher
than the prior year level of $68.3 million. The sales increase was primarily related to increases
in the communications, medical and radar markets. The Econco acquisition represents $2.8 million
of the sales increase, while the remaining increase of $2.6 million was due to growth from existing
business. Communications sales of $21.1 million in the first quarter of fiscal year 2005 were $3.0
million, or 17%, higher than the first quarter of fiscal year 2004, primarily due to the timing of
deliveries of direct-to-home broadcast products and additional sales from the Econco acquisition.
Medical sales of $11.8 million for the first quarter of fiscal year 2005 were $1.5 million, or 15%,
higher than the first quarter of fiscal year 2004, primarily due to increased shipments of VEDs
used in cancer therapy and magnetic resonance imaging systems and x-ray generator systems and power
supply products used in x-ray imaging systems. Radar sales of $27.0 million for the first quarter
of fiscal year 2005 were $1.3 million, or 5%, higher than the first quarter of fiscal year 2004,
primarily due to increased VED shipments for foreign military applications. Gross Profit. Gross profit of $23.7 million in the first quarter of fiscal year 2005 was $2.5
million higher than the prior years 24




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level of $21.2 million. The increase in gross profit was
primarily due to higher sales, a lower warranty provision, a favorable mix of product shipments
with higher profit margins and incremental gross margins from the Econco acquisition. Gross margin
for the first quarter of fiscal year 2005 included a purchase accounting charge of $0.4 million
related to the write-up of inventory from the Econco acquisition. Research and Development Expenses. Research and development expenses of $1.4 million, or 2.0% of
sales, for the first quarter of fiscal year 2005 were $0.3 million lower than the first quarter of
fiscal year 2004. The lower research and development expense in the first quarter of fiscal year
2005 is primarily due to additional engineering efforts on customer-funded development contracts
rather than Company-funded research and development programs. Selling and Marketing Expenses. Selling and marketing expenses of $4.1 million, or 5.5% of sales,
for the first quarter of fiscal year 2005 were $0.5 million higher than the $3.6 million, or 5.3%
of sales, for the first quarter of fiscal year 2004. The increase in selling and marketing
expenses in the first quarter of fiscal year 2005 was primarily due to additional costs to support
the increase in sales volume and incremental costs for the Econco acquisition. General and Administrative Expenses.General and administrative expenses of $4.0 million, or 5.5%
of sales, for the first quarter of fiscal year 2005 were consistent as a percentage of sales with
the $3.7 million, or 5.4% of sales, for the first quarter of fiscal year 2004. The increase in
general administrative expenses in the first quarter of fiscal year 2005 was primarily due to
incremental costs for the Econco acquisition. Merger Expenses.Merger expenses of $0.4 million for the first quarter of fiscal year 2004
consisted of expenses incurred in connection with the sale of Holding, primarily for attorneys and
investment bankers fees. Amortization of Acquisition-Related Intangibles. Amortization of acquisition-related intangibles of
$4.9 million for the first quarter of fiscal year 2005 was related to purchase accounting charges
of $4.4 million for customer backlog and $0.5 million for amortization of other acquisition-related
intangible assets. Customer backlog will be fully amortized in January 2005 while the
other acquisition-related intangible assets will continue to be amortized over the next 5 to 50
years. Amortization of acquisition-related intangibles is expected to be approximately $1.5
million in the second quarter of fiscal year 2005 and $0.6 million per quarter thereafter for the
next four years. EBITDA. EBITDA for the first quarter of fiscal year 2005 was $15.5 million, an increase of $2.4
million compared to $13.1 million for the first quarter of fiscal year 2004. The increase in EBITDA
resulted primarily from higher gross profit in fiscal year 2005 compared to fiscal year 2004. For
a reconciliation of EBITDA to income (loss) before taxes, see Note 8 to the Condensed Consolidated
Financial Statements. Interest Expense, net. Interest expense, net of $4.1 million, or 5.5% of sales, for the first
quarter of fiscal year 2005 was $0.5 million higher than the $3.6 million, or 5.2% of sales, for
the first quarter of fiscal year 2004. Higher interest expense in the first quarter of fiscal year
2005 compared to the first quarter of fiscal year 2004 is due to higher debt levels for the
Successor compared to the Predecessor, somewhat offset by lower interest rates for the Successor. Income Tax Expense. The Company recorded income tax expense of $2.1 million for the first quarter
of fiscal year 2005, a reduction of $1.2 million, compared to income tax expense of $3.3 million
for the first quarter of fiscal year 2004. The effective income tax rate was 40% for both the
first quarter of fiscal year 2005 and the first quarter of fiscal year 2004. Net Income. The Company recorded net income of $3.1 million for the first quarter of fiscal year
2005, a decrease of $1.7 million compared to net income of $4.8 million for the first quarter of
fiscal year 2004. Lower net income for the first quarter of fiscal year 2005 compared to the first
quarter of fiscal year 2004 is primarily due to purchase accounting charges in fiscal year 2005,
which was partially offset by improved operating performance in fiscal year 2005 Financial Condition The Company generated net cash from operating activities of $10.1 million for the first quarter of
fiscal year 2005, compared to $6.2 million for the first quarter of fiscal year 2004. The $3.9
million increase in net cash from operating activities for the first quarter of fiscal year 2005
compared to the first quarter of fiscal year 2004 is primarily due to the increase in cash from net
income, excluding non-cash charges, and more favorable changes in accrued expense, and contract
advances, partially offset by unfavorable changes in inventory. The unfavorable change in
inventory was due to higher inventory levels in the first quarter of fiscal year 2005 that were
needed to support increased order delivery requirements. Investing activities used net cash of $19.9 million for the first quarter of fiscal year 2005,
compared to $0.2 million for the first quarter of fiscal year 2004. Investing activities for first
quarter of fiscal year 2005 include $18.7 million for the purchase of Econco and $1.2 million for
the purchases of property, plant and equipment, primarily in connection with the relocation of the
San Carlos production facility to Palo Alto, California. Financing activities used net cash of $3.8 million for the first quarter of fiscal year 2005,
compared to $1.6 million for the first quarter of fiscal year 2004. Financing activities for the
first quarter of fiscal year 2005 included a repayment of $3.9 million for 25




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the Term Loan (defined
below). Working capital was $65.0 million at December 31, 2004 compared to $72.4 million at October 1,
2004, representing a decrease of $7.4 million during the first quarter of fiscal year 2005. The
decrease in working capital was primarily due to the $18.7 million purchase consideration for the
purchase of Econcos common stock, partially offset by cash generated from operating activities and
additional working capital from the Econco acquisition. On December 31, 2004, CPI had $26.9 million in cash and cash equivalents compared to $40.5 million
at October 1, 2004. Cash balances in excess of operating requirements are invested daily in
federal securities. In connection with the Merger, CPI entered into a $130.0 million credit agreement, which was
amended and restated on November 29, 2004 (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 $89.6 million term loan (Term Loan), which expires on July 23, 2010, of which $85.7 million was
outstanding as of December 31, 2004. 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 also
requires an annual prepayment to be made within 90 days after the end of the fiscal year based on a
calculation of excess cash flow (ECF), as defined in the Senior Credit Facility, multiplied by a
factor of 25%, 50% or 75% depending on the leverage ratio at the end of the fiscal year, less
optional prepayments made during the fiscal year. On December 30, 2004, CPI made an ECF payment of
$3.9 million, which was applied pro rata against the remaining scheduled installments of principal
due up to, but not including, the September 30, 2009 scheduled principal installment. The Senior
Credit Facility is guaranteed by CPI Holdco, and all of CPIs domestic subsidiaries and is secured
by substantially all of their assets. The Senior Credit Facility contains customary covenants,
including financial covenants and also provides that, upon specified conditions, CPI may seek
commitments for a new class of term loans, not to exceed $75 million. See Note 5 to the Condensed
Consolidated Financial Statements. On December 31, 2004, CPI had outstanding $125.0 million of Senior Subordinated Notes and $85.7
million of Term Loans and availability of $35.8 million under the Revolver . The
following table summarizes future minimum principal payments on outstanding debt and minimum
rentals due for certain facilities and other leased assets under long-term non-cancelable operating
leases as of December 31, 2004 (in thousands): Due in Fiscal YearsDescription
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    TotalDebt obligations
    
    $
    66
    
    
    
    88
    
    
    
    88
    
    
    
    88
    
    
    
    21,386
    
    
    
    188,956
    
    
    
    210,672Noncancellable operating leases
    
    
    840
    
    
    
    437
    
    
    
    224
    
    
    
    112
    
    
    
    61
    
    
    
    2,419
    
    
    
    4,093Total cash obligations
    
    $
    906
    
    
    
    525
    
    
    
    312
    
    
    
    200
    
    
    
    21,447
    
    
    
    191,375
    
    
    
    214,765Standby letters of credit
    
    $
    4,236
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,236
 As of December 31, 2004, CPI had outstanding forward contract commitments to purchase Canadian
dollars for an aggregate U.S. notional amount of $31.0 million. The last forward contract expires
on March 10, 2006. The Companys foreign currency forward contracts are designated as a cash flow
hedge and are considered highly effective, as defined by Financial Accounting Standards Board
(FASB) Statement No. 133. At December 31, 2004, the fair value of unrealized foreign currency
forward contracts was $3.1 million and the unrealized gain was approximately $2.2 million, net of
related tax expense. The unrealized gains from these forward contracts are included in other
comprehensive income and are shown as a component of stockholders equity. The Companys liquidity is affected by many factors, some of which are based on normal ongoing
operations of our business and others related to uncertainties in the markets in which we compete
and global economies. We believe that cash and cash equivalents, cash expected to be generated from
operations and borrowing capability under our Senior Credit Facility will be sufficient to meet the
Companys cash requirements for the next 12 months. CPI Holdco, Inc., announced on February 4, 2005 that it intends to raise $80.0 million of gross
proceeds through a private placement offering of Floating Rate Senior Notes due 2015. CPI Holdco
intends to use the net proceeds from the offering to make payments to its stockholders and option
holders and/or to fund repurchases of its equity interests. The notes will not be guaranteed by
any of CPI Holdcos subsidiaries. There can be no assurance that this proposed transaction will
close. Recent Accounting Pronouncements In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-01, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. Issue No.
03-01 requires certain quantitative and
qualitative disclosures be made for debt and marketable equity securities classified as
available-for-sale under SFAS No. 115 that are impaired at the balance sheet date, but for which an
other-than-temporary impairment has not been recognized. Issue 26




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##### Table of Contents



No. 03-01 is effective for
reporting periods beginning after June 15, 2004. The adoption of EITF No. 03-01 did not have a
material impact on the Companys consolidated financial position, results of operations or cash
flows. In November 2004, the FASB issued SFAS No. 151, Inventory Costsan amendment of ARB No. 43,
Chapter 4, which is the result of the FASBs project to reduce differences between U.S. and
international accounting standards. SFAS No. 151 requires idle facility costs, abnormal freight,
handling costs, and amounts of wasted materials (spoilage) be treated as current-period costs.
Under this concept, if the costs associated with the actual level of spoilage or production defects
are greater than the costs associated with the range of normal spoilage or defects, the difference
would be charged to current-period expense, not included in inventory costs. SFAS No. 151 will be
effective for inventory costs incurred during fiscal years beginning after June 15, 2005, or for
our fiscal year 2006. The Company has not yet determined the impact of applying the provisions of
SFAS No. 151. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No.
123R). SFAS No. 123R requires companies to recognize in the income statement the grant-date fair
value of stock options and other equity-based compensation issued to employees, but expresses no
preference for a type of valuation model. SFAS No. 123R eliminates the intrinsic value-based method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, that the Company currently uses. SFAS No. 123R requires
the Company to adopt the new accounting provisions beginning in the first annual reporting period
that begins after December 15, 2005, or for our fiscal year 2007, as a nonpublic entity as defined
by SFAS No. 123R. The Company has not yet determined the impact of applying the provisions of SFAS
No. 123R. 
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Companys market risk disclosures set forth in the Annual Report on Form 10-K for the fiscal
year ended October 1, 2004, 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. 27




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##### Table of Contents



PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a)The following exhibits are beingfiled as part of this report: ExhibitNo.
    
    Description31
    
    Rule 13a-14 (a) /15d-14 (a) Certifications32
    
    Section 1350 Certifications
 (b) Reports on Form 8-K A report on Form 8-K was filed on October 1, 2004 under Item 8 to report that CPI signed a
definitive agreement to acquire Econco Broadcast Service, Inc. A report on Form 8-K was filed on October 8, 2004, under Item 8 to report that CPI completed
its previously announced acquisition of Econco Broadcast Service, Inc. 28




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CPI HOLDCO, INC.By:
    
    /s/ O. Joe CaldarelliO. Joe CaldarelliChief Executive OfficerDate: February 8, 2005By:
    
    /s/ Joel LittmanJoel LittmanChief Financial Officer, Treasurer and Secretary(Principal Financial and Accounting Officer)Date: February 8, 2005
 -29-




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Exhibit Index ExhibitNo.
    
    Description31
    
    Rule 13a-14 (a) /15d-14 (a) Certifications32
    
    Section 1350 Certifications