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UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION  FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended July 2, 2004
or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to Commission file number: 333-11386-04 CPI HOLDCO, INC.  Delaware   75-3142681   811 Hansen Way
Palo Alto, California 94303-1110
(650) 846-2900
 Indicate by check mark whether each registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past
90 days.     Yes x     No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act
Rule 12b-2).     Yes o     No x APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding for each of the Registrants classes
of Common Stock, as of the latest practicable date: 4,275,566 shares of Common
Stock, $.01 par value, at August 2, 2004.




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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 Congress may prevent proposed sales to foreign customers;  
    
    the Companys results of operations and financial condition may be adversely affected by increased or unexpected costs
incurred by it on its contracts and sales orders;  
    
    the Companys business could be adversely affected by environmental regulation and legislation, liabilities relating to
contamination and changes in our ability to recover under Varian Medical Systems Inc.s obligations to indemnify the
Company for certain potential environmental liabilities;  
    
    the Company has only a limited ability to protect its intellectual property rights;  
    
    the Companys inability to obtain certain necessary raw materials and key components could disrupt the manufacture of its
products and cause its financial condition and results of operations to suffer; and  
    
    the Company is controlled by affiliates of The Cypress Group L.L.C. Any of the foregoing factors could cause the Companys business, results of
operations, or financial condition to suffer, and actual results could differ
materially from those expected. 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 (Loss)
    
    
    5Condensed Consolidated Statements of Cash Flows
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    8ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    27ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    37ITEM 4: CONTROLS AND PROCEDURES
    
    
    37PART II: OTHER INFORMATION
    
    
    38SIGNATURES
    
    
    39EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 31EXHIBIT 32
 3




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CPI HOLDCO, INC.
and subsidiaries 
 CONDENSED CONSOLIDATED BALANCE SHEETS  July 2,
    
    October 3,2004
    
    2003(Successor)
    
    (Predecessor)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    30,219
    
    
    $
    33,751Accounts receivable, net
    
    
    39,376
    
    
    
    33,128Inventories
    
    
    36,114
    
    
    
    37,358Deferred tax assets
    
    
    15,247
    
    
    
    Other current assets
    
    
    3,080
    
    
    
    2,210Total current assets
    
    
    124,036
    
    
    
    106,447Property, plant and equipment, net
    
    
    69,335
    
    
    
    32,551Debt issue costs, net
    
    
    9,188
    
    
    
    2,285Intangibles, net
    
    
    84,821
    
    
    
    21,536Goodwill
    
    
    140,418
    
    
    
    19,149Total assets
    
    $
    427,798
    
    
    $
    181,968LIABILITIES, PREFERRED STOCK AND
STOCKHOLDERS EQUITY (DEFICIT)Current LiabilitiesCurrent portion of term loan
    
    $
    900
    
    
    $
    Mortgage financing
    
    
    
    
    
    
    17,500Accounts payable
    
    
    15,803
    
    
    
    15,624Accrued expenses
    
    
    23,816
    
    
    
    21,445Product warranty
    
    
    6,014
    
    
    
    5,401Income taxes payable
    
    
    6,154
    
    
    
    3,584Accrued dividends payable
    
    
    
    
    
    
    15,449Advance payments from customers
    
    
    10,195
    
    
    
    10,203Total current liabilities
    
    
    62,882
    
    
    
    89,206Deferred income taxes
    
    
    44,110
    
    
    
    Senior term loan
    
    
    88,875
    
    
    
    Senior subordinated notes
    
    
    125,000
    
    
    
    100,000Total liabilities
    
    
    320,867
    
    
    
    189,206Senior Redeemable Preferred Stock of CPI
    
    
    
    
    
    
    28,907Junior Preferred Stock of CPI
    
    
    
    
    
    
    29,300Commitments and contingenciesStockholders Equity (Deficit)Common stock
    
    
    43
    
    
    
    50Additional paid-in capital
    
    
    102,237
    
    
    
    21,519Deferred compensation
    
    
    
    
    
    
    (1,289
    )Retained earnings (deficit)
    
    
    4,638
    
    
    
    (84,469
    )Stockholder loans
    
    
    
    
    
    
    (1,256
    )Other comprehensive income
    
    
    13
    
    
    
    Net stockholders equity (deficit)
    
    
    106,931
    
    
    
    (65,445
    )Total liabilities, preferred stock and
stockholders equity (deficit)
    
    $
    427,798
    
    
    $
    181,968
 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  Fiscal Year2004
    
    200313-Week
    
    13-WeekPeriod Ended
    
    Period EndedJuly 2, 2004
    
    July 4, 2003(Successor)
    
    (Predecessor)Sales
    
    $
    72,345
    
    
    $
    70,721Cost of sales
    
    
    50,392
    
    
    
    47,273Gross profit
    
    
    21,953
    
    
    
    23,448Operating costs and expenses:Research and development
    
    
    1,869
    
    
    
    1,695Selling and marketing
    
    
    3,856
    
    
    
    3,963General and administrative
    
    
    5,011
    
    
    
    4,549Amortization of acquisition-related
intangible assets
    
    
    4,682
    
    
    
    Acquired in-process research and
development
    
    
    (9,000
    )
    
    
    Total operating costs and expenses
    
    
    6,418
    
    
    
    10,207Operating income
    
    
    15,535
    
    
    
    13,241Interest expense
    
    
    3,822
    
    
    
    3,591Income before taxes
    
    
    11,713
    
    
    
    9,650Income tax expense
    
    
    242
    
    
    
    1,393Net income
    
    
    11,471
    
    
    
    8,257Preferred dividends:Senior redeemable preferred stock
    
    
    
    
    
    
    1,502Junior preferred stock
    
    
    
    
    
    
    979Net income attributable to common stock
    
    $
    11,471
    
    
    $
    5,776Other comprehensive loss, net of tax:Unrealized loss on cash flow hedges
    
    
    (352
    )
    
    
    Comprehensive income
    
    $
    11,119
    
    
    $
    5,776
 See accompanying notes to the condensed consolidated financial statements. 5




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CPI HOLDCO, INC.
and subsidiaries 
 CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)  Fiscal Year2004
    
    2003January 23, 2004
    
    October 4,
    
    40-Weekto
    
    to
    
    Period EndedJuly 2, 2004
    
    January 22, 2004
    
    July 4, 2003(Successor)
    
    (Predecessor)
    
    Predecessor)Sales
    
    $
    137,986
    
    
    $
    79,919
    
    
    $
    200,244Cost of sales
    
    
    96,419
    
    
    
    56,189
    
    
    
    139,422Gross profit
    
    
    41,567
    
    
    
    23,730
    
    
    
    60,822Operating costs and expenses:Research and development
    
    
    3,333
    
    
    
    2,200
    
    
    
    4,714Selling and marketing
    
    
    6,994
    
    
    
    4,352
    
    
    
    11,732General and administrative
    
    
    8,523
    
    
    
    6,033
    
    
    
    13,245Merger expenses
    
    
    
    
    
    
    6,374
    
    
    
    Amortization of acquisition related
intangible assets
    
    
    8,078
    
    
    
    
    
    
    
    Acquired in-process research and
development
    
    
    2,500
    
    
    
    
    
    
    
    Total operating costs and expenses
    
    
    29,428
    
    
    
    18,959
    
    
    
    29,691Operating income
    
    
    12,139
    
    
    
    4,771
    
    
    
    31,131Interest expense
    
    
    6,772
    
    
    
    8,902
    
    
    
    10,837Income (loss) before taxes
    
    
    5,367
    
    
    
    (4,131
    )
    
    
    20,294Income tax expense
    
    
    729
    
    
    
    439
    
    
    
    6,282Net income (loss)
    
    
    4,638
    
    
    
    (4,570
    )
    
    
    14,012Preferred dividends:Senior redeemable preferred stock
    
    
    
    
    
    
    3,861
    
    
    
    4,356Junior preferred stock
    
    
    
    
    
    
    2,382
    
    
    
    2,838Net income (loss) attributable to common stock
    
    $
    4,638
    
    
    $
    (10,813
    )
    
    $
    6,818Other comprehensive income, net of tax:Unrealized gain on cash flow hedges
    
    
    13
    
    
    
    
    
    
    
    Comprehensive income (loss)
    
    $
    4,651
    
    
    $
    (10,813
    )
    
    $
    6,818
 See accompanying notes to the condensed consolidated financial statements. 6




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CPI HOLDCO, INC.
and subsidiaries 
 CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS  Fiscal Year2004
    
    2003January 23,
    
    October 4, 2003
    
    40-Weekto
    
    to
    
    period endedJuly 2, 2004
    
    January 22, 2004
    
    July 4, 2003(Successor)
    
    (Predecessor)
    
    (Predecessor)OPERATING ACTIVITIESNet cash provided by operating activities
    
    $
    11,464
    
    
    $
    7,166
    
    
    $
    27,678INVESTING ACTIVITIESPurchase of Predecessor net assets, net of
cash acquired
    
    
    (113,760
    )
    
    
    
    
    
    
    Proceeds from the sale of SSPD division
    
    
    
    
    
    
    
    
    
    
    136Purchase of property, plant and equipment, net
    
    
    (1,222
    )
    
    
    (459
    )
    
    
    (1,325
    )Net cash used in investing activities
    
    
    (114,982
    )
    
    
    (459
    )
    
    
    (1,189
    )FINANCING ACTIVITIESRetirement of debt and preferred stock:Senior subordinated notes
    
    
    (74,000
    )
    
    
    (26,000
    )
    
    
    Senior redeemable preferred stock
    
    
    (29,735
    )
    
    
    
    
    
    
    Junior preferred stock
    
    
    (32,336
    )
    
    
    
    
    
    
    Dividends on senior preferred stock
    
    
    (19,310
    )
    
    
    
    
    
    
    Mortgage financing
    
    
    (17,500
    )
    
    
    
    
    
    
    Proceeds from/(payments for) the issuance of debt:Senior subordinated notes
    
    
    125,000
    
    
    
    
    
    
    
    Senior term loan
    
    
    90,000
    
    
    
    
    
    
    
    Debt issue costs
    
    
    (9,648
    )
    
    
    
    
    
    
    Proceeds from the repayment of Predecessor
management loans
    
    
    1,266
    
    
    
    
    
    
    
    Net proceeds from the issuance of common stock
    
    
    98,075
    
    
    
    
    
    
    
    110Repayments on senior term loan
    
    
    (225
    )
    
    
    
    
    
    
    Repayments on capital leases
    
    
    
    
    
    
    
    
    
    
    (45
    )Repayment of mortgage financing
    
    
    
    
    
    
    
    
    
    
    (250
    )Payment of debt issue refinancing costs
    
    
    
    
    
    
    
    
    
    
    (339
    )Net repayment from bank overdraft
    
    
    2,150
    
    
    
    (1,639
    )
    
    
    (242
    )Net cash provided by (used in) financing activities
    
    
    133,737
    
    
    
    (27,639
    )
    
    
    (766
    )NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    30,219
    
    
    
    (20,932
    )
    
    
    25,723Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    33,751
    
    
    
    2,724Cash and cash equivalents at end of period
    
    $
    30,219
    
    
    $
    12,819
    
    
    $
    28,447
 See accompanying notes to the condensed consolidated financial statements. 7




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CPI HOLDCO, INC.
and subsidiaries 
 NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  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 which end on the
Friday nearest September 30. The Successors fiscal year did not change from
that of the Predecessor. Fiscal year 2004 will be comprised of the 52-week
period ending October 1, 2004, and fiscal year 2003 was comprised of the
53-week period ended October 3, 2003. Both the third quarter of fiscal year
2004 and the third quarter of fiscal year 2003 were comprised of 13 weeks. 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 2004. Certain
information and footnote disclosures normally included in annual financial
statements have been condensed or omitted and, accordingly, these financial
statements should be read in conjunction with the financial statements and the
notes thereto contained in the Companys Annual Report on Form 10-K for the
year ended October 3, 2003. There is currently no public market for the Companys common stock. The Company
is subject to the periodic reporting requirements of the Securities Exchange
Act of 1934, pursuant to Section 15(d) thereof, because it, along with
Communications & Power Industries, Inc. (CPI) and certain of its
subsidiaries, filed a registration statement on Form S-4 to register CPIs 8%
Senior Subordinated Notes due 2012 (8% Notes). The registration statement
became effective April 20, 2004 pursuant to the Securities Act of 1933, as
amended. As allowed by Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, the
Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Under this method, compensation
expense is recorded only if the current market price of the underlying stock
exceeded the exercise price at the measurement date. All stock options issued
by Successor were issued at the current market price of the underlying stock.
During fiscal year 2003, the Company issued stock options to employees which
were subsequently determined to have been issued below the fair value of the
stock on the date of grant. The compensation cost associated with the 2003
stock options was amortized as a charge against income under the caption
General and administrative in the Condensed Consolidated Statement of
Operations on a straight-line basis over the four year vesting period until
they became fully vested at the time of the Merger. If compensation cost for the Companys stock-based compensation plan had been
determined consistent with SFAS No. 123, the Companys net income would have
changed to the pro forma amounts indicated below (in thousands): 8




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CPI HOLDCO, INC.
and subsidiaries Fiscal Year2004
    
    200313-Week
    
    13-WeekPeriod ended
    
    Period endedJuly 2, 2004
    
    July 4, 2003(Successor)
    
    (Predecessor)Net income as reported
    
    $
    11,471
    
    
    $
    8,257Add:Stock-based compensation
included in net income
determined under intrinsic
value method, net of tax
    
    
    
    
    
    
    94Deduct:Stock-based compensation
determined under fair value
based method, net of tax
    
    
    172
    
    
    
    203Pro forma net income
    
    $
    11,299
    
    
    $
    8,148
 Fiscal Year2004
    
    2003January 23, 2004
    
    October 4, 2003
    
    40-Weekto
    
    to
    
    Period endedJuly 2, 2004
    
    January 22, 2004
    
    July 4, 2003(Successor)
    
    (Predecessor)
    
    (Predecessor)Net income (loss) as reported
    
    $
    4,638
    
    
    $
    (4,570
    )
    
    $
    14,012Add:Stock-based compensation included
in net income determined under
intrinsic value method, net of tax
    
    
    
    
    
    
    1,289
    
    
    
    915Deduct:Stock-based compensation determined
under fair value based method, net
of tax
    
    
    215
    
    
    
    227
    
    
    
    331Pro forma net income (loss)
    
    $
    4,423
    
    
    $
    (3,508
    )
    
    $
    14,596
 For purposes of computing stock based compensation determined under the fair
value based method, the following assumptions were used: (Successor)
    (Predecessor)Expected life in years
    
    
    7
    
    
    
    5Risk-free interest rate
    
    
    3.67
    %
    
    
    3.38
    %Expected stock price volatility
    
    
    0
    %
    
    
    0
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
 2. Mergers Merger On January 23, 2004, CPI Holdcos wholly-owned subsidiary, Merger Sub, merged
with and into Holding pursuant to the terms of the Agreement and Plan of Merger
(the Merger Agreement), dated as of November 17, 2003, by and among Holding,
CPI Holdco, Merger Sub and Green Equity Investors II, L.P., as the
representative 9




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CPI HOLDCO, INC.
and subsidiaries of the security holders of Holding, under which CPI Holdco,
Merger Subs parent corporation and a corporation controlled by affiliates of
Cypress, agreed to acquire Holding. In the Merger, each share of Holdings
common stock and stock options outstanding immediately prior to the Merger, other than
a portion of stock options held by certain members of management (which were
converted into options to purchase shares of CPI Holdco) and other than any
shares of common stock owned by Holding or CPI Holdco, were converted into the
right to receive a pro rata portion of the aggregate merger consideration of
$130.3 million. In connection with the Merger, CPI Holdco received an equity
contribution of $100.0 million before expenses from affiliates of Cypress in
exchange for 4,251,122 shares of common stock of CPI Holdco. Members of
management of Holding, as a result of rolling over their options to purchase
common stock of Holding, received stock options to purchase 168,998 shares of
common stock of CPI Holdco. In connection with the Merger, Holding and CPI
refinanced all of their outstanding indebtedness. As part of the refinancing,
CPI effected a covenant defeasance of the remaining $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 (the 12% Indenture). In addition, CPI terminated its
credit facility, and Holding paid off all amounts owing under, and terminated,
the loan agreement related to its San Carlos Property. CPI also redeemed all of
the outstanding shares of its 14% Junior Cumulative Preferred Stock and its
Series B 14% Senior Redeemable Exchangeable Cumulative Preferred Stock. The Merger transaction described above was accounted for using the purchase
method of accounting as required by the Financial Accounting Standards Board
(FASB) Statement No. 141, Business Combinations. Accordingly, the assets
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 is based, in part, upon independent appraisals and internal
estimates of cash flow and recoverability. The financial statements for the
quarter ended April 2, 2004 presented a preliminary purchase price allocation
because the independent appraisal of certain identifiable intangibles had not
yet been completed. The final allocation of purchase price was completed
during the quarter ended July 2, 2004. The following table summarizes the fair
values of the assets acquired and liabilities assumed at January 23, 2004 (in
thousands): PreliminaryPurchase Price
    
    Final PurchaseAllocation
    
    Price AllocationCash
    
    $
    12,819
    
    
    $
    12,819Accounts receivable
    
    
    29,587
    
    
    
    29,587Inventories
    
    
    43,608
    
    
    
    43,608Other current assets
    
    
    3,241
    
    
    
    3,241Property, plant and equipment
    
    
    70,145
    
    
    
    70,079Identifiable intangible assets
    
    
    30,733
    
    
    
    93,183Acquired in-process research and development
    
    
    11,500
    
    
    
    2,500Goodwill
    
    
    165,507
    
    
    
    140,418Debt and preferred stock
    
    
    (172,881
    )
    
    
    (172,881
    )Deferred tax liabilities, net
    
    
    (5,959
    )
    
    
    (34,254
    )Other liabilities
    
    
    (57,979
    )
    
    
    (57,979
    )Total
    
    $
    130,321
    
    
    $
    130,321
 Below is a discussion of the significant changes between the preliminary and
final purchase price allocation:  
    
    Intangible identifiable assets increased by $62.5 million  The
increase in intangibles consists of $58.5 million for technology and
$4.4 million for a trade name, partially offset by a $0.4 million
reduction in customer backlog valuation.
    
    Acquired in-process research and development decreased by $9.0
million  The decrease in acquired in-process research and development
was due to the finalization of estimated useful lives for in-process 10




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CPI HOLDCO, INC.
and subsidiaries  research and development technology from the second quarters
preliminary purchase price allocation to the third quarters final
purchase price allocation.
    
    Deferred tax liabilities, net of deferred tax assets increased by
$28.3 million  The increase in deferred tax liabilities, net of
deferred tax assets is primarily due to the tax effect of the increase
in intangible assets. Deferred taxes are provided to reflect the
difference between the assigned fair value and the tax bases of the
assets and liabilities acquired.
    
    Goodwill decreased by $25.1 million  The decrease in goodwill
represents the net change in fair value of intangibles, acquired
in-process research and development and deferred tax liabilities, net of
deferred tax assets. 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. For the third quarter ended July 2, 2004, the final purchase price
allocation reduced acquired in-process research and development by $9.0
million. For second quarter ended April 2, 2004, the preliminary purchase
price allocation assigned $11.5 million to acquired in-process research and
development. The value assigned to acquired in-process research and
development is related to technology application projects involving development
of VEDs for communications, scientific and military applications and
development of power supplies, x-ray generators and transmitters for
industrial, medical and military applications. 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): Fiscal Year2004
    
    200313-Week
    
    13-WeekPeriod ended
    
    Period endedJuly 2, 2004
    
    July 4, 2003Sales
    
    $
    72,345
    
    
    $
    70,721Pro forma net income
    
    $
    5,564
    
    
    $
    7,650
 Fiscal Year2004
    
    200339-Week
    
    40-WeekPeriod ended
    
    Period endedJuly 2, 2004
    
    July 4, 2003Sales
    
    $
    217,905
    
    
    $
    200,244Pro forma net income
    
    $
    17,011
    
    
    $
    13,733
 Intercompany Merger On March 12, 2004, Holding was merged with and into its wholly-owned
subsidiary, CPI, with CPI as the surviving corporation (the Intercompany
Merger). As a result of the Intercompany Merger, the corporate structure of
the Company and its subsidiaries consists of one parent holding corporation,
CPI Holdco, and all of the obligations of Holding existing prior to the
Intercompany Merger became obligations of CPI. 11




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CPI HOLDCO, INC.
and subsidiaries 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): July 2,
    
    October 3,2004
    
    2003Raw materials and parts
    
    $
    24,391
    
    
    $
    26,330Work in process
    
    
    8,945
    
    
    
    8,786Finished goods
    
    
    2,778
    
    
    
    2,242Total
    
    $
    36,114
    
    
    $
    37,358
 4. Accrued Warranty The Companys products are generally warranted for a variety of periods,
typically one to three years or a predetermined product usage life. The
Company assesses the adequacy of its preexisting warranty liabilities and
adjusts the balance based on actual experience and changes in future
expectations. The following table reconciles the changes in the Companys
accrued warranty (in thousands): Fiscal Year2004
    
    200313-Week
    
    13-WeekPeriod ended
    
    Period endedJuly 2, 2004
    
    July 4, 2003(Successor)
    
    (Predecessor)Beginning accrued warranty
    
    $
    5,889
    
    
    $
    5,073Cost of warranty claims
    
    
    (1,421
    )
    
    
    (1,235
    )Accruals for product warranty
    
    
    1,546
    
    
    
    1,230Ending accrued warranty
    
    $
    6,014
    
    
    $
    5,068
 Fiscal Year2004
    
    2003January 23, 2004
    
    October 4, 2003
    
    40-Weekto
    
    to
    
    Period endedJuly 2, 2004
    
    January 22, 2004
    
    July 4, 2003(Successor)
    
    (Predecessor)
    
    (Predecessor)Beginning accrued warranty
    
    $
    5,839
    
    
    $
    5,401
    
    
    $
    4,823Cost of warranty claims
    
    
    (2,247
    )
    
    
    (1,241
    )
    
    
    (3,963
    )Accruals for product warranty
    
    
    2,422
    
    
    
    1,679
    
    
    
    4,208Ending accrued warranty
    
    $
    6,014
    
    
    $
    5,839
    
    
    $
    5,068
 5. Senior Credit Facility In connection with the Merger, CPI entered into a $130.0 million credit
agreement (Senior Credit Facility). This Senior Credit Facility consists of a
$40.0 million revolving commitment, with a sub-facility of $15.0 million for
letters of credit and $5.0 million for swingline loans (Revolver), which
expires on January 23, 2010, and a $90.0 million term loan (Term Loan), which
expires on July 23, 2010. The Term Loan requires 1.0% of the loan amount to be
repaid annually in quarterly installments of 0.25% beginning June 30, 2004 and
continuing for 12




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CPI HOLDCO, INC.
and subsidiaries 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, 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. The Senior Credit Facility
is guaranteed by CPI Holdco and all of CPIs domestic subsidiaries and
collateralized with a security agreement, which includes a security interest in
certain property and fixtures. The Revolver and Term Loan borrowings will initially bear interest at a rate
equal to LIBOR plus 3.00% per annum (the 3.00% being referred to as the
Applicable LIBOR Margin), or the Alternate Base Rate (ABR) plus 2.0% per
annum; the ABR is the greater of (a) the Prime Rate and (b) the Federal Funds
Rate plus 0.50%. In addition to customary fronting and administrative fees
under the Senior Credit Facility, CPI will pay letter of credit participation
fees equal to the Applicable LIBOR Margin per annum on the average daily amount
of letter of credit exposure, and a commitment fee of 0.50% per annum on the
average daily unused amount of revolving commitment. The Senior Credit Facility contains a number of covenants that, among other
things, restrict the ability of CPI Holdco, CPI and certain of its subsidiaries
to sell assets; engage in mergers and acquisitions; pay dividends and
distributions or repurchase their capital stock; incur additional indebtedness
or issue equity interests; make investments and loans; create liens or further
negative pledges on assets; engage in certain transactions with affiliates;
enter into sale and leaseback transactions; change their business or ownership;
amend agreements or make prepayments relating to subordinated indebtedness;
amend 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 July 2, 2004, CPI is in compliance
with all Senior Credit Facility covenants. 6. 8% Senior Subordinated Notes In connection with the Merger, CPI issued an aggregate principal amount of
$125.0 million of 8% Notes which will mature on February 1, 2012. CPI is
required to pay interest on the 8% Notes semiannually, beginning on August 1,
2004. The indenture governing the terms of the 8% Notes (the 8% Indenture)
contains restrictive provisions which, among other things, limit CPI and
certain of its subsidiaries from incurring certain indebtedness, selling assets
or consolidating or merging with or into other companies, paying dividends or
repurchasing or redeeming capital stock, making certain investments and
entering into certain types of transactions with their affiliates. The payment
of principal, premium and interest on, and other obligations evidenced by the
8% Notes is subordinated in right of payment, as set forth in the 8% Indenture,
to the prior payment in full of all senior debt (as defined in the 8%
Indenture), including indebtedness under the Senior Credit Facility, whether
outstanding on the date of the 8% Indenture or thereafter incurred. CPIs
payment obligations under the 8% Notes are jointly and severally guaranteed by
CPI Holdco and all of CPIs domestic subsidiaries. The 8% Notes may be redeemed
as described in, and subject to the terms and conditions set forth in, the 8%
Indenture. In addition, the 8% Indenture requires the Company to make an offer
to purchase the 8% Notes in certain circumstances. 7. Financial Instruments The Company enters into foreign currency forward and option contracts with
financial institutions primarily to protect financial performance against the
effects of foreign currency fluctuations from certain firmly committed 13




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CPI HOLDCO, INC.
and subsidiaries transactions and probable but not firmly committed transactions. The Company
may also enter into foreign currency forward and option contracts to offset the
foreign exchange gains and losses generated by the re-measurement of certain
recorded assets and liabilities denominated in non-functional currencies of its
foreign subsidiaries. To protect against foreign exchange risks associated with probable but not
firmly committed transactions, the Company entered into forward contracts to
purchase Canadian dollars for an aggregate notional amount of $44.5 million;
the contracts expire on March 10, 2006. As of July 2, 2004, the outstanding
commitment on forward contracts was $35.8 million. The Companys foreign
exchange forward contracts are designated as a cash flow hedge and are
considered highly effective, as defined by FASB Statement No. 133. At July 2,
2004, the fair value of the foreign currency forward was a gain of
approximately $0.1 million, net of related tax expense. The unrealized gains
from these forwards are included in other comprehensive income and are shown as
a component of stockholders equity. 8. Change in Accounting Estimate As a result of an appraisal performed by an independent third party in
connection with the Merger purchase price allocation, the Company revised the
useful lives of its property, plant and equipment to reflect the current
economic useful life of its assets during the second quarter ended April 2,
2004. The change in useful lives resulted in a decrease in depreciation expense
for the 13-week and 39-week periods ended July 2, 2004 of approximately $0.4
million and $0.8 million, respectively. The following table summarizes the
historical and revised useful lives for the main components of property, plant
and equipment: Revised Useful Life
    
    Historical UsefulAsset Category
    
    (Years)
    
    Life (Years)Buildings
    
    
    25
    
    
    
    20Land improvements
    
    
    20
    
    
    
    15Process equipment
    
    
    12
    
    
    
    7Machinery and equipment
    
    
    7 to 15
    
    
    
    5 to 7Office furniture and
equipment
    
    
    5 to 10
    
    
    
    5
 9. Supplemental Cash Flow Information Fiscal Year2004
    
    2003January 23, 2004
    
    October 4, 2003
    
    40-Weekto
    
    to
    
    Period endedJuly 2, 2004
    
    January 22, 2004
    
    July 4, 2003(In thousands)
    
    (Successor)
    
    (Predecessor)
    
    (Predecessor)Cash paymentsInterest payments
    
    $
    6,699
    
    
    $
    1,637
    
    
    $
    7,080Income tax payments
    
    $
    1,234
    
    
    $
    2,376
    
    
    $
    5,078Non-cash financingUnpaid cash dividends on
senior preferred stock
    
    $
    
    
    
    $
    3,861
    
    
    $
    4,356
 10. Segments and Related Information 14




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CPI HOLDCO, INC.
and subsidiaries The Company has two reportable segments: vacuum electronic devices (VEDs) and
satcom equipment. Management evaluates performance and allocates resources
based on earnings before provision for income taxes, interest expense,
depreciation and amortization (EBITDA). Summarized financial information concerning the Companys reportable segments
is shown in the following table.
Intersegment product transfers are recorded at cost. Included in the Other
category of EBITDA are unallocated corporate operating expenses, merger
expenses, and acquired in-process research and development. Fiscal Year2004
    
    200313-Week
    
    13-WeekPeriod ended
    
    Period endedJuly 2, 2004
    
    July 4, 2003(In thousands)
    
    (Successor)
    
    (Predecessor)Revenues from external customersVEDs
    
    
    62,780
    
    
    $
    56,766Satcom Equipment
    
    
    9,565
    
    
    
    13,955Total
    
    $
    72,345
    
    
    $
    70,721Intersegment product transfersVEDs
    
    $
    4,161
    
    
    $
    5,400Satcom Equipment
    
    
    2
    
    
    
    Total
    
    $
    4,163
    
    
    $
    5,400EBITDAVEDs
    
    $
    16,350
    
    
    $
    15,644Satcom Equipment
    
    
    262
    
    
    
    1,439Other
    
    
    4,776
    
    
    
    (2,268
    )Total
    
    $
    21,388
    
    
    $
    14,815
 In addition to unallocated corporate operating expenses, the Other category
of EBITDA for the 13-Week period ended July 2, 2004 also includes a $7.7
million credit that increases EBITDA for purchase accounting related to the
$9.0 million adjustment for acquired in-process research and development,
somewhat offset by a $1.3 million inventory valuation charge. 15




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CPI HOLDCO, INC.
and subsidiaries Fiscal Year2004
    
    2003January 23, 2004
    
    October 4, 2003
    
    40-Weekto
    
    to
    
    Period endedJuly 2, 2004
    
    January 22, 2004
    
    July 4, 2004(In thousands)
    
    (Successor)
    
    (Predecessor)
    
    (Predecessor)Revenues from external customersVEDs
    
    $
    118,878
    
    
    $
    69,048
    
    
    $
    164,854Satcom Equipment
    
    
    19,108
    
    
    
    10,871
    
    
    
    35,390Total
    
    $
    137,986
    
    
    $
    79,919
    
    
    $
    200,244Intersegment product transfersVEDs
    
    $
    7,749
    
    
    $
    4,070
    
    
    $
    11,912Satcom Equipment
    
    
    20
    
    
    
    
    
    
    
    Total
    
    $
    7,769
    
    
    $
    4,070
    
    
    $
    11,912EBITDAVEDs
    
    $
    34,201
    
    
    $
    15,889
    
    
    $
    38,819Satcom Equipment
    
    
    1,220
    
    
    
    (229
    )
    
    
    3,823Other
    
    $
    (13,011
    )
    
    $
    (9,111
    )
    
    $
    (6,620
    )Total
    
    
    22,410
    
    
    
    6,549
    
    
    
    36,022
 In addition to unallocated corporate operating expenses, the Other category
of EBITDA for the period January 23, 2004 to July 2, 2004 also includes
purchase accounting adjustments of $5.5 million related to the inventory
write-up and $2.5 million for acquired in-process research and development. In addition to unallocated corporate operating expenses, the Other category
of EBITDA for the period October 4, 2003 to January 22, 2004 also includes $6.4
million of merger expenses. EBITDA represents earnings before interest expense, provision for income taxes,
depreciation and amortization. Other companies may define EBITDA differently
and, as a result, our measure of EBITDA may not be directly comparable to
EBITDA of other companies. A reconciliation of EBITDA from reportable segments
to income (loss) before taxes is as follows: 16




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CPI HOLDCO, INC.
and subsidiaries Fiscal Year2004
    
    200313-Week
    
    13-WeekPeriod ended
    
    Period endedJuly 2, 2004
    
    July 4, 2003(In thousands)
    
    (Successor)
    
    (Predecessor)EBITDA
    
    $
    21,388
    
    
    $
    14,815Less:Depreciation and
amortization
    
    
    5,853
    
    
    
    1,574Interest expense
    
    
    3,822
    
    
    
    3,591Income before taxes
    
    $
    11,713
    
    
    $
    9,650
 Fiscal Year2004
    
    2003January 23, 2004
    
    October 4, 2003
    
    40-Weekto
    
    to
    
    Period endedJuly 2, 2004
    
    January 22, 2004
    
    July 4, 2003(In thousands)
    
    (Successor)
    
    (Predecessor)
    
    (Predecessor)EBITDA
    
    $
    22,410
    
    
    $
    6,549
    
    
    $
    36,022Less:Depreciation and
amortization
    
    
    10,271
    
    
    
    1,778
    
    
    
    4,891Interest expense
    
    
    6,772
    
    
    
    8,902
    
    
    
    10,837Income (loss) before taxes
    
    $
    5,367
    
    
    $
    (4,131
    )
    
    $
    20,294
 Sales by geographic area to unaffiliated customers (based on the location of
customer) are as follows: Fiscal Year2004
    
    200313-Week
    
    13-WeekPeriod ended
    
    Period endedJuly 2, 2004
    
    July 4, 2003(In thousands)
    
    (Successor)
    
    (Predecessor)United States
    
    $
    50,617
    
    
    $
    48,132All foreign countries
    
    
    21,728
    
    
    
    22,589Total sales
    
    $
    72,345
    
    
    $
    70,721
 Fiscal Year2004
    
    2003January 23, 2004
    
    October 4, 2003
    
    40-Weekto
    
    to
    
    Period endedJuly 2, 2004
    
    January 22, 2004
    
    July 4, 2003(In thousands)
    
    (Successor)
    
    (Predecessor)
    
    (Predecessor)United States
    
    $
    98,017
    
    
    $
    52,417
    
    
    $
    134,384All foreign countries
    
    
    39,969
    
    
    
    27,502
    
    
    
    65,860Total sales
    
    $
    137,986
    
    
    $
    79,919
    
    
    $
    200,244
 The Company had one customer, the United States Government, that accounted for
10% or more of consolidated sales. Sales to this customer were $17.0 million
and $14.6 million, of the Companys consolidated sales for the 13-week periods
ended July 2, 2004 and July 4, 2003, respectively. Sales to this customer were
$30.8 million, $17.0 million, and $40.3 million, of the Companys consolidated sales for the period
January 23, 2004 to July 2, 2004, October 4, 2003 to January 22, 2004 and the
40-week period ended July 4, 2003, respectively. A substantial majority 17




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CPI HOLDCO, INC.
and subsidiaries of these sales were VED segment products, but this customer also purchased satcom
equipment products. 11. Recent Accounting Pronouncements In March 2004, the FASB issued EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments.
EITF 03-1 includes new guidance for evaluating and recording impairment losses
on debt and equity investments, as well as new disclosure requirements for
investments that are deemed to be temporarily impaired. The accounting guidance
of EITF 03-1 is effective for years beginning after June 15, 2004, while the
disclosure requirements are effective for annual periods ending after June 15,
2004. Although the Company will continue to evaluate the application of EITF
03-1, management does not currently believe adoption will have a material
impact on its results of operations or financial position. In December 2003, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition, which supersedes SAB
101, Revenue Recognition in Financial Statements. SAB 104 clarifies existing
guidance regarding revenue contracts that contain multiple deliverables to make
it consistent with Emerging Issues Task Force No. 00-21. The adoption of SAB
104 did not have a material impact on the Companys results of operations or
financial position. In January 2003, FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities, which addresses consolidation by business enterprises of
variable interest entities which have one or both of the following
characteristics: (1) The equity investment at risk is not sufficient to permit
the entity to finance its activities without support from other parties and (2)
the equity investors lack one or more of the defined essential characteristics
of a controlling financial interest. This Interpretation requires existing
unconsolidated variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among the
participating parties. This Interpretation applies immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. On
October 9, 2003, FASB Staff Position FIN 46-6, Effective Date of FASB
Interpretation No. 46, Consolidation of Variable Interest Entities was issued.
This delayed the effective date of this Interpretation for variable interest
entities created before February 1, 2003 until January 3, 2004. The Company
has evaluated the impact of the provisions of Interpretation No. 46 and
believes it will not have a material impact on the Companys consolidated
financial statements. 12.Goodwill and Other Intangible Assets Goodwill The following table summarizes goodwill by reportable segment (in thousands): VEDs
    
    $
    128,476Satcom Equipment
    
    
    11,942Total
    
    $
    140,418
 Intangible Assets The carrying amount of intangible assets is as follows (in thousands): 18




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CPI HOLDCO, INC.
and subsidiaries Useful Life(Years)
    
    July 2, 2004Technology
    
    
    15 to 50
    
    
    $
    58,500Customer backlog
    
    
    1
    
    
    
    17,450Land lease
    
    
    46
    
    
    
    11,810Trade name
    
    indefinite
    
    
    4,400Other
    
    
    3
    
    
    
    1,02393,183Less accumulated amortization
    
    
    
    
    
    
    8,362Net identifiable intangible assets
    
    
    
    
    
    $
    84,821
 Intangible amortization expense was $8.4 million, $0.2 million, and $0.7
million for the period January 23, 2004 to July 2, 2004, October 4, 2003 to
January 22, 2004 and the 40-week period ended July 4, 2003, respectively. In
the condensed consolidated statement of operations and comprehensive income,
for the period January 23, 2004 to July 2, 2004, intangible amortization
expense of $8.1 million, $0.1 million and $0.2 million was reported under the
caption Amortization of acquisition-related intangible assets, General and
administrative and Cost of sales, respectively. Amortization expense for
these intangible assets for the next five fiscal years is projected to be
approximately $8.4 million in fiscal year 2005, $2.6 million in fiscal year
2006 and $2.2 million per year thereafter. 13.Redemption of 12% Senior Subordinated Notes of CPI On January 5, 2004, CPI redeemed $26.0 million in principal amount of the 12%
Notes, pursuant to and in accordance with the terms of the 12% Indenture. The
redemption occurred at a price equal to 101.5% of the principal amount of such
notes plus accrued and unpaid interest to January 5, 2004. In connection with
the redemption, CPI and Holding entered into an amendment to CPIs secured
credit facility that, among other things, permitted CPI to redeem up to an
aggregate maximum amount of $30.0 million of the 12% Notes in any fiscal year.
At the closing of the Merger described in Note 2 above, CPI issued a notice of
redemption for the remaining $74 million outstanding 12% Notes, and the 12%
Notes were subsequently redeemed on February 22, 2004. 14.Related Party Transactions On January 23, 2004, the Company paid Cypress a fee of $2.5 million for
services provided in connection with the Merger. The fee has been offset
against the investment proceeds from Cypress affiliates in the common stock of
CPI Holdco. On January 23, 2004, the Company paid Chris Toffales, a director of CPI and CPI
Holdco, a fee of $350,000 for services provided in connection with the Merger.
Prior to his January 23, 2004 appointment as a board director of CPI and CPI
Holdco, Mr. Toffales was a consultant to Cypress. In March 2004, CPI Holdco issued 24,444 shares of common stock to two members
of the Board of Directors of CPI Holdco for aggregate consideration of
$575,000. Such securities were sold at fair value as determined by the Board of
Directors. 15.Income Taxes In connection with the Merger, the Company recorded a deferred tax liability to
reflect differences between the assigned values and the tax bases of assets and
liabilities recognized. Except for the portion of goodwill for which
amortization is not deductible for tax purposes, and certain other items, the
Company recorded deferred income tax liabilities of $46.4 million to reflect
the differences between the assigned values and the tax bases of assets and
liabilities acquired. A previously established deferred tax asset valuation
allowance of $12.2 million was also adjusted as a reduction to the amount of
goodwill acquired. 19




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CPI HOLDCO, INC.
and subsidiaries The Internal Revenue Code restricts the ability of a corporation to utilize the
net operating loss and tax credit carryforwards in the event of a change in
ownership. The annual limitation may result in the expiration of net operating
loss and tax credit carryforwards before utilization. Based on a preliminary
analysis, the Companys net operating loss and tax credit carryforwards will
not be subject to such annual limitation. 16.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, 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. For
periods ending prior to January 23, 2004, the accompanying condensed
consolidated financial statements represent the consolidated results and
financial position of Holding. 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. 20




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries CONDENSED CONSOLIDATING BALANCE SHEET
As of July 2, 2004 (Successor)
(in thousands -unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedParent
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    TotalASSETSCurrent AssetsCash and cash equivalents
    
    $
    
    
    
    
    23,541
    
    
    
    2,904
    
    
    
    3,774
    
    
    
    
    
    
    
    30,219Accounts receivable, net
    
    
    
    
    
    
    22,646
    
    
    
    5,173
    
    
    
    11,557
    
    
    
    
    
    
    
    39,376Inventories
    
    
    
    
    
    
    27,865
    
    
    
    (284
    )
    
    
    8,533
    
    
    
    
    
    
    
    36,114Deferred tax assets
    
    
    
    
    
    
    14,471
    
    
    
    
    
    
    
    776
    
    
    
    
    
    
    
    15,247Intercompany receivable
    
    
    
    
    
    
    31,010
    
    
    
    
    
    
    
    
    
    
    
    (31,010
    )
    
    
    Other current assets
    
    
    
    
    
    
    2,235
    
    
    
    255
    
    
    
    764
    
    
    
    (174
    )
    
    
    3,080Total current assets
    
    
    
    
    
    
    121,768
    
    
    
    8,048
    
    
    
    25,404
    
    
    
    (31,184
    )
    
    
    124,036Property, plant and equipment, net
    
    
    
    
    
    
    61,419
    
    
    
    18
    
    
    
    7,898
    
    
    
    
    
    
    
    69,335Intercompany notes receivable
    
    
    
    
    
    
    14,335
    
    
    
    
    
    
    
    
    
    
    
    (14,335
    )
    
    
    Debt issue costs, net
    
    
    
    
    
    
    9,188
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,188Intangibles, net
    
    
    
    
    
    
    74,015
    
    
    
    
    
    
    
    10,806
    
    
    
    
    
    
    
    84,821Investment in subsidiaries
    
    
    134,959
    
    
    
    22,298
    
    
    
    
    
    
    
    
    
    
    
    (157,257
    )
    
    
    Goodwill
    
    
    
    
    
    
    105,486
    
    
    
    
    
    
    
    34,932
    
    
    
    
    
    
    
    140,418Total assets
    
    $
    134,959
    
    
    
    408,509
    
    
    
    8,066
    
    
    
    79,040
    
    
    
    (202,776
    )
    
    
    427,798LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS EQUITYCurrent LiabilitiesCurrent portion of term loan
    
    $
    
    
    
    
    900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    900Accounts payable
    
    
    
    
    
    
    11,278
    
    
    
    237
    
    
    
    4,288
    
    
    
    
    
    
    
    15,803Intercompany payable
    
    
    28,041
    
    
    
    
    
    
    
    1,651
    
    
    
    1,327
    
    
    
    (31,019
    )
    
    
    Accrued expenses
    
    
    
    
    
    
    19,802
    
    
    
    517
    
    
    
    3,488
    
    
    
    9
    
    
    
    23,816Product warranty
    
    
    
    
    
    
    3,704
    
    
    
    
    
    
    
    2,310
    
    
    
    
    
    
    
    6,014Income taxes payable
    
    
    
    
    
    
    6,202
    
    
    
    126
    
    
    
    
    
    
    
    (174
    )
    
    
    6,154Advance payments from customers
    
    
    
    
    
    
    7,459
    
    
    
    1,292
    
    
    
    1,444
    
    
    
    
    
    
    
    10,195Total current liabilities
    
    
    28,041
    
    
    
    49,345
    
    
    
    3,823
    
    
    
    12,857
    
    
    
    (31,184
    )
    
    
    62,882Deferred income taxes
    
    
    
    
    
    
    37,003
    
    
    
    
    
    
    
    7,107
    
    
    
    
    
    
    
    44,110Intercompany notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,335
    
    
    
    (14,335
    )
    
    
    Senior term loans
    
    
    
    
    
    
    88,875
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,875Senior subordinated notes
    
    
    
    
    
    
    125,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000Total liabilities
    
    
    28,041
    
    
    
    300,223
    
    
    
    3,823
    
    
    
    34,299
    
    
    
    (45,519
    )
    
    
    320,867Stockholders EquityCommon stock
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Parent investment
    
    
    
    
    
    
    103,566
    
    
    
    3,882
    
    
    
    43,584
    
    
    
    (151,032
    )
    
    
    Additional paid-in-capital
    
    
    102,237
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102,237Retained earnings
    
    
    4,638
    
    
    
    4,638
    
    
    
    361
    
    
    
    1,226
    
    
    
    (6,225
    )
    
    
    4,638Other comprehensive income (loss)
    
    
    
    
    
    
    82
    
    
    
    
    
    
    
    (69
    )
    
    
    
    
    
    
    13Net stockholders equity
    
    
    106,918
    
    
    
    108,286
    
    
    
    4,243
    
    
    
    44,741
    
    
    
    (157,257
    )
    
    
    106,931Total liabilities, preferred stock and
stockholders equity
    
    $
    134,959
    
    
    
    408,509
    
    
    
    8,066
    
    
    
    79,040
    
    
    
    (202,776
    )
    
    
    427,798
 21




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##### Table of Contents



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




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the 13-Week Period Ended July 2, 2004 (Successor)
(in thousands  unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedParent
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    TotalSales
    
    $
    
    
    
    
    56,223
    
    
    
    8,901
    
    
    
    24,935
    
    
    
    (17,714
    )
    
    
    72,345Cost of sales
    
    
    
    
    
    
    40,235
    
    
    
    7,870
    
    
    
    20,001
    
    
    
    (17,714
    )
    
    
    50,392Gross profit
    
    
    
    
    
    
    15,988
    
    
    
    1,031
    
    
    
    4,934
    
    
    
    
    
    
    
    21,953Operating costs and expenses:Research and development
    
    
    
    
    
    
    555
    
    
    
    
    
    
    
    1,314
    
    
    
    
    
    
    
    1,869Selling and marketing
    
    
    
    
    
    
    1,813
    
    
    
    534
    
    
    
    1,509
    
    
    
    
    
    
    
    3,856General and administrative
    
    
    
    
    
    
    3,964
    
    
    
    80
    
    
    
    967
    
    
    
    
    
    
    
    5,011Amortization of acquisition -related
intangible assets
    
    
    
    
    
    
    3,988
    
    
    
    
    
    
    
    694
    
    
    
    
    
    
    
    4,682Acquired in-process R&D
    
    
    
    
    
    
    (4,485
    )
    
    
    
    
    
    
    (4,515
    )
    
    
    
    
    
    
    (9,000
    )Total operating costs and expenses
    
    
    
    
    
    
    5,835
    
    
    
    614
    
    
    
    (31
    )
    
    
    
    
    
    
    6,418Operating income
    
    
    
    
    
    
    10,153
    
    
    
    417
    
    
    
    4,965
    
    
    
    
    
    
    
    15,535Interest expense (income), net
    
    
    
    
    
    
    3,387
    
    
    
    (3
    )
    
    
    438
    
    
    
    
    
    
    
    3,822Income before income tax expense (benefit)
and equity in income of subsidiaries
    
    
    
    
    
    
    6,766
    
    
    
    420
    
    
    
    4,527
    
    
    
    
    
    
    
    11,713Income tax expense (benefit)
    
    
    
    
    
    
    583
    
    
    
    4
    
    
    
    (345
    )
    
    
    
    
    
    
    242Equity in income of subsidiaries
    
    
    11,471
    
    
    
    5,288
    
    
    
    
    
    
    
    
    
    
    
    (16,759
    )
    
    
    Net income
    
    $
    11,471
    
    
    
    11,471
    
    
    
    416
    
    
    
    4,872
    
    
    
    (16,759
    )
    
    
    11,471
 CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
For the 13-Week Period Ended July 4, 2003 (Predecessor)
(in thousands  unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedParent
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    TotalSales
    
    $
    
    
    
    
    51,251
    
    
    
    7,346
    
    
    
    26,805
    
    
    
    (14,681
    )
    
    
    70,721Cost of sales
    
    
    
    
    
    
    35,599
    
    
    
    6,575
    
    
    
    19,843
    
    
    
    (14,744
    )
    
    
    47,273Gross profit
    
    
    
    
    
    
    15,652
    
    
    
    771
    
    
    
    6,962
    
    
    
    63
    
    
    
    23,448Operating costs and expenses:Research and development
    
    
    
    
    
    
    510
    
    
    
    
    
    
    
    1,185
    
    
    
    
    
    
    
    1,695Selling and marketing
    
    
    
    
    
    
    2,118
    
    
    
    622
    
    
    
    1,318
    
    
    
    (95
    )
    
    
    3,963General and administrative
    
    
    288
    
    
    
    3,973
    
    
    
    115
    
    
    
    702
    
    
    
    (529
    )
    
    
    4,549Intercompany income (expense)
    
    
    (614
    )
    
    
    30
    
    
    
    (95
    )
    
    
    
    
    
    
    679
    
    
    
    Total operating costs and expenses
    
    
    (326
    )
    
    
    6,631
    
    
    
    642
    
    
    
    3,205
    
    
    
    55
    
    
    
    10,207Operating income
    
    
    326
    
    
    
    9,021
    
    
    
    129
    
    
    
    3,757
    
    
    
    8
    
    
    
    13,241Interest expense (income), net
    
    
    498
    
    
    
    3,271
    
    
    
    (2
    )
    
    
    (175
    )
    
    
    (1
    )
    
    
    3,591(Loss) income before income tax expense
and equity in income of subsidiaries
    
    
    (172
    )
    
    
    5,750
    
    
    
    131
    
    
    
    3,932
    
    
    
    9
    
    
    
    9,650Income tax expense
    
    
    141
    
    
    
    1,226
    
    
    
    1
    
    
    
    25
    
    
    
    
    
    
    
    1,393Equity in income of subsidiaries
    
    
    8,570
    
    
    
    4,004
    
    
    
    
    
    
    
    
    
    
    
    (12,574
    )
    
    
    Net income
    
    $
    8,257
    
    
    
    8,528
    
    
    
    130
    
    
    
    3,907
    
    
    
    (12,565
    )
    
    
    8,257
 23




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
From October 4, 2003 to January 22, 2004 (Predecessor)
(in thousands  unadudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedParent
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    TotalSales
    
    $
    
    
    
    
    60,721
    
    
    
    10,673
    
    
    
    26,470
    
    
    
    (17,945
    )
    
    
    79,919Cost of sales
    
    
    
    
    
    
    43,551
    
    
    
    9,448
    
    
    
    21,223
    
    
    
    (18,033
    )
    
    
    56,189Gross profit
    
    
    
    
    
    
    17,170
    
    
    
    1,225
    
    
    
    5,247
    
    
    
    88
    
    
    
    23,730Operating costs and expenses:Research and development
    
    
    
    
    
    
    607
    
    
    
    
    
    
    
    1,593
    
    
    
    
    
    
    
    2,200Selling and marketing
    
    
    
    
    
    
    2,136
    
    
    
    591
    
    
    
    1,678
    
    
    
    (53
    )
    
    
    4,352General and administrative
    
    
    355
    
    
    
    4,973
    
    
    
    236
    
    
    
    1,508
    
    
    
    (1,039
    )
    
    
    6,033Merger expenses
    
    
    5,074
    
    
    
    1,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,374Intercompany income
    
    
    (755
    )
    
    
    (215
    )
    
    
    (53
    )
    
    
    
    
    
    
    1,023
    
    
    
    Total operating costs and expenses
    
    
    4,674
    
    
    
    8,801
    
    
    
    774
    
    
    
    4,779
    
    
    
    (69
    )
    
    
    18,959Operating income
    
    
    (4,674
    )
    
    
    8,369
    
    
    
    451
    
    
    
    468
    
    
    
    157
    
    
    
    4,771Interest expense (income), net
    
    
    590
    
    
    
    7,731
    
    
    
    (3
    )
    
    
    584
    
    
    
    
    
    
    
    8,902(Loss) income before income tax expense
and equity in income of subsidiaries
    
    
    (5,264
    )
    
    
    638
    
    
    
    454
    
    
    
    (116
    )
    
    
    157
    
    
    
    (4,131
    )Income tax expense
    
    
    
    
    
    
    334
    
    
    
    55
    
    
    
    50
    
    
    
    
    
    
    
    439Equity in income of subsidiaries
    
    
    694
    
    
    
    321
    
    
    
    
    
    
    
    
    
    
    
    (1,015
    )
    
    
    Net (loss) income
    
    $
    (4,570
    )
    
    
    625
    
    
    
    399
    
    
    
    (166
    )
    
    
    (858
    )
    
    
    (4,570
    )
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Period from January 23, 2004 to July 2, 2004 (Successor)
(in thousands  unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedParent
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    TotalSales
    
    $
    
    
    
    
    105,192
    
    
    
    15,579
    
    
    
    47,163
    
    
    
    (29,948
    )
    
    
    137,986Cost of sales
    
    
    
    
    
    
    76,109
    
    
    
    13,815
    
    
    
    36,443
    
    
    
    (29,948
    )
    
    
    96,419Gross profit
    
    
    
    
    
    
    29,083
    
    
    
    1,764
    
    
    
    10,720
    
    
    
    
    
    
    
    41,567Operating costs and expenses:Research and development
    
    
    
    
    
    
    933
    
    
    
    
    
    
    
    2,400
    
    
    
    
    
    
    
    3,333Selling and marketing
    
    
    
    
    
    
    3,304
    
    
    
    1,000
    
    
    
    2,690
    
    
    
    
    
    
    
    6,994General and administrative
    
    
    
    
    
    
    6,099
    
    
    
    396
    
    
    
    2,028
    
    
    
    
    
    
    
    8,523Amortization of acquisition-related
intangible assets
    
    
    
    
    
    
    7,084
    
    
    
    
    
    
    
    994
    
    
    
    
    
    
    
    8,078Acquired in-process R&D
    
    
    
    
    
    
    1,415
    
    
    
    
    
    
    
    1,085
    
    
    
    
    
    
    
    2,500Total operating costs and expenses
    
    
    
    
    
    
    18,835
    
    
    
    1,396
    
    
    
    9,197
    
    
    
    
    
    
    
    29,428Operating income
    
    
    
    
    
    
    10,248
    
    
    
    368
    
    
    
    1,523
    
    
    
    
    
    
    
    12,139Interest expense (income), net
    
    
    
    
    
    
    6,003
    
    
    
    (4
    )
    
    
    773
    
    
    
    
    
    
    
    6,772Income before income tax expense (benefit)
and equity in income of subsidiaries
    
    
    
    
    
    
    4,245
    
    
    
    372
    
    
    
    750
    
    
    
    
    
    
    
    5,367Income tax expense (benefit)
    
    
    
    
    
    
    1,194
    
    
    
    11
    
    
    
    (476
    )
    
    
    
    
    
    
    729Equity in income of subsidiaries
    
    
    4,638
    
    
    
    1,587
    
    
    
    
    
    
    
    
    
    
    
    (6,225
    )
    
    
    Net income
    
    $
    4,638
    
    
    
    4,638
    
    
    
    361
    
    
    
    1,226
    
    
    
    (6,225
    )
    
    
    4,638
 24




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the 40-Week Period Ended July 4, 2003 (Predecessor)
(in thousands  unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedParent
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    TotalSales
    
    $
    
    
    
    
    149,072
    
    
    
    25,260
    
    
    
    71,602
    
    
    
    (45,690
    )
    
    
    200,244Cost of sales
    
    
    
    
    
    
    110,497
    
    
    
    22,363
    
    
    
    52,414
    
    
    
    (45,852
    )
    
    
    139,422Gross profit
    
    
    
    
    
    
    38,575
    
    
    
    2,897
    
    
    
    19,188
    
    
    
    162
    
    
    
    60,822Operating costs and expenses:Research and development
    
    
    
    
    
    
    1,392
    
    
    
    
    
    
    
    3,322
    
    
    
    
    
    
    
    4,714Selling and marketing
    
    
    
    
    
    
    5,799
    
    
    
    1,829
    
    
    
    4,322
    
    
    
    (218
    )
    
    
    11,732General and administrative
    
    
    863
    
    
    
    9,776
    
    
    
    445
    
    
    
    3,091
    
    
    
    (930
    )
    
    
    13,245Intercompany income (expense)
    
    
    (1,838
    )
    
    
    110
    
    
    
    (218
    )
    
    
    
    
    
    
    1,946
    
    
    
    Total operating costs and expenses
    
    
    (975
    )
    
    
    17,077
    
    
    
    2,056
    
    
    
    10,735
    
    
    
    798
    
    
    
    29,691Operating income
    
    
    975
    
    
    
    21,498
    
    
    
    841
    
    
    
    8,453
    
    
    
    (636
    )
    
    
    31,131Interest expense (income), net
    
    
    1,546
    
    
    
    7,743
    
    
    
    (6
    )
    
    
    1,555
    
    
    
    (1
    )
    
    
    10,837(Loss) income before income tax expense
and equity in income of subsidiaries
    
    
    (571
    )
    
    
    13,755
    
    
    
    847
    
    
    
    6,898
    
    
    
    (635
    )
    
    
    20,294Income tax expense
    
    
    9
    
    
    
    6,169
    
    
    
    25
    
    
    
    79
    
    
    
    
    
    
    
    6,282Equity in income of subsidiaries
    
    
    14,592
    
    
    
    6,889
    
    
    
    
    
    
    
    
    
    
    
    (21,481
    )
    
    
    Net income
    
    $
    14,012
    
    
    
    14,475
    
    
    
    822
    
    
    
    6,819
    
    
    
    (22,116
    )
    
    
    14,012
 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Period from January 23, 2004 to July 2, 2004 (Successor)
(in thousands  unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedParent
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    TotalOPERATING ACTIVITIESNet cash provided by (used in) operating activities
    
    $
    15,685
    
    
    
    (11,019
    )
    
    
    2,917
    
    
    
    3,881
    
    
    
    
    
    
    
    11,464INVESTING ACTIVITIESPurchase of Predecessor net assets, net of cash acquired
    
    
    (113,760
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (113,760
    )Purchase of property, plant and equipment, net
    
    
    
    
    
    
    (1,102
    )
    
    
    (13
    )
    
    
    (107
    )
    
    
    
    
    
    
    (1,222
    )Net cash used in investing activities
    
    
    (113,760
    )
    
    
    (1,102
    )
    
    
    (13
    )
    
    
    (107
    )
    
    
    
    
    
    
    (114,982
    )FINANCING ACTIVITIESRetirement of debt and preferred stock:Senior subordinated notes
    
    
    
    
    
    
    (74,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74,000
    )Senior redeemable preferred stock
    
    
    
    
    
    
    (29,735
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,735
    )Junior preferred stock
    
    
    
    
    
    
    (32,336
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,336
    )Dividends on senior preferred stock
    
    
    
    
    
    
    (19,310
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,310
    )Mortgage financing
    
    
    
    
    
    
    (17,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,500
    )Proceeds from/(payments for) the issuance of debt:
    
    
    
    
    
    
    Senior subordinated notes
    
    
    
    
    
    
    125,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000Senior term loan
    
    
    
    
    
    
    90,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,000Debt issue costs
    
    
    
    
    
    
    (9,648
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,648
    )Proceeds from the repayment of Predecessor
management loans
    
    
    
    
    
    
    1,266
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,266Net proceeds from the issuance of common stock
    
    
    98,075
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,075Repayment of senior term loan
    
    
    
    
    
    
    (225
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (225
    )Net repayment of bank overdraft
    
    
    
    
    
    
    2,150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,150Net cash provided by financing activities
    
    
    98,075
    
    
    
    35,662
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    133,737NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    
    
    
    
    23,541
    
    
    
    2,904
    
    
    
    3,774
    
    
    
    
    
    
    
    30,219Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash and cash equivalents at end of period
    
    $
    
    
    
    
    23,541
    
    
    
    2,904
    
    
    
    3,774
    
    
    
    
    
    
    
    30,219
 25




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
From October 4, 2003 to January 22, 2004 (Predecessor)
(in thousands  unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedParent
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    TotalOPERATING ACTIVITIESNet cash provided by (used in) operating activities
    
    $
    
    
    
    
    7,105
    
    
    
    206
    
    
    
    (145
    )
    
    
    
    
    
    
    7,166INVESTING ACTIVITIESPurchase of property, plant and equipment, net
    
    
    
    
    
    
    (416
    )
    
    
    (2
    )
    
    
    (41
    )
    
    
    
    
    
    
    (459
    )FINANCING ACTIVITIESRetirement of senior subordinated notes
    
    
    
    
    
    
    (26,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,000
    )Net repayment of bank overdraft
    
    
    
    
    
    
    (1,639
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,639
    )Net cash used in financing activities
    
    
    
    
    
    
    (27,639
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,639
    )NET I (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS
    
    
    
    
    
    
    (20,950
    )
    
    
    204
    
    
    
    (186
    )
    
    
    
    
    
    
    (20,932
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    30,561
    
    
    
    1,718
    
    
    
    1,472
    
    
    
    
    
    
    
    33,751Cash and cash equivalents at end of period
    
    $
    
    
    
    
    9,611
    
    
    
    1,922
    
    
    
    1,286
    
    
    
    
    
    
    
    12,819
 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the 40-Week Period Ended July 4, 2003 (Predecessor)
(in thousands  unaudited) Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedParent
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    TotalOPERATING ACTIVITIESNet cash provided by operating activities
    
    $
    2,480
    
    
    
    23,210
    
    
    
    429
    
    
    
    15,995
    
    
    
    (14,436
    )
    
    
    27,678INVESTING ACTIVITIESProceeds from sale of SSPD division
    
    
    
    
    
    
    136
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136Purchase of property, plant and equipment, net
    
    
    
    
    
    
    (1,139
    )
    
    
    (1
    )
    
    
    (185
    )
    
    
    
    
    
    
    (1,325
    )Net cash used in investing activities
    
    
    
    
    
    
    (1,003
    )
    
    
    (1
    )
    
    
    (185
    )
    
    
    
    
    
    
    (1,189
    )FINANCING ACTIVITIESProceeds from issuance of common stock
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110Repayments on capital leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    (45
    )Repayment of mortgage financing
    
    
    (250
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250
    )Payment of debt issue costs
    
    
    (41
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (339
    )Payment of intercompany note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,436
    )
    
    
    14,436
    
    
    
    Net repayment of bank overdraft
    
    
    
    
    
    
    (242
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (242
    )Net cash used in financing activities
    
    
    (181
    )
    
    
    (540
    )
    
    
    
    
    
    
    (14,481
    )
    
    
    14,436
    
    
    
    (766
    )NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    2,299
    
    
    
    21,667
    
    
    
    428
    
    
    
    1,329
    
    
    
    
    
    
    
    25,723Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    1,077
    
    
    
    698
    
    
    
    949
    
    
    
    
    
    
    
    2,724Cash and cash equivalents at end of period
    
    $
    2,299
    
    
    
    22,744
    
    
    
    1,126
    
    
    
    2,278
    
    
    
    
    
    
    
    28,447
 26




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries 
 ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Overview The following discussion and analysis should be read in conjunction with the
Condensed consolidated financial statements and notes thereto included
elsewhere within this report and the Annual Report on Form 10-K of
Communications and Power Industries Holding Corporation (Holding or the
Predecessor); references to the Company refer to the Predecessor prior to
the Merger (defined below) and to the Successor (defined below) post-Merger: The Company is a leading designer, manufacturer and global marketer of vacuum
electron devices (VEDs), satellite communications amplifiers, medical x-ray
generators and other related products for critical defense and commercial
applications. The Companys defense applications include radar, electronic
warfare and communications end markets and its commercial applications include
communications, medical, industrial and scientific end markets. Communications
applications consist of applications for military and commercial satellite
communications uses and broadcast uses. The Company defines and discusses its
recorded orders and sales trends by these end markets in order to more clearly
relate its business to outside investors. Internally, however, the Company is
organized into five operating divisions that are differentiated based on
products operating in two segments. Four of these operating divisions comprise
the Companys vacuum electronic device (VED) segment. The Company also has a
satellite communications equipment segment. Segment data is included in Note
10 of the Notes to Condensed consolidated financial statements. Merger On January 23, 2004, a wholly-owned subsidiary of CPI Holdco, Inc. (CPI
Holdco or the Successor), CPI Merger Sub Corp., a Delaware corporation
(Merger Sub), merged with and into Holding (Merger) pursuant to the terms
of the Agreement and Plan of Merger (the Merger Agreement), dated as of
November 17, 2003, by and among Holding, CPI Holdco, Merger Sub and Green
Equity Investors II, L.P., as the representative of the security holders of
Holding, under which CPI Holdco, Merger Subs parent corporation and a
corporation controlled by affiliates of Cypress, agreed to acquire Holding. In
the Merger, each share of Holdings common stock and stock options outstanding
immediately prior to the Merger, other than a portion of stock options held by
certain members of management (which were converted into options to purchase
shares of CPI Holdco) and other than any shares of common stock owned by
Holding or CPI Holdco, were converted into the right to receive a pro rata
portion of the aggregate merger consideration of $130.3 million. In connection
with the merger, CPI Holdco received an equity contribution of $100.0 million
from affiliates of The Cypress Group, L.L.C. (Cypress) in exchange for
4,251,122 shares of common stock of CPI Holdco. Members of management of
Holding, as a result of rolling over their options to purchase common stock of
Holding, received options to purchase 168,998 shares of common stock of CPI
Holdco. In connection with the Merger, Holding and Communications & Power
Industries, Inc. (CPI) refinanced all of their outstanding indebtedness. As
part of the refinancing, CPI effected a covenant defeasance of its 12% Senior
Subordinated Notes (12% Notes) and elected to redeem in full the remaining
$74.0 million outstanding aggregate principal amount of the 12% Notes pursuant
to the terms of the Indenture governing the 12% Notes. In addition, CPI
terminated its credit facility and Holding paid off all amounts owing under,
and terminated, the loan agreement related to its San Carlos Property. CPI also
redeemed all of the outstanding shares of its 14% Junior Cumulative Preferred
Stock and its Series B 14% Senior Redeemable Exchangeable Cumulative Preferred
Stock. See Note 2 of the Notes to Condensed Consolidated Financial Statements. 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. 27




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CPI HOLDCO, INC.
and subsidiaries 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. Orders recorded during the third quarter of fiscal year 2004 were $69.2
million, a decrease of $1.7 million, or 2.4%, from $70.9 million for the third
quarter of fiscal year 2003. Radar orders were $28.6 million for the third
quarter of fiscal year 2004, a decrease of $1.7 million, or 5.7%, from the
third quarter of fiscal year 2003. This decrease can be attributed to several
orders being received during fiscal year 2003 that will likely not repeat for
several years combined with fluctuations in the timing of order receipts
compared to the third quarter of fiscal year 2003. Current quarter orders
figures in the Companys remaining markets were essentially consistent with
those in the third quarter of fiscal year 2003. Orders recorded in the nine-month period ended July 2, 2004 were $219.9
million, a decrease of $16.2 million from $236.1 million in the comparable
period of fiscal year 2003. The decrease relates to the radar and
communications markets offset by increases in the industrial and scientific
markets. Orders in the radar market for the nine-month period of fiscal year
2004 declined from the nine-month period of fiscal year 2003 by $17.1 million.
During fiscal year 2003, available U.S. defense funding for CPIs types of
products, combined with increased demand for our products by defense service
agencies, resulted in order quantities that were above normal rates, and in
certain cases covered delivery periods longer than traditional orders. Some of
those orders will be shipped in fiscal year 2004 and into fiscal year 2005.
Fiscal year 2004 radar orders reflect more normal levels. Orders in the
communications market for the nine-month period ended July 2, 2004 are down
$9.3 million from the comparable period of fiscal year 2003. A portion of the
decrease is attributable to orders for direct-to-home broadcast, which although
down from fiscal year 2003 continues to be a healthy business for the Company
as direct-to-home broadcast service providers expand their infrastructure. The
remainder of the decrease in communication orders relates to the continued
moderate spending by non-broadcast communication companies. Industrial orders
were $15.0 million in the first nine-months of fiscal year 2004, an increase of
$5.4 million from the first nine-months of fiscal year 2003 due principally to
strong demand for a new version of the Companys power grid tetrode as well as
a general recovery in the semiconductor market from a year ago. Orders in the
Companys scientific market were $9.4 million in the first nine-months of
fiscal year 2004. This represents a $5.4 million, or 138.5%, increase over the
comparable period of the previous fiscal year. A $3.8 million order for high
frequency, high power gyrotrons received in the second quarter for fusion
research was the main reason for the increased performance in this market. This
was an anticipated follow-on order to an ongoing program and production for
these gyrotrons will be completed over the next 36 months. Order backlog consists of firm orders for which goods and services are yet to
be provided. As of July 2, 2004, the Company had an order backlog of $176.6
million, representing approximately eight months of sales, compared to an order
backlog of $181.5 million, representing approximately eight-and-a-half months
of sales, as of July 4, 2003. Order backlog increased to $176.6 million as of
July 2, 2004 from $172.1 million at the end of fiscal year 2003. Although
orders can be and sometimes are modified or terminated, the amount of
modifications and terminations has historically not been material compared to
total contract volume. San Carlos Sale Agreement The Company has entered into an agreement to sell its land and close its
facilities located in San Carlos, California. The purchase price is $23.8
million. Under the agreement, upon the satisfaction of certain conditions,
including the receipt of approval of the buyers proposed environmental
remediation plan with respect to the site from the San Francisco Bay Regional
Water Quality Control Board (RWQCB), the buyer would be required to pay to
the Company a $12.5 million deposit on the purchase price which the Company
would use to defray the costs of moving its EIMAC division from the San Carlos
facility to its Palo Alto facility. The closing of the sale 28




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CPI HOLDCO, INC.
and subsidiaries is subject to a number of conditions, including the receipt of RWQCB approval
and 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., and CPI dated June 9, 1995, as
amended (the Varian Agreement), Varian has agreed to indemnify the Company
for, and retained, various environmental liabilities relating to Varians
Electron Devices Business prior to 1995, with certain exceptions and
limitations (the Varian Environmental Indemnity). Pursuant to 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 and further agreed
to certain financial contributions to be made by Varian to CPI. Critical Accounting Policies Management is required to make judgments, assumptions and estimates in
preparing its financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States. The Companys
significant accounting policies are described in Note 2 of the Notes to
Consolidated Financial Statements in the Predecessors Annual Report on Form
10-K for the fiscal year ended October 3, 2003. The following critical
accounting policies are those policies that management believes affect its more
significant estimates and assumptions used in preparation of its consolidated
financial statements. Revenue Recognition The estimated sales values of performance under certain contracts to commercial
customers and United States Government fixed-price and fixed-price incentive
contracts are recognized under the percentage of completion method of
accounting. When applying the percentage of completion method, the Company
relies on estimates of total expected contract revenue and costs. Recognized
revenues and profit are subject to revisions as the contract progresses towards
completion. Allowance for Doubtful Accounts The Company monitors the creditworthiness of its customers based on a variety
of factors, including the length of time the receivables are past due, the
financial health of the customer, economic conditions and historical
experience. If collectibility is considered uncertain, then the Company will
record a reserve to reduce the receivable to the amount considered collectable.
If circumstances change, then further adjustments could be required. Warranty Reserves The Companys products are generally subject to warranties, and the Company
provides for the estimated future costs of repair, replacement or customer
accommodation at the time of sale as an additional cost of sales. Managements
estimates are based on historical costs for warranty, and are adjusted when
circumstances indicate that future costs are expected to vary from historical
levels. If actual product failure rates or material usage incurred differs from
the Companys estimates, then revisions to the estimated warranty liability
would be required. Inventory Valuation Inventories are stated at the lower of average cost or market (net realizable
value). The carrying value of inventory is reduced for estimated obsolescence
or unmarketability based upon assumptions about future demand, market
conditions, product lifecycles and product pricing. If the Companys
assumptions were to be substantially different than estimated, further
adjustments could be required. While these estimates require management to make
assumptions and judgments, management believes its understanding of the markets
and customers the Company serves, as well as the mature nature of many of the
products the Company manufactures, provides it with the ability to make
reliable estimates. Management also evaluates the carrying value of inventory
for lower of cost or market on 29




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CPI HOLDCO, INC.
and subsidiaries an individual product or contract basis. Analyses are performed based on the
estimated costs at completion and if necessary, a provision is recorded to
properly reflect the inventory value of the products or contracts at the lower
of cost or net realizable value (selling price less estimated cost of
disposal). If estimated costs, based on these analyses, for fixed-price
contracts, which represent virtually all of the Companys contracts, are
significantly higher than originally estimated, provisions are also required,
and in such a case, the Company records a reserve that is charged to costs of
goods sold. Impairment of Long-Lived Assets The Company reviews long-lived assets, excluding intangible assets that are
covered by Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of long-lived assets is measured by comparison
of its carrying amount to future net cash flows expected to be generated from
the operation and sale of long-lived assets. If such assets are considered to
be impaired, the Companys carrying value is reduced to its estimated fair
value with a charge to general and administrative at the time of the reduction.
Adverse changes in the customers and markets served by the Company could result
in future impairments of long-lived assets. Goodwill Impairment The Company has a goodwill balance of $140.4 million as of July 2, 2004.
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired in the Merger. See further information at Note 2 of the
Notes to Condensed Consolidated Financial Statements. The Company performs an
annual goodwill impairment test during the fourth quarter of each fiscal year,
or earlier if an event or circumstance indicates that an impairment loss has
occurred. Goodwill and certain other corporate assets and liabilities are
assigned to the reporting units which are consistent with the Companys
operating divisions. The fair value of the reporting units are then compared to
the carrying value to determine if there is any potential impairment. The
process of evaluating potential impairment is subjective and requires judgments
regarding revenue forecasts, discount rates, and weighted average cost of
capital among other things. Adverse changes in the industries served by the
Company, customer demand or other market conditions could result in future
impairments of goodwill. Merger and Acquisition Accounting The Company accounts for mergers and acquisitions under the purchase method of
accounting. Accordingly, the total costs of such transactions are allocated to
the tangible and intangible assets acquired and liabilities assumed based on
their respective fair values. The determination of fair values involves the use
of significant estimates and assumptions which could require adjustment in the
future. The allocation of the Merger purchase price for inventory, property,
plant and equipment, and certain intangibles was completed during the second
quarter ended April 2, 2004. The independent appraisal of additional
identifiable intangibles including in-process research and development was
completed during the third quarter ended July 2, 2004. Effect of Acquisition 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 purchase price over the
fair value was recorded as goodwill. The revised fair values could
significantly impact 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 $17.4 million. Customer backlog is
being amortized over the 12 month expected product delivery schedule of
the contracts in backlog at the Merger closing date with $11.6 million
and $5.8 million expected to be charged to operating expense in fiscal
years 2004 and 2005, respectively. 30




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CPI HOLDCO, INC.
and subsidiaries  
    
    Inventory valuation was increased by $5.5 million. The inventory
valuation was amortized over the 3 month period of inventory turn-over;
all of which was charged against fiscal year 2004 cost of sales.
    
    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.
    
    Acquired in-process research and development was valued at $2.5
million and charged to operating expense in fiscal year 2004. 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 and had no alternative future use
as of the Merger closing date. For the third quarter ended July 2,
2004, as more fully described in Note 2 of the Notes to Condensed
Consolidated Financial Statements, the final purchase price allocation
reduced acquired in-process research and development by $9.0 million.
For second quarter ended April 2, 2004, the preliminary purchase price
allocation had an $11.5 million charge for acquired in-process research
and development.
    
    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 affect 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. 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 which end on the
Friday nearest September 30. The Successors fiscal year did not change from
that of the Predecessor. Fiscal year 2004 will be comprised of the 52-week
period ending October 1, 2004, and fiscal year 2003 was comprised of the
53-week period ended October 3, 2003. Both the third quarter of fiscal year
2004 and the third quarter of fiscal year 2003 were comprised of 13 weeks. Third Quarter of Fiscal Year 2004 Compared to the Third Quarter of Fiscal Year
2003 Sales. Sales for the third quarter of fiscal year 2004 of $72.3 million were
$1.6 million higher than the prior year level of $70.7 million. Radar and
electronic countermeasure sales of $36.0 million for the third quarter of
fiscal year 2004 were $3.5 million, or 10.6%, higher than the third quarter of
fiscal year 2003 due to increased shipments of VEDs to the Department of
Defense. Industrial sales of $4.5 million for the third quarter of fiscal year
2004 were $1.6 million, or 58.5%, higher than third quarter of fiscal year 2003
due to strong demand for semiconductor products, including a new version of the
Companys power grid tetrode. Communication sales of $18.6 million in the
third quarter of fiscal year 2004 were $3.9 million, or 17.4%, lower primarily
due to the timing of deliveries of direct-to-home broadcast products combined
with continued moderate spending by non-broadcast communication companies.
Sales to the companys remaining markets for the third quarter fiscal year 2004
were consistent with those in the third quarter of fiscal year 2003. Gross Profit. Gross profit of $22.0 million in the third quarter of fiscal
year 2004, was $1.4 million lower than the prior year level of $23.4 million.
The decrease in gross profit was primarily due to the $1.3 million purchase 31




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CPI HOLDCO, INC.
and subsidiaries accounting charge related to the write-up of inventory and the unfavorable mix
of lower margin product shipments; somewhat offset by increased gross profit
due to higher sales. Excluding the $1.3 million purchase accounting charge for
inventory write-up, gross profit as a percentage of sales was 32.1% in the
third quarter of fiscal year 2004 compared to 33.2% in the third quarter of
fiscal year 2003. Research and Development Expenses. Research and development expenses of $1.9
million for the third quarter of fiscal year 2004 were $0.2 million higher than
the third quarter of fiscal year 2003 primarily due to additional development
efforts on products for the radar and medical markets. Selling and Marketing Expenses. Selling and marketing expenses of $3.9 million,
or 5.3% of sales, for the third quarter of fiscal year 2004 were consistent
with the $4.0 million, or 5.6% of sales, for the third quarter of fiscal year
2003. General and Administrative Expenses.General and administrative expenses of
$4.8 million, or 6.7% of sales, for the third quarter of fiscal year 2004 were
$0.3 million higher than the $4.5 million, or 6.4% of sales, for the third
quarter of fiscal year 2003. The increase in general and administrative expense
for the third quarter of fiscal year 2004 can primarily be attributed to
expenses incurred to evaluate companies as acquisition candidates. Amortization of Acquisition Related Intangibles. Amortization of acquisition
related intangibles of $4.8 million for the third quarter of fiscal year 2004
was related to purchase accounting charges of $3.9 million for customer backlog
and $0.9 million for technology amortization. Customer backlog will be fully
amortized in January 2005 while technology will continue to be amortized over
the next 15 to 50 years. Technology amortization expense is expected to be
$0.5 million per quarter for the next five years. Acquired In-Process Research and Development. Acquired in-process research and
development expense of negative $9.0 million for the third quarter of fiscal
year 2004 represents a reduction to the $11.5 million charge for the second
quarter of fiscal year 2004. As more fully described in Note 2 of the Notes to
Condensed Consolidated Financial Statements, the Company reported a preliminary
purchase price allocation in the second quarter of fiscal year 2004 and
finalized the purchase price allocation in the third quarter of fiscal year
2004. The decrease in acquired in-process research and development was due to
the finalization of estimated useful lives for in-process research and
development technology for the final purchase price allocation. EBITDA. EBITDA for the third quarter of fiscal year 2004 was $21.4 million, an
increase of $6.6 million compared to $14.8 million for the third quarter of
fiscal year 2003. The increase in EBITDA resulted primarily from purchase
accounting charges during the third quarter of fiscal year 2004 for acquired
in-process research and development expense of negative $9.0 million that was
partially offset by a $1.3 million charge for inventory write-up. In addition
to the favorable purchase accounting charges of $7.7 million, EBITDA for the
third quarter of fiscal year 2004 was unfavorable in comparison to the third
quarter of fiscal year 2003 due to a fiscal year 2004 expenditure of $0.7
million for expenses incurred in evaluating companies for possible acquisition.
For a reconciliation of EBITDA to Income before taxes, see Note 10 of the
Notes to Condensed Consolidated Financial Statements. Interest Expense. Interest expense of $3.8 million, or 5.3% of sales, for the
third quarter of fiscal year 2004 was essentially unchanged compared to the
$3.6 million, or 5.1% of sales, for the third quarter of fiscal year 2003. The
lower interest rates on outstanding debt offset the expense impact of
maintaining higher debt levels in third quarter of fiscal year 2004 compared to
the third quarter of fiscal year 2003. Income Tax Expense. The Company recorded income tax expense of $0.2 million
for the third quarter of fiscal year 2004 compared to income tax expense of
$1.4 million for the third quarter of fiscal year 2003. The primary reason for
the lower income tax expense in the third quarter of fiscal year 2004 is due to
an adjustment of the second quarter tax provision related to non-deductible
acquired in-process research and development. With the finalization of the
purchase price allocation in the third quarter, acquired in-process research
and development was decreased by $9.0 million and the income tax provision was
adjusted accordingly. 32




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CPI HOLDCO, INC.
and subsidiaries Net Income. The Company recorded net income of $11.5 million for the third
quarter of fiscal year 2004, an increase of $3.2 million compared to net income
of $8.3 million for the third quarter of fiscal year 2003. Higher net income
for the third quarter of fiscal year 2004 is primarily due to purchase
accounting related adjustments related to the Merger, as discussed above. First Nine Months of Fiscal Year 2004 Compared to the First Nine Months of
Fiscal Year 2003 The discussion of results of operations for the nine-month period ending July
2, 2004 refers to the combined results of the Predecessor from October 4, 2003
to January 22, 2004 and the Successor from January 23, 2004 to July 2, 2004.
The first nine months of fiscal year 2004 is comprised of a 39-week period
while the first nine months of fiscal year 2003 is comprised of a 40-week
period. Sales. Sales for the first nine months of fiscal year 2004 of $217.9 million
were $17.7 million, or 8.8%, higher than the same period in fiscal year 2003 of
$200.2 million. Except for the communications market, sales for the first nine
months of fiscal year 2004 increased by at least 10% in all market segments
from the comparable period of fiscal year 2003. The majority of the sales
increase occurred in the Companys radar, industrial and medical markets.
Radar sales of $86.2 million for the first nine months of fiscal year 2004 were
$9.4 million, or 12.2%, higher than the first nine months of fiscal year 2003.
The increase was primarily due to increased shipments of VEDs to the Department
of Defense. Industrial sales of $14.8 million in the first nine months of
fiscal year 2004 were $7.2 million, or 94.8%, higher than the $7.6 million for
the first nine months of fiscal year 2003 due to strong demand for
semiconductor products. Sales in the medical market of $31.7 million increased
$3.5 million, or 12.4%, compared to $28.2 million for the first nine months of
fiscal year 2003 as the demand for x-ray generators and VED products used in
cancer treatment applications continues to be robust. Scientific sales of $7.9
million for the first nine months of fiscal year 2004 were $2.0 million, or
34.6%, higher than the comparable period of fiscal year 2003 primarily due to
increased delivery of products for physics accelerator projects. Sales to the
scientific market, the Companys smallest market, are historically one-time
projects and thus are subject to large fluctuations. Communications sales of
$57.4 million for the first nine months of fiscal year 2004 were $6.9 million,
or 10.8%, lower than the comparable period of fiscal year 2003. The decrease in
communication sales for the first nine months of fiscal year 2004 can be
attributed to the timing of deliveries of direct-to-home broadcast products
combined with continued moderate spending by non-broadcast communication
companies. Gross Profit. Gross profit of $65.3 million for the first nine months of
fiscal year 2004, was $4.5 million higher than the prior year level of $60.8
million. The increase in gross profit was primarily due to higher shipment
volume and a favorable mix of product shipments with higher pricing as well as
manufacturing volume efficiencies; somewhat offset by the $5.5 million purchase
accounting charge related to the write-up of inventory. Excluding the $5.5
million purchase accounting charge for inventory write-up, gross profit as a
percentage of sales was 32.5% for the first nine months of fiscal year 2004,
compared to 30.4% for the first nine months of fiscal year 2003. Research and Development Expenses. Research and development expenses of $5.5
million for the first nine months of fiscal year 2004 were $0.8 million higher
than the first nine months of fiscal year 2003. The increase in research and
development expenses for the first nine months of fiscal year 2004 is primarily
attributable to additional development efforts on products for the radar and
medical markets. Selling and Marketing Expenses. Selling and marketing expenses of $11.3
million, or 5.2% of sales, for the first nine months of fiscal year 2004 were
down slightly from the $11.7 million, or 5.9% of sales, for the first nine
months of fiscal year 2003. The decrease in selling and marketing expenses as a
percentage of sales is primarily due to the higher sales volume for the first
nine months of fiscal year 2004 compared to the first nine months of fiscal
year 2003. General and Administrative Expenses.General and administrative expenses of
$14.4 million, or 6.6% of sales, for the first nine months of fiscal year 2004
were $1.2 million higher than the $13.2 million, or 6.6% of sales, for the
first nine months of fiscal year 2003. The increase in general and
administrative expense for the first nine months of 33




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CPI HOLDCO, INC.
and subsidiaries fiscal year 2004 can primarily be attributed to expenses incurred to evaluate
companies as acquisition candidates and stock compensation expense from stock
options vesting in connection with the Merger. Merger Expenses.Merger expenses of $6.4 million for the first nine months of
fiscal year 2004 were primarily fees for investment bankers, legal expenses,
transaction bonuses, and transaction fees paid pursuant to the Management
Services Agreement with Leonard, Green & Partners, L.P., an affiliate of the
former holder of a majority of the common stock of the Predecessor. Amortization of Acquisition Related Intangibles.Amortization of acquisition
related intangibles of $8.2 million for the first nine months of fiscal year
2004 was related to purchase accounting charges of $7.2 million for customer
backlog and $1.0 million for technology amortization. Customer backlog will be
fully amortized in January 2005 while technology will continue to be amortized
over the next 15 to 50 years. Technology amortization expense is expected to
be $1.9 million per year for the next five years. Acquired In-Process Research and Development.Acquired in-process research and
development expense of $2.5 million for the first nine months of fiscal year
2004, represents the estimated fair value of acquired in-process research and
development projects that had not yet reached technological feasibility and had
no alternative future use as of the Merger closing date. EBITDA. EBITDA for the first nine months of fiscal year 2004 was $29.0
million, a decrease of $7.1 million compared to $36.0 million for the first
nine months of fiscal year 2003. The decrease in EBITDA resulted primarily from
purchase accounting charges of $8.0 million for inventory write-up and acquired
in-process research and development, and merger expenses of $6.4 million. The
effect of these Merger-related items was offset in part by improved gross
margins for the first nine months of fiscal year 2004 compared to the nine
month period of fiscal year 2003 due to higher shipment volume and a favorable
mix of product shipments with higher pricing as well as manufacturing volume
efficiencies. For a reconciliation of EBITDA to Income before taxes, see Note
10 of the Notes to Condensed Consolidated Financial Statements. Interest Expense. Interest expense of $15.7 million, or 7.2% of sales, for the
first nine months of fiscal year 2004 was $4.8 million higher than the $10.8
million, or 5.4% of sales, for the first nine months of fiscal year 2003.
Interest expense for the first nine months of fiscal year 2004 included
expenses of $4.6 million associated with the redemption and termination of
Predecessor debt. Since refinancing outstanding indebtedness at the Merger
closing date, interest expense has remained consistent with prior year levels.
The lower interest rates on outstanding debt offset the expense impact of
maintaining higher debt levels in fiscal year 2004 compared to fiscal year
2003. Income Tax Expense. The Company recorded income tax expense of $1.2 million
for the first nine months of fiscal year 2004 compared to income tax expense of
$6.3 million for the first nine months of fiscal year. The effective income
tax rates were 95% and 31% for the first nine months of fiscal year 2004 and
2003, respectively. The change in income tax expense is primarily due to
non-deductible acquired in-process research and development and other purchase
accounting charges related to the Merger. Net Income. The Company recorded net income of $0.1 million for the first nine
months of fiscal year 2004, a decrease of $13.9 million compared to net income
of $14.0 million for the first nine months of fiscal year 2003. Net income is
lower for the first nine months of fiscal year 2004 primarily because of merger
related expenses and purchase accounting charges, as discussed above. Liquidity and Capital Resources CPI generated net cash from operating activities of $18.6 million for the first
nine months of fiscal year 2004, compared to $27.7 million for the first nine
months of fiscal year 2003. The $9.1 million decrease in net cash from
operating activities for the first nine months of fiscal year 2004 compared to
the first nine months of fiscal year 2003 is primarily due to increases in
deferred taxes associated with the merger valuation of intangible assets, lower 34




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CPI HOLDCO, INC.
and subsidiaries inventory reduction and lower customer contract advance payments. Somewhat
offsetting these decreases is a $4.0 million increase in cash generated from
net earnings for the first nine months of fiscal year 2004 compared to the
first nine months of fiscal year 2003, after adjusting for non-cash purchase
accounting and Successor debt retirement charges. Investing activities used net cash of $115.4 million for the first nine months
of fiscal year 2004, compared to $1.2 million for the first nine months of
fiscal year 2003. Investing activities for the first nine months of fiscal
year 2004 includes $113.8 million of purchase consideration to acquire CPI
Holding. Investing activities to purchase property, plant and equipment are
similar for the first nine months of fiscal year 2004 and 2003. Financing activities generated net cash of $106.1 million for the first nine
months of fiscal year 2004, compared to net cash used of $0.8 million for the
first nine months of fiscal year 2003. Financing activities for the first nine
months of fiscal year 2004 includes $313.1 million of Successor cash proceeds
from the issuance of debt and equity that was used to extinguish $172.9 million
of Predecessor debt. Also during the first nine months of fiscal year 2004,
the Predecessor redeemed $26 million of its Senior Subordinated Notes. Working capital increased by $43.9 million for the first nine months of fiscal
year 2004 principally due to a $15.2 million increase in deferred tax assets, a
$17.5 million decrease in mortgage financing and a $15.4 million decrease in
accrued dividends payable. In connection with the Merger revaluation of assets
and liabilities, the valuation allowance for deferred tax assets was removed,
thus increasing deferred tax assets. At the Merger closing date, the mortgage
was terminated and Senior Preferred Stock and dividends outstanding were
redeemed. At July 2, 2004, CPI had $30.2 million in cash and cash equivalents compared to
$33.8 million at October 3, 2003. Cash balances in excess of operating
requirements are invested daily in federal securities. On July 2, 2004, CPI had $125.0 million of Senior Subordinated Notes, $89.8
million of Term Loans and availability of $35.5 million under the Revolver
credit facility. Details of the debt and Merger financing are discussed below. In connection with the Merger, CPI entered into a $130.0 million credit
agreement (Senior Credit Facility). The Senior Credit Facility consists of a
$40.0 million revolving commitment, with a sub-facility of $15.0 million for
letters of credit and $5.0 million for swingline loans (Revolver), which
expires on January 23, 2010, and a $90.0 million term loan (Term Loan), which
expires on July 23, 2010. The Term Loan requires 1.0% of the loan amount to be
repaid annually in quarterly installments of 0.25% beginning June 30, 2004 and
continuing for five years with the remainder due in equal quarterly
installments thereafter. The Senior Credit Facility 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, 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. The Senior Credit Facility
is guaranteed by CPI Holdco, and all of CPIs domestic subsidiaries and is
collateralized with a security agreement, which includes a security interest in
certain property and fixtures. The Revolver and Term Loan borrowings that will initially bear interest at a
rate equal to LIBOR plus 3.00% per annum, or the Alternate Base Rate (ABR)
plus 2.0% per annum; the ABR is the greater of (a) the Prime Rate and (b) the
Federal Funds Rate plus 0.50%. In addition to customary fronting and
administrative fees, the Company will pay letter of credit participation fees
and a commitment fee on the unused amount of the Revolver. The Senior Credit Facility also contains customary covenants, including
financial covenants. See Note 5 of Notes to Condensed Consolidated Financial
Statements. In addition to the Senior Credit Facility, and in connection with the Merger,
CPI issued an aggregate principal amount of $125.0 million of 8% Notes. CPI is
required to pay interest on the 8% Notes semiannually, beginning on August 1,
2004. The indenture governing the terms of the 8% Notes (8% Indenture)
contains restrictive provisions 35




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CPI HOLDCO, INC.
and subsidiaries which limit, among other things, CPI and certain of its subsidiaries from
incurring certain indebtedness, selling assets or consolidating or merging with
or into other companies, paying dividends or repurchasing or redeeming capital
stock, making certain investments and entering into certain types of
transactions with their affiliates. The 8% Notes are subordinate to all senior
debt (as defined in the 8% Indenture), including indebtedness under the Senior
Credit Facility. CPIs payment obligations under the 8% Notes are jointly and
severally guaranteed by CPI Holdco and all of CPIs domestic subsidiaries. The
8% Notes may be redeemed as described in, and subject to the terms and
conditions set forth in, the 8% Indenture. In addition, the 8% Indenture
requires the Company to make an offer to purchase the 8% Notes in certain
circumstances. The following table summarizes 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 July 2, 2004 (in
thousands): Due in Fiscal YearsRemaining threemonths of fiscal
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2009 andyear 2004
    
    2005
    
    2006
    
    2007
    

2008
    
    Thereafter
    
    TotalDebt obligations
    
    $
    225
    
    
    
    900
    
    
    
    900
    
    
    
    900
    
    
    
    900
    
    
    
    210,950
    
    
    $
    214,775Noncancellable operating leases
    
    
    282
    
    
    
    888
    
    
    
    268
    
    
    
    80
    
    
    
    71
    
    
    
    2,436
    
    
    
    4,025Total cash obligations
    
    $
    507
    
    
    
    1,788
    
    
    
    1,168
    
    
    
    980
    
    
    
    971
    
    
    
    213,386
    
    
    $
    218,800
 The Company entered into forward contracts to purchase Canadian dollars for an
aggregate notional amount of $44.5 million; the contracts expire on March 10,
2006. As of July 2, 2004, the outstanding commitment on forward contracts was
$35.8 million. The Companys foreign exchange forward contracts are designated
as a cash flow hedge and are considered highly effective, as defined by FASB
Statement No. 133. At July 2, 2004, the fair value of the foreign currency
forward was a gain of approximately $0.1 million, net of related tax benefit.
The unrealized gains from these forwards are included in other comprehensive
income and are shown as a component of stockholders equity. Generally, there can be no assurance that the combination of cash generated by
operations, borrowing availability from the Senior Credit Facility and
additional financing will be sufficient to meet the Companys cash
requirements. If the Company is unable to satisfy such cash requirements from
these sources, the Company may adopt one or more alternatives, such as reducing
or delaying capital expenditures, reducing discretionary costs, and attempting
to negotiate an increase to the Companys borrowing capacity under its Senior
Credit Facility, although there can be no assurances that such alternatives
will be available on acceptable terms, if at all. Recent Accounting Pronouncements In March 2004, the FASB issued EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments.
EITF 03-1 includes new guidance for evaluating and recording impairment losses
on debt and equity investments, as well as new disclosure requirements for
investments that are deemed to be temporarily impaired. The accounting guidance
of EITF 03-1 is effective for years beginning after June 15, 2004, while the
disclosure requirements are effective for annual periods ending after June 15,
2004. Although the Company will continue to evaluate the application of EITF
03-1, management does not currently believe adoption will have a material
impact on its results of operations or financial position. In December 2003, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition, which supersedes SAB
101, Revenue Recognition in Financial Statements. SAB 104 clarifies existing
guidance regarding revenue contracts that contain multiple deliverables to make
it consistent with Emerging Issues Task Force No. 00-21. The adoption of SAB
104 did not have a material impact on the Companys results of operations or
financial position. 36




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, which
addresses consolidation by business enterprises of variable interest entities
which have one or both of the following characteristics: (1) The equity
investment at risk is not sufficient to permit the entity to finance its
activities without support from other parties and (2) the equity investors lack
one or more of the defined essential characteristics of a controlling financial
interest. This Interpretation requires existing unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among the participating parties.
This Interpretation applies immediately to variable interest entities created
after January 31, 2003 and to variable interest entities in which an enterprise
obtains an interest after that date. On October 9, 2003, FASB Staff Position
FIN 46-6, Effective Date of FASB Interpretation No. 46, Consolidation of
Variable Interest Entities was issued. This delayed the effective date of
this Interpretation for variable interest entities created before February 1,
2003 until January 3, 2004. The Company has evaluated the impact of the
provisions of Interpretation No. 46 and believes it will not have a material
impact on the Companys consolidated financial statements. 
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Companys market risk disclosures set forth in the Predecessors Annual
Report on Form 10-K for the fiscal year ended October 3, 2003, have not changed
materially. 
 ITEM 4: CONTROLS AND PROCEDURES Management, including the Companys principal executive officer and principal
financial officer, has evaluated, as of the end of the period covered by this
report, the effectiveness of the design and operation of the Companys
disclosure controls and procedures with respect to the information generated
for use in this report. Based upon, and as of the date of that evaluation, the
principal executive officer and principal financial officer concluded that the
disclosure controls and procedures were effective to provide reasonable
assurances that information required to be disclosed in the reports filed or
submitted under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms. There have been no changes in the Companys internal control over financial
reporting that occurred during the Companys most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. 37




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##### Table of Contents



CPI HOLDCO, INC.
and subsidiaries 
 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.  (a)
    
    The following exhibits are being filed as part of this report: ExhibitNo.
    
    Description10.1
    
    Agreement of Purchase and Sale (San Carlos Property) between CPI Holdco,
Inc., then known as CPI Holding Corporation, and Palo Alto Medical
Foundation, dated February 7, 2003; Seventh Amendment, dated November 12,
2003: and Ninth Amendment, dated June 16, 200410.2
    
    Modification Agreement to Stock Sale Agreement between CPI and Varian;
dated June 18, 200410.3
    
    Agreement Re Environmental Matters between 301 Holding LLC, CPI, Varian
Medical Systems, Inc. and Palo Alto Medical Foundation, dated June 18,
200431
    
    Rule 13a-14 (a) /15d-14 (a) Certifications32
    
    Section 1350 Certifications(b)
    
    Reports on Form 8-K
 None. 38




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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, INCBy:
    /s/ O. Joe CaldarelliO. Joe CaldarelliAugust 13, 2004
    
    Chief Executive Officer By:
    /s/ Joel LittmanJoel LittmanAugust 13, 2004
    
    Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)




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##### Table of Contents



EXHIBIT INDEX ExhibitNo.
    
    Description10.1
    
    Agreement of Purchase and Sale (San Carlos Property) between CPI Holdco,
Inc., then known as CPI Holding Corporation, and Palo Alto Medical
Foundation, dated February 7, 2003; Seventh Amendment, dated November 12,
2003: and Ninth Amendment, dated June 16, 200410.2
    
    Modification Agreement to Stock Sale Agreement between CPI and Varian;
dated June 18, 200410.3
    
    Agreement Re Environmental Matters between 301 Holding LLC, CPI, Varian
Medical Systems, Inc. and Palo Alto Medical Foundation, dated June 18,
200431
    
    Rule 13a-14 (a) /15d-14 (a) Certifications32
    
    Section 1350 Certifications
 None.