UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

     (Mark One)

or

Commission file number: 333-11386-04

Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes o No x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding for each of the Registrant’s classes of Common Stock, as of the latest practicable date: 4,275,566 shares of Common Stock, $.01 par value, at May 7, 2004.

CPI HOLDCO, INC.
and subsidiaries

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CPI HOLDCO, INC.
and subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

See accompanying notes to the unaudited consolidated condensed financial statements.

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CPI HOLDCO, INC.
and subsidiaries

CONSOLIDATED CONDENSED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

See accompanying notes to the unaudited consolidated condensed financial statements.

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CPI HOLDCO, INC.
and subsidiaries

CONSOLIDATED CONDENSED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(in thousands - unaudited)

See accompanying notes to the unaudited consolidated condensed financial statements.

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CPI HOLDCO, INC.
and subsidiaries

CONSOLIDATED CONDENSED
STATEMENTS OF CASH FLOWS
(in thousands - unaudited)

See accompanying notes to the unaudited consolidated condensed financial statements.

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CPI HOLDCO, INC.
and subsidiaries

NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
(unaudited)

1. Basis of Presentation

For periods prior to January 22, 2004, the accompanying consolidated condensed financial statements represent the consolidated results and financial position of Communications & Power Industries Holding Corporation (“Holding” or the “Predecessor”). On January 23, 2004, the Predecessor merged with CPI Merger Sub Corp. (“Merger Sub”), a wholly-owned subsidiary of CPI Holdco, Inc. (“CPI Holdco” or the “Successor”), a Delaware corporation formerly known as CPI Acquisition Corp., controlled by affiliates of The Cypress Group L.L.C. (“Cypress”) as more fully described in Note 2 (the “Merger”). As a result of the Merger, the Predecessor became a wholly owned subsidiary of CPI Holdco. The financial statements for periods subsequent to January 22, 2004 represent the consolidated condensed financial statements of CPI Holdco after giving effect to the Merger. References to the “Company” refer to the Predecessor prior to the Merger and the Successor post-Merger.

CPI Holdco’s fiscal years are the 52- or 53-week periods which end on the Friday nearest September 30. The Successor’s fiscal year did not change from that of the Predecessor. Fiscal year 2004 will be comprised of the 52-week period ending October 1, 2004, and fiscal year 2003 was comprised of the 53-week period ended October 3, 2003. Both the second quarter of fiscal year 2004 and the second quarter of fiscal year 2003 were comprised of 13 weeks.

Management believes that these unaudited interim condensed financial statements contain all adjustments, all of which are of a normal recurring nature, necessary to present fairly the financial position of the Company and its results of operations and cash flows for the interim periods presented. The results for the interim periods reported are not necessarily indicative of the results for the complete fiscal year 2004. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted and, accordingly, these financial statements should be read in conjunction with the financial statements and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended October 3, 2003.

There is currently no public market for the Company’s common stock. The Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, pursuant to Section 15(d) thereof, because it, along with Communications & Power Industries, Inc. (“CPI”) and certain of its subsidiaries, filed a registration statement on Form S-4 to register CPI’s 8% Senior Subordinated Notes due 2012 (“8% Notes”). The registration statement became effective April 20, 2004 pursuant to the Securities Act of 1933, as amended.

As allowed by Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” the Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under this method, compensation expense is recorded only if the current market price of the underlying stock exceeded the exercise price at the measurement date. During fiscal year 2003, the Company issued stock options to employees which were subsequently determined to have been issued below the fair value of the stock on the date of grant. The compensation cost associated with the 2003 stock options was amortized as a charge against income under the caption “General and administrative” in the Consolidated Condensed Statement of Operations on a straight-line basis over the four year vesting period until they became fully vested at the time of the merger.

If compensation cost for the Company’s stock-based compensation plan had been determined consistent

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CPI HOLDCO, INC.
and subsidiaries

with SFAS No. 123, the Company’s net income would have changed to the pro forma amounts indicated below:

2. Mergers

Merger

On January 23, 2004, CPI Holdco’s wholly-owned subsidiary, Merger Sub, merged with and into Holding pursuant to the terms of the Agreement and Plan of Merger (the “Merger Agreement”), dated as of November 17, 2003, by and among Holding, CPI Holdco, Merger Sub and Green Equity Investors II, L.P., as the representative of the security holders of Holding, under which CPI Holdco, Merger Sub’s parent corporation and a corporation controlled by affiliates of Cypress, agreed to acquire Holding. In the Merger, each share of Holding’s common stock and stock options outstanding immediately prior to the Merger, other than a portion of stock options held by certain members of management (which were converted into options to purchase shares of CPI Holdco) and other than any shares of common stock owned by Holding or CPI Holdco, were converted into the right to receive a

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CPI HOLDCO, INC.
and subsidiaries

pro rata portion of the aggregate merger consideration of $130.3 million. In connection with the Merger, CPI Holdco received an equity contribution of $100.0 million before expenses from affiliates of Cypress in exchange for 4,251,122 shares of common stock of CPI Holdco. Members of management of Holding, as a result of rolling over their options to purchase common stock of Holding, received stock options to purchase 168,998 shares of common stock of CPI Holdco. In connection with the Merger, Holding and CPI refinanced all of their outstanding indebtedness. As part of the refinancing, CPI effected a covenant defeasance of its 12% Senior Subordinated Notes (“12% Notes”) and elected to redeem in full the remaining $74.0 million outstanding aggregate principal amount of the 12% Notes pursuant to the terms of the Indenture governing the 12% Notes (the “12% Indenture”). In addition, CPI terminated its credit facility, and Holding paid off all amounts owing under, and terminated, the loan agreement related to its San Carlos Property. CPI also redeemed all of the outstanding shares of its 14% Junior Cumulative Preferred Stock and its Series B 14% Senior Redeemable Exchangeable Cumulative Preferred Stock.

The transaction described above is being accounted for using the purchase method of accounting as required by the Financial Accounting Standards Board (“FASB”) Statement No. 141, “Business Combinations.” Accordingly, the assets and liabilities of Holding will be adjusted to their fair values and the excess of the purchase price over the fair value of the assets acquired will be recorded as goodwill. The allocation of the purchase price to specific assets and liabilities is based, in part, upon independent appraisals and internal estimates of cash flow and recoverability. The allocation of purchase price has been completed for inventory, property, plant and equipment, and certain intangibles, such as backlog, in-process research and development and land leases. An independent appraisal of additional identifiable intangibles is in process and is expected to be completed in the quarter ended July 2, 2004. It is probable that additional adjustments to this allocation will be made in future periods, which could adversely affect the Company’s results of operations. Based on the preliminary purchase price allocation, the following table summarizes the fair values of the assets acquired and liabilities assumed at January 23, 2004:

The acquired in-process research and development of $11.5 million represents the estimated fair value of acquired in-process research and development projects that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was written off at the Merger date. The value assigned to in-process technology relates to ten projects involving development of VEDs for communications, scientific and military applications and development of power supplies, x-ray generators and transmitters for industrial, medical and military applications. See Note 12 for description of identifiable intangible assets acquired.

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CPI HOLDCO, INC.
and subsidiaries

The following unaudited pro forma summary presents information as if the Merger had taken place at the beginning of each period presented. The pro forma amounts include certain adjustments, including depreciation based on the allocated purchase price of property and equipment, amortization of finite lived intangible assets acquired, interest expense and taxes. One-time charges for the inventory write-up, merger expenses, acquired in-process research and development and backlog amortization are excluded from the adjustments to the pro forma amounts.

Intercompany Merger

On March 12, 2004, Holding was merged with and into its wholly-owned subsidiary, CPI, with CPI as the surviving corporation (the “Intercompany Merger”). As a result of the Intercompany Merger, the corporate structure of the Company and its subsidiaries consists of one parent holding corporation, CPI Holdco, and all of the obligations of Holding existing prior to the Intercompany Merger became obligations of CPI.

3. Inventories

Inventories are stated at the lower of average cost or market (net realizable value). The main components of inventories are as follows:

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:

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CPI HOLDCO, INC.
and subsidiaries

5. Senior Credit Facility

In connection with the Merger, CPI entered into a $130.0 million credit agreement (“Senior Credit Facility”). This Senior Credit Facility consists of a $40.0 million revolving commitment, with a sub-facility of $15.0 million for letters of credit and $5.0 million for swingline loans (“Revolver”), which expires on January 23, 2010, and a $90.0 million term loan (“Term Loan”), which expires on July 23, 2010. The Term Loan requires 1.0% of the loan amount to be repaid annually in quarterly installments of 0.25% beginning June 30, 2004 and continuing for five years with the remainder due in equal quarterly installments thereafter. The Senior Credit Facility is guaranteed by CPI Holdco and all of CPI’s domestic subsidiaries and collateralized with a security agreement, which includes a security interest in certain property and fixtures.

The Revolver and Term Loan borrowings will initially bear interest at a rate equal to LIBOR plus 3.00% per annum (the 3.00% being referred to as the “Applicable LIBOR Margin”), or the Alternate Base Rate (“ABR”) plus 2.0% per annum; the ABR is the greater of (a) the Prime Rate and (b) the Federal Funds Rate plus 0.50%. In addition to customary fronting and administrative fees under the Senior Credit Facility, CPI will pay Letter of Credit Participation fees equal to the Applicable LIBOR Margin per annum on the average daily amount of letter of credit exposure, and a commitment fee of 0.50% per annum on the average daily unused amount of revolving commitment.

The Senior Credit Facility contains a number of covenants that, among other things, restrict the ability of CPI Holdco, CPI and certain of its subsidiaries to sell assets; engage in mergers and acquisitions; pay dividends and distributions or repurchase their capital stock; incur additional indebtedness or issue equity interests; make investments and loans; create liens or further negative pledges on assets; engage in certain transactions with affiliates; enter into sale and leaseback transactions; change their business or ownership; amend agreements or make prepayments relating to subordinated indebtedness; amend

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CPI HOLDCO, INC.
and subsidiaries

or waive provisions of charter documents, agreements with respect to capital stock or any other document related to the Merger Agreement or related transaction documents in a manner that is materially adverse to the lenders; and change their fiscal year. These covenants are subject to certain exceptions.

In addition, the Senior Credit Facility requires CPI and its subsidiaries to maintain the following financial covenants: a minimum interest coverage ratio; a maximum total leverage ratio; a minimum fixed charge coverage ratio; and a maximum capital expenditures limitation.

6. 8% Senior Subordinated Notes

In connection with the Merger, CPI issued an aggregate principal amount of $125.0 million of 8% Notes which will mature on February 1, 2012. CPI is required to pay interest on the 8% Notes semiannually, beginning on August 1, 2004. The indenture governing the terms of the 8% Notes (the “8% Indenture”) contains restrictive provisions which, among other things, limit CPI and certain of its subsidiaries from incurring certain indebtedness, selling assets or consolidating or merging with or into other companies, paying dividends or repurchasing or redeeming capital stock, making certain investments and entering into certain types of transactions with their affiliates. The payment of principal, premium and interest on, and other obligations evidenced by the 8% Notes is subordinated in right of payment, as set forth in the 8% Indenture, to the prior payment in full of all senior debt (as defined in the 8% Indenture), including indebtedness under the Senior Credit Facility, whether outstanding on the date of the 8% Indenture or thereafter incurred. CPI’s payment obligations under the 8% Notes are jointly and severally guaranteed by CPI Holdco and all of CPI’s domestic subsidiaries. The 8% Notes may be redeemed as described in, and subject to the terms and conditions set forth in, the 8% Indenture. In addition, the 8% Indenture requires the Company to make an offer to purchase the 8% Notes in certain circumstances.

7. Financial Instruments

The Company enters into foreign currency forward and option contracts with financial institutions primarily to protect financial performance against the effects of foreign currency fluctuations from certain firmly committed transactions and probable but not firmly committed transactions. The Company may also enter into foreign currency forward and option contracts to offset the foreign exchange gains and losses generated by the re-measurement of certain recorded assets and liabilities denominated in non-functional currencies of its foreign subsidiaries.

The Company entered into foreign currency forward contracts on March 2, 2004 for an aggregate notional amount of $25.1 million, expiring on February 25, 2005 to protect against foreign exchange risks associated with probable but not firmly committed transactions. The Company’s foreign exchange forward contracts are designated as a cash flow hedge and are considered highly effective, as defined by FASB Statement No. 133. At April 2, 2004, the fair value of the foreign currency forward was a gain of approximately $0.4 million, net of related tax expense. The unrealized gains from these forwards are included in other comprehensive income and are shown as a component of stockholder’s equity.

8. Change in Accounting Estimate

As a result of an appraisal performed by an independent third party in connection with the Merger purchase price allocation, the Company revised the useful lives of its property, plant and equipment to reflect the current economic useful life of its assets during the second quarter of fiscal year 2004. The

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CPI HOLDCO, INC.
and subsidiaries

change resulted in a decrease in depreciation expense for the period from January 23, 2004 to April 2, 2004 of approximately $0.4 million. The following table summarizes the historical and revised useful lives for the main components of property, plant and equipment:

9. Supplemental Cash Flow Information

10. Segments and Related Information

The Company has two reportable segments: vacuum electronic devices (“VEDs”) and satcom equipment. Management evaluates performance and allocates resources based on earnings before provision for income taxes, interest expense, depreciation and amortization (“EBITDA”).

Summarized financial information concerning the Company’s reportable segments is shown in the following table. Intersegment product transfers are recorded at cost. Included in the “Other” category of EBITDA are acquired in-process research and development, merger expenses and certain unallocated corporate-level operating expenses.

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CPI HOLDCO, INC.
and subsidiaries

EBITDA represents earnings before provision for income taxes, interest expense, depreciation and amortization. Other companies may define EBITDA differently and, as a result, our measure of EBITDA may not be directly comparable to EBITDA of other companies. A reconciliation of EBITDA from reportable segments to (loss) income before taxes is as follows:

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CPI HOLDCO, INC.
and subsidiaries

Sales by geographic area to unaffiliated customers (based on the location of customer) are as follows:

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CPI HOLDCO, INC.
and subsidiaries

The Company had one customer, the US Government, that accounted for 10% or more of consolidated sales. Sales to this customer were $13.8 million, $2.0 million, and $14.2 million, of the Company’s consolidated sales for the period January 23, 2004 to April 2, 2004, the period January 3, 2004 to January 22, 2004 and the 13-week period ended April 4, 2003, respectively. Sales to this customer were $13.8 million, $17.0 million, and $25.7 million, of the Company’s consolidated sales for the period January 23, 2004 to April 2, 2004, October 4, 2003 to January 22, 2004 and the 27-week period ended April 4, 2003, respectively. A substantial majority of these sales were VED segment products, but this customer also purchased satcom equipment products.

11. Recent Accounting Pronouncements

In December 2003, the Securities and Exchange Commission released Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, which supersedes SAB 101, Revenue Recognition in Financial Statements. SAB 104 clarifies existing guidance regarding revenue contracts that contain multiple deliverables to make it consistent with Emerging Issues Task Force No. 00-21. The adoption of SAB 104 did not have a material impact on the Company’s results of operations or financial position.

In January 2003, the Financial Accounting Standards Board (the “FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities”, which addresses consolidation by business enterprises of variable interest entities which have one or both of the following characteristics: (1) The equity investment at risk is not sufficient to permit the entity to finance its activities without support from other parties and (2) the equity investors lack one or more of the defined essential characteristics of a controlling financial interest. This Interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the participating parties. This Interpretation applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. On October 9, 2003, FASB Staff Position FIN 46-6, “Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities” was issued. This delayed the effective date of this Interpretation for variable interest entities created before February 1, 2003 until January 3, 2004. The Company has evaluated the impact of the provisions of Interpretation No. 46 and believes it will not have a material impact on the Company’s consolidated financial statements.

12. Goodwill and Other Intangible Assets

As more fully described in Note 2, an independent appraisal is in process to determine the value of the Merger purchase price to assign to additional identifiable intangible assets. Any increase in value of intangible assets will result in a decrease in the value assigned to goodwill, and may result in an increase in intangible amortization expense.

Goodwill

The following table summarizes goodwill by reportable segment:

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CPI HOLDCO, INC.
and subsidiaries

Intangible Assets

The carrying amount of intangible assets is as follows:

Amortization of intangible assets for the period January 23, 2004 to April 2, 2004, the period January 3, 2004 to January 22, 2004 and the 13-week period ended April 4, 2003 was approximately $3.5 million, $0 and $0.2 million, respectively. The amounts allocated to identifiable intangible assets are preliminary and may change based on the results of the independent appraisal of additional identifiable intangible assets.

13. Redemption of 12% Senior Subordinated Notes of CPI

On January 5, 2004, CPI redeemed $26.0 million in principal amount of the 12% Notes, pursuant to and in accordance with the terms of the 12% Indenture. The redemption occurred at a price equal to 101.5% of the principal amount of such notes plus accrued and unpaid interest to January 5, 2004. In connection with the redemption, CPI and Holding entered into an amendment to CPI’s secured credit facility that, among other things, permitted CPI to redeem up to an aggregate maximum amount of $30.0 million of the 12% Notes in any fiscal year. At the closing of the Merger described in Note 2 above, CPI issued a notice of redemption for the remaining $74 million outstanding 12% Notes, and the 12% Notes were subsequently redeemed on February 22, 2004.

14. Related Party Transactions

On January 23, 2004, the Company paid Cypress a fee of $2.5 million for services provided in connection with the Merger. The fee has been offset against the investment proceeds from Cypress’ affiliates in the common stock of CPI Holdco.

On January 23, 2004, the Company paid Chris Toffales, a director of CPI and CPI Holdco, a fee of $350,000 for services provided in connection with the Merger. Prior to his January 23, 2004 appointment as a board director of CPI and CPI Holdco, Mr. Toffales was a consultant to Cypress.

In March 2004, CPI Holdco issued 24,444 shares of common stock to two members of the Board of Directors of CPI Holdco for aggregate consideration of $575,000. Such securities were sold at fair value as determined by the Board of Directors.

15. Income Taxes

In connection with the Merger, the Company recorded an increase in net deferred income tax liabilities of $4.8 million. Except for the portion of goodwill for which amortization is not deductible for tax purposes, and certain other items, the Company recorded deferred income tax liabilities of $19.2 million for the differences between the assigned values and the tax bases of assets and liabilities acquired. A previously established deferred tax asset valuation allowance of $13.3 million was also adjusted as a reduction to the amount of goodwill acquired.

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CPI HOLDCO, INC.
and subsidiaries

Because of the change in ownership provisions of the Internal Revenue Code, a portion of the Company’s net operating loss and tax credit carryforwards may be subject to annual limitation. The annual limitation may result in the expiration of net operating loss and tax credit carryforwards before utilization. The Company has not yet determined if a Section 382 change of ownership has occurred, but the Company does not believe that net operating losses and tax credit carryforwards will be subject to such annual limitation.

16. Supplemental Guarantors Consolidating Condensed Financial Information

On January 23, 2004, CPI issued $125.0 million of 8% Notes as part of the Merger discussed in Note 2.

The consolidating condensed financial statements are presented below and should be read in connection with the Consolidated Financial Statements of CPI Holdco. Separate financial statements of the Guarantors are not presented because (i) the Guarantors are wholly-owned and have fully and unconditionally guaranteed the 8.0% Notes on a joint and several basis, and (ii) the Company’s management has determined that such separate financial statements are not material to investors.

The following unaudited consolidating condensed financial information presents: the consolidating condensed balance sheets as of April 2, 2004 and October 3, 2003, and the unaudited consolidating condensed statements of operations and statements of cash flows for the period January 23, 2004 to April 2, 2004, the period January 3, 2004 to January 22, 2004, the 13-week period ended April 4, 2003, the period October 4, 2003 to January 22, 2004 and the 27-week period ended April 4, 2003 of (a) the parent; (b) the issuer, CPI; (c) the guarantor subsidiaries; (d) the non-guarantor subsidiaries; (e) the elimination entries necessary to consolidate parent with the guarantor subsidiaries and the non-guarantor subsidiaries; and (f) the consolidated total.

For periods ending prior to January 23, 2004, the accompanying consolidated condensed financial statements represent the consolidated results and financial position of the Predecessor. The Predecessor “parent” is Holding while the Successor “parent” is CPI Holdco.

Investments in subsidiaries are accounted for on the equity method. The principal elimination entries eliminate investments in subsidiaries, intercompany balances, intercompany transactions and intercompany sales.

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CPI HOLDCO, INC.
and subsidiaries

CONSOLIDATING CONDENSED BALANCE SHEET
As of April 2, 2004 (Successor)
(Unaudited)

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CPI HOLDCO, INC.
and subsidiaries

CONSOLIDATING CONDENSED BALANCE SHEET
As of October 3, 2003 (Predecessor)
(Unaudited)