UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

For the fiscal year ended October 1, 2004
OR

Commission file number: 333-11386-04

CPI HOLDCO, INC.

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 if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)

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

No voting stock of CPI Holdco, Inc. is held by non-affiliates of CPI Holdco, Inc.

Indicate the number of shares outstanding for each of the Registrant’s classes of Common Stock, as of the latest practicable date: CPI Holdco, Inc.: 4,275,566 shares of Common Stock, $.01 par value, at December 8, 2004.

DOCUMENTS INCORPORATED BY REFERENCE:
(None)

CPI HOLDCO, INC.
TABLE OF CONTENTS

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Cautionary Statements Regarding Forward-Looking Statements

This document contains forward-looking statements that relate to future events or the future financial performance of the Company (as defined below). 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.

The Company refers to CPI Holdco, Inc. and subsidiaries on or subsequent to January 23, 2004 and Communications & Power Industries Holding Corporation and subsidiaries prior to January 23, 2004.

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.

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PART I

Item 1: Business

General

On January 23, 2004, CPI Merger Sub Corp. (“Merger Sub”), a Delaware corporation and wholly-owned subsidiary of CPI Holdco, Inc. (“CPI Holdco” or the “Successor”), merged (the “Merger”) with and into Communications & Power Industries Holding Corporation (“Holding” or the “Predecessor”) 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, a corporation controlled by affiliates of The Cypress Group, L.L.C. (“Cypress”), agreed to acquire Holding.

As used herein, the “Company”, “we”, “us” and “our” refer to the Predecessor prior to the Merger and to the Successor after the Merger, in each case, including its wholly-owned subsidiary, Communications & Power Industries, Inc. (“CPI”).

On March 12, 2004, Holding was merged with and into CPI, with CPI as the surviving corporation (the “Intercompany Merger”). As a result of the Intercompany Merger, CPI now has only one parent holding corporation, CPI Holdco, and all of the obligations of Holding existing prior to the Intercompany Merger became obligations of CPI.

Prior to August 11, 1995, the Company’s operations were part of the Electron Devices Business of Varian Associates, Inc., which is the predecessor of Varian Medical Systems, Inc. (“Varian”).

On October 8, 2004, the Company purchased all of the outstanding stock of Econco Broadcast Service, Inc. (“Econco”) of Woodland, California for approximately $18.0 million in cash, plus an amount to be determined to reimburse the sellers for certain tax costs associated with a tax election to treat the transaction as an asset sale, plus customary adjustments for working capital. Econco is a provider of rebuilding service for vacuum electron devices (“VED’s”), allowing broadcasters and other users of these critical products to extend the life of their devices at a cost that is lower than buying a new VED.

The Company is a leading designer, manufacturer and global marketer of VED’s, 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 describe its business to outside investors. Internally, however, the Company is organized into six operating divisions that are differentiated based on products operating in two segments. Five of these operating divisions comprise the Company’s vacuum electron device (“VED”) segment. The Company also has a satellite communications equipment (“satcom equipment”) segment.

VED’s are devices that use high energy electrons, in a vacuum, to generate and amplify microwave signals. We offer over 6,000 products, which generally have selling prices ranging from $2,000 to $50,000, with certain limited products priced up to $1,000,000. Our products include microwave and power grid VED’s, and non-VED products such as satellite communications amplifiers, medical x-ray generators, modulators and various other electronic power supply and control equipment and devices. We sell our products directly to procurement groups within the U.S. Department of Defense, foreign military services and commercial customers as well as to original equipment manufacturers and systems integrators for ultimate sales to these customers. We currently operate five manufacturing facilities in North America and sell and service our products and customers globally through our internal sales and marketing force of over 50 professionals and over 35 external sales organizations.

Our worldwide government applications include defense electronics markets in radar, electronic warfare and communications. We believe that our defense business benefits from our broad, market leading presence, the increase in defense spending generally and the expanded emphasis by the U.S. Government on addressing terrorism and homeland security. In addition to our strong presence in defense applications, we have successfully applied our key technology to commercial end markets, including communications, medical, industrial and scientific applications, which we believe enables us to leverage our 55 years of design experience and provides a diversified base of sales. In the communications market, we sell both VED and non-VED microwave amplifiers for satellite communication uplinks for broadcast, video, voice and data transmission. In the medical market, we supply VED’s used in radiation oncology systems primarily to Varian, with whom we have a long standing, sole provider relationship. We also supply x-ray generators, subsystems, software and user interfaces used in diagnostic imaging systems, a market where we continue to experience growth.

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Markets

The Company operates in six different markets:

•

Radar Market - The radar market utilizes microwave and power grid vacuum electron devices, amplifiers, receiver protectors as well as equipment for air, ground and shipboard radar systems. The Company’s vacuum electron devices have been an integral component of radar systems for over five decades. Sales in the radar market were $112.1 million in fiscal year 2004, compared to $102.6 million in fiscal year 2003 and $93.2 million in fiscal year 2002.

•

Electronic Countermeasures Market - The electronic countermeasures market utilizes microwave vacuum electron devices for systems that provide protection for ships, aircraft and high-value land targets against radar-guided munitions. Sales in the electronic countermeasures market were $23.8 million in fiscal year 2004, compared to $22.5 million in fiscal year 2003 and $21.7 million in fiscal year 2002.

•

Medical Market - The Company participates in the diagnostic and treatment sectors of the medical market. In the diagnostic market, the Company provides x-ray generators, including state-of-the-art, high-efficiency, lightweight power supplies and modern digital consoles for diagnostic equipment. In the treatment market, the Company provides microwave generators (klystrons) for high-end cancer therapy machines. Sales in this market were $41.6 million in fiscal year 2004, compared to $38.2 million in fiscal year 2003 and $29.3 million in fiscal year 2002.

•

Communications Market - The communications market is comprised of applications for satellite communications (“satcom”), wireless point-to-point and point-to-multipoint radio and broadcast sectors. In this market, the Company’s products generate, amplify and transmit signals and data within an overall communication system. Sales in the communications market were $74.8 million in fiscal year 2004 compared to $82.5 million in fiscal year 2003 and $84.8 million in fiscal year 2002.

•

Industrial Market - The industrial market includes applications for a wide range of systems used for materials processing, instrumentation and voltage generation. Sales in this market were $20.2 million in fiscal year 2004, compared to $11.3 million in fiscal year 2003, and $15.5 million in fiscal year 2002.

•

Scientific Market - The scientific market consists primarily of equipment utilized in reactor fusion programs and accelerators for high-energy particle physics, referred to as “Big Science”. Sales in the scientific market were $9.7 million in fiscal year 2004, compared to $8.3 million in fiscal year 2003 and $6.7 million in fiscal year 2002.

The Company’s products have applications among commercial and government customers. The commercial sector represents all sales for which the U.S. Government is not the end-user. The end-user markets identified above are not categorized based upon whether they consist entirely of sales into commercial or government sectors. Therefore, sales in any one of the Company’s markets may consist of sales to commercial customers, the U.S. Government, or both. The commercial sector contributed approximately $178.6 million, or 63.3%, of the Company’s total sales in fiscal year 2004, compared to $174.9 million, or 65.9%, of the Company’s total sales in fiscal year 2003, and $187.0 million, or 74.4%, of the Company’s total sales in fiscal year 2002. U.S. Government sales, both direct and through original equipment manufacturers (“OEMs”), contributed approximately $103.6 million, or 36.7%, of the Company’s total sales in fiscal year 2004 compared to $90.5 million, or 34.1%, of the Company’s total sales in fiscal year 2003 and $64.2 million, or 25.6%, in fiscal year 2002. The Company believes that the fiscal year 2004 and 2003 increase in U.S. Government sales reflects the Department of Defense’s expanded emphasis on addressing terrorism and homeland security. Based on a stable trend of order receipts for spares and upgrades from fiscal year 1995 to fiscal year 2004, management expects that U.S. Government and defense-related end-users will continue to provide a steady source of revenue.

In fiscal year 2004, approximately 69.8% of sales were derived from U.S. customers, while approximately 30.2% of sales were derived from international customers, compared to fiscal year 2003 when approximately 66.3% of sales were derived from U.S. customers and approximately 33.7% of sales were derived from international customers and fiscal year 2002 when approximately 69.7% of sales were derived from U.S. customers and approximately 30.3% of sales were derived from international customers. However, many domestic OEMs, primarily those in the satcom market, export their products, and management believes that some percentage of the Company’s sales to U.S. customers ultimately have international end-users. Excluding sales directly to the U.S. Government, which accounted for 21.1% of sales in fiscal year 2004, 19.3% of sales in fiscal year 2003 and 17.5% of sales in fiscal year 2002, no single customer accounted for more than 10% of the Company’s total sales in fiscal years 2004, 2003, or 2002.

The Company has two reportable segments: VED’s and satcom equipment. VED products are used in the communication, radar, electronic countermeasures, industrial, medical and scientific markets depending on the specific power and frequency requirements of the end-user and the physical operating conditions of the environment in which the VED will be located. The satcom equipment products are used exclusively in the communications market.

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Sales, Marketing and Service

Our global distribution system provides us with the capability to introduce, sell and service our products worldwide. Our wide-ranging distribution capabilities enable us to serve growing international markets, which accounted for approximately 30%, 34% and 30% of the Company’s sales in fiscal years 2004, 2003 and 2002, respectively.

Our sales professionals receive extensive technical training and generally focus exclusively on our products. As a result, they are able to provide knowledgeable assistance to our customers regarding product applications and the implementation of new technology and at the same time provide technical support.

In addition to our direct sales force, we use over 35 external sales organizations and one stocking distributor, Richardson Electronics, Ltd., to service the needs of low volume customers. The majority of the third-party sales organizations that the Company uses are located outside the United States and focus primarily on customers in South America, Southeast Asia, East Asia, the Middle East, Africa and Eastern Europe. Through the use of third-party sales organizations, the Company is better able to meet the needs of its foreign customers by establishing a local presence in lower volume markets. Using both our direct sales force and a distribution agreement with Richardson Electronics, Ltd., we are able to market our products to both end users and system integrators around the world and are able to provide solutions with short turn-around time.

Given the complexity of our products, their critical function in customers’ systems and the unacceptably high costs of system failure and downtime, we believe our customers view our product breadth, reliability and superior responsive service as key points of differentiation. The Company offers comprehensive customer support, with direct technical support provided by thirteen strategically located service centers; most of which are outsourced. These service centers are located in the United States (California and New Jersey), The Netherlands, Brazil, China (2), India (2), Taiwan, Japan, Russia, Singapore and South Africa. The service centers enable us to provide extensive technical support and rapid response to customers’ critical spare parts and service requirements throughout the world. In addition, the Company offers on-site installation assistance, on-site service contracts, a 24-hour technical support hotline and complete product training at both its service centers and customer sites for its customers. Many of the Company’s customers specify our products in competitive bids based on our responsive global support and product quality.

Manufacturing

The Company manufactures its products at five manufacturing facilities in North America. The Company has implemented modern manufacturing methodologies based upon “continuous improvement”, including Just In Time (“JIT”) materials handling, Demand Flow Technology (“DFT”), Statistical Process Control and Value Managed Relationships with suppliers and customers. Except for the recently acquired Econco operation, the Company’s facilities have all achieved the ISO 9001 international certification standard.

Generally, each of the Company’s manufacturing divisions use similar processes consisting of product development, purchasing, high level assembly and test. For satellite communications equipment, the process is primarily one of integration, and contract manufacturers are used whenever possible. Satellite communications equipment uses both VED and solid state technology, and the satellite communications division procures certain of the components that it incorporates into the subsystems that it manufactures from the Company’s other manufacturing divisions. For VED manufacturing, the process starts with procurement of raw material and sub-assemblies from qualified suppliers, who often deliver on a JIT basis. Raw materials are then formed, primarily by machining, cleaning, brazing and plating certain parts. These steps use statistical process control techniques to assure quality and high production yields. Assembly is then performed to produce a vacuum envelope, the essential part of a VED. This assembly process is performed utilizing DFT, which helps to minimize inventory. Vacuum assemblies are processed by pumping the atmosphere from the assemblies while heating them in a furnace and simultaneously stimulating them with an electrical current. When this step is complete, final assembly and testing, and often environmental stress screening, is performed on the product before shipment. The Company has developed sophisticated test programs to assure that each product meets operating specifications.

Certain materials necessary for the manufacture of the Company’s products, such as molybdenum, cupronickel, OFHC copper, and some cathodes, are obtained from a limited group of, or occasionally, sole suppliers.

Competition

The industries and markets in which the Company operates are competitive. The Company encounters competition in most of its business areas from numerous other companies, including L-3 Communications, e2v, Xicom and Thales, some of which have resources substantially greater than those of the Company. Some of these competitors are also customers of the Company. The Company’s ability to compete in its markets depends to a large extent on its ability to provide high quality products with shorter lead times at competitive prices, and its readiness in facilities, equipment and personnel.

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The Company must also continually engage in effective research and development efforts in order to introduce innovative new products for technologically sophisticated customers and markets. There is an inherent risk that advances in existing technology, including solid state technology, or the development of new technology could adversely affect the Company’s market position and financial condition. Solid state devices generally serve end-users’ low-power requirements, while only microwave VED’s currently serve higher-power and higher-frequency demands. The laws of physics limit the ability of solid state technology to efficiently or cost effectively serve the high-power/high-frequency applications of the Company’s customers. The extreme operating parameters of these applications necessitate heat dissipation capabilities that are best satisfied by the Company’s VED products. The Company’s management believes that VED and solid state technologies currently each serves its own niche without significant overlap.

Backlog

As of October 1, 2004, the Company had an order backlog of $179.7 million compared to an order backlog of $172.1 million as of October 3, 2003, both representing approximately seven-and-a-half months of sales. Although the backlog consists of firm orders for which goods and services are yet to be provided, these orders can be and sometimes are modified or terminated. However, the amount of modifications and terminations has historically not been material compared to total contract volume.

Intellectual Property

Our business is dependent, in part, on our intellectual property rights, including patents, trademarks and trade secrets. We rely on a combination of nondisclosure and other contractual arrangements as well as upon trade secret, patent, trademark and copyright laws to protect our intellectual property rights. Management does not believe that any single patent or other intellectual property right or license is material to our success as a whole.

We have entered into agreements pursuant to which we license intellectual property from third parties for use in our business, and we also license intellectual property to third parties. As a result of contracts with the U.S. Government which contain patent and/or data rights clauses, the U.S. Government has acquired royalty-free licenses or other rights in inventions and technology resulting from certain work done by us on behalf of the U.S. Government.

We maintain an intellectual property protection program designed to protect, preserve and enforce our intellectual property rights. Nevertheless, we cannot provide assurance that the steps taken by us will prevent misappropriation or loss of our technology.

Research and Development

Company-sponsored research and development expense was approximately $7.5 million, $6.9 million, and $5.9 million during fiscal year 2004, fiscal year 2003, and fiscal year 2002, respectively. Research and development expenses increased during fiscal year 2004. This increase was related to new product development for the radar, communications and satellite communications markets. Customer-sponsored research and development was approximately $3.5 million, $3.7 million, and $5.2 million during fiscal year 2004, fiscal year 2003, and fiscal year 2002, respectively.

Company-sponsored research and development costs related to both present and future products are expensed currently. Customer-sponsored research and development costs are charged to cost of sales to match revenue received.

Employees

As of October 1, 2004, the Company had approximately 1,510 employees, as compared to 1,490 employees as of October 3, 2003. With the addition of employees from the Econco acquisition, the Company currently has approximately 1,605 employees. The Company’s workforce has stabilized at this level after being reduced from approximately 1,720 at the end of fiscal year 2001. None of the Company’s employees is subject to a collective bargaining agreement although a limited number of the Company’s sales force members located in Europe are members of work councils or unions. The Company has not experienced any work stoppages and believes that it has good relations with its employees.

Because of the specialized and technical nature of the Company’s business, the Company is dependent on the continued service of, and on its ability to attract and retain qualified technical, marketing, sales and managerial personnel. There is competition for these types of personnel and the failure to retain and/or recruit additional or substitute key personnel in a timely manner could have a material adverse effect on the Company’s business and operating results.

U.S. Government Contracts and Regulations

Management expects that in the foreseeable future a significant portion of the Company’s sales will continue to result from contracts with the U.S. Government, either directly or through prime contractors or subcontractors. The Company’s business with the U.S. Government is performed primarily under fixed-price contracts and, to a lesser degree, cost-plus-fixed-fee contracts. Fixed-price contracts accounted for 97.4% of the Company’s U.S. Government

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sales in fiscal year 2004 and cost-plus-fixed-fee contracts accounted for 2.6%, as compared to fiscal year 2003, in which 96.9% of the U.S. Government sales were from fixed-price contracts and 3.1% of U.S. Government sales were from cost-plus-fixed-fee contracts and in fiscal year 2002, in which 95.2% of U.S. Government sales were from fixed-price contracts and 4.8% of U.S. Government sales were from cost-plus-fixed-fee contracts.

Under fixed-price contracts, the Company agrees to perform certain work for a fixed price and, accordingly, realizes all the benefit or detriment from decreases or increases in the costs of performing the contract. In addition, under U.S. Government regulations, certain costs, including certain financing costs, portions of research and development costs, and certain expenses related to the preparation of competitive bids and proposals and international sales are not reimbursable. The U.S. Government also regulates the methods under which costs are allocated to U.S. Government contracts.

U.S. Government contracts are, by their terms, subject to termination by the U.S. Government either for its convenience or upon default by the contractor. Cost-plus-fixed-fee contracts provide that, upon termination, the contractor is generally entitled to reimbursement of its incurred costs and, if the termination is for convenience, a fee proportionate to the percentage of the work completed under the contract is permitted. If the termination is for default, a contractor may receive a fee proportionate to any items delivered to and accepted by the U.S. Government. Fixed-price contracts generally provide for payment upon termination for items delivered to and accepted by the U.S. Government, and, if the termination is for convenience, for reimbursement of its other incurred costs and a reasonable profit on incurred costs. If a contract termination is for default, however, (i) the contractor is paid an amount agreed upon for completed and partially completed products and services accepted by the U.S. Government, (ii) the U.S. Government is not liable for the contractor’s incurred costs with respect to unaccepted items, and is entitled to repayment of advance payments and progress payments, if any, related to the terminated portions of the contracts and (iii) the contractor may be liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source.

In addition to the right of the U.S. Government to terminate its contracts, U.S. Government contracts are conditioned upon the availability of congressional appropriations. Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may take many years. Consequently, at the outset of a major program, multi-year contracts are usually funded for only the first year and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years.

The Company’s contracts with foreign governmental defense agencies are subject to certain similar limitations and risks as those encountered with U.S. Government contracts. Licenses are required from U.S. Government agencies to export many of the Company’s products and technology, or to discuss certain technology with foreign persons. Certain of the Company’s products and technical data are not permitted to be exported.

Due to its business with the U.S. Government, the Company may also be subject to “qui tam” or whistle blower suits brought by private plaintiffs in the name of the U.S. Government upon the allegation that the Company submitted a false claim to the U.S. Government, as well as to false claim suits brought by the U.S. Government. A judgment against the Company in a qui tam or false claim suit could cause the Company to be liable for substantial damages and could carry penalties of suspension or debarment which would make the Company ineligible to be awarded any U.S. Government contracts for a period of up to three years and, therefore, could potentially have a material adverse effect on the Company’s financial condition and results of operations. The Company is not currently subject to any “qui tam” or whistle blower suits.

Similar to other companies that derive a substantial portion of their sales from contracts with the U.S. Government for defense-related products, the Company is subject to business risks, including changes in governmental appropriations, national defense policies or regulations and availability of funds. Any of these factors could adversely affect the Company’s business with the U.S. Government in the future.

Environmental Matters

The Company is subject to a variety of U.S. federal, state and local as well as foreign environmental laws and regulations relating, among other things, to wastewater discharge, air emissions, handling of hazardous materials, disposal of solid and hazardous wastes, and remediation of soil and groundwater contamination. We use a number of chemicals or similar substances, and generate wastes, that are classified as hazardous, and require environmental permits to conduct many of our operations. Violation of such laws and regulations can result in substantial fines, penalties, and other sanctions. Changes in environmental laws or regulations (or in their enforcement) affecting or limiting, for example, our chemical uses, certain of our manufacturing processes, or our disposal practices, could restrict the ability of the Company to operate as it is currently operated or is permitted to be operated. In addition, we may experience releases of certain chemicals or other events, including the discovery of previously unknown contamination that could cause us to incur material cleanup costs or other damages. The Company is involved from time to time in legal proceedings involving compliance with environmental requirements applicable to its ongoing operations, and may be involved in legal proceedings involving regulatory compliance, exposure to chemicals or the remediation of environmental contamination.

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Pursuant to the stock sale agreement by and between Varian Associates, Inc., the predecessor of Varian , and the Company dated June 9, 1995, as amended (the “Varian Agreement”), and except as noted below, Varian has agreed to indemnify us for, and retained, various environmental liabilities relating to Varian’s Electron Devices Business prior to the closing of the sale of that business, with certain exceptions and limitations (the “Varian Environmental Indemnity”). With certain limited exceptions, the Company is not indemnified under the Varian Environmental Indemnity with respect to liabilities resulting from the Company’s operations after the closing of the transactions contemplated by the Varian Agreement.

Varian is undertaking environmental investigation and remedial work at three of the Company’s manufacturing facilities, Palo Alto, California, Beverly, Massachusetts and Georgetown, Ontario, Canada. The Company subleases a portion of the larger Varian Palo Alto campus, for which Varian has entered into a Consent Order with the California Environmental Protection Agency for remediation of soil and groundwater contamination. The Palo Alto site abuts a federal Superfund site and a state Superfund site. In addition, Varian has been sued or threatened with suit with respect to some of the above-mentioned manufacturing facilities.

The Company’s San Carlos California facility has soil and groundwater contamination that has been the subject of some remediation. The Company has entered into an agreement for the sale of the San Carlos real property. The closing of the sale of the property is subject to a number of conditions including the requirement that the Company vacate its facilities and obtain regulatory closure of certain permitted equipment located on the property. In connection with the sale of the San Carlos, California facility, the Company released Varian with respect to certain of its indemnification obligations regarding the San Carlos facility.

To date, Varian has, generally at its expense, conducted required investigation and remediation work at the Company’s facilities and responded to environmental claims arising from Varian’s prior operations of the Electron Devices Business. Although the Company believes that Varian currently has sufficient financial resources to satisfy its obligations to the Company under the Varian Environmental Indemnity, because of the long-term nature of Varian’s remediation obligations, there can be no assurance that Varian will continue to have the financial resources to comply fully with those obligations, or will continue to take the same view with respect to the scope of those obligations.

There can also be no assurance that material costs or liabilities will not be incurred by the Company in connection with obligations, proceedings or claims related to environmental conditions arising from the Company’s operations or properties. Such costs or liabilities, if significant, could have a material adverse effect on the Company’s results of operations and financial condition. For more information, see Item 2, “Properties”.

Item 2: Properties

The Company owns, leases or subleases manufacturing, assembly, warehouse, service and office properties having an aggregate floor space of approximately 1,120,000 square feet, of which approximately 2,950 square feet are leased or subleased to third parties. The table that follows provides summary information regarding principal properties owned or leased by the Company:

(a)		As discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, this property is subject to a contract for sale.
(b)		The Beverly, Massachusetts square footage also includes approximately 2,950 square feet leased to two tenants.
(c)		This facility is primarily leased by way of assignment of Varian’s lessee interest with the remainder subleased from Varian.
(d)		Includes both leased facilities occupied entirely by the Company’s field sales and service organizations and one foreign shared use facility which the Company is sharing under a rental agreement with Varian.

The lenders under our Senior Credit Facility (as defined below) have a security interest in certain of the Company’s interest in the real property that it owns and leases.

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The Company’s headquarters and one principal complex, including one of the Company’s manufacturing facilities, located at the Palo Alto, California site are leased by way of assignment, or subleased, from Varian or one of its affiliates or former affiliates. Therefore, the Company’s occupancy rights are dependent on the tenant’s fulfillment of its responsibilities to the master lessor, including its obligation to continue environmental remediation activities under a consent order with the California Environmental Protection Agency. The consequences of the loss by the Company of such occupancy rights could include the loss of valuable improvements and favorable lease terms, the incurrence of substantial relocation expenses and the disruption of the Company’s business operations.

Item 3: Legal Proceedings

The Company may be involved from time to time in various legal proceedings and various cost accounting and other government pricing claims; however, as of October 1, 2004, no such legal proceeding or claims are pending. Pursuant to the Varian Agreement, Varian has agreed to indemnify the Company against liabilities arising from litigation and governmental claims pertaining to Varian’s Electron Devices Business prior to the closing of the sale of that business to CPI, with certain exceptions and limitations. Accordingly, management believes that litigation and governmental claims pending against Varian and relating to the Electron Devices Business prior to the closing of that sale will not have a material adverse effect on the Company’s financial condition or results of operations. For more information, see Item 1, “Environmental Matters”.

Item 4: Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the fourth quarter of fiscal year 2004.

PART II

Item 5: Market For Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

All of the common stock of CPI Holdco is held by Cypress Merchant Banking Partners, L.P. and its affiliates and certain directors of the Company, and accordingly, there is no trading market for the common stock of CPI Holdco, Inc. For more information, see Item 12, “Security Ownership of Certain Beneficial Owners and Management”. See Item 11, “Executive Compensation” for a discussion of Securities Authorized for Issuance Under Equity Compensation Plans.

Neither CPI Holdco nor Holding paid any dividends on its common stock in fiscal year 2004, and Holding paid no dividends on its common stock in fiscal years 2003 or 2002. The 8% Notes (as defined below) and the Senior Credit Facility contain certain restrictions on the amount of dividends that CPI Holdco’s subsidiaries may pay to CPI Holdco (See “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition” and Notes 6 and 7 to the Consolidated Financial Statements). Such limits on making dividend payments to CPI Holdco, in turn, may limit CPI Holdco’s ability to pay dividends to its stockholders.

Item 6: Selected Financial Data

The following selected financial data has been derived from the consolidated financial statements. The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.

The selected financial data for fiscal year 2004 represents the combined pro-forma results of the Successor for the 36-week period ended October 1, 2004 and the Predecessor for the 16-week period ended January 22, 2004 based on the following audited financial results:

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FIVE-YEAR SELECTED FINANCIAL DATA

(a)

As a result of the Merger, the Company incurred charges for the amortization of inventory write-up and intangible assets, merger expenses and a write-off of in-process research and development.

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(b)		On September 26, 2002, the Company sold its Solid State Products Division (“SSPD”). The net pretax loss of $3.0 million included approximately $2.5 million for the write-off of goodwill. The $0.1 million gain on sale of SSPD for fiscal year 2003 represents principal payments on the unsecured promissory note due from KMIC Technology Inc. for the purchase of SSPD. Due to the uncertainty of ultimate collection on the promissory note, the gain was recognized when the cash payments were received.
(c)		EBITDA is presented because the Company believes that EBITDA is used by some investors as a financial indicator of a company’s ability to service indebtedness. While management considers EBITDA to be an important measure of comparative operating performance, it should be considered in addition to, but not as a substitute for or superior to, operating income, net earnings (loss), cash flow and other measures of financial performance prepared in accordance with accounting principles generally accepted in the United States. EBITDA does not reflect cash available to fund cash requirements, and the items excluded from EBITDA, such as depreciation and amortization, are significant components in assessing the Company’s financial performance. Other significant uses of cash flows are required before cash will be available to the Company including debt service, taxes and cash expenditures for various long-term assets. The Company’s calculation of EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited. A reconciliation of EBITDA to income (loss) before taxes is as follows:

“Other” in fiscal year 2002 represents the non-cash write-off of goodwill associated with the sale of SSPD of $2.5 million and the non-cash impairment loss of $0.5 million related to plant and equipment used in the satcom equipment segment.

Item 7:Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

For periods ending prior to January 23, 2004, the accompanying consolidated financial statements represent the consolidated results and financial position of the Predecessor. The financial statements for periods subsequent to January 22, 2004 represent the consolidated financial statements of CPI Holdco after giving effect to the Merger. Financial statements for fiscal year 2004 represent the combined results of the Predecessor and Successor.

In the Merger, each share of Holding’s common stock and stock options outstanding immediately prior to the Merger, other than a portion of stock options held by certain members of management (which were converted into options to purchase shares of CPI Holdco) and other than any shares of common stock owned by Holding or CPI Holdco, were converted into the right to receive a pro rata portion of the aggregate merger consideration of $131.7 million. In connection with the Merger, CPI Holdco received an equity contribution of $100.0 million before expenses from affiliates of Cypress in exchange for 4,251,122 shares of common stock of CPI Holdco. Members of management of Holding, as a result of rolling over their options to purchase common stock of Holding, received options to purchase 167,513 shares of common stock of CPI Holdco. The fair value of such options was $5.0 million and was accounted for as Merger purchase price as of January 23, 2004. Members of Holding management that were residents of Canada received stock options to purchase 1,485 shares of common stock of CPI Holdco as payment of Merger escrow proceeds in respect of their Holding stock options.

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 (“Junior Preferred Stock”) and its Series B 14% Senior Redeemable Exchangeable Cumulative Preferred Stock (“Senior Preferred Stock”).

Although the Merger, which essentially resulted in the recapitalization of the Company, triggered a change in the basis of the Company’s assets and liabilities, the underlying operations of the Company were not impacted by the Merger.

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Orders

Orders for fiscal year 2004 were $286.8 million, a decrease of $4.6 million from $291.4 million for fiscal year 2003. The orders decrease is due to lower demand for products in the radar market partially offset by increases in demand for products in the electronic warfare, communications, medical, industrial and scientific markets. Orders in the radar market for fiscal year 2004 were $102.8 million, a $21.3 million, or 17%, decline from fiscal year 2003. During fiscal year 2003, increased demand by defense service agencies and higher available U.S. defense funding for our radar products, resulted in order quantities that were above normal rates and in certain cases covered delivery periods that are longer than traditional orders. Some of the 2003 radar orders were shipped in fiscal year 2004 and into fiscal year 2005. Compared to fiscal year 2003, fiscal year 2004 radar orders reflect more normal market demand levels. Orders in the electronic countermeasures market increased $5.3 million, or 21%, to $30.2 million from $24.9 million in fiscal year 2003. The increase in electronic countermeasures orders reflects growth in the U.S. defense budget stemming principally from the Department of Defense’s expanded emphasis on addressing terrorism and homeland security. The protection of military assets has become a very high priority resulting in the continuing funding of new, upgrade and replenishment programs for electronic countermeasure systems. Orders in the communications market of $84.2 million for fiscal year 2004 were $1.1 million higher than fiscal year 2003. The increase in communications orders reflects the continued strength in the direct-to-home broadcast market. Medical orders increased by $1.7 million, or 4.0%, to $41.0 million in fiscal year 2004 from $39.3 million in fiscal year 2003. The increase in medical orders was primarily due to higher orders for VED’s used in magnetic resonance imaging and x-ray generator systems and power supply products used in x-ray imaging systems. Industrial orders were $18.5 million for fiscal year 2004, an increase of $4.2 million, or 30%, from fiscal year 2003 principally due 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 the previous year. Orders in the Company’s scientific market were $10.0 million in fiscal year 2004, a $4.4 million, or 78%, increase over fiscal year 2003. The primary reason for the increased performance in the scientific market for fiscal year 2004 was a $3.8 million fusion research order for high frequency, high power gyrotrons that was received in the second quarter. Product deliveries for this program will be completed over the next 36 months.

The Company’s sales are highly dependent upon manufacturing scheduling, performance and shipments and, accordingly, it is not possible to accurately predict when orders will be recognized as sales.

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, the buyer paid the Company a $13.0 million deposit on the purchase price which the Company is using to defray the costs of moving its EIMAC division from the San Carlos facility to its Palo Alto facility. The closing of the sale is subject to a number of conditions, including the requirement that the Company vacate its facilities and obtain regulatory closure of certain permitted equipment located on the property. There can be no assurance that the sale of the San Carlos property will occur.

Pursuant to the Varian Agreement, the Company had agreed to certain development restrictions affecting the San Carlos property. In connection with the San Carlos property sale agreement, Varian agreed to a waiver of certain of the development restrictions on the San Carlos property in the event that the sale closes, subject to certain conditions, and further agreed to pay the Company $1.0 million, of which $0.5 million was paid as of October 1, 2004. In addition, the Company has agreed to relieve Varian of certain of its obligations under the Varian Environmental Indemnity and to reimburse Varian for certain environmental costs which are not covered by insurance and the Company and Varian have agreed to certain use restrictions and environment cost-sharing provisions related to the Company’s property in Beverly, Massachusetts.

As of October 1, 2004, in the accompanying consolidated balance sheet, the San Carlos land and building is classified as held for use and the advance payments from the sale of the property, aggregating $13.5 million, are classified as a long-term liability. As of October 1, 2004, the San Carlos land and building had a net book value of $24.0 million and the building continues to be depreciated over its remaining useful life. The Company does not expect to recognize a loss on the sale of the San Carlos property.

Critical Accounting Policies

This discussion and analysis of financial condition and results of operation is based on our financial statements, which we prepare in conformity with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and assumptions also require the application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and

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related notes. We periodically review our accounting policies and estimates and make adjustments when facts and circumstances dictate.

     Revenue Recognition

The estimated sales values of performance under certain contracts to commercial customers and U. S. Government fixed-price contracts are recognized under the percentage of completion method of accounting. When applying the percentage of completion method, the Company relies on estimates of total expected contract revenue and costs. Recognized revenues and profit are subject to revisions as the contract progresses towards completion. Revisions in profit estimates are charged to income in the period in which they become determinable.

     Allowance for Doubtful Accounts

The Company monitors the creditworthiness of its customers based on a variety of factors including the length of time the receivables are past due, the financial health of the customer, economic conditions and historical experience. If collectibility is considered uncertain, then the Company will record a reserve to reduce the receivable to the amount considered collectable. If circumstances change, then further adjustments could be required.

     Warranty Obligations

The Company’s products are generally subject to warranties, and the Company provides for the estimated future costs of repair, replacement or customer accommodation at the time of sale as an additional cost of the sales. Management’s estimates are based on historical costs for warranty, and are adjusted when circumstances indicate that future costs are expected to vary from historical levels. If actual product failure rates or material usage incurred differ from the Company’s estimates, then revisions to the estimated warranty liability would be required.

     Inventory Valuation

The Company reviews inventory quantities on hand and adjusts for excess and obsolete inventory based primarily on historical usage rates and our estimates of product demand and production. Actual demand may differ from our estimates, in which case we may have understated or overstated the provision required for obsolete and excess inventory, which would have an impact on our operating results.

The Company also reviews the carrying value of inventory for lower of cost or market on an individual product or contract basis. Analyses are performed based on the estimated costs at completion and if necessary, a provision is recorded to properly reflect the inventory value of the products or contracts at the lower of cost or net realizable value (selling price less estimated cost of disposal). If estimated costs are different than originally estimated, the provision adjustment would have an impact on our operating results.

     Impairment of Long-Lived Assets

The Company reviews long-lived assets, excluding intangible assets that are covered by Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, for impairment 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.

Impairment of Goodwill

During the fourth quarter of the fiscal year, the Company makes an assessment as to the carrying value of goodwill in accordance with SFAS 142. During this review, we determine whether the fair value of the Company’s five reporting units, which represent the Company’s operating divisions, exceed their carrying value and thus do not require an impairment charge. We will continue to make assessments of impairment on an annual basis or more frequently if certain indicators suggest that impairment may have occurred. In assessing the value of goodwill, we must make assumptions regarding the estimated future cash flows and other factors to determine the fair value of the reporting units. If these estimates or their related assumptions change in the future, we may be required to record impairment charges, which would negatively impact operating results.

Results of Operations

The Company’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 was comprised of the 36-week period ending October 1, 2004 and the 16-week period ended January 22, 2004; fiscal year 2003 was comprised of the 53-week period ended October 3, 2003; and fiscal year 2002 was comprised of the 52-week period ended September 27, 2002.

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Management’s discussion and analysis of the results of operations for fiscal year 2004 represents the combined pro-forma results of the Successor for the 36-week period ended October 1, 2004 and the Predecessor for the 16-week period ended January 22, 2004.

The following table sets forth Company’s historical results of operations as a percentage of sales for each of the periods indicated.