Communications & Power Form 10-K

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


Commission File Number: 33-96858-01		Commission File Number: 33-96858
COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION		COMMUNICATIONS & POWER INDUSTRIES, INC.
(Exact Name of Registrant as Specified in Its Charter)		(Exact Name of Registrant as Specified in Its Charter)
Delaware		Delaware
(State or Other Jurisdiction of Incorporation or Organization)		(State or Other Jurisdiction of Incorporation or Organization)
77-0407395		77-0405693
(IRS Employer Identification No.)		(IRS Employer Identification No.)
811 Hansen Way		811 Hansen Way
Palo Alto, California 94303-1110		Palo Alto, California 94303-1110
(650) 846-2900		(650) 846-2900
(Address of Principal Executive Offices and telephone number, including area code,)		(Address of Principal Executive Offices and telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:		Securities registered pursuant to Section 12(b) of the Act:
None		None
Securities registered pursuant to Section 12(g) of the Act:		Securities registered pursuant to Section 12(g) of the Act:
None		None

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

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 No X

The aggregate market value of voting stock of Communications & Power Industries Holding Corporation held by non-affiliates is $288,750, based upon the price at which it was last sold. No voting stock of Communications & Power Industries, Inc. is held by non-affiliates of Communications & Power Industries, Inc. Communications & Power Industries, Inc.’s voting stock is wholly owned by Communications & Power Industries Holding Corporation, a Delaware corporation. Neither Communications & Power Industries, Inc.’s nor Communications & Power Industries Holding Corporation’s common stock is publicly traded.

Indicate the number of shares outstanding for each of the Registrant’s classes of Common Stock, as of the latest practicable date: Communications & Power Industries Holding Corporation: 5,008,172 shares of Common Stock, $.01 par value, at December 8, 2003. Communications & Power Industries, Inc.: 1 share of Common Stock, $.01 par value, at December 8, 2003.

This document contains forward-looking statements. These statements relate to future events or the Company’s future financial performance. In some cases, you 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 which 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. 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.

You should read the following discussion and analysis in conjunction with the Financial Statements and related Notes thereto contained elsewhere in this report. The information in this report is not a complete description of the Company’s business or the risks associated with an investment in the Company’s securities. We urge you to carefully review and consider the various disclosures made by the Company in this report and in the Company’s other reports filed with the Securities and Exchange Commission (the “SEC”).

Communications & Power Industries Holding Corporation (“Holding”), through its wholly owned subsidiary, Communications & Power Industries, Inc. (“CPI”, both companies together referred to as the “Company”), is a world leader in the development, manufacture and distribution of components for systems used primarily to generate, control and transmit high-power/high-frequency microwave and radio frequency signals. End-use applications of these systems include the transmission of radar signals for location and tracking of threats and navigation; transmitting decoy and jamming signals for electronic warfare; the transmission and amplification of voice, data and video signals for broadcasting, internet and telecommunications; providing power and control for medical diagnostic imaging and generating microwave energy for radiation therapy in the treatment of cancer; and various other uses in the industrial and scientific markets.

The Company’s products include microwave and power grid vacuum electron devices, microwave amplifiers, modulators, and various other power supply equipment and devices. The majority of the Company’s products are consumable and have a finite life. The Company operates four manufacturing facilities in North America, and sells and services its products and customers worldwide primarily through a direct sales force.

CPI is a wholly owned subsidiary of Holding. Both Holding and CPI are Delaware corporations formed in 1995. Prior to August 11, 1995, the Company’s operations were part of the Electron Devices Business of Varian Associates, Inc., as the predecessor of Varian Medical Systems, Inc. (“Varian”). The principal executive offices of Holding and CPI are located at 811 Hansen Way, Palo Alto, California 94303, and their telephone number is (650) 846-2900.

On November 17, 2003, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), under which a corporation (“Acquiror”) owned by The Cypress Group L.L.C., a New York-based private equity firm, agreed to acquire the Company in a cash-for-stock transaction with a total value of approximately $300 million. As more fully described in Item 12 “Security Ownership of Certain Beneficial

Owners and Management and Related Stockholder Matters”, the acquirer has entered into a Voting and Indemnification Agreement with stockholders of Holding to vote in favor of the Merger Agreement.

Pursuant to the Merger Agreement, a wholly owned subsidiary of Acquiror will merge with and into the Company (the “Merger”), with the Company as the surviving corporation. In connection with the Merger, it is anticipated that all outstanding debt of the Company will be refinanced. Consummation of the merger is subject to customary conditions, including a condition that Acquiror obtain the requisite debt financing. Subject to satisfaction of the applicable conditions, it is currently anticipated that the Merger will close in the second quarter of fiscal year 2004.

On December 4, 2003, CPI instructed the trustee under the Indenture (the “Indenture”) relating to CPI’s 12% Senior Subordinated Notes (the “Notes”) to send a notice to all of the registered holders of the Notes, notifying them that CPI has elected to redeem $26,000,000 in principal amount of the Notes on January 5, 2004, pursuant to and in accordance with the terms of the Indenture. The redemption will occur 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 the Company’s credit facility that, among other things, permits CPI to redeem up to an aggregate maximum amount of $30,000,000 of the Notes in any fiscal year.

The Company offers a comprehensive range of microwave and power grid vacuum electron devices, microwave amplifiers, modulators and various other power supply equipment and devices for use in the radar, electronic countermeasures, medical, communications, industrial and scientific markets. The Company offers over 6,000 products that generally have selling prices from $2,000 to $50,000, with certain products ranging in price up to $1,000,000. Most of these products are consumable and have a finite life based upon hours of usage, operating environment and application. Certain of the Company’s products are sold in more than one market depending on the specific power and frequency requirements of the end-user and the physical operating conditions of the environment in which the vacuum electron device will be located.

•

Radar Market - The radar market utilizes microwave and power grid vacuum electron devices, amplifiers, receiver protectors and related 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 $102.6 million in fiscal year 2003, compared to $93.2 million in fiscal year 2002 and $87.9 million in fiscal year 2001.

•

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 $22.5 million in fiscal year 2003, compared to $21.7 million in fiscal year 2002 and $21.8 million in fiscal year 2001.

•

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 $38.2 million in fiscal year 2003, compared to $29.3 million in fiscal year 2002 and $27.4 million in fiscal year 2001.

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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 $82.5 million in fiscal year 2003 compared to $84.8 million in fiscal year 2002 and $109.9 million in fiscal year 2001.

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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 $11.3 million in fiscal year 2003, compared to $15.5 million in fiscal year 2002, and $20.0 million in fiscal year 2001.

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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 $8.3 million in fiscal year 2003, compared to $6.7 million in fiscal year 2002, and $5.5 million in fiscal year 2001.

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. However, 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 $174.9 million, or 65.9%, of the Company’s total sales in fiscal year 2003, compared to $187.0 million, or 74.4%, of the Company’s total sales in fiscal year 2002, and $212.1 million, or 77.8%, of the Company’s total sales in fiscal year 2001. U.S. Government sales, both direct and through original equipment manufacturers (“OEMs”), contributed approximately $90.5 million, or 34.1%, of the Company’s total sales in fiscal year 2003 compared to $64.2 million, or 25.6%, of the Company’s total sales in fiscal year 2002 and $60.4 million, or 22.2%, in fiscal year 2001. The Company believes the fiscal year 2003 increase in U.S. Government sales reflects the Department of Defense’s recent 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 2003, management expects that U.S. Government and defense-related end-users will continue to provide a steady source of revenue. Segment data is included in Note 13 of the Notes to Consolidated Financial Statements.

In fiscal year 2003, approximately 66.3% of sales were derived from U.S. customers, while approximately 33.7% of sales were derived from international customers, compared to 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 and fiscal year 2001 when approximately 67.0% of sales were derived from U.S. customers and approximately 33.0% 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 19.3% of sales in fiscal year 2003, 17.5% of sales in fiscal year 2002 and 15.7% of sales in fiscal year 2001, no single customer accounted for more than 5% of the Company’s total sales in fiscal years 2003, 2002, or 2001.

As of October 3, 2003, the Company had over 100 direct sales, marketing and technical support professionals representing the largest direct sales, service and technical support organization focused exclusively on high-power/high-frequency signal generation, amplification and transmission. Most of the Company’s sales professionals are responsible for marketing the Company’s entire product line. Company sales professionals receive extensive technical training in all of the Company’s products, which allows them to provide customers with appropriate technical support, including information on product application and implementation.

In addition to its direct sales force, the Company utilizes 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 organizations that the Company utilizes are located outside the U.S. and focus primarily on customers in South America, Southeast Asia, the Far East, the Middle East, Africa and Eastern Europe. Through the use of third-party sales organizations, the Company has been better able to meet the needs of its foreign customers by establishing a local presence in lower volume markets.

The Company also has a specialized network of thirteen service centers for the satcom replacement market. These service centers are located in the United States (California and New Jersey), Amsterdam, Brazil, China (2), India (2), Taiwan, Japan, Russia, Singapore and South Africa.

The Company manufactures its products within five manufacturing operations 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. The Company has achieved the ISO-9000 international certification standard.

Generally, each of the Company’s manufacturing units use similar processes consisting of product development, purchasing, high level assembly and test. For satcom equipment, the process is primarily one of integration, and contract manufacturers are used whenever possible. Satcom equipment utilizes both vacuum electron devices (“VEDs”) and solid-state technology, and the satcom division procures certain of its components from the Company’s other manufacturing units. For VEDs, 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 and plating certain parts. These steps utilize statistical process control techniques to assure quality and high production yields. Subassembly is then performed to produce a vacuum envelope, the essential part of a vacuum electron device. This subassembly 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 is performed on each 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, cupernickel, OFHC copper, and some cathodes, are obtained from sole, or a limited group of, suppliers.

The industries and markets in which the Company operates are highly competitive. The Company encounters competition in most of its business areas from numerous other companies, including L3 Electron Devices, E2V Technologies, Xicom Technologies and Thales Electron Devices, 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.

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 vacuum electron devices 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 vacuum electron device products. The Company’s management believes that each technology currently serves its own niche without significant overlap.

As of October 3, 2003, the Company had an order backlog of $172.1 million, representing approximately eight months of sales, compared to an order backlog of $145.1 million, or approximately seven months of sales, as of September 27, 2002. 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 as compared to total contract volume.

The Company owns a number of United States and foreign patents having various expiration dates (collectively, the “Patents”). The Patents relate to various aspects of the technologies used by the Company in many of its operations. In addition to the Patents, the Company has certain trade secrets, know-how, trademarks

and copyrights related to its technology and products. The Company also has acquired certain intellectual property rights and incurred certain obligations through license and research and development agreements with third parties. These agreements may include royalty-bearing licenses, technology cross licenses and manufacturing supply agreements. Management does not believe that any single patent or license is material to the success of the Company as a whole. As a result of contracts with the U.S. Government that contain patent and/or data rights clauses, the U.S. Government also has acquired royalty-free licenses or other rights in inventions and technology resulting from certain work done by the Company on behalf of the U.S. Government. The Company also has certain software license agreements with vendors and suppliers that affect the Company’s intellectual property rights. The Company generally enters into confidentiality agreements with its employees, consultants and vendors, and generally limits access to, and distribution of, its proprietary information. The Company maintains an intellectual property protection program designed to preserve the intellectual property assets for the Company’s future products. This program includes the filing of new domestic and foreign patent applications, copyright and trademark applications and the pursuit of enforcement of its intellectual property rights. Nevertheless, the Company cannot provide assurance that the steps taken by it will prevent misappropriation or loss of its technology.

Six United States patents and one United States patent application, and their foreign counterparts, are jointly owned by the Company and Varian, along with related trade secrets and know-how, including drawings, manufacturing and testing processes and designs (the “Key Component Technology”). The Key Component Technology relates to the manufacture and testing of certain key electron beam guns and key medical klystrons, and any improvements thereto. The Company and Varian are parties to a Cross-License Agreement that allocates the rights to the Key Component Technology between the Company and Varian, on a royalty free basis.

Company-sponsored research and development (“R&D”) expense was approximately $6.9 million, $5.9 million, and $5.8 million during fiscal year 2003, fiscal year 2002, and fiscal year 2001, respectively. Research and development expenses increased during fiscal year 2003 related to new product development for the communications, radar and medical markets. Customer-sponsored R&D was approximately $3.7 million, $5.2 million, and $5.0 million during fiscal year 2003, fiscal year 2002 and fiscal year 2001, respectively. For customer-sponsored R&D, the costs were charged to cost of sales to match revenue earned.

As of October 3, 2003, the Company had approximately 1,490 employees, as compared to 1,480 employees as of September 27, 2002. 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 exists competition for such 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.

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 contracts. Fixed-price contracts accounted for 96.9% of the Company’s U.S. Government sales in fiscal year 2003 and cost-plus contracts accounted for 3.1% of the Company’s U.S. Government sales in fiscal year 2003, as compared to fiscal year 2002, in which approximately 95.2% of U.S. Government sales were from fixed-price contracts and approximately 4.8% of U.S. Government sales were from cost-plus contracts and fiscal year 2001, in which approximately 96.2% of U.S. Government sales was from fixed-price contracts and approximately 3.8% of U.S. Government sales was from cost-plus 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 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 also receive a fee proportionate to any items delivered to and accepted by the U.S. Government. Fixed-price contracts 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 (including any termination penalty), 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. Certain of the Company’s products are not permitted to be exported.

Due to its business with the U.S. Government, the Company may also be subject to “qui tam” (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, as a result, could potentially have a material adverse effect on the Company’s financial condition and results of operations.

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.

The Company is subject to a variety of federal, state and local environmental laws and regulations and utilizes in its operations a number of chemicals or similar substances that are classified as hazardous. Management believes that the Company’s current operations are in substantial compliance with current environmental laws and regulations. However, changes in law or limitations on chemical uses or certain manufacturing processes could restrict the ability of the Company to operate in the manner in which the Company is currently operated or is permitted to be operated. In addition, it is possible that the Company may experience releases of certain chemicals or other events that could cause the incurrence of 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.

Varian has agreed to indemnify the Company for environmental claims arising from the operations of Varian’s Electron Devices Business (including pre-existing contamination) prior to August 11, 1995, subject to certain exceptions and limitations. Environmental investigation and remedial work is being undertaken by Varian at three of the Company’s manufacturing facilities, Palo Alto, California, Beverly, Massachusetts and Georgetown, Ontario, Canada. Although the Company believes that Varian currently has sufficient financial resources to satisfy its environmental indemnification obligations to the Company, 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 its indemnification obligations to the Company. Unreimbursed liabilities arising from environmental claims, if significant, could have a material adverse effect on the Company’s results of operations and financial condition.

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 Company’s facilities. 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.

The Company’s San Carlos, California facility also has soil and groundwater contamination that may require remediation. On February 7, 2003, Holding entered into an agreement for the sale of the San Carlos real property. In addition to customary closing and due diligence conditions, the sale of the property is contingent upon completion of environmental remediation and demolition of existing structures, to be agreed upon by the parties. The purchaser has not completed or approved its due diligence investigations of the property, and there is no assurance that it will do so or that the other conditions to closing will be satisfied.

With certain limited exceptions, the Company is not indemnified by Varian for environmental claims arising from the Company’s operations after August 11, 1995. The Company cannot provide assurance that it will not incur material costs or liabilities in connection with proceedings or claims related to environmental conditions arising from its operations after 1995.

The Company owns, leases or subleases manufacturing, assembly, warehouse, service and office properties having an aggregate floor space of approximately 1,075,000 square feet, of which approximately 29,000 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:

The lenders under CPI’s secured credit facility, have a security interest in all of the Company’s interest in the real property that it owns and leases, excluding its San Carlos, California real property.

On December 22, 2000, a sale-leaseback transaction related to CPI’s facilities in San Carlos was accomplished between CPI and Holding. Holding paid CPI aggregate consideration of $23.0 million for the San Carlos real property, consisting of $17.25 million in cash and an unsecured promissory note in the principal amount of $5.75 million maturing in December 2009, with interest-only payments on a quarterly basis at the rate of 15.5% per annum, with up to 35.25% of each interest payment payable in kind, at Holding’s option, by issuance of additional notes. CPI and Holding entered into a lease of the San Carlos real property for a term of twenty (20) years on a net basis with a fixed annual rent (payable in equal monthly installments) of $2.45 million. Holding financed the cash portion of the San Carlos purchase price and its fees and expenses with respect to the transaction by borrowing $18.0 million from Wells Fargo Bank. During fiscal year 2002, the loan was extended until June 1, 2003 and a principal payment of $0.2 million was made. During fiscal year 2003, the loan was extended until January 31, 2004 and another principal payment of $0.3 million was made. The loan bears interest at LIBOR plus 4.25% and is secured on a non-recourse basis (subject to normal and customary exceptions) by the San Carlos real property. Holding has entered into an agreement for the sale of the San Carlos property to an unrelated party. As discussed above in Item 1 “Business—Environmental Matters,” the proposed sale is subject to various conditions.

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.

The Company is involved from time to time in various legal proceedings and is the subject of various cost accounting and other government pricing claims. Pursuant to the agreement between CPI and Varian dated August 11, 1995, Varian has agreed to indemnify the Company against liabilities arising from litigation and governmental claims pertaining to the operation of the Electron Devices Business of Varian prior to August 11, 1995. Accordingly, management believes that litigation and governmental claims pending against Varian and relating to the operation of the Electron Devices Business prior to August 1995, will not have a material adverse effect on the Company’s financial condition or results of operations. See “Business — Environmental Matters.”

There were no matters submitted to a vote of security holders during the fourth quarter of fiscal year 2003.

Item 5: Market for the Registrant’s Common Equity and Related Shareholder Matters

CPI is a wholly owned subsidiary of Holding. There is no established public trading market for the common stock of CPI or Holding. As of December 8, 2003, there were approximately forty-five holders of record of common stock of Holding and one holder of the common stock of CPI. No cash dividends have been declared on the common stock of CPI or Holding during the two most recent fiscal years. Restrictive covenants under the Company’s credit facility generally restrict the declaration or payment of dividends on common stock of CPI or Holding. The Indenture and the Senior Notes also restrict the declaration and payment of dividends unless, among other things, certain financial covenants are satisfied.

See Item 11 “Executive Compensation—Holding’s 2000 Stock Option Plan” for a discussion of Securities Authorized for Issuance Under Equity Compensation Plans.

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 “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.

COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION AND SUBSIDIARIES
FIVE-YEAR SELECTED FINANCIAL DATA


			Fiscal Year

(Dollars in Thousands)			2003			2002			2001			2000			1999

Statement of Operations Data:
	Sales		$	265,434			251,245			272,521			243,054			255,680
	Gross profit			81,477			59,056			49,189			54,306			56,042
	(Gain) loss on sale of SSPD (a)			(136	)		3,004			—			—			—
	Operating income			41,164			14,329			4,837			8,303			8,752
	Interest expense			14,540			16,508			20,734			18,663			17,805
	Income tax expense			10,076			4,554			2,950			1,232			605

	Net income (loss) before preferred dividends		$	16,548			(6,733	)		(18,847	)		(11,592	)		(9,658	)

	EBITDA (b)		$	47,457			28,666			18,183			23,619			22,527
	Certain Non-Cash Charges:
		Depreciation and amortization	$	6,293			11,304			13,346			15,316			13,635
		Amortization of deferred debt issuance costs		1,383			1,629			1,987			1,288			1,209
	Capital expenditures			3,067			3,378			5,788			5,325			8,588
Balance Sheet Data:
	Working capital		$	17,241			1,101			22,048			19,881			26,907
	Total assets			181,968			156,189			204,067			226,985			233,584
	Long-term debt and redeemable preferred stock			128,907			128,693			148,569			139,160			142,039
	Total stockholders’ deficit			(65,445	)		(73,104	)		(57,608	)		(31,188	)		(12,962	)

The Company has paid no cash dividend on its common stock in any of the years presented above.

(a)

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.

(b)

EBITDA represents earnings before provision for income taxes, interest expense, depreciation and amortization and certain non-recurring charges. A reconciliation of EBITDA to income (loss) before taxes is as follows:

			In fiscal year 2002, EBITDA also excludes 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.

			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.

COMMUNICATIONS & POWER INDUSTRIES, INC. AND SUBSIDIARIES
FIVE-YEAR SELECTED FINANCIAL DATA


			Fiscal Year

(Dollars in Thousands)			2003			2002			2001			2000			1999

Statement of Operations Data:
	Sales		$	265,434			251,245			272,521			243,054			255,680
	Gross profit			81,477			59,056			49,189			54,306			56,042
	(Gain) loss on sale of SSPD (a)			(136	)		3,004			—			—			—
	Operating income			39,691			12,961			3,813			8,303			8,752
	Interest expense			12,511			14,463			18,646			18,663			17,805
	Income tax expense			10,325			4,559			2,950			1,232			605

	Net income (loss) before preferred dividends		$	16,855			(6,061	)		(17,783	)		(11,592	)		(9,658	)

	EBITDA (b)		$	45,443			26,639			16,661			23,619			22,527
	Certain Non-Cash Charges:
		Depreciation and amortization	$	5,752			10,645			12,848			15,316			13,635
		Amortization of deferred debt issuance costs		1,294			1,557			1,655			1,288			1,209
	Capital expenditures			3,067			3,378			5,788			5,325			8,588
Balance Sheet Data:
	Working capital		$	33,149			17,837			39,265			19,881			26,907
	Total assets			174,881			148,501			195,649			226,985			233,584
	Long-term debt and redeemable preferred stock			135,794			136,004			156,304			139,160			142,039
	Total stockholders’ deficit			(34,211	)		(45,918	)		(34,450	)		(12,018	)		3,660

The Company has paid no cash dividend on its common stock in any of the years presented above.

(a)

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.

(b)

In fiscal year 2002, EBITDA also excludes 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.

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 requirement, 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.

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

The following discussion reflects the consolidated results of Holding, which are materially consistent with those of CPI except as identified below, and should be read in conjunction with the consolidated financial statements and notes thereto:

The Company serves the radar, electronic countermeasures, medical, communications, industrial and scientific markets. In addition, the Company divides the communications market into applications for ground-based satellite uplinks for military and commercial uses and broadcast sectors. The Company defines and discusses its 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 units that are differentiated based on products. Four of these operating units comprise the Company’s vacuum electron device (“VED”) segment. The Company also has a satcom equipment segment. Segment data is included in Note 13 of the Notes to Consolidated Financial Statements.

Orders for fiscal year 2003 were $291.4 million, an increase of $43.2 million from fiscal year 2002. The increase from fiscal year 2002 levels reflects higher demand for products in the radar, electronic countermeasures, medical and communications markets. Radar orders were $124.1 million, an increase of $23.1 million, or 22.9%, from $101.0 million in fiscal year 2002. Orders in the electronic countermeasures market have increased $9.7 million, or 63.8%, to $24.9 million from $15.2 million in fiscal year 2002. The increase in radar and electronic countermeasure orders reflect continued growth in the U.S. defense budget stemming principally from the Department of Defense’s recent expanded emphasis on addressing terrorism and homeland security. This funding has resulted in an increase in new radar system development and deployment, including increases in the rate at which naval surface combat ships are being built. In addition, protection of military assets has become a very high priority resulting in the continuing funding of new, upgrade and replenishment programs in the electronic countermeasure area. The Company has enjoyed growth in both the radar and electronic countermeasures market due to its strong participation in these various initiatives and platforms. Medical orders increased by $6.0 million, or 18.0%, to $39.3 million from $33.3 million in fiscal year 2002. The increase was due to higher orders for VED’s used in cancer therapy systems and magnetic resonance imaging, and x-ray generator and power supply products used in x-ray imaging. Communication orders increased by $10.8 million, or 14.9%, to $83.1 million from fiscal year 2002, due principally to several large orders from direct-to-home service suppliers. These orders shipped by the end of fiscal year 2003. The Company anticipates a slight rebound in the traditional communications market and expects order levels of approximately $80 million for fiscal year 2004. These order increases were offset in part by declines in the industrial and scientific markets of $2.3 million and $4.1 million, respectively, from fiscal year 2002. The slight decline in the industrial market is attributable to the weakness in the semiconductor market. Order levels for the industrial market for fiscal year 2004 are expected to continue at the $13 million level. Orders for products sold to the scientific market, the Company’s smallest market, decreased from $9.8 million in fiscal year 2002 to $5.6 million in fiscal year 2003. Orders in this market are historically one-time type projects and thus difficult to predict. Also, incoming order levels fluctuate significantly on a quarterly basis and a particular year’s order rate may not be indicative of future order levels. In addition, the Company’s sales are highly dependent upon manufacturing scheduling and performance and, accordingly, it is not possible to accurately predict when orders will be recognized as sales.

Sales for fiscal year 2003 were $265.4 million compared to sales of $251.2 million in fiscal year 2002, an increase of $14.2 million, or 5.7%. This increase was primarily related to higher sales in the radar and medical markets. Sales in the radar market increased $9.4 million to $102.6 million in fiscal year 2003 due to higher spending by the Department of Defense. Sales of products in the medical market of $38.2 million have increased $8.9 million, or 30.4%, from fiscal year 2002 due to sales of VED’s in cancer treatment applications and the Company’s x-ray generator products. The increase in the radar and medical markets were offset in part by a $4.2 million decrease in sales in the industrial market attributable primarily to a weak semiconductor market. With respect to the remaining markets, sales for fiscal year 2003 remained stable as compared to fiscal year 2002 levels.

In fiscal 2004, orders are expected to decrease by approximately five to ten percent from the record high fiscal year 2003 levels. The Company expects that orders in the commercial communications market will decrease slightly from the 2003 levels as the orders from direct-to-home service suppliers are not expected to recur at the same levels. Radar and medical orders are expected to remain strong during fiscal year 2004. Orders

in the electronic countermeasure market are likely to decline from their 2003 levels, as logistic agencies are catching up on needed repairs and spares. Orders in the industrial and scientific markets are expected to be relatively stable as compared to fiscal year 2003.

On September 26, 2002, the Company sold the assets used in its Solid State Products Division (“SSPD”) to KMIC Technology Inc., a company owned by the former management of SSPD. The Company received approximately $0.9 million in cash and a $0.3 million unsecured promissory note. The note bears interest at 12% per annum and is payable as follows: one-third of the principal plus unpaid interest is due October 1, 2003 with the remaining balance payable in eight equal, quarterly installments of principal and interest beginning January 1, 2004 and ending October 1, 2005. During fiscal year 2002, the sale resulted in a charge to operations of approximately $3.0 million, which represents the net assets sold including approximately $2.5 million in goodwill and costs and expenses of the transaction, net of $0.9 million of cash received from the sale of the operation’s net assets. Due to the uncertainty of ultimate collection, the proceeds from the promissory note will be recognized when the cash payments are received. During fiscal year 2003, a principal payment of $0.1 million was received from KMIC Technology Inc. In connection with the SSPD transaction, the Company agreed, subject to certain limitations and exceptions, not to engage in the manufacture of intermediate power amplifiers for satcom amplifiers (“IPA’s”) for a 3-year period. In addition, the Company agreed to purchase from KMIC Technology Inc. $0.7 million of its IPA’s per year for such 3-year period at market value.

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 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.

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

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.

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 product. Management’s estimates are based on historical costs for warranty, and 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.

Inventories are stated at the lower of average cost or market (net realizable value). The carrying value of inventory is reduced for estimated obsolescence or unmarketability based upon assumptions about future demand, market conditions, product lifecycles and product pricing. If the Company’s assumptions were to be substantially different than estimated, further adjustments could be required. While these estimates require management to make assumptions and judgments, management believes its understanding of the markets and

customers the Company serves, as well as the mature nature of many of the products the Company manufactures, provides it with the ability to make reliable estimates. Management also evaluates the carrying value of inventory for lower of cost or market on an individual product or contract basis. Analyses are performed based on the estimated costs at completion, and if necessary, a provision is recorded to properly reflect the inventory value of the products or contracts at the lower of cost or net realizable value (selling price less estimated cost of disposal. If estimated contract costs based on these analyses for fixed-price contracts, which represent virtually all of our contracts, were to be substantially higher than originally estimated, provisions could also be required, and in such a case, the Company would record a reserve that would be charged to costs of goods sold.

The Company reviews long-lived assets excluding intangible assets which 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. Adverse changes in the customers and markets served by the Company could result in future impairments of long-lived assets.

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. The Company performed a goodwill impairment test in the first quarter of fiscal year 2003, upon adoption of SFAS No. 142. The Company also performed another goodwill impairment test during the fourth quarter of the 2003 fiscal year. No impairment was noted based on either test. 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.

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

Sales. Sales for fiscal year 2003 of $265.4 million were $14.2 million higher than the prior year level of $251.2 million due primarily to increased demand for radar and medical products. Radar sales increased $9.4 million from fiscal year 2002 due to growth in the U.S. defense budget related to the Department of Defense’s recent expanded emphasis on addressing terrorism and homeland security. This funding has resulted in an increase in new radar system development and deployment, including increases in the rate at which naval surface combat ships are being built. Sales of products in the medical market of $38.2 million have increased by $8.9 million, or 30.4%, from fiscal year 2002 due to sales of VEDs in cancer treatment applications and the Company’s x-ray generator products. Electronic countermeasure and scientific sales were $22.5 million and $8.3 million, respectively, represents increases of $0.8 million and $1.6 million, respectively, from fiscal year 2002. These increases were offset in part by decreased sales in the communications and industrial markets. Communications sales were $82.5 million, a decrease of $2.3 million, or 2.7%, from fiscal year 2002 sales of $84.8 million. The decrease is primarily a result of the Company’s exit from the solid state business at the end of fiscal year 2002. The solid state business contributed approximately $3.5 million in sales in fiscal year 2002. Sales in the industrial market decreased $4.2 million from fiscal year 2002 due primarily to a weak semiconductor market.

Gross Margin. Gross margin as a percentage of sales increased to 30.7% in fiscal year 2003 from 23.5% of sales in fiscal year 2002. The increase in gross profit as a percentage of sales resulted primarily from gains in production efficiencies from the increase in sales volume, resolution of technical problems, favorable product mix, improved pricing for certain products and completion of contracts with lower pricing in prior periods. In addition, gross profit for fiscal year 2003 does not include lower margin products from SSPD , which was sold in September of 2002. In addition, margin fluctuations are expected from period to period due to the variation in the mix of products sold during any period.

Research and Development Expenses. Research and development expenses in fiscal year 2003 increased by $1.0 million to $6.9 million, or 2.6% of sales, compared to fiscal year 2002’s level of $5.9 million, or 2.3% of sales. The increase can be attributed to new product development including outdoor amplifiers for the satcom communications market, new low cost x-ray generators for the medical market and air-cooled transmitter products for the synthetic aperture radar market.

Selling, Marketing, General and Administrative Expenses. Selling, marketing, general and administrative expenses in fiscal year 2003 were $33.6 million, or 12.7% of sales, compared to $35.9 million, or 14.3% of sales, in fiscal year 2002. The total amount of selling and marketing costs decreased slightly as compared to fiscal year 2002. General and administrative costs decreased by $1.8 million to $17.9 million from fiscal year 2002. The decrease relates to the elimination of goodwill amortization expense in fiscal year 2003 upon adoption of SFAS No. 142, a reduction in capital lease amortization related to the Company’s enterprise resource planning system which was fully amortized in fiscal year 2002, and elimination of operating expenses from the SSPD Division that was sold in September 2002. The decreases in general and administrative expenses were offset in part by stock compensation expense of $0.8 million recorded by the Company related to 100,000 shares of common stock purchased by certain executive officers for $0.1 million in cash in March 2003 at a price subsequently determined to be less than fair value as determined by an independent appraisal. In addition, $0.2 million of stock compensation expense was recognized related to stock option grants in fiscal year 2003.

Gain on Sale of SSPD. The $0.1 million gain on sale of SSPD represents a principal payment on the unsecured promissory note due from KMIC Technology Inc. for the purchase of SSPD as described above in “—Overview.”

Interest Expense. Interest expense in fiscal year 2003 was $14.5 million, a decrease of $2.0 million from fiscal year 2002. The decrease can be attributed primarily to the prepayment of the $20.0 million term loan in June 2002. The interest on the term loan accrued at a rate equal to the prime rate plus 5.50% which resulted in approximately $1.7 million of interest expense in fiscal year 2002.

Net Income. Net income before taxes and preferred dividends was $26.6 million for fiscal year 2003 compared to a net loss before taxes and preferred dividends of $2.2 million for fiscal year 2002. Net income after taxes but before preferred dividends was $16.5 million, an improvement of $23.3 million compared to losses of $6.7 million for fiscal year 2002. The tax expense for fiscal year 2003 represents an effective tax rate of approximately 38%. The Company’s net loss for fiscal year 2002 reflected income tax expense in spite of a

consolidated pretax loss, as a result of the recognition of a 100% valuation allowance for net operating losses previously recognized.

Differences Between Holding and CPI. CPI’s operating results differ slightly from Holding’s operating results due to a sale-leaseback transaction between CPI and Holding that took place in December 2000. (See further discussion under “Financial Condition of Holding”). In fiscal year 2003, CPI’s net income before taxes was $27.2 million, which was approximately $0.6 million higher than Holding’s net income before taxes. As a result of this transaction, operating costs for CPI were approximately $1.5 million higher than those of Holding due to rental payments paid by CPI to Holding for use of the San Carlos facility, offset by amortization of the deferred gain on the sale-leaseback and additional depreciation by Holding on the San Carlos facility. Interest expense, net, for CPI was approximately $2.0 million lower than that of Holding. The decrease primarily relates to the fact that Holding’s interest expense includes interest paid on the mortgage financing of the San Carlos facility. In addition, interest income from Holding of $0.9 million related to an intercompany receivable is included in CPI’s results, but is eliminated upon consolidation for Holding. All other operations data for CPI is consistent with Holding’s operations data for fiscal year 2003.

Sales. Sales for fiscal year 2002 of $251.2 million were $21.3 million lower than the prior year level of $272.5 million due primarily to the continued weakness in the commercial communications market. Communications sales were $84.8 million, a decrease of $25.0 million, or 22.8%, from fiscal year 2001 sales of $109.8 million. Industrial and electronic countermeasure sales were $15.5 million and $21.7 million, respectively, which represents a decrease of $4.5 million and $0.2 million, respectively, from fiscal year 2001. Radar, medical and scientific sales, on the other hand, increased by $5.3 million, $1.9 million and $1.2 million, respectively from fiscal year 2001. Sales in the radar and scientific markets of $93.2 million and $6.7 million, respectively benefited from increased military and research spending. Sales of products in the medical market of $29.3 million have increased due to sales of VEDs in cancer treatment applications and the Company’s new line of generators used in x-ray applications.

Gross Margin. Gross margin as a percentage of sales increased 5.5% to 23.5% in fiscal year 2002 from 18.0% of sales in fiscal year 2001. Gross margins were negatively affected in fiscal year 2001 by higher start-up and warranty costs on several new satcom products and increased provisions for potentially excess and obsolete inventories. In addition, margin fluctuations are expected from period to period due to the variation in the mix of products sold during any period.

Research and Development Expenses. Research and development expenses in fiscal year 2002 increased by $0.1 million to $5.9 million, or 2.3% of sales, compared to fiscal year 2001’s level of $5.8 million, or 2.1% of sales. The slight increase can be attributed to increased research and development activities at the Company’s satcom equipment segment offset by increased customer funded development at the Company’s division in Beverly, Massachusetts.

Selling, Marketing, General and Administrative Expenses. Selling, marketing, general and administrative expenses in fiscal year 2002 were $35.9 million or 14.3% of sales compared to $38.6 million, or 14.2% of sales in fiscal year 2001. Selling and marketing costs decreased approximately $1.4 million in fiscal year 2002 due primarily to reductions in commissions as a result of weaker sales, lower headcount in Europe and various cost reduction programs. General and administrative costs decreased by $1.1 million to $19.8 million from fiscal year 2001. The decrease primarily relates to reduced general and administrative costs associated with the relocation of the satcom division to Canada as well as a reduction in overall spending due to cost reduction programs in place. These decreases were offset in part by higher management performance incentives. In addition, fiscal year 2001 general and administrative costs included a gain of $0.9 million on the sale of rental property in Beverly, Massachusetts.

Loss on Sale of SSPD. On September 26, 2002, the Company sold SSPD to KMIC Technology Inc., a company owned by the former management of SSPD. The Company received approximately $0.9 million in cash and a $0.3 million unsecured promissory note. The sale resulted in a fourth quarter charge to operations of approximately $3.0 million which represents the book value of the net assets sold including approximately $2.5 million in goodwill and costs and expenses of the transaction, net of $0.9 million of cash received from the sale of the operation’s net assets. Due to the uncertainty of ultimate collection, the proceeds from the promissory note will be recognized when the cash payments are received.

Interest Expense. Interest expense in fiscal year 2002 was $16.5 million, a decrease of $4.2 million from fiscal 2001. The decrease is due primarily to a reduction in outstanding debt as well as lower interest rates.

Net Loss. Net loss before taxes and preferred dividends was $2.2 million for fiscal year 2002 compared to a net loss before taxes and preferred dividends of $15.9 million for fiscal year 2001. Net loss after taxes but before preferred dividends was $6.7 million, an improvement of $12.1 million compared to losses of $18.8 million for fiscal year 2001. In spite of a consolidated pretax loss, a provision for income tax expense was booked in fiscal year 2002 based on the establishment of a 100% valuation allowance. The fiscal year 2001 provision for income tax expense was primarily due to the release of amounts previously accrued for potential examinations by tax authorities and deferred income tax expense resulting from the recognition of a 100% valuation allowance for net operating losses previously recognized, carryforwards in the United States, and foreign taxes.

Differences Between Holding and CPI. CPI’s operating results differ slightly from Holding’s operating results due to a sale-leaseback transaction between CPI and Holding that took place in December 2000. (See further discussion under “Financial Condition of Holding”). In fiscal year 2002, CPI’s net loss before taxes was $1.5 million, which was approximately $0.7 million lower than Holding’s net loss before taxes. As a result of this transaction, operating costs for CPI were approximately $1.4 million higher than those of Holding due to rental payments paid by CPI to Holding for use of the San Carlos facility, offset by amortization of the deferred gain on the sale-leaseback and additional depreciation by Holding on the San Carlos facility. Interest expense, net, for CPI was approximately $2.0 million lower than that of Holding. The decrease primarily relates to the fact that Holding’s interest expense includes interest paid on the mortgage financing of the San Carlos facility. In addition, interest income from Holding of $0.9 million related to an intercompany receivable is included in CPI’s results, but is eliminated upon consolidation for Holding. All other operations data for CPI is consistent with Holding’s operations data for fiscal year 2002.

As of October 3, 2003, cash and cash equivalents were $33.8 million, as compared to $2.7 million at September 27, 2002. The majority of the $31.0 million increase relates to cash generated from operating activities, offset in part by cash used in investing and financing activities in fiscal year 2003 of $2.9 million and $1.3 million, respectively. Cash provided by operating activities of $35.3 million was generated primarily from $16.5 million in net income, non-cash depreciation and amortization of $7.7 million and increases in current liabilities of $9.2 million. Cash provided by operating activities in fiscal year 2002 was $44.0 million despite a net loss of $6.7 million due to significant reductions in accounts receivable and inventories from the prior year.

Net cash used in investing activities was $2.9 million in fiscal year 2003, $2.5 million in fiscal year 2002, and $3.8 million in fiscal year 2001. Investing activities were comprised principally of investment in property, plant and equipment totaling $3.1 million in fiscal year 2003, $3.4 million in fiscal year 2002, and $5.8 million in fiscal year 2001. The use of cash for investment in property, plant and equipment in fiscal year 2003 and 2002 was partially offset by cash proceeds from the fiscal year 2002 sale of SSPD of $0.1 million and $0.9 million, respectively. The use of cash for investment in property, plant and equipment in fiscal year 2001 was partially offset by cash proceeds for the sale of property, plant and equipment of $1.9 million. The Company’s continuing operations typically do not have large capital requirements. Capital expenditures are generally made to replace existing assets, increase productivity, facilitate cost reductions or meet regulatory requirements. The Company expects the level of capital expenditures in fiscal year 2004 to be moderately higher than fiscal year 2003 levels; however, the Company will continue to manage capital expenditures consistent with business conditions.

Financing activities during fiscal year 2003 were related primarily to payment of debt issuance costs and principal on Holding’s mortgage financing, offset by proceeds from the sale by Holding of common stock to members of management.

In a further effort to provide capital and liquidity in the long term and in an effort to decrease production costs and more efficiently use the Company’s facilities, the Company relocated its satcom division’s production operation from Palo Alto, California to its facility in Ontario, Canada during fiscal year 2001 and 2002. Also, during fiscal year 2001, the Company relocated its administrative offices into a single building in Palo Alto.

As of October 3, 2003, the Company had $30.0 million available under its revolving line of credit that expires May 31, 2005. The following table provides a summary of the effect on liquidity and cash flows from the Company’s contractual obligations as of October 3, 2003:

The Company’s debt obligations include mortgage financing of Holding in the amount of $17.5 million incurred by Holding in connection with the purchase by Holding of the San Carlos real property. This mortgage financing was refinanced in June 2003. Under the terms of the refinancing, the loan was extended until January 31, 2004. During fiscal years 2002 and 2003, the Company repaid $0.5 million in principal amount of loan in two installments, one on June 1, 2002 and one on December 1, 2002. Restrictions in the Indenture and the Senior Notes and in the Company’s credit facility prohibit CPI from distributing cash to Holding to satisfy this obligation. Management expects to either refinance this obligation or to enter into a sale or other transaction with respect to this property. Holding has entered into an agreement to sell the San Carlos property. As discussed above in Item 1 “Business—Environmental Matters,” the proposed sale is subject to various conditions.

On December 4, 2003, the trustee under the Indenture on behalf of, CPI, issued a notice to all of the registered holders of the Senior Notes, notifying them that CPI has elected to redeem $26,000,000 in principal amount of the Senior Notes on January 5, 2003. The redemption will occur at a price equal to 101.5% of the principal amount of such notes plus accrued and unpaid interest to January 5, 2003. See Item 1 “Business—Recent Events—Redemption of Senior Subordinated Notes of CPI.”

Upon the occurrence of a change in control, the Company shall make an offer to each holder of the Senior Preferred Stock at a purchase price in cash equal to 101.0% of the aggregate liquidation preference thereof plus accumulated and unpaid dividends thereon to the date of repurchase.

Generally, there can be no assurance that the combination of cash generated by operations, borrowing availability from the Company’s credit facility and additional collateral-based 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 will adopt one or more alternatives, such as reducing or delaying capital expenditures, reducing discretionary costs, and negotiating an increase to the Company’s borrowing capacity under its line of credit.

As of October 3, 2003, cash and cash equivalents were $33.8 million, as compared to $2.7 million at September 27, 2002. The majority of the $31.0 million increase relates to cash generated from operating activities, offset in part by cash used in investing and financing activities in fiscal year 2003 of $2.9 million and $1.1 million, respectively. Cash provided by operating activities of $35.1 million was generated primarily from $16.9 million in net income, non-cash depreciation and amortization of $7.0 million and increases in current liabilities of $9.8 million. Cash provided by operating activities in fiscal year 2002 was $43.8 million despite a net loss of $6.1 million due to significant reductions in accounts receivable and inventories from the prior year.

Net cash used in investing activities was $2.9 and $2.5 million in fiscal years 2003 and 2002, respectively. Net cash provided by investing activities was $13.4 million in fiscal year 2001. Net cash used in investing activities were comprised principally of investment in property, plant and equipment totaling $3.1 million in fiscal year 2003, $3.4 million in fiscal year 2002, and $5.8 million in fiscal year 2001. The use of cash for investment in property, plant and equipment in fiscal year 2003 and 2002 was partially offset by cash proceeds

from the fiscal year 2002 sale of SSPD of $0.1 million and $0.9 million, respectively. In fiscal year 2001, the use of cash for investment in property, plant and equipment was offset by cash proceeds from the sale by CPI of the San Carlos, California facility to Holding of $17.3 million and the sale of rental property at the Company’s Beverly, Massachusetts facility of $1.9 million. The Company’s continuing operations typically do not have large capital requirements. Capital expenditures are generally made to replace existing assets, increase productivity, facilitate cost reductions or meet regulatory requirements. The Company expects the level of capital expenditures in fiscal year 2004 to be moderately higher than fiscal year 2003 levels; however, the Company will continue to manage capital expenditures consistent with business conditions.

In a further effort to provide capital and liquidity in the long term and in an effort to decrease production costs and more efficiently use the Company’s facilities, the Company relocated its Satcom Division’s production operation from Palo Alto, California to its facility in Ontario, Canada during fiscal year 2001 and 2002. Also, during fiscal year 2001, the Company relocated its administrative offices into a single building in Palo Alto.

On December 4, 2003, the trustee under the Indenture on behalf of CPI, issued a notice to all of the registered holders of the Senior Notes, notifying them that CPI has elected to redeem $26,000,000 in principal amount of the Senior Notes on January 5, 2003. The redemption will occur at a price equal to 101.5% of the principal amount of such notes plus accrued and unpaid interest to January 5, 2003. See Item 1 “Business—Recent Events—Redemption of Senior Subordinated Notes of CPI.”

Upon the occurrence of a change in control, the Company shall make an offer to each holder of the Senior Preferred Stock at a purchase price in cash equal to 101.0% of the aggregate liquidation preference therof plus accumulated and unpaid dividends thereon to the date of repurchase.

Generally, there can be no assurance that the combination of cash generated by operations, borrowing availability from the Company’s Credit Facility and additional collateral-based 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 will adopt one or more alternatives, such as reducing or delaying capital expenditures, reducing discretionary costs, and negotiating an increase to the Company’s borrowing capacity under its line of credit.

The Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations”, in August 2001, and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”, in October 2001. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and requires that the fair value of an asset retirement obligation be recorded as a liability in the period in which it incurs the obligation. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. It provides a single accounting model for long-lived assets to be disposed of and replaces SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of.” The Company adopted these Statements on September 28, 2002. The adoption did not have a material impact on the Company’s consolidated financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This Statement rescinds SFAS Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, SFAS Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” SFAS No. 145 Statement amends SFAS Statement No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 are effective in fiscal years beginning after May 15, 2002, with early adoption permitted, and, in general, are to be applied prospectively. The Company adopted this Statement on September 28, 2002. The adoption did not have a material impact on the Company’s consolidated financial position or results of operations.

In June 2002, the Financial Accounting Standard Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated with Exit and Disposal Activities.” SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002. Adoption of this statement did not have a material effect on the Company’s consolidated financial position or results of operations.

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires a guarantor to include disclosure of certain obligations, and if applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee. The recognition requirement is effective for guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on the Company’s consolidated financial position or results of operations.

In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of SFAS 123.” SFAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the accounting provisions of SFAS 123, “Accounting for Stock-Based Compensation.” In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the provisions under this Statement in the second quarter of fiscal year 2003. Adoption of SFAS 148 did not have a material impact on the Company’s consolidated financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”, in an effort to expand upon and strengthen existing accounting guidance as to when a company should consolidate the financial results of another entity. This interpretation requires “variable interest entities” as defined to be consolidated by a company if that company is subject to a majority of expected losses of the entity or is entitled to receive a majority of expected residual returns of the entity, or both. A company that is required to consolidate a variable interest entity is referred to as the entity’s primary beneficiary. The interpretation also requires certain disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. The consolidation and disclosure requirements apply immediately to variable interest entities created after January 31, 2003. The Company is not the primary beneficiary of any variable interest entity created after January 31, 2003, nor does the Company have a significant variable interest in a variable interest entity created after January 31, 2003.

For variable interest entities that existed prior to February 1, 2003, the consolidation requirements were initially effective for reporting periods beginning after June 15, 2003. On October 9, 2003, the FASB Staff Issued Position No. FIN46-6 which delayed the effective date of consolidation provisions of this interpretation for variable interest entities created before February 1, 2003 if the reporting entity had not yet issued financial statements reporting the variable interest entities in accordance with the consolidation provision of Interpretation 46. The new effective date is for reporting periods ending after December 15, 2003. The Company will apply the provisions of this interpretation to variable interest entities created before February 1, 2003 as of January 3, 2004. The Company has evaluated the impact of the provisions of Interpretation 46 and it believes it will not have a material impact on the Company’s consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This Statement will be applied prospectively for contracts entered into or modified after June 30, 2003 and hedging relationships designated after June 30, 2003. Adoption of SFAS No. 149 in the Company’s fourth quarter did not have a material impact on the Company’s consolidated financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 requires that certain financial instruments with characteristics of both liabilities and equity, be classified as liabilities in statements of financial position. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to existing financial instruments at the beginning of the first fiscal period beginning after December 15, 2003 for non-public entities. The Company is currently analyzing this Statement and has not yet determined its impact on the Company’s consolidated financial position or results of operations.

Investors should carefully consider the following risks and the other information in this report and the Company’s other filings with the SEC before deciding to invest in the Company or to maintain or increase any investment. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties may also adversely impact and impair the Company’s business. If any of the following risks actually occur, the Company’s business, results of operations, or financial condition would likely suffer. In such case, the trading price of the Company’s securities could decline and investors might lose all or part of their investment.

•

The Company had historical losses. In fiscal year 2003, the Company had its first profitable year since fiscal year 1998. The Company has an accumulated deficit, as of October 3, 2003, of $84.5 million. The Company’s ability to generate revenues and profits is subject to the risks and uncertainties encountered by companies in very competitive markets.

•

The Company’s leverage is substantial, which could adversely affect its financial health and ability to obtain financing in the future and to react to changes in its business. The Company has a significant amount of debt, which could have important consequences, including, but not limited to the following: it could make it more difficult for the Company to satisfy its obligations under its credit facilities and to its noteholders; it could require the Company to dedicate a substantial portion of its cash flow from operations to payments on debt, which will reduce the funds available for working capital, capital expenditures, and other general corporate expenses; it could have the effect of limiting the Company’s flexibility in planning for, or reacting to, changes in its business and the markets in which it competes; it could place the Company at a disadvantage compared to its competitors that have proportionately less debt; and it could limit the Company’s ability to borrow additional funds in the future, if needed, due to applicable financial and restrictive covenants in the debt.

•

The Company’s ability to generate the significant amount of cash needed to service its debt and grow its business depends on many factors beyond the Company’s control. The Company’s ability to make payments on its debt and to fund its planned capital expenditures will depend on its ability to generate cash and to secure financing in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond the Company’s control. If the business does not generate sufficient cash flow from operations, and sufficient future borrowings are not available to the Company under its credit facilities or from other sources of financing, the Company may not be able to repay its debt, grow its business or fund its other liquidity needs.

•

The markets in which the Company operates are competitive. The Company encounters competition in certain business areas from other companies, some of which have resources substantially greater than those of the Company. The Company’s ability to compete in such 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.

•

Certain markets in which the Company operates are subject to technological change. The Company must 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 financial condition and results of operations. The Company’s success will depend on its ability to anticipate or adapt to new technology on a timely basis, and if it fails to adapt successfully to technological changes or fails to obtain access to important technologies, the business may suffer.

•

Changes to governmental environmental regulation and legislation could adversely affect the Company’s business. The Company is subject to a variety of federal, state and local environmental laws and regulations and utilizes in its operations a number of chemicals or similar substances that are classified as hazardous. Management believes that the Company’s current operations are in substantial compliance with current environmental laws and regulations. However, changes in law or limitations on chemical uses or certain manufacturing processes could restrict the ability of the Company to operate in the manner in which the Company is currently operated or is permitted to be operated. In addition, it is possible that the Company may experience releases of certain chemicals or other events that could cause the incurrence of material cleanup costs or other damages.

•

A portion of the Company’s sales are, and are expected to continue to be, from contracts through the United States Government, which are subject to Government regulation, changes in Governmental appropriations, national defense policies and availability of government funds. United States 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. Government contracts are, by their terms, subject to termination by the United States Government at its convenience or upon default by the contractor. Changes in governmental regulations, national defense policies or congressional appropriation could negatively impact the Company’s revenues.

•

The Company depends on a limited group of suppliers for certain materials necessary for the manufacture of its products. If the Company is unable to procure the necessary materials from its suppliers, its ability to manufacture products could be severely impaired, and the Company’s growth, financial condition and results of operations could suffer. In addition, the prices of these raw materials are subject to fluctuation and could also negatively impact the Company’s financial condition.

•

The Company depends on its ability to attract and retain qualified personnel. 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 exists competition for such 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.

•

The Company’s principal common stockholders can exercise significant control over the Company and could limit the ability of the Company’s other stockholders to influence the outcome of transactions requiring shareholder vote. As of December 8, 2003, approximately 76% of the Company’s outstanding common stock is owned by the Company’s executive officers, directors and principal stockholders. These stockholders will have the ability to exercise influence over all matters requiring approval by the Company’s stockholders, including the election of directors and approval of significant corporate transactions.

The Company is exposed to interest rate risk on a portion of its outstanding debt, as well as foreign currency exchange rate risk inherent in its sales commitments and non-U.S. dollar denominated expenses, and non-U.S. dollar denominated assets and liabilities. The Company regularly assesses the potential impact of these

risks and does not anticipate any material losses in these areas. The Company does not use derivative financial instruments for speculative or trading purposes.

The Company’s Senior Subordinated Notes mature in August 2005, and bear a fixed interest rate of 12% per annum. As discussed above in Item 1 “Business-Recent Events,” in December 2003, the Company notified the holders of the Notes of its election to redeem $26.0 million of the Notes. The Company’s remaining outstanding debt, with a carrying value of approximately $17.5 million at October 3, 2003, is subject to changes in the prime rate or LIBOR rates.

The majority of the Company’s revenue and expense activities are transacted in U.S. dollars. However, CPI does enter into these transactions in other currencies, primarily the Canadian dollar, the British pound, the Euro, the Australian dollar and the Swiss franc. The Company limits its foreign currency exposure primarily through natural hedging (offsetting foreign currency payables with foreign currency receivables), but may enter into forward contracts if necessary. These efforts reduce, but do not eliminate, the impact of foreign currency rate movements. The Company estimates that a one cent strengthening in the Canadian dollar against the U.S. dollar will increase the Company’s costs of goods sold and operating expenses by $0.4 million on an annual basis, and a one cent weakening will cause a decrease of an equivalent amount.

The Company performed a sensitivity analysis in which it assessed the potential loss in future income from the impact of a 10% adverse movement in interest and foreign currency exchange rates on outstanding debt and non-U.S. dollar denominated assets and liabilities. The impact was determined based on the hypothetical change from shifts in the market rates over a period of one year. Other market sensitive financial instruments were not included in the analysis as they were not material. In terms of interest rate risk, a 10% adverse movement in the Base Rate or Effective Rate on the Company’s variable rate debt would result in a decrease in future income of less than $0.1 million. In terms of foreign currency exchange rate risk, a 10% adverse movement in the levels of foreign currency exchange rates against the U.S. dollar with all other variables held constant would have virtually no effect on future income as foreign payable and receivable balances have similar values, minimizing the foreign exchange exposure. Actual results, however, could differ materially.

Information called for by this item is set forth in the consolidated financial statements of Holding and CPI contained in this report. Specific financial statements and schedules can be found at the pages listed in the Index to Financial Statements on page F-1.

Item 9: Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

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.

In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the above evaluation, management believes that its controls do provide such reasonable assurances.

There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal year that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The following is a table setting forth certain information with respect to the directors and executive officers of Holding. All directors serve for a period of one year or until their successors are duly elected and qualified.

The following is a table setting forth certain information with respect to the individuals who are the directors and executive officers of CPI. All directors serve for a period of one year or until their successors are duly elected and qualified.

William P. Rutledge became Chairman of the Board of Holding and CPI in June 1999. He was also interim Chief Executive Officer during the period June 1999 to November 1999. Prior to this appointment, Mr. Rutledge served as President and Chief Executive Officer of Allegheny Teledyne Incorporated (“Teledyne, Inc”) from August 1996 to March 1997. Mr. Rutledge held several other positions at Teledyne, Inc. beginning with Group Executive in 1986, Vice President in 1987, Senior Vice President 1988, Executive Vice President in 1989, and President in 1990. In 1991 he was elected as Chief Executive Officer and appointed as Chairman in 1993. Prior to joining Teledyne, Inc. Mr. Rutledge held several management positions at FMC from 1971 to 1986. Mr. Rutledge received a BS in Metallurgical Engineering from Lafayette College and an MS in Financial Management from George Washington University.

O. Joe Caldarelli became Chief Executive Officer and a director of Holding and CPI in March 2002. Prior to this, Mr. Caldarelli was a Co-Chief Operating Officer since October 2000 and Vice President of CPI since August 1995. Mr. Caldarelli is also the Division President of the Communications and Medical Products (“CMP”) and Satcom Divisions. Mr. Caldarelli was Vice President and General Manager for CMP under the Electron Device Business of Varian, from 1985 until August 1995 and was President and a director of Varian Canada, Inc. from 1992 until August 1995. From 1982 until 1985, Mr. Caldarelli was Marketing Manager of CMP and served as its Equipment Operations Manager from 1979 until 1982. Prior to joining Varian, Mr. Caldarelli served as Manufacturing Engineering Manager for Medtronic Canada, Inc. Mr. Caldarelli holds a B.S. in Mechanical Engineering from the University of Toronto.

Robert A. Fickett became President, Chief Operating Officer and a director of Holding and CPI in March 2002. Prior to this, Mr. Fickett was a Co-Chief Operating Officer since October 2000 and Vice President of CPI since April 1998. Mr. Fickett has also been the Division President of the Microwave Power Products (“MPP”) Division since April 1998. From January 1996 to April 1998, Mr. Fickett was Vice President of Operations for MPP. From 1993 until January 1996, he was President and Chief Executive Officer of Altair Technologies, Inc., a contract manufacturer. From 1982 until 1993, Mr. Fickett held a number of positions with Varian, including Engineering Manager of MPP’s Klystron Engineering Group, which he was promoted to in 1989. Mr. Fickett received a B.S. degree in Mechanical Engineering from the University of California, Berkeley.

Joel A. Littman became Chief Financial Officer of Holding and CPI in September 2001. Mr. Littman was Corporate Controller for CPI from November 1996 to September 2001. From September 1989 to November 1996 Mr. Littman served as Controller of the Microwave Power Products Division of Varian Associates and CPI. Prior to that Mr. Littman held various finance positions with Varian Associates and TRW. Mr. Littman received a B.A. degree in economics and a MBA, both from the University of California at Los Angeles.

John R. Beighley became a Vice President of CPI in March 1997 and currently heads the Company’s Worldwide Field Sales Organization. From May 1992 to March 1997, Mr. Beighley was Western Hemisphere Sales Manager responsible for sales in the Americas, as well as the Far East and Australia. From June 1989 to May 1992, Mr. Beighley was the North American Sales Manager. From March 1981 to June 1989, Mr. Beighley held a number of Product Marketing and Field Sales positions with CPI’s predecessor, Varian. Mr. Beighley received a BS degree in Marketing from San Francisco State University and a MBA from Santa Clara University.

Don C. Coleman became a Vice President of CPI and Division President of the Beverly Microwave Division (“BMD”) in February 1999. Mr. Coleman was Vice President of Manufacturing for BMD from February of 1996 until accepting his current position. From 1990 until 1996, Mr. Coleman held the position of Engineering Manager for Receiver Protector Products at BMD. Mr. Coleman held a variety of manufacturing and development engineering positions at Varian from the time he joined Varian in 1976 until 1990. Prior to being employed by Varian, Mr. Coleman attended the University of Massachusetts where he received a B.S. degree in Engineering.

Mike Cheng became a Vice President of CPI in August 2000 and currently heads the Company’s Eimac Division. From April 1999 to August 2000, Mr. Cheng was Vice President of Operations for MPP. From 1994 until April 1999, he was Vice President of Marketing for MPP. From 1980 until 1994, Mr. Cheng held a number of manufacturing and engineering positions with Varian, including Production Manager of MPP’s Klystron Engineering Group, which he was promoted to in 1989. Prior to joining Varian, Mr. Cheng was an engineer in

the Nuclear Energy Division of General Electric Corporation. Mr. Cheng received a B.S. degree in Chemical Engineering from the University of California, Berkeley and an MBA from Golden Gate University.

John G. Danhakl became a director of the Company in August 1995. He has been a partner of Leonard Green & Partners, L.P. (“LGP”), a merchant-banking firm that manages Green Equity Investors II, L.P. (“GEI II”), since 1995. Prior to becoming a partner at LGP, Mr. Danhakl was a Managing Director at Donaldson, Lufkin & Jenrette Securities Corporation (“DLJ”) since 1990. Prior to joining DLJ, Mr. Danhakl was a Vice President at Drexel Burnham Lambert from 1985 to 1990. Mr. Danhakl currently serves on the Boards of Directors of the Arden Group, Inc., Big 5 Sporting Goods, Diamond Triumph, Auto Glass, Inc., Leslie’s Poolmart, Inc., VCA Antech, Inc., Petco Animal Supplies, Inc., MEMC Electronic Materials, Inc., and Phoenix Scientific, Inc. Mr. Danhakl is a 1980 graduate of the University of California at Berkeley. He received his MBA in 1985 from the Harvard Business School.

John M. Baumer became a director of the Company in October 2001. He has been a partner of LGP since 2001. Mr. Baumer had previously been a Vice President at LGP since 1999. Prior to joining LGP, he had been a Vice President at DLJ, and had been with DLJ since 1995. Prior to joining DLJ, Mr. Baumer worked at Fidelity Investments and Arthur Andersen. Mr. Baumer currently serves on the Boards of Directors of Intercontinental Art, Inc., VCA Antech, Inc., Petco Animal Supplies, Inc., Leslie’s Poolmart, Inc., and Phoenix Scientific, Inc. Mr. Baumer is a 1990 graduate of the University of Notre Dame. He also received his MBA in 1995 from the Wharton School at the University of Pennsylvania.

J. Kristofer Galashan became a director of the Company in March 2003. He joined LGP as an associate in August 2002. Prior to joining LGP, Mr. Galashan was in the Investment Banking Division of Credit Suisse First Boston (formerly DLJ) in their Los Angeles office. Mr. Galashan earned a Bachelor of Arts degree in Honors Business Administration from the Richard Ivey School of Business at the University of Western Ontario.

Neither CPI nor Holding has an audit committee. No member of the Board of Directors of CPI or Holding has the qualifications required to be considered an audit committee financial expert for purposes of the SEC rules and regulations. Currently, the Company is not required to have an audit committee or an audit committee financial expert.

The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer and to its controller. The code of ethics is filed as an exhibit to this annual report on Form 10-K.

The following table shows certain information concerning compensation paid or accrued by the Company to the Chief Executive Officer and the next four most highly compensated executive officers of Holding and CPI (collectively, the “Named Executive Officers”) for each of the last three fiscal years.


		Annual Compensation (e)								Long Term Compensation (e)

										Securities
										Underlying
								Other Annual		Options		All other
Name and		Fiscal				Bonus		Compensation		# of shares		Compensation
Principal Position		Year		Salary		(a)		(b)		(c)		(d)

			2003	$	324,000	$	792,000	$	19,500		50,000	$	24,843
O. Joe Caldarelli			2002		252,933		665,972		19,762		—		153,425
	Chief Executive Officer		2001		184,033		—		6,864		—		14,147

Robert A. Fickett			2003	$	255,008	$	421,875	$	18,958		30,000	$	20,697
	Chief Operating Officer and President		2002		237,500		600,000		29,421		—		17,901
			2001		211,462		—		24,090		—		14,982

Don C. Coleman			2003	$	160,519	$	178,875	$	22,025		10,000	$	10,923
	Vice President		2002		142,077		137,523		30,703		—		9,652
			2001		139,462		52,208		17,230		—		9,011

Joel A. Littman			2003	$	161,538	$	217,200	$	18,958		15,000	$	11,031
	Chief Financial Officer, Treasurer		2002		143,780		156,000		19,966		—		10,059
	and Secretary		2001		133,462		24,507		6,832		6,000		8,649

Mike Cheng			2003	$	156,354	$	174,375	$	30,125		10,000	$	10,387
	Vice President		2002		135,536		102,239		17,543		—		9,146
			2001		131,746		30,968		2,862		—		6,504

(a)

Consists of awards under CPI’s Management Incentive Plan for fiscal year 2003, 2002 and 2001. Fiscal year 2003’s awards will be paid in fiscal year 2004.

(b)

Consists of amounts paid for personal benefits and amounts reimbursed for the payment of taxes on certain perquisites.

(c)

Consists of stock options granted under the 2000 Stock Option Plan. Each option granted vests at the rate of 25% per year over a four-year period, beginning on the date of grant.

(d)

Consists of (1) Company contributions to CPI’s 401(k) plan and Non-Qualified Deferred Compensation Plan for Named Executive Officers except Mr. Caldarelli, (2) Company contributions to the Pension Plan for Mr. Caldarelli, and (3) Company paid premiums for group life insurance for each of the named executive officers.

(e)

The table does not include compensation expense attributable to the 100,000 shares of Holdings’ common stock purchased by certain executive officers during fiscal year 2003 at a price which was subsequently determined to be at below fair value.

(a)

Based on a total of 191,000 options granted to employees in fiscal year 2003.

(b)

During the closing of the quarter ended October 3, 2003 and in connection with the Merger Agreement described above in Item 1 “Business-Recent Events”, the Company obtained an updated independent appraisal to determine the fair value of common stock purchased by certain executives and stock options granted to certain employees during the quarter ended April 4, 2003.

(c)

These columns show gains that could accrue for the respective options, assuming that the market price of the Company’s common stock appreciates from the date of grant over a period of 10 years at an annualized rate of 0%, 5% and 10%, respectively. If the stock price does not increase above the exercise price at the time of exercise, realized value to the named executives from these options will be zero.

Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-end Option Values

The following table provides summary information concerning the shares of common stock acquired in 2003, the value realized upon exercise of stock options in 2003, and the year end number and value of unexercised options with respect to each of the officers listed in the summary compensation table as of October 3, 2003. The value was calculated by determining the difference between the fair value of underlying securities and the exercise price. The fair value of the Company’s common stock at October 3, 2003 was assumed to be $15.49 per share based upon an independent appraisal.

During fiscal year 2003, the Company established a defined benefit pension plan for its Chief Executive Officer, O. Joe Caldarelli. The amount of annual pension payable to Mr. Caldarelli at age 65 is equal to: (1) 2% of the average of Mr. Caldarelli’s highest average indexed earnings for each year of pensionable service before December 31, 1990 plus (2) the aggregate of 2% of Mr. Caldarelli’s Indexed Earnings for each year of pensionable service on or after January 1, 1991. Notwithstanding the above formula, the amounts payable to Mr. Caldarelli under the plan cannot exceed the maximum pension limits under the Canadian Income Tax Act, which currently generally limit annual payments to approximately $1,700 (Canadian) for each year of service.

Based on the limits imposed under the Canadian Income Tax Act, the Company estimates that the annual benefits Mr. Caldarelli would receive pursuant to the pension plan upon retirement at age 65 (assuming continued service until then) would be approximately $62,000 (Canadian).

In March 2000, Holding established the Communications & Power Industries 2000 Stock Option Plan (“the Plan”) to provide an incentive for key employees (including the Named Executive Officers), consultants, advisors, and non-affiliate directors of Holding and its subsidiaries and reserved 250,000 shares of Holding’s common stock for issuance under the Plan. Options granted under the Plan are granted at fair value, expire ten years from the date of grant and generally vest in four equal annual installments, commencing one year from the date of grant. The stock options granted pursuant to the Plan are not considered “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code, as amended and are subject to all of the terms and restrictions contained in the Stock Option Agreements and Stockholders Agreements. On March 3, 2003, a majority of the holders of Holding’s common stock approved an amendment to the Plan to increase the total number of shares of common stock that Holding is authorized to issue pursuant to the Plan from 250,000 to 350,000. As of the fiscal year ended October 3, 2003, options granted under the Plan totaled 304,050 shares of common stock, of which 82,600 were exercisable.

The following table contains information as of October 3, 2003 for compensation plans previously approved by security holders. There are no compensation plans for which approval has not been obtained by security holders.

The Named Executive Officers and certain of Holding’s and CPI’s other executive officers are participants in Holding’s 1995 Management Equity Plan (the “Holding Equity Plan”). Under the Holding Equity Plan, participants may purchase shares of Holding common stock (“Management Shares”) at a price determined by Holding’s board of directors to be the fair value of such Holding common stock on the date the participant executes an agreement to purchase the shares. Holding has reserved a total of 1,250,000 shares of common stock for issuance under the Holding Equity Plan, of which 1,146,750 were issued to the Company’s former Chief Executive Officer, certain executive officers and key employees (collectively, any executive officers and key employees who may acquire Management Shares are referred to as the “Management Investors”) in fiscal year 1995. In March 2003, the Company sold an additional 100,000 shares of the common stock of Holding for $0.1 million of cash to certain executive officers of the Company, for a purchase price of $1.10 per share, pursuant to the Holding Equity Plan. The Company recorded compensation expense of $0.8 million in fiscal year 2003 related to this sale as the shares were subsequently determined to have been sold at less than fair value as determined by an independent appraisal.

In connection with Holding’s 1995 Management Equity Plan, certain executive officers of CPI and Holding elected to pay a portion of the purchase price for their Management Shares by delivery of a secured promissory note to Holding (collectively, the “Management Notes”). The aggregate principal amount of such Management Notes was $0.9 million as of October 3, 2003. Of this amount, $0.7 million is secured by a pledge of a portion (from 50% to 75%) of the Management Shares issued to each executive officer and is guaranteed by Varian. The balance of $0.2 million is secured by a pledge of approximately 91% of the Management Shares issued, but is not guaranteed by Varian. Outstanding principal under each type of Management Note bears interest at an annually adjustable rate equal to the “Applicable Federal Rate” in effect under Internal Revenue Code Section 1274(d) for obligations of a term equal to the then-remaining term of such note. Recourse by Holding under both types of Management Notes is limited to the Management Shares pledged to secure the applicable note and the Varian guaranty. The Board of Directors of Holding has extended the due dates of all past and future scheduled interest and principal payments on these Management Notes until the Management Notes are due in 2004 or upon request of the Board of Directors, whichever comes first.

Mr. Caldarelli, Mr. Fickett, Mr. Cheng, Mr. Coleman, and Mr. Littman are parties to employment agreements with CPI, providing for annual base salaries of $300,000, $250,000 (subject to annual review and adjustment), approximately $155,000, approximately $159,000, and $144,000 (subject to annual review and adjustment), respectively.

Under these agreements, each of these executives is eligible for participation in the Management Incentive Plan. The Board of Directors of CPI will review the Management Incentive Plan at the beginning of each fiscal year and will establish the details for participation for such fiscal year. Mr. Caldarelli’s target bonus under the Management Incentive Plan is set at 1 times salary, but is subject to change. The targets for Mr. Fickett , Mr. Cheng, Mr. Coleman and Mr. Littman are set annually by the Board of Directors.

Upon termination of his employment by the CPI, Mr. Caldarelli will be entitled to receive severance payments, medical benefits and all other benefits provided to him by CPI (except for long-term disability) for at least 18 months and no more than 30 months. Mr. Fickett and Mr. Littman will each be entitled to receive severance payments, medical benefits and all other benefits provided to them by CPI for 18 months upon termination of their employment by CPI. Each of Mr. Caldarelli, Mr. Fickett and Mr. Littman will be entitled to

receive his bonus under the Management Incentive Plan for the entire year in which his employment is terminated.

Upon termination of their employment by CPI without cause, Mr. Cheng and Mr. Coleman will each be entitled to receive severance payments, medical benefits and all other benefits provided to them by CPI for at least 6 months and no longer than 12 months. If their employment is terminated at any time within 2 years after the date of a change of control event, Mr. Cheng and Mr. Coleman will each be entitled to receive severance payments, medical benefits and all other benefits provided to them by CPI for 12 months. During the severance period, each of Mr. Cheng and Mr. Coleman will be entitled to receive 100% of the bonus under the Management Incentive Plan that otherwise would have been earned by such executive.

Neither Holding nor CPI has a Compensation Committee. All decisions on the compensation of executive officers and directors of Holding, CPI or any of their respective subsidiaries are made by the full board of directors.

None of the directors of Holding or CPI are officers or employees or former officers or employees of Holding, CPI or any of their respective subsidiaries, other than Mr. Caldarelli and Mr. Fickett. None of the directors or officers has any relationships that would require disclosure by the Company pursuant to Item 404 of Regulation S-K (“Certain Relationships and Related Transactions”), except as described below.

LGP is investment adviser to, and an affiliate of the general partner of, GEI II, which holds approximately 71.7% of the outstanding shares of Holding. Holding, in turn, owns all of the outstanding shares of common stock of CPI. Messrs. Danhakl and Baumer, who are directors of Holding and CPI, are also stockholders of the general partner of LGP. See “Directors and Executive Officers.” In connection with the acquisition by GEI II of its interest in Holding in 1995, Holding and CPI entered into a Management Services Agreement with LGP pursuant to which LGP receives an annual fee of approximately $362,000 plus reasonable expenses for providing management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analysis, negotiating and structuring financing, and exploring, negotiating and arranging expansion and capital market opportunities, in the future. In addition, pursuant to the Management Services Agreement, it is contemplated that in connection with and upon consummation of the Merger, LGP will receive a transaction fee of $1,250,000. See “Certain Relationships and Related Transactions — Management Agreements.”

Individuals who are officers of Holding and CPI, as well as Messrs. Danhakl, Baumer and Galashan, do not receive any compensation from the Company for their service on the Boards of Directors of Holding and CPI. Mr. Rutledge was paid annual compensation of $25,000 in fiscal year 2003.

Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

All of CPI’s common stock is owned by Holding. The following table sets forth, as of December 8, 2003 certain information with respect to the beneficial ownership of Holding Common Stock by (i) each person known by Holding to own beneficially 5% or more of the outstanding shares of Holding Common Stock, (ii) each director of Holding and CPI, (iii) each person named in the summary compensation table, and (iv) all executive officers and directors as a group.


	Amount and Nature of		Percent of
Name and Address of Beneficial Owner (a)	Beneficial Ownership		Shares Outstanding (b)

Green Equity Investors II, L.P. (c) (d)		3,590,750		71.70	%
11111 Santa Monica Boulevard, Suite 2000
Los Angeles, California 90025
John G. Danhakl (c) (d)		3,590,750		71.70	%
11111 Santa Monica Boulevard, Suite 2000
Los Angeles, California 90025
John M. Baumer (c) (d)		3,590,750		71.70	%
11111 Santa Monica Boulevard, Suite 2000
Los Angeles, California 90025
J. Kristofer Galashan		0		0.00	%
Al D. Wilunowski (c) (e)		535,000		10.70	%
811 Hansen Way
Palo Alto, California 94303
William P. Rutledge		0		0	%
O. Joe Caldarelli (c)		110,000		2.20	%
Robert A. Fickett (c)		38,000		.76	%
Don C. Coleman (c)		21,250		.42	%
Joel A. Littman (c)		23,750		.47	%
Mike Cheng (c)		14,500		.29	%
Directors and Executive Officers as a group (10 persons) (b)		3,809,500		76.07	%

(a)

Addresses are given only for persons listed as beneficial owners of 5% or more of common stock of Holding.

(b)

Applicable percentage of ownership is based on 5,008,172 shares of common stock of Holding outstanding as of December 8, 2003. Shares of common stock of Holding that a person or entity has the right to acquire within 60 days of December 8, 2003 are deemed outstanding for purposes of computing the percentage ownership of the person or entity holding such rights, but are not deemed outstanding for purposes of computing the percentage ownership of any other person, except with respect to the percentage ownership of all directors and executive officers as a group.

(c)

In connection with the Merger Agreement described above in “Business-Recent Events-Merger Agreement”, Acquiror entered into a Voting and Indemnification Agreement (the “Voting Agreement”) on November 17, 2003 with Holding , GEI II, and certain other stockholders of Holding, which stockholders have agreed to vote shares of common stock totaling 4,354,500, or approximately 87% of the outstanding shares of common stock of Holding. Pursuant to the Voting Agreement, each of the stockholders has agreed, among other things, to vote (a) in favor of the approval and adoption of all of the transactions contemplated by the Merger Agreement, (b) against any action, proposal, agreement or transaction that would result in a breach of any covenant, obligation, agreement, representation or warranty of Holding under the Merger Agreement or of such person under the Voting Agreement and (c) against any action, agreement, transaction or proposal that could reasonably be expected to result in any of the conditions to the closing of the Merger or Holding’s obligations under the Merger Agreement not being fulfilled, or that is intended, or could reasonably be expected to delay or adversely affect the Merger Agreement, the closing of the Merger or the Voting Agreement. Each of the stockholders party to the Voting Agreement has also agreed that if such stockholder fails to comply with the voting provisions described above, then such failure will result in the appointment of certain officers of Acquiror as such stockholder’s proxy to vote with respect to such stockholder’s shares of common stock. The provisions of the Voting Agreement described above will terminate upon the earliest of (1) the mutual agreement of CPI Acquisition Corp. and the security holders party to the Voting Agreement that hold a majority of the securities subject to the Voting Agreement, (2) the closing of the Merger and (3) the termination of the Merger Agreement in accordance with its terms.

(d)

GEI II is a Delaware limited partnership managed by LGP, which is an affiliate of the general partner of GEI II. Messrs. Baumer and Danhakl, through equity ownership interest and/or officer position, may be deemed to control LGP and such general partner. LGP and such general partner may be deemed to control the voting and disposition of the shares of Holding common stock owned by GEI II. Accordingly, for certain purposes, Messrs. Baumer, and Danhakl, may be deemed to have shared voting power and investment power with respect to the shares of Holding common stock held by GEI II. However, such individuals disclaim beneficial ownership of the securities held by GEI II, except to the extent of their respective pecuniary interests therein. All of the shares of Holding common stock shown in the table as being beneficially owned by Messrs. Baumer, and Danhakl are owned by GEI II.

(e)

Includes 25,000 shares originally acquired by Mr. Wilunowski and subsequently transferred to his child.

See Item 11 “Executive Compensation-Holding’s 2000 Stock Option Plan” for a discussion of the features of the Holding 2000 Stock Option Plan described in the above table.

LGP is investment adviser to, and an affiliate of the general partner of, GEI II, which, as of December 8, 2003, holds approximately 71.7% of the outstanding shares of Holding. Holding, in turn, owns all of the outstanding shares of common stock of CPI. Messrs. Danhakl and Baumer, who are directors of Holding and CPI, are also stockholders of the general partner of LGP. In connection with the acquisition by GEI II of its interest in Holding in 1995, Holding and CPI entered into a Management Services Agreement with LGP pursuant to which LGP receives an annual fee of approximately $362,000 plus reasonable expenses for providing management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analysis, negotiating and structuring financing, and exploring, negotiating and arranging expansion and capital market opportunities, in the future. The Management Services Agreement has a term of up to twelve years. Holding and CPI believe that the contacts and expertise provided by LGP in these areas enhance the Company’s opportunities and management’s expertise in these matters and that the fees to be paid to LGP fairly reflect the value of the services provided by LGP. In addition, LGP may provide financial advisory and investment banking services to the Company in connection with major financial transactions that may be undertaken from time to time. In consideration for these services, the Company will pay LGP reasonable and customary fees for services of like kind. The amount of such fees shall be (a) approved in accordance with the procedures set forth in the applicable Holding or CPI charter documents or financing agreements, or, (b) if no such procedures are set forth therein, either (i) approved by a majority of the Board of Directors of Holding or CPI, as applicable, or (ii) fair to Holding or CPI, as applicable, from a financial point of view in the opinion of an independent nationally recognized investment banking firm. In fiscal year 2003, LGP earned $362,000 pursuant to the terms of the Management Services Agreement. In addition, pursuant to the Management Services Agreement, it is contemplated that in connection with and upon consummation of the Merger, LGP will receive a transaction fee of $1,250,000.

In November 2003, Green Equity Investors III, L.P., an affiliate of GEI II, purchased all of the outstanding shares of 14% Junior Cumulative Preferred Stock of CPI and approximately 60% of the shares of 14% Senior Exchangeable Redeemable Cumulative Preferred Stock of CPI from an independent third party.

Item 15: Exhibits, Financial Statement Schedules, and Reports on Form 8-K


Exhibit
No.		Description

2.1(1)		Stock Sale Agreement between CPI (as successor by merger to CPII Acquisition Corp., then known as Communications & Power Industries Holding Corporation) and Varian dated as of June 9, 1995.

2.2(1)		First Amendment to Stock Sale Agreement among Holding, CPI (as successor by merger to CPII Acquisition) and Varian dated as of August 11, 1995.

2.3(1)		Second Amendment to Stock Sale Agreement among Holding, CPI (as successor by merger to CPII Acquisition) and Varian dated as of August 11, 1995.

2.4		Agreement and Plan of Merger dated as of November 17, 2003, by and among CPI Acquisition Corp., CPI Merger Sub Corp., Holding and GEI II.

3.1(1)		Restated Certificate of Incorporation of CPI filed with the Delaware Secretary of State on August 11, 1995.

3.2 (7)		Amended and Restated Bylaws of CPI dated March 19, 2002.

3.3 (1)		Certificate of Incorporation of Holding.

3.4 (1)		Bylaws of Holding.

4.1(1)		Indenture among CPII Acquisition, Holding, the other guarantors of the Notes (the “Guarantors”) and U.S. Trust Company of California, N.A., relating to the Notes dated as of August 11, 1995.

4.2(1)		First Supplemental Indenture among CPI, Holding, the other Guarantors and U.S. Trust Company of California, N.A., relating to the Notes dated as of August 11, 1995.

4.3 (1)		Form of Notes (included in Exhibit 4.1, Exhibit A)

4.4(1)		Form of Indenture between CPI and Shawmut Bank Connecticut, National Association, relating to the Exchange Notes.

4.5(1)		Form of Exchange Note (included in Exhibit 4.5, Exhibit A)

4.6(2)		Form of Second Supplemental Indenture among CPI, Holding, the other Guarantors and U.S. Trust Company of California, N.A., relating to the Notes.

10.1(6)		Loan and Security Agreement by and among CPI as borrower, the other obligors named therein, the lenders that are signatories hereto as the senders, and Foothill Capital Corporation as the arranger and administrative agent, dated as of December 15, 2000.

10.1.1(9)		Amendment Number One to Loan and Security Agreement by and among CPI as borrower, the other obligors named as signatories therein, the lenders that are signatories as lenders, and Foothill Capital Corporation as the arranger and administrative agent.

10.1.2		Letter Agreement dated as of December 1, 2003 amending Loan and Security Agreement by and among CPI as borrower, the other obligors named as signatories therein, the lenders that are signatories as lenders, and Foothill Capital Corporation as the arranger and administrative agent, dated as of December 1, 2003.

10.2(6)		Intellectual Property Security Agreement between CPI and Foothill Capital Corporation as Agent for the Lenders dated December 15, 2000.

10.3(6)		Stock Pledge and Security Agreement by CPI to and in favor of Foothill Capital Corporation, as agent for itself and the other lenders dated December 15, 2000.

10.4(6)		Stock Pledge and Security Agreement by Holding and various CPI subsidiaries to and in favor of Foothill Capital Corporation, as agent for itself and the other lenders, dated December 15, 2000.

10.5(6)		Environmental Indemnity Agreement for the benefit of Foothill Capital Corporation, as agent for itself and the other lenders and the lenders, dated December 15, 2000.

10.6(6)		Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing by and among CPI, First American Title Company and Foothill Capital Corporation, as agent for itself and the other lenders, dated December 15, 2000.

10.7(6)		Guaranty and Security Agreement in favor of Foothill Capital Corporation as Agent for itself and the lenders and the other lenders pursuant to that certain Loan and Security Agreement by and among CPI, the other obligors, Foothill and the other lenders named herein, dated December 15, 2000.

10.8(6)		Continuing Guaranty in favor of Foothill Capital Corporation, as agent for itself and the lenders and the other lenders pursuant to that certain Loan and Security Agreement by and among CPI, the other obligors named therein, Foothill and the other lenders named herein, dated December 15, 2000.


Exhibit
No.		Description


10.9(6)		Intercreditor Agreement among the CPI Parties and Foothill Capital Corporation, as agent for itself and other lenders, dated December 15, 2000.

10.10(6)		Fourth Amendment of Lease by and between The Board of Trustees of the Leland Stanford Junior University and CPI, dated December 15, 2000.

10.11(6)		Loan Agreement between Holding and Wells Fargo Bank, National Association, executed as of December 15, 2000.

10.11.1(8)		Modification Agreement of Secured Loan between Holding and Wells Fargo Bank, National Association, dated June 1, 2002.

10.12(6)		Promissory Note Secured by Deed of Trust by Holding in favor of Wells Fargo Bank, National Association, dated December 15, 2000.

10.12.1(8)		Amended and Restated Promissory Note Secured by Deed of Trust by Holding in favor of Wells Fargo Bank, National Association, dated June 1, 2002.

10.13(6)		Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing by and among Holding, American Securities Company and Wells Fargo Bank, National Association, dated December 15, 2000.

10.13.1(8)		Memorandum of Modification Agreement Amending Deed of Trust by Holding in favor of Wells Fargo Bank, National Association, dated June 1, 2002.

10.13.2(11)		Second Modification Agreement, dated May 30, 2003, by and between Holding and Wells Fargo Bank, National Association.

10.14(6)		Subordination Agreement by CPI and Holding in favor of Wells Fargo Bank, National Association, dated December 15, 2000.

10.14.1(8)		Junior Lienor’s Consent and Subordination Agreement by CPI in favor of Wells Fargo Bank, National Association, dated June 1, 2002.

10.15(6)		Hazardous Materials Indemnity Agreement by Holding in favor of Wells Fargo Bank, National Association, dated December 15, 2000.

10.16(6)		Unsecured Promissory Note by Holding in favor of CPI, dated December 15, 2000.

10.17(6)		Lease dated as of December 1, 2000 by and between Holding, as lessor, and CPI, as lessee.

10.18(1)		Cross License Agreement between CPI and Varian dated as of August 10, 1995.

10.19(1)		Trademark License Agreement between CPI and Varian dated as of August 10, 1995.

10.21(1)		Purchase Agreement among CPII Acquisition, Holding and the initial purchaser of the Series A Senior Preferred Stock (the “Initial Senior Preferred Stock Purchaser”) dated as of August 11, 1995.

10.26(1)		Holding Common Stock Registration Rights Agreement by and among Holding, GEI II and the Initial Senior Preferred Stock Purchaser dated as of August 11, 1995 relating to the Holding Common Stock sold with the Series A Senior Preferred Stock.

10.27(1)		Stockholders Agreement by and among Holding, GEI II and the Initial Senior Preferred Stock Purchaser dated as of August 11, 1995 relating to the Holding Common Stock sold with the Series A Senior Preferred Stock.

10.28(1)		Stock Subscription Agreement among Holding, CPII Acquisition Corp. and GEI II dated as of August 11, 1995.

10.29(1)		Management Services Agreement among CPI, Holding and Leonard Green & Partners, L.P. dated as of August 11, 1995.

10.30(1)		1995 Holding Management Equity Plan (including Form of Management Subscription and Stockholders Agreement).

10.32(5)		Communications & Power Industries 2000 Stock Option Plan.

10.32.1(10)		First Amendment to Communications and Power Industries 2000 Stock Option Plan.

10.33(5)		Form of Stock Option Agreement.

10.34(1)		Assignment and Assumption of Lessee’s Interest in Lease (Units 1-4, Palo Alto) and Covenants, Conditions and Restrictions on Leasehold Interests (Units 1-12, Palo Alto) dated as of August 10, 1995 between Varian Realty Inc., Varian Associates, Inc. and CPI.

10.35(1)		Sublease (Unit 8, Palo Alto) dated as of August 10, 1995 between Varian Realty Inc. and CPI.


Exhibit
No.		Description


10.36(1)		Sublease (Building 4, Palo Alto) dated as of August 10, 1995 between CPI, as Sublessee, Varian Associates, Inc., as Sublessor, and Varian Realty Inc., as Adjacent Property Sublessor.

10.37(12)		Employment Agreement for O. Joe Caldarelli dated March 19, 2002.

10.38(12)		Employment Agreement for Robert A. Fickett dated September 30, 2002.

10.39(12)		Employment Agreement for Joel A. Littman dated September 30, 2002.

10.40		Employment Agreement for Mike Cheng dated November 2, 2002.

10.41		Employment Agreement for Don C. Coleman dated November 2, 2002.

10.42		Code of Ethics

10.43		Pension Plan for Executive Employees of CPI Canada, Inc. (as applicable to O.Joe Caldarelli effective January 1, 2002

21(1)		Subsidiaries of CPI and Holding.

31		Rule 13a-14 (a) /15d-14 (a) Certifications.

32		Section 1350 Certifications

Pursuant to the requirements of Section 13 or 15(d) 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.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Securities Exchange Act of 1934 by Registrants which have not Registered Securities Pursuant to Section 12 of the Securities Exchange Act of 1934:

No annual report to security holders covering either registrant’s last fiscal year has been sent to either registrant’s security holders and no proxy statement, form of proxy or other proxy soliciting material has been sent to more than ten of either registrant’s security holders with respect to any annual or other meeting of security holders. No such report or proxy material is expected to be furnished to security holders subsequent to the filing of the annual report on this Form.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

COMMUNICATIONS & POWER INDUSTRIES, INC.,
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)


	Page

Independent Auditors’ Report		F-2

Consolidated Balance Sheets as of October 3, 2003 and September 27, 2002		F-3

Consolidated Statements of Operations for the 53-week period ended October 3, 2003 and the 52-week periods ended September 27, 2002 and September 28, 2001		F-4

Consolidated Statements of Stockholders’ Deficit for the 53-week period ended October 3, 2003 and the 52-week periods ended September 27, 2002 and September 28, 2001		F-5

Consolidated Statements of Cash Flows for the 53-week period ended October 3, 2003 and the 52-week periods ended September 27, 2002 and September 28, 2001		F-6

Notes to the Consolidated Financial Statements		F-8

COMMUNICATIONS & POWER INDUSTRIES, INC.

Independent Auditors’ Report		F-33

Consolidated Balance Sheets as of October 3, 2003 and September 27, 2002		F-34

Consolidated Statements of Operations for the 53-week period ended October 3, 2003 and the 52-week periods ended September 27, 2002 and September 28, 2001		F-35

Consolidated Statements of Stockholders’ Deficit for the 53-week period ended October 3, 2003 and the 52-week periods ended September 27, 2002 and September 28, 2001		F-36

Consolidated Statements of Cash Flows for the 53-week period ended October 3, 2003 and the 52-week periods ended September 27, 2002 and September 28, 2001		F-37

Notes to the Consolidated Financial Statements		F-39

FINANCIAL STATEMENT SCHEDULES

Communications & Power Industries Holding Corporation		F-65

Communications & Power Industries, Inc.		F-66

The Board of Directors and Stockholders
Communications & Power Industries Holding Corporation:

We have audited the accompanying consolidated balance sheets of Communications & Power Industries Holding Corporation and subsidiaries (Holding) as of October 3, 2003 and September 27, 2002, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the 53-week period ended October 3, 2003 and the 52-week periods ended September 27, 2002 and September 28, 2001. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of Holding’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Communications & Power Industries Holding Corporation and subsidiaries as of October 3, 2003 and September 27, 2002, and the results of their operations and their cash flows for the 53-week period ended October 3, 2003 and the 52-week periods ended September 27, 2002 and September 28, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 4 to the consolidated financial statements, effective September 28, 2002, Holding adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”


			Fiscal Year-End

ASSETS			2003			2002

Current Assets
	Cash and cash equivalents		$	33,751			2,724
	Accounts receivable, net			33,128			30,165
	Inventories			37,358			40,726
	Prepaid expenses			2,210			2,637

		Total current assets		106,447			76,252
Property, plant, and equipment, net				52,947			55,846
Goodwill				19,149			19,149
Intangibles assets, net				1,140			1,613
Debt issue costs, net				2,285			3,329

		Total assets	$	181,968			156,189

LIABILITIES, SENIOR REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Current Liabilities
	Current portion of capital leases		$	—			45
	Mortgage financing			17,500			17,750
	Accounts payable			15,624			14,111
	Accrued expenses			21,445			18,331
	Product warranty			5,401			4,823
	Income taxes payable			3,584			2,959
	Accrued dividends payable			15,449			9,538
	Advance payments from customers			10,203			7,594

		Total current liabilities		89,206			75,151
Senior subordinated notes				100,000			100,000

		Total liabilities		189,206			175,151

Senior Redeemable Preferred Stock of CPI ($.01 par value, 325,000 shares authorized; 297,346 shares issued and outstanding as of 2003 and 2002; liquidation preference $100 per share)				28,907			28,693

Junior Preferred Stock of CPI ($.01 par value, 525,000 shares authorized: 299,541 and 261,032 shares issued and outstanding as of 2003 and 2002, respectively; liquidation preference $100 per share)				29,300			25,449

Commitments and contingencies
Stockholders’ Deficit
	Common stock ($.01 par value, 6,500,000 shares authorized; 5,008,172 and 4,908,172 shares issued and outstanding as of 2003 and 2002, respectively.)			50			49
	Additional paid-in capital			21,519			19,111
	Deferred compensation			(1,289	)		—
	Accumulated deficit			(84,469	)		(91,041	)
	Stockholder loans			(1,256	)		(1,223	)

		Net stockholders’ deficit		(65,445	)		(73,104	)

		Total liabilities, preferred stock and stockholders’ deficit	$	181,968			156,189


		Fiscal Years

		2003			2002			2001

Sales		$	265,434			251,245			272,521
Cost of sales			183,957			192,189			223,332

Gross profit			81,477			59,056			49,189

Operating costs and expenses:
	Research and development		6,860			5,873			5,767
	Selling and marketing		15,650			16,073			17,544
	General and administrative		17,939			19,777			21,041
	(Gain) loss on sale of Solid State Products Division (SSPD)		(136	)		3,004			—

Total operating costs and expenses			40,313			44,727			44,352

Operating income			41,164			14,329			4,837
Interest expense			14,540			16,508			20,734

Income (loss) before taxes			26,624			(2,179	)		(15,897	)
Income tax expense			10,076			4,554			2,950

Net income (loss)			16,548			(6,733	)		(18,847	)
Preferred dividends:
	Senior redeemable preferred stock		5,911			5,151			4,387
	Junior preferred stock		3,851			3,356			2,924

Net income (loss) attributable to common stock		$	6,786			(15,240	)		(26,158	)


See accompanying notes to the consolidated financial statements.


					Deferred									Total
	Common		Paid-in		Stock-based			Accumulated			Stockholder			Stockholders’
	Stock		Capital		Compensation			Deficit			Loans			Deficit

Balances, September 29, 2000	$	49		19,111		—			(49,215	)		(1,133	)		(31,188	)

Amortization of discount and issue costs on senior redeemable preferred stock		—		—		—			(214	)		—			(214	)
Dividends on senior redeemable preferred stock		—		—		—			(4,387	)		—			(4,387	)
Payment of dividends on junior preferred stock		—		—		—			(2,924	)		—			(2,924	)
Net loss		—		—		—			(18,847	)		—			(18,847	)
Interest accrued on stockholder loans		—		—		—			—			(48	)		(48	)

Balances, September 28, 2001	$	49		19,111		—			(75,587	)		(1,181	)		(57,608	)

Amortization of discount and issue costs on senior redeemable preferred stock		—		—		—			(214	)		—			(214	)
Dividends on senior redeemable preferred stock		—		—		—			(5,151	)		—			(5,151	)
Payment of dividends on junior preferred stock		—		—		—			(3,356	)		—			(3,356	)
Net loss		—		—		—			(6,733	)		—			(6,733	)
Interest accrued on stockholder loans		—		—		—			—			(42	)		(42	)

Balances, September 27, 2002	$	49		19,111		—			(91,041	)		(1,223	)		(73,104	)

Amortization of discount and issue costs on senior redeemable preferred stock		—		—		—			(214	)		—			(214	)
Dividends on senior redeemable preferred stock		—		—		—			(5,911	)		—			(5,911	)
Payment of dividends on junior preferred stock		—		—		—			(3,851	)		—			(3,851	)
Issuance of stock options at less than fair value		—		1,509		(1,289	)					—			220
Net income		—		—		—			16,548			—			16,548
Interest accrued on stockholder loans		—		—		—			—			(33	)		(33	)
Issuance of common stock at less than fair value		1		899		—			—			—			900

Balances, October 3, 2003	$	50		21,519		(1,289	)		(84,469	)		(1,256	)		(65,445	)


		Fiscal Years

		2003			2002			2001

OPERATING ACTIVITIES
	Net cash provided by operating activities	$	35,261			44,020			6,513

INVESTING ACTIVITIES
	Proceeds from sale of SSPD division		136			926			—
	Proceeds from sale of property, plant, and equipment		—			—			1,944
	Purchase of property, plant, and equipment		(3,067	)		(3,378	)		(5,788	)

	Net cash used in investing activities		(2,931	)		(2,452	)		(3,844	)

FINANCING ACTIVITIES
	Repayments on capital leases		(45	)		(964	)		(960	)
	Payment of debt issue costs		(339	)		(101	)		(2,217	)
	Repayment of terminated revolving credit facility		—			—			(40,000	)
	Net (repayments) proceeds from revolving credit facility		—			(21,293	)		21,530
	Repayments on terminated senior term loans		—			—			(16,049	)
	Net (repayments) proceeds from senior term loan		—			(20,000	)		20,000
	Net (repayments) proceeds from mortgage financing		(250	)		(250	)		18,000
	Net (repayments) proceeds from bank overdraft		(779	)		861			(4,836	)
	Proceeds from issuance of common stock		110			—			—

	Net cash (used in) provided by financing activities		(1,303	)		(41,747	)		(4,532	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			31,027			(179	)		(1,863	)
	Cash and cash equivalents at beginning of period		2,724			2,903			4,766

	Cash and cash equivalents at end of period	$	33,751			2,724			2,903


	See accompanying notes to the consolidated financial statements.


			Fiscal Years

			2003			2002			2001

DETAIL OF NET CASH PROVIDED BY OPERATING ACTIVITIES
Net income (loss)			$	16,548			(6,733	)		(18,847	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Depreciation			5,820			9,240			10,708
	Amortization of deferred debt issue costs			1,383			1,629			1,987
	Amortization of goodwill and intangibles			473			2,064			2,638
	Allowance for doubtful accounts			133			331			355
	Net (gain) loss on the sale of SSPD			(136	)		3,004			—
	Compensation expense from stock issued at less than fair value			790			—			—
	Compensation expense from stock options issued at less than fair value			220			—			—
	Deferred income taxes			—			3,500			11,360
	Loss on liquidation of capital lease			—			73			—
	Interest accrued on stockholder loans			(33	)		(42	)		(48	)
	Asset impairment loss			—			508			—
	Net losses (gains) on the disposition of assets			92			187			(792	)
	Changes in operating assets and liabilities:
		Accounts receivable		(3,096	)		15,705			(4,659	)
		Inventories		3,422			16,175			6,271
		Prepaid expenses		427			(437	)		(638	)
		Accounts payable		2,292			(1,672	)		1,007
		Accrued expenses		3,114			817			1,052
		Product warranty		578			618			1,247
		Income tax payable, net		625			652			(9,111	)
		Advance payments from customers		2,609			(1,599	)		3,983

Net cash provided by operating activities			$	35,261			44,020			6,513


See accompanying notes to the consolidated financial statements.

Communications & Power Industries Holding Corporation (“Holding”), through its wholly owned subsidiary, Communications & Power Industries, Inc. (“CPI”, and collectively with Holding, the “Company”) develops, manufactures and distributes microwave and power grid vacuum electronic devices, microwave amplifiers, modulators and various other power supply equipment and devices. The Company operates five manufacturing operations in North America, and sells and services its products and customers worldwide primarily through a direct sales force.

In August 1995, CPI acquired substantially all of the assets of the Electron Devices Business of Varian Associates, Inc., now known as Varian Medical Systems, Inc. (“Varian”) and then was merged with a wholly owned subsidiary of Communications & Power Industries Holding Corporation, a corporation newly formed by a group of investors, including management of the Company. The acquisition was accounted for as a purchase and, accordingly, the purchase price was allocated based upon the fair values of assets acquired and liabilities assumed. Financing for the acquisition was obtained through the issuance of 12% Senior Subordinated Notes due 2005 of CPI (“Notes”) in the aggregate principal amount of $100.0 million, the issuance 14% Senior Redeemable Exchangeable Cumulative Preferred Stock due 2007 of CPI (the “Senior Preferred Stock”) and the issuance of 14% Junior Cumulative Preferred Stock of CPI (the “Junior Preferred Stock”), and common stock of Holding.

The accompanying consolidated financial statements include the accounts of Holding and its direct and indirect wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company’s fiscal years reported are the 52- week or 53-week periods ending on the Friday nearest to September 30. Fiscal year 2003 was comprised of the 53-week period ending on October 3, 2003. Fiscal years 2002 and 2001 were comprised of the 52-week periods ending on September 27, 2002 and September 28, 2001, respectively. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

Generally, the Company requires no collateral from its customers, and the Company estimates an allowance for doubtful accounts based on the creditworthiness of its customers and general economic conditions. Consequently, an adverse change in those factors could affect the Company’s estimate

of its bad debts. Historical credit losses have been within management’s expectations, and most transactions with third world economies are backed by letters of credit.

The Company is self insured for certain losses relating to workers’ compensation. The self insurance accrual is based on claims filed and an estimate for significant claims incurred but not reported.

Currency on hand, demand deposits, and all highly liquid investments with an original maturity of three months or less are considered to be cash and cash equivalents. On October 3, 2003, cash and cash equivalents included $0.2 million of restricted cash related to a sublease of the Company’s San Carlos facility. There was no restricted cash at the end of fiscal year 2002 or 2001.

Sales are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectibility is reasonably assured. The Company’s products are generally subject to warranties, and the Company provides for the estimated future costs of repair, replacement or customer accommodation in cost of sales.

The estimated sales values of performance under certain contracts to commercial customers and U.S. Government fixed-price and fixed-price incentive contracts are recognized under the percentage of completion method of accounting where the sales value is determined on the basis of costs incurred. Provisions for anticipated losses are made in the period in which they first become determinable. Sales under cost-reimbursement contracts, primarily research and development contracts, are recorded as costs are incurred and include estimated earned fees in the proportion that costs incurred to date bear to total estimated costs. The fees under certain U.S. Government contracts may be increased or decreased in accordance with cost or performance incentive provisions that measure actual performance against established targets or other criteria. Such incentive fee awards or penalties are included in revenue at the time the amounts can be reasonably determined.

Property, plant and equipment are stated at cost. Major improvements are capitalized, while maintenance and repairs are expensed currently. Plant and equipment are depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized using the straight-line method over their estimated useful lives, or the remaining term of the lease, whichever is shorter. Estimated useful lives of property, plant, and equipment are as follows: land leaseholds, the life of the lease; buildings, 20 to 40 years; and machinery and equipment, 3 to 7 years.

Gains and losses resulting from the disposition of assets (property, plant and equipment) are reported on a net basis under the caption “General and administrative” in the accompanying Consolidated Statements of Operations. Net (losses) gains on the disposition of assets were ($0.1) million, ($0.2) million, and $0.8 million for fiscal years 2003, 2002, and 2001, respectively.

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” at the beginning of fiscal year 2003. SFAS No. 142 requires that goodwill be tested annually for impairment and whenever events or changes in circumstances indicate that an impairment loss may have occurred, rather than being amortized as previous accounting standards required. Furthermore, SFAS No. 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite.

Prior to fiscal year 2003, the Company amortized goodwill on a straight-line basis over 15 to 25 years and evaluated goodwill for impairment in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.”

The Company adopted SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” at the beginning of fiscal year 2003. SFAS No. 144 requires that the Company assess the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable from the estimated future cash flows expected to result from their use and eventual disposition. Long-lived assets subject to this evaluation include property, plant and equipment and amortizable intangible assets.

The Company’s products are generally warranted for a variety of periods, typically one to three years or a predetermined product usage life. A provision for estimated future costs of repair, replacement or customer accommodations is reflected in the accompanying consolidated financial statements.

Costs incurred related to the issuance of CPI’s long-term debt, mortgage financing and other credit facilities are capitalized and amortized over the estimated time the obligations are expected to be outstanding using the effective interest method. The amortization periods used for the deferred costs associated with the mortgage financing, CPI’s revolving credit facility (the “Credit Facility”), and the Notes are 1 year, 4 years and 10 years, respectively.

The Senior Preferred Stock was issued in units with an aggregate of 262,500 shares of common stock of Holding. The fair value of the shares of Holding’s common stock issued, and the issue costs associated with the issuance of the Senior Preferred Stock, have been reflected as a reduction of the Senior Preferred Stock issued and are being amortized via a charge to accumulated deficit over the period until mandatory redemption, 12 years, using the straight-line method.

The Company records income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recorded or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Defense-related applications such as certain radar, electronic countermeasures and military communications constitute a significant portion of the Company’s sales. Companies engaged in supplying defense-related equipment and services to government agencies are subject to certain business risks peculiar to that industry. Sales to the government may be affected by changes in procurement policies, budget considerations, changing concepts of national defense, political developments abroad, and other factors.

The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. Gains or losses resulting from the translation into U.S. dollars of amounts denominated in foreign currencies are included in the determination of net income or loss. Foreign currency gains and losses are reported on a net basis in the caption “General and administrative” on the Consolidated Statements of Operations.

Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, Credit Facility, mortgage financing and long-term debt. The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, Credit Facility and mortgage financing approximate their fair values due to the relatively short period to maturity of the instruments. The fair value of the Notes based on quoted market prices or pricing models using current market rates, is a premium of 1.5% as of October 3, 2003 and a discount of 16% as of September 27, 2002.

is amortized as a charge against income under the caption “General and administrative” in the Consolidated Statement of Operations on a straight-line basis over four years vesting period of the options. If compensation cost for the Company’s stock-based compensation plan had been determined consistent with SFAS No. 123, the Company’s net income (loss) would have changed to the pro forma amounts indicated below:

The per share weighted-average fair value of stock options granted during fiscal years 2003, 2002 and 2001 was $8.07, $.62, and $.74, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: risk-free interest rate of 3.38%, 3.38%, and 4.09%, in fiscal years 2003, 2002 and 2001, respectively; expected life of 5 years; no expected stock price volatility as the shares are not publicly traded; and an expected dividend yield of 0.0% in all years presented. Stock-based compensation determined under the fair value based method has been calculated using accelerated vesting as prescribed by Financial Accounting Standards Board (“FASB”) Interpretation No. 28.

The Company has no components of other comprehensive income (loss) and, accordingly, comprehensive income (loss) is the same as reported net income (loss) for all periods presented.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit and Disposal Activities.” SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002. Adoption of this statement did not have a material effect on the Company’s consolidated financial position or results of operations.

In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of SFAS 123.” SFAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the accounting provisions of SFAS 123, “Accounting for Stock-Based Compensation.” In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the provisions under this Statement in the second quarter of fiscal year 2003. Adoption of SFAS 148 did not have a material impact on the Company’s consolidated financial position or results of operations.

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 for the Company until January 3, 2004. The Company has evaluated the impact of the provisions of Interpretation 46 and it believes it will not have a material impact on the Company’s consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 requires that certain financial instruments with characteristics of both liabilities and equity be classified as liabilities in statements of financial position. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to existing financial instruments at the beginning of the first fiscal period beginning after December 15, 2003 for non-public entities. The Company is currently analyzing this Statement and has not yet determined its impact on the Company’s consolidated financial position or results of operations.

Certain amounts in prior years’ consolidated financial statements have been reclassified to conform to the fiscal 2003 presentation. Net operating results have not been affected by these reclassifications.

Accounts receivable are stated net of allowances for doubtful accounts of $0.6 million at the end of each of fiscal year 2003 and 2002.

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

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

In June 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be reviewed for impairment annually, or more frequently if certain indicators arise. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated lives and be reviewed for impairment. The Company adopted the provisions of SFAS No. 141 and SFAS No. 142 and ceased amortization of its goodwill, beginning in fiscal year 2003.

Upon adoption of SFAS No. 142, the Company performed a transitional goodwill impairment evaluation to assess whether goodwill was impaired as of the date of adoption. Based on the results of the first step of the transitional goodwill impairment test, it was determined that no potential impairment exists. In addition, as required by SFAS No. 142, an annual test was performed during the fourth quarter of fiscal year 2003 and no potential impairment was noted. Also upon adoption of SFAS No. 142, as required by SFAS No. 141, the Company reassessed the useful lives and residual values of all intangible assets acquired in purchase business combinations, and no significant changes were deemed necessary.

As of October 3, 2003 and September 27, 2002, the Company had $19.1 million of goodwill, $13.4 million of which has been allocated to the vacuum electron devices (“VED”) segment and $5.7 million of which has been allocated to the satcom equipment segment. During fiscal year ended October 3, 2003, there were no goodwill impairment losses and there were no changes in the carrying amount of goodwill.

The following table presents the impact of adopting SFAS No. 142 on net income (loss) if such standard had been in effect for the 52-week periods ended September 27, 2002 and September 28, 2001:

As of October 3, 2003 and September 27, 2002, the Company had $1.9 million of intangible assets at cost, with accumulated amortization of $0.8 million and $0.3 million, respectively. Amortization of intangible assets for fiscal years 2003, 2002 and 2001 was approximately $0.5 million, $0.4 million and $1.3 million, respectively. Amortization expense for these intangible assets is projected to be approximately $0.4 million per year through fiscal year 2006.

On September 26, 2002, the Company sold its Solid State Products Division (“SSPD”) to KMIC Technology Inc., a company owned by the former management of SSPD. The Company received approximately $0.9 million in cash and a $0.3 million unsecured promissory note. The note bears interest at 12% per annum and is payable as follows: one-third of the principal plus unpaid interest was due October 1, 2003 with the remaining balance payable in eight quarterly installments of principal and interest beginning January 1, 2004 and ending October 1, 2005. During fiscal year 2002, the sale resulted in a charge to operations of approximately $3.0 million, which represents the net assets sold, including approximately $2.5 million in goodwill and costs and expenses of the transaction, net of $0.9 million of cash received from the sale of the operation’s net assets. Due to the uncertainty of ultimate collection, the proceeds from the promissory note are recognized when the cash payments are received. During fiscal year 2003, cash payments of $0.1 million were recognized. In connection with the SSPD transaction, the Company agreed, subject to certain limitations and exceptions, not to engage in the manufacture of intermediate power amplifiers for satcom amplifiers (“IPA’s”) for a 3-year period. In addition, the Company agreed to purchase from KMIC Technology Inc. $0.7 million of its IPA’s per year for such 3-year period at market value.

In December 2002, CPI amended the Credit Facility to increase the maximum amount of its revolving credit line by $20.0 million (the amount of the term loan formerly outstanding under the same credit facility) from $41.0 million to $61.0 million and to extend the expiration date from December 22, 2004 to May 31, 2005. The Credit Facility continues to be secured by substantially all of the assets of CPI and guaranteed by Holding and most of CPI’s subsidiaries. Availability under the Credit Facility continues to be based upon eligible receivables, machinery and equipment and certain real estate. As of October 3, 2003, CPI had $30.0 million available under the Credit Facility.

The Credit Facility provides for borrowings that will bear interest at a rate equal to LIBOR plus 3.25% per annum or prime rate plus 1.75% per annum. Additionally, the terms of the Credit Facility require the Company to maintain certain financial covenants and limit the payment of cash dividends

on the Senior Preferred Stock and Junior Preferred Stock. In addition to customary fronting and other fees under the Credit Facility, CPI pays a fee equal to 1.25% per annum on outstanding but undrawn amounts of letters of credit, customary collateral management fees and a commitment fee of 0.375% per annum on unused facilities.

The $100 million principal amount of Senior Notes matures in 2005 and bears interest at 12% per annum, payable semiannually. The payment of principal, premium and interest on, and other obligations evidenced by the Notes is subordinated in right of payment, as set forth in the indenture governing the Notes (the “Indenture”), to the prior payment in full of all senior indebtedness (as defined), including indebtedness under the Credit Facility, whether outstanding on the date of the Indenture or thereafter incurred. CPI’s payment obligations under the Notes are jointly and severally guaranteed by Holding and all of CPI’s subsidiaries.

The Notes are subject to redemption at the option of CPI, in whole or in part, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, thereon to the applicable redemption date, if redeemed during the 12-month period beginning on August 1 of the years indicated as follows:

Upon the occurrence of a change of control, CPI will be required to make an offer to each holder of Notes to repurchase all or a portion of such holder’s Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption. The Credit Facility currently allows CPI to redeem limited amounts of the Notes each fiscal year without prior permission from the lenders under the Credit Facility. Subsequent to October 3, 2003, CPI and Holding entered into an amendment to the Credit Facility that, among other things, permits CPI to redeem up to an aggregate maximum amount of $30.0 million of the Notes in any fiscal year. See Note 21, Subsequent Events. In addition, the Indenture contains various restrictions, including restrictions on mergers or the sales of CPI’s assets, dividend payments, purchase, redemption, acquisition or retirement of equity interests of CPI or its affiliates, principal payment on any indebtedness of CPI or guarantors that is subordinated to the Notes, the incurrence of certain indebtedness, or the making of any restricted investment, as defined.

CPI is authorized to issue up to 325,000 shares of Senior Preferred Stock, including shares of Senior Preferred Stock that may be used to pay dividends on the Senior Preferred Stock if the Company so elects. Dividends on the Senior Preferred Stock accrue at the rate of 14% per annum and are payable quarterly, commencing on November 1, 1995. On or before August 1, 2000, CPI may, at its option and subject to debt covenant restrictions, pay dividends in cash or in shares of Senior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. Beginning August 1, 2000, dividends may only be paid in cash.

During fiscal years 2003, 2002, and 2001 cash dividends of $5.9 million, $5.1 million, and $4.4 million, respectively were accrued and not paid on Senior Preferred Stock.

The Senior Preferred Stock is redeemable at the option of CPI, in whole or in part from time to time, initially at 107% of the liquidation preference thereof and at decreasing prices thereafter to and including August 1, 2004 and thereafter at 100% of the liquidation preference thereof, together, in each case, with accumulated and unpaid dividends thereon. The Senior Preferred Stock is subject to mandatory redemption in whole on August 1, 2007 at a price equal to the liquidation preference thereof, plus accumulated and unpaid dividends.

In the event of a change of control, CPI will be required to make an offer to each holder of shares of Senior Preferred Stock to repurchase all or a portion of such holder’s Senior Preferred Stock at a price equal to 101% of the liquidation preference thereof, plus accumulated and unpaid dividends. The Credit Facility currently prohibits, and the Indenture currently restricts, CPI from making such an offer. In addition, CPI will be required to use the proceeds from certain asset sales to permanently reduce senior indebtedness of CPI, to invest in certain related assets or businesses or to offer to repurchase Senior Preferred Stock. Any such repurchases shall be effected at an offer price equal to 100% of the liquidation preference of the shares of Senior Preferred Stock purchased, plus accumulated and unpaid dividends.

The Restated Certificate of Incorporation of CPI, which governs the rights, preferences, privileges and restrictions of the Senior Preferred Stock, contains certain provisions that, among other things, limit the ability of CPI to incur indebtedness, pay dividends, incur liens, make loans or investments, transact with affiliates and engage in mergers and consolidations.

CPI may, at its option, on any dividend payment date, exchange all, but not less than all, of the outstanding shares of Senior Preferred Stock into 14% Junior Subordinated Notes (the “Exchange Notes”) due 2007, so long as such exchange is permitted by the Credit Facility and the Indenture, in an aggregate principal amount not to exceed the aggregate liquidation preference, plus accumulated and unpaid dividends on the date of exchange. The Exchange Notes will be general unsecured obligations of CPI and will be subordinated to all existing and future senior indebtedness of CPI, including indebtedness under the Credit Facility and the Indenture. Except for terms relating to these subordination provisions, payment of interest on a quarterly basis, optional redemption and the date on which repayment is mandatory (all of which terms would be similar to the terms of Senior Preferred Stock), the terms of the Exchange Notes will be generally identical to the terms of the Senior Notes.

CPI is authorized to issue up to 525,000 shares of Junior Preferred Stock including shares of Junior Preferred Stock that may be used to pay dividends on the Junior Preferred Stock if CPI elects to pay dividends in shares of Junior Preferred Stock. The aggregate liquidation preference of the Junior Preferred Stock issued in connection with the formation of CPI in 1995 was $10.0 million. Dividends on the Junior Preferred Stock accrue at the rate of 14% per annum and are payable quarterly, commencing on November 1, 1995. On or before the redemption of the Senior Preferred Stock or the exchange of Senior Preferred Stock into Exchange Notes, CPI is required to pay

dividends on the Junior Preferred Stock in additional fully paid and non-assessable shares of Junior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. After such redemption or exchange, CPI may, at its option and subject to debt and Senior Preferred Stock covenant restrictions, pay dividends on the Junior Preferred Stock in cash or in additional fully paid and non-assessable shares of Junior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends.

At a value of $100 per share, CPI paid preferred dividends on its Junior Preferred Stock through the issuance of 38,509, 33,557, and 29,243 shares of Holding Stock for fiscal years 2003, 2002, and 2001, respectively.

The Junior Preferred Stock ranks junior in right of payment to all liabilities of CPI and to any preferred stock, including Senior Preferred Stock, that is senior in right of payment to the Junior Preferred Stock and ranks senior in right of payment to any additional preferred stock that does not expressly provide that it ranks senior to or on parity with the Junior Preferred Stock and CPI’s common stock.

Cash paid for interest was $13.3 million, $15.5 million, and $19.2 million, in fiscal years 2003, 2002, and 2001, respectively. Cash paid for taxes was $8.6 million, $1.2 million, and $0.6 million, in fiscal years 2003, 2002, and 2001, respectively.

Non-cash financing activities included the following: Dividends on Senior Preferred Stock included $5.9 million, $5.1 million and $4.4 million of accrued but unpaid preferred dividends in fiscal years 2003, 2002 and 2001, respectively. Dividends on Junior Preferred Stock were paid through the issuance of 38,509, 33,557, and 29,243, shares of Junior Preferred Stock during fiscal years 2003, 2002, and 2001, respectively. Amortization of discount and issue costs on the Senior Preferred Stock was $0.2 million for each of fiscal years 2003, 2002, and 2001. Equipment of $0.1 million was acquired under capital leases during fiscal year 2001 and fully depreciated in fiscal year 2003. No equipment was acquired under capital leases in fiscal years 2003 or 2002.

At October 3, 2003, the Company was committed to minimum rentals under non-cancelable operating lease agreements primarily for land and facility space. A summary of future minimum lease payments (dollars in thousands) follows:

Real estate taxes, insurance, and maintenance are also obligations of the Company. Rental expense under non-cancelable operating leases amounted to $1.3 million, $1.3 million, and $1.2 million, for fiscal years 2003, 2002, and 2001, respectively.

The amount of outstanding letters of credit provided for under the Credit Facility was $5.3 million as of October 3, 2003. These outstanding obligations are comprised of the following: $2.6 million related to ten performance bond guarantees, $2.0 million related to the Company’s worker’s compensation insurance, and $0.7 million to various other beneficiaries related primarily to insurance and service contracts.

The Company and Varian are currently defendants in a lawsuit relating to operations prior to the acquisition by the Company of its business from Varian. The Company’s acquisition agreement with Varian provides for Varian’s retention of liability arising out of the above referenced litigation. Accordingly, in the opinion of management, the outcome of that litigation will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

From time to time, the Company may be subject to other claims that arise in the ordinary course of business. In the opinion of management, as of October 3, 2003, all such matters involve amounts that would not have a material adverse effect on the Company’s consolidated financial position if unfavorably resolved.

The Company has two reportable segments: VEDs and satcom equipment. Reportable segments are differentiated based on product. The VED segment is made up of four operating units, which have been aggregated. Each operating unit has a President that reports either to the Chief Operating Officer, who in turns reports to the Chief Executive Officer (“CEO”), or directly to the CEO.

of economic characteristics was based on both a historical and anticipated future analysis of performance. In addition, the aggregated units are similar in (i) the nature of their products, (ii) their manufacturing processes, (iii) their customers and, (iv) their distribution and sales methods.

The VED segment develops, manufactures and distributes high power/high frequency microwave and radio frequency signal components. Its products include linear beam, cavity, power grid, crossed field and magnetron devices. These 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. These products are distributed through the Company’s direct sales force, independent sales representatives and distributors.

The satcom equipment segment manufactures and supplies high power amplifiers and networks for satellite communication uplink and industrial applications. This segment also provides spares, service and other post sales support. Its products are distributed through the Company’s direct sales force and independent sales representatives.

Sales and marketing, finance and administration expenses are allocated to the operating units and are included in the results reported. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment product transfers are recorded at cost.

Summarized financial information concerning the Company’s reportable segments is shown in the following table. Included in the “Other” column is financial information for SSPD, which was sold in September 2002 and did not meet the quantitative thresholds to be reported separately, and certain unallocated corporate-level operating expenses.


(Dollars in thousands)			Satcom
	VEDs		Equipment			Other			Total

Fiscal Year 2003:
Revenues from external customers	$	219,870		45,564			–			265,434
Intersegment product transfers		15,662		–			–			15,662
EBITDA		50,850		4,183			(7,576	)		47,457
Total assets		94,671		13,045			74,252			181,968
Capital expenditures		2,612		352			103			3,067

Fiscal Year 2002:
Revenues from external customers	$	202,978		45,432			2,835			251,245
Intersegment product transfers		12,527		–			952			13,479
EBITDA		37,300		672			(9,306	)		28,666
Total assets		91,608		14,207			50,374			156,189
Capital expenditures		3,086		87			205			3,378

Fiscal Year 2001:
Revenues from external customers	$	203,656		64,819			4,046			272,521
Intersegment product transfers		20,081		–			1,432			21,513
EBITDA		29,183		(4,046	)		(6,954	)		18,183
Total assets		109,684		33,015			61,368			204,067
Capital expenditures		3,522		1,487			779			5,788

A reconciliation of EBITDA from reportable segments to Income (loss) before Taxes is as follows:

CPI’s operations outside of North America consist of sales offices in certain foreign countries. Long-lived assets outside of North America are less than 10% of total consolidated assets. Information about CPI’s sales to geographical regions is presented in the table below. Sales to unaffiliated customers are based on the location of the customer. There are no individual foreign countries in which sales are considered material.

CPI had one customer, the US Government, that accounted for 10% or more of consolidated sales in fiscal years 2003, 2002 and 2001. Sales to this customer were $51.3 million, $43.9 million, and $42.8 million in the Company’s consolidated sales for fiscal years 2003, 2002, and 2001, respectively. Accounts receivable from this customer represented 21% and 18% of consolidated accounts receivable at fiscal year end 2003 and 2002, respectively. A substantial majority of these sales were VED segment products, but this customer also purchased satcom equipment products as well.

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. Total expenditures incurred by the Company on research and development are summarized as follows:

Income (loss) before income taxes for domestic and non-U.S. operations is as follows:

The significant components of the CPI’s deferred tax assets and liabilities are as follows:

The provision for income tax expense for fiscal year 2003 and 2002 consists of federal and state current tax expenses. The foreign income tax expense results from current tax payable in the foreign jurisdictions.

As of fiscal year 2003 and 2002, management has established a full valuation allowance for all of deferred tax assets for which realization is uncertain. This allowance has been established based on the uncertainty of utilizing net operating losses and various tax credits. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax

liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at October 3, 2003. The net change in the total valuation allowance for the 53-week period ended October 3, 2003 and the 52-week period ended September 27, 2002 was a decrease of $1.5 million and a decrease of $0.6 million, respectively.

As of October 3, 2003, the Company has fully utilized the net operating loss carryforward for federal income tax and has approximately $12.3 million in state net operating loss carryforward available to reduce future income subject to income taxes. State net operating loss carryforwards expire beginning in 2008.

As of October 3, 2003, the Company has foreign tax credit carryforwards for federal income tax and a Manufacturers’ Investment Credit for California income tax purposes of approximately $0.6 million available to reduce future federal and California income taxes, respectively. Foreign tax credit carryforwards expire beginning in 2008. The California credit carryforward will expire beginning in 2005.

The differences between the effective income tax rate and the statutory federal income tax rate are as follows:

In March 2000, Holding established the Communications & Power Industries 2000 Stock Option Plan (“the Plan”) to provide an incentive for key employees, consultants, advisors and non-affiliate directors of Holding and its subsidiaries, and reserved 250,000 shares of Holding’s common stock for issuance under the Plan. Options granted under the Plan are granted at fair market value, expire ten years from the date of grant and generally vest in four equal annual installments, commencing one year from the date of grant. The stock options granted pursuant to the Plan are not considered “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code, as amended, and are subject to all of the terms and restrictions contained in the Stock Option Agreements and Stockholders Agreements. Upon a merger or a sale, the Stock Option Committee of

the Board of Directors (“Committee”), may, in its discretion, do one or more of the following: (1) shorten the period which options are exercisable, (2) accelerate the vesting schedule of the options, (3) arrange to have surviving or successor entity assume the options or grant replacement options with appropriate adjustments in the exercise prices and adjustments in the number and kind of securities, and (4) cancel these options upon payment to the option holder in cash. All determinations to the preceding shall be made by the Committee and shall be final, binding and conclusive on all parties.

On March 3, 2003, a majority of the holders of Holding’s common stock adopted an amendment to the Plan to increase the total number of shares of common stock that Holding is authorized to issue pursuant to the Plan from 250,000 to 350,000. A summary of the status of the Plan is as follows:

The following table summarizes information about options outstanding under the Plan at October 3, 2003:

The Company uses the intrinsic-value based method to account for its employee’s stock-based compensation plan. For options granted in fiscal year 2002 and 2001, no compensation cost has been recognized in the accompanying consolidated financial statements for options granted under this plan as the exercise price of each option equaled the fair value of the underlying common stock as of the grant date. With respect to options granted in fiscal year 2003, the Company has recorded deferred stock-based compensation of approximately $1.5 million for the difference at the grant date between

the exercise price and the fair value as determined by an independent appraisal. The total deferred stock-based compensation recorded will be amortized on a straight-line basis over the four-year vesting period.

In August 1995, Holding established the Holding 1995 Management Equity Plan (the “Holding Equity Plan”), under which certain of Holding’s and CPI’s present and former executive officers are participants. Under the Holding Equity Plan, participants may purchase shares of Holding common stock (“Management Shares”) at a price determined by Holding’s Board of Directors to be the fair market value of such Holding common stock on the date the participant executes an agreement to purchase the shares. Holding has reserved a total of 1,250,000 shares of Holding Common Stock for issuance under the Holding Equity Plan, of which 1,146,750 were issued to the Company’s former Chief Executive Officer, certain officers and key employees in fiscal year 1995. In March 2003, the Company sold an additional 100,000 shares to certain executive officers of Holding and CPI for $1.10 per share in cash. The Company recorded compensation expense of $0.8 million related to this sale as the shares were subsequently determined to have been sold at less than the fair value as determined by an independent appraisal.

CPI provides a qualified 401(k) investment plan covering substantially all of its domestic employees and a pension contribution plan covering substantially all of its Canadian employees. The plans provide for CPI to contribute an amount based on a percentage of each participant’s base pay. CPI also has a Non-Qualified Deferred Compensation Plan (the “Non-Qualified Plan”) that allows eligible executives and directors to defer a portion of their compensation. Participant contributions and Company matching contributions are 100% vested. The deferred compensation liability amounted to approximately $0.1 and $0.1 million as of October 3, 2003 and September 27, 2002, respectively. Total CPI contributions to these plans were $2.7 million for each of fiscal years 2003, 2002, and 2001.

CPI’s bonus program provides incentive bonuses to management if certain performance goals are achieved. Such performance goals are measured based upon earnings before interest, taxes, depreciation and amortization, cash flow and asset utilization.

In fiscal year 2003, the Company established a defined benefit pension plan for its Chief Executive Officer. The plan’s benefits are based on compensation earnings but are limited by Canada’s Income Tax Act. All costs of the plan will be borne by the Company. The plan’s assets consist primarily of mutual funds and cash.

The following table shows the net periodic pension cost and other data of this plan for fiscal year 2003:

The projected benefit obligations and net periodic pension cost were determined using the following weighted average assumptions:

On December 22, 2000, a sale-leaseback transaction related to CPI’s facilities in San Carlos, California was accomplished between CPI and Holding. Holding paid CPI aggregate consideration of $23.0 million for the San Carlos real property, consisting of $17.25 million in cash and an unsecured promissory note in the principal amount of $5.75 million. The promissory note matures in December 2009, and provides for interest-only payments on a quarterly basis at the rate of 15.5% per annum, with up to 35.25% of each interest payment payable in kind, at Holding’s option, by its issuance of additional notes. CPI and Holding entered into a lease of the San Carlos real property for a term of twenty (20) years on a net basis with a fixed annual rent (payable in equal monthly

installments) of $2.45 million. Holding financed the cash portion of the San Carlos purchase price and its fees and expenses with respect to the transaction by borrowing $18.0 million from Wells Fargo Bank, which loan matured June 1, 2002. During fiscal year 2002 , the loan was extended until June 1, 2003 and a principal payment of $0.2 million was made. During fiscal year 2003, the loan was extended until January 31, 2004 and another principal payment of $0.3 million was made. The loan bears interest at LIBOR plus 4.25% and is secured on a non-recourse basis (subject to normal and customary exceptions) by the San Carlos real property. CPI realized a gain on the sale of the property of approximately $8.5 million that is being recognized over the twenty year lease term. Intercompany accounts and transactions associated with this sale-leaseback transaction have been eliminated in consolidation.

Holding and CPI have entered into a management services agreement with Leonard Green & Partners, L.P. (“LGP”) to pay approximately $0.4 million, plus out-of-pocket expenses, annually to LGP, which is an affiliate of the general partner of Green Equity Investors II, L.P., Holding’s majority stockholder. Certain individuals who are stockholders of the general partner of LGP are members of the Board of Directors of Holding and CPI. The management services agreement provides for management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analyses, negotiating and structuring financing and exploring expansion opportunities. In addition, LGP may provide financial advisory and investment banking services to the Company in connection with major financial transactions for an additional fee.

The aggregate principal amount of such Management Notes was $0.9 million as of October 3, 2003. Of this amount, $0.7 million is secured by a pledge of a portion (from 50% to 75%) of the Management Shares issued to each executive officer and is guaranteed by Varian. The balance of $0.2 million is secured by a pledge of approximately 91% of the Management Shares issued, but is not guaranteed by Varian. Outstanding principal under each type of Management Note bears interest at an annually adjustable rate equal to the “Applicable Federal Rate” in effect under Internal Revenue Code Section 1274(d) for obligations of a term equal to the then-remaining term of such note. Recourse by Holding under both types of Management Notes is limited to the Management Shares pledged to secure the applicable note and the Varian guaranty. The Board of Directors of Holding has extended the due dates of all past and future scheduled interest and principal payments on these Management Notes until the Management Notes are due in 2004 or upon request of the Board of Directors, whichever comes first.

Holding has guaranteed CPI’s obligations under the Credit Facility, the Senior Notes and the Indenture. Other than the transactions associated with the San Carlos real property purchase and

related financing and leaseback arrangements, the consolidated balance sheets of Holding as of October 3, 2003 and September 27, 2002 are substantially identical to those of CPI.

In connection with the sale of SSPD in September 2002 to KMIC Technology Inc. the Company was required to provide a $100,000 letter of credit as a partial guarantee for the new company’s leased facilities. The letter of credit guarantee expires in November 2003.

During the closing of the quarter ended October 3, 2003 and in connection with the Merger Agreement described in Note 21, the Company obtained an updated independent appraisal to determine the fair value of common stock purchased by certain executives and stock options granted to certain employees during the quarter ended April 4, 2003. The Company recognized additional employee compensation expense for 100,000 shares of Holding common stock, based on the difference between the issue price of common stock and the revised fair value of common stock. The Company also recognized additional employee compensation expense over the four-year vesting period for 191,000 shares of stock options granted, based on the difference between the exercise price and the revised fair value of the Company’s common stock. As a result, compensation expense increased from previously reported amounts by $0.8 million and $0.1 million for the quarters ended April 4, 2003 and July 4, 2003, respectively. As of April 4, 2003, the reported balance sheet amounts for additional paid-in capital and deferred stock-based compensation were increased by $2.3 million and $1.5 million, respectively. As of July 4, 2003, the reported balance sheet amounts for additional paid-in capital and deferred stock-based compensation were increased by $2.3 million and $1.4 million, respectively.

Pursuant to the Merger Agreement, a wholly owned subsidiary of Acquiror will merge with and into the Company (the “Merger”), with the Company as the surviving corporation. Consummation of the Merger is subject to customary conditions, including a condition that Acquiror obtain the requisite debt financing. Subject to the satisfaction of the applicable conditions, it is currently anticipated that the Merger will close in the second quarter of fiscal year 2004.

Pursuant to the Management Services Agreement described in Note 18, it is contemplated that in connection with and upon consummation of the Merger, LGP will receive a transaction fee of $1,250,000.

On December 4, 2003, CPI instructed the trustee under the Indenture to send a notice to all of the registered holders of the Senior Notes, notifying them that CPI has elected to redeem $26,000,000 in principal amount of the Notes on January 5, 2004, pursuant to and in accordance with the terms of the Indenture. The redemption will occur 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 the Credit Facility that, among other things, permits CPI to redeem up to an aggregate maximum amount of $30.0 million of the Senior Notes in any fiscal year.

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

The Board of Directors and Stockholders
Communications & Power Industries, Inc.:

We have audited the accompanying consolidated balance sheets of Communications & Power Industries, Inc. (a wholly owned subsidiary of Communications & Power Industries Holding Corporation) and subsidiaries (“CPI”) as of October 3, 2003 and September 27, 2002, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the 53-week period ended October 3, 2003 and the 52-week periods ended September 27, 2002 and September 28, 2001. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of CPI’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Communications & Power Industries, Inc. and subsidiaries as of October 3, 2003 and September 27, 2002, and the results of their operations and their cash flows for the 53-week period ended October 3, 2003 and the 52-week periods ended September 27, 2002 and September 28, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 4 to the consolidated financial statements, effective September 28, 2002, CPI adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)


			Fiscal Year-End

			2003			2002
ASSETS
Current Assets
	Cash and cash equivalents		$	33,751			2,724
	Accounts receivable, net			33,128			30,165
	Inventories			37,358			40,726
	Prepaid expenses			2,210			2,637

		Total current assets		106,447			76,252
Property, plant, and equipment, net				40,132			42,478
Goodwill				19,149			19,149
Intangibles assets, net				1,140			1,613
Debt issue costs, net				2,263			3,259
Note receivable from parent				5,750			5,750

Total assets			$	174,881			148,501

LIABILITIES, SENIOR REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Current Liabilities
	Current portion of capital leases		$	—			45
	Accounts payable			15,624			14,111
	Accrued expenses			22,783			19,340
	Product warranty			5,401			4,823
	Income taxes payable			3,838			2,964
	Accrued dividends payable			15,449			9,538
	Advance payments from customers			10,203			7,594

		Total current liabilities		73,298			58,415
Senior subordinated notes				100,000			100,000
Deferred income on sale-leaseback				6,887			7,311

		Total liabilities		180,185			165,726

Senior Redeemable Preferred Stock ($ .01 par value, 325,000 shares authorized; 297,346 shares issued and outstanding as of 2003 and 2002, respectively; liquidation preference $100 per share)				28,907			28,693

Commitments and contingencies
Stockholders’ Deficit
	Junior Preferred Stock ($ .01 par value, 525,000 shares authorized; 299,541 and 261,032 shares issued and outstanding as of 2003 and 2002, respectively; liquidation preference $100 per share)			2			2
Common stock ($ .01 par value, 400,000 shares authorized; 1 share issued and outstanding as of 2003 and 2002)				—			—
Additional paid-in capital				50,758			44,608
Deferred stock-based compensation				(1,289	)		—
Accumulated deficit				(82,426	)		(89,305	)
Stockholder loans				(1,256	)		(1,223	)

	Net stockholders’ deficit			(34,211	)		(45,918	)

	Total liabilities, senior redeemable preferred stock and stockholders’ deficit		$	174,881			148,501

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)


		Fiscal Year

		2003			2002			2001

Sales		$	265,434			251,245			272,521
Cost of sales			183,957			192,189			223,332

Gross profit			81,477			59,056			49,189

Operating costs and expenses:
	Research and development		6,860			5,873			5,767
	Selling and marketing		15,650			16,073			17,544
	General and administrative		19,412			21,145			22,065
	(Gain) losson sale of Solid State Products Division (SSPD)		(136	)		3,004			—

Total operating costs and expenses			41,786			46,095			45,376

Operating income			39,691			12,961			3,813
Interest expense			12,511			14,463			18,646

Income (loss) before taxes			27,180			(1,502	)		(14,833	)
Income tax expense			10,325			4,559			2,950

Net income (loss)			16,855			(6,061	)		(17,783	)
Preferred dividends:
	Senior Redeemable Preferred Stock		5,911			5,151			4,387
	Junior Preferred Stock		3,851			3,356			2,924

Net income (loss) attributable to common stock		$	7,093			(14,568	)		(25,094	)

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)


	Junior				Additional		Deferred									Total
	Preferred		Common		Paid-in		Stock-based			Accumulated			Stockholder			Stockholders'
	Stock		Stock		Capital		Compensation			Deficit			Loans			Deficit

Balances, September 29, 2000	$	2		—		38,328		—			(49,215	)		(1,133	)		(12,018	)

Amortization of discount and issue costs on senior redeemable preferred stock		—		—		—		—			(214	)		—			(214	)
Dividends on senior redeemable preferred stock		—		—		—		—			(4,387	)		—			(4,387	)
Payment of dividends on junior preferred stock		—		—		2,924		—			(2,924	)		—			—
Net loss		—		—		—		—			(17,783	)		—			(17,783	)
Interest accrued on stockholder loan		—		—		—		—			—			(48	)		(48	)

Balances, September 28, 2001	$	2		—		41,252		—			(74,523	)		(1,181	)		(34,450	)

Amortization of discount and issue costs on senior redeemable preferred stock		—		—		—		—			(214	)		—			(214	)
Dividends on senior redeemable preferred stock		—		—		—		—			(5,151	)		—			(5,151	)
Payment of dividends on junior preferred stock		—		—		3,356		—			(3,356	)		—			—
Net loss		—		—		—		—			(6,061	)		—			(6,061	)
Interest accrued on stockholder loan		—		—		—		—						(42	)		(42	)

Balances, September 27, 2002	$	2		—		44,608		—			(89,305	)		(1,223	)		(45,918	)

Amortization of discount and issue costs on senior redeemable preferred stock		—		—		—		—			(214	)		—			(214	)
Dividends on senior redeemable preferred stock		—		—		—		—			(5,911	)		—			(5,911	)
Payment of dividends on junior preferred stock		—		—		3,851		—			(3,851	)		—			—
Issuance of Holding stock options at less than fair value		—		—		1,509		(1,289	)		—			—			220
Issuance of Holding stock at less than fair value		—		—		790					—			—			790
Net income		—		—		—		—			16,855			—			16,855
Interest accrued on stockholder loan		—		—		—		—						(33	)		(33	)

Balances, October 3, 2003	$	2		—		50,758		(1,289	)		(82,426	)		(1,256	)		(34,211	)

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)


			Fiscal Years

			2003			2002			2001

OPERATING ACTIVITIES
		Net cash provided by operating activities	$	35,080			43,770			6,789

INVESTING ACTIVITIES
		Proceeds from sale of property to parent		—			—			17,250
		Proceeds from sale of SSPD division		136			926			—
		Proceeds from sale of property, plant and equipment		—			—			1,944
		Purchase of property, plant, and equipment		(3,067	)		(3,378	)		(5,788	)

		Net cash (used in) provided by investing activities		(2,931	)		(2,452	)		13,406

FINANCING ACTIVITIES
		Repayments on capital leases		(45	)		(964	)		(960	)
		Payment of debt issue costs		(298	)		(101	)		(1,743	)
		Repayment of terminated revolving credit facility		—			—			(40,000	)
		Net repayments of revolving credit facility		—			(21,293	)		21,530
		Repayments on terminated senior term loans		—			—			(16,049	)
		Net (repayments) proceeds from bank overdraft		(779	)		861			(4,836	)
		Net (repayments) proceeds from senior term loans		—			(20,000	)		20,000

		Net cash used in financing activities		(1,122	)		(41,497	)		(22,058	)

NET INCREASE (DECREASE) IN
	CASH AND CASH EQUIVALENTS			31,027			(179	)		(1,863	)
		Cash and cash equivalents at beginning of period		2,724			2,903			4,766

		Cash and cash equivalents at end of period	$	33,751			2,724			2,903

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)


			Fiscal Years

			2003			2002			2001

DETAIL OF NET CASH PROVIDED
	BY OPERATING ACTIVITIES
Net income (loss)			$	16,855			(6,061	)		(17,783	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation		5,279			8,581			10,210
		Amortization of deferred debt issue costs		1,294			1,557			1,655
		Amortization of goodwill and intangibles		473			2,064			2,638
		Allowance for doubtful accounts		133			331			355
		(Gain) loss on the sale of SSPD		(136	)		3,004			—
		Gain on sale of property to Holding		(424	)		(424	)		(317	)
		Compensation expense from Holding stock issued at less than fair value		790			—			—
		Compensation expense from Holding stock options issued at less than fair value		220			—			—
Deferred income taxes				—			3,500			11,360
Loss on liquidation of capital lease				—			73			—
Interest accrued on stockholder loan				(33	)		(42	)		(48	)
Asset impairment loss				—			508			—
Net losses (gains) on the disposition of assets				80			188			(792	)
Changes in operating assets and liabilities:
		Accounts receivable		(3,096	)		15,705			(4,659	)
		Inventories		3,422			16,175			6,271
		Prepaid expenses		427			(436	)		(638	)
		Accounts payable		2,292			(2,118	)		1,453
		Accrued expenses		3,443			1,489			965
		Product warranty		578			618			1,247
		Income tax payable, net		874			657			(9,111	)
		Advance payments from customers		2,609			(1,599	)		3,983

		Net cash provided by operating activities	$	35,080			43,770			6,789

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

Communications & Power Industries, Inc. (“CPI” or the “Company”) develops, manufactures and distributes microwave and power grid vacuum electronic devices, microwave amplifiers, modulators and various other power supply equipment and devices. The Company operates five manufacturing operations in North America, and sells and services its products and customers worldwide primarily through a direct sales force.

In August 1995, CPI acquired substantially all of the assets of the Electron Devices business of Varian Associates, Inc.(now known as Varian Medical Systems, Inc.) (“Varian”) and then was merged with a wholly owned subsidiary of Communications & Power Industries Holding Corporation (“Holding”), a corporation newly formed by a group of investors, including management of the Company. The acquisition was accounted for as a purchase and, accordingly, the purchase price was allocated based upon the fair values of assets acquired and liabilities assumed. Financing for the acquisition was obtained through the issuance of 12% Senior Subordinated Notes due 2005 of CPI (the “Notes”) in the aggregate principal amount of $100.0 million, the issuance of 14% Senior Redeemable Exchangeable Cumulative Preferred Stock due 2007 of CPI (the “Senior Preferred Stock”), and the issuance of 14% Junior Cumulative Preferred Stock of CPI, (the “Junior Preferred Stock”), and common stock of Holding.

The accompanying consolidated financial statements include the accounts of CPI and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company’s fiscal years reported are the 52-week or 53-week periods ending on the Friday nearest to September 30. Fiscal year 2003 was comprised of the 53-week period ending on October 3, 2003. Fiscal years 2002 and 2001 were comprised of the 52-week periods ending on September 27, 2002 and September 28, 2001, respectively. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted.

Generally, CPI requires no collateral from its customers, and CPI estimates an allowance for doubtful accounts based on the creditworthiness of its customers and general economic conditions. Consequently, an adverse change in those factors could affect CPI’s estimate of its bad debts.

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

Historical credit losses have been within management’s expectations, and most transactions with third world economies are backed by letters of credit.

The estimated sales values of performance under certain contracts to commercial customers and U.S. Government fixed-price and fixed-price incentive contracts are recognized under the percentage of completion method of accounting where the sales value is determined on the basis of costs incurred. Provisions for anticipated losses are made in the period in which they first become determinable. Sales under cost-reimbursement contracts, primarily research and development contracts, are recorded as costs are incurred and include estimated earned fees in the proportion that costs incurred to date bear to total estimated costs. The fees under certain U.S. Government contracts may be increased or decreased in accordance with cost or performance incentive provisions that measure actual performance against established targets or other criteria. Such incentive fee awards or penalties are included in revenue at the time the amounts can be reasonably determined.

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

CPI’s products are generally warranted for a variety of periods, typically one to three years or a predetermined product usage life. A provision for estimated future costs of repair, replacement or customer accommodations is reflected in the accompanying consolidated financial statements.

Costs incurred related to the issuance of CPI’s long-term debt and other credit facilities are capitalized and amortized over the estimated time the obligations are expected to be outstanding using the effective interest method. The amortization periods used for the deferred costs associated with the mortgage financing, , CPI’s revolving credit facility (the “Credit Facility”), and the Senior Notes are 1 year, 4 years and 10 years, respectively.

The Company records income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recorded or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The functional currency of CPI’s foreign subsidiaries is the U.S. dollar. Gains or losses resulting from the translation into U.S. dollars of amounts denominated in foreign currencies are included in the determination of net income (loss). Foreign currency gains and losses are reported under the caption “General and administrative” in the Consolidated Statement of Operations.

Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, Credit Facility, mortgage financing and long-term debt. The carrying value of CPI’s cash and cash equivalents, accounts receivable, accounts payable, Credit Facility and mortgage financing approximate their fair values due to the relatively short period to maturity of the instruments. The fair value of the Senior Notes based on quoted market prices or pricing models using current market rates, is a premium of 1.5% as of October 3, 2003 and a discount of 16% as of September 27, 2002.

As allowed by 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 costs associated with the 2003 stock options is amortized as a charge against income under the caption “General and administrative” on the Consolidated Statement of Operations on a straight-line basis over four years vesting period of the options. If compensation cost for the Company’s stock-based compensation plan had been determined consistent with SFAS No. 123, the Company’s net income (loss) would have changed to the pro forma amounts indicated below:

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

The Company has no components of other comprehensive income (loss) and, accordingly, comprehensive income (loss) is the same as reported net income (loss) for all periods presented.

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 are effective in fiscal years beginning after May 15, 2002, with early adoption permitted, and, in general, are to be applied prospectively. The Company adopted this Statement on September 28, 2002. The adoption did not have a material impact on the Company’s consolidated financial position or results of operations.

In January 2003, 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 for the Company until January 3, 2004. The Company has evaluated the impact of the provisions of Interpretation 46 and it believes it will not have a material impact on the Company’s financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS 149 amends and clarifies financial accounting and

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

reporting for derivative instruments and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This Statement will be applied prospectively for contracts entered into or modified after June 30, 2003 and hedging relationships designated after June 30, 2003. Adoption of SFAS No. 149 in the Company’s fourth quarter did not have a material impact on the Company’s consolidated financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 requires that certain financial instruments with characteristics of both liabilities and equity be classified as liabilities in statements of financial position. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to existing financial instruments at the beginning of the first fiscal period beginning after December 15, 2003 for non-public entities. The Company is currently analyzing this Statement and has not yet determined its impact on the Company’s consolidated financial position or results of operations.

Accounts receivable are stated net of allowances for doubtful accounts of $0.6 million at the end of each of fiscal year 2003 and 2002.

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

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

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

Upon adoption of SFAS No. 142, the Company performed a transitional goodwill impairment evaluation to assess whether goodwill was impaired as of the date of adoption. Based on the results of the first step of the transitional goodwill impairment test, it was determined that no potential impairment exists. In addition, as required by SFAS No. 142, an annual test was performed during the fourth quarter of fiscal year 2003, and no potential impairment was noted. Also upon adoption of SFAS No. 142, as required by SFAS No. 141, the Company reassessed the useful lives and residual values of all intangible assets acquired in purchase business combinations, and no significant changes were deemed necessary.

As of October 3, 2003 and September 27, 2002, the Company had $19.1 million of goodwill, $13.4 million of which has been allocated to the vacuum electron devices (“VED”) segment and $5.7 million of which has been allocated to the satcom equipment segment. During the fiscal year ended October 3, 2003, there were no goodwill impairment losses and no changes in the carrying amount of goodwill.

The following table presents the impact of adopting SFAS No. 142 on net income (loss) if such standard had been in effect for the 52-week periods ended September 27, 2002 and September 28, 2001.

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

On September 26, 2002, the Company sold its Solid State Products Division (“SSPD”) to KMIC Technology Inc., a company owned by the former management of SSPD. The Company received approximately $0.9 million in cash and a $0.3 million unsecured promissory note. The note bears interest at 12% per annum and is payable as follows: one-third of the principal plus unpaid interest was due October 1, 2003 with the remaining balance payable in eight quarterly installments of principal and interest beginning January 1, 2004 and ending October 1, 2005. During fiscal year 2002, the sale resulted in a charge to operations of approximately $3.0 million, which represents the net assets sold including approximately $2.5 million in goodwill and costs and expenses of the transaction, net of $0.9 million of cash received from the sale of the operation’s net assets. Due to the uncertainty of ultimate collection, the proceeds from the promissory note are recognized when the cash payments are received. During fiscal year 2003, cash payments of $0.1 million were recognized. In connection with the SSPD transaction, the Company agreed, subject to certain limitations and exceptions, not to engage in the manufacture of intermediate power amplifiers for satcom amplifiers (“IPA’s”) for a 3-year period. In addition, the Company agreed to purchase from KMIC Technology Inc. $0.7 million of its IPA’s per year for such 3-year period.

In December 2002, the Company amended the Credit Facility to increase the maximum amount of its revolving credit line by $20.0 million (the amount of the term loan formerly outstanding under the same credit facility), from $41.0 million to $61.0 million and to extend the expiration date from December 22, 2004 to May 31, 2005. The Credit Facility continues to be secured by substantially all of the assets of CPI and guaranteed by Holding and most of CPI’s subsidiaries. Availability under the Credit Facility continues to be based upon eligible receivables, machinery and equipment and certain real estate. As of October 3, 2003, CPI had $30.0 million available under the Credit Facility.

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

The $100 million principal amount of the Notes matures in 2005 and bears interest at 12% per annum, payable semiannually. The payment of principal, premium and interest on, and other obligations evidenced by the Notes is subordinated in right of payment, as set forth in the indenture governing the Notes (the “Indenture”), to the prior payment in full of all senior indebtedness (as defined), including indebtedness under the Credit Facility, whether outstanding on the date of the Indenture or thereafter incurred. CPI’s payment obligations under the Notes are jointly and severally guaranteed by Holding and all of CPI’s subsidiaries.

Upon the occurrence of a change of control, CPI will be required to make an offer to each holder of Notes to repurchase all or a portion of such holder’s Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption. The Credit Facility currently allows CPI to redeem limited amounts of Notes each fiscal year without prior permission from the lenders under the Credit Facility. Subsequent to October 3, 2003, CPI and Holding entered into an amendment to the Credit Facility that, among other things, permits CPI to redeem up to an aggregate maximum amount of $30.0 million of the Notes in any fiscal year. See Note 21, Subsequent Events. In addition, the Indenture contains various restrictions, including restrictions on mergers or the sales of CPI’s assets, dividend payments, purchase, redemption, acquisition or retirement of equity interests of CPI or its affiliates, principal payment on any indebtedness of CPI or guarantors that is subordinated to the Notes, the incurrence of certain indebtedness, or the making of any restricted investment, as defined.

During fiscal years 2003, 2002 and 2001, cash dividends of $5.9 million, $5.1 million and $4.4 million, respectively were accrued and not paid on Senior Preferred Stock.

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

CPI is authorized to issue up to 525,000 shares of Junior Preferred Stock, including shares of Junior Preferred Stock that may be used to pay dividends on the Junior Preferred Stock if CPI elects to pay dividends in shares of Junior Preferred Stock. The aggregate liquidation preference of the Junior Preferred Stock issued in connection with the formation of CPI in 1995 was $10.0 million. Dividends on the Junior Preferred Stock accrue at the rate of 14% per annum and are payable quarterly, commencing on November 1, 1995. On or before the redemption of the Senior Preferred Stock or the exchange of Senior Preferred Stock into Exchange Notes, CPI is required to pay dividends on the Junior Preferred Stock in additional fully paid and non-assessable shares of Junior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. After such redemption or exchange, CPI may, at its option and subject to debt and Senior Preferred Stock covenant restrictions, pay dividends on the Junior Preferred Stock in cash or in additional fully paid

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

and non-assessable shares of Junior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends.

At a value of $100 per share, CPI paid preferred dividends on its Junior Preferred Stock through the issuance of 38,509, 33,557 and 29,243 shares of Holding Stock for fiscal years 2003, 2002 and 2001, respectively.

Cash paid for interest was $12.3 million, $14.5 million and $18.2 million in fiscal years 2003, 2002 and 2001, respectively. Cash paid for taxes was $8.6 million, $1.2 million and $0.6 million, in fiscal years 2003, 2002 and 2001, respectively.

Non-cash financing activities included the following: Dividends on Senior Preferred Stock included $5.9 million, $5.1 million and $4.4 million of accrued but unpaid preferred dividends in fiscal years 2003, 2002 and 2001, respectively. Dividends on Junior Preferred Stock were paid through the issuance of 38,509, 33,557 and 29,243 shares of Junior Preferred Stock during fiscal years 2003, 2002, and 2001, respectively. Amortization of discount and issue costs on the Senior Preferred Stock was $0.2 million for each of fiscal years 2003, 2002, and 2001. Equipment of $0.1 million was acquired under capital leases during fiscal year 2001 and fully depreciated in fiscal year 2003. No equipment was acquired under capital leases for fiscal years 2003 or 2002.

At October 3, 2003, CPI was committed to minimum rentals under non-cancelable operating lease agreements primarily for land and facility space. Also, as noted in Note 18 “Related Party Transactions,” on December 22, 2000, CPI and Holding entered into an operating lease of the San Carlos real property for a term of twenty (20) years on a net basis with a fixed annual rent (payable in equal monthly installments) of $2.45 million.

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

Real estate taxes, insurance, and maintenance are also obligations of CPI. Rental expense under non-cancelable operating leases amounted to $3.7 million, $3.7 million, and $3.0 million for fiscal years 2003, 2002, and 2001, respectively.

From time to time, CPI may be subject to other claims that arise in the ordinary course of business. In the opinion of management, as of October 3, 2003, all such matters involve amounts that would not have a material adverse effect on the Company’s consolidated financial position if unfavorably resolved.

The Company has two reportable segments: VED and satcom equipment. Reportable segments are differentiated based on product. The VED segment is made up of four operating units, which have been aggregated. Each operating unit has a President that reports either to the Chief Operating Officer, who in turns reports to the Chief Executive Officer (“CEO”), or directly to the CEO.

The CEO evaluates performance and allocates resources to each of these operating units based on the Company’s principal performance measure, earnings before interest, income taxes, depreciation and amortization and certain other non-cash charges (“EBITDA”). These four operating units have similar economic characteristics as measured by EBITDA. The Company’s analysis of the similarity of economic characteristics was based on both a historical and anticipated future analysis of performance. In addition, the aggregated units are similar in (i) the nature of their products, (ii) their manufacturing processes, (iii) their customers and, (iv) their distribution and sales methods.

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

The VED segment develops, manufactures and distributes high power/high frequency microwave and radio frequency signal components. Its products include linear beam, cavity, power grid, crossed field and magnetron devices. These 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. Its products are distributed through the Company’s direct sales force, independent sales representatives and distributors.

The satcom equipment segment manufactures and supplies high power amplifiers and networks for satellite communication uplink and industrial applications. This segment also provides spares, service and other post sales support. These products are distributed through the Company’s direct sales force and independent sales representatives.

Summarized financial information concerning the Company’s reportable segments is shown in the following table. Included in the “Other” column is financial information for SSPD, which was sold on September 26, 2002 and did not meet the quantitative thresholds to be reported separately, and certain unallocated corporate-level operating expenses.

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)


			Satcom
(Dollars in thousands)	VEDs		Equipment			Other			Total

Fiscal Year 2003:
Revenues from external customers	$	219,870		45,564			—			265,434
Intersegment product transfers		15,662		—			—			15,662
EBITDA		50,850		4,183			(9,590	)		45,443
Total Assets		94,671		13,045			67,165			174,881
Capital Expenditures		2,612		352			103			3,067

Fiscal Year 2002:
Revenues from external customers	$	202,978		45,432			2,835			251,245
Intersegment product transfers		12,527		—			952			13,479
EBITDA		37,300		672			(11,333	)		26,639
Total Assets		91,608		14,207			42,686			148,501
Capital Expenditures		3,086		87			205			3,378

Fiscal Year 2001:
Revenues from external customers	$	203,656		64,819			4,046			272,521
Intersegment product transfers		20,081		—			1,432			21,513
EBITDA		29,183		(4,046	)		(8,476	)		16,661
Total Assets		109,684		33,015			52,950			195,649
Capital Expenditures		3,522		1,487			779			5,788

A reconciliation of EBITDA from reportable segments to Income (Loss) before Taxes is as follows:

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

CPI has one customer, the US Government, that accounted for 10% or more of consolidated sales in fiscal years 2003, 2002 and 2001. Sales to this customer were $51.3 million, $43.9 million and $42.8 million in the Company’s consolidated sales for fiscal years 2003, 2002, and 2001, respectively. Accounts receivable from this customer represented 21% and 18% of consolidated accounts receivable at fiscal year end 2003 and 2002, respectively. A substantial majority of these sales were VED segment products, but this customer also purchased satcom equipment products as well.

CPI-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. Total expenditures incurred by CPI on research and development are summarized as follows:

Income (loss) before income taxes for domestic and non-U.S. operations is as follows:

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

The significant components of the CPI’s deferred tax assets and liabilities are as follows:

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at October 3, 2003. The net change in the total valuation allowance for the 53 week-period ended October 3, 2003 and the 52-week period ended September 27, 2002 was a decrease of $1.5 million and a decrease of $0.2 million, respectively.

As of October 3, 2003, the Company has fully utilized the net operating loss carryforward for federal income tax and has approximately $12.0 million in state net operating loss carryforwards available to reduce future income subject to income taxes. State net operating loss carryforwards expire beginning in 2008.

As of October 3, 2003, the Company has foreign tax credit carryforwards for federal income tax purposes of $0.2 million and a manufacturers’ investment credit for California income tax purposes of approximately $0.6 million available to reduce future federal and California income taxes, respectively. Foreign tax credit carryforwards expire beginning in 2008. The California credit will expire beginning in 2005.

The differences between the effective income tax rate and the statutory federal income tax rate are as follows:

In March 2000, Holding established the Communications & Power Industries 2000 Stock Option Plan (“the Plan”) to provide an incentive for key employees, consultants, advisors and non-affiliate directors of Holding and its subsidiaries, and reserved 250,000 shares of Holding’s common stock for issuance under the Plan. Options granted under the Plan are granted at fair value, expire ten years from the date of grant and generally vest in four equal annual installments, commencing one year from the date of grant. The stock options granted pursuant to the Plan are not considered “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code, as amended, and are subject to all of the terms and restrictions contained in the Stock Option Agreements and Stockholders Agreements. Upon a merger or a sale, the Stock Option Committee of the Board of Directors

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

(“Committee”), may, in its discretion, do one or more of the following: (1) shorten the period which options are exercisable, (2) accelerate the vesting schedule of the options, (3) arrange to have surviving or successor entity assume the options or grant replacement options with appropriate adjustments in the exercise prices and adjustments in the number and kind of securities, and (4) cancel these options upon payment to the option holder in cash. All determinations to the preceding shall be made by the Committee and shall be final, binding and conclusive on all parties.

The following table summarizes information about options outstanding under the Plan at October 3, 2003:

The Company uses the intrinsic-value based method to account for its employee’s stock-based compensation plan. For options granted in fiscal year 2002 and 2001, no compensation cost has been

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

recognized in the accompanying consolidated financial statements for options granted under this plan as the exercise price of each option equaled the fair value of the underlying common stock as of the grant date. With respect to options granted in fiscal year 2003, the Company has recorded deferred stock-based compensation of approximately $1.5 million for the difference at the grant date between the exercise price and the fair value as determined by an independent appraisal. The total deferred stock-based compensation recorded will be amortized on a straight-line basis over the four-year vesting period.

In August 1995, Holding established the Holding 1995 Management Equity Plan (the “Holding Equity Plan”), under which certain of Holding’s and CPI’s present and former executive officers are participants. Under the Holding Equity Plan, participants may purchase shares of Holding common stock (“Management Shares”) at a price determined by Holding’s Board of Directors to be the fair value of such Holding common stock on the date the participant executes an agreement to purchase the shares. Holding has reserved a total of 1,250,000 shares of Holding Common Stock for issuance under the Holding Equity Plan, of which 1,146,750 were issued to the Company’s former Chief Executive Officer, certain officers and key employees in fiscal year 1995. In March 2003, the Company sold an additional 100,000 shares to certain executive officers of Holding and CPI for $1.10 per share in cash. The Company recorded compensation expense of $0.8 million related to this sale as the shares were subsequently determined to have been sold at less than the fair value as determined by an independent appraisal.

CPI provides a qualified 401(k) investment plan covering substantially all of its domestic employees and a pension contribution plan covering substantially all of its Canadian employees. The plans provide for CPI to contribute an amount based on a percentage of each participant’s base pay. CPI also has a Non-Qualified Deferred Compensation Plan (the “Non-Qualified Plan”) that allows eligible executives and directors to defer a portion of their compensation. Participant contributions and CPI matching contributions to the Non-Qualified Plan are 100% vested. The deferred compensation liability amounted to approximately $0.1 million and $0.1 million as of October 3, 2003 and September 27, 2002, respectively. Total CPI contributions to these plans were $2.7 million for each of fiscal years 2003, 2002, and 2001.

The following table shows the net periodic pension cost and other data of this plan for fiscal year 2003:

The projected benefit obligations and net periodic pension cost were determined using the following weighted-average assumptions:

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

$2.45 million. Holding financed the cash portion of the San Carlos purchase price and its fees and expenses with respect to the transaction by borrowing $18.0 million from Wells Fargo Bank, which loan matured June 1, 2002. During fiscal year 2002, the loan was extended until June 1, 2003 and a principal payment of $0.2 million was made. During fiscal year 2003, the loan was extended until January 31, 2004 and another principal payment of $0.3 million was made. The loan bears interest at LIBOR plus 4.25% and is secured on a non-recourse basis (subject to normal and customary exceptions) by the San Carlos real property. CPI realized a gain on the sale of the property of approximately $8.5 million that is being recognized over the twenty year lease term. Intercompany accounts and transactions associated with this sale-leaseback transaction have been eliminated in consolidation.

CPI’s related party transactions with Holding consist of the following (in thousands);

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

Holding has guaranteed CPI’s obligations under the Credit Facility, the Senior Notes and the Indenture. Other than the following, the consolidated balance sheets of Holding as of October 3, 2003 and September 27, 2002 are substantially identical to that of CPI and its subsidiaries: (i) the presentation of CPI’s preferred stock as minority interest and the components of stockholders’ equity of Holding, and (ii) the transactions associated with the San Carlos real property purchase and related financing and leaseback arrangements, as noted in Note 18 “Related Party Transactions.”

The consolidated balance sheets of Holding are summarized as follows (in thousands, except per share amounts):

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)


		Fiscal Year

Assets		2003			2002

Current assets		$	106,447			76,252
Long-term assets			75,521			79,937

	Total assets	$	181,968			156,189

Liabilities and Stockholders’ Equity
Current liabilities		$	89,206			75,151
Long-term debt and deferred taxes			100,000			100,000

	Total liabilities		189,206			175,151
Senior Redeemable Preferred Stock of subsidiary			28,907			28,693
Junior Preferred Stock of subsidiary			29,300			25,449
Stockholders’ Equity:
	Common stock ($.01 par value, 6,500,000 shares authorized; 5,008,172 and 4,908,172 shares issued and outstanding as of 2003 and 2002, respectively)		50			49
	Additional paid-in capital		21,519			19,111
	Deferred stock-based compensation		(1,289	)		—
	Accumulated deficit		(84,469	)		(91,041	)
	Less stockholder loans		(1,256	)		(1,223	)

	Total liabilities and stockholders’ equity	$	181,968			156,189

Separate financial statements of CPI’s direct and indirect subsidiaries, all of which are also guarantors under the Senior Notes and the Indenture and certain of which are guarantors under the Credit Facility, are not included because (i) these subsidiaries are jointly and severally liable for the obligations under the Senior Notes, the Indenture and, as applicable, the Credit Facility and (ii) the separate financial statements and other disclosures concerning these subsidiaries are not deemed by CPI to be material to investors.

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)

common stock. The Company also recognized additional employee compensation expense over the four-year vesting period for 191,000 shares of stock options granted based on the difference between the exercise price and the revised fair value of common stock. As a result, compensation expense increased from previously reported amounts by $0.8 million and $0.1 million for the quarters ended April 4, 2003 and July 4, 2003, respectively. As of April 4, 2003, the reported balance sheet amounts for additional paid-in capital and deferred stock-based compensation were increased by $2.3 million and $1.5 million, respectively. As of July 4, 2003, the reported balance sheet amounts for additional paid-in capital and deferred stock-based compensation were increased by $2.3 million and $1.4 million, respectively.

Pursuant to the Merger Agreement, a wholly owned subsidiary of Acquiror will merge with and into the Company (the “Merger”) with the Company as the surviving corporation. Consummation of the Merger is subject to customary conditions, including a condition that Acquiror obtain the requisite debt financing. Subject to the satisfaction of the applicable conditions, it is currently anticipated that the Merger will close in the second quarter of fiscal year 2004.

Pursuant to the Management Services Agreement described in Note 18, it is contemplated that in connection with and upon consummation of the Merger, LGP will receive a transaction fee of $1,250,000.

COMMUNICATIONS & POWER INDUSTRIES, INC.
and subsidiaries
(A wholly owned subsidiary of Communications & Power Industries Holding Corporation)


Exhibit
No.		Description

2.1(1)		Stock Sale Agreement between CPI (as successor by merger to CPII Acquisition Corp., then known as Communications & Power Industries Holding Corporation) and Varian dated as of June 9, 1995.

2.2(1)		First Amendment to Stock Sale Agreement among Holding, CPI (as successor by merger to CPII Acquisition) and Varian dated as of August 11, 1995.

2.3(1)		Second Amendment to Stock Sale Agreement among Holding, CPI (as successor by merger to CPII Acquisition) and Varian dated as of August 11, 1995.

2.4		Agreement and Plan of Merger dated as of November 17, 2003, by and among CPI Acquisition Corp., CPI Merger Sub Corp., Holding and GEI II.

3.1(1)		Restated Certificate of Incorporation of CPI filed with the Delaware Secretary of State on August 11, 1995.

3.2(7)		Amended and Restated Bylaws of CPI dated March 19, 2002.

3.3(1)		Certificate of Incorporation of Holding.

3.4(1)		Bylaws of Holding.

4.1(1)		Indenture among CPII Acquisition, Holding, the other guarantors of the Notes (the “Guarantors”) and U.S. Trust Company of California, N.A., relating to the Notes dated as of August 11, 1995.

4.2(1)		First Supplemental Indenture among CPI, Holding, the other Guarantors and U.S. Trust Company of California, N.A., relating to the Notes dated as of August 11, 1995.

4.3(1)		Form of Notes (included in Exhibit 4.1, Exhibit A)

4.4(1)		Form of Indenture between CPI and Shawmut Bank Connecticut, National Association, relating to the Exchange Notes.

4.5(1)		Form of Exchange Note (included in Exhibit 4.5, Exhibit A)

4.6(2)		Form of Second Supplemental Indenture among CPI, Holding, the other Guarantors and U.S. Trust Company of California, N.A., relating to the Notes.

10.1(6)		Loan and Security Agreement by and among CPI as borrower, the other obligors named therein, the lenders that are signatories hereto as the senders, and Foothill Capital Corporation as the arranger and administrative agent, dated as of December 15, 2000.

10.1.1(9)		Amendment Number One to Loan and Security Agreement by and among CPI as borrower, the other obligors named as signatories therein, the lenders that are signatories as lenders, and Foothill Capital Corporation as the arranger and administrative agent.

10.1.2		Letter Agreement dated as of December 1, 2003 amending Loan and Security Agreement by and among CPI as borrower, the other obligors named as signatories therein, the lenders that are signatories as lenders, and Foothill Capital Corporation as the arranger and administrative agent, dated as of December 1, 2003.

10.2(6)		Intellectual Property Security Agreement between CPI and Foothill Capital Corporation as Agent for the Lenders dated December 15, 2000.

10.3(6)		Stock Pledge and Security Agreement by CPI to and in favor of Foothill Capital Corporation, as agent for itself and the other lenders dated December 15, 2000.

10.4(6)		Stock Pledge and Security Agreement by Holding and various CPI subsidiaries to and in favor of Foothill Capital Corporation, as agent for itself and the other lenders, dated December 15, 2000.

10.5(6)		Environmental Indemnity Agreement for the benefit of Foothill Capital Corporation, as agent for itself and the other lenders and the lenders, dated December 15, 2000.

10.6(6)		Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing by and among CPI, First American Title Company and Foothill Capital Corporation, as agent for itself and the other lenders, dated December 15, 2000.

10.7(6)		Guaranty and Security Agreement in favor of Foothill Capital Corporation as Agent for itself and the lenders and the other lenders pursuant to that certain Loan and Security Agreement by and among CPI, the other obligors, Foothill and the other lenders named herein, dated December 15, 2000.

10.8(6)		Continuing Guaranty in favor of Foothill Capital Corporation, as agent for itself and the lenders and the other lenders pursuant to that certain Loan and Security Agreement by and among CPI, the other obligors named therein, Foothill and the other lenders named herein, dated December 15, 2000.


Exhibit
No.		Description

10.9(6)		Intercreditor Agreement among the CPI Parties and Foothill Capital Corporation, as agent for itself and other lenders, dated December 15, 2000.

10.10(6)		Fourth Amendment of Lease by and between The Board of Trustees of the Leland Stanford Junior University and CPI, dated December 15, 2000.

10.11(6)		Loan Agreement between Holding and Wells Fargo Bank, National Association, executed as of December 15, 2000.

10.11.1(8)		Modification Agreement of Secured Loan between Holding and Wells Fargo Bank, National Association, dated June 1, 2002.

10.12(6)		Promissory Note Secured by Deed of Trust by Holding in favor of Wells Fargo Bank, National Association, dated December 15, 2000.

10.12.1(8)		Amended and Restated Promissory Note Secured by Deed of Trust by Holding in favor of Wells Fargo Bank, National Association, dated June 1, 2002.

10.13(6)		Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing by and among Holding, American Securities Company and Wells Fargo Bank, National Association, dated December 15, 2000.

10.13.1(8)		Memorandum of Modification Agreement Amending Deed of Trust by Holding in favor of Wells Fargo Bank, National Association, dated June 1, 2002.

10.13.2(11)		Second Modification Agreement, dated May 30, 2003, by and between Holding and Wells Fargo Bank, National Association.

10.14(6)		Subordination Agreement by CPI and Holding in favor of Wells Fargo Bank, National Association, dated December 15, 2000.

10.14.1(8)		Junior Lienor’s Consent and Subordination Agreement by CPI in favor of Wells Fargo Bank, National Association, dated June 1, 2002.

10.15(6)		Hazardous Materials Indemnity Agreement by Holding in favor of Wells Fargo Bank, National Association, dated December 15, 2000.

10.16(6)		Unsecured Promissory Note by Holding in favor of CPI, dated December 15, 2000.

10.17(6)		Lease dated as of December 1, 2000 by and between Holding, as lessor, and CPI, as lessee.

10.18(1)		Cross License Agreement between CPI and Varian dated as of August 10, 1995.

10.19(1)		Trademark License Agreement between CPI and Varian dated as of August 10, 1995.

10.21(1)		Purchase Agreement among CPII Acquisition, Holding and the initial purchaser of the Series A Senior Preferred Stock (the “Initial Senior Preferred Stock Purchaser”) dated as of August 11, 1995.

10.26(1)		Holding Common Stock Registration Rights Agreement by and among Holding, GEI II and the Initial Senior Preferred Stock Purchaser dated as of August 11, 1995 relating to the Holding Common Stock sold with the Series A Senior Preferred Stock.

10.27(1)		Stockholders Agreement by and among Holding, GEI II and the Initial Senior Preferred Stock Purchaser dated as of August 11, 1995 relating to the Holding Common Stock sold with the Series A Senior Preferred Stock.

10.28(1)		Stock Subscription Agreement among Holding, CPII Acquisition Corp. and GEI II dated as of August 11, 1995.

10.29(1)		Management Services Agreement among CPI, Holding and Leonard Green & Partners, L.P. dated as of August 11, 1995.

10.30(1)		1995 Holding Management Equity Plan (including Form of Management Subscription and Stockholders Agreement)

10.32(5)		Communications & Power Industries 2000 Stock Option Plan.

10.32.1(10)		First Amendment to Communications and Power Industries 2000 Stock Option Plan.

10.33(5)		Form of Stock Option Agreement.

10.34(1)		Assignment and Assumption of Lessee’s Interest in Lease (Units 1-4, Palo Alto) and Covenants, Conditions and Restrictions on Leasehold Interests (Units 1-12, Palo Alto) dated as of August 10, 1995 between Varian Realty Inc., Varian Associates, Inc. and CPI.

10.35(1)		Sublease (Unit 8, Palo Alto) dated as of August 10, 1995 between Varian Realty Inc. and CPI.


Exhibit
No.		Description

10.36(1)		Sublease (Building 4, Palo Alto) dated as of August 10, 1995 between CPI, as Sublessee, Varian Associates, Inc., as Sublessor, and Varian Realty Inc., as Adjacent Property Sublessor.

10.37(12)		Employment Agreement for O. Joe Caldarelli dated March 19, 2002.

10.38(12)		Employment Agreement for Robert A. Fickett dated September 30, 2002.

10.39(12)		Employment Agreement for Joel A. Littman dated September 30, 2002.

10.40		Employment Agreement for Mike Cheng dated November 2, 2002.

10.41		Employment Agreement for Don C. Coleman dated November 2, 2002.

10.42		Code of Ethics

10.43		Pension Plan for Executive Employees of CPI Canada, Inc. (as applicable to O.Joe Caldarelli effective January 1, 2002

21(1)		Subsidiaries of CPI and Holding.

31		Rule 13a-14 (a) /15d-14 (a) Certifications.

32		Section 1350 Certifications

EX-2.4 3 f95383exv2w4.txt EXHIBIT 2.4 Exhibit 2.4 AGREEMENT AND PLAN OF MERGER BY AND AMONG CPI ACQUISITION CORP., CPI MERGER SUB CORP., COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION AND GREEN EQUITY INVESTORS II, L.P., AS SECURITYHOLDERS' REPRESENTATIVE DATED AS OF NOVEMBER 17, 2003 TABLE OF CONTENTS

- i -

- ii -

- iii -

- iv -

- v - AGREEMENT AND PLAN OF MERGER This Agreement and Plan of Merger, dated as of November 17, 2003, is entered into by and among CPI ACQUISITION CORP., a Delaware corporation ("ACQUIROR"), CPI MERGER SUB CORP., a Delaware corporation and a wholly owned subsidiary of Acquiror ("MERGER SUB"), COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION, a Delaware corporation (the "COMPANY"), and GREEN EQUITY INVESTORS, II, L.P., a Delaware limited partnership ("GEI"), as the Securityholders' Representative. A. The respective boards of directors of Acquiror, Merger Sub and the Company have approved this Agreement and have determined that it is advisable and in the best interests of each such corporation and its respective stockholders to effect a merger of Merger Sub with and into the Company, with the Company as the surviving corporation, pursuant to the Certificate of Merger and upon the terms and subject to the conditions set forth herein. B. Pursuant to the Merger, all shares of Company Common Stock (other than Dissenting Shares, shares owned by Acquiror or Merger Sub, and shares held in the treasury of the Company) shall be cancelled and converted into the right to receive cash and, all vested Stock Options shall either be cancelled and converted automatically into the right to receive cash or if agreed to in writing by Acquiror and any holder of Stock Options, converted into options to purchase stock of Acquiror. C. Stockholders of the Company holding at least a majority of the outstanding shares of Company Common Stock have approved the Merger and have approved and adopted this Agreement. D. Concurrently with the execution of this Agreement, the Company, Acquiror, the Securityholders' Representative and certain stockholders and option holders of the Company are entering into a voting and indemnification agreement in the form attached hereto as Exhibit A (the "VOTING AND INDEMNIFICATION AGREEMENT"), pursuant to which (i) such stockholders and option holders are agreeing to vote all shares of Company Common Stock now owned or hereafter acquired by them in favor of, or deliver written consents approving, the transactions contemplated by this Agreement, and (ii) such stockholders and option holders are severally and proportionally agreeing to indemnify Acquiror following the Closing, all as more fully set forth therein. NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties and covenants contained herein and intending to be legally bound, the parties hereto agree as follows (capitalized terms used herein but not otherwise defined herein shall have the meanings set forth in Article X hereof): ARTICLE I THE MERGER 1.1 THE MERGER. 1.1.1 At the Effective Time, Merger Sub shall be merged with and into the Company in accordance with the Delaware General Corporation Law (the "DGCL") and the terms and conditions hereof (the "MERGER"). Upon consummation of the Merger, the separate corporate existence of Merger Sub shall cease and the Company, as the surviving corporation in the Merger (the "SURVIVING CORPORATION"), shall continue its existence under the DGCL. 1.1.2 On the Closing Date, Merger Sub and the Company shall cause a certificate of merger (the "CERTIFICATE OF MERGER") to be executed and filed with the Secretary of State of Delaware as provided in Section 251 of the DGCL and will make all other filings or recordings required by applicable Law in connection with the Merger. The Merger shall become effective at such time as the Certificate of Merger is duly filed with the Secretary of State of Delaware or at such later time as is agreed to by the parties hereto and is specified in the Certificate of Merger (such date and time being referred to herein as the "EFFECTIVE TIME"). 1.1.3 The Merger shall have the effects set forth in the DGCL. 1.1.4 Subject to the terms and conditions hereof, the closing of the Merger (the "CLOSING") and the transactions contemplated by this Agreement shall take place at the offices of Simpson Thacher & Bartlett LLP, 425 Lexington Avenue, New York, New York 10017 at 9:00 A.M. (Eastern Standard time) on a date to be mutually agreed upon by Acquiror and the Securityholders' Representative, which date shall be no later than the third Business Day after all of the conditions set forth in Article VI have been satisfied or waived (other than those conditions that by their terms are intended to be satisfied at the Closing) or at such other place and time as Acquiror and the Securityholders' Representative may agree. The date upon which the Closing occurs is hereinafter referred to as the "CLOSING DATE." 1.1.5 At least two (2) Business Days prior to the scheduled Closing Date, the Company shall deliver to Acquiror (a) a certificate signed by an officer of the Company certifying as to (i) a schedule setting forth the Net Indebtedness and Preferred Stock Amount as of the scheduled Closing Date, (ii) the list of Persons to whom Transaction Expenses are owed as of the scheduled Closing Date and as to the amount of each Transaction Expense as of such date and (iii) the amount of the unpaid Specified Bonuses as of the scheduled Closing Date and the Persons to whom such unpaid Specified Bonuses are payable and (b) a list of the accounts to which funds to pay any Indebtedness, Senior Preferred Stock, Junior Preferred Stock and such Transaction Expenses and unpaid Specified Bonuses shall be wired. If the Closing does not occur on the scheduled Closing Date, the Company shall deliver an updated certificate with respect to the amounts as of any subsequently scheduled Closing Date. 1.2 MERGER CONSIDERATION AND CONVERSION OF SECURITIES. At the Effective Time, pursuant to this Agreement and by virtue of the Merger and without any - 2 - action on the part of Acquiror, Merger Sub, the Company or the holders of any of the following securities: 1.2.1 (a)(i) Each Stock Option outstanding immediately prior to the Effective Time, to the extent unvested, shall immediately become vested, and (ii) each share of restricted Company Common Stock set forth on Schedule 1.2.1 and issued and outstanding immediately prior to the Effective Time, to the extent unvested, shall immediately become vested; (b) Each vested Stock Option outstanding immediately prior to the Effective Time, including any such Stock Option that becomes vested pursuant to Section 1.2.1(a), immediately prior to the Effective Time shall be exercisable, at the sole discretion of the holder of such Stock Options, for shares of Company Common Stock. Schedule 1.2.1(b) (which shall be prepared by the Company and Acquiror after the date hereof and prior to Closing) shall set forth the specific Stock Options to be so exercised. Notwithstanding the foregoing, to the extent that the vesting of the Stock Options would result in an "excess parachute payment" pursuant to Section 280G of the Code, such Stock Options shall not be vested unless the requisite approval of the stockholders of the Company pursuant to Section 280G(b)(5)(ii) of the Code is obtained. If stockholder approval for such vesting is not obtained, then the unvested portion of such Stock Options shall not be exchanged for cash as provided in Section 1.2.3 but shall instead be converted into options to purchase common stock of Acquiror subject to the following parameters: (i) the vesting schedule of the options shall be the same as the vesting schedule for the unvested Stock Options and (ii) each option shall preserve the product of (A) the difference between (x) the Per Share Amount minus (y) the exercise price per share of the applicable Stock Option multiplied by (B) the number of the shares subject to the unvested portion of such Stock Option. In addition, with respect to each share subject to the unvested portion of such Stock Options, the holder of such option shall be entitled to (x) the Per Share Additional Amount (if any) and (y) the payment described in Section 2.3.1(e) and distributions from the Expense Escrow Amount and the Working Capital Escrow Amount, subject to the terms and conditions of this Agreement and the Escrow Agreement. 1.2.2 Each vested share of the Common Stock, par value $0.01 per share, of the Company ("COMPANY COMMON STOCK") issued and outstanding immediately prior to the Effective Time (other than any Dissenting Shares and shares to be cancelled pursuant to Section 1.2.4) shall be cancelled and shall be converted automatically into (a) the right to receive, at the Effective Time, an amount in cash equal to the Per Share Amount, (b) the right to receive, subject to the terms and conditions of this Agreement, an amount in cash equal to the Per Share Additional Amount (if any) and (c) the right to receive, subject to the terms and conditions of this Agreement and the Escrow Agreement, the payment described in Section 2.3.1(e) and the distributions from the Expense Escrow Amount and the Working Capital Escrow Amount pursuant to Sections 2.3.2 and 2.3.3 (the shares of Company Common Stock being converted into the right to receive the amounts set forth in subsections (a)-(c) above are hereinafter referred to as the "COMPANY SHARES"). The amount payable to any holder of Company Shares pursuant to clause (a) of this Section 1.2.2 shall be reduced by the aggregate principal amount and accrued and unpaid interest (through and including the Closing Date) with respect to any Management Equity Loans owing by such holder. 1.2.3 Except as otherwise agreed to in writing by Acquiror and any holder of Stock Options, each vested Stock Option outstanding immediately prior to the Effective - 3 - Time shall be cancelled, shall cease to be outstanding and shall be converted automatically into (a) the right to receive, at the Effective Time, an amount in cash equal to (i) the Per Share Amount per share of Company Common Stock issuable upon the exercise of such Stock Option less (ii) the exercise price for each such share of Company Common Stock issuable upon the exercise of such Stock Option, (b) the right to receive, subject to the terms and conditions of this Agreement, an amount in cash equal to the Per Share Additional Amount, if any, per share of Company Common Stock issuable upon the exercise of such Stock Option, and (c) the right to receive, subject to the terms and conditions of this Agreement and the Escrow Agreement, the payment described in Section 2.3.1(e) and the distributions from the Expense Escrow Amount and the Working Capital Escrow Amount pursuant to Sections 2.3.2 and 2.3.3. 1.2.4 Each share of Company Common Stock held in the treasury of the Company or held by Acquiror or Merger Sub immediately prior to the Effective Time shall be cancelled and retired and shall cease to exist without any conversion thereof and no payment or distribution shall be made with respect thereto. 1.2.5 Each share of common stock, par value $0.01 per share, of Merger Sub that is issued and outstanding immediately prior to the Effective Time shall be converted into one share of common stock, par value $0.01 per share, of the Surviving Corporation. 1.3 PAYMENT AND EXCHANGE OF CERTIFICATES. 1.3.1 At the Effective Time, Acquiror or Merger Sub shall cause the Surviving Corporation to possess an amount in cash that, together with cash of the Company on hand at such time, shall be sufficient to pay (a) the aggregate Merger Consideration payable pursuant to Sections 1.2.2(a) and 1.2.3(a), (b) the Net Indebtedness and Preferred Stock Amount as of the Closing Date, (c) the amount of Transaction Expenses listed on the certificate delivered pursuant to Section 1.1.5 and (d) the Escrow Amount. 1.3.2 At the Effective Time, the Company will deliver or cause to be delivered to each holder of Stock Options being cancelled pursuant to Section 1.2.3 an amount in cash equal to the Merger Consideration payable to such holder pursuant to Section 1.2.3(a). 1.3.3 Prior to the Effective Time, the Company shall mail to each holder of record of Company Shares (a) a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the certificates or other instrument(s) evidencing the Company Shares (the "SHARE CERTIFICATES") shall pass, only upon proper delivery of a Share Certificate to the Company, and which shall be in such form and have such other provisions as Acquiror and the Company may reasonably specify prior to the Effective Time) and (b) instructions for use in effecting the surrender of Share Certificates pursuant to such letter of transmittal. Upon the later to occur of (i) the surrender to the Company of a Share Certificate, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, and such other documents as may be required pursuant to such instructions and (ii) the Effective Time, subject to the terms and conditions of this Agreement, the Company shall pay to the holder of such Share - 4 - Certificate in exchange therefor the amounts set forth in Section 1.2 for each Company Share formerly represented by such Share Certificate, and the Share Certificate so surrendered shall forthwith be cancelled. Except as otherwise specifically provided herein, no interest shall accrue or be paid on the amounts set forth in Section 1.2 upon the surrender of any Share Certificate for the benefit of the holder of such Share Certificate. Until surrendered and exchanged as contemplated by this Section 1.3.3, each Share Certificate (other than certificates representing Dissenting Shares and shares to be cancelled pursuant to Section 1.2.4) shall, from and after the Effective Time, be deemed to represent only the right to receive the amounts set forth in Section 1.2, and, until such surrender, no cash or payment of any kind shall be paid to the holder of such outstanding Share Certificate in respect thereof. All of the payments provided for in Sections 1.3.2 and 1.3.3 shall be paid by wire transfer of immediately available funds to the bank accounts designated in writing by the respective payees at least two (2) days prior to the Closing Date; provided, however, that any such payment may be made by means of a check if (x) the amount of any such payment is less than $150,000 or (y) wire instructions are not provided on a timely basis. 1.3.4 If payment of the amounts set forth in Section 1.2 is to be made to a Person other than the registered holder of the Company Shares represented by the Share Certificate so surrendered in exchange therefor, it shall be a condition to such payment that the Share Certificate so surrendered shall be properly endorsed, with signature guaranteed, or otherwise be in proper form for transfer and that the Person requesting such payment shall pay to the Company any transfer or other Taxes required as a result of such payment to a Person other than the registered holder of such Company Shares or establish to the satisfaction of the Company that such Tax has been paid or is not payable. Notwithstanding anything to the contrary in this Agreement, Acquiror, the Surviving Corporation or the Company shall be entitled to deduct and withhold from the amounts otherwise payable pursuant to this Agreement (including any transaction contemplated by this Agreement) to any Securityholder or holder of Senior Preferred Stock, Junior Preferred Stock or Dissenting Shares such amounts as Acquiror, the Surviving Corporation or the Company are required to deduct and withhold under the Code or any provision of any applicable Law, with respect to the making of such payment. To the extent that amounts are so withheld by Acquiror, the Surviving Corporation or the Company, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Securityholder or holder of Senior Preferred Stock, Junior Preferred Stock or Dissenting Shares (as applicable) in respect of whom such deduction and withholding was made by Acquiror, the Surviving Corporation or the Company. 1.3.5 After the Effective Time, there shall be no further transfers on the stock transfer books of the Surviving Corporation of the Company Shares that were outstanding immediately prior to the Effective Time. If, after the Effective Time, Share Certificates previously representing Company Shares are presented to the Surviving Corporation, they shall be cancelled and exchanged for the amounts provided for, and in accordance with the procedures set forth, in this Article I, subject to applicable law in the case of Dissenting Shares. 1.3.6 In the event that any Share Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Share Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the - 5 - delivery by such holder of an indemnity agreement in such form and substance as is reasonably requested by the Surviving Corporation as indemnity against any claim that may be made against it with respect to such Share Certificate, the Company will issue in exchange for and in lieu of such lost, stolen or destroyed Share Certificate the amounts set forth in Section 1.2. 1.3.7 The Surviving Corporation shall not be liable to any holder of Company Shares for any amount paid to a public official pursuant to applicable unclaimed property laws. Any amounts remaining unclaimed by holders of Company Shares six (6) years after the Effective Time (or such earlier date immediately prior to such time as such amounts would otherwise escheat to or become property of any Governmental Entity) shall, to the extent permitted by applicable Law, become the property of the Surviving Corporation, free and clear of any claims or interest of any Person previously entitled thereto. 1.4 ESCROW AMOUNTS. At the Effective Time, Acquiror shall deliver, or shall cause the Surviving Corporation to possess sufficient funds to enable it to deliver, and will cause it to deliver, to an escrow agent reasonably acceptable to Acquiror and the Company (the "ESCROW AGENT") an amount in cash equal to Two Million Dollars ($2,000,000) (together with all interest, income and other amounts earned thereon, the "WORKING CAPITAL ESCROW AMOUNT") to satisfy any Underpayment Amount owing pursuant to Section 2.3.1(b), plus an amount in cash equal to Two Hundred Thousand Dollars ($200,000) to satisfy any and all third party fees and expenses incurred by or on behalf of the Securityholders' Representative (in its capacity as such) in connection with its activities pursuant to Articles I and II hereof (together with all interest, income and other amounts earned thereon, the "EXPENSE ESCROW AMOUNT," and, collectively with the Working Capital Escrow Amount, the "ESCROW AMOUNT"). The Escrow Agent shall hold the Escrow Amount in accordance with, and subject to, the terms and conditions of an Escrow Agreement, by and among Acquiror, the Company, GEI, as the Securityholders' Representative, and the Escrow Agent in substantially the form attached hereto as Exhibit B (the "ESCROW AGREEMENT"), which shall be executed and delivered on the Closing Date. 1.5 DISSENTING SHARES. Notwithstanding any other provisions of this Agreement, shares of Company Common Stock that are issued and outstanding immediately prior to the Effective Time and that are held by a holder who has not voted such shares of Company Common Stock in favor of the Merger nor consented thereto in writing and who has properly perfected its rights of appraisal within the meaning of Section 262 of the DGCL or, if applicable, Chapter 13 of the California Code, and who, as of the Effective Time, shall not have effectively withdrawn or lost such right to relief as a dissenting stockholder ("DISSENTING SHARES"), shall not be converted into the right to receive the amounts set forth in Section 1.2. The holders of such Dissenting Shares shall be entitled only to such rights as are granted by Section 262 of the DGCL or, if applicable, Chapter 13 of the California Code. Each holder of Dissenting Shares who becomes entitled to payment of the appraised value for such Dissenting Shares pursuant to Section 262 of the DGCL or, if applicable, Chapter 13 of the California Code, shall receive payment therefor from the Surviving Corporation in accordance with the DGCL or, if applicable, Chapter 13 of the California Code; provided, however, that if any such holder of Dissenting Shares (i) shall have failed to establish such holder's entitlement to appraisal as a dissenting stockholder as provided in Section 262 of - 6 - the DGCL, or, if applicable, Chapter 13 of the California Code, (ii) shall have effectively withdrawn such holder's demand for appraisal as a dissenting stockholder with respect to such Dissenting Shares, (iii) shall have lost such holder's right of appraisal as a dissenting stockholder and payment under Section 262 of the DGCL or, if applicable, Chapter 13 of the California Code, or (iv) shall have failed to file a complaint with the appropriate court seeking relief as to determination of the value of all Dissenting Shares within the time provided in Section 262 of the DGCL or, if applicable, Chapter 13 of the California Code, such holder shall forfeit the right of appraisal as a dissenting stockholder with respect to such Dissenting Shares and each such Dissenting Share shall be converted into the right to receive the amounts set forth in Section 1.2, without interest thereon, from the Surviving Corporation as provided in Section 1.2.2. The Company shall give Acquiror prompt notice of any demands for appraisal filed pursuant to Section 262 of the DGCL or, if applicable, Chapter 13 of the California Code, received by the Company and withdrawals of such demands received by the Company prior to the Effective Time, and Acquiror shall have the right to participate in all negotiations and proceedings with respect to demands made pursuant to Section 262 of the DGCL or, if applicable, Chapter 13 of the California Code. The Company shall not, except with the prior written consent of Acquiror (which consent shall not be unreasonably withheld or delayed), make any payment with respect to, or settle or offer to settle, any such demands, or waive any failure to timely deliver a written demand for appraisal or timely take any other action to perfect appraisal rights in accordance with the DGCL or, if applicable, Chapter 13 of the California Code. 1.6 CORPORATE MATTERS. 1.6.1 The certificate of incorporation of the Surviving Corporation immediately after the Effective Time shall be the certificate of incorporation of the Company as in effect immediately prior to the Effective Time, as amended and attached hereto as Exhibit C. 1.6.2 The bylaws of the Surviving Corporation immediately after the Effective Time shall be the bylaws of Merger Sub until thereafter amended or repealed in accordance with their terms and the certificate of incorporation of the Surviving Corporation and as provided by Law. 1.6.3 From and after the Effective Time, until successors are duly elected or appointed and qualified in accordance with applicable Law, (a) the directors of Merger Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation and (b) the officers of the Company immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, in each case, to hold office in accordance with the certificate of incorporation and the bylaws of the Surviving Corporation. 1.7 MANAGEMENT ROLLOVER. Acquiror and any holder of Stock Options that is a member of the management of CPI may enter into an agreement providing that any or all of the Stock Options held by such holder shall be converted into stock options of Acquiror on the terms and subject to the conditions to be specified in such agreement. Schedule 1.7 (which shall be prepared by the Company and Acquiror after the date hereof - 7 - and prior to the Closing) shall set forth the specific Stock Options subject to any such agreement. ARTICLE II WORKING CAPITAL ADJUSTMENT TO MERGER CONSIDERATION 2.1 PREPARATION OF FINAL WORKING CAPITAL STATEMENT. As promptly as practicable following the Closing Date (but in no event later than ninety (90) days after the Closing Date), Acquiror shall prepare a statement (the "FINAL WORKING CAPITAL STATEMENT") setting forth the computation of the Final Working Capital of the Company and its Subsidiaries as of the opening of business on the Closing Date, and provided, for the avoidance of doubt, that no effect shall be given to, and the Final Working Capital Statement shall not reflect, (i) any transaction occurring between the opening of business on the Closing Date and the close of business on the Closing Date relating to Acquiror's financing of either the Company or any of its Subsidiaries, (ii) any transaction occurring on the Closing Date between the Company or any of its Subsidiaries on the one hand and/or Acquiror or any of its Affiliates on the other hand or (iii) any purchase accounting or other similar adjustments resulting from the Final Working Capital Statement. All accounting entries (including all liabilities and accruals) will be taken into account regardless of their amount, and all errors and omissions with respect to such accounting entries will be corrected and all proper adjustments will be made. After delivery of the Final Working Capital Statement, the Surviving Corporation shall provide the Securityholders' Representative and its Representatives reasonably timely access to its accounting and financial personnel and to such working papers, trial balances, financial information and other similar information as may be reasonably requested by the Securityholders' Representative. 2.2 REVIEW BY SECURITYHOLDERS' REPRESENTATIVE. 2.2.1 Upon completion of the Final Working Capital Statement, Acquiror shall promptly deliver the same to the Securityholders' Representative with a notice (the "NOTICE OF ADJUSTMENT") of Acquiror setting forth its proposed adjustment, if any, of the Merger Consideration. 2.2.2 Following receipt of the Notice of Adjustment, the Securityholders' Representative will be afforded a period of twenty (20) Business Days (the "FIRST 20-DAY PERIOD") to review the Notice of Adjustment. At or before the end of the First 20-Day Period, the Securityholders' Representative (i) will accept the Final Working Capital (as set forth in the Notice of Adjustment) in its entirety, in which case the Final Working Capital will be as set forth in the Notice of Adjustment or (ii) will deliver to Acquiror a written notice (the "OBJECTION NOTICE") containing a detailed written explanation of those items in the Final Working Capital Statement (as set forth in the Notice of Adjustment) that the Securityholders' Representative disputes, and specifying the amount thereof in dispute and the basis therefor, in which case the items so identified by the Securityholders' Representative in such Objection Notice shall be deemed to be in dispute. The failure by the Securityholders' Representative to deliver the Objection Notice within the First 20-Day Period shall constitute the Securityholders' Representative's acceptance of the Final Working Capital as set forth in the Notice of Adjustment. If the Securityholders' Representative - 8 - delivers the Objection Notice in a timely manner, then, within a further period of twenty (20) Business Days from the end of the First 20-Day Period, the parties and, if desired, their accountants, will attempt to resolve in good faith any disputed items and reach a written agreement (the "SETTLEMENT AGREEMENT") with respect thereto. Failing such resolution, the unresolved disputed items will be referred for final binding resolution to Deloitte & Touche LLP or another nationally recognized independent accounting firm mutually acceptable to the Securityholders' Representative and Acquiror (the "ARBITRATING ACCOUNTANTS"). If the disputed items are referred to the Arbitrating Accountants, (i) the Arbitrating Accountants shall consider only those items or amounts as to which Acquiror and the Securityholders' Representative disagree and (ii) the Final Working Capital will be deemed to be as determined by such Arbitrating Accountants. Such determination (the "ACCOUNTANTS' DETERMINATION") (A) shall be in writing, (B) shall be furnished to the Securityholders' Representative and Acquiror as soon as practicable after the items in dispute have been referred to the Arbitrating Accountants, (C) shall be made in a manner that is consistent with the prescribed manner of preparation of the Final Working Capital Statement pursuant to Section 2.1, (D) shall be nonappealable and incontestable by the Company, the Securityholders' Representative, Acquiror or any of their respective Affiliates, and (E) shall not be subject to collateral attack for any reason absent manifest error or fraud. 2.2.3 If any fees and expenses of the Arbitrating Accountants are required to be paid prior to the final determination of the Final Working Capital, then the Surviving Corporation shall pay all such fees and expenses when due, provided that Acquiror and the Securityholders' Representative shall give the Escrow Agent instructions to release to the Surviving Corporation from the Working Capital Escrow Amount one-half (1/2) of any amounts paid to the Arbitrating Accountants by the Surviving Corporation pursuant to this Section 2.2.3. 2.2.4 Following the final determination of the Final Working Capital, the total fees and expenses of the Arbitrating Accountants shall be allocated among the Securityholders (but solely out of the Working Capital Escrow Amount), on the one hand, and the Surviving Corporation, on the other hand, in proportion to the extent to which each such party(ies) prevailed with respect to the total amount in dispute. Such allocation shall be accomplished by means of the payments described in Sections 2.3.1(d), 2.3.1(e) and 2.3.2(a). For purposes of this Agreement, "SURVIVING CORPORATION'S SHARE OF ACCOUNTING EXPENSES" shall mean the total fees and expenses of the Arbitrating Accountants allocated to the Surviving Corporation pursuant to the first sentence of this Section 2.2.4. 2.3 ADJUSTMENT. 2.3.1 Upon the final determination of the Final Working Capital in accordance with this Article II, the following amounts will be payable within five (5) Business Days of the Final Determination Date in accordance with the following terms: (a) if the Final Working Capital is greater than the Estimated Closing Date Working Capital, Acquiror shall promptly pay to each Securityholder in accordance with written payment instructions furnished by such holder to Acquiror, such holder's Per Share Additional Amount. All of the payments to Securityholders provided for in this Section 2.3.1(a) shall be paid by wire transfer of immediately available funds to the - 9 - bank accounts designated in writing by the respective payees at least two (2) days prior to the date of such payments; provided, however, any such payment may be made by means of a check if (x) the amount of any such payment is less than $100,000 or (y) wire instructions are not provided at least two (2) Business Days prior to the fifth Business Day following such final determination; (b) if the Final Working Capital is less than the Estimated Closing Date Working Capital (such difference, the "UNDERPAYMENT AMOUNT"), then the payments described in Section 2.3.2(c) shall be paid to Acquiror from the Working Capital Escrow Amount; provided, however, in no event shall any Securityholder have any personal or individual liability for payment of the Underpayment Amount, any portion thereof or any portion of the fees of the Arbitrating Accountants; (c) if the Final Working Capital is equal to the Estimated Closing Date Working Capital, no adjustment shall be made to the Merger Consideration; (d) the Surviving Corporation shall pay to the Arbitrating Accountants any remaining outstanding fees and expenses of the Arbitrating Accountants; and (e) if (x) the Surviving Corporation's Share of Accounting Expenses exceeds (y) the sum of the total amounts previously paid by the Surviving Corporation pursuant to Section 2.2.3 that were not previously reimbursed out of the Working Capital Escrow Amount and the amounts paid by the Surviving Corporation pursuant to Section 2.3.1(d), then the Surviving Corporation, at its option, (i) shall pay to each Securityholder such Securityholder's Percentage Share of such excess or (ii) shall reduce payments (if any) to be made to Acquiror pursuant to Section 2.3.2(c) by the amount of any such excess. 2.3.2 Upon the final determination of Final Working Capital in accordance with this Article II, the Securityholders' Representative and Acquiror shall give instructions to the Escrow Agent to cause the following payments to be made from the Working Capital Escrow Amount within five (5) Business Days of the Final Determination Date in accordance with the following terms: (a) (i) If Arbitrating Accountants were engaged, and (x) the sum of the total amounts previously paid by the Surviving Corporation pursuant to Section 2.2.3 that were not previously reimbursed out of the Working Capital Escrow Amount and the amounts paid by the Surviving Corporation pursuant to Section 2.3.1(d), exceeds (y) the Surviving Corporation's Share of Accounting Expenses, then the Securityholders' Representative and Acquiror shall give instructions to the Escrow Agent to disburse from the Working Capital Escrow Amount to the Surviving Corporation the lesser of the amount of such excess and the remaining Working Capital Escrow Amount. (ii) To the extent not previously disbursed to Acquiror pursuant to the terms and conditions of the Escrow Agreement, the Securityholders' Representative and Acquiror shall give instructions to the Escrow Agent to disburse to Acquiror from the Working Capital Escrow Amount an amount sufficient to pay the taxes - 10 - owed by Acquiror with respect to income allocated to Acquiror pursuant to the Escrow Agreement, pursuant to and as more fully set forth in the Escrow Agreement. (b) If the Final Working Capital is greater than the Estimated Closing Date Working Capital, then the Securityholders' Representative and Acquiror shall give instructions to the Escrow Agent to disburse to each Securityholder an amount equal to the product of (i) such Securityholder's Percentage Share and (ii) the Working Capital Escrow Amount remaining after the payment (if any) set forth in Section 2.3.2(a) hereof. (c) If the Final Working Capital is less than the Estimated Closing Date Working Capital, then the Securityholders' Representative and Acquiror shall instruct the Escrow Agent to pay to Acquiror an amount equal to the lesser of (i) the Underpayment Amount and (ii) the Working Capital Escrow Amount remaining after the payment (if any) set forth in Section 2.3.2(a) hereof. If the Underpayment Amount is less than the Working Capital Escrow Amount remaining after the payment (if any) set forth in Section 2.3.2(a) is made, then the Securityholders' Representative and Acquiror shall also give instructions to the Escrow Agent to disburse to each Securityholder an amount equal to the product of (i) such Securityholder's Percentage Share and (ii) the Working Capital Escrow Amount remaining after the payment (if any) set forth in the preceding sentence has been made. 2.3.3 The Securityholders' Representative shall give instructions to the Escrow Agent to disburse to each Securityholder an amount equal to the product of (i) such Securityholder's Percentage Share and (ii) the remaining Expense Escrow Amount (if any) within five (5) days after: (a) all third party fees and expenses incurred by or on behalf of the Securityholders' Representative (in its capacity as such) in connection with its activities pursuant to Articles I and II hereof have been fully and finally satisfied, and the Securityholders' Representative has been fully reimbursed from the Expense Escrow Amount for any such fees and expenses previously paid or disbursed by it and (b) all taxes owed by the Securityholders' Representative with respect to income allocated to the Securityholders' Representative pursuant to the Escrow Agreement have been fully satisfied out of the Expense Escrow Amount, pursuant to and as more fully set forth in the Escrow Agreement, but in no event later than sixty (60) days after the final determination of Final Working Capital has been made. 2.3.4 Any required adjustment to the Merger Consideration pursuant to Section 2.3.1 shall be referred to as the "MERGER CONSIDERATION ADJUSTMENT." 2.3.5 Interest shall accrue on the Merger Consideration Adjustment, if any, at the per annum rate equal to the prime rate set forth in The Wall Street Journal published on the Closing Date, from the Closing Date until the date on which such amount is paid. 2.3.6 The parties hereto agree to treat any adjustment made pursuant to Section 2.3.1 as an adjustment to the Merger Consideration for all Tax purposes. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Acquiror and Merger Sub as of the date of this Agreement that, except with respect to each section or subsection of this Article III as - 11 - set forth (i) in the section of the Company Schedules corresponding to such section or subsection in this Article III or (ii) in any other section of the Company Schedules to the extent it is reasonably apparent from the face of such disclosure that such disclosure qualifies such section or subsection in this Article III: 3.1 ORGANIZATION AND GOOD STANDING. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the corporate power and authority to carry on its business as the same is now being conducted. The Company is duly qualified to transact business as a foreign corporation and is in good standing in each of the jurisdictions listed in Schedule 3.1, which are each of the jurisdictions in which its ownership, lease or operation of property or the conduct of its business as the same is now being conducted requires it to so qualify, except where the failure to so qualify would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. 3.2 CAPITALIZATION. 3.2.1 The authorized capital stock of the Company consists of 6,500,000 shares of Company Common Stock, of which 5,008,172 shares are issued and outstanding as of October 31, 2003, and of which 304,050 shares are reserved for issuance upon exercise of the Stock Options outstanding as of October 31, 2003. Schedule 3.2.1 sets forth all of the holders of record of Company Common Stock as of October 31, 2003. All shares of Company Common Stock have been duly authorized, are validly issued, fully paid and nonassessable and were not issued in violation of any preemptive right. 3.2.2 Except for the Stock Options and except as set forth in Schedule 3.2.2, the Company does not have any capital stock, equity securities or Equity-Like Securities authorized, issued or outstanding, and there are no outstanding agreements, options, warrants, subscription rights, preemptive rights, rights of conversion or exchange, calls or puts, or arrangements existing or outstanding that provide for the sale or issuance of any of the foregoing or any securities by the Company to which the Company is a party or by which it is bound. Schedule 3.2.2 sets forth all of the holders of Stock Options as of October 31, 2003. Except as set forth in Schedule 3.2.2, there are no agreements or other obligations (contingent or otherwise) that require the Company to repurchase or otherwise acquire or cancel any shares of the Company's capital stock, equity securities or Equity-Like Securities. 3.3 SUBSIDIARIES. 3.3.1 The name and jurisdiction of incorporation of each Subsidiary of the Company is set forth in Schedule 3.3. Each Subsidiary of the Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as the same is now being conducted. Each Subsidiary of the Company is duly qualified to transact business as a foreign corporation in the jurisdictions listed in Schedule 3.3, which are, with respect to each such Subsidiary, each of the jurisdictions in which its ownership, lease or operation of property or the conduct of its business as the same is now being conducted - 12 - requires it to so qualify, except where the failure to so qualify would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. 3.3.2 Except for the Series B 14% Senior Redeemable Exchangeable Cumulative Preferred Stock ("SENIOR PREFERRED STOCK") of Communications & Power Industries, Inc., a Delaware corporation ("CPI"), and the Series A 14% Junior Preferred Stock of CPI ("JUNIOR PREFERRED STOCK"), and except as set forth in Schedule 3.3, the Company or CPI owns, beneficially and of record, all of the issued and outstanding capital stock of each Subsidiary identified on Schedule 3.3, in each case free and clear of all Encumbrances of any kind or nature whatsoever, and all such capital stock is validly issued, fully paid and nonassessable and is free of preemptive rights. Except as set forth on Schedule 3.3, the Company's Subsidiaries do not have any capital stock, equity securities or Equity-Like Securities authorized, issued or outstanding. Schedule 3.3 sets forth the number of authorized shares of Senior Preferred Stock and Junior Preferred Stock the number of such shares issued and outstanding and all of the holders of record of such shares, in each case, as of November 1, 2003. All shares of Senior Preferred Stock and Junior Preferred Stock have been duly authorized, are validly issued, fully paid and nonassessable, and were not issued in violation of any preemptive right. Except as set forth on Schedule 3.3, there are no agreements or other obligations (contingent or otherwise) that require any of the Company's Subsidiaries to repurchase or otherwise acquire or cancel any shares of the Company's Subsidiaries' capital stock, equity securities or Equity-Like Securities. Except as set forth on Schedule 3.3, neither the Company nor any of its Subsidiaries is a party to, or otherwise bound by or subject to, any agreement or understanding, whether oral or written, that (a) grants an option, preemptive right, right of conversion or exchange, or other right to acquire stock in any Subsidiary of the Company, (b) grants a right of first refusal or other such similar right upon the sale of the stock in any such Subsidiary, (c) grants a call or put right relating to the stock in any Subsidiary of the Company, (d) restricts or affects the voting or the ownership or any other rights of the stock in any such Subsidiary, or (e) provides for the sale or issuance of any of the foregoing or any securities of any Subsidiary of the Company. Except as set forth on Schedule 3.3, true and correct copies of each certificate of incorporation, bylaws, certificate of partnership or limited liability company, partnership or limited liability company agreement and similar organizational documents of the Company and each of its Subsidiaries have been delivered to Acquiror. Except as set forth on Schedule 3.3, neither the Company nor any of its Subsidiaries owns or holds the right to acquire any stock, partnership interest, joint venture interest or other equity ownership interest in any other Person. 3.4 AUTHORITY AND ABSENCE OF CONFLICT. 3.4.1 The Company has the requisite corporate power and authority to enter into this Agreement and the agreements and instruments contemplated hereby and to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and the agreements and instruments contemplated hereby and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the board of directors of the Company, and no other corporate action on the part of the Company or its stockholders is necessary. This Agreement and the other agreements and instruments to be executed by the Company hereunder have been (or on or prior to the Closing Date will have been, as applicable), duly executed by the Company and constitute (or upon execution will - 13 - constitute) the valid and legally binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as may be limited by any bankruptcy, insolvency, reorganization, moratorium and other similar laws and equitable principles relating to or limiting creditors' rights generally. 3.4.2 Except as set forth in Schedule 3.4, the execution, delivery and performance of this Agreement and the agreements and instruments contemplated hereby, the consummation of the transactions contemplated hereby and thereby, and compliance with the provisions hereof and thereof do not and will not (a) violate, or conflict with, or result in a breach of any provisions of, or constitute a default (or an event that, with notice or lapse of time, or both, would constitute a default) under any of the terms, conditions or provisions of the certificate of incorporation or bylaws of the Company, (b) violate, or conflict with, or result in a breach of any provisions of, or constitute a default (or an event that, with notice or lapse of time, or both, would constitute a default) under, or give rise to a right of termination, cancellation, modification or acceleration of the performance required by, or a loss of a material benefit under, or result in the creation of any Encumbrance upon any of the properties or assets of the Company or any of its Subsidiaries under any of the terms, conditions or provisions of, any note, bond, mortgage, indenture, deed of trust, license, agreement, lease, franchise or other instrument or arrangement to which the Company or any of its Subsidiaries is bound or to which any of their assets is subject, including those listed on Schedule 3.11, or (c) violate any Order or Law applicable to any of the foregoing, where, in any such cases described in clause (b) or clause (c), such violation, conflict, breach, default, termination, cancellation, modification, acceleration, loss or Encumbrance would reasonably be expected to be material to the Business. 3.5 APPROVALS. 3.5.1 Except for the notices, reports, filings or Approvals set forth on Schedule 3.5.1, and, to the knowledge of the Company and its Subsidiaries, in connection with matters described in Section 3.18, neither the Company nor any of its Subsidiaries is required by any Law, Order or contract to submit any notice, report or other filing with, or obtain any Approval from, any Governmental Entity in connection with the execution, delivery or performance by it of this Agreement or the consummation of the transactions contemplated by this Agreement, except where the failure to submit or deliver any such notice, report or filing or obtain any such Approval would not reasonably be expected to be material to the Business. 3.5.2 Except as set forth on Schedule 3.5.2, no Approvals are required to be given by the Company or any of its Subsidiaries or obtained by the Company or any of its Subsidiaries from any and all third parties (other than Governmental Entities) in connection with the execution, delivery or performance by it of this Agreement or consummation of the transactions contemplated by this Agreement, except where the failure to file, deliver or obtain such Approval would not reasonably be expected to be material to the Business. 3.5.3 The affirmative vote of the holders of a majority of the issued and outstanding Company Common Stock, voting as a class, is the only vote of the holders of any class or series of the Company's securities or its Subsidiaries' securities necessary to approve the Merger. - 14 - 3.6 FINANCIAL STATEMENTS; NO UNDISCLOSED LIABILITIES; INDEBTEDNESS. (a) Schedule 3.6(a) constitutes true and correct copies of (i) the audited consolidated balance sheets of the Company and its Subsidiaries at September 28, 2001 and September 27, 2002 and the related audited consolidated statements of operations and retained earnings and of cash flows for each of the fiscal years ended September 28, 2001 and September 27, 2002, including the notes, if any, thereto; and (ii) the unaudited consolidated balance sheet of the Company and its Subsidiaries at July 4, 2003 (the "LATEST BALANCE SHEET"), together with the related unaudited consolidated statements of operations and of cash flows for the nine-month period ended July 4, 2003, including the notes, if any, thereto. The foregoing audited and unaudited financial statements (including the related notes, if any, thereto) are collectively referred to herein as the "COMPANY FINANCIAL STATEMENTS." The Company Financial Statements present fairly, in all material respects, the financial position, results of operations and cash flows of the Company and its Subsidiaries, as applicable, in each case on a consolidated basis as of the respective dates of and for the respective periods reflected in such Company Financial Statements in conformity with GAAP consistently applied except, with respect to interim statements, for customary year-end adjustments (which individually and in the aggregate, are not expected to be material to the Company Financial Statements). (b) The Company and its Subsidiaries had no liabilities or obligations of any kind, whether absolute, accrued, contingent or otherwise, except for liabilities (i) incurred in the Ordinary Course, (ii) reflected on, accrued or reserved against in the Latest Balance Sheet, (iii) disclosed or reflected in Schedule 3.6(b), (iv) arising under contracts listed on Schedules 3.11, 3.12.1, 3.12.2 and/or 3.16 or not required to be so listed in accordance with their terms other than the payment of liquidated damages or arising as a result of a default or breach thereof, (v) related to Hazardous Substances or Environmental Laws or Orders relating thereto or (vi) that, individually or in the aggregate do not exceed $500,000. Except as disclosed in Schedule 3.6(b), the Company and its Subsidiaries are not obligated for any off-balance sheet Indebtedness or guarantees. (c) Schedule 3.6(c) constitutes true and correct copies of the unaudited consolidated balance sheet of the Company and its Subsidiaries at October 3, 2003 and the related unaudited consolidated statements of operations and retained earnings and of cash flows for the fiscal year ended October 3, 2003 (collectively, the "UNAUDITED 2003 FINANCIAL STATEMENTS"). The audited consolidated balance sheet of the Company and its Subsidiaries at October 3, 2003 and the related audited consolidated statements of operations and retained earnings and of cash flows for the fiscal year ended October 3, 2003 will be in all material respects the same as the Unaudited 2003 Financial Statements , except that they will contain footnotes and will reflect customary year-end adjustments, which shall not be material in amount. (d) Except as set forth on Schedule 3.6(d), as of the date hereof, none of the Company or any of its Subsidiaries has any outstanding Indebtedness, and none of the Company or any of its Subsidiaries has assumed, guaranteed, or endorsed the Indebtedness of any other Person. - 15 - 3.7 CONDUCT OF BUSINESS. Except as set forth on Schedule 3.7 or as contemplated by this Agreement, since July 4, 2003 and to the date hereof, the Company and each of its Subsidiaries have conducted their respective businesses in the Ordinary Course, and there has not been any: 3.7.1 sale, assignment, disposition, transfer, pledge, mortgage, lease or license of any asset of the Company or any of its Subsidiaries, other than (i) sales or leases of inventory in the Ordinary Course, (ii) non-exclusive licenses to customers in the Ordinary Course and (iii) any sale of other assets the aggregate proceeds of which do not exceed $1,000,000; 3.7.2 material increase in the compensation or level of benefits payable or to become payable by the Company or any of its Subsidiaries to any of its current or former directors, consultants or employees, other than increases made in the Ordinary Course; 3.7.3 except as may have been required by GAAP, change by the Company or any of its Subsidiaries in any accounting principles, methods or practices; 3.7.4 damage, destruction or loss with respect to any of the properties or assets of the Company or its Subsidiaries, individually or in the aggregate in excess of $500,000, net of third party insurance; 3.7.5 except for dividends on Senior Preferred Stock and Junior Preferred Stock in accordance with the terms thereof and repurchases of Company Common Stock pursuant to the Company's 1995 Management Equity Plan, any declaration or payment by the Company of any dividend or distribution of any assets of any kind whatsoever to any of its stockholders; 3.7.6 borrowing or guarantee of any amount other than guarantees provided in the Ordinary Course in connection with customer advances and borrowings under the Foothill Loan Agreement necessary to meet ordinary course working capital requirements; 3.7.7 mortgage, pledge or other Encumbrance of any material portion of the Company's or any of its Subsidiaries' assets, except Permitted Encumbrances; 3.7.8 extraordinary losses, waiver of any rights of material value, or settlement or compromise of any material litigation; 3.7.9 material capital expenditures or commitments therefor other than (i) capital expenditures or commitments therefor in the Ordinary Course and (ii) other capital expenditures or commitments therefor not in excess of $1,000,000; 3.7.10 other material transaction, except in the Ordinary Course; 3.7.11 loan or advance by the Company or any of its Subsidiaries to any Person; 3.7.12 change or revocation of any Tax election, settlement or compromise of any material Tax liability, change of any annual Tax accounting period, change of any - 16 - method of Tax accounting, execution of any closing agreement relating to any Tax, surrender of any right to claim a Tax refund, or consent to any extension or waiver of the limitations period applicable to any Tax claim or assessment, in each case by the Company or any of its Subsidiaries; 3.7.13 agreement or arrangement entered into by the Company or any of its Subsidiaries and (i) any record holder of more than 5% of the outstanding shares of Company Common Stock, Senior Preferred Stock or Junior Preferred Stock, (ii) any such record holder's immediate family member, or (iii) to the knowledge of the Company, any Affiliate of any such record holder of Company Common Stock; 3.7.14 issuance of (i) shares of Company Common Stock, including for the avoidance of doubt, restricted shares (other than Common Stock issued upon the exercise of Stock Options), (ii) Stock Options, or Equity-Like Securities or other equity-based awards or (iii) shares of Senior Preferred Stock or Junior Preferred Stock (except for the issuance of preferred stock of CPI as payment in kind of dividends on Senior Preferred Stock and Junior Preferred Stock in accordance with the terms thereof); or 3.7.15 agreement, arrangement or understanding by the Company or any of its Subsidiaries to do any of the foregoing. 3.8 COMPLIANCE WITH LAW. Except as set forth in Schedule 3.8 and other than in connection with environmental matters described in Section 3.9 and the matters described in Section 3.18, (i) the Company and each of its Subsidiaries are in compliance with all applicable Laws and Orders, and (ii) neither the Company nor any of its Subsidiaries has received any notice alleging any such violation, except for any such non-compliance or violation described in clause (i) or clause (ii) that would not reasonably be expected to be material to the Business. 3.9 ENVIRONMENTAL MATTERS. 3.9.1 Since August 11, 1995: (a) the Business has been conducted in material compliance with, and has not violated in any material respect, any Laws or Orders relating to Hazardous Substances or protection of the environment ("ENVIRONMENTAL LAWS"); (b) there has been no release, generation, treatment, storage, disposal or transportation of Hazardous Substances (it being understood that, for purposes of this Section 3.9.1(b), migration of Hazardous Substances present in soil or groundwater on August 11, 1995 does not constitute any release, generation, treatment, storage, disposal or transportation of Hazardous Substances) by the Company or any of its Subsidiaries, or at any of the Company Owned Real Estate or at the Company's Palo Alto, California site, Beverly, Massachusetts site, San Carlos, California site or Georgetown, Ontario site, or, to the knowledge of the Company, at any other Company Leased Real Estate, except, in any case, for any release, generation, treatment, storage, disposal or transportation of Hazardous Substances that would not reasonably be expected to result in a material liability to the Company; - 17 - (c) excepting claims based on events occurring or conditions existing on or before August 11, 1995 that were made by third parties or governmental agencies to Varian and to which Varian has responded without asserting that the Company or any of its Subsidiaries is responsible in whole or in part, none of the Company or any of its Subsidiaries has received any written claim asserted under any Environmental Law or with respect to any Hazardous Substances, except for claims that could not reasonably be expected to materially and adversely affect the Company or any of its Subsidiaries; and (d) none of the Company or any of its Subsidiaries has entered into any consent decree or material settlement agreement with any Governmental Entity, and none of the Company or its Subsidiaries has been subject to any judgment or decree or material order, in either case under any Environmental Laws or concerning any Hazardous Substances, except for such decrees, agreements, judgments or orders, if any, as to which Varian has assumed full responsibility under the Varian Environmental Indemnity and the terms of which do not materially affect the Company. 3.9.2 The Company has provided or made available to Acquiror true copies of all of the reports set forth on Schedule 3.9.2 without omitting any portion thereof in the possession of the Company. There are no other reports in the Company's possession that identify any material conditions (including, for the avoidance of doubt, any conditions existing on or before August 11, 1995) that could reasonably be expected to result in a material liability to the Company or any of its Subsidiaries under any Environmental Laws, which conditions are not described in the reports set forth on Schedule 3.9.2. To the knowledge of the Company, there are no material conditions (including, for the avoidance of doubt, any conditions existing on or before August 11, 1995) that could reasonably be expected to result in a material liability to the Company or any of its Subsidiaries under any Environmental Laws, that are not described in the reports set forth on Schedule 3.9.2. 3.9.3 The provisions in Article X of the Stock Sale Agreement, dated as of June 6, 1995 (the "STOCK SALE AGREEMENT"), by and between Varian and the Company (as amended), relating to indemnification by Varian respecting certain environmental matters (the "VARIAN ENVIRONMENTAL INDEMNITY") are applicable to, and the Company is indemnified as to, any Hazardous Substances in soil and ground water at certain of the Company Owned Real Estate and the Company's Palo Alto, California site, Beverly, Massachusetts site, San Carlos, California site and Georgetown, Ontario site, as described in the reports listed on Schedule 3.9.2, to the extent set forth in such Article X. The Company has not received any written notice by or on behalf of Varian asserting any material objection to or denial of indemnification under the Varian Environmental Indemnity, it being understood that Varian (i) from time to time over the last approximately twelve (12) months from the date hereof raised objections to the Company's requests for indemnification in connection with the redevelopment of the Company's San Carlos, California site, and (ii) during or before 1996 objected to indemnification of certain claims asserted under proviso 10.2(a)(2) of the Varian Indemnity Agreement, which claims have been resolved in a manner satisfactory to the Company. 3.10 PERMITS. Except as set forth in Schedule 3.10 and other than in connection with matters described in Section 3.18, the Company and each of its Subsidiaries have and are in compliance with, or have a valid exemption from the requirement to obtain, all - 18 - Permits and Approvals from Governmental Entities necessary for the ownership, lease and operation of its properties and to conduct the Business, in each case in all material respects in the manner as it is currently being conducted, except where a failure to obtain or to be in compliance with such Permit or Approval would not reasonably be expected to be material to the Business. All such Permits and Approvals are in full force and effect, except where failure to be in full force or effect would not reasonably be expected to be material to the Business, and none of the Company or any of its Subsidiaries has received any written notice of any proceeding threatening the non-renewal, suspension, revocation or adverse modification of any Permit or Approval, except with respect to any non-renewal, suspension, revocation or adverse modification the effect of which would not reasonably be expected to be material to the Business. 3.11 CONTRACTS. Schedule 3.11 lists all of the following contracts and agreements to which the Company or any of its Subsidiaries is a party or by which any of them is bound or to which any of their assets is subject: (a) as of the reference date set forth on Schedule 3.11, any contract that provides for aggregate payments by any party in excess of $1,000,000 per contract over the remaining life of such contract, except for (i) leases of real property listed on Schedule 3.12.2, (ii) Plans listed on Schedule 3.15 and (iii) contracts described in subsections (b)-(k) of this Section 3.11; (b) all agreements containing covenants limiting, in any material respect, the freedom of the Company or any of its Subsidiaries to compete with any person or otherwise freely to engage in any line of business or in any area or territory, (c) all indentures, mortgages, and notes or other debt instruments evidencing indebtedness for borrowed money or otherwise placing an Encumbrance on any portion of the Company's or any of its Subsidiaries' assets other than Permitted Encumbrances; (d) all agreements relating to completed or pending acquisitions or dispositions (outside the Ordinary Course) by the Company and/or its Subsidiaries of businesses or lines of businesses or investments therein; (e) any guaranty of any obligation for borrowed money or other guaranty (excluding any guaranty made in the Ordinary Course in respect of customer advances, the principal amount of which is $500,000 or less); (f) any lease or agreement not in the Ordinary Course under which the Company or any of its Subsidiaries is lessee of, or holds or operates any personal property owned by any other party, for which the annual rent exceeds $100,000; (g) any lease or agreement not in the Ordinary Course under which the Company or any of its Subsidiaries is lessor of or permits any third party to hold or operate any personal property for which the annual rent exceeds $100,000; (h) any contract providing for a joint venture, or any sharing of revenues or business, with any Person other than the Company or any of its Subsidiaries; (i) any lease of real property under which the Company or any of its Subsidiaries is a lessor or sublessor; (j) any agreement with respect to any hedging, swap, forward, future or derivative transaction or option or similar agreement involving, or settled by reference to, one or more rates, currencies, commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value or any similar transaction or any combination of these transactions; and (k) any material contract containing any provision involving a change in control of the Company. Except as set forth in Schedule 3.11, neither the Company nor any of its Subsidiaries nor, to the knowledge of the Company, any other party to any contract or agreement listed in Schedule 3.11 or Schedule 3.16, is in material violation of any such contract or agreement nor, to the knowledge of the Company, has a material default or violation thereof occurred or been threatened in writing. All contracts listed on the Schedule 3.11 and Schedule 3.16 (A) are valid, in full force and effect and - 19 - binding upon the Company or the applicable Subsidiary of the Company, and (B) to the knowledge of the Company, are valid, in full force and effect and binding upon all of the parties to such contract (other than the Company or any of its Subsidiaries), in each case, in accordance with the terms of such contracts. None of the other parties to any such contract has notified the Company or any of its Subsidiaries that it intends to terminate or materially alter the provisions thereof by reason of the transactions contemplated by this Agreement or otherwise. Acquiror either has been supplied with, or has been given access to, a true and correct copy of all written contracts and written summaries of all oral contracts that are referred to on Schedule 3.11 and Schedule 3.16, together with all amendments, waivers or other changes thereto. 3.12 REAL PROPERTY AND LEASEHOLDS. 3.12.1 Schedule 3.12.1 identifies all parcels of real property owned in fee by the Company or its Subsidiaries as of the date hereof (collectively, the "COMPANY OWNED REAL ESTATE"). The Company or the applicable Subsidiary owns each of the real properties constituting Company Owned Real Estate with good, marketable and insurable fee title, free and clear of all Encumbrances, except for (i) Encumbrances disclosed in the Company Schedules, (ii) liens for taxes, assessments or governmental charges or levies that are not material in amount relative to the property affected, or that are not yet delinquent or are being contested in good faith by appropriate proceedings, during which collection or enforcement is stayed, so long as adequate security has been posted for the payment of such amounts, (iii) any Encumbrance or imperfection of title that does not materially impair the ownership, occupancy or use of the Company Owned Real Estate or Company Leased Real Estate for the purposes for which it is currently owned, occupied or used in connection with the Business, and, (iv) with respect to the Company Leased Real Estate, any Encumbrances placed upon such property by the owner thereof and the provisions of the leases thereof (the items in clauses (i), (ii), (iii) and (iv) above being referred to herein collectively as "REAL PROPERTY PERMITTED ENCUMBRANCES"); provided, however, that no Real Property Permitted Encumbrances may materially interfere with access to or use of such Company Owned Real Estate as the same is presently being used or occupied. Except for the Real Property Permitted Encumbrances and as otherwise set forth in Schedule 3.12.1, none of the Company Owned Real Estate is subject to any right or option of any other Person to purchase or lease or otherwise obtain title to, or an interest in, such Company Owned Real Estate, and no Person other than the Company or its Subsidiaries has any right to occupy or lease any of the Company Owned Real Estate. 3.12.2 Schedule 3.12.2 identifies all parcels of real property leased or subleased to the Company or any of its Subsidiaries as of the date hereof (collectively, the "COMPANY LEASED REAL ESTATE"), as well as each Lease as to which the annual rent exceeds $50,000. A true and complete copy of each Lease as to which the annual rent exceeds $50,000 per year has been provided or made available by the Company to Acquiror. Except as set forth in Schedule 3.12.2, the Company or the applicable Subsidiary owns each of the leaseholds constituting Company Leased Real Estate, free and clear of all Encumbrances other than Real Property Permitted Encumbrances. Each Lease is in full force and effect, and constitutes a valid and binding obligation of the Company or the applicable Subsidiary and, to the knowledge of the Company, the respective parties thereto (other than the Company or any of its Subsidiaries), and is legally enforceable against the Company or the - 20 - applicable Subsidiary and, to the knowledge of the Company, the respective parties thereto (other than the Company or any of its Subsidiaries). For purposes hereof, "LEASE" means any lease or sublease for Company Leased Real Estate, together with any amendments, modifications and supplements thereto. 3.12.3 With respect to each Lease described in Schedule 3.12.2, except as set forth in Schedule 3.12.3, to the knowledge of the Company, neither the Company, nor any of its Subsidiaries, nor any other party thereto is in default with respect to any material term or condition thereof, no rent or other material sums and charges payable thereunder are delinquent, and no event has occurred that through the passage of time or the giving of notice, or both, would constitute a material default thereunder. The Company and its Subsidiaries have not received any notice from the other party to any Lease of the termination thereof. 3.12.4 There is no pending or, to the knowledge of the Company or any Subsidiary, threatened condemnation or eminent domain or similar proceeding affecting all or any part of the Company Owned Real Estate or, to the knowledge of the Company, the Company Leased Real Estate (the Company Owned Real Estate and the Company Leased Real Estate being referred to herein collectively as the "PROPERTIES"), and neither the Company, nor any Subsidiary has received any written notice of any of the same. 3.12.5 Subject to the need to perform customary periodic repairs that do not materially interfere with the Business, the buildings and other structures on the Properties are fit for the purposes for which they are presently used. 3.12.6 There is no known violation of a condition or agreement contained in any easement, restrictive covenant or any similar instrument or agreement affecting any of the Company Owned Real Estate. No Company Owned Real Estate is taxed as part of any real property that does not constitute Company Owned Real Estate. 3.12.7 Neither the Company nor any of its Subsidiaries has received any written notice from the utility company or municipality of any proposed discontinuation of presently provided sewer, water, electric, gas, telephone or other utilities or services for any of the Properties. 3.12.8 To the knowledge of the Company, there are no proposed reassessments of any Properties by any taxing authority that could give rise to a material increase in real property Taxes or assessments against any of the Properties, and there are no threatened or pending special assessments or other actions or proceedings that could give rise to a material increase in real property Taxes or assessments against any of the Properties; provided, that the foregoing shall not apply to any reassessments arising out of or resulting from the transactions contemplated by this Agreement. 3.12.9 To the extent that the operation of the Business as presently conducted on any of the Properties requires the use (other than for utility service) of a property that is not Company Owned Real Estate or Company Leased Real Estate, the Company or one of its Subsidiaries has the right to use such other property. - 21 - 3.13 LITIGATION. Except as set forth in Schedule 3.13 and other than in connection with environmental matters described in Section 3.9, there are no Actions pending or, to the Company's knowledge, threatened in writing against the Company or any of its Subsidiaries or any of their respective properties, at law, in equity or in any arbitral proceeding, and there is no investigation or proceeding pending or, to the knowledge of the Company, threatened before or by any Governmental Entity nor is there any presently effective Order against the Company or any of its Subsidiaries or any of their respective properties, except for any such Action or Order that, if adversely determined, would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. 3.14 TAX MATTERS. 3.14.1 Except as set forth in Schedule 3.14.1, each of the Company and its Subsidiaries (a) have timely filed (or by the Closing Date will have timely filed) all material Tax Returns required to be filed by them through and including the Closing Date and all such Tax Returns are true, complete and correct in all material respects, and (b) have timely paid or have made appropriate provision for on the Latest Balance Sheet (in accordance with GAAP) all material Taxes of the Company and its Subsidiaries (whether or not shown on such Tax Returns) for all taxable periods or portions thereof ending on or prior the date of the Latest Balance Sheet. 3.14.2 As of the date hereof, neither the Tax Returns of the Company or any of its Subsidiaries, nor the Company or its Subsidiaries, have been examined by the Service or any other Taxing Authorities, except for examinations for the periods and jurisdictions shown in Schedule 3.14.2. Except to the extent reserved for in the Latest Balance Sheet or as shown in Schedule 3.14.2, there is no Tax deficiency asserted against the Company or any of its Subsidiaries, and there is no unpaid assessment, written proposal for additional Taxes that has been delivered to the Company, or deficiency or delinquency in the payment of any of the Taxes of the Company or any of its Subsidiaries. 3.14.3 Except as set forth in Schedule 3.14.3, there are no outstanding agreements or waivers extending the statutory period of limitations applicable to any Tax Returns required to be filed by, or that include, the Company or any of its Subsidiaries. 3.14.4 Except as set forth in Schedule 3.14.4, neither the Company nor any of its Subsidiaries is subject to any joint venture, partnership or other arrangement or contract that is treated as a partnership for federal income tax purposes. 3.14.5 Except as set forth in Schedule 3.14.5, none of the Company or any of its Subsidiaries will be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period or portion thereof ending after the Closing Date as a result of any (i) change in the method of accounting for a taxable period or portion thereof ending on or prior to the Closing Date, (ii) closing agreement as described in Section 7121 of the Code (or similar provisions of state, local or foreign Law) entered into on or prior to the Closing Date, (iii) intercompany transaction (including, without limitation, any intercompany transaction subject to Section 367 or 482 of the Code) entered into on or prior to the Closing Date, (iv) excess loss account described in the Treasury Regulations under Section 1502 of the Code with respect to a taxable period or portion thereof ending on - 22 - or prior to the Closing Date or (v) material prepaid amount received on or prior to the Closing Date. 3.14.6 Except as set forth in Schedule 3.14.6, each of the Company and its Subsidiaries have withheld or collected and paid over to the appropriate Taxing Authority (or are properly holding for such payment) all Taxes required by Law to be withheld or collected. 3.14.7 Except as set forth in Schedule 3.14.7, none of the Company or any of its Subsidiaries has any liability for the Taxes of another Person (other than the Company and its Subsidiaries) under Treasury Regulations Section 1.1502-6 (or any similar provision of applicable Law), as a transferee or successor, by contract or otherwise. 3.14.8 Except as set forth in Schedule 3.14.8, there are no liens for Taxes upon any of the assets or properties of the Company or any of its Subsidiaries, except for any liens for Taxes not yet due and payable or that are being contested in good faith and for which adequate reserves (in accordance with GAAP) have been established. 3.14.9 Except as set forth in Schedule 3.14.9, none of the Company or any of its Subsidiaries has been a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A) of the Code. 3.14.10 Except as set forth in Schedule 3.14.10, there is no tax sharing agreement that will require any payment by any of the Company or any of its Subsidiaries after the Closing Date. 3.14.11 Except as set forth in Schedule 3.14.11, none of the Company or any of its Subsidiaries has distributed the stock of another Person, or has had its stock distributed by another Person, in a transaction that was purported or intended to be governed in whole or in part by Section 355 of the Code. 3.15 EMPLOYEE BENEFIT PLANS. For purposes of this Agreement, the term "PLANS" shall mean all "Employee Benefit Plans" (as such term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and all stock purchase, stock option, severance, employment, change-in-control, fringe benefit, collective bargaining, bonus, incentive, deferred compensation, employee loan and all other employee benefit plans, agreements, programs, policies or other arrangements, whether or not subject to ERISA, including, without limitation, multiemployer plans within the meaning of Section 3(37) of ERISA) (including any funding mechanism therefor now in effect or required in the future as a result of the transactions contemplated by this Agreement or otherwise), whether formal or informal, oral or written, legally binding or not, under which the Company, its Subsidiaries, or any member of the same controlled group of businesses as the Company within the meaning of Section 4001(a)(14) of ERISA (an "ERISA AFFILIATE") is a sponsor or participating employer or as to which the Company, its Subsidiaries or any ERISA Affiliate makes contributions or is required to make contributions or to which the Company, its Subsidiaries or any ERISA Affiliate has any liability, other than a "Foreign Plan" as defined below. Schedule 3.15(a) lists all Plans and - 23 - Foreign Plans; provided, however, that such Schedule 3.15(a) lists only the standard forms of employment offer letters for non-executive employees used by the Company and its Subsidiaries, rather than individual executed employment offer letters with such non-executive employees. No Plan is or ever was a "multi employer plan," as defined in Section 3(37) of ERISA, a plan subject to Title IV of ERISA, or a plan subject to Section 412 of the Code and none of the Company, its Subsidiaries or any ERISA Affiliate has any liabilities under Title IV of ERISA that remains unsatisfied. Each Plan that is required to comply with the provisions of Sections 4980B and 4980C of the Code, or with the requirements referred to in Section 4980D(a) of the Code, has complied in all material respects, and, except as required by such sections of the Code or other than any such Plan in which the employee is required to pay the full cost of such benefits, no Plan that is a "welfare benefit plan," as defined in Section 3(1) of ERISA, provides for post-employment benefits. Each of the Plans that is intended to be a qualified plan under Section 401(a) of the Code has received a favorable determination letter from the Service, has been operated substantially in accordance with its terms and with the provisions of the Code and, to the Company's knowledge, nothing has occurred that could reasonably be expected to cause the loss of the qualified status of any such Plan. All of the Plans have been administered and maintained in substantial compliance with their terms, ERISA, the Code and all other applicable Laws. None of the Company, its Subsidiaries or any ERISA Affiliate has any knowledge of any circumstances that reasonably might result in any material, liability, tax or penalty, including, but not limited to, a penalty under Section 502 of ERISA, as a result of a breach of any duty under ERISA or under any other Laws. All contributions required to be made to each of the Plans and the Foreign Plans under the terms of such Plan or Foreign Plan, as the case may be, ERISA, the Code or any other applicable Laws have been timely made. Other than routine claims for benefits under the Plans and the Foreign Plans, there are no pending, or, to the knowledge of the Company, threatened, investigations, proceedings, claims, lawsuits, disputes, actions, audits or controversies involving the Plans or the Foreign Plans, as the case may be, or the fiduciaries, administrators, or trustees of any of the Plans or the Foreign Plans or the Company, its Subsidiaries or any ERISA Affiliate of either as the employer or sponsor under any Plan or Foreign Plan, with any of the Service, the Department of Labor, the Pension Benefit Guaranty Corporation or any other Governmental Entity, any participant in or beneficiary of any Plan or Foreign Plan or any other Person whomsoever, except for any such investigations, proceedings, claims, lawsuits, disputes, actions, audits or controversies that would not, individually or in the aggregate, reasonably be expected to be material to the Company or any of its Subsidiaries. Except as disclosed on Schedule 3.15(b), the execution and performance of this Agreement will not (i) result in any obligation or liability (with respect to accrued benefits or otherwise) of the Company or any of its Subsidiaries to any Plan, or any present or former employee of the Company or any of its Subsidiaries, (ii) be a trigger event under any Plan that will result in any payment (whether of severance pay or otherwise) becoming due to any present or former employee, officer, director, stockholder, contractor, or consultant, or any of their dependents, or (iii) except as otherwise expressly contemplated by this Agreement, accelerate the time of payment or vesting, or increase the amount, of compensation due to any present or former employee, officer, director, stockholder, contractor, or consultant of the Company or any of its Subsidiaries. Except as set forth in Schedule 3.15(c), there is no contract, plan or arrangement (written or otherwise) covering any employee or former employee of the Company or any of its Subsidiaries that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to the terms of Section 280G - 24 - of the Code. With respect to each Plan (including any standard forms of employment offer letters for non-executive employees used by the Company and its Subsidiaries) and Foreign Plan, other than individual executed employment offer letters with non-executive employees of the Company and its Subsidiaries and each Foreign Plan that covers ten (10) or fewer participants, the Company has provided or made available to Acquiror a current, accurate and complete copy (or, to the extent no such copy exists, an accurate description) thereof and, to the extent applicable: (i) any related trust agreement or other funding instrument, (ii) the most recent determination letter, if applicable, (iii) any summary plan description, summary of material modification, or written communication by the Company or its Subsidiaries to all participants in such Plan or Foreign Plan; (iv) a summary of any proposed amendments or changes anticipated to be made to the Plans at any time within the twelve months immediately following the date hereof, and (v) for the most recent year for which they are available (A) the Form 5500 and attached schedules, (B) audited financial statements and (C) actuarial valuation reports. Except for employment agreements, individual executed employment offer letters and Plans and Foreign Plans previously delivered or made available to Acquiror, the Plans and Foreign Plans that each cover ten (10) or fewer participants do not, in the aggregate, provide benefits that could reasonably result in a material liability to the Company and its Subsidiaries. With respect to each employee benefit, fringe benefit, supplemental unemployment benefit, bonus, incentive, profit sharing, termination, change in control, pension, retirement, stock option, stock purchase, stock appreciation, health, welfare, medical, dental, disability, life insurance and similar plan, program, arrangement or practice relating to current or former employees, officers or directors of the Company or any of its Subsidiaries maintained, sponsored or funded by the Company or any of its Subsidiaries that is maintained outside of the United States primarily for the benefit of persons substantially all of whom are nonresident aliens (a "FOREIGN PLAN"): (A) the Foreign Plan has been maintained in all material respects in accordance with its terms and applicable Law, (B) if intended to qualify for special tax treatment, the Foreign Plan substantially satisfies the requirements for such treatment, (C) the Foreign Plan is substantially funded and/or book reserved to the extent required by applicable Law, (D) no insurance policy or any other agreement affecting the Foreign Plan requires or permits a retroactive increase in contributions, premiums or payments due thereunder and (E) no commitments to improve or otherwise amend the Foreign Plan have been made, except as required by applicable Law. No Foreign Plan that would be a "welfare benefit plan" within the meaning of Section 3(1) of ERISA if it were a Plan subject to ERISA provides benefits to retired employees or to the beneficiaries or dependents of retired employees, except as required by applicable Law or other than any such Foreign Plan in which the retired employees, beneficiaries or dependents are required to pay the full cost of such benefits. 3.16 INTELLECTUAL PROPERTY. Schedule 3.16(a) sets forth a list of all of the trademarks, domain names, registered copyrights, patents, and applications for the foregoing, that are owned or used by the Company and/or any of its Subsidiaries (together with all other intellectual property owned or used by the Company and/or any of its Subsidiaries the "INTELLECTUAL PROPERTY"). Schedule 3.16(b) sets forth a list of all material agreements pertaining to the Intellectual Property, except for licenses of off-the-shelf office, business or financial software. Except as set forth in Schedule 3.16(c), (i) the Company and/or its Subsidiaries own all right title and interest in and to, or have the valid and enforceable right to use pursuant to license, all of the material Intellectual Property and all - 25 - of the Intellectual Property listed on Schedule 3.16(a) (whether material or not) free and clear of all Encumbrances except Permitted Encumbrances and restrictions imposed pursuant to (A) non-exclusive licenses to customers and (B) license agreements disclosed on Schedule 3.16(b), (ii) the use of the Intellectual Property owned by the Company or its Subsidiaries, or to the knowledge of the Company, the Intellectual Property licensed to the Company or its Subsidiaries, in the operation of the Business does not infringe or otherwise violate any intellectual property rights of any other Person, except for any such infringements or violations that would not reasonably be expected to be material to the Business, (iii) neither the Company nor any of its Subsidiaries has received any notice contesting its right to use, or asserting infringement or other violation of intellectual property rights with respect to any of the Intellectual Property, and to the Company's knowledge there is no valid basis for same, (iv) to the Company's knowledge, no third party is materially infringing or otherwise violating any of the Intellectual Property, and (v) the Company and each of its Subsidiaries take all actions that are reasonable and customary for companies in similar lines of business as the Company and its Subsidiaries to protect, preserve and maintain the Intellectual Property. 3.17 BROKERS. Except as set forth in Schedule 3.17, the Company and its Subsidiaries are not committed to any liability for the payment of a brokerage or investment banking commission, finder's fee or other similar payment in connection with the transactions contemplated by this Agreement. 3.18 CERTAIN BUSINESS PRACTICES AND REGULATIONS; GOVERNMENT CONTRACTS. 3.18.1 Each Government Contract meeting the criteria set forth in Section 3.11 is noted on Schedule 3.11. 3.18.2 Except as set forth on Schedule 3.18.3, with respect to each Government Contract and each Government Bid, (i) the Company and its Subsidiaries have complied in all material respects with all requirements of all Laws, standards, contractual provisions or agreements applicable thereto, including (if applicable), without limitation, the Cost Accounting Standards, the Truth in Negotiations Act, and the False Claims Act, government property requirements, Foreign Corrupt Practices Act, Anti-Kickback Act, laws prohibiting gratuities, quality assurance requirements, testing and inspection requirements, and cost allowability requirements; (ii) all applicable representations and certifications were complete and correct in all material respects as of their effective dates and the Company and its Subsidiaries have complied with all applicable representations and certifications in all material respects; (iii) neither the U.S. Government nor any prime contractor, subcontractor, or other Person has notified the Company and/or its Subsidiaries, that the Company and/or its Subsidiaries has breached or violated in any material respect any Law, certification, representation, clause, provision, or requirement applicable thereto; (iv) no termination for convenience, termination for default, cure notice, or show cause notice is currently in effect or has been received within the past three (3) years applicable thereto; (v) the Company and its Subsidiaries have not been notified that any money due to the Company and/or its Subsidiaries under the Government Contracts has been withheld or set off or that any claim been made to withhold or set off money, and the Company and/or its Subsidiaries have not been notified that they are not entitled to any progress payments received with respect - 26 - thereto; (vi) no cost incurred by the Company and/or its Subsidiaries under the Government Contracts has been formally challenged or disallowed, and to the knowledge of the Company, no cost incurred by the Company is the subject of any investigation; (vii) there are no currently pending requests for a contract downward price adjustment that are not reflected in existing modifications for any reason, including any claimed disallowance of costs or any notice of alleged defective pricing, under the Government Contracts; (viii) there are no pending claims for equitable adjustments by the Company and/or its Subsidiaries against the U.S. Government or any third party in excess of $50,000; and (ix) there are no pending notices disallowing any costs under the Government Contracts. 3.18.3 (i) None of the Company, its Subsidiaries or any of their directors or officers are under, or at any time during the last five (5) years have been under, any administrative, civil or criminal investigation, indictment, or writ of information by the U.S. Government, for any alleged irregularity, misstatement, omission, or noncompliance arising under any Government Contract or Laws applicable to Government Contracts (including but not limited to ITARs, any other export control laws, and the Foreign Corrupt Practices Act); (ii) to the Company's knowledge, none of the other employees of the Company or its Subsidiaries is under, or at any time during the last five (5) years has been under, any administrative, civil or criminal investigation, indictment, or writ of information by the U.S. Government, for any alleged irregularity, misstatement, omission or noncompliance arising under any Government Contract or Laws applicable to Government Contracts (including, but not limited to, ITARs, any other export control Laws, and the Foreign Corrupt Practices Act); and (iii) during the last five (5) years, neither the Company nor any of its Subsidiaries has conducted or initiated any internal investigation or made a voluntary disclosure to the U.S. Government with respect to any alleged irregularity, misstatement, omission, or noncompliance arising under any Government Contract or any Law applicable to Government Contracts (including but not limited to ITARs, any other export control laws, and the Foreign Corrupt Practices Act). To the Company's knowledge, there exists no irregularity, misstatement, omission, or noncompliance arising under or relating to any Government Contract or any Law applicable to Government Contracts (including but not limited to ITARs, any other export control requirements, and the Foreign Corrupt Practices Act) that could reasonably be expected lead to any administrative, civil or criminal investigation, indictment or writ of information by the U.S. Government. 3.18.4 Except as would not reasonably be expected to be material to the Business, (i) there exist no outstanding asserted claims against the Company and/or its Subsidiaries, either by the U.S. Government or by any prime contractor, subcontractor, vendor or other third party, arising under any Government Contract; and (ii) there exist no asserted disputes between or involving the Company and/or its Subsidiaries and the U.S. Government under any Law, including, without limitation, the Contract Disputes Act, or between the Company and/or its Subsidiaries and any prime contractor, subcontractor, or vendor arising under any Government Contract. 3.18.5 None of the Company, its Subsidiaries or any of their directors or officers (i) has ever been debarred or suspended from participation in, or the award of, contracts or subcontracts with the U.S. Government, including, without limitation, the United States Department of Defense, or (ii) has ever been subject to any debarment or suspension inquiry. To the knowledge of the Company, none of the other employees of the - 27 - Company or its Subsidiaries (i) has ever been debarred or suspended from participation in, or the award of, contracts or subcontracts with the U.S. Government, including, without limitation, the United States Department of Defense or (ii) has ever been subject to any debarment or suspension inquiry. To the knowledge of the Company, there exist no facts or circumstances that would warrant the institution of suspension or debarment proceedings or a finding of nonresponsibility against the Company and/or its Subsidiaries with respect to any prior, current, or future Government Contract or Government Bid. 3.18.6 The Company and/or its Subsidiaries have reached agreement with the responsible U.S. Government contracting officers and agencies approving indirect cost rates charged to Government Contracts for the fiscal years prior to and through 2001 for the Microwave Power Products Division of CPI, and 2000 for the Beverly Microwave Division of CPI, and each of such fiscal years are closed. The Company and its Subsidiaries have submitted to the responsible U.S. Government contracting officers and agencies proposed indirect rates to be bid, billed, and charged under Company Government Contracts for the years ending 2001, 2002 and 2003, for the Beverly Microwave Division of CPI, and 2002 and 2003, for the Microwave Power Products Division of CPI. 3.18.7 The Company and its Subsidiaries have complied with all material requirements of all Laws, standards, or agreements pertaining to contracts with Governmental Entities other than the U.S. Government. 3.18.8 Schedule 3.18.8 lists all Defense Contract Audit Agency audit reports received by the Company and/or its Subsidiaries since January 1, 2000. 3.18.9 The ineligibility of the Microwave Power Products Division of CPI for progress payments under Government Contracts has not reduced the total amount of payments to which it otherwise would have been entitled under Government Contracts and has not affected the eligibility of the Company or its Subsidiaries (other than the Microwave Power Products Division of CPI) for progress payments. 3.18.10 The Company and its Subsidiaries have taken all actions that are reasonable and customary for companies in similar lines of business as the Company and its Subsidiaries to protect its rights and interests under Government Contracts in Technical Data and Computer Software, as defined in the Federal Acquisition Regulation and Defense Federal Acquisition Regulation Supplement. 3.19 LABOR RELATIONS. Neither the Company nor any of its Subsidiaries is party to any collective bargaining agreement. None of the Company or any of its Subsidiaries has experienced in the past three (3) years any strike, slowdown, work stoppage, picketing, lockout or other material labor controversies and no such controversies are pending or, to the knowledge of the Company, threatened, between the Company or any of its Subsidiaries and any of their respective employees, and, to the knowledge of the Company, there are no organizational efforts presently being made or threatened involving any such employees. 3.20 AFFILIATE TRANSACTIONS. Except as set forth on Schedule 3.20, no officer, director or record holder of more than 5% of the outstanding Company Common - 28 - Stock, Senior Preferred Stock or Junior Preferred Stock or any individual in any such Person's immediate family, or, to the knowledge of the Company, any Affiliate of any such record holder of Company Common Stock (i) is a party to any agreement, contract, commitment or transaction with the Company or any of its Subsidiaries (excluding (A) employment agreements and other agreements entered into with officers or directors in their capacities as such listed on Schedule 3.15 and (B) indemnity commitments pursuant to the certificate of incorporation and bylaws (or other similar organizational documents) of the Company and its Subsidiaries) or has any interest in any property used by the Company or any of its Subsidiaries or (ii) is a director, officer or employee of, or consultant to or owns, directly or indirectly, any interest in, any competitor, franchisee, supplier or customer of the Company or any of its Subsidiaries (excluding any ownership of less than 5% of the equity securities of any publicly traded company). 3.21 INSURANCE. Schedule 3.21 lists each material insurance policy maintained by the Company and any of its Subsidiaries. All of such insurance policies are in full force and effect and were in full force and effect during the periods of time that such insurance policies are purported to be in effect, and neither the Company nor any Subsidiary is, or was during such periods, in default in any material respect with respect to its obligations under any of such insurance policies. Except as set forth on Schedule 3.21 hereof, no premiums or payments payable under such insurance policies are past due. During the last two years, neither the Company nor any of its Subsidiaries (i) has received written notice of premature termination or cancellation or non-renewal of any such insurance policies from any of its insurance brokers or carriers or (ii) has been denied coverage under any such insurance policies for any claim in excess of $20,000. All such insurance policies are customary in scope and amount of coverage for companies in the line of business of the Company and its Subsidiaries. 3.22 ACCOUNTS RECEIVABLE; INVENTORY. 3.22.1 Accounts Receivable. All of the accounts receivable of the Company and each of its Subsidiaries represent amounts receivable for merchandise actually delivered or services actually provided (or, in the case of non-trade accounts represent amounts receivable in respect of other bona-fide transactions) and have arisen from bona-fide transactions. The allowance for doubtful accounts that is reflected on the Latest Balance Sheet has been determined in accordance with GAAP applied on a consistent basis. 3.22.2 Inventory. Each item of inventory reflected on the Latest Balance Sheet (a) was owned by the Company or one of its Subsidiaries free and clear of all Encumbrances, except for Permitted Encumbrances and purchase money liens arising from accounts payable reflected on such financial statements, and (b) except for any reserve for lower of cost or market or obsolete or unsalable inventory accrued on the Latest Balance Sheet, to the knowledge of the Company, existed as of the date of such financial statements in salable condition. All inventory reserves reflected on the Latest Balance Sheet have been determined in accordance with GAAP applied on a consistent basis. 3.23 PERSONAL PROPERTY. Except as set forth on Schedule 3.23, the Company and its Subsidiaries own good and marketable title to, or hold pursuant to valid and enforceable leases, all of the personal property necessary for the conduct of the Business - 29 - as presently conducted. The personal property of the Company and its Subsidiaries is in sufficiently good operating condition and repair to permit its use in the continuing operations of the Company and its Subsidiaries as such operations are presently conducted, subject to normal wear and tear. 3.24 SEC REPORTS. None of the reports filed by the Company or CPI with the U.S. Securities and Exchange Commission (the "SEC"), in each case including all exhibits and schedules thereto and documents incorporated by reference therein (including any and all financial statements included therein) contained when filed (except to the extent revised by an amended filing with the SEC) any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. 3.25 CUSTOMERS. To the knowledge of the Company, no customer of the Company or any of its Subsidiaries that accounted for more than $5,000,000 in gross revenues of the Company and its Subsidiaries (on a consolidated basis) during the fiscal year ended September 27, 2003 is threatened with bankruptcy or insolvency or intends to cancel, terminate or otherwise materially modify its relationship with the Company or any of its Subsidiaries, whether as a result of the consummation of the transactions described herein or otherwise. 3.26 MATERIAL ADVERSE EFFECT. Since September 27, 2002, there has not been any event, occurrence or development that has had or would reasonably be expected to have a Material Adverse Effect. 3.27 WARRANTY RESERVES. The warranty reserves reflected on the Latest Balance Sheet have been determined in accordance with GAAP applied on a consistent basis. 3.28 TRANSACTION EXPENSES. Schedule 3.28 sets forth, as of the date hereof, a list of Persons to whom Transaction Expenses are to be paid. 3.29 SPECIFIED BONUSES. Schedule 3.29 sets forth the amount of accrued and unpaid Specified Bonuses as of the date hereof. Except as set forth on Schedule 3.29 and except for bonuses payable out of the division level "key contributor plans," which shall not exceed $350,000 in the aggregate and which bonuses shall either be paid by the Company prior to Closing or accrued for in Final Working Capital, there are no bonuses payable to employees of the Company or any Subsidiary under any Plan or otherwise in respect of the 2003 fiscal year. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB Acquiror and Merger Sub represent and warrant to the Company as of the date of this Agreement as follows: 4.1 ORGANIZATION AND GOOD STANDING. Acquiror is a corporation, and Merger Sub is a corporation, and each of them is duly organized, validly existing and in - 30 - good standing under the laws of the State of Delaware and has the corporate power and authority to carry on its respective business as the same is now being conducted. Acquiror and Merger Sub are duly qualified to transact business as foreign corporations and are in good standing in each of the jurisdictions listed in Schedule 4.1, which are each of the jurisdictions in which their ownership, lease or operation of property or the conduct of their business as the same is now being conducted requires it to so qualify, except where the failure to so qualify would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. 4.2 AUTHORITY AND ABSENCE OF CONFLICT. 4.2.1 Acquiror and Merger Sub have the requisite corporate power and authority to enter into this Agreement and the agreements and instruments contemplated hereby and to carry out their obligations hereunder and thereunder. The execution and delivery of this Agreement and the agreements and instruments contemplated hereby and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action required on the part of Acquiror and Merger Sub. This Agreement and the other agreements have been (or on or prior to the Closing Date will have been, as applicable) duly executed by Acquiror and Merger Sub and constitute (or upon execution will constitute) the valid and legally binding obligations of Acquiror and Merger Sub, enforceable against Acquiror and Merger Sub in accordance with their respective terms except as may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws and equitable principles relating to or limiting creditors' rights generally. 4.2.2 The execution, delivery and performance of this Agreement and the agreements and instruments contemplated hereby, the consummation of the transactions contemplated hereby and thereby, and compliance with the provisions hereof and thereof do not and will not violate any of the terms, conditions or provisions of (i) the certificate of incorporation or bylaws of Acquiror or Merger Sub or (ii) except for any violations that would not reasonably be expected to have a Material Adverse Effect, any Order or Law applicable to Acquiror or Merger Sub. 4.2.3 Except as set forth in Schedule 4.2.3, the execution and delivery of this Agreement and the agreements and instruments contemplated hereby, the consummation of the transactions contemplated hereby and thereby, and compliance with the provisions hereof and thereof do not and will not violate, or conflict with, or result in a breach of any provisions of, or constitute a default (or an event that, with notice or lapse of time or both, would constitute a default) under, or give rise to a right of termination, cancellation, modification or acceleration of the performance required by or a loss of a material benefit under, or result in the creation of any Encumbrance upon any of the properties or assets of Acquiror or Merger Sub under any of the terms, conditions or provisions of, any note, bond, mortgage, indenture, deed of trust, license, agreement, lease, franchise or other instrument or arrangement to which Acquiror or Merger Sub is a party or by which any of them or their respective properties are bound, where, in any such case, such violation, conflict, breach, default, termination, cancellation, modification, acceleration, loss or Encumbrance would affect or interfere with Acquiror's or Merger Sub's ability to perform its obligations hereunder. - 31 - 4.3 APPROVALS. 4.3.1 Except for the notices, reports or filings or Approvals set forth on Schedule 4.3.1, neither Acquiror nor Merger Sub is required to submit any notice, report or other filing with, or obtain any Approval from, any Governmental Entity in connection with the consummation of the transactions contemplated by this Agreement, except where the failure to submit or deliver any such notice, report or filing, or to obtain any such Approval, individually or in the aggregate, would not reasonably be expected to interfere with Acquiror's or Merger Sub's ability to perform its obligations hereunder. 4.3.2 Except as set forth on Schedule 4.3.2, no Approvals are required to be given by Acquiror and Merger Sub or obtained by Acquiror and Merger Sub from any and all third parties other than Governmental Entities in connection with the consummation of the transactions contemplated by this Agreement, except where the failure to file, deliver or obtain such Approvals, individually or in the aggregate, would not reasonably be expected to interfere with Acquiror's or Merger Sub's ability to perform its obligations hereunder. 4.4 BROKERS. Except as previously disclosed in writing by Acquiror to the Company, neither Acquiror nor Merger Sub is committed to any liability for the payment of a brokerage or investment banking commission, finder's fee or other similar payment in connection with the transactions contemplated by this Agreement. 4.5 FINANCING. Acquiror has received, accepted and agreed to funding commitments as evidenced by the signed commitment letter (the "COMMITMENT LETTER") from UBS Loan Finance LLC, UBS Securities LLC, Bear Stearns Corporate Lending Inc., Bear, Stearns & Co. Inc., Wachovia Bank, National Association and Wachovia Capital Markets, LLC (the "LENDERS") dated November 17, 2003 committing the Lenders, subject to the terms and conditions of the Commitment Letter, to provide debt financing to CPI for the transactions contemplated by this Agreement (such debt financing, or any other debt financing combination thereof for an aggregate amount not less than the amounts set forth in the Commitment Letter on terms and conditions not materially less favorable to Acquiror and that can be provided within the time frame contemplated by the debt financing set forth in the Commitment Letter, whether provided by the Lenders or any other banks or financial institutions, the "DEBT FINANCING"). A true, complete and correct copy of the Commitment Letter is attached hereto as Exhibit D. The Commitment Letter is not subject to any conditions other than as set forth therein, has been executed and delivered by all parties thereto and, on the date hereof (a) is in full force and effect and binding upon Acquiror, and (b) to the knowledge of Acquiror, is in full force and effect and binding upon the Lenders. All fees required to be paid under the Commitment Letter prior to the date hereof have been paid. The Commitment Letter, together with an equity investment from Affiliates of Acquiror as reflected in the equity commitment letters delivered to the Company, will provide sufficient financial capability for Acquiror to consummate the Merger on the terms and conditions set forth in this Agreement. - 32 - ARTICLE V COVENANTS 5.1 THE COMPANY'S CONDUCT PRIOR TO CLOSING. The Company agrees that from and after the date hereof to the Closing Date, and except as otherwise consented to by Acquiror in writing (which consent shall not be unreasonably withheld or delayed), as set forth in Schedule 5.1, or as expressly contemplated by this Agreement: 5.1.1 The business, operations, activities and practices of the Company and its Subsidiaries shall be conducted in the Ordinary Course; 5.1.2 The Company and its Subsidiaries: (i) will preserve the business organization of the Company and its Subsidiaries intact; (ii) will pay and discharge the Company's and its Subsidiaries' debts and liabilities as they become due; (ii) will maintain the Company's and its Subsidiaries' facilities, equipment and similar assets in a reasonable state of repair, order and condition; (iv) will maintain the Company's and its Subsidiaries' books and records in accordance with past practice; (v) will pay the Company's and its Subsidiaries' payables only in the Ordinary Course and collect the Company's and its Subsidiaries' receivables in the Ordinary Course; and (vi) will make capital expenditures in the Ordinary Course; 5.1.3 The Company and its Subsidiaries will use their commercially reasonable best efforts: (i) to preserve the goodwill of suppliers, customers, employees and others with whom business relationships exist; (ii) to maintain in full force and effect all material insurance policies and binders; and (iii) to maintain sufficient cash on hand to operate the business in the Ordinary Course; 5.1.4 The Company and its Subsidiaries will not borrow or guarantee any amount or obligation or incur, assume or become subject to any Indebtedness other than (i) guarantees provided in the Ordinary Course in connection with customer advances, (ii) borrowings under the Foothill Loan Agreement necessary to meet ordinary course working capital requirements and (iii) modifications, renewals, extensions or refinancings of the Wells Fargo Loan Agreement; 5.1.5 Neither the Company nor any of its Subsidiaries will authorize, issue, transfer, sell or dispose of any capital stock or other equity interest in the Company or any of its Subsidiaries or options, warrants or other rights to purchase or otherwise acquire any such capital stock or equity interest or any Equity-Like Securities or otherwise make or effect any change in the issued and outstanding capitalization of the Company or any of its Subsidiaries except for the issuance of preferred stock of CPI as payment in kind of dividends on Senior Preferred Stock and Junior Preferred Stock in accordance with the terms thereof and the issuance of Company Common Stock upon the exercise of Stock Options outstanding as of the date hereof; 5.1.6 The Company and its Subsidiaries will not declare any dividend of or make any distribution of any assets of any kind whatsoever to any of its stockholders, including, without limitation, distributions in redemption of or as the purchase price for any capital stock or equity interest, except for (i) repurchases of shares of Company Common - 33 - Stock pursuant to the terms of existing equity plans, stockholders agreements, and a redemption agreement with respect to Junior Preferred Stock and Senior Preferred Stock in accordance with Section 5.11 hereof, (ii) dividends on Senior Preferred Stock and Junior Preferred Stock in accordance with the terms thereof and (iii) dividends payable to the Company and its wholly owned Subsidiaries; 5.1.7 None of the Company or any of its Subsidiaries (i) will merge or consolidate with, purchase all or any substantial part of the assets of, or otherwise acquire any person, corporation or firm or division thereof, or (ii) except as permitted by Section 5.11, will adopt any change in its certificate of incorporation or bylaws; 5.1.8 None of the Company or any of its Subsidiaries will sell, lease, license, transfer, assign or otherwise dispose of ("TRANSFERS") any of its property or assets except for (i) Transfers of inventory to customers, third party distributors or vendors, in each case, in the Ordinary Course, (ii) Transfers other than in the Ordinary Course not exceeding $100,000 individually and $250,000 in the aggregate, (iii) Transfers in connection with any transaction to which the Company or any of its Subsidiaries is contractually obligated prior to the date hereof that is described on Schedule 5.1 and (iv) licenses of Intellectual Property permitted pursuant to Section 5.1.9; 5.1.9 None of the Company or any of its Subsidiaries will license any of its Intellectual Property to a third party (other than the Company or any of its Subsidiaries) except for non-exclusive licenses to customers in the Ordinary Course; 5.1.10 None of the Company or any of its Subsidiaries will purchase, lease, license from another Person or otherwise acquire any assets except for (i) purchases of inventory, services and supplies, in each case, in the Ordinary Course, (ii) capital expenditures in the Ordinary Course, and (iii) other purchases, leases or licenses either not exceeding $350,000 in the aggregate or otherwise permitted under Section 5.1; 5.1.11 Except as may be required by Law, none of the Company or any of its Subsidiaries (i) will increase the compensation or fringe benefits payable or to become payable by the Company or any of its Subsidiaries to any of its current or former directors, officers or employees, other than (A) increases made in the Ordinary Course to employees other than executive officers and (B) bonuses constituting "Specified Bonuses" in connection with or arising as a result of the transactions contemplated hereby in an amount previously disclosed to Acquiror in writing and that shall have been approved by the Board of Directors of the Company, (ii) will grant any severance or termination pay to any present or former director, officer or employee of the Company or its Subsidiaries other than consistent severance or termination pay granted pursuant to the severance policies described in Schedule 3.15, (iii) will loan or advance any money or other property to any present or former director, officer or employee of the Company or its Subsidiaries, (iv) will grant any equity or equity-based awards or (v) will establish, adopt, enter into, amend or terminate any Plan or Foreign Plan or any plan, agreement, program, policy, trust, fund or other arrangement that would be a Plan or Foreign Plan if it were in existence as of the date of this Agreement, except for any of the events described in clauses (i), (ii), and (v) that, individually or in the aggregate with all other such events, would not result in an increased liability to the Company and its Subsidiaries of more than $100,000; - 34 - 5.1.12 None of the Company or any of its Subsidiaries will enter into any agreement or arrangement with (i) any record holder of more than 5% of the outstanding shares of Company Common Stock, Senior Preferred Stock or Junior Preferred Stock, (ii) any such holder's immediate family member or (iii) to the knowledge of the Company, any Affiliate of any such record holder of Company Common Stock; 5.1.13 Except as may be required by GAAP, none of the Company or any of its Subsidiaries will change its accounting principles or accounting methods or practices; 5.1.14 None of the Company or any of its Subsidiaries: (a) will pledge, mortgage, lease or subject to any Encumbrance, (other than a Permitted Encumbrance) any asset or property of the Company or any of its Subsidiaries; (b) will make any loan or advance to any Person; (c) will make or revoke any Tax election, settle or compromise any material Tax liability, change any annual tax accounting period, change any method of Tax accounting, enter into any closing agreement relating to any material amount of Taxes, surrender any right to claim a material Tax refund or consent to any extension or waiver of the limitations period applicable to any Tax claim or assessment with respect to income Taxes; (d) will cancel, compromise, release or assign any material Indebtedness owed to it or any claims held by it outside the Ordinary Course; (e) will settle or compromise any material lawsuit, proceeding or action; (f) will settle or consent to any claim or assessment relating to income Taxes, incur any obligation to make any payment of, or in respect of, any material Taxes, except in the Ordinary Course, or agree to extend or waive the statutory period of limitations for the assessment or collection of income Taxes; (g) will accelerate the delivery or sale of products, or offer discounts or price protection on sale of products or premiums on the purchase of raw materials, except in the Ordinary Course; (h) will purchase, order or otherwise acquire inventory in excess of reasonably forecasted requirements in the Ordinary Course; (i) will enter into any collective bargaining agreement, other than any such agreement that would apply to ten (10) or fewer employees, none of whom reside or work in the United States or Canada, and that is required by applicable Law in the jurisdiction in which such employees reside or work; (j) will enter into any agreement with respect to any hedging, swap, forward, future or derivative transaction or option or similar agreement involving, or settled by reference to, one or more rates, currencies, commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value or any similar transaction or any combination of these transactions; (k)(i) will modify, amend or waive any terms or conditions of any contract or agreement listed on Schedule 3.11 or Schedule 3.16 or any Lease provided that the restriction contained in this clause (k)(i) shall not apply to contracts or agreements with customers, suppliers, sales representatives and/or distributors, in each case in the Ordinary Course, (ii) will terminate or assign any such contract, agreement or Lease; provided, that the restriction contained in this clause (k)(ii) shall not apply to (A) terminations of contracts or agreements with customers, suppliers, sales representatives and/or distributors in the Ordinary Course that are made in connection with or in anticipation of the execution of a contract or agreement that is intended to replace such terminated contract or agreement and (B) assignments of contracts or agreements with customers, suppliers, sales representatives and/or distributors in the Ordinary Course that are made to Subsidiaries of the Company or that are made in connection with a subcontract to a third party by the Company and/or its Subsidiaries in the Ordinary Course, (iii) will enter into any new contract, agreement or lease that, if existing on the date hereof, would be - 35 - required to be listed on any such schedules or on Schedule 3.12.2, provided that the restriction contained in this clause (k)(iii) shall not apply to contracts or agreements with customers, suppliers, sales representatives and/or distributors, in each case, in the Ordinary Course; or (l) will enter into commitments for future capital expenditures in excess of $1,000,000 in the aggregate. 5.1.15 Neither the Company nor any of its Subsidiaries will enter into any agreement, arrangement or understanding or commit to take any action that, if taken on or before the Closing Date, would result in a breach of any of the foregoing covenants contained in this Section 5.1. 5.2 ACQUIROR'S ACCESS. The Company and its Subsidiaries shall authorize and permit Acquiror and Merger Sub and their Representatives and financing sources, subject to the execution of confidentiality agreement(s) reasonably acceptable to the Company (it being understood that the form of the Confidentiality Agreement, dated as of October 30, 2003, between UBS AG and CPI, is reasonably acceptable) to have reasonable access during normal business hours, upon reasonable notice and in such manner as will not unreasonably interfere with the conduct of their respective businesses, to all of their respective directors, officers, employees, representatives, properties, books, records, operating instructions and procedures, Tax Returns or other records, documents or information relating to Taxes and all other information with respect to the Business, the Company or any of its Subsidiaries and any of their affairs as Acquiror (or its Representatives or financing sources) may from time to time reasonably request, and to make copies of such books, records and other documents; provided, however, that Acquiror shall not interview employees of the Company or its Subsidiaries (other than senior management personnel) without the prior consent of the Company, which consent will not be unreasonably withheld. Notwithstanding the foregoing, the rights of access of Acquiror and Merger Sub pending the Closing with respect to environmental matters relating to real property shall be limited to an examination of existing records and interviews with the Company's personnel and other Persons and conducting Phase I environmental studies and other investigations not involving physical testing of the real property or contacting officials of any Governmental Entity (other than to arrange for review of the files thereof), without the Company's prior consent, not to be unreasonably withheld. 5.3 APPROVALS. The Company and Acquiror will use their respective commercially reasonable efforts to obtain all Approvals necessary for the consummation of the transactions contemplated hereby (including, without limitation, the requisite consent of or waiver by the other parties to any financing agreements). 5.4 NO SOLICITATION. The Company shall not, and shall not permit any of its Subsidiaries or any of their respective directors, officers, employees, Representatives or agents to encourage, solicit or initiate, enter into discussions or negotiations concerning, respond to, provide any information to, or consult with any third party Person concerning, any Acquisition Proposal. As used herein, the term "ACQUISITION PROPOSAL" shall mean a proposal for the acquisition (by merger, stock purchase or otherwise) of the Company, any or all of its Subsidiaries, or all or any material portion of their respective or collective assets. - 36 - 5.5 HSR NOTIFICATION. 5.5.1 Filings. As soon as practicable after the execution of this Agreement, if required, each of the Company and Acquiror (or their Ultimate Parent Entity as defined in the rules promulgated under the HSR Act) shall file, or cause to be filed, all filings, submissions, notifications and documentary material under any Laws applicable to the Company or its Subsidiaries, as the case may be, required in connection with consummation of the transactions contemplated by this Agreement, including (a) with the FTC and the Antitrust Division of the DOJ pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR ACT") and any other U.S. Laws applicable to the Company or Acquiror, and (b) with the applicable Canadian Governmental Entity and other applicable Governmental Entities pursuant to their respective competition laws applicable to the Company, Acquiror and the Merger ("FOREIGN HSRS"). 5.5.2 Cooperation. The Company and Acquiror (and the appropriate respective Persons) shall promptly file any additional information requested as soon as practicable after receipt of a request for additional information. The Company and Acquiror shall use their commercially reasonable efforts to obtain early termination of the applicable waiting period under the HSR Act. The parties hereto will coordinate and cooperate with one another in exchanging such information and providing such reasonable assistance as may be requested in connection with such filings. The Company and Acquiror shall keep each other apprised of the status of any material communications with, and any inquiries or requests for additional information from, the FTC, the DOJ or any other Governmental Entity and shall comply promptly with any such inquiry or request. The Company and Acquiror shall each bear its own costs and expenses incurred in connection with this Section 5.5, including any filing fees payable by such party under the HSR Act and any Foreign HSRs. 5.6 COMPANY'S CONSENT REQUIRED PRIOR TO DISCUSSIONS WITH SECURITY HOLDERS. Acquiror shall not, without the Company's prior written consent, engage in substantive discussions with, or make any proposals to, any of the holders (or their representatives) of any of the indebtedness for borrowed money or other securities of the Company or its Subsidiaries (including, without limitation, Senior Preferred Stock and Junior Preferred Stock) or of any indebtedness for which the Company or its Subsidiaries is a guarantor, or to or with any party who has issued a letter of credit that benefits the Company or its Subsidiaries. 5.7 FINANCING. 5.7.1 The Company and its Subsidiaries shall each reasonably cooperate, and shall request the Company's auditors to reasonably cooperate, on a timely basis with Acquiror and Acquiror's auditors in their preparation of any financial statements that are required in connection with the financing of the purchase of the Company and its Subsidiaries. The cooperation required of the Company and its Subsidiaries shall include providing reasonable and customary management and legal representations to KPMG LLP, and the cooperation requested of their auditors shall include providing consents to Acquiror to use their audit reports on the Company and its Subsidiaries and to provide any necessary "comfort letters." - 37 - 5.7.2 Without limitation of the foregoing Section 5.7.1, each of the Company and its Subsidiaries agree to provide, and will request their respective Representatives to provide, reasonable cooperation in connection with the arrangement of financing by Acquiror to be consummated prior to or at the Closing in respect of transactions contemplated by this Agreement. Such cooperation shall include, to the extent reasonable and customary, arranging for senior officers of the Company and its Subsidiaries to meet with prospective lenders and investors in presentations, meetings, road shows and due diligence sessions, and assistance with the preparation of offering memoranda, private placement memoranda, prospectuses and similar documents. 5.7.3 Acquiror shall use its commercially reasonable best efforts to enter into definitive documentation with respect to the financing contemplated by Section 4.5. Without limiting the generality of the preceding sentence, Acquiror shall use its commercially reasonable best efforts to negotiate and finalize definitive loan documentation for the Debt Financing. Acquiror shall keep the Company reasonably informed as to the status of the Debt Financing. If at any time any portion of the Debt Financing becomes unavailable on terms that are not materially less favorable to Acquiror than those in the Commitment Letter, Acquiror shall inform the Company and shall use its commercially reasonable best efforts to obtain replacement Debt Financing on terms substantially comparable to those terms set forth in the Commitment Letter. For the avoidance of doubt, nothing herein shall limit the ability of Acquiror to pursue alternative financing prior to the time set forth in the preceding sentence so long as Acquiror either (i) continues to use its commercially reasonable best efforts to pursue the Debt Financing or (ii) obtains commitment letters with respect to such alternative financing that are acceptable to the Securityholders' Representative in its sole discretion. 5.8 COVENANT TO SATISFY CONDITIONS. The Company will use all commercially reasonable efforts to cause the conditions set forth in Section 6.3.1(a) hereof to be satisfied, insofar as such matters are within the control of the Company, and Acquiror will use all commercially reasonable efforts to cause the conditions set forth in Section 6.2.1(a) hereof to be satisfied, insofar as such matters are within the control of Acquiror. Each party hereto shall promptly consult with the other parties with respect to, and provide to the other parties any legally permitted information and copies of and assistance with all filings made by such party with any Governmental Entity or any other information supplied by such party to a Governmental Entity (other than confidential personnel information) in connection with this Agreement and the transactions contemplated hereby. The Company and Acquiror further covenant and agree, with respect to a pending or threatened preliminary or permanent injunction or other Order or Law that would adversely affect the ability of the parties hereto to consummate the transactions contemplated hereby, to use commercially reasonable efforts to prevent or lift the entry, enactment or promulgation thereof, as the case may be. 5.9 FURTHER ASSURANCES. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use all commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable Law to consummate and make effective the transactions contemplated by this Agreement, including closing the transactions by February 28, 2004. - 38 - 5.10 INDEMNIFICATION, EXCULPATION. 5.10.1 To the full extent permitted by law, all rights to indemnification and exculpation (including the advancement of expenses) from liabilities for acts or omissions occurring at or prior to the Effective Time (including with respect to the transactions contemplated by this Agreement) existing as of the date hereof in favor of the current or former directors, officers and employees of the Company, as provided in the Company's or any Subsidiary's certificate of incorporation and/or bylaws and/or any indemnification agreements as in effect on the date hereof and pursuant to applicable Law shall be assumed by the Surviving Corporation in the Merger, without any further action on the part of any Person, as of the Effective Time and shall survive the Merger and shall continue in full force and effect in accordance with their terms for a period of not less than six (6) years after the Effective Time; provided, however, that if any claims are asserted or made within such period, all rights to indemnification (and to advancement of expenses) hereunder in respect of any such claims shall continue, without diminution, until disposition of any and all such claims. 5.10.2 Notwithstanding anything herein to the contrary, the Company shall be entitled to purchase a runoff policy for its directors and officers liability insurance if the full cost of such insurance is paid prior to the Closing or is reflected as a liability in Working Capital. 5.10.3 The provisions of this Section 5.10 are intended to be for the benefit of, and will be enforceable by, each indemnified party, his or her heirs and his or her representatives. 5.11 SENIOR PREFERRED STOCK; JUNIOR PREFERRED STOCK. The Company or CPI may, at its option, offer to purchase some or all of the outstanding Junior Preferred Stock or Senior Preferred Stock from the holders thereof, which purchase may be contingent on the occurrence of the Closing. In connection with any such offer, the Company may seek the approval of the holders of Junior Preferred Stock and Senior Preferred Stock with respect to changes in the terms thereof, provided, that any such changes shall not be made or proposed without the consent of Acquiror, which consent shall not be unreasonably withheld or delayed. The Company shall keep Acquiror informed with respect to any such actions and the means by which any such offer is made or approval is sought and any documentation with respect thereto shall be subject to the approval of Acquiror which approval shall not be unreasonably withheld or delayed. If any shares of Junior Preferred Stock are outstanding on the Closing Date, (i) the Surviving Corporation shall cause CPI to mail a notice of redemption in accordance with the terms of Section B(2)(e) of Article FOUR of CPI's Restated Certificate of Incorporation no later than the first Business Day following the Closing Date (it being understood that such notice of redemption shall provide for such shares of Junior Preferred Stock to be redeemed no later than the first day following the date such is notice given that such shares of Junior Preferred Stock are permitted to be redeemed in accordance with the terms of Section B(2)(e) of Article FOUR of CPI's Restated Certificate of Incorporation and that the Junior Preferred Stock is being redeemed at the "Optional Redemption Price" pursuant to Section B(2)(e)(i) of Article FOUR of CPI's Restated Certificate of Incorporation) and (ii) the Company shall have obtained on or prior to the Closing Date a waiver (the "JUNIOR PREFERRED WAIVER"), in - 39 - form and substance reasonably satisfactory to Acquiror, by the requisite holders of Junior Preferred Stock pursuant to Section B(2)(f)(ii)(C) of Article FOUR of CPI's Restated Certificate of Incorporation of compliance with (A) Section B(2)(c)(v) and (vi) of Article FOUR of CPI's Restated Certificate of Incorporation and any other restriction contained in Section B(2) of Article FOUR of CPI's Restated Certificate of Incorporation upon CPI transferring funds (by dividend or otherwise) to the Company or the Surviving Corporation, (B) Sections B(2)(g) and B(2)(h) of Article FOUR of CPI's Restated Certificate of Incorporation and (C) Section B(2)(f)(ii) (other than clause (C) thereof). If any shares of Senior Preferred Stock are outstanding on the Closing Date, (i) the Surviving Corporation shall cause CPI to mail a notice of redemption in accordance with the terms of Section B(1)(e) of Article FOUR of CPI's Restated Certificate of Incorporation no later than the first Business Day following the Closing Date (it being understood that such notice of redemption shall provide for such shares of Senior Preferred Stock to be redeemed no later than the first day following the date such notice is given that such shares of Senior Preferred Stock are permitted to be redeemed in accordance with the terms of Section B(1)(e) of Article FOUR of CPI's Restated Certificate of Incorporation and that the Senior Preferred Stock is being redeemed at the "Optional Redemption Price" pursuant to Section B(1)(e) of Article FOUR of CPI's Restated Certificate of Incorporation) and (ii) the Company shall have obtained on or prior to the Closing Date a waiver (the "SENIOR PREFERRED WAIVER"), in form and substance reasonably satisfactory to Acquiror, by the requisite holders of Senior Preferred Stock pursuant to Section B(1)(f)(ii)(C) of Article FOUR of CPI's Restated Certificate of Incorporation of compliance with (A) Sections B(1)(c)(v) and (vi) of Article FOUR of CPI's Restated Certificate of Incorporation and any other restriction contained in Section B(1) of Article FOUR of CPI's Restated Certificate of Incorporation upon CPI transferring funds (by dividend or otherwise) to the Company or the Surviving Corporation, (B) Section B(1)(f)(ii) (other than clause (ii)(C) thereof) and (iii) of Article FOUR of CPI's Restated Certificate of Incorporation, (C) Section B(1)(h) of Article FOUR of CPI's Restated Certificate of Incorporation and (D) Section B(1)(m) of Article FOUR of CPI's Restated Certificate of Incorporation. 5.12 SENIOR SUBORDINATED NOTES. The Company shall do (or, if applicable, shall cause its Subsidiaries to do) one or more of the following at its sole option: (a) simultaneously with the Closing, effect a covenant defeasance of the Senior Notes pursuant to Section 8.03 of the Indenture (using funds to be provided by the financing at the Closing), (b) prior to the Closing, offer to purchase, contingent upon the occurrence of the Closing, some or all of the outstanding Senior Notes at a price to be determined by the Company in its sole discretion, and, at its option, solicit in connection therewith consents with respect to amendments of the Indenture to eliminate or make inapplicable the covenants described in the first sentence of Section 8.03 of the Indenture and any such other amendments as the Company shall determine, which other amendments shall require the prior approval of Acquiror, not to be unreasonably withheld, or (c) prior to the Closing issue a redemption notice for the Senior Notes in accordance with Section 3.03 of the Indenture, and thereafter redeem the Senior Notes in accordance with Section 3.07 of the Indenture either (i) prior to the Closing, with funds to be borrowed by the Company (so long as such borrowing is repaid in full at the Closing) or (ii) at the Closing, with a combination of cash on hand and amounts to be funded by CPI at Closing. The Company shall keep Acquiror informed with respect to any such actions and the means by which any such offer is made or approval is sought and any documentation with respect to any of the foregoing shall be - 40 - subject to the approval of Acquiror, which approval shall not be unreasonably withheld or delayed. In the event that any Senior Notes are outstanding as of the Closing Date, the Surviving Corporation shall cause CPI to mail a redemption notice in accordance with the terms of Section 3.03 of the Indenture no later than the first Business Day following the Closing Date calling for the redemption of the Senior Notes pursuant to Sections 3.03 and 3.07 of the Indenture (it being understood that such redemption notice shall provide for the Senior Notes to be redeemed no later than the first day following the date such notice is mailed that the Senior Notes are permitted to be redeemed pursuant to Section 3.03 of the Indenture). 5.13 GOVERNMENT CONTRACTS. Promptly following the date hereof, (a) the Company and Acquiror shall meet and confer (i) to identify the Government Contracts that they mutually agree are strategically the most important to the Company's continuing Business; and (ii) to agree upon a communications plan for notifying the customers under the Government Contracts identified under (i) above regarding the transactions contemplated by this Agreement; (b) the Company shall promptly notify its Government Contract customers pursuant to the plan agreed upon under (a)(ii) above; and (c) the Company shall promptly notify Acquiror of the customers' responses to the notification given pursuant to (b) above. 5.14 NOTIFICATION. The Company shall disclose to Acquiror in writing in reasonable detail any material variances from the representations and warranties contained in Article III and any other fact or event that would cause or constitute a breach in the covenants in this Agreement made by the Company, any of its Subsidiaries or the Securityholders' Representative, promptly upon discovery thereof. Such disclosures shall not be deemed to amend or supplement the Company Schedules delivered on the date hereof or cure any misrepresentation or breach. The Company shall give prompt notice to Acquiror of any event or circumstance known to the Company or the Securityholders' Representative that would constitute a material breach or non-compliance with any of the terms or conditions of, or agreements of the Company under, this Agreement. 5.15 CONSULTATION WITH RESPECT TO EXECUTIVE COMPENSATION. Notwithstanding anything to the contrary contained in this Agreement regarding the acceleration of Stock Options or the payment of employee bonuses constituting "Specified Bonuses" in connection with or arising out of the transactions contemplated by this Agreement, Acquiror and the Company will consult with each other (including, without limitation, with respect to (i) the determination of which employees require the requisite approval of stockholders referred to Section 1.2.1 or (ii) any other stockholder approval designed to satisfy Section 280G(b)(5)(ii) has been obtained) prior to the Closing concerning whether any such acceleration of Stock Options or payment of such Specified Bonuses, alone or in conjunction with other benefits or payments to be provided to any employee of the Company would result in such employee being deemed to have received an "excess parachute payment" within the meaning of Section 280G of the Code; and, if Acquiror reasonably concludes that any such benefit or payment would so result in an "excess parachute payment," then the Company shall cause the acceleration of Stock Options and the payment of such Specified Bonuses, and/or the payment of other benefits or payments to be provided to such employee to be reduced to the minimum amount necessary to avoid an "excess parachute payment." - 41 - ARTICLE VI CONDITIONS TO OBLIGATIONS 6.1 GENERAL CONDITIONS. The obligations of the parties to consummate the Merger shall be subject to the following conditions unless waived in writing by the parties hereto: 6.1.1 No Law or Orders. No Law or Order shall have been enacted, entered, issued or promulgated by any Governmental Entity (and be in effect) that prohibits or materially restricts the Merger; provided, however, that each party hereto shall have used its commercially reasonable efforts to prevent or contest any such Order. 6.1.2 HSR. Any applicable waiting period under the HSR Act shall have expired or shall have been terminated with respect to the Merger and the Approvals of Governmental Entities listed on Schedule 6.1.2 shall have been obtained. 6.2 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY. The obligation of the Company to consummate the Merger shall be subject to the satisfaction on or prior to the Closing Date of each of the following conditions precedent, any of which may be waived by the Company: 6.2.1 Accuracy of Representations and Performance of Obligations by Acquiror and Merger Sub. (a) All representations and warranties made by Acquiror and Merger Sub in this Agreement, any Schedule or any agreement, certificate or instrument to be executed by Acquiror and Merger Sub pursuant hereto shall be true and correct in all respects on the date when made and as of the Closing Date (other than those representations and warranties that address matters as of particular dates, which shall be true and correct in all respects as of such particular dates), except where such failures have not affected or interfered with, and could not reasonably be expected to affect or interfere with, Acquiror's or Merger Sub's ability to perform its obligations hereunder or to consummate the transactions contemplated hereby. (b) Acquiror and Merger Sub shall have performed or complied in all material respects with all covenants and conditions contained in this Agreement, any Schedule or any agreement, certificate or instrument to be executed by Acquiror or Merger Sub pursuant hereto required to be performed or complied with by Acquiror or Merger Sub either at or prior to the Closing Date. (c) At the Closing, Acquiror and Merger Sub shall deliver to the Company a certificate of the president or any vice president and secretary or any assistant secretary of Acquiror and Merger Sub to the foregoing effect. 6.2.2 Acquiror Deliveries. Acquiror shall have delivered, or shall have caused to be delivered to the Company, the following: - 42 - (a) a certified copy of the resolutions duly adopted by the board of directors of Acquiror and Merger Sub, or an appropriate committee thereof, authorizing this Agreement and the other agreements and instruments contemplated hereby and the transactions contemplated hereby and thereby; and (b) such other documents, instruments or certificates as shall be reasonably requested by the Company or its counsel. 6.3 CONDITIONS PRECEDENT TO OBLIGATION OF ACQUIROR AND MERGER SUB. The obligation of Acquiror and Merger Sub to consummate the Merger shall be subject to the satisfaction on or prior to the Closing Date of each of the following conditions precedent, any of which may be waived by Acquiror: 6.3.1 Accuracy of the Company's Representations and Performance of Obligations. (a) All representations and warranties made by the Company in this Agreement, any Schedule or any agreement, certificate or instrument to be executed by the Company pursuant hereto shall be true and correct in all respects without regard to any materiality qualifiers (including Material Adverse Effect), on the date when made and as of the Closing Date (other than those representations and warranties that address matters as of particular dates, which shall be true and correct in all respects without regard to materiality qualifiers (including Material Adverse Effect) as of such particular dates), except where such failures, individually and in the aggregate, have not had, and could not reasonably be expected to have, a Material Adverse Effect. (b) The Company shall have performed or complied in all material respects with all covenants and conditions contained in this Agreement, any Schedule or any agreement, certificate or instrument to be executed by the Company pursuant hereto required to be performed or complied with by the Company either at or prior to the Closing Date. (c) At the Closing, the Company shall deliver to Acquiror a certificate of the president or any vice president and secretary or any assistant secretary of the Company to the foregoing effect. 6.3.2 Company Adverse Changes. There shall not have occurred after the date hereof any event, occurrence or development that has had or could reasonably be expected to have a Material Adverse Effect. 6.3.3 The Company's Approvals. The Company shall have given or obtained, on terms reasonably satisfactory to Acquiror, the Approvals set forth on Schedule 6.3.3. 6.3.4 The Company and its Subsidiaries shall have terminated the agreements, arrangements and understandings listed on Schedule 6.3.4 on terms and conditions reasonably satisfactory to Acquiror. - 43 - 6.3.5 Deliveries. The Company shall have delivered, or shall have caused to be delivered, to Acquiror at or prior to the Closing Date the following: (a) to the extent requested by Acquiror, resignations of the directors of the Company and each of its Subsidiaries, effective as of the Closing; (b) a certified copy of the resolutions duly adopted by the board of directors of the Company, or an appropriate committee thereof, authorizing this Agreement and the other agreements and instruments contemplated hereby and the transactions contemplated hereby and thereby; (c) a certificate in accordance with Treasury Regulation Section 1.1445-2(c)(3) that the Company is not a U.S. real property holding corporation under Section 897(c)(2) of the Code; (d) payoff letters and UCC-3 termination statements relating to the satisfaction of the Indebtedness set forth in Schedule 6.3.5, all in form and substance satisfactory to Acquiror; and (e) such other documents, instruments or certificates as shall be reasonably requested by Acquiror or its counsel. 6.3.6 Financing. Acquiror and/or Merger Sub shall have obtained the Debt Financing for CPI on terms that are not materially less favorable to Acquiror than those set forth in the Commitment Letter (including the term sheets attached thereto). 6.3.7 Senior Notes. Any of the following shall occur or, as applicable, shall have occurred and the Company shall have delivered to Acquiror evidence thereof, in form and substance reasonably satisfactory to Acquiror: (i) all of the Senior Notes shall be repurchased at or prior to the Closing, (ii) a covenant defeasance shall have occurred pursuant to the Section 8.03 of the Indenture, or (iii) the Indenture shall have been amended to eliminate or make inapplicable the covenants described in the first sentence of Section 8.03 of the Indenture and the events of default described in the last sentence of Section 8.03 of the Indenture. 6.3.8 Senior Preferred Stock; Junior Preferred Stock. If (a) any of the Junior Preferred Stock is outstanding on the Closing Date, then the Junior Preferred Waiver shall have been obtained, shall be in full force and effect and shall be in form and substance reasonably satisfactory to Acquiror and (b) any of the Senior Preferred Stock is outstanding on the Closing Date, then the Senior Preferred Waiver shall have been obtained, shall be in full force and effect and shall be in form and substance reasonably satisfactory to Acquiror. ARTICLE VII INDEMNIFICATION 7.1 INDEMNIFICATION FOR THE BENEFIT OF ACQUIROR INDEMNIFIED PARTIES. From and after the Closing, but subject to the conditions and limitations set forth in this Agreement, the Acquiror Indemnified Parties shall be indemnified and held harmless from and against Losses resulting from or arising out of any - 44 - (i) breach of any representation or warranty of the Company contained herein or (ii) non-fulfillment or breach of any pre-Closing covenant of the Company contained herein, as set forth in, and pursuant to the terms and subject to the conditions and limitations of, the Voting and Indemnification Agreement. It is understood that from and after the Closing, the sole and exclusive remedy of the Acquiror Indemnified Parties with respect to any and all claims arising out of or relating to this Agreement and the transactions contemplated hereby (other than for fraud or for breaches that constitute bad faith) shall be pursuant to the indemnification provisions of the Voting and Indemnification Agreement. 7.2 INDEMNIFICATION FOR THE BENEFIT OF COMPANY INDEMNIFIED PARTIES. From and after the Closing, but subject to the conditions and limitations set forth in this Agreement, Acquiror shall defend, indemnify and save the Company Indemnified Parties harmless from and against any and all Losses whatsoever resulting from or arising out of any (i) breach of any surviving representation or warranty of Acquiror contained herein, which breach shall be determined without regard to materiality qualifiers (including Material Adverse Effect) and (ii) non-fulfillment or breach of any covenant of Acquiror contained herein. Notwithstanding anything to the contrary contained in this Agreement, after the Closing (i) Acquiror shall not be obligated to indemnify or hold harmless the Company Indemnified Parties with respect to any Losses resulting from breaches of Acquiror's or Merger Sub's representations and warranties contained herein until the aggregate amount of such Losses exceeds $1,000,000, and then Acquiror shall only be liable to pay such Losses hereunder in excess of $1,000,000, and (ii) the total maximum aggregate indemnification payments by Acquiror pursuant to this Section 7.2 shall not exceed $20,000,000 in the aggregate. The foregoing limitations shall not apply to any non-fulfillment or breach of any covenants to be performed at or after the Closing. For purposes of indemnification provided in this Article VII, the representations and warranties contained herein shall be deemed to be made as of the date hereof and as of the Closing Date; provided, however, that any representations and warranties that address matters as of a particular date shall be deemed to have been made as of such date. 7.3 CLAIMS. 7.3.1 If a Company Indemnified Party (the "CLAIMANT") desires to make a claim pursuant to this Article VII, the Claimant shall give prompt written notice to Acquiror (in such capacity, the "INDEMNITY REPRESENTATIVE") of the amount and circumstances surrounding the same and the amount (estimated, if necessary) of the Loss incurred or reasonably expected to be incurred in respect of any such claim; provided that the failure to so notify an Indemnity Representative shall not relieve the Indemnity Representative of its obligations hereunder except to the extent prejudiced thereby. If the Indemnity Representative notifies the Claimant that it disputes the Claimant's right of indemnification with respect to any such claim for indemnification, then the Claimant and the Indemnity Representative shall use reasonable efforts to resolve such dispute. If the Claimant and the Indemnity Representative reach a written agreement as to the amount of Losses payable to the Claimant in respect of such claim, the Indemnity Representative shall be required to pay to the Claimant the amount of such Losses within fifteen (15) days after the date of such written agreement. - 45 - 7.3.2 With respect to indemnification claimed by a Claimant with respect to a third party claim or Action ("CLAIM"), the Claimant (a) shall give prompt written notice to the Indemnity Representative of (i) the institution of such Claim at any time instituted against or made upon Claimant in connection with which the Claimant could claim indemnification; provided, that the failure to so notify the Indemnity Representative shall not relieve the Indemnity Representative of its obligations hereunder except to the extent prejudiced thereby and (ii) to the extent known, of the amount and circumstances surrounding the same, and (b) shall permit the Indemnity Representative, at its option, to assume and control the defense against such Claim through counsel of its choice (which counsel shall be reasonably satisfactory to the Claimant) if the Indemnity Representative gives written notice of its intention to do so to the Claimant within thirty (30) calendar days after the receipt of notice of such Claim from Claimant. If the Indemnity Representative does not notify the Claimant within thirty (30) calendar days after the receipt of the Claimant's notice of a claim of indemnity hereunder that it elects to undertake the defense of such Claim, the Claimant shall have the right to contest the Claim but shall not thereby waive any right to indemnity therefor pursuant to this Agreement. In the event that the Indemnity Representative undertakes the defense against any such Claim as provided above, the Claimant shall cooperate with the Indemnity Representative in such defense and make available to the Indemnity Representative, all witnesses, pertinent records, materials and information in its possession or under its control reasonably relating thereto as is reasonably required by the Indemnity Representative. Any Claimant shall be entitled to participate in the defense of such Claim and to employ counsel of its choice for such purpose; provided, that the fees and expenses of such separate counsel shall be borne by the Claimant. No such Claim may be settled by the Indemnity Representative without the written consent of the Claimant, provided that such consent shall not be withheld or delayed unless, as a result of such settlement, injunctive or other equitable relief will be imposed against the Claimant or such settlement does not expressly and unconditionally release the Claimant from all liabilities and obligations with respect to such Claim. If the Indemnity Representative has assumed the defense of a Claim, no such Claim may be settled by the Claimant without the prior written consent of the Indemnity Representative, which consent shall not be unreasonably withheld or delayed. In the event that the Indemnity Representative elects to assume and control the defense of such Claim as provided in this Section 7.3, the Indemnity Representative shall bear the costs of such defense. 7.4 TIME LIMITATION ON CLAIMS FOR INDEMNIFICATION. 7.4.1 Any claim for indemnification under Section 7.2 must be asserted in writing in accordance with the provisions of Section 7.3 and must be asserted within the time period for survival of the provision of this Agreement upon which such claim is based, as set forth in Section 9.1. 7.4.2 So long as any claim is asserted in writing in accordance with the provisions of this Agreement on or prior to the time limitations set forth in this Section 7.4, any right to indemnification under this Agreement shall survive such time period through and until the validity of such claim is finally determined. None of Acquiror, Merger Sub or the Surviving Corporation shall have any liability hereunder with respect to any claim that is not brought within the time limits set forth in this Section 7.4. - 46 - 7.5 ADDITIONAL LIMITATIONS ON INDEMNIFICATION. Each Claimant shall use its commercially reasonable efforts to pursue available third party insurance, indemnification, contribution or similar claims in respect of which a notice of claim is submitted to the Indemnity Representative to the same extent as it would if any Losses were not subject to indemnification hereunder; provided that failure to take any such actions shall not relieve Acquiror of its obligations hereunder. The amount of Acquiror's liability under this Agreement shall be determined net of any applicable insurance proceeds actually received by the respective Claimant and any indemnity, contribution or other similar payment actually received by such Claimant from any third party with respect thereto (in each case, net of any expenses incurred by the Claimant in collecting such amount, including the cost of maintaining any such insurance policy), in each case to the extent actually received prior to the time such Claimant receives a payment (an "INDEMNITY PAYMENT") required by this Agreement in respect of any claim hereunder. In addition, if a Claimant receives an Indemnity Payment and subsequently actually receives any proceeds from any third party indemnification, contribution, insurance or similar claim with respect to such claim (the "RECOVERED PROCEEDS"), then such Claimant will pay to Acquiror an amount equal to the excess of the Indemnity Payment received over the amount of the Indemnity Payment that would have been due from Acquiror to such Claimant if the Recovered Proceeds (in each case, net of any expenses incurred by such Claimant in collecting such amount, including the cost of maintaining any such insurance policy) had been received, realized or recovered before the Indemnity Payment was made. 7.6 THIRD PARTY BENEFICIARIES. The provisions of this Article VII are intended to be for the benefit of, and will be enforceable by the Company Indemnified Parties. 7.7 SOLE REMEDY. From and after the Closing, the sole and exclusive remedy of the Company Indemnified Parties with respect to any and all claims arising out of or relating to this Agreement and the transactions contemplated hereby (other than for fraud or for breaches that constitute bad faith) shall be pursuant to the indemnification provisions of this Agreement. 7.7 EFFECT OF INDEMNIFICATION PAYMENTS. The parties hereto agree that any payments in respect of Acquiror's indemnification obligations pursuant to this Agreement shall be treated as an adjustment to the Merger Consideration. ARTICLE VIII TERMINATION 8.1 TERMINATION. This Agreement may be terminated at any time before Closing: 8.1.1 by the mutual consent of Acquiror and the Company; 8.1.2 by either Acquiror (if neither Acquiror nor Merger Sub is in material breach of its covenants, representations or warranties hereunder) or the Company (if not in material breach of its covenants, representations or warranties hereunder) by notice to the - 47 - other if the Merger shall not have occurred by February 28, 2004 (such date, as extended, the "TERMINATION DATE"); 8.1.3 by the Company by notice to Acquiror if either Acquiror or Merger Sub is in material breach of its covenants, representations or warranties hereunder and such breach either is incapable of cure or is not cured within fifteen (15) days after receipt of notice from the Company; and 8.1.4 by Acquiror by notice to the Company if the Company is in material breach of its covenants, representations or warranties hereunder and such breach either is incapable of cure or is not cured within fifteen (15) days after receipt of notice from Acquiror. 8.2 RIGHTS AFTER TERMINATION. Upon termination of this Agreement as provided in Section 8.1 above, the parties shall be released from all obligations arising hereunder and this Agreement shall become void and of no further force and effect; provided, however, that termination shall not affect (i) the rights and remedies available to the Company as a result of any breach of this Agreement by Acquiror or Merger Sub, (ii) the rights and remedies available to Acquiror or Merger Sub as a result of any breach of this Agreement by the Company, and (iii) the provisions of Sections 3.17 and 4.4, and Article IX. ARTICLE IX MISCELLANEOUS 9.1 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND PRE-CLOSING COVENANTS. Except for the representations and warranties respecting the Company in Section 3.14, which shall survive for a period of three (3) years following the Closing Date, each and every other representation and warranty contained herein shall survive the Closing Date for a period of fourteen (14) months. The pre-closing covenants of Acquiror and the Company contained herein shall survive for a period of fourteen (14) months following the Closing Date, and all other covenants shall survive the Closing Date in accordance with their terms. 9.2 EXPENSES. (a) Each of Acquiror and Merger Sub shall pay all of its own costs and expenses (including, without limitation, attorneys', accountants' and investment bankers' fees) incurred in connection with this Agreement and the transactions contemplated hereby and (b) the Company shall pay all of its costs and expenses (including, without limitation, attorneys', accountants' and investment bankers' fees) incurred in connection with this Agreement and the transactions contemplated hereby, provided that, in the event that the Closing occurs, the Transaction Expenses shall either be paid by the Company prior to the Closing or, if unpaid prior to the Closing, shall be borne by the Securityholders as provided in the definition of "Merger Consideration" and subject to the Voting and Indemnification Agreement. 9.3 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given upon receipt if delivered personally or sent by facsimile transmission (receipt of which is confirmed) or by courier service promising overnight - 48 - delivery (with delivery confirmed the next day) or three (3) Business Days after deposit in the U.S. Mails, first class postage prepaid. Notices shall be addressed as follows: To the Company: Communications & Power Industries, Inc. 811 Hansen Way, Mail Stop A-028 Palo Alto, California 94303 Attention: Joel A. Littman Facsimile: (650) 846-3276 With a copy to: Green Equity Investors II, L.P. c/o Leonard Green & Partners, L.P. 11111 Santa Monica Boulevard, Suite 2000 Los Angeles, California 90025 Attention: John M. Baumer Facsimile: (310) 954-0404 With a copy to: Irell & Manella LLP 1800 Avenue of the Stars, Suite 900 Los Angeles, California 90067 Attention: Richard C. Wirthlin, Esq. Facsimile: (310) 203-7199 To Acquiror or Merger Sub: CPI Acquisition Corp. CPI Merger Sub Corp. c/o The Cypress Group L.L.C. 65 East 55th Street New York, New York 10022 Attention: Michael F. Finley Facsimile: (212) 705-0199 With a copy to: Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York 10017 Attention: Marni J. Lerner, Esq. Facsimile: (212) 455-2502

Any party may from time to time change its address for the purpose of notices by a similar notice specifying the new address but no such change shall be effective as against any Person until such Person shall have actually received it. 9.4 ENTIRE AGREEMENT. This Agreement, including the Schedules and Exhibits hereto (although Schedules shall be delivered separately to each party and shall not be attached to this Agreement), the Voting and Indemnification Agreement, the Escrow Agreement and any other agreements entered into on the date hereof between or among the Company and/or the Stockholders' Representative, on the one hand, and Acquiror and/or Merger Sub, on the other hand, constitute the entire agreement between the parties with respect to the transactions contemplated hereby and supersede all written or verbal representations, warranties, commitments and other understandings prior to the date hereof - 49 - except for the Confidentiality Agreement, which shall continue in full force and effect and shall survive any termination of this Agreement in accordance with its terms (it being understood that the Confidentiality Agreement shall terminate upon the Closing). No reference shall be made to any draft of this Agreement or of any Schedule or Exhibit hereto for purposes of interpretation or resolution of ambiguity or otherwise. 9.5 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 9.6 SEVERABILITY. If any provision of this Agreement shall be held to be unenforceable or invalid by any court of competent jurisdiction or as a result of future legislative action, such holding or action shall be strictly construed and shall not alter the enforceability, validity or effect of any other provision of this Agreement. 9.7 ASSIGNABILITY. This Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of the parties hereto; provided, however, that neither this Agreement nor any right or obligation hereunder may be assigned by (i) the Company or the Securityholders' Representative without the prior written consent of Acquiror and Merger Sub or (ii) Acquiror or Merger Sub without the prior written consent of the Company, or after the Closing, the Securityholders' Representative; provided that Acquiror may assign its rights hereunder to an Affiliate of Acquiror without such consent as long as such assignment does not limit or affect Acquiror's obligations hereunder. 9.8 THIRD PARTY BENEFICIARIES. The terms and provisions of this Agreement are intended solely for the benefit of each of the parties hereto and their respective successors and permitted assigns, and it is not the intention of the parties hereto to confer third party beneficiary rights, and this Agreement does not confer any such rights, upon any other Person other than any Person entitled to indemnity under Section 5.10 hereof and/or Article VII hereof. 9.9 NO REPRESENTATIONS BY SECURITYHOLDERS' REPRESENTATIVE. The parties agree and acknowledge that GEI (i) is executing this Agreement solely in its capacity as the Securityholders' Representative, (ii) is not making any representation or warranty, express or implied, of any nature whatsoever with respect to itself or the Company or its Subsidiaries, and (iii) shall not have any liability whatsoever with respect to any representations, warranties, covenants or other agreements of the Company contained in this Agreement other than any liability therefor as expressly provided pursuant to the Voting and Indemnification Agreement of GEI. The Securityholders' Representative shall have no liability to the Company, any securityholder thereof or any Person claiming by or through any of the foregoing for any actions taken pursuant to this Agreement except to the extent that a court of competent jurisdiction determines in a final, nonappealable judgment that the Securityholders' Representative committed gross negligence or willful misconduct in its capacity as the Securityholders' Representative hereunder. 9.10 CAPTIONS. The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this - 50 - Agreement. The inclusion of section headings in the Schedules is for convenience only, and any reference to the "Schedules" in a section of this Agreement shall be deemed to refer to (i) the section or subsection of the Schedules in which such reference is made and (ii) any other section of the Schedules to the extent that it is reasonably apparent from the face of such disclosure that such disclosure qualifies such section or subsection of this Agreement. 9.11 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to any principles of conflict of laws. 9.12 AMENDMENT AND WAIVER. This Agreement may be amended, modified or supplemented only by an instrument in writing signed by each of the Company (or, if after the Effective Time, then the Surviving Corporation), Acquiror, and the Securityholders' Representative. No waiver by any party of any of the provisions hereof shall be effective unless set forth in writing and executed by the party so waiving. 9.13 CONFIDENTIALITY. Acquiror and the Company agree and acknowledge that they will continue to be bound by the terms and conditions of the letter agreement, dated July 15, 2003, between Bear Stearns & Co. Inc., as representative of CPI, and The Cypress Group, L.L.C. (as amended and supplemented from time to time, the "CONFIDENTIALITY AGREEMENT") until the earlier of the Closing Date and the date upon which the Confidentiality Agreement terminates in accordance with its terms. 9.14 MATERIALITY AND IMMATERIALITY. None of the threshold dollar amounts listed herein shall be deemed an admission that an amount greater than such threshold is material or that an amount less than such threshold is immaterial. The inclusion of any item in a Schedule shall not be deemed an admission that such item is material or that the impact of such item could constitute a Material Adverse Effect. 9.15 PUBLICITY. Except for disclosures required by Law or contract (in which case Acquiror or the Company, as applicable, will have the right to review any such disclosures prior to its issuance, publication or distribution), neither party hereto will make any public statement with respect to this Agreement or the transactions contemplated hereby without the approval of the other parties hereto. 9.16 CONSENT TO JURISDICTION; NO JURY TRIAL. Any legal action, suit or proceeding arising out of or relating to this Agreement may be instituted in any federal court in the Southern District of New York, and each party waives any objection that such party may now or hereafter have to the laying of the venue of any such action, suit or proceeding, and irrevocably submits to the jurisdiction of any such court. Any and all service of process and any other notice in any such action, suit or proceeding will be effective against any party if given as provided herein. THE PARTIES HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY OF THEM AGAINST ANY OTHER PARTY IN ANY MATTERS ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT. - 51 - ARTICLE X DEFINITIONS 10.1 CERTAIN TERMS. For all purposes of this Agreement, except as otherwise expressly provided: 10.1.1 the terms defined in this Article X have the meanings assigned to them in this Article X and include the plural as well as the singular; 10.1.2 all accounting terms not otherwise defined herein have the meanings assigned under GAAP; 10.1.3 all references in this Agreement to designated "Articles," "Sections" and other subdivisions are to the designated Articles, Sections and other subdivisions of the body of this Agreement; 10.1.4 pronouns of either gender or neuter shall include, as appropriate, the other pronoun forms; 10.1.5 the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision; 10.1.6 the word "including" shall mean including without limitation. 10.2 DEFINITIONS. As used in this Agreement and the Exhibits and Schedules delivered pursuant to this Agreement, the following definitions shall apply: "ACCOUNTANTS' DETERMINATION" has the meaning set forth in Section 2.2 hereof. "ACQUIROR" has the meaning set forth in the preamble hereof. "ACQUIROR INDEMNIFIED PARTIES" means Acquiror, Merger Sub, their respective Subsidiaries and Affiliates, any assignee or successor thereof, and each partner, member, officer, director and employee of each of the foregoing. "ACQUISITION PROPOSAL" has the meaning set forth in Section 5.4 hereof. "ACTION" means any action, complaint, petition, investigation, suit or other proceeding, whether civil or criminal, in law or in equity, or before any arbitrator or Governmental Entity. "AFFILIATE" of any Person means another Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first Person. "AGREEMENT" means this Agreement as amended or supplemented together with all Exhibits and Schedules attached or incorporated by reference (although Schedules shall be delivered separately to each party and shall not be attached to this Agreement). - 52 - "APPROVAL" means any approval, authorization, consent, qualification or registration, or any waiver of any of the foregoing, required to be obtained from, or any notice, statement or other communication required to be filed with or delivered to, any Governmental Entity or any other Person. "ARBITRATING ACCOUNTANTS" has the meaning set forth in Section 2.2.2 hereof. "BUSINESS" means the business of the Company and its Subsidiaries, taken as a whole. "BUSINESS DAY" means any day that is not a Saturday, Sunday or legal holiday in the State of California or the State of New York. "CALIFORNIA CODE" means the California Corporations Code, as amended. "CERTIFICATE OF MERGER" has the meaning set forth in Section 1.1.2 hereof. "CLAIM" has the meaning set forth in Section 7.3.2 hereof. "CLAIMANT" has the meaning set forth in Section 7.3.1 hereof. "CLOSING" has the meaning set forth in Section 1.1.4 hereof. "CLOSING DATE" has the meaning set forth in Section 1.1.4 hereof. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITMENT LETTER" has the meaning set forth in Section 4.5 hereof. "COMPANY" has the meaning set forth in the preamble hereof. "COMPANY COMMON STOCK" has the meaning set forth in Section 1.2.2 hereof. "COMPANY FINANCIAL STATEMENTS" has the meaning set forth in Section 3.6(a) hereof. "COMPANY INDEMNIFIED PARTIES" means the Securityholders and their Affiliates, any assignee or successor thereof, and each officer, director and employee of each of the foregoing. "COMPANY LEASED REAL ESTATE" has the meaning set forth in Section 3.12.2 hereof. "COMPANY OWNED REAL ESTATE" has the meaning set forth in Section 3.12.1 hereof. "COMPANY SCHEDULES" means the schedules to this Agreement delivered by the Company, which schedules shall be delivered separately and shall not be attached to this Agreement. "COMPANY SHARES" has the meaning set forth in Section 1.2.2 hereof. - 53 - "CONFIDENTIALITY AGREEMENT" has the meaning set forth in Section 9.13 hereof. "CPI" has the meaning set forth in Section 3.3.2 hereof. "DEBT FINANCING" has the meaning set forth in Section 4.5 hereof. "DGCL" has the meaning set forth in Section 1.1.1 hereof. "DISSENTING SHARES" has the meaning set forth in Section 1.5 hereof. "DOJ" means the United States Department of Justice. "EFFECTIVE TIME" has the meaning set forth in Section 1.1.2 hereof. "ENCUMBRANCE" means any charge, encumbrance, security interest, lien, mortgage, right of first refusal, option, equity, adverse claim or restriction, except for any restrictions on transfer generally arising under any applicable federal or state securities law. "ENVIRONMENTAL LAWS" has the meaning set forth in Section 3.9.1 hereof. "EQUITY-LIKE SECURITIES" means any securities that are convertible into, exercisable for, or exchangeable for, equity securities. "ERISA" has the meaning set forth in Section 3.15 hereof. "ERISA AFFILIATE" has the meaning set forth in Section 3.15 hereof. "ESCROW AGENT" has the meaning set forth in Section 1.4 hereof. "ESCROW AGREEMENT" has the meaning set forth in Section 1.4 hereof. "ESCROW AMOUNT" has the meaning set forth in Section 1.4 hereof. "ESTIMATED CLOSING DATE WORKING CAPITAL" means the estimated amount of Working Capital as of the opening of business on the Closing Date, based on the good faith estimate of Working Capital as of such date prepared by the Chief Financial Officer of the Company, which estimate shall be delivered in writing to the Securityholders' Representative and Acquiror not later than two (2) Business Days prior to the Closing. "EXPENSE ESCROW AMOUNT" has the meaning set forth in Section 1.4 hereof. "FINAL DETERMINATION DATE" shall mean the earliest to occur of the following (i) the 21st Business Day following the receipt by the Securityholders' Representative of the Notice of Adjustment, if the Securityholders' Representative shall have failed to deliver the Objection Notice to Acquiror within the First 20-Day Period, (ii) the date on which either the Securityholders' Representative or Acquiror gives the other a written notice that such party has no objection to the other party's determination of the Final Working Capital, (iii) the date on which the Securityholders' Representative and Acquiror execute and deliver a Settlement Agreement and (iv) the date as of which the Securityholders' Representative and Acquiror shall have received the Accountants' Determination. - 54 - "FINAL WORKING CAPITAL" means the consolidated Working Capital of the Company and its Subsidiaries determined in accordance with Article II hereof. "FINAL WORKING CAPITAL STATEMENT" has the meaning set forth in Section 2.1 hereto. "FIRST 20-DAY PERIOD" has the meaning set forth in Section 2.2.2 hereof. "FOOTHILL LOAN AGREEMENT" means the Loan and Security Agreement, dated as of December 15, 2000, by and among CPI, as borrower, the other obligors named therein, the lenders signatory thereto and Foothill Capital Corporation, as arranger and administrative agent, as amended. "FOREIGN PLAN" has the meaning set forth in Section 3.15 hereof. "FOREIGN HSRS" has the meaning set forth in Section 5.5.1. "FTC" means the United States Federal Trade Commission. "GAAP" means generally accepted accounting principles in the United States, as in effect from time to time. "GEI" has the meaning set forth in the preamble hereof. "GOVERNMENT BID" shall mean any quotation, bid or proposal submitted by the Company or any of its Subsidiaries to the U.S. Government or any party known by the Company or any of its Subsidiaries to be a proposed prime contractor or higher-tier subcontractor of the U.S. Government. "GOVERNMENT CONTRACT" shall mean any agreement for the delivery of goods or services between the Company and/or any of its Subsidiaries and (i) the U.S. Government (acting on its own behalf or on behalf of another country or international organization), (ii) any party known by the Company to be a prime contractor of the U.S. Government or (iii) any party known by the Company to be a subcontractor with respect to any contract of a type described in clauses (i) or (ii) above. "GOVERNMENTAL ENTITY" means any government or any agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign or any quasi-governmental, self-regulatory organization or private body exercising any regulatory or taxing authority thereunder. "HAZARDOUS SUBSTANCE" means any material, substance or waste that is regulated pursuant to any Law or Order the purpose of which is to protect human health or the environment, including the Comprehensive Environmental Response Compensation and Liability Act, the Solid Waste Disposal Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act and the Toxic Substances Control Act. "HSR ACT" has the meaning set forth in Section 5.5.1 hereof. - 55 - "INDEBTEDNESS" means (i) indebtedness for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities incurred in the Ordinary Course and payable in accordance with customary practices), including indebtedness evidenced by a note, bond, debenture or similar instrument; (ii) guarantees or other contingent obligations in respect of items in clause (i); (iii) obligations required to be classified and accounted for as capital leases on a balance sheet under GAAP; (iv) obligations under interest rate cap agreements, interest rate swap agreements, foreign currency exchange agreements and other hedging or similar agreements; and (v) to the extent not otherwise included in the foregoing, any financing of accounts receivable or inventory. "INDEMNITY PAYMENT" has the meaning set forth in Section 7.5 hereof. "INDEMNITY REPRESENTATIVE" has the meaning set forth in Section 7.3.1 hereof. "INDENTURE" means CPI's Indenture, dated as of August 11, 1995, governing the Senior Notes, as amended by the First Supplemental Indenture, dated as of August 11, 1995, and the Second Supplemental Indenture, dated as of December 22, 1995. "INTELLECTUAL PROPERTY" has the meaning set forth in Section 3.16 hereof. "JUNIOR PREFERRED STOCK" has the meaning set forth in Section 3.3.2 hereof. "JUNIOR PREFERRED WAIVER" has the meaning set forth in Section 5.11. "LATEST BALANCE SHEET" has the meaning set forth in Section 3.6(a) "LAW" means any law (including common law), statute, rule, regulation, administrative requirement, code or ordinance of any Governmental Entity. "LEASE" has the meaning set forth in Section 3.12.2 hereof. "LENDERS" has the meaning set forth in Section 4.5 hereof. "LOSSES" means losses, damages, claims, costs and expenses, interest, awards, judgments and penalties (including reasonable legal fees and costs) suffered or incurred. "MANAGEMENT EQUITY LOANS" means the outstanding loans payable by certain stockholders of the Company in respect of amounts borrowed to purchase Company Shares. Schedule 3.2.3 sets forth the outstanding principal amount and accrued interest of each Management Equity Loan as of October 31, 2003. "MATERIAL ADVERSE EFFECT" means, (i) with respect to the Company and its Subsidiaries, a material adverse effect on the financial condition, results of operations, assets or liabilities (except insofar as they relate generally to the economy or to the industry of which the Business is a part and do not affect the Company and its Subsidiaries in a materially disproportionate manner) or business of the Company and its Subsidiaries taken as a whole; and (ii) with respect to Acquiror or Merger Sub, a material adverse change in - 56 - Acquiror's or Merger Sub's ability to perform its obligations hereunder or to consummate the transactions contemplated hereby. "MERGER" has the meaning set forth in Section 1.1.1 hereof. "MERGER CONSIDERATION" means an amount equal to (i) $300,000,000, minus (ii) the Net Indebtedness and Preferred Stock Amount, plus (iii) the aggregate amount of exercise price proceeds of all Stock Options (assuming that all such Stock Options were exercised and/or converted and the Company collected such exercise price proceeds), plus (iv) the aggregate principal amount of all Management Equity Loans plus any accrued but unpaid interest thereon through and including the Closing Date, plus (v) an amount equal to the excess, if any, of the Estimated Closing Date Working Capital over the Working Capital Target, minus (vi) an amount equal to the excess, if any, of the Working Capital Target over the Estimated Closing Date Working Capital, minus (vii) the aggregate Transaction Expenses to the extent unpaid as of the opening of business on the Closing Date, and minus (viii) the total amount of Specified Bonuses that are unpaid as of the opening of business on the Closing Date. "MERGER CONSIDERATION ADJUSTMENT" has the meaning set forth in Section 2.3.4 hereof. "MERGER SUB" has the meaning set forth in the preamble hereof. "NET INDEBTEDNESS AND PREFERRED STOCK AMOUNT" means, without duplication, the aggregate amount of (i) all outstanding principal on the Senior Notes and accrued interest thereon, (including, if any Senior Notes are outstanding on the Closing Date, interest payable thereon through the date of redemption of such Senior Notes), and all outstanding principal and accrued interest on all other Indebtedness other than intercompany Indebtedness, (ii) the liquidation preference and all accrued and unpaid dividends on the outstanding Senior Preferred Stock and Junior Preferred Stock (including, if any Senior Preferred Stock or Junior Preferred Stock is outstanding on the Closing Date, dividends payable thereon through the date of redemption thereof) and (iii) any redemption or prepayment premiums or penalties required or imposed in connection with the actual repayment of the Company's Indebtedness, Junior Preferred Stock or Senior Preferred Stock at or in connection with the Closing, including any redemption premium required to be paid to holders of the Senior Notes or the trustee thereof pursuant to the Indenture in connection with the transactions described in Section 5.12 hereof and any premium payable to holders of the Junior Preferred Stock or Senior Preferred Stock in connection with the transactions described in Section 5.11 hereof, reduced by (iv) the total cash and cash equivalents of the Company and its Subsidiaries. All such amounts shall be determined in conformity with GAAP as of the opening of business on the Closing Date, provided, for the avoidance of doubt, no effect shall be given to any debt incurred in connection with Acquiror's financing of either the Company or any of its Subsidiaries. "NOTICE OF ADJUSTMENT" has the meaning set forth in Section 2.2.1 hereof. "OBJECTION NOTICE" has the meaning set forth in Section 2.2.2 hereof. - 57 - "ORDER" means any decree, injunction, judgment, order, ruling, arbitration award, assessment or writ. "ORDINARY COURSE" means the ordinary course of business, consistent with past practice. "PERCENTAGE SHARE" means, with respect to each Securityholder, a percentage equal to (i) the total number of shares of Common Stock and Stock Options owned of record by such Securityholder immediately prior to the Effective Time, divided by (ii) the Share Number. "PERMIT" means any license, permit, franchise or authorization. "PERMITTED ENCUMBRANCES" means (i) Encumbrances securing the obligations of the Company and/or any of its Subsidiaries under the Foothill Loan Agreement and the Wells Fargo Loan Agreement, (ii) Encumbrances disclosed in Schedule 10.2, (iii) liens for taxes, assessments or governmental charges or levies that are not material in amount relative to the property affected, or that are not yet delinquent or are being contested in good faith by appropriate proceedings, during which collection or enforcement is stayed, so long as adequate security has been posted for the payment of such amounts, (iv) suppliers', materialmens', mechanics', and similar statutory liens that arise in the Ordinary Course, all of which are not delinquent or are being contested in good faith by appropriate proceedings and are not, individually or in the aggregate, significant in amount (v) security interests in leased equipment arising under equipment leases, and (vi) any Encumbrance or imperfection of title that does not materially impair the ownership, occupancy or use of the property for the purposes for which it is currently owned, occupied or used in connection with the Business. "PER SHARE ADDITIONAL AMOUNT" means an amount equal to the result obtained by dividing the (i) the lesser of (A) the amount, if any, by which the Final Working Capital is greater than the Estimated Closing Date Working Capital and (B) $2,000,000 by (ii) the Share Number, rounded to the nearest $0.0001. "PER SHARE AMOUNT" means an amount equal to (i) the result obtained by dividing (x) the Merger Consideration by (y) the Share Number, rounded to the nearest $0.0001, minus (ii) the Per Share Escrow Amount. "PER SHARE ESCROW AMOUNT" means an amount equal to the result obtained by dividing (i) the Escrow Amount by (ii) the Share Number, rounded to the nearest $0.0001. "PERSON" means an association, a corporation, an individual, a partnership, a trust or any other entity or organization, including without limitation, a Governmental Entity. "PLANS" has the meaning set forth in Section 3.15 hereof. "PROPERTIES" has the meaning set forth in Section 3.12.4 hereof. "REAL PROPERTY PERMITTED ENCUMBRANCES" has the meaning set forth in Section 3.12.1 hereof. - 58 - "RECOVERED PROCEEDS" has the meaning set forth in Section 7.5 hereof. "REPRESENTATIVES" means Persons acting on behalf of the Company, Acquiror, Merger Sub, or the Securityholders' Representative, as the context may require, including, without limitation, their respective independent accountants, investment bankers and counsel. "SEC" has the meaning set forth in Section 3.24 hereof. "SECURITYHOLDER" means each holder of record, immediately prior to the Effective Time, of Company Shares and/or Stock Options. "SECURITYHOLDERS' REPRESENTATIVE" means GEI. "SENIOR NOTES" means CPI's 12% Senior Subordinated Notes due 2005 "SENIOR PREFERRED STOCK" has the meaning set forth in Section 3.3.2 hereof. "SENIOR PREFERRED WAIVER" has the meaning set forth in Section 5.11. "SERVICE" means the Internal Revenue Service or any successor entity. "SETTLEMENT AGREEMENT" has the meaning set forth in Section 2.2.2 hereof. "SHARE CERTIFICATES" has the meaning set forth in Section 1.3.3 hereof. "SHARE NUMBER" means (i) the number of shares of Company Common Stock issued and outstanding immediately prior to the Effective Time (other than shares to be cancelled pursuant to Section 1.2.4) plus (ii) the number of shares of Company Common Stock issuable upon the exercise of the Stock Options issued and outstanding immediately prior to the Effective Time. "SPECIFIED BONUSES" means any bonuses payable to employees in respect of the 2003 fiscal year or in connection with or arising as a result of the transactions contemplated by this Agreement, in each case approved by the Board of Directors or the Chief Executive Officer of the Company or one of its Subsidiaries prior to the Closing; provided, however, "Specified Bonuses" shall not include bonus amounts payable in respect of the 2003 fiscal year out of the division level "key contributor plans" to the extent that such amounts are paid by the Company prior to Closing or accrued as a liability in Final Working Capital; provided, further, that for the avoidance of doubt, "Specified Bonuses" shall exclude all salaries and bonuses in respect of the 2004 fiscal year. "STOCK OPTIONS" means the options to purchase Company Common Stock granted pursuant to the Company's 2000 Stock Option Plan. "STOCK SALE AGREEMENT" has the meaning set forth in Section 3.9.3. "SUBSIDIARY" of a company means any Person in which such company has a direct or indirect equity or ownership interest by vote or value of in excess of 50%. - 59 - "SURVIVING CORPORATION" has the meaning set forth in Section 1.1.1 hereof. "SURVIVING CORPORATION'S SHARE OF ACCOUNTING EXPENSES" has the meaning set forth in Section 2.2.4 hereof. "TAX" or "TAXES" as the context may require means any income, alternative or add-on minimum tax, gross income, gross receipts, franchise, profits, sales, use, ad valorem, business license, withholding, payroll, employment, excise, stamp, transfer, recording, occupation, premium, property, value added, custom duty, severance, windfall profit or license tax, governmental fee, including estimated taxes relating to any of the foregoing, or other similar tax or other like assessment or charge of similar kind whatsoever together with any interest and any penalty, addition to tax or additional amount imposed by any Governmental Entity responsible for the imposition of any such Tax. "TAX RETURN" means any return, report, information return, schedule, certificate, statement or other document or amendment thereto (including any related or supporting information) filed or required to be filed with, or, where none is required to be filed with a Taxing Authority, the statement or other document issued by, a Taxing Authority in connection with any Tax. "TAXING AUTHORITY" means any federal, state, local or foreign Governmental Entity responsible for the imposition of a Tax (domestic or foreign). "TERMINATION DATE" has the meaning set forth in Section 8.1.2 hereof. "TRANSACTION EXPENSES" shall mean all third party professional fees, costs and expenses incurred or to be incurred by the Securityholders' Representative and/or the Company and its Subsidiaries prior to the Effective Time in connection with the transactions contemplated by this Agreement, for which the Company or any of its Subsidiaries have or may have liability or obligation, including but not limited to those payable to Bear Stearns & Co., Inc., Irell & Manella LLP and McDermott, Will & Emery in connection with the transactions contemplated by this Agreement. "TRANSFERS" has the meaning set forth in Section 5.1.8 hereof. "UNAUDITED 2003 FINANCIAL STATEMENTS" has the meaning set forth in Section 3.6(c) "UNDERPAYMENT AMOUNT" has the meaning set forth in Section 2.3.1(b) hereof. "VARIAN" means Varian Medical Systems, Inc., formerly known as Varian Associates, Inc. "VARIAN ENVIRONMENTAL INDEMNITY" has the meaning set forth in Section 3.9.3 hereof. "VOTING AND INDEMNIFICATION AGREEMENT" has the meaning set forth in the recitals hereof. - 60 - "WELLS FARGO LOAN AGREEMENT" means Loan Agreement, dated as of December 22, 2000, by and between the Company and Wells Fargo Bank National Association, as amended. "WORKING CAPITAL" means and includes: (i) the consolidated current assets of the Company, excluding cash, cash equivalents and deferred tax assets, less (ii) the consolidated current liabilities of the Company, excluding (A) accrued interest, (B) any accrued dividends on Senior Preferred Stock and Junior Preferred Stock, (C) deferred tax liabilities, (D) any Transaction Expenses and (E) any Specified Bonuses, in each case, without duplication for any amounts included or reflected in the definition of Net Indebtedness and Preferred Stock Amount. Schedule 2.1 sets forth the calculation of the Working Capital as of October 3, 2003. The Final Working Capital shall be prepared in conformity with GAAP applied on a consistent basis and, to the extent there are alternatives under GAAP, a manner that is consistent with the accounting principles and methodologies used in the Working Capital calculation that is attached hereto as Schedule 2.1. "WORKING CAPITAL ESCROW AMOUNT" has the meaning set forth in Section 1.4 hereof. "WORKING CAPITAL TARGET" means $24,200,000. - 61 - IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION By: ------------------------------ Name: Title CPI ACQUISITION CORP. By: ------------------------------ Name: Title CPI MERGER SUB CORP. By: ------------------------------ Name: Title GREEN EQUITY INVESTORS II, L.P. By: Grand Avenue Capital Partners, L.P., its General Partner By: Grand Avenue Capital Corporation, its General Partner By: ------------------------------ Name: Title - 62 - EXHIBIT LIST ~~EXHIBIT A VOTING AND INDEMNIFICATION AGREEMENT EXHIBIT B ESCROW AGREEMENT EXHIBIT C CERTIFICATE OF INCORPORATION EXHIBIT D COMMITMENT LETTER~~

EXHIBIT A VOTING AND INDEMNIFICATION AGREEMENT EXHIBIT B ESCROW AGREEMENT EXHIBIT C CERTIFICATE OF INCORPORATION EXHIBIT D COMMITMENT LETTER EX-10.1.2 4 f95383exv10w1w2.txt EXHIBIT 10.1.2 Exhibit 10.1.2 [WELLS FARGO LOGO] WELLS FARGO FOOTHILL 2450 Colorado Avenue Suite 3000 West Santa Monica, CA 90404 310 453-7300 www.wffoothill.com December 1, 2003 COMMUNICATIONS & POWER INDUSTRIES, INC. 607 Hansen Way, Mail Stop A-200 P.O. Box 51110 Palo Alto, California 94303-1110 Attn: Joel Littman, Chief Financial Officer Re: Loan and Security Agreement --------------------------- Dear Joel: Reference is made to that certain Loan and Security Agreement, dated as of December 15, 2000, by and among Communications & Power Industries, Inc., a Delaware corporation ("Borrower"), each of the Obligors that is a signatory thereto (collectively, "Obligors"), each of the lenders that is a signatory thereto (collectively, "Lenders"), and Wells Fargo Foothill, Inc., a California corporation, as the arranger and administrative agent for the Lenders (in such capacity, "Agent" and together with the Lenders, collectively, the "Lender Group") (as amended, restated, supplemented, or modified from time to time, the "Loan Agreement"). Capitalized terms, which are used herein but not defined herein, shall have the meanings ascribed to them in the Loan Agreement. Borrower has requested that the Loan Agreement be amended to enable Borrower to repurchase or redeem a greater principal amount of Senior Subordinated Notes. Subject to the satisfaction of the terms and conditions set forth in this letter agreement, the Lender Group is willing to grant the amendment and consent requested by Borrower as described in the preceding sentence. NOW, THEREFORE, the parties hereby agree to the following: 1. Section 7.8(a)(ii) of the Loan Agreement is hereby amended and restated in its entirety as follows: "(ii) any repurchase or redemption of Senior Subordinated Notes up to an aggregate maximum amount of $30,000,000 in any fiscal year of Borrower so long as (1) immediately prior to any such repurchase or redemption and after giving effect thereto, no Event of Default has occurred and is continuing; (2) prior to any such repurchase or redemption, Borrower's chief financial officer issues a certificate to Agent, in form and substance satisfactory to Agent in its Permitted Discretion, demonstrating that, immediately after any such repurchase or redemption, Borrower will have Availability of no less than the Threshold Excess Availability; (3) concurrently with any delivery by Borrower to the Trustee (as defined in the Indenture) of a notice of optional redemption in accordance with Section 3.01 of the Indenture in connection with any such redemption, Borrower delivers a copy of such notice to Agent; and (4) concurrently with any delivery by Borrower to the Holders (as defined in the Indenture) of a notice of redemption in 1 accordance with Section 3.03 of the Indenture in connection with any such redemption, Borrower delivers a copy of such notice to Agent, and" 2. Each Obligor hereby (a) represents and warrants to the Lender Group that the execution, delivery, and performance of this letter agreement are within its powers, have been duly authorized by all necessary action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected; (b) consents to the transactions contemplated by this letter agreement; (c) acknowledges and reaffirms its obligations owing to the Lender Group under any Loan Documents to which it is a party; and (d) agrees that each of the Loan Documents to which it is a party is and shall remain in full force and effect. Although each Obligor has been informed of the matters set forth herein and has acknowledged and agreed to same, it understands that the Lender Group has no obligations to inform it of such matters in the future or to seek its acknowledgement or agreement to future amendments, and nothing herein shall create such a duty. 3. The satisfaction of each of the following shall constitute conditions precedent to the effectiveness of this letter agreement and each and every provision hereof: a. The representations and warranties in the Loan Agreement and the other Loan Documents shall be true and correct in all respects on and as of the date hereof, as though made on such date (except to the extent that such representations and warranties relate solely to an earlier date); b. No Default or Event of Default shall have occurred and be continuing on the date hereof or as of the date of the effectiveness of this letter agreement; c. No injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein shall have been issued and remain in force by any Governmental Authority against any Obligor or the Lender Group; d. Agent shall have received from Borrower an amendment fee (the "Amendment Fee") in the amount of $10,000. Upon Agent's receipt of a copy of this letter agreement executed by Borrower, Agent shall be authorized to charge Borrower's Loan Account the Amendment Fee, which Amendment Fee shall be non-refundable when charged. 4. This letter agreement constitutes an amendment to the Loan Agreement. Except as expressly set forth herein, the Loan Documents shall remain in full force and effect. 5. Borrower agrees that all of Agent's attorneys' fees and costs in drafting and negotiating this letter agreement are part of the Lender Group Expenses and are payable on demand. 6. This letter agreement may be executed in any number of counterparts and by different parties on separate counterparts. Each of such counterparts shall be deemed to be an original, and all of such counterparts, taken together, shall constitute but one and the same 2 agreement. Delivery of an executed counterpart of this letter agreement by telefacsimile shall be equally effective as delivery of a manually executed counterpart. Please indicate your agreement with the foregoing by signing in the space provided below and returning the same to the undersigned. AGENT WELLS FARGO FOOTHILL, INC., a California corporation, as Agent By: /s/ Illegible ------------------------------------ Title: Vice President --------------------------------- OTHER LENDERS: FOOTHILL INCOME TRUST II, L.P. By: FIT II GP, LLC, Its General Partner By: ----------------------------------- Title: --------------------------------- Acknowledged and Agreed: BORROWER: COMMUNICATIONS & POWER INDUSTRIES, INC., a Delaware corporation By: /s/ Illegible --------------------------- Title: Chief Financial Officer ------------------------ 3 agreement. Delivery of an executed counterpart of this letter agreement by telefacsimile shall be equally effective as delivery of a manually executed counterpart. Please indicate your agreement with the foregoing by signing in the space provided below and returning the same to the undersigned. AGENT: WELLS FARGO FOOTHILL, INC., a California corporation, as Agent By: ------------------------------------ Title: --------------------------------- OTHER LENDERS: FOOTHILL INCOME TRUST II, L.P. By: FIT II GP, LLC, Its General Partner By: /s/ Illegible ----------------------------------- Title: Managing Member --------------------------------- Acknowledged and Agreed: BORROWER: COMMUNICATIONS & POWER INDUSTRIES, INC., a Delaware corporation By: --------------------------- Title: ------------------------ 3 OTHER OBLIGORS: COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION, a Delaware corporation By: /s/ Illegible --------------------------- Title: Chief Financial Officer ------------------------ CPI SUBSIDIARY HOLDINGS INC., a Delaware corporation By: /s/ Illegible --------------------------- Title: Secretary ------------------------ COMMUNICATIONS & POWER INDUSTRIES INTERNATIONAL INC., a Delaware corporation By: /s/ Illegible --------------------------- Title: Secretary ------------------------ COMMUNICATIONS & POWER INDUSTRIES ASIA INC., a Delaware corporation By: /s/ Illegible --------------------------- Title: Treasurer ------------------------ COMMUNICATIONS & POWER INDUSTRIES CANADA, INC., an Ontario corporation By: /s/ Illegible --------------------------- Title: Vice President ------------------------ 4 EX-10.40 5 f95383exv10w40.txt EXHIBIT 10.40 Exhibit 10.40 November 2, 2002 Mr. Mike Cheng 270 Selby Lane Atherton, CA 94027 Dear Mike: As discussed, following is your compensation package effective November 2, 2002: - - Base Salary: Bi-weekly of $5,961.54, which approximates $155,000.00 per year (payroll is based on 26 pay periods per year). - - Management Incentive Plan (MIP): Participation in the FY03 MIP, beginning October 1, 2002. - - Executive Car Program: Participation in the Company's Executive Car Program at the current FY03 level. - - Insurance: Business Travel: 3 x Base up to $1M (regular death) 6 x Base up to $1M (death by air) Special Death Benefit: 2 x weekly earnings, plus 1 day for each complete year of service - - Retirement Plan: - Participation in a defined contribution plan (Qualified and Non-Qualified) - - Retirement Plan (continued): - Employee contribution rate of 0-18% Base Pay pre-post tax - Company contribution rate of 4.75% of base salary to the Qualified Plan - Company contribution rate of an additional 4.75% of employee base over social security wage base to the Non-Qualified Plan - made annually at calendar year-end (plan details to follow) - - Executive Physical: Eligible to participate in the Executive Physical Program with reimbursement of up to $600 annually - - Severance Agreement: Employment with the Company will be "at will," meaning that your employment with the Company may be terminated at any time for any reason. As described below, however, you will be entitled to the following in the event you are terminated without "cause:" Termination Without Cause Guaranteed - 6 months Salary Contingent - 6 months Salary Termination as a result of a "Change Of Control" Event- In the event that your termination is the result of a "change in control" event, the Severance Benefits outlined below will be applicable for such a termination if it occurs at any time during a two-year period following the date of that event. Guaranteed-12 Months Salary Benefits Full coverage at normal employee contribution rates for the duration of the severance. This benefit will be provided through COBRA. MIP 100% of the award that would have otherwise been earned - - Severance Agreement (continued): Car Retain through severance period Outplacement Full outplacement service In order to receive the foregoing you shall execute a general release in favor of CPI. Sincerely, Joe Caldarelli CEO EX-10.41 6 f95383exv10w41.txt EXHIBIT 10.41 Exhibit 10.41 November 2, 2002 Mr. Don Coleman 1 Toll Road Salisbury, MA 01952 Dear Don: As discussed, following is your revised compensation package: - - BASE SALARY: Bi-weekly of $6,115.38, which approximates $159,000.00 per year (payroll is based on 26 pay periods per year). - - MANAGEMENT INCENTIVE PLAN (MIP): Participation in the FY03 MIP, beginning October 1, 2002. - - EXECUTIVE CAR PROGRAM: Participation in the Company's Executive Car Program at the current FY03 level. - - INSURANCE: Business Travel: 3 x Base up to $1M (regular death) 6 x Base up to $1M (death by air) Special Death Benefit: 2 x weekly earnings, plus 1 day for each complete year of service - - RETIREMENT PLAN: Participation in a defined contribution plan (Qualified and Non-Qualified) - - RETIREMENT PLAN (CONTINUED): - Employee contribution rate of 0-18% Base Pay pre-post tax - Company contribution rate of 4.75% of base salary to the Qualified Plan - Company contribution rate of an additional 4.75% of employee base over social security wage base to the Non-Qualified Plan - made annually at calendar year-end (plan details to follow) - - EXECUTIVE PHYSICAL: Eligible to participate in the Executive Physical Program with reimbursement of up to $600 annually - - SEVERANCE AGREEMENT: Employment with the Company will be "at will," meaning that your employment with the Company may be terminated at any time for any reason. As described below, however, you will be entitled to the following in the event you are terminated without "cause:" Termination Without Cause Guaranteed - 6 months Salary Contingent - 6 months Salary Termination as a result of a "Change Of Control" Event- In the event that your termination is the result of a "change in control" event, the Severance Benefits outlined below will be applicable for such a termination if it occurs at any time during a two-year period following the date of that event. Guaranteed-12 Months Salary Benefits Full coverage at normal employee contribution rates for the duration of the severance. This benefit will be provided through COBRA. MIP 100% of the award that would have otherwise been earned - - SEVERANCE AGREEMENT (CONTINUED): Car Retain through severance period Outplacement Full outplacement service In order to receive the foregoing you shall execute a general release in favor of CPI. Sincerely, Joe Caldarelli CEO EX-10.42 7 f95383exv10w42.txt EXHIBIT 10.42 Exhibit 10.42 COMPANY POLICY number 0001 eff. date 30 Sept. 2003 [CPI LOGO] LEGAL AND ETHICAL CONDUCT replaces 12 April 1999 page 1 of 10 PURPOSE At CPI, the Chief Executive Officer and senior executives are responsible for setting standards of business ethics and overseeing compliance with these standards. It is the individual responsibility of each employee, consultant and agent of CPI and its subsidiaries to comply with these standards. This Code is not the exclusive source of guidance and information about CPI's expectations, but it serves as the basis for other company policies and guidelines as defined in the Company Policy Manual. APPLICATION AND COMPLIANCE CPI's Code of Legal and Ethical Conduct is applicable to all employees, consultants and agents of CPI and its subsidiaries. The terms "CPI" and the "Company" include CPI and each of its functions, Divisions, operations, and/or subsidiaries. Managers at all levels are expected to foster the highest standard of ethical conduct and to ensure adherence to company policies and practices and to teach by example the exercise of sound and mature judgment in all business relationships. They are also responsible for maintaining a workplace environment which encourages and supports frank and open communication among employees and with management. Questions as to the requirements of this policy or specific applicable statutes or regulations should be raised with your team leader, supervisor, manager, Division President or Corporate Officer. Any request by an employee (other than a senior executive) for a waiver of any provision of this Code must be in writing and addressed to the employee's Division President or a Corporate Officer. Any request by a senior executive for a waiver of any provision of this Code must be in writing and addressed to CPI's Board of Directors. Responsibility for compliance with this policy rests with each employee. The unqualified recognition on the part of all employees of this responsibility is fundamental to CPI's compliance program. Conduct not complying with both the letter and the spirit of the requirements set forth in this Code of Legal and Ethical Conduct and other company policies may be grounds for disciplinary action, which in serious cases may include dismissal. REPORTING VIOLATIONS If an employee observes possible illegal or unethical behavior or other behavior that is in violation of this Code, it should be reported promptly to any member of management. If necessary, an employee will be provided with access to CPI's outside legal counsel. It is CPI's policy that the employee will not suffer adverse action for honestly raising an ethical or legal concern. Reporting on an anonymous basis is available by calling the CPI Open Line at (650) 846-3200 from an outside line. number 0001 eff. date 30 Sept. 2003 COMPANY POLICY replaces 12 April 1999 page 2 of 10 - -------------------------------------------------------------------------------- GENERAL POLICY CPI's founding tenet and continuing policy is to comply fully with all laws governing it operations, and to honor the highest legal and ethical standards in the conduct of its business. This Code means not only observing the law, but also conducting CPI's business in a manner that identifies CPI as an ethical and law-abiding enterprise, alert to all the responsibilities of good corporate citizenship. The spirit of this Code requires CPI employees to maintain the highest degree of integrity with shareholders, employees, customers, suppliers, local communities, governments at all levels, and the general public. Each section of this Code covers areas in which employees have responsibilities to CPI: - - Rules for Business Courtesies - - Conflicts of Interest - - Recording and Reporting Information - - Marketing Guidelines - - Insider Trading RULES FOR BUSINESS COURTESIES The conduct of CPI's employees and consultants in their business relationships with others involves important responsibilities. Friendly relations with organizations with which CPI does business are desirable. Such relationships, however, must be guided by high standards of personal conduct and integrity. Favoritism, preferential treatment, and unethical business practices must be avoided. Employees and consultants must also avoid any conduct that might be misinterpreted by others or that might provide any basis for questioning propriety. These rules relating to the acceptance or granting of business courtesies, social amenities, gifts, or favors are applicable to all employees and consultants in their relationships with employees and representatives (and their families) of organizations with which CPI has a business relationship. An organization with which CPI "has a business relationship" includes organizations with which CPI competes or does business, and ones which actively seek to do business with CPI. Expenses incurred not meeting the criteria of this company policy are not reimbursable by the Company. No employee may, directly or indirectly, accept from or provide to any employee or representative of any organization with which CPI has a business relationship any gift or favor other than an ordinary business courtesy or social amenity. Any such courtesy or amenity must not be in violation of any statute or regulation, must not create the appearance of impropriety or improper influence, must only be offered or accepted in the ordinary course of business, and must not be frequent, lavish, or extravagant. No employee may solicit any gift or favor. number 0001 eff. date 30 Sept. 2003 COMPANY POLICY replaces 12 April 1999 page 3 of 10 _______________________________________________________________________________ This policy is also applicable to relationships relating to U.S. Government business. However, you must, in addition, comply with the special rules in CPI's Government Business Policy Manual for relationships with employees and representatives of (1) the U.S. Government, (2) U.S. Government prime contractors and higher tier subcontractors, and (3) vendors and subcontractors of CPI under U.S. Government contracts and subcontracts. These rules are based upon strict statutes and regulations. Business courtesies not complying with these rules may be viewed as unlawful by U.S. Government authorities, and may result in penalties and/or cancellation or termination for default of any related U.S. Government contracts. States have similar statutes which are applicable to state and local government agencies and departments, and their contractors. Many federal, state and local government agencies and departments have adopted standards of conduct with respect to business courtesies. You must comply with these statutes and standards of conduct as well. Reciprocity is not an exception to Company Policy on offering business courtesies, social amenities, gifts, or favors. Merely because an employee of an organization with which CPI does business provides a business courtesy, social amenity, gift, or favor to you on one occasion does not permit you to provide anything to this employee on another occasion. Particular care must be exercised where it might appear either that CPI expects something in return, or that an attempt is being made to secure an unfair advantage. This includes situations where the recipient is faced with a pending significant decision affecting the Company, or where the recipient has the ability to directly influence a pending significant decision affecting the Company. CONFLICTS OF INTEREST CPI expects its employees to devote their best efforts and attention to the conduct of its business affairs and the performance of their jobs. Employees are expected to use good judgment, to adhere to the highest legal and ethical standards, and to avoid situations that present an actual or potential conflict between the employee's personal interests and CPI's interests. A conflict of interest exists when the employee's personal interest and CPI's interest. A conflict of interest exists when the employee's loyalties or activities are or could be divided between CPI's interests and those of him, her or another business entity. Both the fact and the appearance of a conflict of interest should be avoided. Any employee who is involved in a transaction, activity or relationship that constitutes or could reasonably constitute a conflict of interest must disclose the matter to his or her manager. Certain situations, as detailed below, require that approval of the activity be obtained upon entering employment with CPI, or prior to engaging in the activity if the employee is already employed with CPI. number 0001 eff.date 30 Sept. 2003 COMPANY POLICY replaces 12 April 1999 page 4 of 10 _______________________________________________________________________________ Failure to adhere to the provisions of this policy will result in disciplinary action up to and including termination of employment. When in doubt as to whether a conflict of interest exists or might occur regarding a particular transaction, activity or relationship, the employee should disclose the details to his or her manager, Human Resources Manager, or Division President. Any CPI manager receiving such details concerning a potential conflict of interest shall disclose these details to the Division Human Resources manager and the Division President or to a CPI Corporate Officer. Final approval authority in this matter rests with the Division President or a CPI Corporate Officer, who may elect to consult with outside counsel in complex situations. The following provisions describe particular conflict of interest situations for which approval by a CPI Division President or Corporate Officer is required. This is intended to be a representative listing only and is neither all-inclusive nor descriptive of all possible conflict of interest situations requiring CPI's approval. 1. Other Employment or Associations No employee can accept other employment or consult with another business enterprise that competes with CPI or engages in the sale or purchase of products or services with CPI. Any employee who desires to engage in any outside employment (including self-employment) or consulting must disclose the facts of this work to his or her team leader, supervisor, manager, and Human Resources Manager for approval in advance. It is CPI's policy to withhold permission for consulting or other employment if: a. Additional effort or a work schedule is involved with the other employment or consulting that would interfere with or reduce the productivity of the employee's work at CPI in any way. b. The other employment is with a competitor or potential competitor of CPI, or with a person or company that could, in any way, be construed as being interested in obtaining or capable of using trade secrets or any information that is proprietary to CPI. c. The other employment or consulting involves the selling or leasing of services or of any interest in property or assets of any kind to CPI. d. The employee's association with CPI plays any part in the other activity. No employee may accept or retain a directorship of any commercial business enterprise regardless of its business relationship with CPI without the prior notification and approval of CPI's senior management or, where deemed appropriate, CPI's Board of Directors. number 0001 eff. date 30 Sept. 2003 COMPANY POLICY replaces 12 April 1999 page 5 of 10 - -------------------------------------------------------------------------------- 2. Financial Interests Potential conflicts of interest can develop if employees or members of their immediate families have significant financial interests in organizations with which CPI has a business relationship. Certain financial interests present such a potential for conflict of interest that they may not be acquired or retained by employees. Other financial interests may be permissible after review by the Company's management. To avoid actual or potential conflicts of interest, employees are required to report and obtain prior approval from the employee's Division President or Corporate Officer for the following financial interests: a. Ownership or acquisition of the right to acquire more than 1% of any class of securities of any publicly-held company with which CPI has a material business relationship. b. Any interest in an organization with which CPI has a business relationship whose securities or other indications of ownership including, for example, partnership or proprietor shares, are not publicly held, whether or not the organization is incorporated. c. Any interest in any organization, whether or not publicly held, formed or to be formed by employees who left CPI less than 12 months before the date of acquisition of the financial interest. d. Any interest in any transaction to which CPI is a party or which it is planned or proposed that CPI shall become a party. e. Any financial interest in a non-publicly held organization that is in competition with CPI. The required reports must be made to the employee's Division President or Corporate Officer, as applicable. New employees will be requested to make a report of any of the specified interests prior to the date of employment. Reportable interests that the employee plans to acquire should be reported far enough in advance to allow adequate time for review. 3. Personal Relationships Any employee who has a close relationship with someone else (a family member or close personal friend) who has a significant financial or employment relationship with a competitor, customer or supplier of CPI must disclose this information in writing to the employee's Human Resources manager. In such event, CPI may take such action as it deems number 0001 eff. date 30 Sept. 2003 COMPANY POLICY replaces 12 April 1999 page 6 of 10 - -------------------------------------------------------------------------------- appropriate to avoid an actual or potential conflict of interest including, without limitation, reassignment or transfer of the employee. No employee may be hired, promoted, transferred or maintained in a position where such aspect of employee's employment may be directly or indirectly influenced by a relative or another employee with whom such employee has a close personal relationship. All supervisor-subordinate relationships must be free of any favoritism or special treatment and must avoid any actual or apparent conflict of interest. RECORDING AND REPORTING INFORMATION Employees must record and report all information accurately and honestly. This includes, for example, time records, marketing orders, engineering or test results and financial reports. One report that many employees use is the expense report. Employees are entitled to reimbursement for reasonable expenses incurred including expenditures for business courtesies, social amenities, gifts, and favors meeting the Rules for Business Courtesies section of this policy. Expenditures must be fully documented and properly accounted for on the books and records of the Company. Expenditures not reimbursable under government contracts (such as entertainment and alcoholic beverages) must be specifically identified. Expense reports require specific names and positions of recipients. The use of such terms as "guest," "customer," or "participant" is not permitted. To submit an expense report for expenses not incurred is dishonest reporting and is prohibited. Under various laws, such as Securities and Exchange Commission Rules, tax laws or the Foreign Corrupt Practices Act, CPI is required to maintain books and records reflecting the Company's transactions. It is essential that these books and records are accurate. Employees must ensure that they do not make false or misleading statements in financial reports, environmental monitoring reports and other documents submitted to or maintained for government agencies. CPI's employees (including senior management) involved in the preparation of CPI's public filings should ensure that these filings contain full, fair, accurate and understandable disclosure and that they reflect on a timely basis all material information required to be included in such filings. An employee may not commit CPI to undertake any performance, payment or obligation unless authorized under the appropriate delegation of authority policies. No employee may engage in the use of sideletters or "off-the-books" arrangements. An employee must not enter into transactions with customers, suppliers or other business partners that facilitate improper revenue recognition, expense treatment or accounting improprieties. To ensure the accuracy and integrity of CPI's books and records, employees must comply with Generally Accepted Accounting Principles (GAAP) and are required to follow those finance policies and procedures as set forth in the CPI Controller's Manual. number 0001 eff. date 30 Sept. 2003 COMPANY POLICY replaces 12 April 1999 page 7 of 10 - -------------------------------------------------------------------------------- CPI's Division Managers, Controllers, and accounting and finance managers are responsible for ensuring all financial reports, analyses and other information for external disclosure is accurate, complete and reported per GAAP and company policies and procedures. Dishonest reporting is strictly prohibited and can lead to civil or even criminal liability for the employee and/or CPI. PROPRIETARY INFORMATION OF OTHERS It is CPI's policy to respect the proprietary rights and trade secret information of others. Employees, consultants, agents and representatives must ensure that they do not solicit, obtain or receive any information regarding others in illegal or improper ways. Proprietary and confidential information belonging to third parties which has not been disclosed without restriction may be obtained and/or used only by permission of the owner. Where an employee is uncertain of the application of these rules, he/she should discuss the situation with their manager, and, if appropriate, with outside legal counsel. Fair Competition - ---------------- CPI's policy is to provide the best possible products and services, and to sell them on their merits while avoiding deprecation or criticism of competitors, their products or services. Although truthful description of a competitor's product or service shortcomings is normally acceptable, if such a description is not accurate the competitor may have cause to initiate a legal claim against CPI. An employee must not mislead others with respect to any specific shortcoming by only providing a part of the relevant information. Stressing the advantages of CPI products and services is preferable to criticizing competitors, their products or their services. It is acceptable to compare published current specifications. Antitrust Constraints - --------------------- All employees must comply with the requirements of Company Policy 0999 "Antitrust". Since a violation of antitrust laws can result in serious legal difficulties, CPI marketing, sales and management personnel must be familiar with the requirements of this company policy. In general, the antitrust laws forbid agreements or understandings of any kind, formal or informal, with competitors or others to fix or control prices, to allocate products, markets or territories, to boycott certain customers or suppliers, or to refrain from or limit the manufacture, sale or production of any product. In business dealings with outside organizations, remember that a supplier or customer may also be a competitor. Normal sales to, purchasing from, and subcontracts with, competitors are to be expected and are not illegal. Contacts at association meetings, seminars, etc., are proper and need not be avoided, provided that the subject matter discussed is appropriate. However, it is unacceptable and unlawful to discuss or collaborate on such things as prices, plans, production, number 0001 eff. date 30 Sept. 2003 COMPANY POLICY replaces 12 April 1999 page 8 of 10 - -------------------------------------------------------------------------------- or sales territories with competitors. Employees and others representing CPI must be sensitive at all times to even an appearance of such activities. INSIDER TRADING CPI's policy prohibits directors, officers and employees from trading on, or improperly disclosing or using "inside" information. Inside information is information known to them through their relationship with or concerning CPI but not known to the investing public. This policy is intended to protect the reputation of CPI and its personnel and to help guard them from legal liability. ANYONE IN DOUBT ABOUT THE APPLICATION OF THIS POLICY MUST SEEK GUIDANCE BEFORE PROCEEDING. 1. The Basic Rule: No Trading on Inside Information Although CPI does not currently have any publicly traded common stock, it does have publicly traded debt (Senior Subordinated Notes) and publicly traded Senior Preferred Stock. Directors, officers and employees shall not trade in any of these outstanding issues while in possession of material, non-public information relating to CPI. These constraints also apply (1) to family members and others living in the same household, and (2) to accounts that are controlled or subject to the influence of any CPI director, officer or employee, his or her family members, or others in his or her household. Non-public information is "material" if it could reasonably be expected to affect the price of a company's stocks, bonds or other securities. Some common examples are material changes in estimates of future company earnings; a proposed merger, acquisition, or joint venture; sale of significant assets; changes in senior management; significant new products or discoveries; impending liquidity problems; stock offerings or repurchases by the company; substantial increases or decreases in dividends; significant expansion or curtailment of operations; or the gain or loss of a substantial customer or supplier. This list is not intended to be exhaustive. 2. Disclosure of Non-Public Information Is Prohibited CPI personnel are prohibited from disclosing to anyone inside or outside the Company any confidential, non-public information, including technical, proprietary, or business-sensitive information obtained at or through CPI, except on a need-to-know basis and where there is no reason to believe that the information will be misused or improperly disclosed. This prohibition applies to all confidential, non-public technical, proprietary or business-sensitive information, whether or not it is "material." number 0001 eff. date 30 Sept. 2003 COMPANY POLICY replaces 12 April 1999 page 9 of 10 ________________________________________________________________________________ 3. Blackout Periods Regarding CPI Securities All Directors, Officers, Division Presidents, and other employees who have access to or assist in compiling company financial data, shall refrain from trading in CPI securities for four periods each year. Each period begins with the last business day of each fiscal quarter and ends two (2) business days after CPI makes public its quarterly operational results. In addition, other "blackout periods" may be imposed depending on particular circumstances. Specific exceptions may be made when the applicant does not possess material, non-public information, personal circumstances warrant the exception, and the exception would not otherwise contravene the law or the purpose of this policy. Any request for an exception shall be directed to the Chief Financial Officer. 4. Trading After Public Announcements Personnel privy to material information concerning CPI which is the subject of a public announcement shall refrain from trading in CPI securities for a period of two (2) business days after the information is made public so as to allow time for the investing public to receive and absorb it. number 0001 eff. date 30 Sept. 2003 COMPANY POLICY replaces 12 April 1999 page 10 of 10 - -------------------------------------------------------------------------------- CERTIFICATION OF COMPLIANCE WITH POLICY ON LEGAL AND ETHICAL CONDUCT It is CPI's policy that all exempt employees, plus all management, supervisors, sales, marketing, procurement and service employees whose positions bring them in frequent contact with customers or suppliers ("Employees Requiring Certification"), comply with company policy and government business guidance documents. Certain policies and practices require legal and ethical standards, which are of overriding importance in the conduct of the company's business. To communicate and ensure the application of these ethical and legal standards, all Employees Requiring Certification must certify that they have read and are familiar with these key policies. They must also certify that they understand these policies contain mandatory legal and ethical standards and practices to be followed in conducting the company's business. Each Corporate Officer, Division President, Controller, Division Marketing Manager, International and Domestic Field Sales Manager and others designated by the Chief Executive Officer (CEO) must provide: - - Company Form 1906 annually. - - Division certification forms will be kept in a separate file in the Division's Human Resources Office. In the case of Corporate Officers, certification forms will be kept in a separate file in the Corporate Headquarters Office. All Employees Requiring Certification must provide: - - Company Form 1909 annually. Individuals newly hired or promoted to exempt positions must provide this certification within ten (10) working days of their start date. - - These certification forms are retained in the employee's personnel file in the appropriate Human Resources Office. Managers and supervisors must review Company Policies and expectations on business conduct with newly hired or promoted Employees Requiring Certification during the initial orientation or evaluation time period, and periodically, as work assignments or job duties change. EX-10.43 8 f95383exv10w43.txt EXHIBIT 10.43 Exhibit 10.43 PENSION PLAN FOR EXECUTIVE EMPLOYEES OF COMMUNICATION & POWER INDUSTRIES CANADA INC. (AS APPLICABLE TO JOE CALDARELLI) EFFECTIVE FROM JANUARY 1, 2002 SIGNED AT Georgetown this 17 DAY OF DECEMBER 2002. /s/ Illegible ---------------------------------------- SIGNATURE Director of Finance ---------------------------------------- TITLE TABLE OF CONTENTS SECTIONS PAGES - -------- ----- 1. - DEFINITIONS 1-3 2. - ELIGIBILITY AND MEMBERSHIP 4 3. - CONTRIBUTIONS 5 4. - RETIREMENT 6-10 5. - OPTIONAL FORMS OF PENSION 11 6. - BENEFITS ON TERMINATION OF EMPLOYMENT 12 7. - BENEFITS ON DEATH 13-14 8. - PORTABILITY 15 9. - LEAVES OF ABSENCE 16-17 10. - PENSION FUND 18 11. - CHANGE OR TERMINATION OF THE PLAN 19 12. - GENERAL 20-21 SUPPLEMENT A SECTION 1 - DEFINITIONS 1.01 In this text the following words and phrases shall have the meanings given unless the context clearly requires a different meaning. Reference to the male gender includes the female gender. Words implying the singular may be taken to mean the plural, and the plural may be taken to mean the singular. 1.02 "ACTUARY" means a person qualified as a Fellow of the Canadian Institute of Actuaries appointed as Actuary for the Plan by the Employer. 1.03 "ACTUARIAL EQUIVALENT" means a benefit of equivalent value determined on the basis of mortality tables, rates of interest and rules adopted from time to time by the Employer for this purpose on the recommendation of the Actuary. 1.04 "APPLICABLE LEGISLATION" means the Ontario Pension Benefits Act (including any regulations thereunder), any Act of a similar nature of any other Province (including any regulations thereunder) or that Act which may be applicable if only one of the said Acts be applicable, and shall include the Income Tax Act of Canada and the regulations thereunder and any administrative rules pursuant thereto. 1.05 "COMMUTED VALUE" means the value calculated in the manner prescribed by Applicable Legislation as of a fixed date of a pension, a deferred pension, a pension benefit or an ancillary benefit, determined in accordance with the "Recommendations for the Computation of Transfer Values from Registered Pension Plans" issued by the Canadian Institute of Actuaries. 1.06 "CONNECTED EMPLOYEE" means an Employee who is a connected person as defined under Income Tax Regulation 8500(3). 1.07 "CONSUMER PRICE INDEX" means the Canada all-terms Consumer Price Index as published by Statistics Canada. 1.08 "CONTINUOUS", means, in relation to membership in the Plan or to employment, without regard to periods of temporary interruption of the membership or employment. 1.09 "DATE OF CALCULATION" means the earliest of the date of retirement, date of termination of employment, date of death or date of termination of the Plan. 2 1.10 "EARNINGS" means the total salary received by the Member from the Employer during the Plan Year, including any payment for commissions, bonuses and profit-sharing. Further, in respect of a Member who is Non-Connected Employee, Earnings for a Plan Year after 1990 shall include (in addition to the above) prescribed compensation during any qualifying period in that year, determined in accordance with Applicable Legislation. 1.11 "EFFECTIVE DATE" has the meaning so described Supplement A. 1.12 "EMPLOYEE" has the meaning so described in Supplement A. 1.13 "EMPLOYER" has the meaning so described in Supplement A. 1.14 "HIGHEST AVERAGE INDEXED EARNINGS" at any date means the average of the Member's highest three years of Indexed Earnings preceding that date or, if the Member has less than three years of Indexed Earnings, the average of such lesser number of years. 1.15 "INDEXED EARNINGS" means, for a given Plan Year, Earnings adjusted to the Date of Calculation to reflect increases after the year, or after 1986, if later, in the average weekly wages and salaries of the Industrial Aggregate as published by Statistics Canada. 1.16 "MEMBER" means an Employee who is enrolled as a Member of the Plan in accordance with Section 2 and includes a Member who has retired or terminated employment and continues to have rights under the Plan. 1.17 "NON-CONNECTED EMPLOYEE" means an Employee who is not a Connected Employee. 1.18 "PAST SERVICE PENSION ADJUSTMENT" of a Member for a calendar year means the accumulated past service pension adjustment of the Member for the year with respect to the Employer, determined as of the end of the year in accordance with Applicable Legislation. 1.19 "PENSIONABLE SERVICE" has the meaning so described in Supplement A. 1.20 "PENSION ADJUSTMENT" of a Member for a calendar year means the aggregate of all amounts each of which is the pension credit for the year in respect of the Employer under the terms of the Plan, determined in accordance with Applicable Legislation. 3 1.21 "PENSION FUND" has the meaning so described in this Plan. 1.22 "PLAN" has the meaning so described in Supplement A. 1.23 "PLAN YEAR" means the period from any January 1 to December 31 of the same calendar year. 1.24 "SAME-SEX PARTNER", in relation to a Member, means a person of the same sex who is living together in a conjugal relationship with the Member, (a) continuously for a period of not less than three years, or (b) in a relationship of some permanence, if they are the natural or adoptive parents of a child, both as defined in the Family Law Act. 1.25 "SPOUSE", in relation to a Member, means, (a) if there is no person described in (b) below, a person of the opposite sex who is married to the Member, or (b) a person of the opposite sex who is not married to the Member and is living together in a conjugal relationship with the Member, (i) continuously for a period of not less than three years, or (ii) in a relationship on some permanence, if such person and the Member are the natural or adoptive parents of a child, both as defined in the Family Law Act provided that the person so determined as the Member's Spouse under (a) or (b) above is not living separate or apart from the Member at the relevant time. 1.26 "TEMPORARY ABSENCE" means a period of absence from work in respect of a Member who is not a Connected Employee at any time after 1990. The aggregate of such periods of temporary absence shall not exceed 5 years. Periods of parenting leave up to 12 months each and to an aggregate of 3 years, may be added to the said 5 year limit. Period of parenting leave is as defined under Income Tax Regulation 8507(3)(b). 1.27 "YEARLY MAXIMUM PENSIONABLE EARNINGS" means the amount established each calendar year under the Canada/Quebec Pension Plan. 4 SECTION 2 - ELIGIBILITY AND MEMBERSHIP 2.01 Membership in the Plan is optional. 2.02 An Employee who elects to join the Plan shall become a Member of the Plan on the date of his commencement of employment with the Employer or the Effective Date, whichever is later. 2.03 To become a Member of the Plan, an Employee must complete an application form on which he designates a beneficiary and identifies his Spouse, if any. 2.04 A Member may not terminate membership in the Plan while employed by the Employer. 2.05 Every Member shall receive a written explanation of the pertinent provisions of the Plan and of any amendments to it together with an explanation of his rights and duties and any other information in accordance with Applicable Legislation. A copy of the Plan and related documents shall be available for inspection by any Member. 5 SECTION 3 - CONTRIBUTIONS 3.01 MEMBER CONTRIBUTIONS A Member is not required nor permitted to contribute to the Plan. All costs will be borne by the Employer. 3.02 EMPLOYER CONTRIBUTIONS The Employer shall pay into the Plan in monthly instalments within 30 days after the month for which contributions are payable, such amounts as are deemed "Employer eligible contributions". An Employer eligible contribution is a contribution made by the Employer to the Plan that is a prescribed contribution or complies with prescribed conditions as per Applicable Legislation and the contribution is made pursuant to the recommendation of the Actuary. Subject to any Applicable Legislation, the costs of performing actuarial and administrative services in relation to the Plan shall be paid out of the Pension Fund, unless the Employer decides to pay it directly. 6 SECTION 4 - RETIREMENT 4.01 NORMAL RETIREMENT A Member's Normal Retirement Date shall be the first of the month coincident with or next following the Member's 65th birthday. 4.02 The amount of annual pension accrued at any date and payable from Normal Retirement Date shall be as described in Supplement A. 4.03 EARLY RETIREMENT A Member may retire early on the first of any month within 10 years of his Normal Retirement Date. 4.04 The amount of annual pension payable at early retirement will be the lesser of (a) and (b) below: (a) the Actuarial Equivalent of the pension accrued to the date of early retirement and otherwise payable from the Member's Normal Retirement Date, and (b) the pension accrued to the date of early retirement and otherwise payable from the Member's Normal Retirement Date, reduced by the early retirement reduction factor prescribed by Income Tax Regulation 8503(3)(c). 4.05 LATE RETIREMENT A Member, who with the consent of the Employer remains in service after his Normal Retirement Date, may delay receipt of his pension to the first day of the month coincident with or following his actual retirement or the first day of the month prior to the end of the calendar year of his 69th birthday, whichever first occurs. 4.06 The amount of annual pension payable at late retirement shall be the sum of (a) and (b) below: (a) the Actuarial Equivalent of the pension accrued according to Supplement A to the Member's Normal Retirement Date, (b) the pension accrued according to Supplement A to the date of late retirement for each year, or part thereof, of Pensionable Service after the Member's Normal Retirement Date. 7 4.07 NORMAL FORM OF PENSION Pension payments will commence on the date that the Member actually retires and will be paid in equal monthly instalments of one-twelfth the annual amount. (a) Subject to the provisions set out in (c) below, if the Member does not have a Spouse at the time pension commences to be paid, pension payments shall cease with the last payment due prior to the Member's death or after 180 monthly payments have been made, whichever occurs later. If the Member were to die before the said 180 monthly payments had been made, then the Commuted Value of the remaining payments would be paid to the Member's beneficiary in a lump sum. (b) Subject to the provisions set out in (c) below, if the Member has a Spouse or a Same-Sex Partner at the time pension commences to be paid, pension payments shall be made throughout the Member's lifetime for a minimum of 60 monthly payments with the provision that after the death of the Member or after 60 monthly payments have been made, whichever occurs later, pension payments will continue to his Spouse or Same-Sex Partner throughout the lifetime of the Spouse or Same-Sex Partner at the rate of 66 2/3% of the Member's pension. If the Member were to die before the said minimum of 60 monthly payments had been made, then the said payments will continue in full to the surviving Spouse or Same-Sex Partner until the balance of the 60 monthly payments has been made and will then reduce to 66 2/3%. If the Spouse or Same-Sex Partner were also to die before the said minimum of 60 monthly payments had been made, then the Commuted Value of the remaining payments would be paid to the estate of the Member, in a lump sum. (c) Notwithstanding anything to the contrary, the parties who are entitled to the joint life and survivor pension under (b) above, may waive their entitlement to receive payment of such pension by delivering to the administrator of the Plan a written waiver in the manner and in the form prescribed by Applicable Legislation within 12 months prior to the date the pension is to commence. In that event the Member shall be deemed as not having a Spouse or Same-Sex Partner at the time pension commences to be paid and shall be entitled to receive the form of pension pursuant to (a) above. 8 4.08 INDEXATION The pension being paid under any provision of the Plan to a Member, his Spouse or Same-Sex Partner will be increased annually on January 1 each year, commencing from January 1 following the date of commencement of such pension. Such increases will be based on the average rate of increase in the Consumer Price Index during the previous calendar year, or part thereof, in respect of which pension payments were made, less 1%. 4.09 CASH SETTLEMENT OF SMALL PENSIONS If the annual pension benefit payable at Normal Retirement Date under any provision of the Plan is less than 2% of the Yearly Maximum Pensionable Earnings for the calendar year in which the Member retires, dies or terminates employment, then a lump sum equal to the Commuted Value of the pension shall be paid instead. 4.10 MAXIMUM PENSION LIMIT The maximum pension limit at any given time for lifetime retirement benefits shall not exceed the limit stipulated under the Income Tax Act as at that given time. The current limit is specified first for the year in which the pension commences to be paid and is stated as follows: (a) In respect of Pensionable Service prior to January 1, 1990: The lesser of (i) and (ii) below: (i) 2% of the Member's Highest Average Indexed Earnings times the number of years of Pensionable Service prior to 1990, and (ii) $1,150 (or any higher limit allowed under Applicable Legislation) times the number of years of Pensionable Service prior to 1990. 9 (b) In respect of Pensionable Service in the year 1990: The lesser of (i) and (ii) below: (i) 2% of the Member's Highest Average Indexed Earnings for the year 1990, and (ii) $1,722.22 (or any higher limit allowed under Applicable Legislation) times the fraction of the year 1990 that is Pensionable Service. (c) In respect of Pensionable Service of a Member, who is a Non-Connected Employee, on or after January 1, 1991: The lesser of (i) and (ii) below: (i) 2% of the Member's Highest Average Indexed Earnings times the number of years of Pensionable Service after 1990 as a Non-Connected Employee, and (ii) $1,722.22 (or any higher limit allowed under Applicable Legislation) times the number of years of Pensionable Service after 1990 as a Non-Connected Employee. (d) In respect of Pensionable Service of a Member, who is a Connected Employee, on or after January 1, 1991: The aggregate of the lesser of (i) and (ii) below: (i) 2% of the Member's Indexed Earnings for each year as a Connected Employee, and (ii) $1,722.22 (or any higher limit allowed under Applicable Legislation) times the fraction of each year that is Pensionable Service as a Connected Employee. The number of years of Pensionable Service prior to January 1, 1991 shall not exceed 35. 10 After a pension commences, the maximum pension limit is the limit for the year of pension commencement (as described above) adjusted from that time in accordance with increases in the Consumer Price Index as prescribed by Applicable Legislation. The above rule applies to all pension benefits payable under the Plan including any amount payable to the Member's Spouse or Same-Sex Partner as a result of breakdown of marriage or conjugal relationship, whether payable upon retirement, termination of employment or termination of the Plan. 11 SECTION 5 - OPTIONAL FORMS OF PENSION 5.01 A Member who has no Spouse or Same-Sex Partner shall not be permitted to elect any of the following optional forms of pension. A Member who has a Spouse or Same-Sex Partner may, by written designation to the Employer, elect to have his pension paid in one of the optional forms described in Section 5.02 instead of in the normal form described in Section 4.07(b). The election of this optional form of pension may be rescinded at any time before pension payments commence but may not be rescinded after the commencement of pension payments. The amount of this optional form of pension shall be the Actuarial Equivalent of the pension otherwise payable in the normal form pursuant to Section 4.07(b). 5.02 A reduced amount of pension would be payable throughout the Member's lifetime, with the provision that after the death of the Member, payments shall continue, (a) in full without a guaranteed period or with a guaranteed period from the commencement date of the Member's pension of 60, 120 or 180 monthly payments, or (b) reduced to two-thirds with a guaranteed period from the commencement date of the Member's pension of 120 or 180 monthly payments during the lifetime of the Member's Spouse or Same-Sex Partner if such Spouse or Same-Sex Partner is then living. The level at which payments continue shall be in accordance with the Member's election stated at the time of electing this option. If the Member, his Spouse or Same-Sex Partner dies before pension payments commence, the election of this option will be automatically cancelled. 12 SECTION 6 - BENEFITS ON TERMINATION OF EMPLOYMENT 6.01 A Member who terminates employment prior to Normal Retirement Date shall receive, in accordance with the Member's election, either (i) a lump sum return of the Commuted Value of the pension accrued to the date of termination, or (ii) a deferred pension payable from Normal Retirement Date in the normal form described in Section 4.07. The amount of the deferred pension shall be equal to the amount of pension accrued under the Plan in accordance with Section 4.02 up to the date of termination. 6.02 Notwithstanding anything to the contrary stated in Section 6.01, if a Member terminates employment prior to Normal Retirement Date and at the date of termination of employment the Member has been a Member of the Plan for a Continuous period of at least 2 years, such Member will not be entitled to a lump sum return but instead shall receive the deferred pension described in Section 6.01. This deferred pension is not capable of surrender or commutation during the lifetime of the Member. 6.03 A Member in service who is within 10 years of attaining Normal Retirement Date and would be entitled to a deferred pension on termination of employment pursuant to Section 6.02 is entitled upon termination of employment or on wind-up of the Plan in whole or in part to receive an early retirement pension in accordance with Section 4.04. Similarly, a Member who has terminated employment may elect to receive an early retirement pension in accordance with Section 4.04, if he is entitled to a deferred pension pursuant to Section 6.02 and is within 10 years of attaining Normal Retirement Date. An election under the above provisions shall be made in writing, signed by the Member and delivered to the administrator of the Plan. 6.04 A member, who terminates employment and is entitled to a lump sum return described in Section 6.01, may have his lump sum return, in whole or in part, transferred in accordance with Applicable Legislation, to a registered retirement savings plan or the registered pension plan of his new employer where that plan so permits. 13 SECTION 7 - BENEFITS OF DEATH 7.01 BENEFICIARIES A Member may designate a beneficiary to receive after his death any benefits due under the Plan which are not payable to the Member's Spouse or Same-Sex Partner. A Member may alter or revoke such designation, within the limits set by Applicable Legislation, by notification in writing to the Employer, or by a will. Any payments due to the Member's beneficiary under the Plan will be made in a lump sum. If a beneficiary has not been designated or if the designated beneficiary predeceases the Member, any payments due under the Plan will be made to the Member's estate in a lump sum. 7.02 DEATH IN SERVICE PRIOR TO COMMENCEMENT OF PENSION If a Member dies while in service of the Employer prior to commencement of the deferred pension to which he would have been entitled under Section 6, had his employment terminated immediately before his death, the surviving Spouse or Same-Sex Partner, if any, may elect to receive: (a) a lump sum payment equal to the Commuted Value of the said deferred pension, or (b) An immediate pension or a deferred pension payable in equal monthly instalments (the deferred pension to commence prior to the 69th birthday of the Spouse or Same-Sex Partner, or if later, within 1 year after the Member's death), the present value of which does not exceed the present value of the said deferred pension. Further, the said pension shall be payable throughout the lifetime of the Spouse or Same-Sex Partner without a guaranteed period or with a guaranteed period not in excess of 180 monthly payments. If the Spouse or Same-Sex Partner does not make the said election within the time prescribed by Applicable Legislation, the Spouse or Same-Sex Partner shall be deemed to have elected an immediate pension. Notwithstanding anything to the contrary, the Spouse or Same-Sex Partner may waive his entitlement of the above benefit in the manner and form prescribed by Applicable Legislation. In that event the Member shall be deemed as not having a Spouse or Same-Sex Partner on the date of his death. 14 If the Member does not have a Spouse or Same-Sex Partner on the date of his death, or is living separate or apart from his Spouse or Same-Sex Partner on that date, the Member's beneficiary or his estate, as the case may be, will receive a lump sum payment equal to the Commuted Value of the deferred pension mentioned in (a) above. 7.03 DEATH AFTER PENSION PAYMENTS HAVE COMMENCED If a Member dies after pension payments have commenced, any payments due according to the normal or optional forms of pension applicable to the Member will be made as set out in Section 4.07 or Section 5. 7.04 DEATH AFTER TERMINATION OF EMPLOYMENT If a Member, who is entitled to a deferred pension on termination of employment in accordance with Section 6, dies before Normal Retirement Date, his death benefits will be paid in accordance with Section 7.02 as if he died in service prior to commencement of pension. 15 SECTION 8 - PORTABILITY 8.01 (a) Subject to Section 8.02, a Member who terminates employment before becoming eligible to retire and who is entitled to a deferred pension in accordance with provisions of Section 6, may require the administrator of the Plan to pay the Commuted Value of the deferred pension: (i) to the pension fund to provide benefits related to another registered pension plan in respect of the Member, if the administrator of the other pension plan agrees to accept the payment; or (ii) into a prescribed retirement savings arrangement, or (iii) for the purchase for the Member of a deferred life annuity which will not commence before the earliest date on which the Member would have been entitled to receive payment of pension benefits under the Plan. (b) The following are prescribed retirement savings arrangements under Applicable Legislation for the purposes of (ii) above: (i) a registered retirement savings plan (under the Income Tax Act) or any locked-in retirement account (under applicable provincial legislation); as the case may be, or (ii) a life income fund or locked-in retirement income fund (under applicable provincial legislation) that meets the requirements for a registered retirement income fund (under the Income Tax Act). (c) Notwithstanding anything to the contrary in (a) above, a life income fund and a locked-in retirement income fund both referred to in b(ii) above will only be available to a Member who terminates employment on or after the attainment of age 54. 8.02 Amounts transferred in accordance with Section 8.01 shall not exceed the maximum amount prescribed under the Income Tax Act. Any excess of the Commuted Value over the amount transferred shall be paid to the Member in a lump sum. 16 SECTION 9 - LEAVES OF ABSENCE 9.01 TEMPORARY ABSENCES Subject to provisions set out in Section 9.03, if, with the consent of the Employer, a Member is temporarily absent from active duty and is receiving Earnings, pension under the Plan will continue to accrue during such absence. 9.02 If, with the consent of the Employer, a Member is temporarily absent from active duty and is not receiving Earnings, the previously credited pension shall not be affected but pension under the Plan shall not continue to accrue during such absence. 9.03 In respect of a Member who is a Connected Employee anytime after 1990, pension under the Plan shall not continue to accrue during a period of Temporary Absence. 9.04 PREGNANCY AND PARENTAL LEAVE In accordance with the provisions of the Ontario Employment Standards Amendment Act, 1990, when a Member who is a Non-Connected Employee is granted pregnancy or parental leave, without pay, the Member continues to participate in the Plan and accrue benefits thereunder during such leave, unless the Member gives the Employer a written notice that he elects not to participate in the Plan, in which event, no benefits shall accrue during such period of leave. 9.05 Unless the Member has given the Employer the written notice referred to in the foregoing Section 9.04, the Employer shall during such leave continue to make the Employer Contributions in accordance with Section 3.02, subject to the condition that the aggregate of such periods of leave, attributable to a Member's parenting leave, during which pension accrues, shall not exceed 3 years. 9.06 WORKER'S COMPENSATION Where a Member who is a Non-Connected Employee is absent from work due to a work-related injury in accordance with the Workers' Compensation Amendment Act, 1989, he continues to participate in the Plan and accrue benefits for one year after the date the injury occurred. For this purpose, the Member shall be deemed, for one year after the date the injury occurred, to continue to be employed by the Employer on the date of the injury. 17 9.07 The Employer shall made Employer Contributions, in accordance with Section 3.02, throughout the first year after the injury to the Member in order to provide benefits under the Plan in respect of the Member when he is absent from work because of injury. 18 SECTION 10 - PENSION FUND 10.01 The Employer shall establish a Pension Fund to be held under an agreement or agreements with a trust company or companies, under a contract or contracts with an insurance company or companies to be selected by the Employer, or a combination thereof, into which all contributions for the purposes of the Plan shall be deposited. The Pension Fund shall not form any part of the revenue or assets of the Employer. 10.02 Investments and re-investments of the Pension Fund shall be restricted to securities and loans of a class permitted by Applicable Legislation. 10.03 If at any time a surplus arises from the operation of the Plan which is not required to meet the actuarial liability existing thereunder, as determined by the Actuary, such surplus, subject to any Applicable Legislation or any moratorium on surplus withdrawal in effect at the time, may be returned to the Employer or may be applied against the Employer's obligations towards the costs of benefits arising under the Plan in regard to current and subsequent years, or, may be used to provide additional benefits on behalf of Members of the Plan. 19 SECTION 11 - CHANGE OR TERMINATION OF THE PLAN 11.01 The Employer intends to maintain the Plan in force but reserves the right to amend or discontinue the Plan. 11.02 If the Plan is amended, the benefits provided in respect of remuneration and service prior to the date of amendment shall not be adversely affected. Replacement of the Plan by another shall be considered as an amendment to the Plan. 11.03 If the Plan is discontinued, the assets of the Plan will be allocated to Members of the Plan to provide pensions and other benefits according to their entitlements under the terms of the Plan. 11.04 If there are any assets remaining after the liabilities for all benefits accrued under the Plan have been met, they shall be returned to the person or persons described in Supplement A, subject to any Applicable Legislation or any moratorium on surplus withdrawal in effect at the time. 11.05 It is specifically provided that, if a surplus arising out of termination of the Plan is applied to increase benefits to Members of the Plan the total resulting benefits accruing to a Member shall not exceed the limits as described in Section 4.10. 11.06 In order to avoid the revocation of the registration of the Plan, nothing contained herein shall prevent (a) the Employer from amending the Plan at any time to reduce the benefits provided for a Member with respect to employment, and (b) to return to the Employer the contributions made under the Plan by the Employer on behalf of a Member. 20 SECTION 12 - GENERAL 12.01 The Employer shall be the administrator of the Plan and shall be responsible for the overall operation and administration of the Plan. The Employer shall decide all questions relating to Earnings, Pensionable Service, membership, eligibility, retirement, and the calculation of benefits under the Plan. The Employer's decision shall be final and binding upon all persons affected thereby and shall be made in such a way as not to discriminate against any Employee or Member. 12.02 Evidence of age must be produced, by a Member, his Spouse or his Same-Sex Partner who will be entitled to a pension, if requested by the Employer. 12.03 No benefit provided under the Plan is capable of being assigned, charged, anticipated, given as security or surrendered. For the purposes of this Section, an assignment does not include: (a) an assignment pursuant to a decree, order or judgment of a competent tribunal or a written agreement in settlement of rights arising as consequence of a marriage breakdown or other conjugal relationship between a Member, his Spouse, former Spouse, Same-Sex Partner or former Same-Sex Partner, or (b) an assignment by the legal representative of a deceased Member on the distribution of the Member's estate. Further, a surrender does not include a reduction in benefits to avoid the revocation of the registration of the Plan as described in Section 11.06. 12.04 None of the benefits provided under the terms of the Plan are subject to the claim of or to execution, attachment, garnishment or other legal or equitable process by any creditor of a Member or of any other recipient of benefits except as specifically required or permitted under Applicable Legislation. 12.05 Where amounts such as Member's Pension Adjustments and/or Past Service Pension Adjustments are determined under the Income Tax Act Regulations with respect to the Plan, such amounts shall not be inappropriate having regard to the said Regulations and for purposes for which the amounts are determined. In addition, where a Member's Pension Adjustment exceeds the maximum limits set out under the Income Tax Act, the Plan shall become revocable unless the provisions of Section 11.06 are complied with. 21 12.06 Subject to Applicable Legislation, the sex of a Member or other beneficiary under the Plan shall not be taken into account in, (a) determining the pension benefits or the Commuted Value of pension benefits that the Member or other beneficiary is or may become entitled to, (b) the provision of eligibility of membership, (c) the provision of ancillary benefits under the Plan. 12.07 Upon breakdown of marriage or conjugal relationship, the pension benefits accrued during the course of marriage or conjugal relationship shall be divided between the parties in accordance with the Applicable Legislation affecting matrimonial property. 12.08 Each Member shall receive annually a written statement containing information in respect of the Plan, the Member's pension benefits and any ancillary benefits, as prescribed by Applicable Legislation. 12.09 On retirement, termination of employment or death of a Member, such Member, his Spouse, Same-Sex Partner or beneficiary, as the case may be, shall receive a written statement showing the benefits to which he is entitled, as prescribed by Applicable Legislation. SUPPLEMENT A A1 "EFFECTIVE DATE" means January 1, 2002. A2 "EMPLOYEE" means an executive employee of the Employer who has been classified as such by the Employer. A3 "EMPLOYER" means Communication & Power Industries Canada Inc. A4 "NORMAL RETIREMENT PENSION": The amount of annual pension accrued at any date and payable from Normal Retirement Date shall be as follows: (a) 2% of the Member's Highest Average Indexed Earnings multiplied by the period of Pensionable Service prior to January 1, 1991; plus (b) the aggregate of 2% of the Member's Indexed Earnings for each year, or part thereof, that is Pensionable Service on or after January 1, 1991. A5 "PENSIONABLE SERVICE" means (subject to the provisions of Section 9) the number of years and completed months (with completed months counted as a fraction of a year) of Continuous service in Canada with the Employer from the incorporation date of the company and all pensionable service recognized under The Retirement Plan of Communications & Power Industries Canada Inc. (registration number 1020429). A6 "PLAN" means the Pension Plan for Executive Employees of Communication & Power Industries Canada Inc. (As Applicable to Joe Caldarelli) as set out in this document and includes any future amendment, additions thereto or substitutions therefore. A7 "SURPLUS WITHDRAWAL": The surplus on termination of the Plan referred to in Section 11.04 of the Plan shall be returned to the employee. STANDARD LIFE CLIENT NUMBER RS102249-S0521 EX-31 9 f95383exv31.txt EXHIBIT 31 Exhibit 31 CERTIFICATION I, O. Joe Caldarelli, certify that: 1. I have reviewed this annual report on Form 10-K of Communications & Power Industries Holding Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 30, 2003 Signature: /s/ O. Joe Caldarelli ----------------- --------------------------------- O. Joe Caldarelli, Chief Executive Officer CERTIFICATION I, Joel A. Littman, certify that: 1. I have reviewed this annual report on Form 10-K of Communications & Power Industries Holding Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: d) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; e) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and f) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): b) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 30, 2003 Signature: /s/ Joel A. Littman ---------------- ------------------------------------ Joel A. Littman, Chief Financial Officer CERTIFICATION I, O. Joe Caldarelli, certify that: 1. I have reviewed this annual report on Form 10-K of Communications & Power Industries, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: g) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; h) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and i) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most fourth quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): c) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 30, 2003 Signature: /s/ O. Joe Caldarelli ---------------- -------------------------------------- O. Joe Caldarelli, Chief Executive Officer CERTIFICATION I, Joel A. Littman, certify that: 1. I have reviewed this annual report on Form 10-K of Communications & Power Industries, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: j) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; k) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and l) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): d) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 30, 2003 Signature: /s/ Joel A. Littman ------------------------------------ Joel A. Littman, Chief Financial Officer EX-32 10 f95383exv32.txt EXHIBIT 32 EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Communications & Power Industries Holding Corporation (the "Company") on Form 10-K for the period ending October 3, 2003 as filed with the Securities Exchange Commission on the date hereof (the "Report"), I, O. Joe Caldarelli, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ O. Joe Caldarelli O. Joe Caldarelli Chief Executive Officer December 30, 2003 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Communications & Power Industries Holding Corporation (the "Company") on Form 10-K for the period ending October 3, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joel Littman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Joel Littman Joel Littman Chief Financial Officer Dcemeber 30, 2003 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Communications & Power Industries, Inc. (the "Company") on Form 10-K for the period ending October 3, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, O. Joe Caldarelli, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ O. Joe Caldarelli O. Joe Caldarelli Chief Executive Officer December 30, 2003 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Communications & Power Industries, Inc. (the "Company") on Form 10-K for the period ending October 3, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joel Littman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Joel Littman Joel Littman Chief Financial Officer December 30, 2003 -----END PRIVACY-ENHANCED MESSAGE-----


(Mark One)
x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended October 3, 2003
OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934


PART 1
	Item 1: Business
	Item 2: Properties
	Item 3: Legal Proceedings
	Item 4: Submission of Matters to a Vote of Security Holders
PART II
	Item 5: Market for the Registrant’s Common Equity and Related Shareholder Matters
	Item 6: Selected Financial Data
	Item 7: Management’s Discussion and Analysis of Financial Condition and Results of operations
	Item 7A: Quantitative and Qualitative Disclosures About Market Risk
	Item 8: Financial Statements and Supplementary Data
	Item 9: Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9a: Controls and Procedures
PART III
	Item 10: Directors and Executive Officers
	Item 11: Executive Compensation
	Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
	Item 13: Certain Relationships and Related Transactions
PART IV
	Item 15: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
INDEX TO FINANCIAL STATEMENTS
	COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION AND SUBSIDIARIES
		Independent Auditors’ Report
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries
		Independent Auditors’ Report
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	SCHEDULE II COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION AND SUBSIDIARIES
	SCHEDULE II COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries
Exhibit Index
EXHIBIT 2.4
EXHIBIT 10.1.2
EXHIBIT 10.40
EXHIBIT 10.41
EXHIBIT 10.42
EXHIBIT 10.43
EXHIBIT 31
EXHIBIT 32


Property	Owned			Leased/Subleased

	(square footage)
San Carlos, California		322,000	(a)
Beverly, Massachusetts		169,385	(b)
Georgetown, Ontario, Canada		126,000			21,975
Palo Alto, California		—			419,000	(c)
Various locations		—			16,355	(d)


		Due in Fiscal Years

		2004			2005		2006		2007		2008		Thereafter		Total

							(in thousands)
			(a	)
Debt obligations		$	17,500			100,000		—		—		—		—		117,500
Noncancellable operating leases			1,127			888		268		80		71		2,436		4,870
Senior Redeemable Preferred Stock			—			—		—		28,907		—		—		28,907

	Total cash obligations	$	18,627			100,888		268		28,987		71		2,436		151,277

Standby letters of credit		$	3,317			2,018		—		—		—		—		5,335


		Due in Fiscal Years

		2004			2005		2006		2007		2008		Thereafter		Total

							(in thousands)
			(a	)
Debt obligations		$	—			100,000		—		—		—		—		100,000
Noncancellable operating leases			3,577			3,338		2,718		2,530		2,463		32,507		47,133
Senior Redeemable Preferred Stock			—			—		—		28,907		—		—		28,907

	Total cash obligations	$	3,577			103,338		2,718		31,437		2,463		32,507		176,040

Standby letters of credit		$	3,317			2,018		—		—		—		—		5,335



(a)		The San Carlos, California square footage includes approximately 20,736 square feet leased to one tenant who provides services to the Company and others.

(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. The Palo Alto, California square footage includes approximately 5,470 square feet subleased to two tenants.


COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION	Page

Independent Auditors’ Report		F-2
Consolidated Balance Sheets as of October 3, 2003 and September 27, 2002		F-3
Consolidated Statements of Operations for the 53-week period ended October 3, 2003, and the 52-week periods ended September 27, 2002 and September 28, 2001		F-4
Consolidated Statements of Stockholders’ Deficit for the 53-week period ended October 3, 2003 and the 52-week periods ended September 27, 2002 and September 28, 2001		F-5
Consolidated Statements of Cash Flows for the 53-week period ended October 3, 2003, and the 52-week periods ended September 27, 2002 and September 28, 2001		F-6
Notes to the Consolidated Financial Statements		F-8
Financial Statement Schedule		F-65


Name	Age		Position

William P. Rutledge		61	Chairman of the Board and Director
O. Joe Caldarelli		53	Chief Executive Officer and Director
Robert A. Fickett		43	President, Chief Operating Officer and Director
Joel A. Littman		51	Chief Financial Officer, Treasurer and Secretary
John R. Beighley		51	Vice President and Assistant Secretary
John G. Danhakl		47	Director
John M. Baumer		36	Director
J. Kristofer Galashan		25	Director


			% of Total
			Options
	Securities		Granted to					Market				Potential Realizable Value at
	Underlying		Employees			Exercise		Price on				Assumed Annual Rates of Stock
	Options		in Fiscal			Price per		Date of		Expiration		Price Appreciation for Ten-Year
Name	# of shares		Year			Share		Grant		Date		Option Term (c)

			(a)					(b)				0%		5%		10%

O. Joe Caldarelli		50,000		26.2	%	$	1.10	$	9.00		3/10/13	$	395,000	$	429,589	$	482,656
Robert A. Fickett		30,000		15.7	%	$	1.10	$	9.00		3/10/13	$	237,000	$	257,754	$	289,594
Don C. Coleman		10,000		5.2	%	$	1.10	$	9.00		3/10/13	$	79,000	$	85,918	$	96,531
Joel A. Littman		15,000		7.9	%	$	1.10	$	9.00		3/10/13	$	118,500	$	128,877	$	144,797
Mike Cheng		10,000		5.2	%	$	1.10	$	9.00		3/10/13	$	79,000	$	85,918	$	96,531


					Number of Securities				Value of Unexercised In-the-
					Underlying Unexercised				Money Options at Fiscal Year-
					Options at Fiscal Year-End				End
	Shares
	Acquired		Value
Name	On Exercise		Realized		Exercisable		Unexercisable		Exercisable		Unexercisable

O. Joe Caldarelli		—		—		6,000		52,000	$	86,340	$	748,280
Robert A. Fickett		—		—		13,625		33,125		196,064		476,669
Don C. Coleman		—		—		3,750		11,250		53,963		161,888
Joel A. Littman		—		—		4,500		18,500		64,755		266,215
Mike Cheng		—		—		4,125		11,250		59,359		161,888

(1)		Incorporated by reference to CPI’s Registration Statement on Form S-1 (Registration No. 33-96858), filed on September 12, 1995.

(2)		Incorporated by reference to Amendment No. 3 to CPI’s Registration Statement on Form S-1 (Registration No. 33-96858), filed on November 9, 1995.

(3)		Incorporated by reference to Amendment No. 1 to CPI’s Registration Statement on Form S-1 (Registration Statement No. 33-96858), filed on October 25, 1995.

(4)		Incorporated by reference to CPI’s Annual Report on Form 10-K, for the year ended October 1, 1999.

(5)		Incorporated by reference to CPI’s Annual Report on Form 10-K, for the year ended September 29, 2000.

(6)		Incorporated by reference to CPI’s Quarterly Report on Form 10-Q, for the quarter ended December 28, 2000.

(7)		Incorporated by reference to CPI’s Quarterly Report on Form 10-Q, for the quarter ended March 29, 2002.

(8)		Incorporated by reference to CPI’s Quarterly Report on Form 10-Q, for the quarter ended June 28, 2002.

(9)		Incorporated by reference to CPI’s Quarterly Report on Form 10-Q, for the quarter ended January 3, 2003.

(10)		Incorporated by reference to CPI’s Quarterly Report on Form 10-Q, for the quarter ended April 4, 2003.

(11)		Incorporated by reference to CPI’s Quarterly Report on Form 10-Q, for the quarter ended July 4, 2003.

(12)		Incorporated by reference to CPI’s Annual Report on Form 10-K, for the year ended September 27, 2002.


		COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION

		By:		/s/ O. Joe Caldarelli

				O. Joe Caldarelli
				Chief Executive Officer


Signature	Title	Date


/s/ JOHN G. DANHAKL John G. Danhakl	Director	December 30, 2003

/s/ JOHN M. BAUMER John M. Baumer	Director	December 30, 2003

/s/ J. KRISTOFER GALASHAN J. Kristofer Galashan	Director	December 30, 2003

/s/ ROBERT A. FICKETT Robert A. Fickett	Director	December 30, 2003

/s/ WILLIAM P. RUTLEDGE William P. Rutledge	Chairman of the Board and Director	December 30, 2003

/s/ O. JOE CALDARELLI O. Joe Caldarelli	Director, Chief Executive Officer (Principal Executive Officer)	December 30, 2003

/s/ JOEL A. LITTMAN Joel A. Littman	Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer)	December 30, 2003


		COMMUNICATIONS & POWER INDUSTRIES , INC

		By:		/s/ O. Joe Caldarelli

				O. Joe Caldarelli
				Chief Executive Officer


	Operating		Sublease
Fiscal Year	Leases		Income

2004	$	1,127		137
2005		888		10
2006		268		–
2007		80		–
2008		71		–
Thereafter		2,436		–

Total future minimum lease payments	$	4,870		147


(Dollars in thousands)	CPI		Customer		Total
	Sponsored		Sponsored		Incurred

Fiscal year 2003	$	6,860		3,725		10,585
Fiscal year 2002	$	5,873		5,174		11,047
Fiscal year 2001	$	5,767		5,012		10,779


						Options Outstanding

						Number of			Weighted-
			Options Available			Shares Under			Average Exercise
			for Grant			Option			Price

Authorized				250,000			—			—
Granted				(235,050	)		235,050		$	4.00

	Balance at September 28, 2001			14,950			235,050		$	4.00

Granted				(2,000	)		2,000		$	4.00
Canceled				21,750			(21,750	)	$	4.00

	Balance at September 27, 2002			34,700			215,300		$	4.00

Additional shares authorized				100,000			—			—
Granted				(191,000	)		191,000		$	1.10
Canceled				102,250			(102,250	)	$	4.00

		Balance at October 3, 2003		45,950			304,050		$	2.18


Options Outstanding							Options Exercisable

			Outstanding Options
			Weighted Average		Weighted-				Weighted-
Range of			Remaining		average		Number of		average
Exercise	Number		Contractual Life		Exercise		Shares		Exercise
Prices	of Shares		(In Years)		Price		Exercisable		Price

$4.00		113,050		6.78	$	4.00		82,600	$	4.00
$1.10		191,000		9.42	$	1.10		—	$	1.10


(Dollars in thousands)

Components of net periodic pension cost
Current year service cost		$	23
Prior year service cost			124
Interest cost			20
Actual return on plan assets			(13	)

Net periodic pension cost		$	154

Benefit Obligation
Beginning balance		$	—
	Transfer from defined contribution plan		102
	Service cost		147
	Interest cost		20
	Benefits paid		—
	Exchange rate adjustment		40

Ending balance		$	309
Plan Assets at Fair Value
Beginning balance		$	—
	Transfer from defined contribution plan		102
	Actual return on plan assets		13
	Company contributions		147
	Benefits paid		—
	Exchange rate adjustment		40

Ending balance		$	302

Benefit obligations in excess of plan assets		$	7


Discount rate	4.75	%
Expected return on plan assets	7.50	%
Expected rate of compensation increases	5.50	%


	(Dollars in thousands)

	Oct. 3,		July 4,		Apr. 4,		Jan. 3,		Sept. 27,			June 28,			Mar. 29,			Dec. 28,
Quarter Ended	2003		2003		2003		2003		2002			2002			2002			2001

Sales	$	65,190		70,721		67,897		61,626		59,613			64,792			60,612			66,228
Gross profit	$	20,655		23,448		20,684		16,690		15,287			16,664			12,946			14,159
Net income (loss)	$	2,536		8,257		3,219		2,536		(2,927	)		(1,039	)		(1,733	)		(1,034	)


					Options Outstanding

		Options Available				Number of Shares			Weighted-average
		for Grant				Under Option			Exercise Price

Authorized			250,000				—			—
Granted			(235,050	)			235,050		$	4.00

	Balance at September 28, 2001		14,950				235,050		$	4.00

Granted			(2,000	)			2,000		$	4.00
Canceled			21,750				(21,750	)	$	4.00

	Balance at September 27, 2002		34,700				215,300		$	4.00

Additional shares authorized			100,000				—			—
Granted			(191,000	)			191,000		$	1.10
Canceled			102,250				(102,250	)	$	4.00

	Balance at October 3, 2003		45,950				304,050		$	2.18


	Balance at		Charged to				Balance at
	Beginning of		Costs and		Deduction		End of
Description	Period		Expenses		Amount		Period

Allowance for doubtful accounts receivable
Fiscal year ended 2001	$	797		355		717		435
Fiscal year ended 2002	$	435		331		189		577
Fiscal year ended 2003	$	577		133		135		575