##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-K þ
    
    Annual report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, 2004, or
 o
    
    Transition report pursuant section 13 or 15 (d) of the Securities Exchange Act of 1934For the transition
period from  to
 Commission file number 0-49651 SUNTRON CORPORATION 
  Delaware
    
    86-1038668(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 2401 West Grandview Road, Phoenix, Arizona 85023 
  (602) 789-6600 
  Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, $0.01 par value
    
    Nasdaq National Market
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ  No o Indicate by check mark 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 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. o Indicate by check mark if the Registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes o  No þ The aggregate market value of the outstanding common equity held by non-affiliates of the
registrant, computed as of June 25, 2004, which was the last business day of the registrants most
recently completed second fiscal quarter, was $20.8 million. This amount is based on 3,028,000
shares held by non-affiliates. For purposes of this computation, all current officers, directors,
and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should
not be deemed to be an admission that such officers, directors, or 10% beneficial owners are, in
fact, affiliates of the registrant. As
of March 31, 2005, there were outstanding 27,415,221shares of the registrants Common
Stock, $0.01 par value. Documents Incorporated by Reference
None




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SUNTRON CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS PART I1. Business
    
    
    12. Properties
    
    
    63. Legal Proceedings
    
    
    64. Submission of Matters to a Vote of Security Holders
    
    
    6PART II5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    76. Selected Financial Data
    
    
    87. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    107A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    328. Financial Statements and Supplementary Data
    
    
    329. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    329A. Controls and Procedures
    
    
    329B. Other Information
    
    
    32PART III10. Directors and Executive Officers of the Registrant
    
    
    3311. Executive Compensation
    
    
    3612. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    3913. Certain Relationships and Related Transactions
    
    
    4114. Principal Accountant Fees and Services
    
    
    41PART IV5. Exhibits and Financial Statement Schedules
    
    
    42Signatures
    
    
    44Index to Consolidated Financial Statements and Schedule
    
    
    F-1Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  Statement Regarding Forward-Looking Statements This report onForm 10-Kcontains forward-looking statements regarding future events or
our future financial and operational performance. Forward-looking statements include statements
regarding markets for our products; trends in net sales, gross profits, and estimated expense
levels; liquidity and anticipated cash needs and availability; and any statement that contains the
words anticipate, believe, plan, estimate, expect, seek, and other similar expressions.
The forward-looking statements included in this report reflect our current expectations and
beliefs, and we do not undertake publicly to update or revise these statements, even if experience
or future changes make it clear that any projected results expressed in this report, annual or
quarterly reports to stockholders, press releases, or company statements will not be realized. In
addition, the inclusion of any statement in this report does not constitute an admission by us that
the events or circumstances described in such statement are material. Furthermore, we wish to
caution and advise readers that these statements are based on assumptions that may not materialize
and may involve risks and uncertainties, many of which are beyond our control, that could cause
actual events or performance to differ materially from those contained or implied in these
forward-looking statements. These risks and uncertainties include, but are not limited to, risks
related to the realization of anticipated revenue, profitability, and synergies of the recent
business combinations; the ability to meet cost estimates and achieve the expected benefits
associated with planned restructuring activities; trends affecting our growth; and the business and
economic risks described herein under Factors That May Affect Future Results.




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PART I 
 ITEM 1. BUSINESS Overview Suntron Corporation delivers complete manufacturing services and solutions to support the
entire life cycle of complex products in the semiconductor capital equipment, aerospace and
defense, industrial, networking and telecommunications, and medical equipment market sectors of the
electronic manufacturing services (EMS) industry. Our manufacturing services include printed
circuit board assembly, cable and harness production, engineering services, quick-turn
manufacturing services and full systems integration, testing, and after-market repair and warranty
services. We believe our success in the marketplace is a direct result of our ability to provide
unique solutions tailored to match each of our customers specific requirements, while meeting the
highest quality standards in the industry. Manufacturing Services We provide a variety of manufacturing services including printed circuit board assembly and
testing, electronic interconnect assemblies, subassemblies, and full systems integration (known as
box-build), after-market repair and warranty services, and engineering and design services. Our
competitive strengths include our ability to manufacture highly complex products in short cycle
times with smaller lot sizes (referred to as high-mix manufacturing services). Our strategy
targets capturing turnkey work by providing customers with support throughout the entire
manufacturing process, starting with prototype design for manufacturability all the way through
material procurement, supply chain management, final assembly, and testing, to reduce our
customers costs and improve their time to market. We provide the following services: Design Services. We provide our customers product development, design and test engineering
services. Our design for manufacturability and design for testability reviews allow our engineering
group to collaborate with our customers early in the design process to reduce variation, cost, and
complexity in new designs. Following completion of the initial design, we also offer design
services to assist our customers in taking their product to market. Our support teams work closely
with our customers through all stages of product planning and production. Our computer systems
feature a computer-aided design capability that allows our engineers to collaborate online with a
customers engineers when developing and changing product designs. Prototype Manufacturing Services. We provide quick-turn prototype manufacturing services that
provide customers with 24 hour to 10-day turnaround times. Our prototype manufacturing operations,
located in Manchester, New Hampshire, and Phoenix, Arizona, provide full turnkey solutions to
support our customers with new product introduction activities. These services permit our customers
to be more competitive by reducing the amount of time required to bring new products to market. Materials and Supply Chain Management Services. We consult with our customers and their
suppliers early in the component selection process. This early supplier involvement helps ensure an
efficient supply stream that focuses not only on cost but also on availability of components and
the component life cycle. When material obsolescence affects our customers designs, we can provide
recommendations on alternative components through our component-engineering group. We have
developed innovative material planning relationships with a select group of Original Equipment
Manufacturers (OEMs) in the semiconductor capital equipment, aerospace and defense, computer,
medical instrumentation, networking, and telecommunications industries. These relationships are
supported by sophisticated in-house product design and technical support capabilities. In addition,
certain of our customers have internet access to our intranet in order to monitor printed circuit
board production quality, board and box-build assembly methods, and product throughput in a
real-time environment. Each customers internet access is secured and tailored for the customers
unique needs. We further complement our offerings by providing full logistics support that allows
the final assembly to be shipped directly to the customers end user. This supply chain management
ability differentiates us as a resource in enhancing customers cost-efficiency and time-to-market. Manufacturing and Assembly Services. We provide high-mix manufacturing services for a variety
of highly complex electronic products. Our manufacturing methodology is central to supporting
high-mix manufacturing. While typical high-volume manufacturing companies use high-volume runs to
recover costs incurred 2




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in the initial set-up for the manufacturing process, our high-mix manufacturing technique
focuses on parallel processing and set-up reductions in order to reduce initial set-up costs. Testing Services. We offer in-circuit functional testing and environmental stress testing
that includes temperature and motion/shock/electronic cycle testing. These tests verify that
components have been properly placed and electrical continuity exists at the proper places on the
circuit board. Functional testing is performed on the in-circuit testers or separate test adapters
and verifies that the board or system is in compliance with customer specifications. Environmental
tests determine how the product will function at various temperatures and seeks to identify and
remove any latent defects that might appear later in the product life cycle. Quality Control Services. Our quality control standards provide another means of serving the
needs of our customers, because OEMs often rely on suppliers to assure quality control for
subassemblies rather than providing such quality control themselves. We believe that our adherence
to strict quality control standards and our investment in state-of-the-art production facilities
and equipment have attracted and retained important customers that have established extremely rigid
product quality standards. After-market Repair Services. We provide after-market warranty and repair services for
electronic products, including products that may not have been originally manufactured by us, in
support of customer product warranty, repair, and upgrade programs. Customers Suntron focuses on serving OEMs in industries that have high-mix requirements. Sales to
Honeywell International, Inc. (Honeywell) and Applied Materials, Inc. (Applied) represented
approximately 21% and 25%, respectively, of our net sales for 2004. In the fourth quarter of 2004,
Applied informed us that they planned to transition substantially all of their business with us to
alternative contract manufacturers and by January 2005 this transition was substantially complete.
Accordingly, we expect this transition will adversely impact our results of operations beginning in
the first quarter of 2005. The loss of Honeywell as a customer would, and the loss of any other
significant customer could, have a material adverse effect on our financial condition and results
of operations. The following table presents Suntrons net sales by market sector for the years
ended December 31, 2002, 2003 and 2004: 2002
    
    
    2003
    
    
    2004Semiconductor capital equipment
    
    
    25
    %
    
    
    24
    %
    
    
    39
    %Aerospace and defense
    
    
    42
    %
    
    
    33
    %
    
    
    24
    %Industrial
    
    
    9
    %
    
    
    25
    %
    
    
    25
    %Networking and telecommunications
    
    
    18
    %
    
    
    15
    %
    
    
    9
    %Medical equipment
    
    
    1
    %
    
    
    3
    %
    
    
    3
    %Other
    
    
    5
    %
    
    
    
    %
    
    
    
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Sales and Marketing Our sales force develops close working relationships with customers beginning early in the
design phase and throughout all stages of production. We focus our marketing efforts on developing
long-term relationships with our customers key personnel. We continue to focus our sales and marketing efforts on the following market sectors: (1)
semiconductor capital equipment, (2) aerospace and defense, (3) industrial, (4) networking and
telecommunications, and (5) medical equipment. This approach facilitates sales personnel
specialization within related product groupings and permits sales representatives to develop a high
degree of technical expertise. Our sales strategy is to target (1) technology companies with minimal manufacturing
capabilities that require one-stop shopping service in rapidly evolving sectors and (2) OEMs in
our target markets that require the outsourcing services in which we specialize. Our vertical
integration, coupled with our unique focus on the underserved high-mix needs of our customers,
differentiates us from other electronics manufacturing services providers. 3




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We supplement the efforts of our sales force in the marketing of our services with direct
mailings of brochures and other literature. Backlog Although we obtain firm purchase orders from our customers, OEM customers typically do not
place firm orders for delivery of products more than 30 to 90 days in advance. We do not believe
that the backlog of expected product sales covered by firm purchase orders is a meaningful measure
of future sales since customers may reschedule or cancel orders. Suppliers We use numerous suppliers of electronic components and other materials for our operations.
From time to time, some components we use have been subject to shortages, and suppliers have been
forced to allocate available quantities among their customers. See Item 7  Managements Discussion
and Analysis of Financial Condition and Results of Operations  Factors That May Affect Future
Results  We are dependent on limited and sole source suppliers for electronic components and may
experience component shortages, which would cause us to delay shipments to customers. We attempt
to mitigate the risks of component shortages by working with customers to delay delivery schedules
or by working with suppliers to provide the needed components using just-in-time inventory
programs. Competition The electronics manufacturing services industry is extremely competitive and includes hundreds
of companies. The contract manufacturing services we provide are available from many independent
sources. Many of our competitors are more established in the industry and have substantially
greater financial, manufacturing, or marketing resources than we do. Certain of our competitors
have broader geographic presence than we do, including manufacturing facilities in Asia, Europe,
and South America. We believe that the principal competitive factors in our targeted market are
quality, reliability, ability to meet delivery schedules, technological sophistication, geographic
location, and price. We also face competition from current and potential customers, which are
continually evaluating the relative merits of internal manufacturing versus contract manufacturing
for various products. Intellectual Property We seek to protect our proprietary technology and other intangible assets primarily through
trade secret protection. In addition, we depend heavily on training, recruiting, and retaining our
employees, who are required to have sufficient know-how to operate advanced equipment and to
conduct sensitive and complicated manufacturing processes. Governmental Regulation Our operations are subject to certain federal, state, and local regulatory requirements
relating to environmental, waste management, and health and safety matters, and there can be no
assurance that material costs and liabilities will not be incurred in complying with those
regulations or that past or future operations will not result in exposure to injury or claims of
injury by employees or the public. To meet various legal requirements, we have modified our circuit
board cleaning processes to utilize only aqueous (water-based) methods. Some risk of liabilities related to these matters is inherent in our business, as with many
similar businesses. Our management team believes that our business is operated in compliance with
applicable environmental, waste management, and health and safety regulations, the violation of
which could have a material adverse effect on our business, financial condition, and results of
operations. In the event of violation, these regulations provide for civil and criminal fines,
injunctions, and other sanctions and, in certain instances, allow third parties to sue to enforce
compliance. In addition, new, modified, or more stringent requirements or enforcement policies
could be adopted that may adversely affect our business. We periodically generate and temporarily handle limited amounts of materials that are
considered hazardous waste under applicable law. We engage independent contractors for the off-site
disposal of these materials. For additional information, see Item 7  Managements Discussion and
Analysis of Financial Condition 4




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and Results of Operations  Factors That May Affect Future Results  Our failure to comply
with the requirements of environmental laws could result in fines and revocation of permits
necessary to our manufacturing processes. Employees As
of March 31, 2005, we had 1,559 full-time equivalent employees,
including 1,089 that
were engaged in manufacturing operations, 286 in material handling
and procurement, and 184 in
finance, sales, and administration. As of the same date, we also engaged the full-time services of
433 temporary laborers through employment agencies. None of our employees are subject to a
collective bargaining agreement. Our management team believes that the relationship with our
employees is good. Availability of Reports Filed with the Securities and Exchange Commission Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
registration statements, and amendments to those reports are available without charge on our
website, http://www.suntroncorp.com/investor/index.html#, as soon as reasonably practicable after
they are filed electronically with the SEC. Copies are also available without charge by (i)
telephonic request by calling 1-888-520-3382, (ii) email request to ir@suntroncorp.com, or (iii) a
written request to Suntron Corporation Investor Relations, 2401 West Grandview Road, Phoenix,
Arizona 85023. 5




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ITEM 2. PROPERTIES The following table describes locations where our material operations are conducted. Year Acquired/
    
    Approximate Size
    
    Owned/Location
    
    Opened
    
    (Square Feet)
    
    Leased
    
    Primary UseSugar Land, Texas
    
    2000
    
    472,000
    
    Owned
    
    ManufacturingPhoenix, Arizona
    
    1999
    
    99,000
    
    Leased
    
    Manufacturing/HeadquartersLawrence, Massachusetts
    
    2001
    
    73,000
    
    Leased
    
    ManufacturingOlathe, Kansas
    
    2002
    
    49,000
    
    Leased
    
    ManufacturingGarner, Iowa
    
    2002
    
    40,000
    
    Leased
    
    ManufacturingNewberg, Oregon
    
    1998
    
    65,000
    
    Leased
    
    ManufacturingTijuana, Mexico
    
    2005
    
    78,000
    
    Leased
    
    ManufacturingTijuana, Mexico
    
    1999
    
    30,000
    
    Leased
    
    ManufacturingManchester, New Hampshire
    
    1998
    
    19,000
    
    Leased
    
    Manufacturing
 We lease a 45,000 square foot facility in Phoenix that is not shown in the table above since
we exited it in February 2004. We are currently subleasing approximately 43% of this facility for
$19,800 per month, and we are actively marketing the remainder of this facility to locate a
sublease tenant. In March 2005, we exited a 45,000 square foot warehouse in Austin, Texas. We
entered into a lease termination agreement with the landlord for the Austin warehouse for cash
payments totaling $160,000. We believe our facilities are in good condition and that our current
capacity is sufficient to handle our anticipated needs for the foreseeable future. 
 ITEM 3. LEGAL PROCEEDINGS Suntron Corporation and Suntron GCO, L.P. v. Applied Materials, Inc.In December 2004,
Suntron filed a complaint in the 268th Judicial District Court of Fort Bend County, Texas (the
Texas Complaint) against Applied. On February 14, 2005, we filed a Cross Complaint in the
Superior Court of the State of California, County of Santa Clara (the California Cross
Complaint). On February 25, 2005, we amended the Texas Complaint. The Texas Complaint and the
California Cross Complaint are substantially similar actions that set forth our claim for
reimbursement of amounts in excess of $20 million that we believe Applied is contractually
obligated to pay, including amounts due for excess and obsolete inventories of $18.3 million as of
January 2005. The California Cross Complaint and the Texas Complaint also set forth various causes
of action that we are asserting against Applied and are seeking to recover punitive damages,
interest and legal fees. Applied Materials, Inc. v. Suntron CorporationOn January 14, 2005, Applied filed a
Complaint for Declaratory Relief in the Superior Court of the State of California, County of Santa
Clara. We have supplied parts to Applied on a contract basis for approximately ten years. We have
been asserting claims against Applied for reimbursement for excess and obsolete inventory and other
costs associated with our manufacturing work on behalf of Applied. Applied filed suit in state
court in California for a declaration of the parties rights with respect to our claim for
reimbursement. Applied seeks attorneys fees but no damages were claimed. Management believes that Applied is responsible for the carrying value of these inventories
and we intend to vigorously prosecute all of our claims. The precise amount or likelihood of
recovery cannot be quantified, and no assurances can be given as to the final timing or outcome of
this litigation. There are no other legal proceedings to which we are a party or to which any of
our properties are subject, that we expect to have a material adverse effect on our company. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 6




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PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market for Our Common Stock Our common stock is listed on the Nasdaq National Market under the symbol SUNN. The
following table sets forth the low and high closing sale prices for the Companys common stock, as
reported on the Nasdaq National Market, for each of the fiscal quarters in 2003 and 2004: Period Ended
    
    Low
    
    
    HighMarch 30, 2003
    
    $
    2.75
    
    
    $
    4.75June 29, 2003
    
    $
    2.24
    
    
    $
    3.75September 28, 2003
    
    $
    2.48
    
    
    $
    3.45December 31, 2003
    
    $
    3.18
    
    
    $
    4.58March 28, 2004
    
    $
    4.45
    
    
    $
    8.31June 27, 2004
    
    $
    5.18
    
    
    $
    9.00September 26, 2004
    
    $
    4.01
    
    
    $
    6.27December 31, 2004
    
    $
    3.00
    
    
    $
    5.19
 As
of March 31, 2005, there were approximately 623 holders of record of our common stock.
The closing sale price of our common stock on the Nasdaq National
Market on March 31, 2005 was
$2.15 per share. Dividends Our senior credit facility prohibits the payment of dividends. Suntron has not declared or
paid any dividends, and we do not anticipate paying any cash dividends in the foreseeable future.
We presently intend to retain any future earnings to finance future operations and expansion of our
business, and to reduce indebtedness. 7




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ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented below as of and for each of the years in the
five-year period ended December 31, 2004 are derived from our audited consolidated financial
statements (including financial statements of our predecessors, EFTC Corporation and K*TEC
Electronics Holding Corporation). The consolidated financial statements as of December 31, 2003 and
2004, and for each of the years in the three-year period ended December 31, 2004, and the report of
independent registered public accounting firm thereon, is included elsewhere in this Annual Report
on Form 10-K. Year Ended December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(In thousands, except per share amounts)Statement of Operations Data:Net sales
    
    $
    463,130
    
    
    $
    574,401
    
    
    $
    370,797
    
    
    $
    313,231
    
    
    $
    475,388Cost of goods sold
    
    
    439,210
    
    
    
    579,123
    
    
    
    398,767
    
    
    
    321,599
    
    
    
    449,516Gross profit (loss)
    
    
    23,920
    
    
    
    (4,722
    )
    
    
    (27,970
    )
    
    
    (8,368
    )
    
    
    25,872Operating costs and expenses:Selling, general and administrative expenses
    
    
    27,020
    
    
    
    29,619
    
    
    
    27,234
    
    
    
    22,648
    
    
    
    24,361Severance, retention, and lease exit costs
    
    
    4,579
    
    
    
    228
    
    
    
    169
    
    
    
    124
    
    
    
    1,085Recapitalization and reorganization
transaction costs
    
    
    5,336
    
    
    
    2,375
    
    
    
    312
    
    
    
    
    
    
    
    Related party fees
    
    
    2,713
    
    
    
    3,750
    
    
    
    835
    
    
    
    750
    
    
    
    750Impairment of long-lived assets
    
    
    1,662
    
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    Goodwill amortization
    
    
    907
    
    
    
    2,905
    
    
    
    
    
    
    
    
    
    
    
    Operating loss
    
    
    (18,297
    )
    
    
    (43,599
    )
    
    
    (56,541
    )
    
    
    (31,890
    )
    
    
    (324
    )Interest expense
    
    
    (10,881
    )
    
    
    (12,217
    )
    
    
    (2,568
    )
    
    
    (2,696
    )
    
    
    (3,982
    )Reduction in interest due to settlement of
dispute
    
    
    
    
    
    
    
    
    
    
    1,029
    
    
    
    
    
    
    
    Gain (loss) on sale of assets
    
    
    4,369
    
    
    
    764
    
    
    
    (166
    )
    
    
    50
    
    
    
    (11
    )Other, net
    
    
    549
    
    
    
    551
    
    
    
    835
    
    
    
    248
    
    
    
    (140
    )Loss before income taxes and cumulative
effect of change in accounting principle
    
    
    (24,260
    )
    
    
    (54,501
    )
    
    
    (57,411
    )
    
    
    (34,288
    )
    
    
    (4,457
    )Income tax benefit (expense)
    
    
    (287
    )
    
    
    (20
    )
    
    
    276
    
    
    
    
    
    
    
    Loss before cumulative effect of change in
accounting principle
    
    
    (24,547
    )
    
    
    (54,521
    )
    
    
    (57,135
    )
    
    
    (34,288
    )
    
    
    (4,457
    )Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    (69,015
    )
    
    
    
    
    
    
    Net loss
    
    $
    (24,547
    )
    
    $
    (54,521
    )
    
    $
    (126,150
    )
    
    $
    (34,288
    )
    
    $
    (4,457
    )Net loss applicable to common stockholders:Basic and Diluted
    
    $
    (27,019
    )
    
    $
    (55,071
    )
    
    $
    (126,150
    )
    
    $
    (34,288
    )
    
    $
    (4,457
    )Net loss per share applicable to common
stockholders- Basic and Diluted:Loss before cumulative effect of
change in accounting principle
    
    $
    (3.64
    )
    
    $
    (2.29
    )
    
    $
    (2.08
    )
    
    $
    (1.25
    )
    
    $
    (0.16
    )Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    (2.52
    )
    
    
    
    
    
    
    Net loss
    
    $
    (3.64
    )
    
    $
    (2.29
    )
    
    $
    (4.60
    )
    
    $
    (1.25
    )
    
    $
    (0.16
    )Number of shares used for computation-
Basic and Diluted
    
    
    7,433
    
    
    
    24,092
    
    
    
    27,409
    
    
    
    27,409
    
    
    
    27,413
 8




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##### Table of Contents



Year Ended December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(In thousands)Other Operating Data:Computation of EBITDA (a)(b)Loss before cumulative effect of change in
accounting principle
    
    $
    (24,547
    )
    
    $
    (54,521
    )
    
    $
    (57,135
    )
    
    $
    (34,288
    )
    
    $
    (4,457
    )Income tax expense (benefit)
    
    
    287
    
    
    
    20
    
    
    
    (276
    )
    
    
    
    
    
    
    Interest expense
    
    
    10,881
    
    
    
    12,217
    
    
    
    2,568
    
    
    
    2,696
    
    
    
    3,982Reduction in interest under settlement
    
    
    
    
    
    
    
    
    
    
    (1,029
    )
    
    
    
    
    
    
    Depreciation and amortization expense
    
    
    12,639
    
    
    
    25,064
    
    
    
    21,987
    
    
    
    22,133
    
    
    
    11,199EBITDA (a)(b)
    
    $
    (740
    )
    
    $
    (17,220
    )
    
    $
    (33,885
    )
    
    $
    (9,459
    )
    
    $
    10,724Cash Flow Data:Cash provided (used) by:Operating activities
    
    $
    (84,062
    )
    
    $
    75,543
    
    
    $
    22,779
    
    
    $
    (19,768
    )
    
    $
    (22,774
    )Investing activities
    
    
    (171,428
    )
    
    
    (16,772
    )
    
    
    (7,779
    )
    
    
    (2,805
    )
    
    
    (4,521
    )Financing activities
    
    
    288,937
    
    
    
    (78,762
    )
    
    
    (27,551
    )
    
    
    20,978
    
    
    
    27,283
 December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(In thousands)Balance Sheet Data:Total assets
    
    $
    535,445
    
    
    $
    322,639
    
    
    $
    172,216
    
    
    $
    154,646
    
    
    $
    180,109Total debt
    
    
    152,854
    
    
    
    43,830
    
    
    
    10,856
    
    
    
    34,011
    
    
    
    59,128Stockholders equity
    
    
    244,671
    
    
    
    230,132
    
    
    
    104,011
    
    
    
    69,949
    
    
    
    65,814Total invested capital (c)
    
    
    397,525
    
    
    
    273,962
    
    
    
    114,867
    
    
    
    103,960
    
    
    
    124,942Liquidity Data:Working capital (d)
    
    $
    216,416
    
    
    $
    105,530
    
    
    $
    50,372
    
    
    $
    49,378
    
    
    $
    17,153
   (a)
    
    Earnings (loss) before interest, taxes, depreciation and amortization (EBITDA) is
presented because we believe it is an indicator of our ability to incur and service debt and
to fund capital expenditures. An EBITDA-based calculation is also used by our lenders in
determining compliance with certain financial covenants.(b)
    
    The primary measure of operating performance is net income (loss). EBITDA should not be
construed as an alternative to net income (loss), determined in accordance with U.S.
generally accepted accounting principles, or GAAP, as an indicator of operating performance,
as a measure of liquidity or as an alternative to cash flows from operating activities
determined in accordance with GAAP. We believe the presentation of these additional
financial performance indicators is beneficial to investors since they provide an additional
perspective from which to evaluate our company. However, in evaluating alternative measures
of operating performance, it is important to understand that there are no standards for these
calculations. Accordingly, the lack of standards can result in subjective determinations by
management about which items may be excluded from the calculations, as well as the potential
for inconsistencies between different companies that have similarly titled alternative
measures. For example, as discussed in greater detail under Managements Discussion and
Analysis of Financial Condition and Results of Operations of this Report on Form 10-K, the
calculation of EBITDA in our amended credit agreement with Citibank is different than the
calculation of EBITDA shown above.(c)
    
    Total invested capital represents total debt plus total stockholders equity.(d)
    
    Working capital represents total current assets less total current liabilities. Beginning
in 2004, the principal balance ($59,128 at December 31, 2004) under our revolving credit
agreement is included in current liabilities due to the existence of a lockbox requirement
in the amended credit agreement. 9




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be
read in conjunction with our consolidated financial statements and the related notes, and the other
financial information included in this report. This discussion and analysis contains
forward-looking statements that involve risks and uncertainties. Our actual results may differ
materially from those results anticipated in these forward-looking statements as a result of
certain factors, including those set forth in Factors That May Affect Future Results below and
elsewhere in this report. Executive Summary For the year ended December 31, 2004, we incurred a net loss of $4.5 million which is a
significant improvement compared to net losses of $126.2 million in 2002 and $34.3 million in 2003.
During 2001 through 2003, we experienced a severe contraction in our business where quarterly net
sales declined from $197.9 million in the first quarter of 2001 to $78.6 million in the fourth
quarter of 2003. We responded to the economic downturn by closing five of our manufacturing
facilities, which resulted in significant restructuring charges. These plant closures combined with
other restructuring and cost containment initiatives resulted in a much lower cost structure at the
beginning of 2004. In 2004, we experienced increased demand in each of our targeted market sectors which resulted
in a 52% increase in our net sales in 2004 compared to 2003. Gross profit improved by $34.2 million
in 2004 due to improved plant capacity utilization that was driven by increased net sales, and a
$10.8 million reduction in depreciation and amortization expense. However, after seven consecutive
quarters of improvement, our net sales and gross profit began to decline in the third quarter of
2004. We expect a further reduction of 25% to 30% in our net sales for the first quarter of 2005
compared to the fourth quarter of 2004. Applied accounted for 18% of our net sales for 2003 and 25% of our net sales for 2004. In
October 2004, Applied notified us that it intended to transition substantially all of its business
to alternative contract manufacturers and by January 2005 our business relationship with Applied
had substantially terminated. In December and February 2005, we filed lawsuits in Texas and
California that seek, through the enforcement of contractual provisions or based upon tort
theories, to recover approximately $18.3 million of costs incurred for excess and obsolete
inventories; additional charges for carrying costs, warehousing costs, cancellation charges, and
employee termination costs; plus punitive damages, interest and legal fees. We believe that Applied
is responsible for the net carrying value of these inventories and we intend to vigorously
prosecute all of our claims against Applied. The precise amount or likelihood of recovery cannot be
quantified, and no assurances can be given as to the final timing or outcome of the litigation. Despite our improved financial results for 2004, we used $22.8 million of operating cash flow,
primarily to fund working capital requirements associated with the significantly higher sales
volumes during this period. Our negative operating cash flows were funded by additional borrowings
under our revolving line of credit, resulting in an increase in outstanding debt of $25.1 million
during 2004. Due to the termination of our relationship with Applied, our lenders determined in
January 2005 that all inventories related to Applied are ineligible in future calculations of the
borrowing base. This action, along with changes in the advance rates for real estate and equipment,
contributed to a reduction in our borrowing availability from $14.5 million at December 31, 2004 to
$7.3 million at March 20, 2005. Furthermore, due to the reduction in borrowing availability, a more
stringent EBITDA covenant first became effective in January 2005. We believe the Company would have
violated this more stringent EBITDA covenant by the end of the first
quarter of 2005. However, effective March 29, 2005, the lenders agreed to amend the EBITDA covenant that will be effective for the
remainder of the year ending December 31, 2005. We believe we will be able to comply with the
amended EBITDA covenant and that our borrowing availability will be sufficient to fund planned
operations in 2005. We believe market conditions in the semiconductor capital equipment market sector peaked
during the third quarter of 2004, and we are currently taking steps to reduce costs in anticipation
of sequentially lower net sales for the first quarter of 2005. In addition to the loss of Applied
as a major customer, we are experiencing lower demand from other customers in the semiconductor
capital equipment market sector and relatively flat demand in 10




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most of our other targeted market sectors. While we have commenced efforts to reduce our cost
structure in anticipation of lower net sales, our past experience indicates that it is extremely
difficult to execute cost reduction actions without some deterioration in profitability.
Additionally, it is not feasible to reduce fixed costs during temporary downturns, which results in
lower margins due to less efficient capacity utilization. On July 7, 2004, we entered into an amended credit agreement with Citibank and Congress
Financial Corporation. The maximum borrowings permitted under the amended credit agreement remain
unchanged at $75.0 million and the maturity date was extended until July 2008. However, due to the
requirement to maintain a lockbox arrangement, the entire principal balance is classified as a
current liability. We are continuing to focus substantial efforts to improve operational performance. Some of the
tactical issues we are addressing include managing inventory purchases to improve our cash cycle
time and to reduce incremental borrowings, monitoring production schedules to minimize overtime and
materials expediting charges (except for those cases where our customers agree to reimburse us to
support their orders placed inside standard lead-times), and the renegotiation of unfavorable
arrangements with certain customers. Following is an overview of the information included under each section of Managements
Discussion and Analysis of Financial Condition and Results of Operations: Caption
    
    
    OverviewInformation About Our Business
    
    
    Under this section we provide
information to help understand our
industry conditions and information
unique to our business and customer
relationships.Critical Accounting Policies and
Estimates
    
    
    This section provides details about
some of the critical estimates and
accounting policies that must be
applied in the preparation of our
financial statements. It is
important to understand the nature
of key uncertainties and estimates
that may not be apparent solely
from reading our financial
statements and the related
footnotes.Overview of Statement of Operation
    
    
    This section includes a description
of the types of transactions that
are included in each significant
category included in our statement
s of operations.Results of Operations
    
    
    This section includes a discussion
and analysis of our operating
results for 2003 compared to 2004.
This section also contains a
similar discussion and analysis of
our operating results for 2002
compared to 2003.Liquidity and Capital Resources
    
    
    There are several sub-captions
under this section, including a
discussion of our cash flows for
2004 and other liquidity measures
that we consider important to our
business. Under the sub-caption for
Contractual Obligations, we discuss
on- and off-balance-sheet
obligations and the expected impact
on our liquidity. Under the
sub-caption for Capital Resources,
we have included a discussion of
our amended credit agreement,
including details about interest
rates charged, calculation of the
borrowing base and unused
availability, the expected impact
of litigation with Applied on our
liquidity and capital resources,
compliance with the EBITDA covenant
in our credit agreement, and
alternatives if current capital
resources are inadequate.Factors That May Affect Future
Results
    
    
    This section includes an in-depth
discussion of many of the risks and
uncertainties that affect our
business and industry, as well as
risks that should be considered
before investing in our common
stock. Our future financial results
are dependent upon effectively
managing and responding to these
risks.
 11




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Information About Our Business Suntron delivers complete manufacturing services and solutions to support the entire life
cycle of complex products in the semiconductor capital equipment, aerospace and defense,
industrial, and medical equipment market sectors of the electronic manufacturing services (EMS)
industry. Our manufacturing services include printed circuit board assembly, cable and harness
production, engineering services, quick-turn manufacturing services and full systems integration,
testing, and after-market repair and warranty services. We believe our success in the marketplace
is a direct result of our ability to provide unique solutions tailored to match each of our
customers specific requirements, while meeting the highest quality standards in the industry. We are engaged in the EMS industry. Accordingly, our largest single expenditure is for the
purchase of electronic components and our expertise in electronics manufacturing techniques is
critical to our ability to provide competitive, quality services. However, in order to fully
comprehend our business, it is also important to understand that our customers are engaged in
semiconductor capital equipment, aerospace and defense, medical products, and many other
industries. While our ability to compete with other companies in the EMS industry is important to
our long-term success, short-term fluctuations in the demand for our manufacturing services are
primarily affected by the economic conditions in the market sectors served by our customers. Since
more than half of our customers have been concentrated in two market sectors, the quarterly
fluctuations in our net sales can be extremely volatile when these sectors are experiencing either
rapid growth or contraction. As an EMS company, many of our customers are original equipment manufacturers, or OEMs, that
have designed their own products. Our customers request proposals that include key terms such as
quality, delivery, and the price to purchase the materials and perform the manufacturing services
to make one or more components or assemblies. Generally, the component or assembly that we
manufacture is delivered to the customer where it is then integrated into their final product. We
price new business with our customers by obtaining raw material quotes from our suppliers and then
estimating the amount of labor and overhead that will be required to make the products. Before we begin a customer relationship, we typically enter into arrangements that are
intended to protect us in case a customer cancels an order after we purchase the raw materials to
fill that order. In these circumstances, the customer is generally required to purchase the
materials or reimburse us if we incur a loss from liquidating the raw materials. The electronics manufacturing services industry is extremely dynamic and our customers make
frequent changes to their orders. The magnitude and frequency of these changes make it difficult to
predict revenues beyond the next quarter, and even relatively short-term forecasts may prove
inaccurate depending on changes in economic, political, and military factors, as well as unexpected
customer requests to delay shipments near the end of our fiscal quarters. These changes in
customer orders also cause substantial difficulties in managing inventories, which often leads to
excess inventories and the need to recognize losses on inventories. However, from time to time, we
may also have difficulties obtaining certain electronic components that are in short supply. In
addition, our inventories consist of over 150,000 different parts and many of these parts have
limited alternative uses or markets beyond the products that we manufacture for our customers. When
we liquidate excess materials through an inventory broker or auction, we often realize less than
the original cost of the materials, and in some cases we determine that there is no market for the
excess materials. The most common reasons we incur losses related to inventories are due to purchasing more
materials than are necessary to meet a customers requirements or failing to act promptly to
minimize losses once the customer communicates a cancellation. Occasionally it is not clear what
action caused an inventory loss and there is a shared responsibility whereby our customers agree to
negotiate a settlement with us. Accordingly, management continually evaluates inventory on-hand,
forecasted demand, contractual protections, and net realizable values in order to determine whether
an adjustment to the carrying amount of inventory is necessary. When the relationship with a
customer terminates, we tend to be more vulnerable to inventory losses because the customer may be
reluctant to accept responsibility for the remaining inventory if a product is at the end of its
life cycle. We can also incur inventory losses if a customer becomes insolvent and the materials do
not have alternative uses or markets into which we can sell them. 12




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Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations is based
upon our consolidated financial statements, which have been prepared in accordance with U.S.
generally accepted accounting principles. The preparation of these financial statements requires
that we make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going
basis, we evaluate our estimates, including those related to bad debts, inventories, property,
plant and equipment, intangible assets, income taxes, warranty obligations, restructuring-related
obligations, and litigation. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. We cannot assure you that actual results will not differ from
those estimates. We believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition.We recognize revenue from manufacturing services and product sales upon
shipment and transfer of title of the manufactured product, whereby our customers assume the risks
and rewards of ownership of the product. Occasionally, we enter into arrangements where services
are bundled and completed in multiple stages. In these cases, we follow the guidance in Emerging
Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables,to determine
the amount of revenue allocable to each deliverable. Generally, there are no formal customer acceptance requirements or further obligations related
to manufacturing services after shipment; however, if such requirements or obligations exist, then
revenue is recognized at the point when the requirements are completed and the obligations
fulfilled. If uncertainties exist about whether the customer has assumed the risks and rewards of
ownership or if continuing performance obligations exist, we expand our written communications with
the customer to ensure that our understanding of the arrangement is consistent with that of the
customer before revenue is recognized. In limited circumstances, the Companys customers agree to
purchase products but they request that we store the physical product in our facilities. In these
circumstances, revenue is only recognized when the terms of the arrangement comply with the
guidance in SEC Staff Accounting Bulletin No. 104, Revenue Recognition. Revenue from design,
engineering and other services is recognized as the services are performed. Write-Downs for Obsolete and Slow-Moving Inventories.Our judgments about excess and obsolete
inventories are especially difficult because (i) hundreds of different components may be associated
with a single product we manufacture for a customer, (ii) we make numerous products for most of our
customers, (iii) even though we are engaged in the EMS industry, most of our customers are engaged
in diverse industries, (iv) a significant amount of the parts we purchase are unique to a
particular customers orders and there are limited alternative markets if that customers order is
canceled, and (v) all of our customers experience dynamic business environments affected by a wide
variety of economic, political, and regulatory factors. This complex environment results in

positive and negative events that can change daily and which affect judgments about future demand
for our manufacturing services and the amounts we can realize when it is not possible to liquidate
inventories through production of finished products. We frequently review customer demand to determine if we have excess raw materials that will
not be consumed in production. In determining demand we consider firm purchase orders and forecasts
of demand submitted by our customers. If we determine that excess inventories exist and that the
customer is not contractually obligated for the excess inventories, we make judgments about whether
unforecasted demand for those materials is likely to occur or the amount we would likely realize in
the sale of this material through a broker or auction. If we determine that future demand from the
customer is unlikely, we write down our inventories to the extent that the cost of the inventory
exceeds the estimated market value. If actual market conditions are less favorable than those projected by management, additional
inventory write-downs may be required in future periods. Likewise, if we underestimate contractual
recoveries from customers or future demand, hindsight may indicate that we over-reported our costs
of goods sold in earlier periods, which results in the recognition of additional gross profit at
the time the material is used in production and the related goods are sold. Therefore, although we
make every effort to ensure the accuracy of our forecasts of future product demand, any significant
unanticipated changes in demand or the outcome of customer negotiations with respect to 13




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the enforcement of contractual provisions could have a significant impact on the value of our
inventory and our reported operating results. Allowance for Doubtful Accounts Receivable.We maintain an allowance for doubtful accounts
for estimated losses resulting from the inability of our customers to make required payments, as
well as to provide for adjustments related to pricing and quantity differences. If the financial
condition of our customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances would be required. When our customers experience difficulty in
paying us, we estimate how much of our receivable will not be collected. These judgments are often
difficult because the customer may not divulge complete and accurate information. Even if we are
fully aware of the customers financial condition it can be difficult to estimate the expected
recovery and there is often a wide range of potential outcomes. Sometimes we collect receivables
that we reserved for in prior periods and these recoveries are reflected as a credit to operations
in the periods in which the recovery occurs. Over the past few years, we have diversified our
concentration of business with our major customers and have added smaller customers that generally
have higher credit risk. Accordingly, we may experience higher bad debt losses in the future. Restructuring Activities and Asset Impairments.When we undertake restructuring activities and
decide to close a plant that we occupy under a non-cancelable operating lease, we are required to
estimate how long it will take to locate a new tenant to sublease the facility and to estimate the
rate that we are likely to receive when a tenant is located. Accordingly, we will incur additional
lease exit charges in future periods if our estimates of the rate or timing of sublease payments
turns out to be less favorable than our current expectations. We also consider the estimated cost
of building improvements, brokerage commissions, and any other costs we believe will be incurred in
connection with the subleasing process. The precise outcome of most of these factors is difficult
to predict. We review our estimates at least quarterly, including consultation with our commercial
real estate advisors to assess changes in market conditions, feedback from parties that have
expressed interest, and other information that we believe is relevant to most accurately reflect
the expected outcome of obtaining a subtenant to lease the facility. Commercial real estate
conditions are currently weak in the areas in which we are attempting to sublease closed
facilities, and we believe our estimates have appropriately considered these conditions. When we undergo changes in our business, including the closure or relocation of facilities, we
often have equipment and other long-lived assets that are no longer needed in continuing
operations. When this occurs, we are required to estimate future cash flows and if such
undiscounted cash flows are less than the carrying value of the assets (or asset group, as
applicable), we recognize impairment charges to reduce the carrying value to estimated fair value.
The determination of future cash flows and fair value tend to be highly subjective estimates. When
assets are held for sale and the actual market conditions deteriorate, or are less favorable than
those projected by management, additional impairment charges may be required in subsequent periods. Contingencies.We are subject to loss contingencies arising in the ordinary course of
business. These contingencies often involve legal proceedings where the outcome is not determinable
with precision until all of the facts surrounding the dispute are known to both parties and legal
counsel has had the opportunity to evaluate the merits of the case. An estimated loss from
contingencies such as a legal proceedings and claims brought against us is required to be accrued
by a charge to income if it is probable that an asset has been impaired or a liability has been
incurred and the amount of the loss can be reasonably estimated. In determining whether a loss
should be accrued we evaluate, among other factors, the degree of probability of an unfavorable
outcome and the ability to make a reasonable estimate of the amount of loss. Revisions in estimates
related to the potential outcome of loss contingencies could have a material impact on our
consolidated results of operations and financial position. From time to time, we are also subject to gain contingencies in the ordinary course of our
business. Generally, it is not appropriate to record a gain contingency in our financial statements
until it is realized in cash. For a detailed discussion on the application of these and other accounting policies, see Note
1 in our audited consolidated financial statements for the year ended December 31, 2004, included
elsewhere in this Annual Report on Form 10-K. 14




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##### Table of Contents



Overview of Statement of Operations Net salesare recognized when title is transferred to our customers, which generally
occurs upon shipment from our facilities. Net sales from design, engineering and other services
are generally recognized as the services are performed. Our sales are recorded net of customer
discounts and credits taken or expected to be taken. Cost of goods soldincludes materials, labor, and overhead expenses incurred in the
manufacture of our products. Cost of goods sold also includes charges and credits related to
manufacturing operations for lease exit costs, severance and retention costs, impairment of
long-lived assets, and obsolete and slow moving inventories. Many factors affect our gross profit,
including capacity utilization, product mix, and production volume. Selling, general, and administrative expensesprimarily include the salaries for executive,
finance, accounting, and human resources personnel; salaries and commissions paid to our internal
sales force and external sales representatives and marketing costs; insurance expenses;
depreciation expense related to assets not used in manufacturing activities; bad debt charges and
recoveries; professional fees for auditing and legal assistance; and general corporate expenses. Related party expenses- management feesconsist of fees paid to affiliates of our majority
stockholder. Severance, retention, and lease exit costsprimarily relate to costs associated with the
closure of administrative facilities and reductions in our administrative workforce. Severance,
retention, and lease exit costs that relate to manufacturing activities are included in cost of
goods sold. Reorganization transaction costsconsist of expenses incurred in connection with the business
combination between EFTC and K*TEC, which is described in Note 3 of our consolidated financial
statements included in this Report. Reorganization costs include professional fees and printing
costs for the combination and related Securities and Exchange Commission filings. The business
combination was accounted for as a reorganization of entities under common control, and,
accordingly, these costs were charged to operations in the period when the costs were incurred. Impairment of long-lived assetsreflects charges related to property, equipment and intangible
assets not used in manufacturing activities; impairment of manufacturing assets is included in cost
of goods sold. Interest expenserelates to our senior credit facilities and other debt obligations. Interest
expense also includes the amortization of debt issuance costs and unused commitment fees that are
charged for the portion of our $75 million credit facility that is not used from time to time. Results of Operations Our results of operations are affected by several factors, primarily the level and timing
of customer orders (especially orders from our major customers). The level and timing of orders
placed by a customer vary due to the customers attempts to balance its inventory, changes in the
customers manufacturing strategy, and variation in demand for its products due to, among other

things, product life cycles, competitive conditions, and general economic conditions. In the past,
changes in orders from customers have had a significant effect on our quarterly results of
operations. The following table sets forth certain operating data as a percentage of net sales for
the years ended December 31, 2002, 2003, and 2004. 2002
    
    
    2003
    
    
    2004Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    107.5
    %
    
    
    102.7
    %
    
    
    94.6
    %Gross profit (loss)
    
    
    (7.5
    )%
    
    
    (2.7
    )%
    
    
    5.4
    %Operating costs and expenses:Selling, general, and administrative expenses
    
    
    7.4
    %
    
    
    7.3
    %
    
    
    5.1
    %Related party expenses- management fees
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.2
    %Severance, retention, and lease exit costs
    
    
    
    
    
    
    
    
    
    
    0.2
    %Reorganization transaction costs
    
    
    0.1
    %
    
    
    
    
    
    
    Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    Operating loss
    
    
    (15.2
    )%
    
    
    (10.2
    )%
    
    
    (0.1
    )%
 15




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Year Ended December 31, 2003 Compared to Year Ended December 31, 2004 Net Sales.Net sales increased $162.2 million, or 51.8%, from $313.2 million for 2003 to
$475.4 million for 2004. The increase in 2004 net sales was primarily attributable to an increase
of $107.9 million in our net sales to customers engaged in the semiconductor capital equipment
sector, an increase of $38.8 million for customers in the industrial sector, and an increase of
$10.6 million for customers in the aerospace and defense sector. For 2003 and 2004, we recognized
net sales related to the May 2003 acquisition of Trilogic Systems of $8.0 million and $18.0
million, respectively. For 2004, we recognized net sales to new customers of approximately $19.0
million. Net sales for 2003 and 2004 includes approximately $8.2 million and $9.2 million,
respectively, of excess inventories that were sold back to customers pursuant to contractual
provisions of our customer agreements. For 2003, net sales also include the recovery of
unauthorized customer discounts of approximately $1.0 million. For 2003, Honeywell and Applied accounted for 29% and 18%, respectively, of our net sales. For
2004, Honeywell and Applied accounted for 21% and 25%, respectively, of our net sales. Gross Profit (Loss).Our gross profit improved by $34.3 million from a loss of $8.4 million
for 2003 to a profit of $25.9 million for 2004. Similarly, gross profit as a percentage of net
sales improved from a loss of 2.7% for 2003 to a profit of 5.4% for 2004. The improvement in gross
profit for 2004 is primarily attributable to the significant increase in net sales while fixed
manufacturing costs remained relatively unchanged. In 2003, we incurred restructuring costs related to manufacturing activities of $2.7 million,
including $1.3 million of accelerated depreciation due to shortened lives of leasehold
improvements, $0.5 million for lease exit costs primarily associated with the consolidation of
operations in Phoenix, and $0.8 million for severance costs related to terminated employees. In
November 2003, the Company entered into an agreement with the landlord of the Fremont facility
whereby the Company paid $2.7 million as consideration for the early termination of the lease. The
Company incurred additional costs of $0.4 million related to the Fremont lease in the fourth
quarter of 2003, resulting in a credit of $4.7 million due to the extinguishment of the remaining
liability. This credit was reflected as a reduction of cost of goods sold since the loss relating
to future lease exit costs of the vacated facility that was accrued in 2002 was charged to cost of
goods sold. In 2004, we incurred restructuring costs related to our manufacturing activities of
$0.3 million. Presented below is a combined summary of the changes in manufacturing- and
administrative-related liabilities for lease exit costs and severance and retention obligations for
the years ended December 31, 2003 and 2004 (Dollars in Millions): Accrued
    
    
    AccruedLease Exit
    
    
    Severance &Costs
    
    
    RetentionBalance, December 31, 2002
    
    $
    10.3
    
    
    $
    0.1Accrued expense for restructuring activities
    
    
    0.4
    
    
    
    1.1Cash receipts under subleases
    
    
    0.4
    
    
    
    Cash payments
    
    
    (5.9
    )
    
    
    (1.1
    )Reversal of accrued lease exit costs
    
    
    (4.7
    )
    
    
    Reclassification of non-level rent liability
    
    
    0.5
    
    
    
    Balance, December 31, 2003
    
    
    1.0
    
    
    
    0.1Accrued expense for restructuring activities
    
    
    0.4
    
    
    
    0.6Cash receipts under subleases
    
    
    0.5
    
    
    
    Cash payments
    
    
    (1.5
    )
    
    
    (0.6
    )Accretion of interest
    
    
    0.1
    
    
    
    Expense due to change in previous estimates
    
    
    0.2
    
    
    
    Balance, December 31, 2004
    
    $
    0.7
    
    
    $
    0.1
 Accrued lease exit costs are expected to be paid through July 2007 and accrued severance and
retention costs are expected to be paid in 2005. 16




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##### Table of Contents



During 2004 a significant amount of manufacturing equipment became fully depreciated, although
many of these assets are still in service. Accordingly, depreciation expense for 2004 declined by
approximately $10.7 million compared to 2003, and this reduction also contributed favorably to the
improvement in our gross profit. We expect depreciation expense will decline by approximately $2.5
million for the year ending December 31, 2005 compared to the year ending December 31, 2004. Inventory write-downs increased $0.4 million from $3.3 million, or 1.1% of net sales, for 2003
to $3.7 million, or 0.8% of net sales, for 2004. During 2004, we continued our efforts to improve
our inventory management processes and to work closely with our customers to minimize losses due to
excess inventories. In 2003 and 2004, write-downs of excess inventories are related to a variety of
customers for which we do not expect to realize the carrying value through production or other
means of liquidation. Selling, General, and Administrative Expenses.Selling, general, and administrative expenses
(SG & A) increased $1.8 million, or 7.6%, from $22.6 million for 2003 to $24.4 million for 2004.
The increase in SG & A during 2004 was primarily attributable to an increase in compensation and
benefits of $3.6 million, an increase in professional fees of $0.2 million; offset by a reduction
in bad debt expense of $1.7 million, and a decrease in facilities-related costs of $0.5 million.
Bad debt expense for 2003 included a charge of $1.3 million that was required when we reserved a
significant portion of our receivable from a former customer that filed for bankruptcy protection
in February 2004. Severance, Retention, and Lease Exit Costs.Severance, Retention, and Lease Exit Costs
amounted to $1.1 million for 2004, primarily due to a lease exit charge of $0.6 million related to
the consolidation of our Phoenix operations. We also incurred severance costs, primarily related to
executive level management changes, of approximately $0.4 million for 2004. During 2003, we
incurred total severance, retention and lease exit costs of $0.1 million. Interest Expense.Interest expense increased $1.3 million, or 47.7%, from $2.7 million for
2003 to $4.0 million for 2004, primarily due to an increase in average outstanding borrowings. Our
weighted average borrowings increased from $23.5 million for 2003 to $55.4 million for 2004. The
impact of higher borrowings was partially offset by a reduction in our weighted average interest
rate from 7.3% in 2003 to 5.2% in 2004. Our weighted average interest rate is computed without
regard to amortization of debt issuance costs, which comprised approximately $1.0 million of our
interest expense in both 2003 and 2004. During 2005, the prime and LIBOR rates have been increasing
so we expect our weighted average interest rate will increase, beginning in the first quarter of
2005. Unrealized
Loss on Marketable Equity Securities.During the third quarter of 2004, a former customer
emerged from bankruptcy protection and we received marketable equity securities that are traded on
NASDAQ in exchange for our fully-reserved receivable. The trading value of these securities
declined from $0.8 million when the bankruptcy plan was confirmed to $0.4 million by the end of
2004, which resulted in an unrealized loss of $0.4 million. The
unrealized loss is included under other income (expense) in the 2004
statement of operations since we classified the securities as
trading.  We expect to complete a sale of these
securities during 2005. Year Ended December 31, 2002 Compared to Year Ended December 31, 2003 Net Sales.Net sales decreased $57.6 million, or 15.5%, from $370.8 million in 2002 to
$313.2 million in 2003. This decrease in 2003 net sales was attributable to significant decreases
in net sales across our customer base, including decreases with Honeywell and Applied of $64.5
million and $24.1 million, respectively. The reduction in net sales to Honeywell and Applied was
partially offset by approximately $56 million of net sales to new customers and $8 million of net
sales related to the May 30, 2003 acquisition of the assets of Trilogic. We believe the primary
reason for lower net sales to our major customers in 2003 was due to the economic downturn in the
aerospace and semiconductor capital equipment industries. In 2002, Honeywell and Applied accounted for 42% and 22%, respectively, of our net sales. In
2003, Honeywell and Applied accounted for 29% and 18%, respectively, of our net sales. Net sales
in 2002 and 2003 include approximately $24.2 million and $8.2 million, respectively, of excess
inventories that were sold back to customers pursuant to contractual provisions of our customer
agreements. In 2003, net sales include the recovery of unauthorized customer discounts of
approximately $1.0 million. 17




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##### Table of Contents



Gross Profit (Loss).Our gross profit (loss) improved by $19.6 million from a loss of $28.0
million in 2002 to a loss of $8.4 million in 2003. Gross profit (loss) as a percentage of net sales
improved from a loss of 7.5% of net sales in 2002 to a loss of 2.7% of net sales in 2003. In 2003, we incurred restructuring costs of $2.7 million, including $1.3 million of
accelerated depreciation due to shortened lives of leasehold improvements, $0.5 million for lease
exit costs primarily associated with the consolidation of operations in Phoenix, and $0.8 million
for severance costs related to terminated employees. In November 2003, the Company entered into an
agreement with the landlord of the Fremont facility whereby the Company paid $2.7 million as
consideration for the early termination of the lease. The Company incurred additional costs of $0.4
million related to the Fremont lease in the fourth quarter of 2003, resulting in a credit of $4.7
million due to the extinguishment of the remaining liability. This credit was reflected as a
reduction of cost of goods sold since the loss relating to future lease exit costs of the vacated
facility that was accrued in 2002 was charged to cost of goods sold. The improvement in gross
profit (loss) in 2003 is primarily attributable to the reduction in restructuring costs and
benefits realized from other cost reduction initiatives that have been implemented. In 2002, we
incurred a gross profit deficiency of $28.0 million, primarily due to $13.6 million of
restructuring charges (consisting of $10.1 million for lease exit costs primarily associated with
the closure of our Fremont facility; $2.8 million for impairment of a building and manufacturing
equipment; and $0.7 million for severance, retention and moving costs related to our manufacturing
workforce). Inventory write-downs decreased $2.1 million from $5.4 million, or 1.5% of net sales in 2002
to $3.3 million, or 1.1% of net sales in 2003. This reduction in inventory write-downs resulted
primarily from our substantial efforts over the past two years to improve our inventory management
processes and to work more closely with our customers to minimize losses due to excess inventories.
Write-downs of excess inventories are related to a variety of customers for which we do not expect
to realize the carrying value through production or other means of liquidation. Selling, General, and Administrative Expenses.SG & A decreased $4.6 million, or 16.8%, from
$27.2 million in 2002 to $22.6 million in 2003. The decrease in SG & A during 2003 was primarily
attributable to reductions in (i) compensation and benefits due to an approximately 15% reduction
in our administrative workforce, (ii) professional fees primarily due to lower legal and accounting
services upon the complete integration of K*tec by the end of 2002, and (iii) information
technology and facilities costs due to fewer employees and the closure of several facilities. These
decreases were partially offset by a charge of $1.3 million that was required in the fourth quarter
of 2003 when we reserved a significant portion of our receivable from a former customer that filed
for bankruptcy protection in February 2004. Aggregate net sales generated from our two major customers declined from about $237 million in
2002 to $148 million in 2003, as both of these customers were impacted by adverse industry
conditions. During 2003, we replaced some of this business with orders from smaller, less
credit-worthy customers. While losses due to credit risk have not been a significant percentage of
our net sales, this trend may not continue in the future as we continue to diversify our customer
base. Interest Expense.Interest expense increased $0.1 million, or 5.0%, from $2.6 million in 2002
to $2.7 million in 2003, primarily due to an increase in our weighted average borrowings from $16.7
million in 2002 to $23.5 million in 2003. The impact of higher borrowings in 2003 was partially
offset by a reduction in our weighted average interest rate (computed without regard to
amortization of debt issuance costs, which comprised approximately $1.0 million of our interest
cost in both 2002 and 2003) from 9.4% in 2002 to 7.3% in 2003. Since our borrowings were higher in
2003, we paid less for unused commitment fees under the revolving credit agreement, which also
contributed to the lower effective interest rate in 2003. A portion of the purchase price for the October 2000 acquisition of K*TEC Electronics Holding
Corporation was subject to a dispute that was expected to be resolved through arbitration
proceedings. On May 7, 2002, the parties agreed to settle the dispute whereby the $12.2 million
principal balance of a note payable to the former owner was reduced by $6.9 million, resulting in
an adjusted principal balance of $5.3 million. In accounting for this settlement, the Company
reduced the carrying amount of goodwill by $6.9 million and recognized a credit to operations of
$1.0 million for accrued interest that was previously expensed and that was no longer payable due
to the settlement. This note, which provided for interest at 14%, was repaid in May 2002. 18




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##### Table of Contents



Cumulative Effect of Change in Accounting for Goodwill.During the first quarter of 2002, we
adopted the provisions of Statement of Financial Accounting Standards No. 142, which resulted in
the requirement to perform a periodic impairment test, using a two-step process. The first step is
to identify if potential impairment of goodwill exists. If impairment of goodwill is determined to
exist, the second step of the goodwill impairment test measures the amount of the impairment loss,
using a fair value-based approach. Based on the results of comparing the carrying value of goodwill
with the implied fair value of goodwill, we concluded that goodwill related to the K*TEC reporting
unit was impaired for the entire carrying value, which resulted in an impairment loss of $69.0
million. This impairment loss was recorded as the cumulative effect of a change in accounting
principle in 2002. Liquidity and Capital Resources Cash Flows from Operating Activities.Net cash used by operating activities for 2004 was
$22.8 million, compared with net cash used by operating activities of $19.8 million for 2003. The
difference between our net loss of $4.5 million for 2004 and $22.8 million of negative operating
cash flow was primarily attributable to an increase in trade receivables of $15.9 million, an
increase in inventories of $17.6 million, and a decrease in accrued compensation and other current
liabilities of $1.8 million; partially offset by $11.2 million of depreciation and amortization
expense, a decrease in prepaid expenses and other of $2.7 million, and an increase in accounts
payable of $2.5 million. The large increases in trade receivables and inventories are directly related to a 51.8%
increase in our net sales for 2004 compared to 2003. For the first quarter of 2005, we expect our
net sales will be between $80 million and $85 million compared to $115.8 million in the fourth
quarter of 2004. The expected decrease in first quarter 2005 net sales is primarily attributable to
the loss of Applied as a customer. We expect this decrease in our net sales will result in lower
receivables and inventories by the end of the first quarter of 2005, which is expected to
contribute to positive operating cash flow and a reduction in outstanding debt for the first
quarter of 2005. During 2003 and 2004, we accepted some orders from smaller, less credit-worthy customers.
While losses due to credit risk have not been a significant factor in the past, this trend may not
continue in the future as we continue to diversify our major customer concentration with orders
from smaller customers. If delinquencies related to our receivables increase in the future, this
could adversely affect our borrowing capacity because accounts that are aged more than 90 days from
the invoice date are ineligible for the borrowing base calculation under our credit agreement with
Citibank. Days sales outstanding (based on net sales for the year and net trade receivables outstanding
at the end of the year) decreased to 39 days for 2004, compared to 40 days for 2003. Days sales
outstanding is expected to increase during 2005 since Applied was a large customer that took
advantage of accelerated payment terms and net sales to Applied will be insignificant after January
2005. Inventories increased 29.0% from $61.4 million at December 31, 2003 to $79.2 million at
December 31, 2004. For 2004, inventory turns (i.e., cost of goods sold for the year, excluding
restructuring charges and credits included in cost of goods sold as shown in Note 10 to the financial statements, divided by year-end inventories) amounted to 5.7 times per year
compared to 5.3 times per year for 2003. The increase in inventory turns in 2004 is due in part to
improved inventory management practices in 2004. Cash Flows from Investing Activities.Net cash used by investing activities for 2004 was $4.5
million compared with net cash used by investing activities of $2.8 million for 2003. Investing
cash flows for 2004 included the payment of $2.1 million of contingent consideration related to the
2003 earn-out associated with the acquisition of Trilogic Systems and $0.4 million for the
acquisition of another business. Additionally, our investing cash flows for 2004 included payments
of $1.3 million for manufacturing equipment, $1.0 million for information technology assets, and
$0.4 million for leasehold improvements. Investing cash flows for 2003 include capital expenditures of $0.6 million for leasehold
improvements at our Olathe, Kansas facility, $1.5 million for new manufacturing equipment at
several locations (including approximately $0.9 million for testing equipment to meet new customer
manufacturing requirements), and $0.6 million for information technology assets. In July 2003, we
also paid $0.2 million for the purchase of certain design and engineering assets from an entity
affiliated with Trilogic. Our 2003 cash outflows for investing activities were partially offset by
$0.3 million of cash acquired in the acquisition of Trilogic. 19




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##### Table of Contents



During the first quarter of 2005, we will be required to pay approximately $1.4 million to the
former owners of Trilogic due to the 2004 earn-out that was accrued in our consolidated balance
sheet at December 31, 2004. We have a letter of credit in place for $1.1 million as of December 31,
2004 so the payment of this $1.4 million liability will only impact our borrowing availability by
$0.3 million. We also expect to incur other capital expenditures during 2005 in the range of $3.0
million to $4.0 million, although we do not have any material firm commitments in place at this
time. A major portion of our planned capital expenditures is for information technology upgrades
and building improvements and equipment related to our expansion plans in Mexico where our lease
for a larger facility commenced in February 2005. In the first quarter of 2005, we entered into
agreements to sell certain equipment used for plastic injection molding and sheet metal fabrication
for $2.0 million. Cash Flows from Financing Activities.Net cash provided by financing activities for 2004 was
$27.3 million, compared with net cash provided by financing activities of $21.0 million for 2003.
Financing cash flows for 2004 reflect net borrowings under our revolving line of credit of $25.1
million. During 2004, an increase in outstanding checks in excess of cash balances of $4.3 million
contributed positively to cash flows from financing activities. During 2004, the Company also paid
debt issuance costs of $2.0 million, primarily related to the July 2004 amendment to our revolving
credit agreement. Financing cash flows for 2003 reflect net borrowings under our revolving line of credit of
$23.2 million. During 2003, the Company repaid $1.2 million of debt assumed in the Trilogic
acquisition as well as other debt obligations of $0.4 million. During 2003, we also paid debt
issuance costs of $0.6 million related to our previous credit agreement with Citibank. Contractual Obligations.The following table summarizes our contractual obligations as of
December 31, 2004: Revolving
    
    
    Operating
    
    
    PurchaseCredit(1)
    
    
    Leases (2)
    
    
    Obligations (3)
    
    
    Other (4)
    
    
    Total(Dollars in Table are in Millions)Year ending December 31:2005
    
    $
    59.1
    
    
    $
    4.3
    
    
    $
    39.5
    
    
    $
    2.3
    
    
    $
    105.22006
    
    
    
    
    
    
    3.7
    
    
    
    1.0
    
    
    
    0.3
    
    
    
    5.02007
    
    
    
    
    
    
    2.7
    
    
    
    0.1
    
    
    
    
    
    
    
    2.82008
    
    
    
    
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    1.62009
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    0.8After 2009
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    

    
    
    
    
    0.7$
    59.1
    
    
    $
    13.8
    
    
    $
    40.6
    
    
    $
    2.6
    
    
    $
    116.1
   (1)
 (2)Includes an aggregate of $1.7 million, which has been included in the determination of
our liability for lease exit costs that is recorded on our balance sheet at December 31, 2004.
U.S. generally accepted accounting principles require that we record a liability for future
lease payments, net of estimated sublease rentals, for facilities that we have closed. (3)Consists of obligations under outstanding purchase orders. Approximately 84% of the
deliveries under outstanding purchase orders are expected to be received in the first quarter
of 2005. We often have the ability to cancel these obligations if we provide sufficient notice
to our suppliers. (4)Includes $1.4 million for purchase consideration payable to the former owners of
Trilogic in the first quarter of 2005, and $1.2 million payable under agreements for the
acquisition of software and equipment. We believe we will be able to fund our contractual operating lease and other purchase order
obligations from operating cash flows during the periods that payments are required. We believe we
will be able to fund the 20




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##### Table of Contents



payments required under the Trilogic acquisition agreement through borrowings under our credit
agreement with Citibank. Capital Resources.Our working capital at December 31, 2004 totaled $17.2 million compared to
$49.4 million at December 31, 2003. This decrease in working capital is attributable to the
reclassification to current liabilities of outstanding borrowings under our amended credit
agreement due to the existence of the lockbox arrangement discussed below. At December 31, 2004,
the borrowing base under our $75.0 million revolving credit facility with Citibank would have
supported borrowings up to $75.0 million, and we had outstanding borrowings of approximately $59.1
million and outstanding letters of credit for $1.4 million under this credit facility. Accordingly,
as of December 31, 2004, we had unused availability of $14.5 million after deducting outstanding
borrowings and the letters of credit. The borrowing base calculation under the credit facility is
based on a percentage of eligible receivables and inventories, plus the appraised value of certain
real estate and equipment. Accordingly, our borrowing availability generally decreases as our net
receivables and inventories decline. On July 7, 2004, we entered into an amended credit agreement with Citibank and Congress
Financial Corporation. The maximum borrowings permitted under the amended credit agreement remained
unchanged from the previous agreement with Citibank at $75.0 million but the maturity date was
extended until July 7, 2008. The amended credit agreement includes a lockbox arrangement that
requires the Company to instruct our customers to remit payments to restricted cash accounts,
whereby all available funds are immediately used to pay down the outstanding principal balance
under the amended credit agreement. In order to ensure the continuing availability of funding under our credit facility, we are
required to comply with certain financial and reporting covenants, including the covenant for
earnings before interest, taxes, depreciation and amortization (EBITDA) discussed below. Compared
to the previous credit facility, the amended credit agreement generally includes less stringent
covenants for EBITDA, and covenants for minimum tangible net worth and capital expenditures were
eliminated in the current agreement. However, the amended credit agreement provides that a more
stringent EBITDA covenant is effective when the aggregate value of assets included in the borrowing
base does not exceed outstanding borrowings by at least $15.0 million. If we violate the EBITDA
covenant, there can be no assurance that the lenders would waive our noncompliance. In these
circumstances, the lenders could elect to withdraw the credit facility, which would have a material
adverse effect on our liquidity and financial condition, resulting in the need to seek other
sources of financing. As of December 31, 2004, we were in compliance with the covenants under the
amended credit agreement. Due to the termination of our relationship with Applied, our lenders determined in January
2005 that all inventories related to Applied are ineligible in future calculations of the borrowing
base. This action, along with changes in the advance rates for real estate and equipment,
contributed to the reduction in our borrowing availability from $14.5 million at December 31, 2004
to $7.3 million at March 20, 2005. Furthermore, due to the reduction in borrowing availability, a
more stringent EBITDA covenant first became effective in January 2005. We believe the Company would
have violated this more stringent EBITDA covenant by the end of the first quarter of 2005. However,
as discussed below under the caption EBITDA Financial Covenant, effective on March 29, 2005, the lenders
agreed to amend the EBITDA covenant that will be effective for the remainder of the year ending
December 31, 2005. We believe we will be able to comply with the amended EBITDA covenant and that
our borrowing availability will be sufficient to fund planned operations in 2005. Through
December 2004, the Applicable Margin (the
premium we are charged in excess of published Base and LIBOR Rates) under the amended credit
agreement was reduced from
previous levels by 1.75% for Base Rate borrowings and 1.00% for LIBOR Rate borrowings.
However, in connection with the amendment discussed in the preceding
paragraph, the Applicable Margin for Base Rate borrowings increased
by 1.00% on March 29, 2005, with subsequent quarterly increases of 0.25%
on July 1, 2005, October 1, 2005 and January 1, 2006. The Applicable
Margin for LIBOR Rate borrowings increased by 0.50% on March 29,
2005, with subsequent quarterly increases of 0.25% on July 1, 2005,
October 1, 2005 and January 1, 2006.

Beginning in 2005, interest rates may be adjusted further depending on the amount of EBITDA for the
preceding four fiscal quarters. In addition, the Company is obligated to pay a commitment fee of
0.5% per annum of the unused portion of the credit facility. The amended credit agreement also
limits or prohibits us from paying dividends, selling significant assets, acquiring other
businesses, or merging with other entities without the consent of the lenders. Substantially all
of our assets are pledged as collateral for outstanding borrowings. Applied has been a customer of Suntron and its predecessors for over ten years. Our
relationship was governed by multiple agreements. During the past two years we intensified our
efforts to enforce our contractual agreements to recover costs incurred for excess and obsolete
inventories. In October 2004, Applied notified us that it intended to transition substantially all
of its business to alternative contract manufacturers and by January 2005 the business relationship
with Applied had substantially terminated. In December 2004, we initiated litigation in Fort 21




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##### Table of Contents



Bend County, Texas, seeking monetary damages against Applied for expenses relating to raw
materials, inventory, and capital and human resources that we expended in reliance upon Applieds
representations. On January 14, 2005, Applied filed a Complaint for Declaratory Relief in the
Superior Court of the State of California. Applieds Complaint seeks to establish that the dispute
should be resolved in California. Applied seeks recovery of its attorneys fees but is not seeking
any other claim for monetary damages. In February 2005, we responded to Applieds California
Complaint with a Cross-Complaint that sets forth our claim for reimbursement of amounts that we
believe Applied is contractually obligated to pay under our agreements, including amounts due for
excess and obsolete inventories of $18.3 million as of January 2005, and additional charges for
carrying costs, warehousing costs, cancellation charges, employee termination costs, punitive
damages, interest and legal fees. Our dispute involves a potential loss contingency if the outcome of the litigation does not
result in a settlement that is adequate to recover the net carrying value of our inventories.
Similar to the process employed for all of our customers, we evaluated excess inventories for
Applied on a quarterly basis and write-downs were recognized in the period when we determined that
recovery was not appropriate based on the applicable contractual agreements. We believe that
Applied is responsible for the net carrying value of inventories that we purchased on its behalf
and we intend to vigorously prosecute all of our claims. The precise amount or likelihood of
recovery can not be quantified and no assurances can be made as to the final timing or outcome of
the litigation. We expect to incur attorneys fees and related costs between $1.5 and $2.0 million
during 2005 in connection with this litigation. We continue to evaluate sales forecasts in relation to our operations and many restructuring
actions were taken in 2002 and 2003 to position us for improved operating results in 2004. However,
we were unable to eliminate the recurring operating losses in 2004, and preliminary sales forecasts
indicate that net sales could be more than 25% lower for the first half of 2005 compared to the
comparable period in 2004. In response to the lower sales forecasts, we have taken actions in the
first quarter of 2005 to reduce operating costs and further reductions will likely be implemented
in the second quarter of 2005. The combination of lower net sales forecast for 2005 and these
restructuring actions is not expected to result in profitable operations in 2005. However, we
expect that we will be able to achieve positive cash flows from operating activities for 2005. EBITDA Financial Covenant.The primary measure of our operating performance is net income
(loss). However, our lenders and many investment analysts believe that other measures of operating
performance are relevant. One of these alternative measures is Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA). Management emphasizes that EBITDA is a non-GAAP
measurement that excludes many significant items that are also important to understanding and
assessing Suntrons financial performance. Additionally, in evaluating alternative measures of
operating performance, it is important to understand that there are no standards for these
calculations. Accordingly, the lack of standards can result in subjective determinations by
management about which items may be excluded from the calculations, as well as the potential for
inconsistencies between different companies that have similarly titled alternative measures. In
order to illustrate our EBITDA calculations, we have provided the details below of the calculations
for the years ended December 31, 2003 and 2004 using a traditional definition, as well as the
calculation pursuant to the definition in our credit agreement with Citibank. Citibank modifies its
definition of EBITDA to exclude certain operating charges that may be considered unlikely to recur
in the future or that may be excluded due to a variety of other reasons. As shown below, the
measure of EBITDA under a traditional definition differs materially from the calculation of
EBITDA under our credit agreement: 2003
    
    
    2004(Dollars in Millions)Net loss
    
    $
    (34.3
    )
    
    $
    (4.5
    )Income tax expense
    
    
    
    
    
    
    Interest expense
    
    
    2.7
    
    
    
    4.0Depreciation and amortization
    
    
    22.1
    
    
    
    11.2EBITDA per traditional definition
    
    
    (9.5
    )
    
    
    10.7Restructuring costs (benefit) (A)
    
    
    (3.1
    )
    
    
    1.4Other charges (B)
    
    
    1.6
    
    
    
    0.3$
    (11.0
    )
    
    $
    12.4
 22




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##### Table of Contents



(A)
    
    Restructuring costs include lease exit costs and credits, impairment of long-lived assets,
severance, retention, and moving costs related to facility closures and other reductions in
workforce. Restructuring costs exclude accelerated depreciation due to shortened lives of
leasehold improvements since these amounts are included in depreciation and amortization
expense.(B)
    
    Primarily consists of a bad debt charge related to a former customer, certain professional
fees, stock-based compensation expense, and cash costs related to restructuring activities. In order to remain in compliance with the EBITDA covenant under the amended credit agreement,
our EBITDA (as defined in the credit agreement) was required to be no less favorable than negative
$2.5 million for the year ended December 31, 2004, compared to positive $12.4 million shown above.
Beginning in 2005, as of the end of each fiscal quarter, EBITDA must be no less favorable than
break-even for the four preceding fiscal quarters. Furthermore, due to the reduction in borrowing
availability, a more stringent EBITDA covenant first became effective in January 2005. We believe
the Company would have violated this more stringent EBITDA covenant by the end of the first quarter
of 2005. However, effective March 29, 2005, the lenders agreed to amend the EBITDA covenant that will be
effective for the remainder of the year ending December 31, 2005. However, under the amended
covenant, if the average value of assets included in the borrowing base does not exceed average
outstanding borrowings by at least $10.0 million for each of the first two fiscal months of a
quarter, and at least $12.5 million for the third fiscal month of each quarter, then a more
stringent EBITDA calculation is required for that month (referred to as a Reduced Liquidity
Month). The amended covenant for a Reduced Liquidity Month in 2005 requires minimum rolling
three-month EBITDA calculations ranging from negative $2.3 million for the three-months ended April
3, 2005 to positive $1.8 million for the three-months ended December 31, 2005 (positive $2.5
million per quarter for Reduced Liquidity Months after 2005). As discussed above, we were subject
to the more stringent EBITDA calculation beginning in January 2005 and we complied with the
covenant for both January and February 2005. Impact of Recently Issued Accounting Standards Share-Based Payment.In December 2004, the Financial Accounting Standards Board issued
Statement No. 123R, Share-Based Payment. This statement is a revision to Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees. Statement No. 123R establishes standards of
accounting for transactions in which an entity exchanges its equity instruments for goods or
services, primarily focusing on the accounting for transactions in which an entity obtains employee
services in share-based payment transactions. This standard generally requires companies to measure
the cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. That cost will be recognized over the period during which an
employee is required to provide service (usually the vesting period) in exchange for the award. The
grant-date fair value of employee stock options and similar instruments will be estimated using
option-pricing models. If an equity award is modified after the grant date, incremental
compensation cost will be recognized in an amount equal to the excess of the fair value of the
modified award over the fair value of the original award immediately before the modification. This
statement is effective as of the beginning of the first interim or annual reporting period that
begins after June 15, 2005. Accordingly, we will adopt Statement No. 123R in the third quarter of
2005. We intend to use the modified-prospective transition method when we adopt Statement No.
123R. Under the modified-prospective method, we will be required to recognize compensation cost
for share-based awards to employees based on their grant-date fair value from the beginning of the
fiscal period in which the recognition provisions are first applied, as well as compensation cost
for awards that were granted prior to, but not vested as of the date of adoption. Prior periods
will not be restated and the pro forma disclosures will continue to be required for periods prior
to the adoption date. Our board of directors is considering taking action to accelerate vesting of
all options for which the current exercise price exceeds fair market value, which would eliminate
any incremental future expense related to options that are currently outstanding. If the board of
directors does not take this action, we believe the impact of adopting this new standard on our
future results of operations would require approximately $1.1 million of incremental unvested
compensation cost that will be recognized as an expense in our Consolidated Statements of
Operations. Of this amount, we expect that approximately $0.5 million would be recognized in the
second half of 2005 and $0.6 million after 2005. In addition to these amounts, we will also
recognize additional compensation cost related to new stock options and other share-based payments
that are granted in the future. 23




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Factors That May Affect Future Results An investment in our common stock involves a high degree of risk. You should carefully
consider the factors described below, in addition to those discussed elsewhere in this report, in
analyzing an investment in our common stock. If any of the events described below occur, our
business, financial condition, and results of operations would likely suffer, the trading price of
our common stock could fall, and you could lose all or part of the money you paid for our common
stock. In addition, the following factors could cause our actual results to differ materially from
those projected in our forward-looking statements, whether made in thisForm 10-K, our annual or
quarterly reports to stockholders, future press releases, other SEC filings, or orally, whether in
presentations, responses to questions, or otherwise. See Statement Regarding Forward-Looking
Statements. Our level of indebtedness could adversely affect our financial viability, and the restrictions
imposed by the terms of our debt instruments may severely limit our ability to plan for or respond
to changes in our business. As of December 31, 2004, we had outstanding bank debt of approximately $59.1 million. In
addition, subject to the restrictions under our debt agreements, we may incur significant
additional indebtedness from time to time to finance business acquisitions, capital expenditures,
or for other purposes. Significant levels of debt could have negative consequences. For example, it could:  
    require us to dedicate a substantial portion of our cash flow from operations to
service interest and principal repayment requirements, limiting the availability of
cash for other purposes;
    increase our vulnerability to adverse general economic conditions by making it
more difficult to borrow additional funds to maintain our operations if we suffer
revenue shortfalls;
    limit our ability to attract new customers if we do not have sufficient
liquidity to meet working capital needs; and
    hinder our flexibility in planning for, or reacting to, changes in our business
and industry if we are unable to borrow additional funds to upgrade our equipment
or facilities. We may need additional capital in the future and it may not be available on acceptable terms, or at all. We may need to raise additional funds for the following purposes:  
    to fund working capital requirements for future growth that we may experience;
    to enhance or expand the range of services we offer;
    to increase our promotional and marketing activities; or
    to respond to competitive pressures or perceived opportunities, such as
investment, acquisition, and international expansion activities. If such funds are not available when required or on acceptable terms, our business and financial
results could suffer. We experience significant volatility in our net sales which leads to significant operating
inefficiencies and the potential for significant charges. As a result of the soft demand in the end markets served by our customers, our net sales
declined from $197.9 million in the first quarter of 2001 to $78.6 million in the fourth quarter of
2003. As demand in these end markets increased in 2004, our net sales increased to $130.4 million
in the second quarter of 2004. However, by the fourth quarter of 2004, our net sales had declined
to $115.8 million, and we expect that net sales will be in the range of $80 million to $85 million
for the first quarter of 2005. During periods of rapidly declining net sales, we generally take actions to eliminate variable
and fixed costs, which often results in significant restructuring charges. When our net sales
decline significantly, it is difficult to operate our plants profitably since it is not possible to
eliminate most of our fixed costs. If we believe that the decline in sales is unlikely to be
followed by a rapid recovery, we may determine that there are significant benefits to reducing our
cost structure by closing plants and transferring existing business to other plants that are also
operating below optimal capacity levels. However, there can be no assurance that customers impacted
by a restructuring will agree to transition their business to another Suntron location. In order to
realize the long-term benefits of these actions, we usually incur substantial charges for
impairment of assets, lease exit costs, and the payment of severance and retention benefits to
affected employees. In addition to the up-front costs associated with 24




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these actions, the transition of inventory and manufacturing services to a different facility
can result in quality and delivery issues that may have an adverse impact in retaining customers
that are affected by the plant closure. Our results of operations could also be materially and
adversely affected by our inability to timely sell or sublet closed facilities on expected terms,
or otherwise achieve the expected benefits of our restructuring activities. During periods of rapidly increasing net sales, we often experience inefficiencies related to
hiring and training workers, as well as incremental costs incurred to expedite the purchase and
delivery of raw materials and overtime costs related to our workforce. Periods of rapid growth tend
to stress our resources and we may not have sufficient capacity to meet our customers delivery
requirements. Significant increases in net sales are typically accompanied by corresponding
increases in inventories and receivables that must be financed with borrowings under our amended
credit agreement. We are dependent upon the highly competitive electronics industry, and excess capacity or decreased
demand for products produced by this industry could result in increased price competition as well
as a decrease in our gross margins and unit volume sales. Our business is heavily dependent on the electronics manufacturing services industry, which is
extremely competitive and includes hundreds of companies. The contract manufacturing services we
provide are available from many independent sources, and we compete with numerous domestic and
foreign EMS firms, including Benchmark Electronics, Inc.; Celestica Inc; Flextronics International
Ltd.; Jabil Circuit, Inc.; Pemstar, Inc.; Plexus Corp.; Sanmina-SCI Corporation; SMTC Corporation;
Solectron Corporation; Sypris Electronics, LLC; and others. Many of such competitors are more
established in the industry and have greater financial, manufacturing or marketing resources than
we do. We may be operating at a cost disadvantage as compared to our competitors that have greater
direct buying power from component suppliers, distributors, and raw material suppliers and have
lower cost structures. In addition, many of our competitors have a broader geographic presence,
including manufacturing facilities in Asia, Europe, and South America. We believe that the principal competitive factors in our targeted market are quality,
reliability, the ability to meet delivery schedules, technological sophistication, geographic
location, and price. We also face competition from our current and potential customers, who are
continually evaluating the relative merits of internal manufacturing versus contract manufacturing
for various products. As stated above, the price of our services is often one of many factors that
may be considered by prospective customers in awarding new business. We believe existing and
prospective customers are placing greater emphasis on contract manufacturers that can offer
manufacturing services in low cost regions of the world, such as certain countries in Asia.
Accordingly, in situations where the price of our services is a primary driver in prospective
customers decision to award new business, we currently believe we may have a competitive
disadvantage in these circumstances. A significant percentage of our net sales are generated from the semiconductor capital
equipment, aerospace and defense, industrial, networking and telecommunications, and medical
sectors of the electronics industry, which is characterized by intense competition and significant
fluctuations in product demand. Furthermore, these sectors are subject to economic cycles and have
experienced in the past, and are likely to experience in the future, recessionary economic cycles.
A recession or any other event leading to excess capacity or a downturn in these sectors of the
electronics industry results in intensified price competition as well as a decrease in our unit
volume sales and our gross margins. We are dependent on the aerospace industry. One of our principal customers is engaged in the aerospace market. See We are dependent
upon a small number of customers for a large portion of our net sales, and a decline in sales to
major customers would harm our results of operations. Consequently, a significant percentage of
our net sales have been derived from the aerospace sector of the electronics industry. The
September 11, 2001 terrorist attacks using hijacked commercial aircraft and the ensuing war on
terrorism have resulted in a reduction in demand for our services, which has had an adverse impact
on our results of operations. See We experience significant volatility in our net sales which
leads to significant operating inefficiencies and the potential for significant charges. In
addition, continuing tensions in the Middle East, have resulted in higher oil prices, which could
result in further reductions in demand for products of our aerospace customers, which would have a
continuing negative impact on our results of operations. 25




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We are dependent upon a small number of customers for a large portion of our net sales, and a
decline in sales to major customers would harm our results of operations. A small number of customers are responsible for a significant portion of our net sales. For
the year ended December 31, 2003, Honeywell and Applied accounted for 29% and 18%, respectively, of
our net sales. For 2004, Honeywell and Applied accounted for 21% and 25%, respectively, of our net
sales. Our customer concentration could increase or decrease depending on future customer
requirements, which will depend in large part on market conditions in the market sectors in which
our customers participate. The loss of one or more major customers or a decline in sales to our
major customers could significantly harm our business and results of operations. In the fourth
quarter of 2004, Applied informed us that they planned to transition substantially all of their
business with us to alternative contract manufacturers and by January 2005 this transition was
substantially complete. Accordingly, we expect this transition will adversely impact our results of
operations beginning in the first quarter of 2005. If we are not able to expand our customer base, we will continue to depend upon a small number
of customers for a significant percentage of our net sales. There can be no assurance that current
customers, including Honeywell, will not terminate their manufacturing arrangements with us or
significantly change, reduce, or delay the amount of manufacturing services ordered from us. In addition, we generate significant accounts receivable in connection with providing services
to our customers. If one or more of our significant customers were to become insolvent or were
otherwise unable or unwilling to pay for our services, our results of operations would deteriorate
substantially. Our financial condition could suffer if we fail to obtain a sufficient award in pending litigation. In December and February 2005, we filed lawsuits in Texas and California that seek,
through the enforcement of contractual provisions or based upon tort theories, to recover
approximately $18.3 million of costs incurred for excess and obsolete inventories; additional
charges for carrying costs, warehousing costs, cancellation charges, and employee termination
costs; plus punitive damages, interest and legal fees. See Item 3- Legal Proceedings. Although we
are vigorously pursuing our claims, this litigation is in a very early stage and we cannot predict
the outcome. If we are not able to obtain a sufficient award to recover the carrying value of these
inventories, our business, operating results and financial condition will be negatively impacted. Our customers may cancel their orders, change production quantities, or delay production. Electronics manufacturing service providers must provide increasingly rapid product turnaround
for their customers. We generally do not obtain firm, long-term purchase commitments from our
customers, and we expect to continue to experience reduced lead-times in customer orders. Customers
may cancel their orders, change production quantities, or delay production for a number of reasons.
Cancellations, reductions, or delays by a significant customer or by a group of customers would
seriously harm our results of operations. When customer orders are changed or cancelled, we may be
forced to hold excess inventories and incur carrying costs as a result of delays, cancellations, or
reductions in orders or poor forecasting by our key customers. In addition, we make significant decisions, including determining the levels of business that
we seek and accept, production schedules, component procurement commitments, personnel needs, and
other resource requirements based on estimates of customer production requirements. The short-term
nature of our customers commitments to us, combined with the possibility of rapid changes in
demand for their products, reduces our ability to accurately estimate future customer orders. In
addition, because many of our costs and operating expenses are relatively fixed, a reduction in
customer demand generally harms our operating results. If we experience excess capacity due to variability in customer demand, our gross margins may
decline. We may schedule certain of our production facilities at less than full capacity to retain our
ability to respond to additional quick turnaround orders. However, if these orders are not
received, we could experience losses due to excess capacity. Whenever we experience excess
capacity, our sales revenue may be insufficient to fully cover our fixed overhead expenses and our
gross margins will decline. Conversely, we may not be able to capture all 26




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potential revenue in a given period if our customers demands for quick turnaround services
exceed our capacity during that period. If we are unable to respond to rapid technological change and process development, we may not be
able to compete effectively. The market for our products and services is characterized by rapidly changing technology and
continual implementation of new production processes. The future success of our business will
depend in large part upon our ability to maintain and enhance our technological capabilities, to
develop and market products that meet changing customer needs, and to successfully anticipate or
respond to technological changes on a cost-effective and timely basis. We expect that the
investment necessary to maintain our technological position will increase as customers make demands
for products and services requiring more advanced technology on a quicker turnaround basis. In addition, the electronics manufacturing services industry could encounter competition from
new or revised manufacturing and production technologies that render existing manufacturing and
production technology less competitive or obsolete. We may not be able to respond effectively to
the technological requirements of the changing market. If we need new technologies and equipment to
remain competitive, the development, acquisition and implementation of those technologies may
require us to make significant capital investments. Operating in foreign countries exposes us to increased risks that could adversely affect our
results of operations. We currently have foreign operations in Mexico. We may in the future expand into other foreign
countries. We have limited experience in managing geographically dispersed operations and in
operating in foreign countries. Because of the scope of our international operations, we are
subject to the following risks, which could adversely impact our results of operations:  
    economic or political instability;
    transportation delays and interruptions;
    increased employee turnover and labor unrest;
    incompatibility of systems and equipment used in foreign operations;
    foreign currency exposure;
    difficulties in staffing and managing foreign personnel and diverse cultures; and
    less developed infrastructures. In addition, changes in policies by the United States or foreign governments could negatively
affect our operating results due to increased duties, increased regulatory requirements, higher
taxation, currency conversion limitations, restrictions on the transfer of funds, the imposition of
or increase in tariffs, and limitations on imports or exports. Also, we could be negatively
affected if our host countries revise their policies away from encouraging foreign investment or
foreign trade, including tax holidays. If we are unsuccessful in managing future opportunities for growth, our results of operations will
be harmed. Our future results of operations will be affected by our ability to successfully manage future
opportunities for growth. Rapid growth, such as that experienced for 2004, is likely to place a
significant strain on our managerial, operational, financial, and other resources. If this growth
continues, it may require us to implement additional management information systems, to further
develop our operating, administrative, financial, and accounting systems and controls and to
maintain close coordination among our accounting, finance, sales and marketing, and customer
service and support departments. In addition, we may be required to retain additional personnel to
adequately support our growth. If we cannot effectively manage periods of rapid growth in our
operations, we may not be able to continue to grow, or we may grow at a slower pace. Any failure to
successfully manage growth and to develop financial controls and accounting and operating systems
or to add and retain personnel that adequately support growth could harm our business and financial
results. 27




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Our results of operations are affected by a variety of factors, which could cause our results of
operations to fail to meet expectations. Our results of operations have varied, and our results of operations may continue to fluctuate
significantly from period to period, including on a quarterly basis. Our results of operations are
affected by a number of factors, including:  
    timing of orders from and shipments to major customers;
    mix of products ordered by major customers;
    volume of orders as related to our capacity at individual locations;
    pricing and other competitive pressures;
    component shortages, which could cause us to be unable to meet customer
delivery schedules;
    our ability to minimize inventory obsolescence and bad debt expense risk;
    our ability to manage effectively inventory and fixed asset levels; and
    timing and level of goodwill and other long-lived asset impairments. We are dependent on limited and sole source suppliers for electronic components and may experience
component shortages, which would cause us to delay shipments to customers. We are dependent on certain suppliers, including limited and sole source suppliers, to provide
critical electronic components and other materials for our operations. At various times, there have
been shortages of some of the electronic components we use, and suppliers of some components have
lacked sufficient capacity to meet the demand for these components. For example, from time to time,
some components we use, including semiconductors, capacitors, and resistors, have been subject to
shortages, and suppliers have been forced to allocate available quantities among their customers.
Such shortages have disrupted our operations in the past, which resulted in incomplete or late
shipments of products to our customers. Our inability to obtain any needed components during future
periods of allocations could cause delays in shipments to our customers. The inability to make
scheduled shipments could in turn cause us to experience a shortfall in revenue. Component
shortages may also increase our cost of goods due to premium charges we may pay to purchase
components in short supply. Accordingly, even though component shortages have not had a lasting
negative impact on our business, component shortages could harm our results of operations for a
particular fiscal period due to the resulting revenue shortfall or cost increases and could also
damage customer relationships over a longer-term period. We depend on our key personnel and may have difficulty attracting and retaining skilled employees. Our future success will depend to a significant degree upon the continued contributions of our
key management, marketing, technical, financial, accounting and operational personnel, including
James K. Bass, our President and Chief Executive Officer. The loss of the services of one or more
key employees could have a material adverse effect on our results of operations. We also believe
that our future success will depend in large part upon our ability to attract and retain additional
highly skilled managerial and technical resources. Competition for such personnel is intense. There
can be no assurance that we will be successful in attracting and retaining such personnel. In
addition, recent and potential future facility shutdowns and workforce reductions may have a
negative impact on employee recruiting and retention. Our manufacturing processes depend on the collective industry experience of our employees. If these
employees were to leave and take this knowledge with them, our manufacturing processes may suffer
and we may not be able to compete effectively. We have no patent or trade secret protection for our manufacturing processes, but instead rely
on the collective experience of our employees to ensure that we continuously evaluate and adopt new
technologies in our industry. Although we are not dependent on any one employee or a small number
of employees, if a significant number of employees involved in our manufacturing processes were to
leave our employment and we are not able to replace these people with new employees with comparable
experience, our manufacturing processes may suffer as we may be unable to keep up with innovations
in the industry. As a result, we may not be able to continue to compete effectively. 28




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Our failure to comply with the requirements of environmental laws could result in fines and
revocation of permits necessary to our manufacturing processes. Our operations are regulated under a number of federal, state, and foreign environmental and
safety laws and regulations that govern, among other things, the discharge of hazardous materials
into the air and water, as well as the handling, storage, and disposal of such materials. These
laws and regulations include the Clean Air Act; the Clean Water Act; the Resource Conservation and
Recovery Act; and the Comprehensive Environmental Response, Compensation, and Liability Act; as
well as analogous state and foreign laws. Compliance with these environmental laws is a major
consideration for us because our manufacturing processes use and generate materials classified as
hazardous, such as ammoniacal etching solutions, copper, and nickel. In addition, because we use
hazardous materials and generate hazardous wastes in our manufacturing processes, we may be subject
to potential financial liability for costs associated with the investigation and remediation of our
own sites or sites at which we have arranged for the disposal of hazardous wastes, if such sites
become contaminated. Even if we fully comply with applicable environmental laws and are not
directly at fault for the contamination, we may still be liable. The wastes we generate include
spent ammoniacal etching solutions, solder stripping solutions, and hydrochloric acid solutions
containing palladium; waste water that contains heavy metals, acids, cleaners, and conditioners;
and filter cake from equipment used for on-site waste treatment. We have not incurred significant
costs related to compliance with environmental laws and regulations in the prior three years, and
we believe that our operations comply with all applicable environmental laws. However, any material
violations of environmental laws by us could subject us to revocation of our effluent discharge and
other environmental permits. Any such revocations could require us to cease or limit production at
one or more of our facilities. Even if we ultimately prevail, environmental lawsuits against us
would be time consuming and costly to defend. Environmental laws could also become more stringent over time, imposing greater compliance
costs and increasing risks and penalties associated with violation. We operate in environmentally
sensitive locations and are subject to potentially conflicting and changing regulatory agendas of
political, business, and environmental groups. Changes or restrictions on discharge limits;
emissions levels; or material storage, handling, or disposal might require a high level of
unplanned capital investment or relocation. It is possible that environmental compliance costs and
penalties from new or existing regulations may harm our business, financial condition, and results
of operations. We may be subject to risks associated with acquisitions, and these risks could harm our results of
operations. We completed two business combinations in 2002 and one each in 2003 and 2004, and we
anticipate that we will seek to identify and acquire additional suitable businesses in the
electronics manufacturing services industry. The long-term success of recent business combinations
will depend on our ability to unite the business strategies, human resources and information
technology systems of previously separate companies. The difficulties of combining operations
include the necessity of coordinating geographically separated organizations and integrating
personnel with diverse business backgrounds. Combining management resources will result in changes
affecting all employees and operations. Differences in management approach and corporate culture
may strain employee relations. Future business combinations could cause certain customers to either seek alternative sources
of product supply or service, or delay or change orders for products due to uncertainty over the
integration of the two companies or the strategic position of the combined company. As a result, we
may experience some customer attrition. Acquisitions of companies and businesses and expansion of operations involve certain risks,
including the following:  
    the business fails to achieve anticipated revenue and profit expectations;
    the potential inability to successfully integrate acquired operations and
businesses or to realize anticipated synergies, economies of scale, or other value;
    diversion of managements attention;
    difficulties in scaling up production and coordinating management of operations at new sites;
    the possible need to restructure, modify, or terminate customer relationships of
the acquired business;
    loss of key employees of acquired operations; and
    the potential liabilities of the acquired businesses. 29




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Accordingly, we may experience problems in integrating the operations associated with any
future acquisition. We therefore cannot provide assurance that any future acquisition will result
in a positive contribution to our results of operations. In particular, the successful combination
with any businesses we acquire will require substantial effort from each company, including the
integration and coordination of sales and marketing efforts. The diversion of the attention of
management and any difficulties encountered in the transition process, including the interruption
of, or a loss of momentum in, the activities of any business acquired, problems associated with
integration of management information and reporting systems, and delays in implementation of
consolidation plans, could harm our ability to realize the anticipated benefits of any future
acquisition. In addition, future acquisitions may result in dilutive issuances of equity
securities, the incurrence of additional debt, large one-time write-offs, and the creation of
goodwill or other intangible assets that could result in increased impairment or amortization
expense. Failure to maintain an effective system of internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act could inhibit our ability to accurately report our financial results and have a
material adverse impact on our business and stock price. Effective internal controls are necessary for us to provide reliable financial reports.
We have in the past discovered, and may in the future discover, areas of our internal controls that
need improvement. We are in the process of documenting and testing our internal control procedures
in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which
requires annual management assessments of the effectiveness of our internal controls over financial
reporting and a report by our independent auditors attesting to these assessments. During the
course of our testing we may identify deficiencies which we may not be able to remediate in time to
meet the December 31, 2006 deadline imposed by the Sarbanes-Oxley Act of 2002 for compliance with
the requirements of Section 404. Failure to achieve and maintain effective internal controls over
financial reporting could have a material adverse effect on our stock price. Our stock price may be volatile, and our stock is thinly traded, which could cause investors to
lose all or part of their investments in our common stock. The stock market has recently experienced volatility that has often been unrelated to the
operating performance of any particular company or companies. If market or industry-based
fluctuations continue, our stock price could decline regardless of our actual operating
performance, and investors could lose a substantial part of their investments. Moreover, if an
active public market for our stock is not sustained in the future, it may be difficult to resell
our stock. Since March 2002 when Suntron shares began trading, the average number of shares of our common
stock that traded on the NASDAQ exchange has been approximately 8,000 shares per day compared to
27,415,221 issued and outstanding shares as of December 31, 2004. When trading volumes are this
low, a relatively small buy or sell order can result in a large percentage change in the trading
price of our common stock, which may be unrelated to changes in our stock price that are associated
with our operating performance. The market price of our common stock will likely fluctuate in response to a number of factors,
including the following:  
    failure to meet the performance estimates of securities analysts;
    changes in estimates of our results of operations by securities analysts;
    announcements about the financial performance and prospects of the industries
and customers we serve;
    announcements about the financial performance of our competitors in the EMS
industry;
    the timing of announcements by us or our competitors of significant contracts
or acquisitions; and
    general stock market conditions. 30




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Our major stockholder controls us and our stock price could be influenced by actions taken by this
stockholder. Additionally, this stockholder could prevent a change of control or other business
combination, or could effect a short form merger without the approval of other stockholders. Thayer-Blum owns approximately 90% of our common stock, and five of our eleven directors are
representatives of Thayer-Blum. The interests of Thayer-Blum may not always coincide with those of
our other stockholders, particularly if Thayer-Blum decides to sell its controlling interest. In
addition, Thayer-Blum will have sufficient voting power (without the approval of Suntrons other
stockholders) to elect the entire Board of Directors of Suntron and, in general, to determine the
outcome of various matters submitted to stockholders for approval, including fundamental corporate
transactions. Thayer-Blum could cause us to take actions that we would not consider absent
Thayer-Blums influence, or could delay, deter, or prevent a change of control or other business
combination that might otherwise be beneficial to our public stockholders. In addition, Thayer-Blum could contribute its Suntron stock to a subsidiary corporation that,
as a 90% stockholder, then would have the ability under Delaware law to merge with or into Suntron
without the approval of the other Suntron stockholders. In the event of such a short-form merger,
Suntron stockholders would have the right to assert appraisal/dissenters rights to receive cash in
the amount of the fair market value of their shares in lieu of the consideration they would have
otherwise received from the transaction. 31




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have a revolving line of credit that provides for total borrowings up to $75.0
million. The interest rate under this agreement is based on the prime rate and LIBOR rates, plus
applicable margins. Therefore, as interest rates fluctuate, the Company may experience changes in
interest expense that will impact financial results. The Company has not entered into any interest
rate swap agreements, or similar instruments, to protect against the risk of interest rate
fluctuations. Assuming outstanding borrowings of $75.0 million, if interest rates were to increase
or decrease by one percentage point, the result would be an increase or decrease in annual interest
expense of $0.75 million. Accordingly, significant increases in interest rates could have a
material adverse effect on the Companys future results of operations. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the financial statements, the report thereon, the notes thereto, and
the supplementary data commencing at page F-1 of this Report, which financial statements, report,
notes, and data are incorporated herein by reference. 
  ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of the
design and operation of the Companys disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15 as of the end of the period covered by this report. Based upon that evaluation, our
Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and
procedures are effective. There were no changes in our internal control over financial reporting
during the quarter ended December 31, 2004, that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting. Disclosure controls and procedures are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms. Disclosure controls and procedures include controls and procedures
designed to ensure that information required to be disclosed in our reports filed under the
Exchange Act is accumulated and communicated to management, including the Companys Chief Executive
Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required
disclosure. 
 ITEM 9B. OTHER INFORMATION Not applicable. 32




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The following table, together with the accompanying text, presents certain information,
as of March 31, 2005, with respect to each of our executive officers and directors. Name
    
    Age
    
    Position(s) Held With the CompanyJames K. Bass
    
    
    48
    
    
    Chief Executive Officer, President and DirectorJames A. Doran
    
    
    50
    
    
    Vice President, Controller and Chief Accounting OfficerMichael Eblin
    
    
    42
    
    
    Chief Operating OfficerOscar A. Hager
    
    
    50
    
    
    Vice President of Information Technology and AdministrationPeter W. Harper
    
    
    43
    
    
    Chief Financial Officer and SecretaryJohn H. Kulp
    
    
    47
    
    
    Vice President of Sales and MarketingAllen S. Braswell, Jr.
    
    
    46
    
    
    DirectorJames J. Forese
    
    
    68
    
    
    DirectorJeffrey W. Goettman
    
    
    45
    
    
    Director and Chairman of the BoardJesse Hermann
    
    
    43
    
    
    DirectorDouglas P. McCormick
    
    
    35
    
    
    DirectorJose S. Medeiros
    
    
    36
    
    
    DirectorThomas B. Sabol
    
    
    46
    
    
    DirectorJames C. Van Horne
    
    
    69
    
    
    DirectorJohn C. Walker
    
    
    43
    
    
    DirectorEnrique Zambrano
    
    
    49
    
    
    Director
 James K. Basshas served as our Chief Executive Officer and President and as a director since
May 2001 and as EFTCs Chief Executive Officer since July 2000. From 1996 to June 2000, Mr. Bass
was a senior vice president of Sony Corporation, a company engaged in the development, design,
manufacture and sale of various kinds of electronic equipment, instruments and devices for consumer
and professional markets. Prior to that, Mr. Bass spent 15 years in various manufacturing
management positions at the aerospace group of General Electric Company, a company engaged in the
development, manufacturing and marketing of a wide variety of products. Mr. Bass also serves as a
director of TTM Technologies, Inc., a provider of time-critical, one-stop manufacturing services
for highly complex printed circuit boards which is also an affiliate of Thayer Capital Partners. James A. Doranis a certified public accountant and has served as our Vice President,
Controller and Chief Accounting Officer since February 2002. Mr. Doran served as EFTCs Controller
from September 1999 to February 2002, and Mr. Doran was a member of the Board of Directors of EFTC
from 1993 until 2000. From 1977 through 1999, Mr. Doran was primarily engaged in the practice of
public accounting with an emphasis on audits of publicly-held companies. Michael Eblinhas served as our Chief Operating Officer since February 2002. Mr. Eblin served
as the Senior Vice President of Operations of EFTC from July 2000 to February 2002. From 1995 to
June 2000, Mr. Eblin was Director of Operations of Sony Corporation. Prior to that, Mr. Eblin held
various management positions in the Electronics Controls division of United Technologies and Hughes
Electronics, part of General Motors Corporation, an automobile manufacturer and communications
systems and financial services provider. Oscar A. Hagerhas served as our Vice President of Human Resources since February 2002. Mr.
Hager served as EFTCs Vice President of Human Resources from November 2000 to February 2002. From
April 1999 to 33




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##### Table of Contents



October 2000, Mr. Hager was EFTCs Director of Human Resources for Southwest
Commercial Operations. Prior to joining EFTC, Mr. Hager spent fifteen years with Honeywells
Commercial Aviation group, a manufacturer of commercial avionics equipment, in various human
resource management capacities. Prior to joining Honeywell, Mr. Hager held various human resource
positions in the aerospace industry. Peter W. Harperhas served as our Chief Financial Officer and Secretary since May 2001. Mr.
Harper served as the Chief Financial Officer of EFTC since July 2000. From 1996 to June 2000, Mr.
Harper served as Vice President of Finance at Iomega Corporation, a company that designs,
manufactures and markets personal and professional storage solutions for users of personal
computers and consumer electronics devices. Prior to that, Mr. Harper spent 12 years in various
financial and operating management positions at General Electric Company in a variety of industries
including Power Systems, Corporate Audit, Lighting and Engineered Materials. John H. Kulphas served as our Vice President of Sales and Marketing since February 2002. Mr.
Kulp served as the Vice President of Sales and Marketing of EFTC from December 2001 to February
2002. From October 1999 to August 2001, Mr. Kulp served as Vice President of Sales at FlexTek
Incorporated, a supplier of electromechanical subassemblies. From 1979 to October 1999, Mr. Kulp
served in various capacities, most recently as regional sales manager, at AMP Inc., a supplier of
electrical and electronic connections and interconnection systems. Allen S. Braswell, Jr.has served as a director since October 2001. Mr. Braswell has engaged
in private investment activities as his principal occupation since December 2000. From September
1999 until such time, Mr. Braswell served as President of Jabil Global Services, a subsidiary of
Jabil Circuit, Inc. engaged in electronic product service and repair, which was purchased by EFTC
from affiliates of Mr. Braswell in September 1997 and sold to Jabil Circuit in September 1999. Mr.
Braswell also served as President of the predecessors of Jabil Global Services since October 1996. James J. Foresehas served as a director since July 2004. He has been Operating Partner and
Chief Operating Officer of Thayer Capital Partners, a private equity investment firm, since July
2003. He was Chairman of the Board of IKON Office Solutions, Inc. (IKON) from 2000 until his
retirement in February 2003. He was President and Chief Executive Officer of IKON from 1998 to
2002, Executive Vice President and President of International Operations of IKON from 1997 to 1998,
and Executive Vice President and Chief Operating Officer of IKON from 1996 to 1997. Prior to
joining IKON, he spent 36 years with IBM Corporation (IBM) in numerous executive positions,
including two years as Chairman and Chief Executive Officer of IBM Credit Corporation, three years
as Vice President-Finance of IBM, and six years as Vice President and Controller of IBM. He is also
a director of Anheuser-Busch, BFI Canada Inc., and Spherion Corporation. Jeffrey W. Goettmanhas served as our Chairman of the Board and a director since May 2001. Mr.
Goettman has served as a Managing Partner of Thayer Capital Partners, a private equity investment
company, since April 2001. Mr. Goettman joined Thayer Capital Partners in February 1998. From
February 1994 to February 1998, Mr. Goettman served as a Managing Director and founder of the EMS
group at Robertson Stephens & Co., Inc., an investment banking firm. Mr. Goettman also has served
as the Chairman of the Board and a director of TTM Technologies, Inc. and its predecessor companies
since July 1999. Jesse Hermannhas served as a director since July 2004. Mr. Hermann has served as the
President and Chief Executive Officer of icarz, Inc., a privately held company that develops and
sells store and distributor management computer systems, since January 2000. Mr. Hermann became
President and CEO of General Automotive Specialty Co., Inc., which manufactured automotive, marine
and industrial switches and locks for both OEM applications and aftermarket distribution, in 1993,
having previously served as VP of Operations and then VP of Sales and Marketing of General
Automotive. Following the sale of General Automotive to Echlin Inc. in 1998, Mr. Hermann managed
General Automotive as a division for Echlin/Dana until December 1999, when he left to found
icarz. Douglas P. McCormickhas served as a director since October 2001. Mr. McCormick has
served as a Managing Director of Thayer Capital Partners since January 2001 and was a Vice
President of that company since January 1999. From June 1997 to January 1999, Mr. McCormick served
as an associate at Morgan Stanley & Co. Incorporated, an investment banking firm. From September
1995 to June 1997, Mr. McCormick attended Harvard Business School. Mr. McCormick also serves as a
director of TTM Technologies, Inc. 34




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##### Table of Contents



Jose S. Medeiroshas served as a director since October 2001. Mr. Medeiros has been a Partner
with Blum Capital Partners, L.P., a San Francisco-based private equity and strategic block
investment firm, since August 2000 and Vice President since August 1998. From June 1996 to August
1998, Mr. Medeiros served as a Vice President in the Technology Mergers & Acquisitions group of
Robertson Stephens & Co., Inc. From January 1990 to June 1996, Mr. Medeiros served as an associate
at McKinsey & Company. Thomas
B. Sabolhas served as a director since July 2004. Since
March 31, 2005, Mr. Sabol has served as Chief Financial Officer for Wolverine Tube, Inc., a manufacturer and distributor of copper
and copper alloy tube products. From December 2004 to March 2005, Mr. Sabol served as Senior Vice President, Finance & Accounting for Wolverine Tube, Inc. Mr. Sabol served as an independent business
consultant from January 2004 to November 2004. Previously, Mr. Sabol served as the Executive Vice
President and Chief Operating Officer of Plexus Corp., an EMS company, from July 2002 to November
2003 and as the Chief Financial Officer of Plexus from January 1996 to June 2002. Prior to joining
Plexus Corp., Mr. Sabol served as Vice President and General Auditor for Kemper Corporation, and
before that as Business Assurance Manager for Coopers & Lybrand. James C. Van Hornehas served as a director since October 2001. Mr. Van Horne has served
as the A.P. Giannini Professor of Finance at the Stanford University Graduate School of Business
since 1979, and has taught at such institution since 1965. Mr. Van Horne also serves as a director
of Montgomery Street Income Securities, Inc. (an investment company), and Bailard Biehl & Kaiser
Fund Group (a family of four mutual funds). John C. Walker,CFA,has served as a director since May 2001. Since April 1997, Mr. Walker has
been a Partner with Blum Capital Partners, L.P., a San Francisco-based private equity and strategic
block investment firm. From 1992 until April 1997, Mr. Walker served as the Vice President of Pexco
Holdings, Inc., a private investment holding company. Mr. Walker is a former director of Smarte
Carte, Inc., a company providing products and services to travelers to efficiently store or move
their belongings, and Playtex Products, Inc., a manufacturer and distributor of a diversified
portfolio of consumer and personal products. Enrique Zambranohas served as a director since April 2004. Mr. Zambrano has served as Chief
Executive Officer and a director of Proeza, S.A. de C.V., a diversified international company that
has operations primarily in the automotive and citrus juice processing industries, since 1988. Mr.
Zambrano is also a director of Grupo IMSA, S.A. de C.V., a steel processing company; XIGNUX, S.A.
de C.V., a Mexican private industrial conglomerate, and Instituto Tecnologico y de Estudios
Superiores de Monterey, the largest private university in Mexico. Audit Committee Our board of directors has established an audit committee to review and monitor our
corporate financial reporting, our internal audit and control functions, the results and scope of
the annual audit and other services provided by our independent auditors, and our compliance with
legal requirements that have a significant impact on our financial reports. The audit committee
also consults with our management and our independent auditors regarding the preparation of
financial statements and, as appropriate, initiates inquiries into aspects of our financial
affairs. In addition, the audit committee has the responsibility to consider and recommend the
appointment of, and to review fee arrangements with, our independent auditors. The members of the
audit committee are Messrs. Van Horne, Hermann, and Sabol. The audit committee met eight times,
including three telephonic meetings, during fiscal year 2004. Our Board of Directors has determined
that James C. Van Horne (the Chairman of our audit committee) and Thomas B. Sabol, are audit
committee financial experts as defined under Item 401(h) of Regulation S-K. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires our directors, officers, and persons who own
more than 10% of a registered class of our securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Directors, officers, and greater than 10%
stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms
they file. During 2004, we believe that our directors, executive officers and 10 percent
stockholders complied with all Section 16(a) filing requirements, except that John H. Kulp
inadvertently failed to file a Form 4 for a grant of 10,000 stock options with an exercise price of
$10.52 on June 1, 2004. 35




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##### Table of Contents



Code of Ethics We have adopted a Code of Ethics within the meaning of Item 406(b) of Regulation S-K.
This Code of Ethics applies to our principal executive officer, principal financial officer and
principal accounting officer. This Code of Ethics is publicly available on our website at
www.suntroncorp.com/investor/index.html. If we make substantive amendments to this Code of Ethics
or grant any waiver, including any implicit waiver, we will disclose the nature of such amendment
or waiver on our website or in a report on Form 8-K. 
 ITEM 11. EXECUTIVE COMPENSATION Executive Compensation The following table sets forth information concerning the compensation paid by Suntron
(including EFTC and K*TEC) for the fiscal years ended December 31, 2002, 2003, and 2004 to our
Chief Executive Officer and each of the four other most highly compensated individuals who served
as executive officers of Suntron at the end of 2004, as well as their titles with Suntron. Summary Compensation Table Long Term CompensationAnnual Compensation
    
    
    Awards
    
    
    PayoutsOther Annual
    
    
    Securities
    
    
    LTIPCompensation
    
    
    Underlying
    
    
    Payouts
    
    
    All OtherName and Principal Position
    
    Year
    
    
    Salary($)
    
    
    Bonus($)
    
    
    ($)(1)
    
    
    Options(#)
    
    
    ($)
    
    
    Compensation($)James K. Bass
    
    
    2002
    
    
    $
    300,000
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    
    
    
    
    
    227,000
    
    
    $
    3⁄4
    
    
    $
    3⁄4Chief Executive
    
    
    2003
    
    
    
    300,000
    
    
    
    31,000
    
    
    
    3⁄4
    
    
    
    
    
    
    
    60,000
    
    
    
    3⁄4
    
    
    
    3⁄4Officer and
President
    
    
    2004
    
    
    
    300,000
    
    
    
    280,200
    
    
    
    3⁄4
    
    
    
    
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Michael Eblin
    
    
    2002
    
    
    
    200,000
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    
    
    
    
    132,500
    
    
    
    3⁄4
    
    
    
    3⁄4Chief Operating
    
    
    2003
    
    
    
    219,231
    
    
    
    24,000
    
    
    
    3⁄4
    
    
    
    
    
    
    
    27,000
    
    
    
    3⁄4
    
    
    
    3⁄4Officer
    
    
    2004
    
    
    
    220,000
    
    
    
    143,000
    
    
    
    3⁄4
    
    
    
    
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Oscar A. Hager
    
    
    2002
    
    
    
    147,692
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    
    
    
    
    22,250
    
    
    
    3⁄4
    
    
    
    3⁄4Vice President of
    
    
    2003
    
    
    
    150,000
    
    
    
    15,000
    
    
    
    3⁄4

    
    
    
    
    
    
    
    15,000
    
    
    
    3⁄4
    
    
    
    3⁄4Human Resources
    
    
    2004
    
    
    
    165,000
    
    
    
    77,000
    
    
    
    3⁄4
    
    
    
    
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Peter W. Harper
    
    
    2002
    
    
    
    200,000
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    
    
    
    
    65,000
    
    
    
    3⁄4
    
    
    
    3⁄4Chief Financial
    
    
    2003
    
    
    
    200,000
    
    
    
    15,000
    
    
    
    3⁄4
    
    
    
    
    
    
    
    15,000
    
    
    
    3⁄4
    
    
    
    3⁄4Officer and
Secretary
    
    
    2004
    
    
    
    210,000
    
    
    
    97,847
    
    
    
    3⁄4
    
    
    
    
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4John H. Kulp
    
    
    2002
    
    
    
    170,000
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    
    
    
    
    40,750
    
    
    
    3⁄4
    
    
    
    70,707
    (2)Vice President of
    
    
    2003
    
    
    
    170,000
    
    
    
    15,000
    
    
    
    3⁄4
    
    
    
    
    
    
    
    12,000
    
    
    
    3⁄4
    
    
    
    3⁄4Sales and
Marketing
    
    
    2004
    
    
    
    195,000
    
    
    
    91,450
    
    
    
    3⁄4
    
    
    
    
    
    
    
    10,000
    
    
    
    3⁄4
    
    
    
    3⁄4
   (1)
    
    Except as otherwise provided in this table, no amounts for perquisites and other personal
benefits received by any of the named executive officers are shown because the aggregate
dollar amounts were lower than the reporting requirements established by the rules of the SEC.(2)
    
    Represents payment to defray moving expenses for relocation to Phoenix, Arizona in connection
with employment by the Company. 36




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##### Table of Contents



Stock Option Grants Suntron did not grant any stock appreciation rights in 2004. The following table sets
forth information concerning the grant of stock options in 2004 to Suntrons Chief Executive
Officer and the other executive officers named in the Summary Compensation Table above. Option Grants In Last Fiscal Year Individual GrantsNumber of
    
    
    % of Total
    
    
    
    
    
    
    Grant
    
    
    
    
    
    
    Potential Realizable Value atSecurities
    
    
    Options
    
    
    
    
    
    
    Date
    
    
    
    
    
    
    Assumed Annual Rates of StockUnderlying
    
    
    Granted to
    
    
    Exercise or
    
    
    Market
    
    
    
    
    
    
    Price Appreciation for Option Terms (3)Options
    
    
    Employees in
    
    
    Base Price
    
    
    Value
    
    
    ExpirationName
    
    Granted (#)
    
    
    Fiscal Year (2)
    
    
    ($/Share)
    
    
    ($/Share)
    
    
    Date
    
    
    5%($)
    
    
    10%($)John H. Kulp
    
    
    10,000
    (1)
    
    
    5.1
    %
    
    $
    10.52
    
    
    $
    8.00
    
    
    
    5-31-14
    
    
    $
    25,112
    
    
    $
    102,299
   (1)
    
    Represents options to purchase shares of Suntron common stock that become exercisable for 25%
of the underlying shares on the first anniversary of the date of grant and 12.5% in
semi-annual installments thereafter, so long as the executive remains employed with Suntron.(2)
    
    The percentages shown above are based on an aggregate of 194,900 options for shares of
Suntron common stock that were granted to employees for the year ended December 31, 2004.(3)
    
    Potential realizable value assumes that the stock price increases from the date of the grant
until the end of the option term (10 years) at the annual rate specified (5% and 10%). The 5%
and 10% assumed annual rates of appreciation are mandated by SEC rules and do not represent
our estimate or projection of the future price of our common stock. We do not believe this
method accurately illustrates the potential value of a stock option. Stock Option Exercises and Values for Fiscal 2004 The following table sets forth information with respect to Suntrons Chief Executive
Officer and the executive officers named in the Summary Compensation Table concerning options
exercised in 2004 and unexercised options held by them as of the end of such fiscal year: Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value Value of UnexercisedShares
    
    
    
    
    
    
    Number of Options at
    
    
    In-the-Money Options atAcquired on
    
    
    Value
    
    
    December 31, 2004
    
    
    December 31, 2004($)(1)Name
    
    Exercise
    
    
    Realized
    
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableJames K. Bass
    
    
    
    
    
    $
    
    
    
    
    325,376
    
    
    
    200,374
    
    
    $
    
    
    
    $
    Michael Eblin
    
    
    
    
    
    
    
    
    
    
    131,688
    
    
    
    111,562
    
    
    
    
    
    
    
    84,510Oscar A. Hager
    
    
    
    
    
    
    
    
    
    
    34,438
    
    
    
    34,812
    
    
    
    
    
    
    
    46,950Peter W. Harper
    
    
    
    
    
    
    
    
    
    
    70,125
    
    
    
    62,375
    
    
    
    
    
    
    
    46,950John H. Kulp
    
    
    
    
    
    
    
    
    
    
    36,875
    
    
    
    50,875
    
    
    
    
    
    
    
    37,560
   (1)
    
    The closing sales price per share for Suntron common stock as reported by the Nasdaq National
Market on December 31, 2004 was $3.14. The option value is calculated by multiplying (a) the
positive difference, if any, between $3.14 and the option exercise price by (b) the number of
shares of common stock underlying the option. 37




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##### Table of Contents



Equity Compensation Plan Information The following table sets forth certain information, as of December 31, 2004, regarding
shares of our common stock that may be issued upon the exercise of options under our only stock
option plan (the Amended and Restated 2002 Stock Option Plan). (a)
    
    
    (b)
    
    
    (c)Number of
    
    
    Weighted
    
    
    Number of SecuritiesSecurities to be
    
    
    Average
    
    
    Remaining Available forIssued Upon
    
    
    Exercise
    
    
    Future Issuance Under EquityExercise of
    
    
    Price of
    
    
    Compensation PlansOutstanding
    
    
    Outstanding
    
    
    (Excluding SecuritiesPlan Category
    
    Options
    
    
    Options
    
    
    Reflected in Column (a))Equity Compensation
Plans Approved by
Stockholders
    
    
    2,081,014
    
    
    $
    9.81
    
    
    
    2,913,102Equity Compensation
Plans Not Approved
by Stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    2,081,014
    
    
    $
    9.81
    
    
    
    2,913,102
 Employment Agreements and Change of Control Arrangements James K. Bass, our Chief Executive Officer and President, has entered into an employment
agreement that provides for employment as our Chief Executive Officer for a term that ended on
December 31, 2003, which term automatically extends for successive one-year periods until the
agreement is terminated. Mr. Bass agreement provides for a minimum annual base salary of $300,000
and incentive-based bonus compensation in an amount determined by the compensation committee of our
board of directors. We may terminate his employment agreement with or without cause. In the case
of a termination without cause, however, we must continue to pay Mr. Bass base salary and prorated
bonus compensation for a period of one year from the date of termination. 38




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##### Table of Contents



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED  STOCKHOLDER MATTERS The following table sets forth information with respect to our common stock beneficially
owned as of March 31, 2005 by (a) each person known by us to own beneficially more than five
percent of our outstanding common stock, (b) each of our directors, (c) each of our executive
officers, and (d) all of our directors and executive officers as a group. Shares Beneficially OwnedName of Beneficial Owner(1)
    
    Number
    
    
    Percent (2)Thayer-Blum Funding III, L.L.C. (3)
    
    
    24,582,191
    
    
    
    89.7
    %James K. Bass (4)
    
    
    347,314
    
    
    
    1.3
    %Allen S. Braswell, Jr. (5)
    
    
    228,635
    
    
    
    *James J. Forese (6)
    
    
    24,582,191
    
    
    
    89.7
    %Jeffrey W. Goettman (6)
    
    
    24,582,191
    
    
    
    89.7
    %Jesse Hermann (7)
    
    
    3,000
    
    
    
    *Douglas P. McCormick (6)
    
    
    24,582,191
    
    
    
    89.7
    %Jose S. Medeiros (6)
    
    
    24,582,191
    
    
    
    89.7
    %Thomas B. Sabol (7)
    
    
    3,000
    
    
    
    *James C. Van Horne (8)
    
    
    14,968
    
    
    
    *John C. Walker (6)
    
    
    24,582,191
    
    
    
    89.7
    %Enrique Zambrano (7)
    
    
    3,000
    
    
    
    *James A. Doran (9)
    
    
    37,030
    
    
    
    *Michael Eblin (10)
    
    
    144,438
    
    
    
    *Oscar A. Hager (11)
    
    
    37,188
    
    
    
    *Peter W. Harper (12)
    
    
    76,625
    
    
    
    *John H. Kulp (13)
    
    
    39,625
    
    
    
    *All directors and executive officers as a group
(16 persons) (6)(14)
    
    
    25,517,014
    
    
    
    90.7
    %
   *
    
    Represents less than 1% of our outstanding common stock.(1)
    
    Except as otherwise indicated, the address of each person listed on the table is 2401 West
Grandview Road, Phoenix, Arizona 85023.(2)
    
    We have determined beneficial ownership in accordance with the rules of the Securities and
Exchange Commission. In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, we have included the shares of common stock subject to
options and convertible securities held by that person that are currently exercisable or
convertible or will become exercisable or convertible within
60 days after March 31, 2005,
but we have not included those shares for purposes of computing percentage ownership of any
other person. We have assumed unless otherwise indicated that the persons and entities named
in the table have sole voting and investment power with respect to all shares beneficially
owned, subject to community property laws where applicable. Beneficial ownership is based on
27,415,221 shares of our common stock outstanding as of March 31, 2005.(3)
    
    Thayer-Blum Funding III, L.L.C. is owned as follows: 59.94% by Thayer Equity Investors IV,
L.P., 0.04% by TC Manufacturing Holdings, L.L.C., 0.02% by TC KCo, L.L.C., 34.4% by Blum
Strategic Partners, L.P., and 5.6% by Blum (K*TEC) Co-Investment Partners, L.P.TC Manufacturing Holdings, L.L.C. is controlled by limited liability companies, the managing
members of which are Frederick Malek, Carl Rickersten and Paul Stern.Thayer Equity Investors IV, L.P. is controlled by a limited liability company, the managing
members of which are Frederick Malek and Carl Rickersten.TC KCo, L.L.C. is controlled by a limited liability company, the managing members of which are
Frederik Malek and Carl Rickertsen. 39




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##### Table of Contents



Blum Strategic Partners, L.P. is controlled by a limited liability company, a managing member
of which is Richard C. Blum.Blum (K*TEC) Co-Investment Partners, L.P. is controlled by a limited liability company, a
managing member of which is Richard C. Blum.Messrs. Goettman and McCormick, both directors of ours, are managing directors of the limited
liability company that controls Thayer Equity Investors IV, L.P. Mr. Forese is an Operating
Partner and Chief Operating Officer of the company that controls Thayer Equity Investors IV,
L.P. Messrs. Walker and Medeiros, both directors of ours, are members of the general partner
of Blum Strategic Partners, L.P.The address of Thayer-Blum Funding III, L.L.C. is 1455 Pennsylvania Avenue, N.W., Suite 350,
Washington, D.C. 20004.(4)
    
    Consists of 347,314 shares issuable pursuant to options that are currently exercisable or
exercisable within 60 days of March 31, 2005.(5)
    
    Includes 37,520 shares beneficially owned by the Allen S. Braswell, Jr. Family Limited
Partnership #1; 24,455 shares beneficially owned by the Allen S. Braswell, Jr. EFTC Limited
Partnership, of which Allen S. Braswell is a general partner; 2,750 shares beneficially owned
by the Allen S. Braswell, Sr. Trust, of which Allen S. Braswell, Sr., Allen S. Braswell, Jr.s
father, is the trustee; 8,750 shares beneficially owned by Circuit Test International, L.P.,
of which Braswell Investment Corporation (BIC) is a general partner; 136,522 shares
beneficially owned by Braswell GRIT Limited Partnership, of which BIC is a general partner;
and 6,410 shares issuable pursuant to options that are exercisable
within 60 days of March
31, 2005. Allen S. Braswell, Jr. is president of BIC.(6)
    
    Reflects 24,582,191 shares held by Thayer-Blum Funding III, L.L.C. See footnote 3. Messrs.
Forese, Goettman, McCormick, Medeiros, and Walker disclaim beneficial ownership of these
securities, except to the extent of any pecuniary interest therein.(7)
    
    Consists of 3,000 shares issuable pursuant to options that are currently exercisable or
exercisable within 60 days of March 31, 2005.(8)
    
    Includes 12,468 shares issuable pursuant to options that are currently exercisable or
exercisable within 60 days of March 31, 2005.(9)
    
    Includes 36,938 shares issuable pursuant to options that are currently exercisable or
exercisable within 60 days of March 31, 2005.(10)
    
    Consists of 144,438 shares issuable pursuant to options that are currently exercisable or
exercisable within 60 days of March 31, 2005.(11)
    
    Includes 37,063 shares issuable pursuant to options that are currently exercisable or
exercisable within 60 days of March 31, 2005.(12)
    
    Consists of 76,625 shares issuable pursuant to options that are currently exercisable or
exercisable within 60 days of March 31, 2005.(13)
    
    Consists of 39,625 shares issuable pursuant to options that are currently exercisable or
exercisable within 60 days of March 31, 2005.(14)
    
    Includes 709,881 shares issuable pursuant to options that are currently exercisable or
exercisable within 60 days of March 31, 2005. 40




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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Sale/Leaseback Transaction Richard L. Monfort, formerly a member of our board of directors, entered into a sale/leaseback
transaction with EFTC in December 1998 whereby EFTC sold manufacturing facilities located in
Newberg, Oregon and Tucson, Arizona to Mr. Monfort for $10.5 million. Mr. Monfort leased these
manufacturing facilities back to us for a term of five years through December 2003. The
Tucson lease provided for monthly payments of $32,000 and the Newberg lease provided for monthly
payments of $58,000. Honeywell International, Inc. subleased the Tucson facility under a
month-to-month agreement that required monthly payments of $32,000 through expiration of the Tucson
lease in December 2003. In July 2003, we renewed the Newberg lease through December 2008 at an
average monthly payment of $47,000. Thayer-Blum Management Fees During 2004, we incurred $750,000 for management fees to affiliates of Thayer-Blum Funding
L.L.C. The services provided under this arrangement consist primarily of management and consulting
services related to corporate development activities. Purchase and Sale of Material For the year ended December 31, 2004, we purchased raw materials to support our production
requirements for $506,000 from TTM Technologies, Inc. For the year ended December 31, 2004, we
purchased raw materials to support our production requirements for $326,000 from Cosmotronic
Corporation. In addition, we sold products for $300,000 to Cosmotronic Corporation during the year
ended December 31, 2004. Two members of our Board of Directors currently serve on the Boards of
Directors of TTM Technologies, Inc. and Cosmotronic Corporation. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES KPMG LLP served as our independent registered public accounting firm for each of the
years in the three-year period ended December 31, 2004. Fees Charged By Independent Registered Public Accounting Firm The following is a summary of fees, all of which were approved by the audit committee, billed
by KPMG LLP for audit and other professional services during the years ended December 31, 2003 and
2004: 2003
    
    
    2004Audit fees
    
    $
    235,000
    
    
    $
    230,000Audit-related fees
    
    
    
    
    
    
    9,630Income tax fees
    
    
    64,839
    
    
    
    29,164All other fees
    
    
    
    
    
    
    Total fees
    
    $
    299,839
    
    
    $
    268,794
 Audit-related fees include fees related to Section 404 of the Sarbanes-Oxley Act of 2002.
Income tax fees include tax return preparation and consultation on various tax-related issues. Pre-Approval Policy for Independent Registered Public Accounting Firms Fees In 2003 our Audit Committee adopted a formal policy concerning pre-approval of audit and
non-audit services to be provided by our independent auditors. The policy requires that all
proposed services to be provided by KPMG LLP must be pre-approved by the audit committee before
any services are performed. This policy
includes all audit, tax and consulting services that KPMG LLP may provide to the Company. In
evaluating whether to engage KPMG LLP for non-audit services, our Audit Committee considers
whether the performance of services other than audit services is compatible with maintaining the
independence of KPMG LLP. 41




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PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  (a)
    Financial Statements and Financial Statement Schedule  (1)
    Financial Statements are listed in the Index to Financial Statements on page
F-1 of this Report.  (2)
    Schedule II is listed in the Index to Financial Statements on page F-1 of this
Report. Other schedules are omitted because they are not applicable, not required, or
because required information is included in the consolidated financial statements or
notes thereto.  (b)
    Exhibits ExhibitNumber
    
    Description2.1
    
    Amended and Restated Agreement and Plan of Merger, dated as of May 3, 2001, by and among EFTC Corporation, K*TEC Electronics Holding Corporation, Thayer-Blum Funding II, L.L.C. and the registrant. (1)3.1
    
    Certificate of Incorporation of the registrant. (1)3.2
    
    Bylaws of the registrant. (1)4.1
    
    Specimen Stock Certificate. (1)10.1
    
    Suntron Corporation Amended and Restated 2002 Stock Option Plan. (2)10.2
    
    Registration Rights Agreement between the registrant and Thayer-Blum. (1)10.3
    
    Employment Agreement dated as of June 23, 2000 by and between James Bass and EFTC Corporation. (1)10.4
    
    Lease Agreement dated as of May 10, 1999 by and between Orsett/I-17 L.L.C. and EFTC Corporation. (1)10.5
    
    Industrial Lease dated December 18, 1998 by and between Buckhorn Trading Co., LLC and EFTC Corporation. (1)10.6
    
    Commercial/Industrial Lease dated as of April 1, 2001 by and between EFTC Corporation and H. J. Brooks, LLC. (1)10.7
    
    Consulting Services Agreement dated as of April 24, 2002 by and between Suntron Corporation and Allen S. Braswell, Jr. (3)10.8
    
    Management and Consulting Agreement by and between Suntron Corporation and Thayer-Blum Funding III, L.L.C. (3)10.9
    
    Second Amended and Restated Credit
Agreement dated July 7, 2004 between Suntron Corporation and Citicorp USA and Congress Financial Corporation. (4)21
    
    List of Subsidiaries of the
registrant. (5)23.1
    
    Consent of KPMG LLP.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive
Officer pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.32.2
    
    Certification of Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   (1)
    
    Incorporated by reference to the Registration Statement on Form S-4 (Registration No.
333-72992) declared
effective February 8, 2002. 42




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##### Table of Contents



(2)
    
    Incorporated by reference to our Annual Report on
Form 10-K, filed on April 15, 2003.(3)
    
    Incorporated by reference to our Quarterly Report on Form 10-Q filed on August 14, 2002.(4)
    
    Incorporated by reference to our Quarterly Report on Form 10-Q filed on July 30, 2004.(5)
    
    Incorporated by reference to our Annual Report on
Form 10-K, filed on March 29, 2004. 43




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registration has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. SUNTRON CORPORATIONDate: April 6, 2005
    By:
    /s/ James K. BassJames K. BassPresident and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been

signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated. Name
    
    Title
    
    Date/s/James K. Bass
    
    President, Chief Executive Officer
    
    April 6, 2005James K. Bass
    
    (Principal Executive Officer), and Director/s/Peter W. Harper
    
    Chief Financial Officer and Secretary
    
    April 6, 2005Peter W. Harper
    
    (Principal Financial Officer)/s/James A. Doran
    
    Chief Accounting Officer
    
    April 6, 2005James A. Doran
    
    (Principal Accounting Officer)/s/Allen S. Braswell, Jr.
    
    Director
    
    April 6, 2005Allen S. Braswell, Jr./s/James J. Forese
    
    Director
    
    April 6, 2005James J. Forese/s/Jeffrey W. Goettman
    
    Director
    
    April 6, 2005Jeffrey W. Goettman/s/Jesse Hermann
    
    Director
    
    April 6, 2005Jesse Hermann/s/Douglas P. McCormick
    
    Director
    
    April 6, 2005Douglas P. McCormick/s/Jose S. Medeiros
    
    Director
    
    April 6, 2005Jose S. Medeiros/s/Thomas B. Sabol
    
    Director
    
    April 6, 2005Thomas B. Sabol/s/ James C. Van Horne
    
    Director
    
    April 6, 2005James C. Van Horne/s/John C. Walker
    
    Director
    
    April 6, 2005JoC. Walker/s/Enrique Zambrano
    
    Director
    
    April 6, 2005Enrique Zambrano
 44




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SUNTRON CORPORATION 
 Index to Consolidated
Financial Statements and Schedule
 Page(s)Consolidated Financial Statements:Report of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2003 and 2004
    
    F-3 to F-4Consolidated Statements of Operations for the years ended
December 31, 2002, 2003 and 2004
    
    F-5Consolidated Statements of Stockholders Equity for the
years ended December 31, 2002, 2003 and 2004
    
    F-6Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2003 and 2004
    
    F-7 to F-8Notes to Consolidated Financial Statements
    
    F-9 to F-28Supplementary Schedule:Schedule II- Valuation and Qualifying Accounts
    
    F-29
 F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders
Suntron Corporation: We have audited the accompanying consolidated balance sheets of Suntron Corporation and
subsidiaries as of December 31, 2003 and 2004, and the related consolidated statements of
operations, stockholders equity, and cash flows for each of the years in the three-year period
ended December 31, 2004. In connection with our audits of the consolidated financial statements, we
also have audited financial statement schedule II. These consolidated financial
statements and financial statement schedule are the responsibility of the Company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 the standards of the Public Company Accounting
Oversight Board (United States). 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 Suntron Corporation and subsidiaries as of December
31, 2003 and 2004, and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles. 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. /s/ KPMG LLP Phoenix, Arizona
February 28, 2005, except as to Note 2
      which is as of April 5, 2005 F-2




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SUNTRON CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 December 31, 2003 and 2004
(In Thousands, Except Per Share Amounts)
 2003
    
    
    2004ASSETSCurrent Assets:Cash and equivalents
    
    $
    26
    
    
    $
    14Trade receivables, net of allowance for doubtful
accounts of $2,898 and $1,411, respectively
    
    
    34,390
    
    
    
    50,435Inventories
    
    
    61,391
    
    
    
    79,202Prepaid expenses and other
    
    
    3,366
    
    
    
    1,122Total Current Assets
    
    
    99,173
    
    
    
    130,773Property, Plant and Equipment,at cost:Land, including land held for sale of $2,398 in 2004
    
    
    4,798
    
    
    
    4,748Leasehold improvements
    
    
    6,742
    
    
    
    6,958Buildings and improvements
    
    
    19,120
    
    
    
    18,456Manufacturing machinery and equipment
    
    
    53,852
    
    
    
    55,989Furniture, computer equipment and software
    
    
    33,536
    
    
    
    34,094Total
    
    
    118,048
    
    
    
    120,245Less accumulated depreciation and amortization
    
    
    (74,554
    )
    
    
    (84,857
    )Net Property, Plant and Equipment
    
    
    43,494
    
    
    
    35,388Intangible and Other Assets:Goodwill
    
    
    9,627
    
    
    
    10,915Identifiable intangible assets, net of accumulated
amortization of $4,560 and $1,780, respectively
    
    
    1,152
    
    
    
    875Debt issuance costs, net
    
    
    913
    
    
    
    1,932Deposits and other
    
    
    287
    
    
    
    226Total Intangible and Other Assets
    
    
    11,979
    
    
    
    13,948$
    154,646
    
    
    $
    180,109
 The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements. F-3




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SUNTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
December 31, 2003 and 2004
(In Thousands, Except Per Share Amounts) 2003
    
    
    2004LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    32,858
    
    
    $
    35,757Outstanding checks in excess of cash balances
    
    
    41
    
    
    
    4,294Borrowings under revolving credit agreement
    
    
    
    
    
    
    59,128Accrued compensation and benefits
    
    
    7,075
    
    
    
    6,667Payable for acquisition of business
    
    
    2,197
    
    
    
    1,408Accrued property taxes
    
    
    1,285
    
    
    
    1,202Customer deposits and deferred profit
    
    
    1,415
    
    
    
    878Current portion of accrued exit costs related to facility closures
    
    
    900
    
    
    
    537Accrued interest expense
    
    
    250
    
    
    
    775Payable to affiliates
    
    
    207
    
    
    
    218Other accrued liabilities
    
    
    3,567
    
    
    
    2,756Total Current Liabilities
    
    
    49,795
    
    
    
    113,620Long-term Liabilities:Borrowings under revolving credit agreement
    
    
    34,011
    
    
    
    Accrued exit costs related to facility closures
    
    
    117
    
    
    
    130Other
    
    
    774
    
    
    
    545Total Liabilities
    
    
    84,697
    
    
    
    114,295Commitments and Contingencies (Notes 9 and 12)Stockholders Equity:Preferred stock, $.01 par value. Authorized 10,000 shares, none issuedCommon stock, $.01 par value. Authorized 50,000 shares; issued and
outstanding 27,409 shares and 27,415 shares, respectively
    
    
    274
    
    
    
    274Additional paid-in capital
    
    
    380,804
    
    
    
    380,637Deferred stock compensation
    
    
    (754
    )
    
    
    (265
    )Accumulated deficit
    
    
    (310,375
    )
    
    
    (314,832
    )Total Stockholders Equity
    
    
    69,949
    
    
    
    65,814$
    154,646
    
    
    $
    180,109
 The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements. F-4




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SUNTRON CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Years Ended December 31, 2002, 2003 and 2004
(In Thousands, Except Per Share Amounts)
 2002
    
    
    2003
    
    
    2004Net Sales
    
    $
    370,797
    
    
    $
    313,231
    
    
    $
    475,388Cost of Goods Sold
    
    
    398,767
    
    
    
    321,599
    
    
    
    449,516Gross profit (loss)
    
    
    (27,970
    )
    
    
    (8,368
    )
    
    
    25,872Operating Costs and Expenses:Selling, general and administrative expenses
    
    
    27,234
    
    
    
    22,648
    
    
    
    24,361Related party expenses- management fees
    
    
    835
    
    
    
    750
    
    
    
    750Severance, retention, and lease exit costs
    
    
    169
    
    
    
    124
    
    
    
    1,085Reorganization transaction costs
    
    
    312
    
    
    
    
    
    
    
    Impairment of long-lived assets
    
    
    21
    
    
    
    
    
    
    
    Total operating costs and expenses
    
    
    28,571
    
    
    
    23,522
    
    
    
    26,196Operating loss
    
    
    (56,541
    )
    
    
    (31,890
    )
    
    
    (324
    )Other Income (Expense):Interest expense
    
    
    (2,568
    )
    
    
    (2,696
    )
    
    
    (3,982
    )Reduction in interest expense due to settlement of
dispute
    
    
    1,029
    
    
    
    
    
    
    
    Gain (loss) on sale of assets
    
    
    (166
    )
    
    
    50
    
    
    
    (11
    )Unrealized loss on marketable equity securities
    
    
    
    
    
    
    
    
    
    
    (385
    )Interest and other income
    
    
    835
    
    
    
    248
    
    
    
    245Loss before income taxes and cumulative
effect of change in accounting principle
    
    
    (57,411
    )
    
    
    (34,288
    )
    
    
    (4,457
    )Income Tax Benefit
    
    
    276
    
    
    
    
    
    
    
    Loss before cumulative effect of change in
accounting principle
    
    
    (57,135
    )
    
    
    (34,288
    )
    
    
    (4,457
    )Cumulative Effect of Change in Accounting Principle
    
    
    (69,015
    )
    
    
    
    
    
    
    Net loss
    
    $
    (126,150
    )
    
    $
    (34,288
    )
    
    $
    (4,457
    )Loss Per Share (Basic and Diluted):Loss before cumulative effect of change in
accounting principle
    
    $
    (2.08
    )
    
    $
    (1.25
    )
    
    $
    (0.16
    )Cumulative effect of change in accounting principle
    
    
    (2.52
    )
    
    
    
    
    
    
    Net loss
    
    $
    (4.60
    )
    
    $
    (1.25
    )
    
    $
    (0.16
    )Number of Shares Used for Computation:Basic and diluted
    
    
    27,409
    
    
    
    27,409
    
    
    
    27,413
 The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements. F-5




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SUNTRON CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 Years Ended December 31, 2002, 2003 and 2004
(In Thousands)
 AdditionalCommon Stock
    
    
    Paid-in
    
    
    Deferred Stock
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Deficit
    
    
    TotalBalances, December 31, 2001
    
    
    27,410
    
    
    $
    274
    
    
    $
    380,000
    
    
    $
    (205
    )
    
    $
    (149,937
    )
    
    $
    230,132Compensation cost
related to stock options
granted to employees
    
    
    
    
    
    
    
    
    
    
    233
    
    
    
    (233
    )
    
    
    
    
    
    
    Amortization of deferred
stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    31Write-off of unvested
deferred stock
compensation related to
cancelled options
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    56
    
    
    
    
    
    
    
    Fractional shares retired
    
    
    (1
    )
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (126,150
    )
    
    
    (126,150
    )Balances, December 31, 2002
    
    
    27,409
    
    
    
    274
    
    
    
    380,175
    
    
    
    (351
    )
    
    
    (276,087
    )
    
    
    104,011Compensation cost
related to stock options
granted to employees
    
    
    
    
    
    
    
    
    
    
    599
    
    
    
    (599
    )
    
    
    
    
    
    
    Amortization of deferred
stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    196Compensation cost
related to stock options
granted to directors
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    30Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34,288
    )
    
    
    (34,288
    )Balances, December 31, 2003
    
    
    27,409
    
    
    
    274
    
    
    
    380,804
    
    
    
    (754
    )
    
    
    (310,375
    )
    
    
    69,949Amortization of deferred
stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    300Write-off of unvested
deferred stock
compensation related to
cancelled options
    
    
    
    
    
    
    
    
    
    
    (189
    )
    
    
    189
    
    
    
    
    
    
    
    Stock options exercised
    
    
    6
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    22Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,457
    )
    
    
    (4,457
    )Balances, December 31, 2004
    
    
    27,415
    
    
    $
    274
    
    
    $
    380,637
    
    
    $
    (265
    )
    
    $
    (314,832
    )
    
    $
    65,814
 The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements. F-6




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SUNTRON CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years Ended December 31, 2002, 2003 and 2004
(In Thousands)
 2002
    
    
    2003
    
    
    2004Cash Flows from Operating Activities:Net loss
    
    $
    (126,150
    )
    
    $
    (34,288
    )
    
    $
    (4,457
    )Adjustments to reconcile net loss to net cash provided (used) by
operating activities:Cumulative effect of change in accounting principle
    
    
    69,015
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    21,987
    
    
    
    22,133
    
    
    
    11,199Amortization of debt issuance costs
    
    
    995
    
    
    
    954
    
    
    
    962Impairment of property, plant and equipment
    
    
    2,791
    
    
    
    40
    
    
    
    Change in accrued severance, retention and lease exit costs
    
    
    8,483
    
    
    
    (9,767
    )
    
    
    (278
    )Reduction of interest expense due to settlement
    
    
    (1,029
    )
    
    
    
    
    
    
    Loss (gain) on sale of assets
    
    
    166
    
    
    
    (50
    )
    
    
    11Stock-based compensation and services expense
    
    
    31
    
    
    
    226
    
    
    
    300Marketable equity securities received for recovery of bad debt
    
    
    
    
    
    
    
    
    
    
    (777
    )Unrealized loss on marketable equity securities
    
    
    
    
    
    
    
    
    
    
    385Changes in operating assets and liabilities, net of effects of
purchase of businesses:Decrease (increase) in:Trade receivables
    
    
    5,017
    
    
    
    (3,617
    )
    
    
    (15,940
    )Inventories
    
    
    42,942
    
    
    
    7,086
    
    
    
    (17,562
    )Prepaid expenses and other
    
    
    383
    
    
    
    (1,334
    )
    
    
    2,697Increase (decrease) in:Accounts payable
    
    
    1,457
    
    
    
    (855
    )
    
    
    2,530Accrued compensation and benefits
    
    
    (1,834
    )
    
    
    (197
    )
    
    
    (480
    )Other accrued liabilities
    
    
    (1,475
    )
    
    
    (99
    )
    
    
    (1,364
    )Net cash provided (used) by operating activities
    
    
    22,779
    
    
    
    (19,768
    )
    
    
    (22,774
    )Cash Flows from Investing Activities:Proceeds from sale of assets
    
    
    115
    
    
    
    23
    
    
    
    642Cash acquired as part of business acquisition
    
    
    
    
    
    
    301
    
    
    
    Payments for acquisition of businesses
    
    
    (5,523
    )
    
    
    (205
    )
    
    
    (2,466
    )Capital expenditures
    
    
    (2,371
    )
    
    
    (2,924
    )
    
    
    (2,697
    )Net cash used by investing activities
    
    
    (7,779
    )
    
    
    (2,805
    )
    
    
    (4,521
    )Cash Flows from Financing Activities:Proceeds from borrowings under revolving credit agreement
    
    
    318,592
    
    
    
    333,382
    
    
    
    505,224Principal payments under debt agreements
    
    
    (344,896
    )
    
    
    (311,817
    )
    
    
    (480,218
    )Payments for debt issuance costs
    
    
    (347
    )
    
    
    (628
    )
    
    
    (1,998
    )Increase (decrease) in outstanding checks in excess of cash balances
    
    
    (900
    )
    
    
    41
    
    
    
    4,253Proceeds from exercise of stock options and warrants
    
    
    
    
    
    
    
    
    
    
    22Net cash provided (used) by financing activities
    
    
    (27,551
    )
    
    
    20,978
    
    
    
    27,283Net decrease in cash and equivalents
    
    
    (12,551
    )
    
    
    (1,595
    )
    
    
    (12
    )Cash and Equivalents:Beginning of year
    
    
    14,172
    
    
    
    1,621
    
    
    
    26End of year
    
    $
    1,621
    
    
    $
    26
    
    
    $
    14
 The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements . F-7




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SUNTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2003 and 2004
(In Thousands) 2002
    
    
    2003
    
    
    2004Supplemental Disclosure of Cash Flow Information:Cash paid for interest
    
    $
    2,175
    
    
    $
    1,579
    
    
    $
    2,496Cash received for income taxes
    
    $
    220
    
    
    $
    
    
    
    $
    Supplemental Schedule of Non-cash Investing and
Financing Activities:Payable for acquisition of business
    
    $
    
    
    
    $
    2,197
    
    
    $
    1,408Contract payable for acquisition of equipment
    
    $
    
    
    
    $
    
    
    
    $
    793Assumption of bank debt for acquisition of business
    
    $
    
    
    
    $
    1,156
    
    
    $
    Reduction of goodwill and note payable to Former
Parent due to settlement of dispute
    
    $
    6,860
    
    
    $
    
    
    
    $
    
 The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements . F-8




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SUNTRON CORPORATION AND
SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation, Nature of Business and Significant Accounting Policies Basis of Presentation.Suntron Corporation (the Company) is a Delaware Corporation
that was formed on May 2, 2001. Prior to February 28, 2002, Suntron was a wholly owned subsidiary
of EFTC Corporation (EFTC). On February 28, 2002, the mergers described in Note 3 were completed
whereby Suntron became the parent company of EFTC and EFTC subsequently was merged into a successor
Delaware Corporation. The accompanying consolidated financial statements present the accounts and
capital structure of the Company and its wholly-owned subsidiaries as if this capital structure had
been in place since the date of formation or acquisition, as described in Note 3. All material
intercompany balances and transactions have been eliminated in consolidation. The preparation of consolidated financial statements in conformity with U.S. generally
accepted accounting principles 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 consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. The actual results could differ significantly from those
estimates. The Companys consolidated financial statements are based on several significant
estimates, including the allowance for doubtful accounts, the write-down of excess and obsolete
inventories, the outcome of lease exit activities and pending litigation, determination of

impairment of long-lived assets, and the selection of estimated useful lives of intangible assets
and property, plant and equipment. These estimates may be adjusted as more current information
becomes available, and the amount of such adjustments could be significant. Fiscal Year.The Companys fiscal year ends on December 31st. Except for the fourth
quarter which ends on December 31st, the Companys fiscal quarters generally end on the
Sunday closest to the end of each calendar quarter. Nature of Business.The Company is a provider of vertically integrated electronics
manufacturing solutions supplying high-mix services that target the semiconductor capital
equipment, aerospace and defense, industrial, networking and telecommunications, and medical
equipment market sectors of the electronic manufacturing services (EMS) industry. The Companys
manufacturing services include printed circuit board assembly, cable and harness production,
engineering services, full systems integration, testing, and after-market repair and warranty
services. High-mix manufacturing involves processing assemblies in small lots (generally less than
100 assemblies per production run) in a flexible manufacturing environment. The Company operates in
one business segment and its operations are predominantly conducted in the United States. Cash and Equivalents. The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents. Under the Companys credit
agreement and banking arrangements, the Company is not required to fund amounts for outstanding
checks until the day that the checks are presented to the Companys bank for payment. Accordingly,
the Company is not required to maintain cash balances in anticipation of funding requirements for
outstanding checks, which often results in a current liability for outstanding checks in excess of
cash balances. Changes in the amount of outstanding checks in excess of cash balances are reflected
as a financing activity in the accompanying consolidated statements of cash flows. Trade Receivables.The allowance for doubtful accounts is based on managements assessment of the
collectibility of specific customer accounts and the contractual aging of accounts receivable. The
Company controls credit risk through credit approvals, credit limits and monitoring procedures. If
there is a F-9




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SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) deterioration of a customers credit worthiness, managements estimate of the recoverability
of amounts due the Company could be adversely affected. Upon exhausting all reasonable alternatives
to collect past due receivables, accounts or portions thereof are written off with a corresponding
reduction in the allowance for doubtful accounts during the period when management determines that
the probability of collection is remote. Trade receivables are also reduced for estimated customer
discounts and credits due to shipping and pricing errors, although these amounts were not
significant at December 31, 2003 and 2004. Inventories. Inventories are stated at the lower of cost (standard cost, which approximates
the first-in, first-out method) or market. The Company evaluates inventory on hand, forecasted
demand, contractual protections and net realizable values in order to determine whether an
adjustment to the carrying amount of inventory is necessary. Groups of identifiable inventory are
segregated by customer or category of inventory and the adjustment to carrying value for such
groups are tracked separately. If the Company records a write-down to reduce the cost of
inventories to market, such write-down is not subsequently reversed. Finished goods and
work-in-process inventories include material, labor and manufacturing overhead. Property, Plant and Equipment. Property, plant and equipment are stated at cost. Material
expenditures that increase the life of an asset are capitalized and depreciated over the estimated
remaining useful life of the asset. The cost of normal maintenance and repairs is charged to
operating expenses as incurred. Upon disposal of an asset, the cost of the properties and the
related accumulated depreciation are removed from the accounts, and any gains or losses are
reflected in current operations. Leasehold improvements are amortized over the lesser of the life
of the lease or the estimated life of the improvement. For the years ended December 31, 2002, 2003
and 2004, the Company recognized depreciation and amortization expense related to property, plant
and equipment of $21,312, $21,577 and $10,922, respectively. Depreciation is computed using the
straight-line method over the following estimated useful lives: YearsBuildings and improvements
    
    30 to 40Manufacturing machinery and equipment
    
    5 to 10Furniture, computer equipment and software
    
    3 to 7
 The Company reviews the carrying value of property, plant, and equipment for impairment whenever
events and circumstances indicate that the carrying value of an asset may not be recoverable from
the estimated future cash flows expected to result from its use and eventual disposition. In cases
where undiscounted expected future cash flows are less than the carrying value, an impairment loss
is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The
factors considered by management in performing this assessment include current operating results,
trends, and prospects, as well as the effects of obsolescence, demand, competition, and other
economic factors. Identifiable Intangible Assets.Amortization of identifiable intangible assets is computed
using the straight-line method over the following estimated useful lives: YearsIntellectual property costs
    
    5 to 10Customer agreement
    
    
    3Covenant not to compete
    
    
    1.5
 F-10




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SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) As of December 31, 2004, the weighted average amortization period for intellectual property
costs is a total of 8.8 years and all intellectual property costs will be fully amortized in 4.4
years. At least annually, management reviews the carrying value of acquired intangible assets that
are being amortized to determine whether impairment may exist. In addition, these assets are
evaluated for impairment whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. The Company considers relevant cash flow and profitability
information, including estimated future operating results, trends and other available information,
in assessing whether the carrying value of intangible assets exceeds the fair value. If the Company
determines that the carrying value of an intangible asset exceeds its fair value based on estimated
undiscounted future cash flows of the asset, the Company considers the carrying value of such
intangible assets to be impaired. An impairment charge is then recognized for the deficiency in the
amount of estimated discounted future cash flows of the intangible asset compared to the related
carrying value of the asset. Debt Issuance Costs.Debt issuance costs are being amortized over the term of the related
debt using the effective interest method. Goodwill. Goodwill is evaluated for impairment at least on an annual basis, using a two-step
process. The first step is to identify if potential impairment of goodwill exists. If impairment of
goodwill is determined to exist, the second step of the goodwill impairment test measures the
amount of the impairment using a fair value-based approach. Revenue Recognition. The Companys revenue generating transactions predominantly involve the
sale of products. However, the Company also performs a limited amount of engineering and design
services and full life cycle product solutions for some of its customers. The Company recognizes
revenue when realized or realizable and earned, which is when all of the following criteria are
satisfied: (i) persuasive evidence of an arrangement exists, (ii) the selling price is fixed and
determinable, (iii) delivery has occurred, and (iv) collection of the selling price is reasonably
assured. The Company is generally not contractually obligated to accept returns, except for
defective products. At the time revenue is recognized, the Company provides for the estimated cost
of warranties and customer discounts taken or expected to be taken. The accrual for warranty claims
is not material at December 31, 2003 and 2004. For product sales, the revenue recognition criteria are generally met when title and risk of loss
have transferred from the Company to the customer, which may be upon shipment or upon delivery to
the customer site depending on the contractual terms. In limited circumstances, although the
physical product remains in the Companys facilities at the request of customers, revenue is
recognized in accordance with the guidance in SEC Staff Accounting Bulletin No. 104, Revenue
Recognition. Revenue from design, engineering and other services is recognized as the services are
performed. In some instances, arrangements with customers involve multiple elements that are delivered at
different points in time. In determining the appropriate amount of revenue to be recognized, the
Company evaluates whether the delivered elements have standalone value to the customer, whether the
fair value of the undelivered elements is reliably determinable, and whether delivery of the
remaining elements is probable and within the Companys control. If all of these conditions are
satisfied, the Company recognizes revenue for the elements that have been delivered to the
customer. If one or more of these conditions have not
been satisfied, the Company defers recognition of revenue until all these conditions have been
satisfied or all elements have been delivered. F-11




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SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) Shipping and Handling Fees.The Company classifies costs associated with shipping and
handling fees as a component of cost of goods sold. Amounts billed to customers for shipping and
handling services are included in net sales. Stock-based Compensation. The Company accounts for stock-based compensation issued to employees
using the intrinsic value method. Accordingly, compensation cost for stock options granted to
employees is measured as the excess, if any, of the quoted market price of the Companys common
stock at the measurement date (generally, the date of grant) over the amount an employee must pay
to acquire the stock. For fixed awards of stock options with pro rata vesting, the Company utilizes
the attribution method described in FASB Interpretation No. 28. If compensation cost had been determined for all options granted to employees under the fair
value method using an option pricing model, the Companys pro forma net loss and net loss per share
(EPS) for the years ended December 31, 2002, 2003 and 2004, would have been as follows: 2002
    
    
    2003
    
    
    2004Net Loss
    
    
    EPS
    
    
    Net Loss
    
    
    EPS
    
    
    Net Loss
    
    
    EPSAmounts reported
    
    $
    (126,150
    )
    
    $
    (4.60
    )
    
    $
    (34,288
    )
    
    $
    (1.25
    )
    
    $
    (4,457
    )
    
    $
    (0.16
    )Add stock-based employee
compensation recorded
under the intrinsic value
method
    
    
    31
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    300Less stock-based employee
compensation under the
fair value method
    
    
    (2,574
    )
    
    
    
    
    
    
    (3,274
    )
    
    
    
    
    
    
    (995
    )Pro forma under fair
value method
    
    $
    (128,693
    )
    
    $
    (4.70
    )
    
    $
    (37,366
    )
    
    $
    (1.36
    )
    
    $
    (5,152
    )
    
    $
    (0.19
    )
 Income Taxes. Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or
settled. Valuation allowances are recorded when necessary to reduce deferred tax assets to an
amount considered more likely than not to be realized. 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. Financial Instruments. The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties. The carrying
amounts of cash and equivalents, trade receivables, accounts payable and accrued liabilities
approximate fair value because of the short maturity of these instruments. The carrying amount of
bank debt approximates fair value due to the variable interest rate. Earnings Per Share. Basic earnings per share excludes dilution for potential common shares and is
computed by dividing net income or loss by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted into common stock.
Basic and diluted loss per F-12




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) share are the same for the years ended December 31, 2002, 2003 and 2004, as all potential
common shares were antidilutive. For the years ended December 31, 2002, 2003 and 2004, common
stock options and warrants that were excluded from the calculation of earnings per share amounted
to an aggregate of 2,292 shares (at exercise prices ranging from $3.74 to $57.24), 2,361 shares (at
exercise prices between $0.01 and $57.24) and 2,081 shares (at exercise prices between $0.01 and
$57.24) , respectively. New Accounting Standards.In December 2004, the Financial Accounting Standards Board issued
Statement No. 123R, Share-Based Payment. This statement is a revision to Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees. Statement No. 123R establishes standards of
accounting for transactions in which an entity exchanges its equity instruments for goods or
services, primarily focusing on the accounting for transactions in which an entity obtains employee
services in share-based payment transactions. This standard generally requires companies to measure
the cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. That cost will be recognized over the period during which an
employee is required to provide service (usually the vesting period) in exchange for the award. The
grant-date fair value of employee stock options and similar instruments will be estimated using
option-pricing models. If an equity award is modified after the grant date, incremental
compensation cost will be recognized in an amount equal to the excess of the fair value of the
modified award over the fair value of the original award immediately before the modification. This
statement is effective as of the beginning of the first interim or annual reporting period that
begins after June 15, 2005. Accordingly, the Company will adopt Statement No. 123R in the third
quarter of 2005. The Company intends to use the modified-prospective transition method when it adopts Statement
No. 123R. Under the modified-prospective method, the Company will be required to recognize
compensation cost for share-based awards to employees based on their grant-date fair value from the
beginning of the fiscal period in which the recognition provisions are first applied, as well as
compensation cost for awards that were granted prior to, but not vested as of the date of adoption.
Prior periods will not be restated and the pro forma disclosures will continue to be required for
periods prior to the adoption date. The Companys board of directors is considering taking action
to accelerate vesting of all options for which the current exercise price exceeds fair market
value, which would eliminate any incremental future expense related to options that are currently
outstanding. If the board of directors does not take this action, management believes the impact of
adopting this new standard on its future results of operations will require approximately $1,100 of
incremental unvested compensation cost that would be recognized as an expense in the Companys
consolidated statements of operations. Of this amount, management expects that approximately $500
would be recognized in the second half of 2005 and $600 would be recognized after 2005. In addition
to these amounts, the Company will also recognize additional compensation cost related to new stock
options and other share-based payments that are granted in the future. 2. Liquidity The Company incurred net losses of $126,150 (including $69,015 for the cumulative effect of a
change in accounting for goodwill) in 2002, $34,288 in 2003, and $4,457 in 2004. The Company
continues to evaluate sales forecasts in relation to its operations and, as discussed in Note 10,
many restructuring actions were
taken to position the Company for improved operating results in 2004. However, the Company was
unable to eliminate the recurring operating losses in 2004 and preliminary sales forecasts indicate
that net sales could be more than 25% lower for the first half of 2005 compared to the comparable
period in 2004. In response to the lower sales forecasts, management has taken actions in the first
quarter of 2005 to reduce operating costs and further reductions will likely be implemented in the
second quarter of 2005. The F-13




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) combination of lower net sales forecast for 2005 and these restructuring actions is not
expected to result in profitable operations in 2005. However, management expects that the Company
will be able to achieve positive cash flows from operating activities for 2005. As discussed in Note 12, the Company is involved in litigation with a former customer to recover
the cost of inventories totaling approximately $18,300 and the Companys lenders have excluded
these inventories from the borrowing base under the credit agreement, as discussed in Note 6. The
Company has outstanding debt under this credit agreement of $59,128 as of December 31, 2004, and
unused borrowing availability was $7,286 as of March 20, 2005. Management believes that the Company
would have violated the covenant for earnings before interest, taxes, depreciation and amortization
(EBITDA), as defined in the agreement, by the end of the first quarter of 2005. However, on April 5, 2005 (effective March 29, 2005) the lenders agreed to amend the EBITDA covenant that will be effective for the remainder
of the year ending December 31, 2005. In connection with this
amendment, the Applicable Margin (the premium we are charged in
excess of published Base and LIBOR Rates) for Base Rate borrowings was increased by 1.00% on
March 29, 2005, with subsequent quarterly increases of 0.25% on July 1,
2005, October 1, 2005 and January 1, 2006. The Applicable Margin for
LIBOR Rate borrowings increased by 0.50% on March 29, 2005, with subsequent quarterly increases of 0.25% on July 1, 2005, October 1, 2005 and
January 1, 2006.  Management believes the Company will be able to comply with
the amended EBITDA covenant and that borrowing availability will be sufficient to fund planned
operations in 2005. 3. Business Combinations Reorganization of Entities Under Common Control.On May 3, 2001, EFTC; K*TEC Electronics
Holding Corporation, formerly known as K*TEC Electronics Corporation (K*TEC); K*TEC Operating
Company, L.L.C., formerly known as Thayer-Blum Funding II, L.L.C. (TBF II); and Suntron
Corporation (Suntron), a wholly owned subsidiary of EFTC, entered into an Amended and Restated
Merger Agreement (the Merger Agreement). K*TEC was a privately held EMS company based in Sugar Land, Texas. K*TEC was 100% owned by TBF
II, an affiliate of Thayer-Blum Funding L.L.C. (TBF), EFTCs principal stockholder. TBF owned
approximately 77% of the outstanding common stock of EFTC. On February 28, 2002, EFTCs
stockholders voted in favor of the business combination and the closing occurred on that date. Under the terms of the Amended and Restated Merger Agreement, Suntron formed two new wholly
owned subsidiaries, which merged with and into EFTC and TBF II, respectively. EFTC subsequently was
merged into a successor Delaware corporation. Accordingly, on February 28, 2002, EFTCs successor
and TBF II became wholly owned subsidiaries of Suntron. Based upon the Amended and Restated Merger
Agreements exchange ratios, the owner of TBF II received approximately 55% of Suntrons
outstanding capital stock, while EFTCs former stockholders received approximately 45% of Suntrons
outstanding capital stock. TBF and its affiliates currently own approximately 90% of the
outstanding capital stock of Suntron. The business combination of EFTC and K*TEC has been accounted for as a reorganization of entities
under common control. Accordingly, the Companys historical financial statements give effect to the
business combination as if it occurred on October 10, 2000, which is the date that common control
was established. Under this accounting method all transaction costs were charged to operations in
the period incurred. Acquisition of Midwestern Electronics.In March 2002, the Company purchased substantially all
of the assets and assumed certain liabilities of Midwestern Electronics, a privately held EMS
provider. Midwesterns business focused on high-mix products and services, including printed
circuit board assembly, subassemblies, box-build, and aftermarket repair services. The purchase
price was $5,523 and Midwesterns results of operations have been included in the consolidated
financial statements since the date of acquisition. F-14




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) The following table presents the allocation of the acquisition cost to the assets acquired and
liabilities assumed, based on their fair values: Accounts receivable
    
    $
    3,149Inventories
    
    
    3,555Other current assets
    
    
    238Property, plant, and equipment
    
    
    940Goodwill
    
    
    235Accounts payable assumed
    
    
    (1,736
    )Accrued compensation and benefits assumed
    
    
    (858
    )Net assets acquired
    
    $
    5,523
 Acquisition of Trilogic Systems, LLC.On May 30, 2003, the Company purchased substantially
all of the assets and assumed certain liabilities of Trilogic Systems, LLC, a privately held
manufacturer and service provider for original equipment manufacturers. Trilogics services include
design, new product introduction, manufacturing, and product life cycle management for customers in
the aerospace and defense, medical equipment and industrial markets. Management believes
Trilogics comprehensive suite of design and integration capabilities, including hardware
engineering, software integration, testing and product life cycle management services provide the
Company with an opportunity to provide an expanded array of services to its customers, increase its
customer base and expand market share in the Northeast. In July 2003, the Company also purchased
certain design and engineering assets from an entity affiliated with Trilogic. The initial purchase consideration was $1,060, which consisted of the assumption and immediate
repayment of $1,156 of Trilogics bank debt, and a cash payment of $205 which was offset by cash
acquired of $301. The net purchase consideration was funded through borrowings under the Companys
revolving line of credit. Trilogics results of operations have been included in the consolidated
financial statements since the date of acquisition. The purchase agreement provided for the payment
of additional consideration up to approximately $4,025 based on the achievement of certain sales
targets during 2003 and 2004. Based on the sales targets achieved in 2003 and 2004, the Company
incurred a liability for additional purchase consideration of $2,197 for 2003 (of which $2,111 was
paid in 2004) and $1,312 for 2004. During 2004, the Company also determined that a liability for
$44 recorded under the initial purchase price allocation is not payable and, accordingly, this
amount was reversed in 2004 with a corresponding reduction of goodwill. The allocation of the acquisition cost, including the additional consideration discussed
above, resulted in goodwill of $3,931. The historical results of operations of Trilogic would not
have had a material effect on the Companys consolidated results of operations, and therefore no
unaudited pro forma results of operations are presented herein. The following table presents the
final allocation of the acquisition cost to the assets acquired and liabilities assumed, based on
their fair values: Cash and equivalents
    
    $
    301Accounts receivable
    
    
    1,612Inventories
    
    
    1,096Property, plant, and equipment
    
    
    248Goodwill
    
    
    3,931Bank debt assumed
    
    
    (1,156
    )Accounts payable assumed
    
    
    (2,022
    )Accrued liabilities assumed
    
    
    (340
    )Net assets acquired
    
    $
    3,670
 F-15




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) Skyline Acquistion.In February 2004, the Company completed an acquisition for
approximately $355. The initial purchase price was allocated to trade receivables for $105,
inventories for $249, equipment for $3, goodwill for $10, and payables for $12. The agreement
provides for the payment of additional consideration in the amount of 1% of net sales related to
the customers of the acquired business during the one-year period following the acquisition. For
the year ended December 31, 2004, the Company recorded additional goodwill of $10 related to the
formula for additional consideration under the Skyline acquisition agreement. The historical
results of operations for this acquisition would not have had a material effect on the Companys
consolidated results of operations, and therefore no unaudited pro forma results of operations are
presented herein. 4. Intangible Assets Goodwill.In July 2001, the Financial Accounting Standards Board issued Statement No.
141, Business Combinationsand Statement No. 142, Goodwill and Other Intangible Assets. Statement
No. 141 requires that the purchase method of accounting be used for business combinations, except
for business combinations between entities under common control. Statement 142 addresses how
intangible assets that are acquired individually or with a group of other assets (but not those
acquired in a business combination) should be accounted for in financial statements upon their
acquisition. Statement 142 also addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial statements. In connection with the adoption of Statement 142 during the first quarter of 2002, the Company
concluded that no impairment existed with respect to goodwill with a carrying value of $6,729
related to the Companys Northwest reporting unit (which arose in connection with the February 1997
acquisition of Current Electronics). However, the Company determined that goodwill related to the
K*TEC reporting unit (which arose in connection with the October 2000 acquisition from Kent
Electronics) was impaired for the entire carrying value which resulted in an impairment loss of
$69,015. This impairment loss was recorded as the cumulative effect of a change in accounting
principle in the 2002 Consolidated Statement of Operations. The changes in the carrying amount of goodwill for the years ended December 31, 2003 and 2004 are
as follows: Northwest
    
    
    Midwestern
    
    
    Trilogic
    
    
    Skyline
    
    
    TotalBalance, December
31, 2002
    
    $
    6,729
    
    
    $
    235
    
    
    $
    
    
    
    $
    
    
    
    $
    6,964Goodwill recorded
    
    
    
    
    
    
    
    
    
    
    2,663
    
    
    
    
    
    
    
    2,663Balance, December
31, 2003
    
    
    6,729
    
    
    
    235
    
    
    
    2,663
    
    
    
    
    
    
    
    9,627Goodwill recorded
    
    
    
    
    
    
    
    
    
    
    1,268
    
    
    
    20
    
    
    
    1,288Balance, December
31, 2004
    
    $
    6,729
    
    
    $
    235
    
    
    $
    3,931
    
    
    $
    20
    
    
    $
    10,915
 F-16




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) Identifiable Intangible Assets.Identifiable intangible assets consist of the following at
December 31, 2003 and 2004: December 31, 2003
    
    
    December 31, 2004Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedCost
    
    
    Amortization
    
    
    Net
    
    
    Cost
    
    
    Amortization
    
    
    NetIntellectual property
    
    $
    4,662
    
    
    $
    3,510
    
    
    $
    1,152
    
    
    $
    2,655
    
    
    $
    1,780
    
    
    $
    875Customer agreement
    
    
    800
    
    
    
    800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Covenant not to
compete
    
    
    200
    
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    50
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,712
    
    
    $
    4,560
    
    
    $
    1,152
    
    
    $
    2,655
    
    
    $
    1,780
    
    
    $
    875
 For the years ended December 31, 2002, 2003 and 2004, the Company recognized amortization expense
related to identifiable intangible assets of $675, $556 and $277, respectively. Estimated
amortization expense for identifiable intangible assets shown above for the years ending December
31, 2005, 2006, 2007, 2008 and 2009 amounts to approximately $200, $200, $200, $200 and $75,
respectively. 5. Inventories Inventories are summarized as follows: December 31,2003
    
    
    2004Purchased parts and completed sub-assemblies
    
    $
    43,113
    
    
    $
    53,015Work-in-process
    
    
    10,044
    
    
    
    12,895Finished goods
    
    
    8,234
    
    
    
    13,292Total
    
    $
    61,391
    
    
    $
    79,202
 For the years ended December 31, 2002, 2003 and 2004, the Company recognized write-downs of excess
and obsolete inventories resulting in charges to cost of goods sold of $5,427, $3,321 and $3,663,
respectively. 6. Borrowings Under Revolving Credit Agreement At December 31, 2003 and 2004, the Company has a $75,000 revolving credit facility with
Citibank as the lead bank. The outstanding principal balance under this credit facility amounted to
$34,011 at December 31, 2003 and $59,128 as of December 31, 2004. The Company can periodically
elect to use either the Base Rate or LIBOR Rate in connection with borrowings under the revolving
line of credit. In addition, the Company is obligated to pay a commitment fee of 0.5% per annum of
the unused portion of the credit
facility. The credit agreement limits or prohibits the Company from paying dividends, incurring
additional debt, selling significant assets, acquiring other businesses, or merging with other
entities without the consent of the lenders. The credit agreement requires compliance with certain
financial and non-financial covenants, including quarterly and monthly requirements related to
earnings before interest, taxes, depreciation and amortization (EBITDA), as defined in the
agreement. F-17




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) On July 7, 2004, the credit agreement was amended whereby Congress Financial Corporation
joined Citibank as a party to the amended credit agreement. The maturity date was extended until
July 7, 2008 and the amendment included less stringent covenants for EBITDA for 2004. Prior to July
7, 2004, the interest rate was the prime rate plus 2.50% for Base Rate borrowings and the LIBOR
rate plus 3.75% for LIBOR Rate borrowings. Under the amended credit agreement, the interest rates
were reduced from previous levels by 1.75% for Base Rate borrowings and 1.00% for LIBOR Rate
borrowings. As of December 31, 2003 and 2004, the interest rate for Base Rate borrowings was 6.5%
and 6.0%, respectively. As of December 31, 2003 and 2004, the effective rate for LIBOR Rate
borrowings was 4.9% and 4.8%, respectively. Beginning in 2005, interest rates may be adjusted
further depending on the amount of EBITDA for the preceding four fiscal quarters. Substantially all of the Companys assets are pledged as collateral for outstanding
borrowings. Total borrowings are subject to limitation based on a percentage of eligible accounts
receivable, inventories, real estate, and equipment. As of December 31, 2004, the borrowing base
calculation permitted total borrowings of $75,000, and the Company was in compliance with all of
the covenants under the amended credit agreement. After deducting the outstanding principal balance
and outstanding letters of credit for $1,370, the Company had borrowing availability of $14,502 as
of December 31, 2004. During the year ended December 31, 2004, the Company incurred debt issuance
costs of $1,752 related to the amended credit agreement. Due to the termination of the Companys relationship with Applied Materials, Inc. as discussed in
Note 12, the Companys lenders determined in January 2005 that inventories related to this customer
will be ineligible in future calculations of the borrowing base. This action, along with changes in
the advance rates for real estate and equipment, contributed to the reduction in borrowing
availability from $14,502 at December 31, 2004 to $5,699 as of February 28, 2005. Furthermore, due
to these reductions in borrowing availability, the amended credit agreement provides that the
EBITDA covenant will be more stringent beginning in January 2005 (see also Note 2). The amended credit agreement includes a lockbox arrangement that requires the Company to
direct its customers to remit payments to restricted bank accounts, whereby all available funds are
used to pay down the outstanding principal balance under the amended credit agreement. Accordingly,
the entire outstanding principal balance is classified as a current liability in the 2004
consolidated balance sheet. 7. Income Taxes At December 31, 2004, the Company has net operating loss (NOL) carryforwards for
Federal income tax purposes of approximately $221,000. If not previously utilized, the NOL
carryforwards will expire in 2019 through 2025. At December 31, 2004, approximately $40,000 of the
NOL carryforwards are subject to limitation, whereby approximately $3,600 becomes available each
year through 2015, as a result of changes in ownership that occurred in 2000. The remaining
$181,000 of NOL carryforwards can be utilized to offset future taxable income that may be generated
in the Companys continuing business activities. Actual income tax expense for the years ended December 31, 2002, 2003 and 2004 differs from
the amounts computed using the federal statutory tax rate of 34%, as follows: F-18




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) 2002
    
    
    2003
    
    
    2004Income tax benefit at the statutory rate
    
    $
    42,891
    
    
    $
    11,658
    
    
    $
    1,515Benefit (expense) resulting from:Change in law related to alternative minimum tax
    
    
    250
    
    
    
    
    
    
    
    Increase in Federal valuation allowance
    
    
    (43,114
    )
    
    
    (11,547
    )
    
    
    (1,786
    )Other, net
    
    
    249
    
    
    
    (111
    )
    
    
    271Income tax benefit
    
    $
    276
    
    
    $
    
    
    
    $
    
 Income tax benefit for the years ended December 31, 2002, 2003 and 2004, is comprised of the
following: 2002
    
    
    2003
    
    
    2004Current:Federal
    
    $
    257
    
    
    $
    
    
    
    $
    State
    
    
    19
    
    
    
    
    
    
    
    Total current
    
    
    276
    
    
    
    
    
    
    
    Deferred:Federal
    
    
    
    
    
    
    
    
    
    
    State
    
    
    
    
    
    
    
    
    
    
    Total deferred
    
    
    
    
    
    
    
    
    
    
    Income tax benefit
    
    $
    276
    
    
    $
    
    
    
    $
    
 At December 31, 2003 and 2004, the tax effects of temporary differences that give rise to
significant deferred tax assets are presented below: 2003
    
    
    2004Federal net operating loss carryforwards
    
    $
    72,576
    
    
    $
    75,229State net operating loss carryforwards
    
    
    10,749
    
    
    
    5,873Intangible assets
    
    
    31,818
    
    
    
    23,259Inventories
    
    
    9,818
    
    
    
    5,086Accrued compensation, benefits, severance
and lease exit costs
    
    
    1,913
    
    
    
    1,546Property, plant and equipment
    
    
    1,946
    
    
    
    883Allowance for doubtful accounts receivable
    
    
    1,130
    
    
    
    616Other
    
    
    386
    
    
    
    141Total deferred tax assets
    
    
    130,336
    
    
    
    112,633Less valuation allowance
    
    
    (130,336
    )
    
    
    (112,633
    )Net deferred tax assets
    
    $
    
    
    
    $
    
 A valuation allowance has been recorded for all deferred tax assets since the more likely than
not realization criterion was not met as of December 31, 2003 and 2004. F-19




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) 8. Stock-based Compensation Stock Options.In June 2002, stockholders approved the Amended and Restated 2002 Stock
Option Plan (the Plan), which provides that options for 5,000 shares of common stock may be
granted under the Plan. The Plan provides for the grant of incentive and non-qualified options to
employees, directors and consultants of the Company. EFTC previously had three stock option plans
and K*TEC had one plan (the Predecessor Plans), all of which were terminated upon adoption and
approval of the Plan. All outstanding options under the Predecessor Plans were replaced with new
options under the Plan with no change to the terms or vesting provisions, except the number of
shares and exercise prices were adjusted based upon the exchange ratios in the business combination
as discussed in Note 3. At December 31, 2004, approximately 2,913 shares were available for grant
under the Plan. The following table summarizes share activity and the weighted average exercise price related
to all stock options granted under the Plan and the Predecessor Plans for the years ended December
31, 2002, 2003 and 2004: 2002
    
    
    2003
    
    
    2004Shares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding, beginning of year
    
    
    1,807
    
    
    $
    14.67
    
    
    
    2,139
    
    
    $
    12.04
    
    
    
    2,361
    
    
    $
    10.28Granted
    
    
    809
    
    
    
    8.49
    
    
    
    437
    
    
    
    3.15
    
    
    
    195
    
    
    
    8.31Canceled
    
    
    (477
    )
    
    
    15.93
    
    
    
    (215
    )
    
    
    13.25
    
    
    
    (469
    )
    
    
    11.66Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    3.81Outstanding, end of year
    
    
    2,139
    
    
    $
    12.04
    
    
    
    2,361
    
    
    $
    10.28
    
    
    
    2,081
    
    
    $
    9.81
 The following table summarizes information about stock options outstanding at December 31, 2004: Stock Options Outstanding
    
    
    Stock Options ExercisableExercise Prices
    
    
    Remaining
    
    
    Number
    
    
    Weighted
    
    
    NumberRange
    
    
    Weighted
    
    
    Contractual
    
    
    of
    
    
    Average
    
    
    ofLow
    
    High
    
    
    Average
    
    
    Life (Years)
    
    
    Shares
    
    
    Exercise Price
    
    
    Shares$  0.01
    
    $
    0.01
    
    
    $
    0.01
    
    
    
    9.0
    
    
    
    106
    
    
    $
    0.01
    
    
    
    62.83
    
    
    3.74
    
    
    
    3.70
    
    
    
    7.8
    
    
    
    217
    
    
    
    3.69
    
    
    
    1164.16
    
    
    5.77
    
    
    
    4.41
    
    
    
    9.0
    
    
    
    276
    
    
    
    4.37
    
    
    
    667.36
    
    
    11.00
    
    
    
    10.46
    
    
    
    6.7
    
    
    
    1,140
    
    
    
    10.50
    
    
    
    70011.52
    
    
    16.00
    
    
    
    14.67
    
    
    
    5.7
    
    
    
    234
    
    
    
    14.53
    
    
    
    17917.24
    
    
    57.24
    
    
    
    28.12
    
    
    
    3.9
    
    
    
    108
    
    
    
    28.12
    
    
    
    108$  0.01
    
    $
    57.24
    
    
    $
    9.81
    
    
    
    7.0
    
    
    
    2,081
    
    
    
    11.66
    
    
    
    1,175
 The Company uses the intrinsic value method to account for stock-based compensation. During 2002,
the Company granted 250 options with an intrinsic value of $233 on the measurement date. During
2003, the
Company granted 139 options with an intrinsic value of $599 on the measurement date. These amounts
are reflected as deferred compensation cost in the accompanying consolidated statements of
stockholders equity and compensation expense is being charged to operations over the vesting
period for the related stock options. During 2004, some of these options were canceled prior to
vesting which resulted in the reversal of deferred stock compensation and a corresponding reduction
in additional paid-in capital for $189. F-20




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) In June 2002, option holders were given the opportunity to exchange certain options for an
aggregate of 476 shares. All option holders accepted the offer, which resulted in the exchange of
options that would have cliff vested in 2007 for new options that vest 20% annually over five
years. There was no change to the terms of these options. This modification resulted in a new
measurement date but a compensation charge was not required since the exercise price of these
options was in excess of the fair market value of the Companys common stock. Under the intrinsic
value method used to account for options granted to employees, the Company recognized total
compensation cost of $31, $196 and $300 for the years ended December 31, 2002, 2003 and 2004,
respectively. Additionally, during 2003 certain directors of the Company elected to accept stock
options in lieu of cash for quarterly director fees. The fair value of these options was determined
using the Black Scholes model that resulted in the issuance of options for an aggregate of 12
shares and the Company recognized a compensation charge of $30. The weighted average fair value of options granted for the years ended December 31, 2002, 2003
and 2004 was $5.06, $3.83 and $5.17, respectively. In estimating the fair value of options, the
Company used the Black-Scholes option-pricing model with the following weighted average
assumptions: Year ended December 31,2002
    
    
    2003
    
    
    2004Dividend yield
    
    
    
    
    
    
    
    
    
    
    Expected volatility
    
    
    110.5
    %
    
    
    122.5
    %
    
    
    110.1
    %Risk-free interest rate
    
    
    4.1
    %
    
    
    2.9
    %
    
    
    3.6
    %Expected lives (years)
    
    
    5.1
    
    
    
    4.3
    
    
    
    5.5
 9. Related Party Transactions Leasing Activities.During 1998, the Company entered into two operating leases with a
director of the Company whereby manufacturing facilities in Newberg, Oregon and Tucson, Arizona
were leased through December 2003. The Tucson lease provided for monthly payments of $32 and the
Newberg lease provided for monthly payments of $58. Honeywell International, Inc. subleased the
Tucson facility under a month-to-month agreement that required monthly payments of $32 through
expiration of the Tucson lease in December 2003. In July 2003, the Company renewed the Newberg
lease through December 2008 at an average monthly payment of $47. In July 2004, this individual
resigned as a director of the Company. Purchases and Net Sales.For the years ended December 31, 2002, 2003 and 2004, the Company
purchased raw materials to support production requirements from affiliates of the Companys
majority stockholder for $59, $481 and $832, respectively. For the year ended December 31, 2004,
the Company had net sales of $300 to an affiliate of the Companys majority stockholder and a trade
receivable of $28 at December 31, 2004. Employment and Consulting Agreements.The Company has entered into an employment agreement with an
executive officer that provides for monthly payments of $25. This employment agreement expired in
December 2003, but automatically extends for successive one-year periods until terminated. Certain
provisions of this agreement remain in effect whereby the Company could be required to pay
severance benefits up to one-years salary which would amount to aggregate payments of $300. In
addition, a
director of the Company provided consulting services for $15 during 2002. F-21




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) Management Fees.During 2002, 2003 and 2004, the Company incurred management fees of
$835, $750 and $750, respectively, for services provided by affiliates of the Companys majority
stockholder. The services provided under this arrangement consist primarily of management and
consulting services related to corporate development activities. 10. Restructuring and Reorganization Activities The Company periodically takes actions to increase capacity utilization through the
closure of facilities and the sale of assets. The results of operations related to these activities
for the years ended December 31, 2002, 2003 and 2004 are summarized as follows: 2002
    
    
    2003
    
    
    2004Amounts related to manufacturing activities and included in cost
of goods sold:Impairment of manufacturing assets
    
    $
    2,770
    
    
    $
    40
    
    
    $
    Severance and retention costs
    
    
    565
    
    
    
    803
    
    
    
    232Lease exit costs
    
    
    10,093
    
    
    
    462
    
    
    
    16Moving and relocation costs
    
    
    131
    
    
    
    150
    
    
    
    50Accelerated depreciation of
leasehold improvements
    
    
    
    
    
    
    1,257
    
    
    
    Reversal of previously accrued
lease exit cost upon termination
of lease
    
    
    
    
    
    
    (4,710
    )
    
    
    Total included in cost of goods sold
    
    
    13,559
    
    
    
    (1,998
    )
    
    
    298Amounts unrelated to manufacturing activities and included in
operating costs and expenses:Severance and retention costs
    
    
    109
    
    
    
    123
    
    
    
    393Lease exit costs
    
    
    
    
    
    
    (1
    )
    
    
    650Moving, relocation and other costs
    
    
    50
    
    
    
    2
    
    
    
    42Total severance, retention and
lease exit costs
    
    
    169
    
    
    
    124
    
    
    
    1,085Impairment of long-lived assets
    
    
    21
    
    
    
    
    
    
    
    Reorganization transaction costs
    
    
    312
    
    
    
    
    
    
    
    Total Expense (Benefit)
    
    $
    14,061
    
    
    $
    (1,874
    )
    
    $
    1,383
 Presented below is a description of the activities that resulted in the charges shown in the table
above: 2002 Plant Consolidations.During the third quarter of 2002, the Company announced plans to
consolidate manufacturing capabilities by closing facilities in Ottawa, Kansas and Fremont,
California in order to eliminate fixed and variable costs associated with excess capacity. The
Fremont closure was completed in the fourth quarter of 2002 and resulted in lease exit costs of
$9,686 that are included in cost of goods sold in the 2002 Consolidated Statement of Operations. These consolidations resulted in a plan to sell the Companys building in Ottawa and certain
machinery, equipment, furniture and fixtures that were previously used at both facilities. In
connection with the plan of
disposal, the Company determined that the carrying value of some of the underlying assets exceeded
their F-22




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) fair value. Consequently, the Company recorded an impairment charge of $2,791 (including
$2,770 classified as cost of goods sold), which represents the excess of the carrying values of the
assets over their fair values, less cost to sell. This impairment charge consisted of $1,294
related to the Ottawa plant, $1,397 for equipment that was removed from service and $100 related to
equipment that remained in service. The fair value of impaired assets held for sale was determined
by consultation with brokers and comparison to similar assets that have been sold or are currently
being offered for sale. In November 2004, the Ottawa plant was sold for an amount that was
approximately equal to the net carrying value. During 2002, the Company incurred charges of $674 for severance costs ($565 included in cost of
goods sold) related to approximately 420 employees, of which $613 was paid in 2002 and $61 was paid
in 2003. These severance costs related to the Fremont and Ottawa closures and other reductions in
force that occurred in 2002. Reversal of Accrual upon Lease Termination.As of October 31, 2003, accrued lease exit costs
included $7,844 related to the Fremont lease discussed above. In November 2003, the Company entered
into an agreement with the landlord of the Fremont facility whereby the Company paid $2,740 as
consideration for the early termination of the lease. The Company incurred additional costs of $394
related to the Fremont lease in the fourth quarter of 2003, resulting in a credit of $4,710 due to
the reversal of accrued lease exit costs. This credit is reflected as a reduction of cost of goods
sold in the consolidated statement of operations for the year ended December 31, 2003. 2003 and 2004 Plant Consolidations. In June 2003, the Company initiated actions to
consolidate its Phoenix manufacturing operations and corporate headquarters into a single facility
with the objective of subleasing up to one-third of the existing leased space in Phoenix. In
connection with the initial phase of the Phoenix consolidation, effective June 1, 2003, the
estimated useful life of leasehold improvements with a carrying value of $1,309 was shortened from
approximately four years to periods ranging from two months to seven months to coincide with the
expected period that the assets would continue to be in service. This change in estimate resulted
in an increase in depreciation and amortization expense of $1,257 ($0.05 per share) for the year
ended December 31, 2003. The Company recognized lease exit costs of approximately $462 in 2003, primarily due to the
consolidation of Phoenix manufacturing operations into one building during the third quarter of
2003. In the first quarter of 2004, the Company completed the move of its corporate headquarters
and the consolidation into a single building was complete. The Company recognized lease exit costs
of $430 in the first quarter of 2004 related to the vacated portion of the building devoted to
corporate headquarters. In the third quarter of 2004, the Company recorded an additional lease
exit charge of approximately $200 due to delays in locating a tenant to sublease the vacant
facility. During 2003, the Company incurred charges of $926 for severance costs and retention ($803 included
in cost of goods sold), of which $862 was paid in 2003. These severance costs related to the
Phoenix consolidation and other reductions in force that occurred in 2003. During 2004, the Company
incurred charges of $625 for severance costs ($232 included in cost of goods sold), of which $498
was paid in 2004. These severance costs related primarily to the termination of executive officers
of the Company and
other reductions in force that occurred in 2004. F-23




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) Summary of Restructuring Liabilities.Presented below is a summary of changes in liabilities
for lease exit costs and severance and retention obligations related to the closures discussed
above: Accrued
    
    
    AccruedLease Exit
    
    
    Severance &Costs
    
    
    RetentionBalance, December 31, 2002
    
    $
    10,321
    
    
    $
    61Accrued expense for restructuring activities
    
    
    423
    
    
    
    1,078Cash receipts under subleases
    
    
    409
    
    
    
    Cash payments
    
    
    (5,876
    )
    
    
    (1,084
    )Reversal of accrued lease exit costs
    
    
    (4,710
    )
    
    
    Reclassification of non-level rent liability
    
    
    489
    
    
    
    Expense due to change in previous estimates
    
    
    (39
    )
    
    
    Balance, December 31, 2003
    
    
    1,017
    
    
    
    55Accrued expense for restructuring activities

    
    
    430
    
    
    
    625Cash receipts under subleases
    
    
    489
    
    
    
    Cash payments
    
    
    (1,544
    )
    
    
    (553
    )Accretion of interest
    
    
    47
    
    
    
    Reclassification of non-level rent liability
    
    
    45
    
    
    
    Expense due to change in previous estimates
    
    
    183
    
    
    
    Balance, December 31, 2004
    
    $
    667
    
    
    $
    127
 Accrued lease exit costs are expected to be paid through July 2007. As shown in the
accompanying consolidated balance sheet as of December 31, 2004, $537 of this obligation is
included in current liabilities and $130 is included in long-term liabilities. The obligation for
accrued severance and retention is included in accrued compensation and benefits in the Companys
consolidated balance sheets and is expected to be paid in the first half of 2005. 11. Business and Credit Concentrations The Company operates in the EMS segment of the electronics industry. Substantially all of
the Companys customers are located in the United States. For the years ended December 31, 2002,
2003 and 2004, the Companys net sales were derived from companies engaged in the following market
sectors: Semiconductor
    
    
    Aerospace
    
    
    
    
    
    
    Networking andYear
    
    Capital Equipment
    
    
    and Defense
    
    
    Industrial
    
    
    Telecommunications2002
    
    
    25
    %
    
    
    42
    %
    
    
    9
    %
    
    
    18
    %2003
    
    
    24
    %
    
    
    33
    %
    
    
    25
    %
    
    
    15
    %2004
    
    
    39
    %
    
    
    24
    %
    
    
    25
    %
    
    
    9
    %
 F-24




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) Sales to significant customers as a percentage of net sales for the years ended December
31, 2002, 2003 and 2004, were as follows: Honeywell
    
    
    AppliedYear
    
    International, Inc.
    
    
    Materials, Inc.2002
    
    
    42
    %
    
    
    22
    %2003
    
    
    29
    %
    
    
    18
    %2004
    
    
    21
    %
    
    
    25
    %
 The percentage of the Companys net trade receivables due from significant customers at December
31, 2003 and 2004 is as follows: Honeywell
    
    
    AppliedYear
    
    International, Inc.
    
    
    Materials, Inc.
    
    
    Input/ Output, Inc.2003
    
    
    13
    %
    
    
    10
    %
    
    
    6
    %2004
    
    
    12
    %
    
    
    5
    %
    
    
    16
    %
 The Company does not require collateral to support trade receivables. The Company has a policy to
regularly monitor the credit worthiness of its customers and provide for uncollectible amounts if
credit problems arise. Customers may experience financial difficulties, including those that may
result from industry developments, which may increase bad debt exposure to the Company. In
addition, the electronics manufacturing services industry has experienced component supply
shortages that have impacted the Companys profitability in previous years. If this situation
recurs, the Company may experience reduced net sales and profitability in the future. The Company maintains its cash in bank deposit accounts that, at times, may exceed federally
insured limits. At December 31, 2003 and 2004, the Company had approximately $477 and $266,
respectively, in excess of federally insured limits. The difference between these amounts and the
amount of cash and equivalents shown in the consolidated balance sheets is primarily attributable
to outstanding checks. The Company has not experienced any losses related to investments in cash
and equivalents. The Company operates a manufacturing facility in Mexico. At December 31, 2004, the Company had
approximately $4,400 of inventories and $800 of manufacturing equipment in Mexico. Over the past
year, the Company has increased its focus on foreign operations and management expects that assets
deployed in foreign jurisdictions will continue to increase in the future. Operations in foreign
countries are generally subject to greater uncertainties than those in the United States, including
the potential for unstable political and economic conditions, and changes in governmental
regulations and taxation policies. 12. Commitments and Contingencies Operating Leases.The Company has noncancelable operating leases for facilities and equipment
that expire in various years through 2011. Lease expense under all operating leases (excluding
charges for lease exit costs discussed in Note 10) amounted to $9,602, $6,727 and $5,963 for the
years ended
December 31, 2002, 2003 and 2004, respectively. F-25




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) At December 31, 2004, future minimum lease payments for operating leases are as follows: Year Ending December 31:2005
    
    $
    4,2572006
    
    
    3,6882007
    
    
    2,6742008
    
    
    1,6222009
    
    
    871After 2009
    
    
    685$
    13,797
 The amounts shown in the table above include $1,672 of future lease payments that were included in
the determination of lease exit liabilities that are recorded in the 2004 consolidated balance
sheet. This amount consists of future lease payments of $613, $669 and $390 for the years ending
December 31, 2005, 2006 and 2007, respectively. Employee Benefit Plan.The Company has a 401(k) Savings Plan covering substantially all employees.
During 2002, the Company matched 50% of an employees contributions, up to a maximum matching
contribution of 3% of the employees compensation. The Company did not make any matching
contributions for 2003 or for the first quarter of 2004. Beginning in the second quarter of 2004,
the Company matched 50% of an employees contributions, up to a maximum matching contribution of 1%
of the employees compensation. Additional profit sharing contributions to the plan are at the
discretion of the Board of Directors. During the years ended December 31, 2002, 2003 and 2004,
total contributions by the Company to the Plan were approximately $1,416, $-0-, and $320,
respectively. Legal Proceedings.Applied Materials, Inc. (Applied) has been a customer of the Company and its
predecessors for over ten years. The parties have entered into multiple agreements that set forth
Applieds responsibility for inventories that are purchased or manufactured based on orders and
forecasts received from Applied, as well as other related costs that Applied is responsible for.
During 2003 and 2004, the Company intensified its efforts to enforce the contractual provisions of
these agreements to recover costs incurred for excess and obsolete inventories. In October 2004,
Applied notified the Company that it intended to transition substantially all of its business to
alternative contract manufacturers and by January 2005 the business relationship with Applied had
substantially terminated. In December 2004, the Company initiated litigation in Fort Bend County, Texas, seeking monetary
damages against Applied for costs relating to raw materials, inventory, and capital and human
resources that the Company claims it expended in reliance upon Applieds representations. On
January 14, 2005, Applied filed a Complaint for Declaratory Relief in the Superior Court of the
State of California. This Complaint seeks to establish that the dispute should be resolved in
California. Applied seeks recovery of its attorneys fees but is not seeking any other claim for
damages. In February 2005, the Company responded to Applieds Complaint with a Cross-Complaint that
sets forth the Companys claim for reimbursement of amounts that management believes Applied is
contractually obligated to pay under the agreements, including amounts due for excess and obsolete
inventories of $18,300 as of January 2005, plus punitive
damages, interest and legal fees. This dispute involves a potential loss contingency if the outcome of the litigation does not result
in a F-26




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) settlement that is adequate to recover the net carrying value of the Companys inventories.
Management believes that Applied is responsible for the net carrying value of inventories that were
purchased on behalf of Applied and the Company intends to vigorously prosecute all of its claims
against Applied. The precise amount or likelihood of recovery can not be quantified and no
assurances can be made as to the final timing or outcome of this litigation. The Company is subject to other litigation, claims and assessments that may arise in the ordinary
course of its business activities. Such matters include contractual matters, employment-related
issues and regulatory proceedings. Although occasional adverse decisions or settlements may occur,
the Company believes that the final disposition of such matters will not have a material adverse
effect on the Companys financial position, results of operations or liquidity. 13. Bad Debt Recovery During the third quarter of 2004, a former customer emerged from bankruptcy protection and the
Company received marketable equity securities that are listed on NASDAQ in exchange for its
fully-reserved receivable. The Company is accounting for this investment in accordance with
Statement of Financial Accounting Standards No. 115. Management has classified the Companys
investment as trading securities whereby changes in fair value are reported in operations. The initial trading value indicated that the value of these securities was $777 and, accordingly,
this amount was recorded as a bad debt recovery (shown as a reduction of selling, general and
administrative expenses in the 2004 consolidated statement of operations). By the end of the 2004,
the value of these securities had declined to $392 and the Company recorded an unrealized loss of
$385 in the 2004 consolidated statement of operations. Management intends to sell this investment
(included in prepaid expenses and other in the 2004 consolidated balance sheet) in 2005. 14. Subsequent Events In January 2005, the Company entered into an agreement to sell certain equipment used for
plastic injection molding and sheet metal fabrication. As of December 31, 2004, the net book value
of this equipment was approximately $1,620 and the sales proceeds are expected to be $2,040. The
sale of the plastic injection molding equipment was completed in January 2005, which resulted in a
gain of approximately $230 in the first quarter of 2005. The sale of the sheet metal fabrication
equipment is not expected to be completed until the third quarter of 2005 when a gain of
approximately $190 is expected. Since these assets were still in use as of December 31, 2004, they
are included in manufacturing machinery and equipment in the 2004 consolidated balance sheet. F-27




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts) 15. Quarterly Financial Information (Unaudited) Presented below is selected unaudited quarterly financial information: Year Ended December 31, 2003
    
    
    Year Ended December 31, 2004Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4Net sales
    
    $
    80,164
    
    
    $
    74,845
    
    
    $
    79,638
    
    
    $
    78,584
    
    
    $
    100,671
    
    
    $
    130,381
    
    
    $
    128,542
    
    
    $
    115,794Cost of goods sold
    
    
    84,451
    
    
    
    78,840
    
    
    
    80,780
    
    
    
    77,528
    
    
    
    97,698
    
    
    
    121,635
    
    
    
    120,913
    
    
    
    109,270Gross profit (loss)
    
    
    (4,287
    )
    
    
    (3,995
    )
    
    
    (1,142
    )
    
    
    1,056
    
    
    
    2,973
    
    
    
    8,746
    
    
    
    7,629
    
    
    
    6,524Selling, general &
administrative
    
    
    (5,609
    )
    
    
    (5,682
    )
    
    
    (5,039
    )
    
    
    (6,318
    )
    
    
    (5,609
    )
    
    
    (6,394
    )
    
    
    (5,762
    )
    
    
    (6,596
    )Severance, retention and lease
exit costs
    
    
    (18
    )
    
    
    (33
    )
    
    
    3⁄4
    
    
    
    (73
    )
    
    
    (632
    )
    
    
    (67
    )
    
    
    (282
    )
    
    
    (104
    )Related party expenses
    
    
    (188
    )
    
    
    (187
    )
    
    
    (188
    )
    
    
    (187
    )
    
    
    (188
    )
    
    
    (187
    )
    
    
    (188
    )
    
    
    (187
    )Operating income (loss)
    
    
    (10,102
    )
    
    
    (9,897
    )
    
    
    (6,369
    )
    
    
    (5,522
    )
    
    
    (3,456
    )
    
    
    2,098
    
    
    
    1,397
    
    
    
    (363
    )Interest expense
    
    
    (480
    )
    
    
    (700
    )
    
    
    (761
    )
    
    
    (755
    )
    
    
    (849
    )
    
    
    (1,097
    )
    
    
    (991
    )
    
    
    (1,045
    )Unrealized gain (loss) on
marketable equity securities
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (428
    )
    
    
    43Gain (loss) on sale of assets
    
    
    29
    
    
    
    7
    
    
    
    6
    
    
    
    8
    
    
    
    (9
    )
    
    
    (25
    )
    
    
    (1
    )
    
    
    24Other, net
    
    
    23
    
    
    
    63
    
    
    
    4
    
    
    
    158
    
    
    
    35
    
    
    
    35
    
    
    
    133
    
    
    
    42Net income (loss)
    
    $
    (10,530
    )
    
    $
    (10,527
    )
    
    $
    (7,120
    )
    
    $
    (6,111
    )
    
    $
    (4,279
    )
    
    $
    1,011
    
    
    $
    110
    
    
    $
    (1,299
    )Basic and diluted loss per
share applicable to common
stockholders
    
    $
    (0.38
    )
    
    $
    (0.38
    )
    
    $
    (0.26
    )
    
    $
    (0.22
    )
    
    $
    (0.16
    )
    
    $
    0.04
    
    
    $
    3⁄4
    
    
    $
    (0.05
    )
 F-28




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES 
 SCHEDULE
IIVALUATION AND QUALIFYING ACCOUNTSAccounts
ReceivableAllowance for Doubtful Accounts(Dollars in
Thousands)
 AdditionsBalance at
    
    
    Charged
    
    
    Charged
    
    
    
    
    
    
    Balance atBeginning
    
    
    To Costs &
    
    
    To Other
    
    
    
    
    
    
    End OfYear Ended December 31,
    
    Of Year
    
    
    Expenses
    
    
    Accounts
    
    
    Deductions
    
    
    Year2002
    
    $
    5,636
    
    
    $
    117
    
    
    $
    1,308
    (1)
    
    $
    5,321
    (2)
    
    $
    1,7402003
    
    
    1,740
    
    
    
    2,694
    
    
    
    31
    (1)
    
    
    1,567
    (3)
    
    
    2,8982004
    
    
    2,898
    
    
    
    1,791
    
    
    
    3⁄4
    
    
    
    3,278
    (4)
    
    
    1,411
   (1)
    
    Allowance for doubtful accounts established in purchase accounting for Midwestern
Electronics in 2002 and Trilogic Systems in 2003.(2)
    
    Deductions consist of write-offs of $3,213 and recoveries of $2,108.(3)
    
    Deductions consist of write-offs of $345 and recoveries of $1,222.(4)
    
    Deductions consist of write-offs of $2,350 and recoveries of $928. F-29




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##### Table of Contents



Exhibit Index ExhibitNumber
    
    Description23.1
    
    Consent of KPMG LLP31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002