##### 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 1934
For the fiscal year ended December 31, 2003, oro
    
    Transition report pursuant section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from

to
 Commission file number 0-49651 SUNTRON CORPORATION 
  Delaware
    
    86-1038668(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 2501 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 29, 2003, which was the
last business day of the registrants most recently completed second fiscal
quarter, was $7.1 million. This amount is based on 2,492,000 shares held by
non-affiliates. For purposes of this computation, all 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 16, 2004, there were outstanding 27,410,588shares of the
registrants Common Stock, $0.01 par value. Documents Incorporated by Reference




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PART I1.
    

Business
    
    13.
    
    Properties
    
    53.
    

Legal Proceedings
    
    54.
    

Submission of Matters to a Vote of Security Holders
    
    5PART II5.
    

Market for Registrants Common Equity and Related Stockholder Matters
    
    66.
    

Selected Financial Data
    
    77.
    

Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    97A.
    

Quantitative and Qualitative Disclosures about Market Risk
    
    308.
    

Financial Statements and Supplementary Data
    
    309.
    

Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    309A.
    

Controls and Procedures
    
    30PART III10.
    

Directors and Executive Officers of the Registrant
    
    3111.
    

Executive Compensation
    
    3412.
    

Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    3713.
    
    Certain Relationships and Related Transactions
    
    3914.
    
    Principal Accountant Fees and Services
    
    39PART IV15.
    
    Exhibits and Reports on Form 8-K
    
    40Signatures
    
    42Index to Consolidated Financial Statements
    
    F-1EX-21EX-23.1EX-31.1EX-31.2EX-32.1EX-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, medical and industrial markets. Our
manufacturing services include printed circuit card assembly, cable and harness
production, plastic injection molding, sheet metal, 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,
sheet metal fabrication and powder paint, plastic injection molding, 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 and 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 OEMs in the aerospace and defense,
semiconductor capital equipment, 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





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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 card.
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. and Applied Materials,
Inc. represented approximately 29% and 18%, respectively, of our net sales for
2003. The loss of either Honeywell or Applied Materials 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 industry segment for
the years ended December 31, 2001, 2002 and 2003: 2001
    
    2002
    
    2003Aerospace and defense
    
    
    51
    %
    
    
    42
    %
    
    
    33
    %Semiconductor capital equipment
    
    
    17
    %
    
    
    25
    %
    
    
    24
    %Industrial
    
    
    2
    %
    
    
    9
    %
    
    
    24
    %Networking and telecommunications equipment
    
    
    21
    %
    
    
    18
    %
    
    
    15
    %Medical equipment
    
    
    1
    %
    
    
    1
    %
    
    
    4
    %Other
    
    
    8
    %
    
    
    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
markets: (1) semiconductor capital equipment, (2), aerospace and defense (3)
industrial, and (4) 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 market 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. 2




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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 customers, most customers do
not place firm purchase orders for products until 30 to 90 days prior to the
delivery date for the finished goods. Backlog covered by firm purchase orders
does not demonstrate a meaningful projection of our future sales because orders
may be modified or canceled. 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 3




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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 12, 2004, we had 1,717 full-time equivalent employees,
including 1,142 that were engaged in manufacturing operations, 387 in material
handling and procurement, and 188 in finance, sales, and administration. As of
the same date, we also engaged the full-time services of 916 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, 2501 West Grandview Road, Phoenix, Arizona
85023. 4




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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
    
    ManufacturingAustin, Texas
    
    
    1996
    
    
    
    45,000
    
    
    Leased
    
    WarehouseTijuana, Mexico
    
    
    1999
    
    
    
    30,000
    
    
    Leased
    
    ManufacturingManchester, New Hampshire
    
    
    1998
    
    
    
    19,000
    
    
    Leased
    
    Manufacturing
 In addition, we lease office space in Denver, Colorado, and a
manufacturing facility in Plano, Texas, both of which have been closed and
subleased. In addition to the Phoenix facility shown in the table above, we
lease a second facility in Phoenix that we exited in February 2004. We are
actively marketing the second facility in Phoenix to locate a sublease tenant.
We also own a manufacturing facility in Ottawa, Kansas that we closed at the
end of 2002, and we are marketing this property for sale. 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 There are no legal proceedings to which we are a party or to which any of
our properties are subject, which we expect to have a material adverse effect
on our company. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 5




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PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market for Our Common Stock Our common stock has been listed on the Nasdaq National Market since March
1, 2002 under the symbol SUNN. The following table sets forth the low and
high sale prices for the Companys common stock, as reported on the Nasdaq
National Market, for the period from March 1, 2002 through March 31, 2002, for
the last three fiscal quarters of 2002, and for each of the fiscal quarters in
2003: Period Ended
    
    Low
    
    HighMarch 31, 2002
    
    $
    6.23
    
    
    $
    9.35June 30, 2002
    
    $
    7.45
    
    
    $
    8.50September 29, 2002
    
    $
    2.75
    
    
    $
    9.80December 31, 2002
    
    $
    3.25
    
    
    $
    5.50March 30, 2003
    
    $
    2.75
    
    
    $
    4.75June 29, 2003
    
    $
    2.24
    
    
    $
    3.75September 28, 2003
    
    $
    2.48
    
    
    $
    3.45December 31, 2003
    
    $
    3.18
    
    
    $
    4.58
 As of March 16, 2004, there were approximately 640 holders of record of
our common stock. The closing sale price of our common stock on the Nasdaq
National Market on March 16, 2004 was $5.18 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. 6




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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, 2003, are derived from our
consolidated financial statements (including financial statements of our
predecessors, EFTC Corporation and K*TEC Electronics Holding Corporation) that
have been audited by KPMG LLP and Arthur Andersen, LLP, independent certified
public accountants. The consolidated financial statements as of December 31,
2002 and 2003, and for each of the years in the three-year period ended
December 31, 2003, and the independent auditors reports thereon, are included
elsewhere in this Annual Report on Form 10-K. Year Ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(In thousands, except per share amounts)Statement of Operations Data:Net sales
    
    $
    221,864
    
    
    $
    463,130
    
    
    $
    574,401
    
    
    $
    370,797
    
    
    $
    313,231Cost of goods sold
    
    
    229,892
    
    
    
    439,210
    
    
    
    579,123
    
    
    
    398,767
    
    
    
    321,599Gross profit (loss)
    
    
    (8,028
    )
    
    
    23,920
    
    
    
    (4,722
    )
    
    
    (27,970
    )
    
    
    (8,368
    )Operating costs and expenses:Selling, general and administrative expenses
    
    
    25,389
    
    
    
    27,020
    
    
    
    29,619
    
    
    
    27,234
    
    
    
    22,648Severance, retention, closure and relocation
costs
    
    
    300
    
    
    
    4,579
    
    
    
    228
    
    
    
    169
    
    
    
    124Recapitalization and reorganization
transaction costs
    
    
    
    
    
    
    5,336
    
    
    
    2,375
    
    
    
    312
    
    
    
    Related party fees
    
    
    
    
    
    
    2,713
    
    
    
    3,750
    
    
    
    835
    
    
    
    750Impairment of long-lived assets
    
    
    2,822
    
    
    
    1,662
    
    
    
    
    
    
    
    21
    
    
    
    Goodwill amortization
    
    
    1,133
    
    
    
    907
    
    
    
    2,905
    
    
    
    
    
    
    
    Litigation settlement
    
    
    6,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating loss
    
    
    (44,072
    )
    
    
    (18,297
    )
    
    
    (43,599
    )
    
    
    (56,541
    )
    
    
    (31,890
    )Interest expense
    
    
    (6,516
    )
    
    
    (10,881
    )
    
    
    (12,217
    )
    
    
    (2,568
    )
    
    
    (2,696
    )Reduction in interest due to settlement of
dispute
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,029
    
    
    
    Gain (loss) on sale of assets
    
    
    (20,880
    )
    
    
    4,369
    
    
    
    764
    
    
    
    (166
    )
    
    
    50Other, net
    
    
    (55
    )
    
    
    549
    
    
    
    551
    
    
    
    835
    
    
    
    248Loss before income taxes and cumulative
effect of change in accounting principle
    
    
    (71,523
    )
    
    
    (24,260
    )
    
    
    (54,501
    )
    
    
    (57,411
    )
    
    
    (34,288
    )Income tax benefit (expense)
    
    
    (2,180
    )
    
    
    (287
    )
    
    
    (20
    )
    
    
    276
    
    
    
    Loss before cumulative effect of change in
accounting principle
    
    
    (73,703
    )
    
    
    (24,547
    )
    
    
    (54,521
    )
    
    
    (57,135
    )
    
    
    (34,288
    )Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69,015
    )
    
    
    Net loss
    
    $
    (73,703
    )
    
    $
    (24,547
    )
    
    $
    (54,521
    )
    
    $
    (126,150
    )
    
    $
    (34,288
    )Net loss applicable to common stockholders-
Basic and Diluted
    
    $
    (73,703
    )
    
    $
    (27,019
    )
    
    $
    (55,071
    )
    
    $
    (126,150
    )
    
    $
    (34,288
    )Net loss per share applicable to common
stockholders- Basic and Diluted:Loss before cumulative effect of
change in accounting principle
    
    $
    (18.97
    )
    
    $
    (3.64
    )
    
    $
    (2.29
    )
    
    $
    (2.08
    )
    
    $
    (1.25
    )Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.52
    )
    
    
    Net loss
    
    $
    (18.97
    )
    
    $
    (3.64
    )
    
    $
    (2.29
    )
    
    $
    (4.60
    )
    
    $
    (1.25
    )Number of shares used for computation-
Basic and Diluted
    
    
    3,886
    
    
    
    7,433
    
    
    
    24,092
    
    
    
    27,409
    
    
    
    27,409
 7




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Year Ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(In thousands)Other Operating Data:Computation of EBITDA (a)(b)Loss before cumulative effect of change in
accounting principle
    
    $
    (73,703
    )
    
    $
    (24,547
    )
    
    $
    (54,521
    )
    
    $
    (57,135
    )
    
    $
    (34,288
    )Income tax expense (benefit)
    
    
    2,180
    
    
    
    287
    
    
    
    20
    
    
    
    (276
    )
    
    
    Interest expense
    
    
    6,516
    
    
    
    10,881
    
    
    
    12,217
    
    
    
    2,568
    
    
    
    2,696Reduction in interest under settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,029
    )
    
    
    Depreciation and amortization expense
    
    
    7,242
    
    
    
    12,639
    
    
    
    25,064
    
    
    
    21,987
    
    
    
    22,133EBITDA (a)(b)
    
    $
    (57,765
    )
    
    $
    (740
    )
    
    $
    (17,220
    )
    
    $
    (33,885
    )
    
    $
    (9,459
    )Cash Flow Data:Cash provided (used) by:Operating activities
    
    $
    (9,873
    )
    
    $
    (84,062
    )
    
    $
    75,543
    
    
    $
    22,779
    
    
    $
    (19,768
    )Investing activities
    
    
    17,752
    
    
    
    (171,428
    )
    
    
    (16,772
    )
    
    
    (7,779
    )
    
    
    (2,805
    )Financing activities
    
    
    (7,786
    )
    
    
    288,937
    
    
    
    (78,762
    )
    
    
    (27,551
    )
    
    
    20,978
 December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(In thousands)Balance Sheet Data:Total assets
    
    $
    131,129
    
    
    $
    535,445
    
    
    $
    322,639
    
    
    $
    172,216
    
    
    $
    154,646Total debt
    
    
    42,994
    
    
    
    152,854
    
    
    
    43,830
    
    
    
    10,856
    
    
    
    34,011Stockholders equity
    
    
    21,278
    
    
    
    244,671
    
    
    
    230,132
    
    
    
    104,011
    
    
    
    69,949Total invested capital (c)
    
    
    64,272
    
    
    
    397,525
    
    
    
    273,962
    
    
    
    114,867
    
    
    
    103,960Liquidity Data:Working capital (d)
    
    $
    26,232
    
    
    $
    216,416
    
    
    $
    105,530
    
    
    $
    50,372
    
    
    $
    49,378
   (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 alternatives to net income (loss),
determined in accordance with 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 Item 7 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. 8




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##### Table of Contents



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 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 During 2003, we reduced our operating loss to $31.9 million compared to
$56.5 million in 2002. Over the past three years, we have experienced a severe
contraction in our business where annual sales have declined from $574.4
million in 2001 to $313.2 million in 2003. We responded to the economic
downturn by closing five of our manufacturing facilities, which resulted in
significant restructuring charges over the past three years. These plant
closures combined with other restructuring and cost containment initiatives
implemented over the last three years, have resulted in a much lower cost
structure that is in place at the end of 2003. Despite our large operating loss in 2002, we were able to generate $22.8
million of positive operating cash flow because we were experiencing sequential
quarterly reductions in our net sales in 2001 and 2002 that allowed us to
reduce inventories and receivables. This generated positive operating cash
flows that more than offset the cash operating losses. However, during 2003 our
quarterly net sales remained relatively flat and we were not able to realize a
similar cash flow benefit by reducing our inventories and receivables. The
resulting negative operating cash flows of $19.8 million in 2003, have
decreased our unused borrowing availability from $43.2 million at the end of
2002 to $11.8 million at the end of 2003. This decline of $31.4 million during
2003 was primarily attributable to increased borrowings to fund our operating
loss, and an April 2003 amendment to our credit facility that temporarily
removed an additional $10.0 million of availability until operating performance
improves to a level acceptable to the lender. During 2003 we increased our bank
debt by $23.1 million primarily to fund our negative operating cash flow. At
the end of 2003 our bank debt had increased to $34.0 million compared to $10.9
million at the end of 2002. As we look forward to the first quarter of 2004, we believe market
conditions are improving in the electronics industry, especially in the
semiconductor capital equipment sector where orders have increased
significantly. We believe it is critical that we achieve significantly improved
financial results during the recovery since our current level of unused
borrowing availability may not be adequate to fund additional operating losses
along with increased working capital requirements associated with a substantial
increase in net sales. Some of the tactical issues we are addressing include
delaying inventory purchases to improve our cash cycle time and minimize
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 to ensure that we fully realize the benefits of improved
capacity utilization before adding incremental costs. 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 major customer concentration with orders from smaller customers. Assuming that we are successful in eliminating our cash operating losses,
we believe we have adequate capital resources to fund our planned operating
activities for 2004. However, we do not have adequate capital resources to fund
the purchase of any additional material business units and we would like to
ensure that we have adequate capital resources to make strategic acquisitions
that enhance our long-term business prospects. Accordingly, we have commenced
discussions with Citibank and other lenders to replace our current credit
facility, which expires in April 2005. Our objective is to secure additional
borrowing capacity and flexibility to make strategic acquisitions. 9




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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
statement and the related
footnotes.Overview of Statement of Operations
    
    This section includes a description
of the types of transactions that
are included in each significant
category included in our statement
of operations.Results of Operations
    
    This section includes a discussion
and analysis of our operating
results over the last three years,
including a discussion and
comparison of results for 2001
versus 2002, and 2002 versus 2003.Liquidity and Capital Resources
    
    There are several sub-captions
under this section, including a
discussion of our 2003 cash flows
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 credit facility with Citibank,
including details about interest
rates charged, calculation of the
borrowing base and unused
availability, compliance with the
EBITDA covenant, and alternatives
if current capital resources are
inadequate.Impact of Recently Issued Accounting
Standards
    
    This section includes a discussion
of the impact of new accounting
standards that were adopted in
2003, along with an explanation of
material differences from the
accounting standards that were
previously applicable.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.
 Information About Our Business Suntron Corporation was formed as a holding company for the purpose of
effecting the business combination of EFTC Corporation and K*TEC Operating
Company, L.L.C. (formerly known as Thayer-Blum Funding II, L.L.C.) and its
wholly owned subsidiary, K*TEC Electronics Holding Corporation (referred to
together as K*TEC). The combination of EFTC and K*TEC was completed on February
28, 2002 and, in connection with the combination, EFTC and K*TEC each became a
wholly owned subsidiary of Suntron. As a result of the combination, the former
holder of membership interests in K*TEC received 15,119,356 shares of Suntron
common stock, and the former shareholders of EFTC received .25 shares of
Suntron common stock for each share of EFTC common stock, or an aggregate of
12,290,032 shares. The combination was accounted for as a reorganization of entities under
common control. Accordingly, our financial statements have been retroactively
adjusted to present the combined results of EFTC since its inception and K*TEC
since October 10, 2000 (the date that common control was established). Suntron delivers complete manufacturing services and solutions to support
the entire life cycle of complex products in the semiconductor capital
equipment, aerospace and defense, medical and industrial markets. Our
manufacturing services include printed circuit card assembly, cable and harness
production, plastic injection molding, sheet metal, 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. 10




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As an electronic manufacturing services 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, which can result in a decision to purchase some materials before formal
notice of demand is received from our customer. 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. 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 accounting principles generally accepted in the
United States. 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 generally recognize revenue from manufacturing
services and product sales upon shipment and transfer of title to the
manufactured product, whereby our customers assume the risks and rewards of
ownership of the product. Generally, there are no formal customer acceptance
requirements or further obligations related to manufacturing services; 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 11




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about whether the customer has assumed the risks and rewards of ownership or if
continuing performance obligations exist, before revenue is recognized we
generally expand our written communications with the customer to ensure that
our understanding of the arrangement is consistent with that of the customer.
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. 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 electronic manufacturing services 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 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 need to 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 outcomes.
Over the past year, 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. Impairment of Long-Lived Assets.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
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. Effective January 1, 2002, we were required to adopt a new accounting
standard that changed the method for evaluating impairment of goodwill. The
valuation of reporting units is a highly subjective process that
can be influenced by a wide range of factors including historical and 12




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forecasted results for the reporting unit, interest rates, and political,
regulatory, and economic conditions. Because of the volatility of these
factors, a significant reduction in the value of a reporting unit may occur in
a relatively short period of time, which could result in a material charge for
impairment. Effective January 1, 2002, we implemented this new accounting
standard and recognized an impairment charge of $69.0 million related to the
K*TEC reporting unit. We are required to evaluate potential impairment of
goodwill at least annually and, depending on changes in the fair value of
reporting units at future testing dates, we may need to recognize additional
impairment losses that could have a material adverse impact on our results of
operations. Accrual of Lease Exit Costs.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 very poor in the areas in which we are attempting to
sublease closed facilities, and we believe our estimates have appropriately
considered these conditions. As discussed under Impact of Recently Issued
Accounting Standardsbelow, new accounting rules are effective for all
restructuring activities initiated in 2003. For a detailed discussion on the application of these and other accounting
policies, see Note 1 in our audited consolidated financial statements referred
to in Item 8 of this Report. 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 is generally recognized as the services are
performed. Our sales are recorded net of customer discounts 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,
impairment of long-lived assets, and obsolete and slow moving inventories.
Many factors affect our gross margin, 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; and professional fees
for auditing and legal assistance and general corporate expenses. Severance, retention, closure and relocation costsprimarily related to
costs associated with reductions in our administrative workforce. Severance,
retention, relocation and closure 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 2 of our consolidated financial statements included in this
Report. Reorganization costs included a fairness opinion, 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. Related party feesinclude management fees and advisory fees paid to
affiliates of our majority stockholder. Impairment of long-lived assetsreflects charges related to
non-manufacturing assets; impairment of manufacturing assets is included in
cost of goods sold. Goodwill amortization expenseincludes the amortization of goodwill
relating to the 1997 acquisition of Current Electronics, Inc. and the 2000
acquisition of K*TEC Electronics Holding Corporation. Effective January 1, 13




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2002, goodwill was no longer permitted to be amortized when Statement of
Financial Accounting Standards No. 142 became effective. 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, 2001, 2002, and 2003. 2001
    
    2002
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    100.8
    %
    
    
    107.5
    %
    
    
    102.7
    %Gross profit (loss)
    
    
    (0.8
    )%
    
    
    (7.5
    )%
    
    
    (2.7
    )%Operating costs and expenses:Selling, general, and administrative
    
    
    5.2
    %
    
    
    7.4
    %
    
    
    7.3
    %Severance, retention, closure, and relocation costs
    
    
    
    
    
    
    
    
    
    
    Reorganization transaction costs
    
    
    0.4
    %
    
    
    0.1
    %
    
    
    Related party management and advisory fees
    
    
    0.7
    %
    
    
    0.2
    %
    
    
    0.2
    %Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    Goodwill amortization
    
    
    0.5
    %
    
    
    
    
    
    
    Operating income (loss)
    
    
    (7.6
    )%
    
    
    (15.2
    )%
    
    
    (10.2
    )%
 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 Materials of $64.5 million and
$24.1 million, respectively. The reduction in net sales to Honeywell and
Applied Materials 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. 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. In 2002, Honeywell and Applied Materials accounted for 42% and 22%,
respectively, of our net sales. In 2003, Honeywell and Applied Materials
accounted for 29% and 18%, respectively, of our net sales. In 2001, Emulex was
also a major customer but our net sales to Emulex had been declining over the
past two years and, by the end of the third quarter of 2003, Emulex had
disengaged as a customer. 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 14




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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. However, despite
our extensive restructuring and cost cutting achievements over the past two
years, we have not been able to increase net sales to a level that would result
in profitable operations. 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). Presented below is a summary of
changes in liabilities for lease exit costs and severance and retention
obligations for the years ended December 31, 2002 and 2003 (Dollars in
Millions): Accrued
    
    AccruedLease Exit
    
    Severance &Costs
    
    RetentionBalance, December 31, 2001
    
    $
    1.9
    
    
    $
    Accrued expense for restructuring activities
    
    
    9.7
    
    
    
    0.7Cash receipts under subleases
    
    
    0.4
    
    
    
    Cash payments
    
    
    (2.2
    )
    
    
    (0.6
    )Expense due to change in previous estimates
    
    
    0.5
    
    
    
    Balance, 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
    
    
    $
    0.1
 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. Through the first half of 2004, we have a significant amount of equipment
that will become fully depreciated, although many of these assets are still in
service. Accordingly, our depreciation expense related to property, plant and
equipment for 2004 is expected to decrease by approximately $7.8 million from
the $21.6 million reported in 2003. Approximately $0.5 million of this benefit
is expected to be reflected in lower selling, general, and administrative
expenses and the remaining $7.3 million is expected to result in a reduction of
cost of goods sold. Selling, General, and Administrative Expenses.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. 15




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##### Table of Contents



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. Year Ended December 31, 2001 Compared to Year Ended December 31, 2002 Net Sales.Net sales decreased $203.6 million, or 35.4%, from $574.4
million in 2001 to $370.8 million in 2002. This decrease in 2002 net sales was
primarily attributable to significant decreases in net sales across our
customer base, including decreases with Honeywell and Emulex of $133.5 million
and $32.9 million, respectively. The decrease in net sales in 2002 was
primarily attributable to significant downturns in the industries that our
major customers are engaged in, including aerospace and networking equipment.
During 2002, our net sales included $24.2 million of excess inventories that
were sold back to our customers pursuant to contractual provisions of our
customer agreements. The decrease in net sales in 2002 was partially offset by
$20.9 million of net sales related to the March 2002 acquisition of the assets
of Midwestern Electronics, Inc. For 2001, Honeywell, Applied Materials, and Emulex accounted for 50%, 15%,
and 11%, respectively, of our net sales. For 2002, Honeywell, Applied Materials
and Emulex accounted for 42%, 22%, and 9%, respectively, of our net sales. Gross Profit (Loss).Our gross profit decreased $23.3 million from a loss
of $4.7 million in 2001 to a loss of $28.0 million in 2002. Similarly, gross
profit as a percentage of net sales deteriorated from a loss of 0.8% of net
sales in 2001 to a loss of 7.5% of net sales in 2002, primarily due to $13.6
million of restructuring charges, unfavorable changes in product mix, our
inability to reduce fixed costs in proportion to the decline in net sales, and
nominal gross margins associated with $24.2 million of revenue from the sale of
excess inventories in 2002. These adverse changes were partially offset by a
$9.1 million reduction in write-downs resulting from excess and obsolete
inventories during 2002 compared to 2001. During 2002, we decided to close manufacturing facilities in Ottawa,
Kansas and Fremont, California, and we took other actions to reduce the size of
our workforce. These activities resulted in total charges to cost of goods sold
of $13.6 million. The $13.6 million charge consists of $10.1 million for lease
exit costs; $2.8 million for impairment of a building and manufacturing
equipment; and $0.7 million for severance, retention, and moving costs. The
benefits of these restructuring activities are not expected to be fully
realized until the first quarter of 2003. During 2001, we assessed certain long-lived assets for impairment related
to the planned move to a new facility in the Northeast, and the abandonment of
manufacturing-related software that is no longer expected to be used. Due to
changes in our customers and product mix, we also assessed the carrying value
of intellectual property and manufacturing equipment related to those customers
during 2001. Accordingly, we recognized an impairment expense of $1.3 million
that was included in cost of goods sold in 2001. During 2001, we also
recognized charges of $1.4 million for severance costs related to workforce
reductions and $0.1 million for lease exit cost related to facility 16




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##### Table of Contents



closures. Inventory write-downs decreased $9.1 million from $14.5 million, or 2.5%
of net sales in 2001 to $5.4 million, or 1.5% of net sales, in 2002. This
reduction in inventory write-downs resulted primarily from our substantial
efforts over the past year to improve our inventory management processes and to
work more closely with our customers to minimize losses due to excess
inventories. Selling, General and Administrative Expenses.Selling, general and
administrative expenses (SG & A) decreased $2.4 million, or 8.1%, from $29.6
million in 2001 to $27.2 million in 2002. The decrease in SG & A in 2002 was
primarily attributable to a reduction in selling related expenses associated
with lower sales in 2002, partially offset by an increase in professional fees. Reorganization Transaction Costs.In 2001, we incurred costs, primarily
for a fairness opinion and professional fees, of $2.4 million related to the
business combination between EFTC and K*TEC. During 2002, we incurred
additional costs of $0.3 million, primarily for professional fees and printing
costs. This business combination, which was completed on February 28, 2002, was
accounted for as a reorganization of entities under common control and,
accordingly, these costs were charged to operations in the period in which the
costs were incurred. Related Party Fees.Related party fees decreased $3.0 million, or 77.7%,
from $3.8 million in 2001 to $0.8 million in 2002. In 2001, affiliates of our
majority stockholder charged fees of $1.8 million for investment advisory
services related to the credit facility entered into in January 2001 with
Citibank and $0.7 million in connection with the merger of EFTC and K*TEC.
During 2001, affiliates of our majority stockholder charged management fees of
$1.3 million. Effective March 1, 2002, a new management fee arrangement was
effective that provides for annual fees of $0.8 million. Goodwill amortization.During 2001, goodwill amortization included $0.3
million related to the 1997 acquisition of Current Electronics, Inc. and $2.6
million related to the 2000 acquisition of K*TEC from Kent Electronics.
Effective January 1, 2002, goodwill was no longer permitted to be amortized
when Statement of Financial Accounting Standards No. 142 became effective. Interest Expense.Interest expense decreased $9.6 million, or 79.0%, from
$12.2 million in 2001 to $2.6 million in 2002, primarily due to a decrease in
average outstanding borrowings. Our weighted average borrowings decreased from
$85.9 million in 2001 to $16.7 million in 2002. Our weighted average interest
rate (computed without regard to amortization of debt issuance costs) also
decreased from 9.9% in 2001 to 9.4% in 2002. The most significant event leading
to lower borrowings and interest rates in 2002 was the May 2001 conversion to
common stock of over $59 million of Convertible Notes held by Thayer-Blum
Funding. These notes accrued interest at 8.875% and were converted to 5,940,837
shares of Suntron common stock in May 2001 as a condition of the K*TEC merger
agreement. Lower interest rates on our revolving credit facilities in 2002 also
contributed to the reduction in interest expense. The prime rate decreased by
approximately 4.75 percentage points during 2001 and the prime rate decreased
by one-half percentage point in 2002. These reductions in the prime rate also
had a favorable impact because the interest rate on the revolving line of
credit is a variable rate based on the prime and LIBOR rates. However, the
positive impact of lower prime and LIBOR rates in 2002 was partially offset by
an increase in the margin in excess of these rates due to the November 2001
amendment to our credit agreement with Citibank. Additionally, as we reduce the
principal balance on the revolver, we are still subject to a 0.5% commitment
fee on the unused portion of the facility and these fees accounted for about
two percentage points of our 9.4% effective interest rate in 2002. A portion of the purchase price for the October 2000 acquisition of K*TEC
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, and 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. This note, which provided for interest at 14%, was repaid in May 2002.
This settlement also resulted in a $1.0 million benefit in 2002 due to
elimination of previously accrued interest on the portion of the principal
balance that was eliminated in the settlement. 17




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##### Table of Contents



Gain (Loss) on Sale of Assets.In April 2001, we entered into a
settlement agreement with respect to the earn-out calculation related to the
1999 sale of our Services Division. As a result of this agreement, we received
a final payment of $0.6 million that accounted for $0.6 million of the gain on
sale of assets in 2001. In 2001, we also recognized a gain of $0.2 million from
the sale of equipment. In 2002, we recognized a loss from the sale of equipment
for $0.2 million. Income Taxes.K*TEC and EFTC reported their results separately for income
tax purposes in 2000 and 2001. In 2000, K*TEC generated earnings that resulted
in an income tax provision of $0.3 million. In 2001, K*TEC incurred a
significant net loss which resulted in a tax benefit of $0.3 million. However,
in 2001 EFTC generated earnings that resulted in alternative minimum tax
liability of $0.3 million, resulting in nominal tax expense for 2001 on a
combined basis. In 2002, the tax laws changed and the alternative minimum tax
liability that we accrued in 2001 was eliminated, resulting in a tax benefit of
$0.3 million for 2002. 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 in 2003 was $19.8 million, compared with net cash provided by
operating activities of $22.8 million in 2002. The difference between our net
loss of $34.3 million in 2003 and $19.8 million of negative operating cash flow
was primarily attributable to $22.1 million of depreciation and amortization
expense, a reduction in inventories of $7.1 million, and $1.0 million of
amortization of debt issuance costs, partially offset by a reduction of $9.8
million in accrued severance, retention and lease exit costs, an increase of
$3.6 million in trade receivables, a decrease in accounts payable and other
accrued liabilities of $1.2 million, and an increase in prepaid expenses of
$1.3 million. Days sales outstanding (based on net sales for the year and net trade
receivables outstanding at the end of the year) increased to 40 days for 2003,
compared to 29 days for 2002. Days sales outstanding has been increasing over
the past year as the mix of our net sales has shifted away from customers that
took advantage of discounts in exchange for accelerated payment terms. We expect our net sales during the first quarter of 2004 will increase
from $78.6 million in the fourth quarter of 2003. Even if we are successful in
eliminating our cash operating losses in the first quarter of 2004, it is
likely that we will use cash in our operating activities, primarily due to an
expected increase in receivables and inventories that usually occurs during
periods of increasing production and sales. 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 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. Inventories decreased 8.9% to $61.4 million at December 31, 2003, compared
to $67.4 million at December 31, 2002. For 2003, inventory turns (i.e., cost of
goods sold for the year, excluding restructuring charges and credits, divided
by year-end inventories) amounted to 5.3 times per year compared to 5.7 times
per year for 2002. The reduction in inventory turns in 2003 is due in part to
raw material purchases near the end of 2003 to support higher production
requirements expected in the first quarter of 2004. 18




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##### Table of Contents



Cash Flows from Investing Activities.Net cash used by investing
activities for 2003 was $2.8 million compared with net cash used by investing
activities of $7.8 million for 2002. Investing cash flows in 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 software and
computer equipment. 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 cash outflows for investing activities were partially offset by $0.3
million of cash acquired in the acquisition of Trilogic. During the first
quarter of 2004, we will be required to pay approximately $2.2 million to the
former owners of Trilogic due to the 2003 earn-out that was accrued in our
consolidated balance sheet at December 31, 2003. We also expect to incur other
capital expenditures during 2004 in the range of $3.0 million to $6.0 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 building improvements
and equipment related to expansion opportunities in Mexico and Texas. Investing cash flows for 2002 include the payment of approximately $5.5
million in March 2002 for the acquisition of the assets of Midwestern
Electronics, Inc., and $2.4 million for other capital expenditures. Cash Flows from Financing Activities.Net cash provided by financing
activities for 2003 was $21.0 million, compared with net cash used by financing
activities of $27.6 million for 2002. 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 amended credit
facility with Citibank. For 2002, financing cash flows reflect the net repayment of debt under
revolving credit facilities of $21.0 million, the repayment of $5.3 million of
debt to the former parent of K*TEC, the payment of $0.3 million of debt
issuance costs related to the credit facility with Citibank, and a decrease in
outstanding checks in excess of cash balances of $0.9 million. The Company
utilized temporary cash investments of approximately $14.0 million at the end
of 2001 to repay outstanding debt during 2002. Contractual Obligations.The following table summarizes our contractual
obligations as of December 31, 2003: Long-term
    
    Operating
    
    PurchaseBank Debt
    
    Leases (1)
    
    Obligations (2)
    
    Other (3)
    
    Total(Dollars in Table are in Millions)Year ending December 31:2004
    
    $
    
    
    
    $
    4.7
    
    
    $
    47.7
    
    
    $
    2.7
    
    
    $
    55.12005
    
    
    34.0
    
    
    
    3.6
    
    
    
    0.1
    
    
    
    0.5
    
    
    
    38.22006
    
    
    
    
    
    
    3.1
    
    
    
    0.9
    
    
    
    
    
    
    
    4.02007
    
    
    
    
    
    
    2.1
    
    
    
    
    
    
    
    
    
    
    
    2.12008
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    1.1After 2008
    
    
    
    
    
    
    1.2
    
    
    
    0.2
    
    
    
    
    
    
    
    1.4$
    34.0
    
    
    $
    15.8
    
    
    $
    48.9
    
    
    $
    3.2
    
    
    $
    101.9
   (1)
    
    Includes an aggregate of $1.3 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, 2003. Accounting principles generally
accepted in the United States require that we record a liability for future
lease payments, net of estimated sublease rentals, for facilities that we
have closed.(2)
    
    Consists of obligations under outstanding purchase orders.
Approximately 80% of the deliveries under outstanding purchase orders are
expected to be received in the first quarter of 2004. We often have the
ability to cancel these obligations if we provide sufficient notice to our
suppliers.(3)
    
    Includes payable for 2003 earn-out calculation related to
acquisition of Trilogic Systems for approximately $2.2 million. In August 2003, we renewed an operating lease for our Newberg, Oregon
facility. The landlord is an entity that is affiliated with a director of the
Company. The renewal terms provided for a reduction in our monthly rent from
approximately $58,000 to $47,000 and the lease term was extended for five years
through December 2008. 19




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##### Table of Contents



The table shown above does not include contingent consideration related to
the purchase of Trilogic on May 30, 2003. Pursuant to the purchase agreement,
we may be required to pay up to approximately $1.8 million if certain sales
targets are achieved for 2004. For the year ended December 31, 2003, the
minimum sales target was achieved and we accrued a payable of approximately
$2.2 million. The agreement also requires that we estimate the annual amount of
qualified 2004 sales based on actual sales for the first half of 2004 and
calculate the estimated amount of consideration that would be payable for the
annual 2004 sales target. Accordingly, we may be required to issue a letter of
credit up to $1.8 million in the third quarter of 2004 for the estimated amount
of the contingent consideration payable related to the 2004 annual sales
target. The letter of credit for the 2003 sales target was issued in the fourth
quarter of 2003 for approximately $2.0 million and this letter of credit will
be canceled after we make the accrued payment of $2.2 million, which is
expected to occur in the first quarter of 2004. We believe we will be able to fund our contractual operating lease and
purchase order obligations from operating cash flows during the periods that
payments are required. We believe we will be able to fund the payments required
under the Trilogic acquisition agreement through borrowings under our credit
agreement with Citibank. We have commenced negotiations with Citibank and other
prospective lenders for a new credit agreement that would provide for maturity
date in three to five years. However, there can be no assurance that we will be
successful in this regard. Capital Resources.Our working capital at December 31, 2003 totaled $49.4
million compared to $50.4 million at December 31, 2002. At December 31, 2003,
the borrowing base under our $75.0 million revolving credit facility with
Citibank would have supported borrowings up to $58.0 million, and we had
outstanding borrowings of approximately $34.0 million and outstanding letters
of credit for $2.2 million under this credit facility. Accordingly, as of
December 31, 2003, we had unused availability of $11.8 million after deducting
outstanding borrowings, letters of credit, and an additional $10.0 million that
Citibank temporarily removed from the borrowing base until operating
performance improves to an acceptable level. In March 2004, Citibank agreed to
increase the advance rates for inventories under the borrowing base
calculation. After giving effect to this change, our unused availability
increased to approximately $16.1 million as of March 24, 2004. In connection with the May 2003 acquisition of Trilogic Systems, we agreed
to issue a letter of credit for the estimated earn-out payable for 2003.
Approximately $2.0 million of our outstanding letters of credit relate to the
Trilogic earn-out for 2003 which is also recorded under current liabilities in
our balance sheet at December 31, 2003. As a result of the substantial net loss in 2002, we would have violated
year-end restrictive covenants for EBITDA and tangible net worth as contained
in the credit agreement with Citibank. On March 31, 2003, Citibank agreed to a
permanent waiver of the year-end covenant violations, as well as expected
violations of the same covenants for the first quarter of 2003. On April 11,
2003, Citibank agreed to amend the credit facility to provide less stringent
covenants for EBITDA and tangible net worth. The amended facility continues to
provide a revolving line of credit up to $75.0 million, and the maturity date
was extended until April 2005. Borrowings under the amended credit facility
bear interest at the prime rate plus 2.50% for Base Rate borrowings and the
LIBOR rate plus 3.75% for LIBOR Rate borrowings. In addition, the Company is
obligated to pay a commitment fee of 0.5% per annum of the unused portion of
the credit facility up to $50.0 million, plus an unused commitment fee of 1.0%
to the extent that the unused portion of the credit facility exceeds $50.0
million. The credit agreement also limits or prohibits us from paying dividends,
incurring additional debt, selling significant assets, or merging with other
entities without the consent of the lenders. Substantially all of our assets
are pledged as collateral for outstanding borrowings. As of December 31, 2003,
the Company is in compliance with the covenants under the amended credit
facility with Citibank. Total borrowings are subject to limitation based on a
percentage of eligible accounts receivable, inventories, real estate, and
equipment. The continued availability of our credit facility with Citibank, or a
comparable credit facility, is a critical assumption underlying our belief that
adequate capital resources are currently in place to fund our planned
activities for the next 12 months. The borrowing base calculation under the
Citibank 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. However, the borrowing base generally
increases as our net receivables and inventories increase. If our sales begin
to increase rapidly, this credit facility is critical to enable us to finance
the increased working capital requirements associated with growth. 20




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##### Table of Contents



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 EBITDA covenant discussed on the following page. While
the EBITDA financial covenant included in the April 2003 amended credit
agreement is less stringent than the previous agreement, we are generally
required to demonstrate sequential quarterly improvements in our financial
performance beginning in the third quarter of 2003. If we violate the financial
covenants in the future, there can be no assurance that Citibank would waive
our noncompliance. In these circumstances, Citibank 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. We also have the ability to issue shares of our common stock to make
acquisitions of businesses or to settle outstanding contractual obligations. We
also have the ability to sell our common stock in a public or private offering
of securities to raise cash to fund working capital and other cash
requirements. However, we have not issued our common stock for these purposes
over the past several years. We believe that adequate capital resources are in place to fund our
working capital and other cash requirements (including up to $1.8 million of
contingent consideration related to 2004 earn-out related to the Trilogic
acquisition) for the next 12 months. However, depending on the amount of
capital resources that are devoted to any future acquisitions of businesses,
and increased working capital requirements if sales levels increase
significantly, we may need to seek additional funds through public or private
debt or equity offerings, bank borrowings, or leasing arrangements. Assuming that we are successful in eliminating our cash operating losses,
we believe we have adequate capital resources to fund our planned operating
activities for 2004. However, we intend to continue to evaluate strategic
acquisitions to enhance our long-term business prospects and we do not believe
we have adequate capital resources to fund the purchase of any additional
material business units. Accordingly, we have commenced discussions with
Citibank and other lenders to replace our current credit facility, which
expires in April 2005. Our objective is to put a new credit facility in place
that will provide additional borrowing capacity and the flexibility to make
strategic acquisitions. While we believe the interest rates on a new facility
would be competitive with our current facility with Citibank, we will probably
incur a material amount of origination and professional fees when a new or
amended credit facility is put in place. Also, if a new facility is put in
place, we would be required to write-off unamortized debt issuance costs
related to our current credit facility, which amounted to $0.9 million as of
December 31, 2003. There can be no assurance that we will be successful in
securing additional financing or an amended agreement with Citibank, and even
if we are successful, the terms may be less favorable than our current
agreement with Citibank. EBITDA Financial Covenant.The primary measure of our operating
performance is net income (loss). However, the Companys 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, 2002 and 2003 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: 21




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##### Table of Contents



2002
    
    2003Net loss
    
    $
    (126,150
    )
    
    $
    (34,288
    )Cumulative effect of change in accounting principle
    
    
    69,015
    
    
    
    Income tax expense (benefit)
    
    
    (276
    )
    
    
    Interest expense
    
    
    2,568
    
    
    
    2,696Interest reversed in settlement
    
    
    (1,029
    )
    
    
    Depreciation and amortization
    
    
    21,987
    
    
    
    22,133EBITDA per traditional definition
    
    
    (33,885
    )
    
    
    (9,459
    )Restructuring and reorganization costs (benefit) (A)
    
    
    14,061
    
    
    
    (3,131
    )Other charges (B)
    
    
    325
    
    
    
    1,549EBITDA per credit agreement definition
    
    $
    (19,499
    )
    
    $
    (11,041
    )
  (A)
    
    Restructuring costs include lease exit costs, impairment of long-lived
assets, and 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, the Companys EBITDA (as defined in the credit
agreement) for the first quarter of 2004 must be more favorable than
approximately negative $1.5 million. Impact of Recently Issued Accounting Standards In
July 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This standard requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by this standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance was provided by EITF Issue
No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). Statement
146 replaces Issue 94-3. The Company has applied Statement 146 in accounting
for all exit or disposal activities initiated after December 31, 2002. During
2003, the Company recognized restructuring costs (including severance,
retention, lease exit costs, moving and relocation) under Statement 146 of
approximately $1.5 million, primarily due to consolidation of manufacturing
operations in Phoenix. During 2003, the Company also recognized a lease
termination credit of $4.7 million related to the reversal of an accrual for
exit and disposal activities that were initiated prior to the adoption of
Statement 146. The adoption of Statement 146 resulted in a delay until the
first quarter of 2004 in the recognition of lease exit costs of approximately
$0.4 million. Under Issue 94-3, these costs would have been recognized in 2003. In November 2002, the EITF reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21
provides guidance on how to account for arrangements that involve the delivery
or performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into
in fiscal periods beginning after June 15, 2003. The provisions of EITF Issue
No. 00-21 did not have a material effect on our consolidated financial
statements. On December 17, 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104 (SAB 104) Revenue Recognition, which updates
previous guidance contained in SAB 101, Revenue Recognition in Financial
Statements. SAB 104 provides additional clarification of the SEC Staffs
interpretation of EITF Issue No. 00-21 with respect to bill and hold
transactions, undelivered elements of a sale that are both inconsequential or
perfunctory and not essential to functionality, and the accounting for
nonrefundable upfront fees. The adoption of SAB 104 did not have a material
impact on our consolidated financial statements. 22




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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 occurs, 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. 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 $574 million in 2001 to $371 million in 2002 to
$313 million in 2003. 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 determine 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. 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 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. Conversely, customers may on occasion require rapid increases in
production. These situations often result in inefficiencies related to hiring
and training workers, as well as incremental costs incurred to expedite the
purchase and delivery of raw materials. Periods of rapid growth tend to stress
our resources and we may not have sufficient capacity to meet our customers
delivery requirements. 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
electronic manufacturing services 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. 23




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A significant percentage of our net sales are generated from the aerospace
and defense, semiconductor capital equipment, industrial, networking and
telecommunications, and medical segments of the electronics industry, which is
characterized by intense competition and significant fluctuations in product
demand. Furthermore, these segments 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 segments 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. Our principal customer 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 segment 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 have
experienced declining net sales. 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. 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. Sales to Honeywell and Applied Materials represented
approximately 42% and 22%, respectively, of our net sales for the year ended
December 31, 2002. For the year ended December 31, 2003, Honeywell and Applied
Materials accounted for 29% and 18%, respectively, of our net sales. In 2001,
Emulex was also a major customer but our net sales to Emulex had been declining
over the past two years and, by the end of the third quarter of 2003, Emulex
had disengaged as a customer. We expect a significant portion of our net sales
will continue to be generated by a small number of customers. Our customer concentration could increase or decrease depending on future
customer requirements, which will depend in large part on market conditions in
the industry segments 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. 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 and
Applied Materials, 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 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 24




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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
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 is likely to
place a significant strain on our managerial, operational, financial, and other
resources. If this growth materializes, 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 25




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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. 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 26




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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. 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 in 2003, 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; 27




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
    
    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. 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. 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, 2003, we had outstanding bank debt of approximately
$34.0 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. While we believe our capital resources are currently adequate, 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 asinvestment, acquisition, and international expansion
activities. If such funds are not available when required or on acceptable terms, our
business and financial results could suffer. 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. During 2002 and 2003, the average number of shares of our common stock
that traded on the NASDAQ exchange amounted to approximately 7,000 shares per
day compared to 27,409,000 issued and outstanding shares. 28




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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 net sales and 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 electronic manufacturing services industry;
    
    the timing of announcements by us or our competitors of
significant contracts or acquisitions; and
    
    general stock market conditions. 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 four of our
nine 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. 29




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  ITEM 7A.
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK On January 26, 2001, the Company entered into a revolving line of credit
agreement with Citibank, N.A. The amended credit agreement provides for total
borrowings up to $75 million. The interest rate under this agreement is based
either on the prime rate or LIBOR rate, 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
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 $750,000. 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  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  ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES  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,
2003, 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. 30




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS  ITEM 10.
    DIRECTORS AND EXECUTIVE OFFICERS The following table, together with the accompanying text, presents certain
information, as of February 29, 2004, with respect to each of our executive
officers and directors. Name
    
    Age
    
    Position(s) Held With the CompanyJames K. Bass
    
    
    47
    
    
    Chief Executive Officer, President and DirectorJohn W. Briant
    
    
    38
    
    
    Vice President of Materials, Quality and Process ManagementJames A. Doran
    
    
    49
    
    
    Vice President, Controller and Chief Accounting OfficerMichael Eblin
    
    
    41
    
    
    Chief Operating OfficerOscar A. Hager
    
    
    48
    
    
    Vice President of Human ResourcesPeter W. Harper
    
    
    42
    
    
    Chief Financial Officer and SecretaryJohn H. Kulp
    
    
    46
    
    
    Vice President of Sales and MarketingAllen S. Braswell, Jr.
    
    
    45
    
    
    DirectorFred A. Breidenbach
    
    
    57
    
    
    DirectorJeffrey W. Goettman
    
    
    44
    
    
    Chairman of the Board and DirectorDouglas P. McCormick
    
    
    34
    
    
    DirectorJose S. Medeiro
    
    
    35
    
    
    DirectorRichard L. Monfort
    
    
    49
    
    
    DirectorJames C. Van Horne
    
    
    68
    
    
    DirectorJohn C. Walker
    
    
    42
    
    
    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 for the generation, transmission, distribution,
control, and utilization of electricity. 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. John W. Brianthas served as our Vice President of Materials, Quality and
Process Management since February 2002. Mr. Briant served as EFTCs Vice
President of Material and Logistics from October 1999 to February 2002. Mr.
Briant served as the Director of Process and Quality Management of EFTC from
July 1998 to September 1999. Prior to joining EFTC, Mr. Briant held various
management, procurement, and engineering positions at AlliedSignal from 1993 to
1998 and was responsible for the development of their corporate supply base for
Electronic Manufacturing Services and Printed Wiring Boards. Prior to that, he
held engineering positions with Honeywells Business and Commuter Aviation
Division, a manufacturer of aerospace products and services. James A. Doranhas 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. Prior to joining EFTC, from 1994 to
September 1999, Mr. Doran served as a Senior Audit Manager with Hein &
Associates LLP, a public accounting and consulting firm. 31




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##### Table of Contents



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 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 has 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 management positions at General Electric Company. 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. Fred A. Breidenbachhas served as a director since October 2001. Mr.
Breidenbach has served as the principal of FA Breidenbach & Associates, LLC, a
management-consulting firm providing services to the aerospace industry, since
November 1997. From April 1993 until July 1997, Mr. Breidenbach served as
President and Chief Operating Officer of Gulfstream Aerospace Corporation (now
a subsidiary of General Dynamics). Mr. Breidenbach also serves as a director of
Synnex 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 electronic
manufacturing services group at Robertson Stephens & Co., Inc., an investment
banking firm. Mr. Goettman also serves as Chairman of the Board and a director
of TTM Technologies, Inc. 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. Jose S. Medeiroshas served as a director since October 2001. Mr. Medeiros
has been a Partner in 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. 32




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Richard L. Monforthas served as a director since October 2001. Mr.
Monfort has been engaged in private investment activities as his principal
occupation since June 1995. From July 1989 to June 1995, Mr. Monfort served as
President and Chief Operating Officer of ConAgra Red Meat Companies, a division
of ConAgra Foods Inc. engaged in beef, pork and lamb production. Mr. Monfort
also serves as a director of Famous Daves of America, Inc., an owner and
operator of restaurants. 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. Walkerhas served as a director since May 2001. Mr. Walker has
been a Partner with Blum Capital Partners since April 1997. From 1992 until
April 1997, Mr. Walker served as the Vice President of PEXCO Holdings, Inc., a
private investment holding company. Mr. Walker also serves as a 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. Audit Committee Our board of directors has established an audit committee to review and
monitor our corporate financial reporting and our external audits, including,
among other things, 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, Goettman, and Breidenbach. The audit committee met nine times, including
three telephonic meetings, during fiscal year 2003. Our Board of Directors has
determined that James C. Van Horne, the Chairman of our audit committee, is an
audit committee financial expert 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 2003, we believe that our directors, executive
officers and 10 percent stockholders complied with all Section 16(a) filing
requirements, except that Messrs. Bass, Briant, Doran, Eblin, Gibbons, Hager,
Harper, and Kulp each inadvertently filed one Form 4 late. These individuals
received stock option grants in mid-December 2003 and the Forms 4 were filed on
January 15, 2004. 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. 33




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ITEM 11. EXECUTIVE COMPENSATION  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, 2001, 2002, and 2003 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 2003, as well as their titles with Suntron. Summary Compensation Table Long Term CompensationAnnual Compensation
    
    Awards
    
    PayoutsOther Annual
    
    Securities
    
    LTIPName and Principal
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation
    
    Underlying
    
    Payouts
    
    All OtherPosition
    
    Year
    
    Salary($)
    
    Bonus($)
    
    ($)(1)
    
    Options(#)(2)
    
    ($)
    
    Compensation($)James K. Bass
    
    
    2001
    
    
    $
    300,000
    
    
    $
    300,000
    
    
    $
    
    
    
    
    13,750
    
    
    $
    
    
    
    $
    Chief Executive
    
    
    2002
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    227,000
    
    
    
    
    
    
    
    Officer and President
    
    
    2003
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    60,000
    
    
    
    
    
    
    
    John Briant
    
    
    2001
    
    
    
    160,000
    
    
    
    80,000
    
    
    
    
    
    
    
    3,750
    
    
    
    
    
    
    
    Vice President of
    
    
    2002
    
    
    
    160,000
    
    
    
    4,125
    
    
    
    
    
    
    
    50,750
    
    
    
    
    
    
    
    Materials, Quality &
Process Management
    
    
    2003
    
    
    
    174,423
    
    
    
    
    
    
    
    
    
    
    
    12,000
    
    
    
    
    
    
    
    Michael Eblin
    
    
    2001
    
    
    
    200,004
    
    
    
    140,000
    
    
    
    
    
    
    
    8,750
    
    
    
    
    
    
    
    Chief Operating
    
    
    2002
    
    
    
    200,004
    
    
    
    
    
    
    
    
    
    
    
    132,500
    
    
    
    
    
    
    
    Officer
    
    
    2003
    
    
    
    219,231
    
    
    
    
    
    
    
    
    
    
    
    27,000
    
    
    
    
    
    
    
    R. Michael Gibbons (3)
    
    
    2001
    
    
    
    198,000
    
    
    
    25,000
    
    
    
    
    
    
    
    197,310
    
    
    
    
    
    
    
    Exec. Vice President-
    
    
    2002
    
    
    
    200,538
    
    
    
    
    
    
    
    
    
    
    
    32,500
    
    
    
    
    
    
    
    New Business Dev.
    
    
    2003
    
    
    
    220,000
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    Peter W. Harper
    
    
    2001
    
    
    
    200,004
    
    
    
    100,000
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    Chief Financial
    
    
    2002
    
    
    
    200,004
    
    
    
    
    
    
    
    
    
    
    
    65,000
    
    
    
    
    
    
    
    Officer and Secretary
    
    
    2003
    
    
    
    200,004
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    
   (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 options to purchase shares of Suntron common stock, after
giving effect to the assumption of EFTC and K*TEC options upon the
completion of the combination and the applicable exchange ratios.(3)
    
    Effective March 12, 2004, Mr. Gibbons was no longer employed by Suntron. Stock Option Grants Suntron did not grant any stock appreciation rights in 2003. The following
table sets forth information concerning the grant of stock options in 2003 to
Suntrons Chief Executive Officer and the other executive officers named in the
Summary Compensation Table above. 34




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Option Grants In Last Fiscal Year Individual GrantsNumber of
    
    % of Total
    
    
    
    
    
    Grant
    
    
    
    
    
    Potential Realizable Value at AssumedSecurities
    
    Options
    
    
    
    
    
    Date
    
    
    
    
    
    Annual Rates of Stock PriceUnderlying
    
    Granted to
    
    Exercise or
    
    Market
    
    
    
    
    
    Appreciation for Option Terms (4)Options
    
    Employees in
    
    Base Price
    
    Value
    
    ExpirationName
    
    Granted (#)
    
    Fiscal Year(3)
    
    ($/Share)
    
    ($/Share)
    
    Date
    
    0%($)
    
    5%($)
    
    10%($)James K. Bass
    
    
    60,000
    (1)
    
    
    13.7
    %
    
    $
    4.40
    
    
    $
    4.35
    
    
    
    12/05/13
    
    
    $
    
    
    
    $
    161,141
    
    
    $
    412,967John Briant
    
    
    12,000
    (2)
    
    
    2.7
    %
    
    
    0.01
    
    
    
    4.21
    
    
    
    12/05/13
    
    
    
    50,400
    
    
    
    82,172
    
    
    
    130,916Michael Eblin
    
    
    27,000
    (2)
    
    
    6.2
    %
    
    
    0.01
    
    
    
    4.35
    
    
    
    12/05/13
    
    
    
    117,180
    
    
    
    191,044
    
    
    
    304,365R. Michael Gibbons
    
    
    15,000
    (2)
    
    
    3.4
    %
    
    
    0.01
    
    
    
    4.35
    
    
    
    12/05/13
    
    
    
    65,100
    
    
    
    106,135
    
    
    
    169,092Peter W. Harper
    
    
    15,000
    (2)
    
    
    3.4
    %
    
    
    0.01
    
    
    
    4.42
    
    
    
    12/05/13
    
    
    
    65,100
    
    
    
    107,846
    
    
    
    171,815
   (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 25% annual installments thereafter, so long as the
executive remains employed with Suntron.(2)
    
    Represents options to purchase Suntron common stock that become
exercisable on January 1, 2006, provided that the executive remains
employed with Suntron.(3)
    
    The percentages shown above are based on an aggregate of 437,021 options
for shares of Suntron common stock that were granted to employees for the
year ended December 31, 2003.(4)
    
    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 (0%, 5% and 10%). The 0%, 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 2003 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 2003 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 UnexercisedNumber of Options at
    
    In-the-Money Options atSharesAcquired on
    
    Value
    
    December 31, 2003
    
    December 31, 2003($)(1)Name
    
    Exercise
    
    Realized
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableJames K. Bass
    
    
    
    
    
    $
    
    
    
    
    205,876
    
    
    
    525,750
    
    
    $
    8,750
    
    
    $
    26,250John Briant
    
    
    
    
    
    
    
    
    
    
    46,501
    
    
    
    111,500
    
    
    
    2,625
    
    
    
    59,355Michael Eblin
    
    
    
    
    
    
    
    
    
    
    81,813
    
    
    
    243,250
    
    
    
    5,250
    
    
    
    131,580R. Michael Gibbons
    
    
    
    
    
    
    
    
    
    
    99,415
    
    
    
    244,810
    
    
    
    1,750
    
    
    
    69,600Peter W. Harper
    
    
    
    
    
    
    
    
    
    
    43,375
    
    
    
    132,500
    
    
    
    3,500
    
    
    
    74,850
   (1)
    
    The closing sales price per share for Suntron common stock as reported by
the Nasdaq National Market on December 31, 2003 was $4.30. The option
value is calculated by multiplying (a) the positive difference, if any,
between $4.30 and the option exercise price by (b) the number of shares of
common stock underlying the option. 35




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##### Table of Contents



Equity Compensation Plan Information The following table sets forth certain information, as of December 31,
2003, 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). (c)Number ofSecuritiesRemaining Availablefor Future Issuance(a)
    
    
    
    
    
    Under EquityNumber of
    
    
    
    
    
    Compensation PlansSecurities to be
    
    (b)
    
    (ExcludingIssued Upon
    
    Weighted Average
    
    SecuritiesExercise of
    
    Exercise Price of
    
    Reflected inPlan Category
    
    Outstanding Options
    
    Outstanding Options
    
    Column (a))Equity Compensation
Plans Approved by
Stockholders
    
    
    2,361,105
    
    
    $
    10.28
    
    
    
    2,638,895Equity Compensation
Plans Not Approved
by Stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    2,361,105
    
    
    $
    10.28
    
    
    
    2,638,895
 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 him to be employed as Chief Executive
Officer for a term 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. 36




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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 February 29, 2004 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)
    
    
    227,814
    
    
    
    *Allen S. Braswell, Jr. (5)
    
    
    225,235
    
    
    
    *Fred A. Breidenbach (6)
    
    
    16,224
    
    
    
    *Jeffrey W. Goettman (7)
    
    
    24,582,191
    
    
    
    89.7
    %Douglas P. McCormick (7)
    
    
    24,582,191
    
    
    
    89.7
    %Jose S. Medeiros (7)
    
    
    24,582,191
    
    
    
    89.7
    %Richard L. Monfort (8)
    
    
    112,571
    
    
    
    *James C. Van Horne (9)
    
    
    10,374
    
    
    
    *John C. Walker (7)
    
    
    24,582,191
    
    
    
    89.7
    %John W. Briant (10)
    
    
    50,875
    
    
    
    *James A. Doran (11)
    
    
    32,280
    
    
    
    *Michael Eblin (12)
    
    
    94,563
    
    
    
    *Oscar A. Hager (13)
    
    
    26,063
    
    
    
    *Peter W. Harper (14)
    
    
    49,875
    
    
    
    *John H. Kulp (15)
    
    
    24,438
    
    
    
    *All directors and executive officers as a
group
(16 persons) (7)(16)
    
    
    25,452,503
    
    
    
    91.1
    %
   *
    
    Represents less than 1% of our outstanding common stock.(1)
    
    Except as otherwise indicated, the address of each person listed on the
table is 2501 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 February 29, 2004, 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 27,410,588 shares of our common stock
outstanding as of February 29, 2004.(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.Blum Strategic Partners, L.P. is controlled by a limited liability company,
a managing member of which is Richard C. Blum. 37




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##### Table of Contents



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. 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 227,814 shares issuable pursuant to options that are
currently exercisable or exercisable within 60 days of February 29, 2004.(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
3,010 shares issuable pursuant to options that are exercisable within 60
days of February 29, 2004. Allen S. Braswell, Jr. is president of BIC.(6)
    
    Includes 7,724 shares issuable pursuant to options currently exercisable
or exercisable within 60 days of February 29, 2004.(7)
    
    Reflects 24,582,191 shares held by Thayer-Blum. See footnote 3. Messrs.
Goettman, McCormick, Medeiros, and Walker disclaim beneficial ownership of
these securities, except to the extent of any pecuniary interest therein.(8)
    
    Includes 67,875 shares held by the Monfort Family Partnership; 23,168
shares held by a partnership in which Mr. Monfort is the principal
investor; 11,518 shares owned by three of Mr. Monforts minor children;
and 10,010 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of February 29, 2004.(9)
    
    Includes 7,874 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of February 29, 2004.(10)
    
    Consists of 50,875 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of February 29, 2004.(11)
    
    Includes 32,188 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of February 29, 2004.(12)
    
    Consists of 94,563 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of February 29, 2004.(13)
    
    Includes 25,938 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of February 29, 2004.(14)
    
    Consists of 49,875 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of February 29, 2004.(15)
    
    Consists of 24,438 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of February 29, 2004.(16)
    
    Includes 636,224 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of February 29, 2004. 38




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##### Table of Contents



ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 Sale/Leaseback Transaction Richard L. Monfort, currently 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 2003, we paid $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. Inventory Purchases For the years ended December 31, 2003, the Company purchased inventories
for $481,000 from TTM Technologies, Inc. An affiliate of Thayer-Blum Funding
L.L.C. has a controlling ownership interest in TTM Technologies. 
 ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
 KPMG LLP served as our independent auditors for the year ended December
31, 2003 and will serve in that capacity for the 2004 fiscal year. Fees Charged By Independent Auditors 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, 2002 and 2003: 2002
    
    2003Audit fees
    
    $
    300,000
    
    
    $
    235,000Audit-related fees
    
    
    19,050
    
    
    
    Income tax fees
    
    
    217,551
    
    
    
    64,839All other fees
    
    
    31,870
    
    
    
    Total fees
    
    $
    568,471
    
    
    $
    299,839
 Audit-related fees include employee benefit plan audit fees and fees
related to auditor consents required by various SEC filings. Income tax fees
include tax return preparation and consultation on various tax issues. All
other fees include due diligence assistances and accounting consultation on
proposed transactions. Pre-Approval Policy for Independent Auditor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. 39




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##### Table of Contents



PART IV 
 ITEM 15.
    
    EXHIBITS AND REPORTS ON FORM 8-K
  (a)
    
    Financial Statements and Financial Statement Schedule  (1)
    
    Financial Statements and Schedule II are 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)
    
    Reports on Form 8-K On November 17, 2003, the Company filed a Current Report on Form 8-K
reporting information under Item 12 for a press release that was issued related
to the Companys earnings for the quarter ended September 28, 2003.  (c)
    
    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
    
    Module Supplier Agreement dated as of February 2, 2000 by and between
Applied Materials, Inc. and K*TEC Electronics Corporation. (1)10.4
    
    Comprehensive Supplier Agreement #305038 dated as of August 3, 1997 by
and between Applied Materials, Inc. and K*TEC Electronics Corporation. (1)10.5
    
    Employment Agreement dated as of June 23, 2000 by and between James Bass
and EFTC Corporation. (1)10.6
    
    Lease Agreement dated as of May 10, 1999 by and between Orsett/I-17
L.L.C. and EFTC Corporation. (1)10.7
    
    Industrial Lease dated December 18, 1998 by and between Buckhorn Trading
Co., LLC and EFTC Corporation. (1)10.8
    
    Commercial/Industrial Lease dated as of April 1, 2001 by and between EFTC
Corporation and H. J. Brooks, LLC. (1)10.9
    
    Consulting Services Agreement dated as of April 24, 2002 by and between
Suntron Corporation and Allen S. Braswell, Jr. (3)
 40




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##### Table of Contents



ExhibitNumber
    
    Description10.10
    
    Management and Consulting Agreement by and between Suntron Corporation
and Thayer-Blum Funding III, L.L.C. (3)10.11
    
    Amended and Restated Credit Agreement dated April 11, 2003 between
Suntron Corporation and Citicorp USA. (4)21
    
    List of Subsidiaries of the registrant.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.(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
May 13, 2003 41




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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: March 26, 2004
    
    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

James K. Bass
    
    President, Chief Executive Officer
(Principal Executive Officer), and
Director
    
    March 26, 2004/s/Peter W. Harper

Peter W. Harper
    
    Chief Financial Officer and Secretary
(Principal Financial Officer)
    
    March 26, 2004/s/James A. Doran

James A. Doran
    
    Chief Accounting Officer
(Principal Accounting Officer)
    
    March 26, 2004/s/Allen
S. Braswell, Jr.
    
    
    
    March 26, 2004Allen S. Braswell, Jr.
    
    Director/s/Fred A. Breidenbach

Fred A. Breidenbach
    
    Director
    
    March 26, 2004/s/Jeffrey W. Goettman

Jeffrey W. Goettman
    
    Director
    
    March 26, 2004/s/Douglas P. McCormick

Douglas P. McCormick
    
    Director
    
    March 26, 2004/s/Jose S. Medeiros

Jose S. Medeiros
    
    Director
    
    March 26, 2004/s/Richard L. Monfort

Richard L. Monfort
    
    Director
    
    March 26, 2004/s/ James C. Van Horne

James C. Van Horne
    
    Director
    
    March 26, 2004/s/John C. Walker

John C. Walker
    
    Director
    
    March 26, 2004
 42




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SUNTRON CORPORATION 
 Index to Consolidated Financial Statements and Schedule Page(s)Consolidated Financial Statements:Independent auditors report
    
    
    F-2Consolidated balance sheets as of December 31, 2002 and 2003
    
    F-3 to F-4Consolidated statements of operations for the years ended
December 31, 2001, 2002 and 2003
    
    
    F-5Consolidated statements of stockholders equity for the
years ended December 31, 2001, 2002 and 2003
    
    
    F-6Consolidated statements of cash flows for the years ended
December 31, 2001, 2002 and 2003
    
    F-7 to F-8Notes to consolidated financial statements
    
    F-9 to F-29Supplementary Schedule:Schedule II- Valuation and Qualifying Accounts
    
    
    F-30
 F-1




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INDEPENDENT AUDITORS REPORT 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, 2002 and 2003, 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, 2003. In
connection with our audits, we also have audited the accompanying financial
statement schedule for each of the years in the three-year period ended
December 31, 2003. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Suntron Corporation
and subsidiaries as of December 31, 2002 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule for each of the years in the three-year period
ended December 31, 2003, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein. As discussed in Note 3 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, effective January 1, 2002. /s/ KPMG LLP Phoenix, Arizona
February 18, 2004 F-2




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SUNTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2003
(Dollars in Thousands, Except Per Share Amounts) 2002
    
    2003ASSETSCurrent Assets:Cash and equivalents
    
    $
    1,621
    
    
    $
    26Trade receivables, net of allowance for
doubtful accounts of $1,740 and $2,898,
respectively
    
    
    29,161
    
    
    
    34,390Inventories
    
    
    67,381
    
    
    
    61,391Prepaid expenses and other
    
    
    1,860
    
    
    
    3,366Total Current Assets
    
    
    100,023
    
    
    
    99,173Property, Plant and Equipment,at cost:Land
    
    
    4,798
    
    
    
    4,798Leasehold improvements
    
    
    6,517
    
    
    
    6,742Buildings and improvements
    
    
    19,204
    
    
    
    19,120Manufacturing machinery and equipment
    
    
    53,699
    
    
    
    53,852Furniture, computer equipment and software
    
    
    32,056
    
    
    
    33,536Total
    
    
    116,274
    
    
    
    118,048Less accumulated depreciation and amortization
    
    
    (54,368
    )
    
    
    (74,554
    )Net Property, Plant and Equipment
    
    
    61,906
    
    
    
    43,494Intangible and Other Assets:Goodwill
    
    
    6,964
    
    
    
    9,627Identifiable intangible assets, net of
accumulated amortization of $4,004 and
$4,560, respectively
    
    
    1,708
    
    
    
    1,152Debt issuance costs, net
    
    
    1,156
    
    
    
    913Deposits and other
    
    
    459
    
    
    
    287Total Intangible and Other Assets
    
    
    10,287
    
    
    
    11,979$
    172,216
    
    
    $
    154,646
 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, 2002 and 2003
(Dollars in Thousands, Except Per Share Amounts) 2002
    
    2003LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    32,550
    
    
    $
    32,858Outstanding checks in excess of cash balances
    
    
    
    
    
    
    41Accrued compensation and benefits
    
    
    7,268
    
    
    
    7,075Payable for acquisition of business
    
    
    
    
    
    
    2,197Accrued property taxes
    
    
    1,626
    
    
    
    1,285Current portion of accrued exit costs related to facility closures
    
    
    3,341
    
    
    
    900Accrued interest expense
    
    
    87
    
    
    
    250Payable to affiliates
    
    
    295
    
    
    
    207Other accrued liabilities
    
    
    4,484
    
    
    
    4,982Total Current Liabilities
    
    
    49,651
    
    
    
    49,795Long-term Liabilities:Long-term debt
    
    
    10,856
    
    
    
    34,011Accrued exit costs related to facility closures
    
    
    6,980
    
    
    
    117Other
    
    
    718
    
    
    
    774Total Liabilities
    
    
    68,205
    
    
    
    84,697Commitments and Contingencies (Notes 9 and 12)Stockholders Equity:Preferred stock, $.01 par value. Authorized 10,000,000 shares,
none issuedCommon stock, $.01 par value. Authorized 75,000,000 shares; issued
and outstanding 27,409,338 shares
    
    
    274
    
    
    
    274Additional paid-in capital
    
    
    380,175
    
    
    
    380,804Deferred stock compensation
    
    
    (351
    )
    
    
    (754
    )Accumulated deficit
    
    
    (276,087
    )
    
    
    (310,375
    )Total Stockholders Equity
    
    
    104,011
    
    
    
    69,949$
    172,216
    
    
    $
    154,646
 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
(Dollars In Thousands, Except Per Share Amounts) Year Ended December 31,2001
    
    2002
    
    2003Net Sales
    
    $
    574,401
    
    
    $
    370,797
    
    
    $
    313,231Cost of Goods Sold
    
    
    579,123
    
    
    
    398,767
    
    
    
    321,599Gross profit (loss)
    
    
    (4,722
    )
    
    
    (27,970
    )
    
    
    (8,368
    )Operating Costs and Expenses:Selling, general and administrative expenses
    
    
    29,619
    
    
    
    27,234
    
    
    
    22,648Severance, retention, closure and relocation costs
    
    
    228
    
    
    
    169
    
    
    
    124Reorganization transaction costs
    
    
    2,375
    
    
    
    312
    
    
    
    Related party expenses:Acquisition and financing expenses
    
    
    2,500
    
    
    
    
    
    
    
    Management fees
    
    
    1,250
    
    
    
    835
    
    
    
    750Impairment of long-lived assets
    
    
    
    
    
    
    21
    
    
    
    Goodwill amortization
    
    
    2,905
    
    
    
    
    
    
    
    Total operating costs and expenses
    
    
    38,877
    
    
    
    28,571
    
    
    
    23,522Operating loss
    
    
    (43,599
    )
    
    
    (56,541
    )
    
    
    (31,890
    )Other Income (Expense):Interest expense
    
    
    (12,217
    )
    
    
    (2,568
    )
    
    
    (2,696
    )Reduction in interest expense due to settlement of
dispute
    
    
    
    
    
    
    1,029
    
    
    
    Gain (loss) on sale of assets
    
    
    764
    
    
    
    (166
    )
    
    
    50Interest and other income
    
    
    551
    
    
    
    835
    
    
    
    248Loss before income taxes and cumulative
effect of change in accounting principle
    
    
    (54,501
    )
    
    
    (57,411
    )
    
    
    (34,288
    )Income Tax Benefit (Expense)
    
    
    (20
    )
    
    
    276
    
    
    
    Loss before cumulative effect of change in
accounting principle
    
    
    (54,521
    )
    
    
    (57,135
    )
    
    
    (34,288
    )Cumulative Effect of Change in Accounting Principle
    
    
    
    
    
    
    (69,015
    )
    
    
    Net loss
    
    $
    (54,521
    )
    
    $
    (126,150
    )
    
    $
    (34,288
    )Net Loss Applicable to Common Stockholders:Net loss
    
    $
    (54,521
    )
    
    $
    (126,150
    )
    
    $
    (34,288
    )Accrued dividends related to preferred stock
    
    
    (550
    )
    
    
    
    
    
    
    Net loss applicable to common stockholders
    
    $
    (55,071
    )
    
    $
    (126,150
    )
    
    $
    (34,288
    )Loss Per Share Applicable to Common Stockholders
(Basic and Diluted):Loss before cumulative effect of change in
accounting principle
    
    $
    (2.29
    )
    
    $
    (2.08
    )
    
    $
    (1.25
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (2.52
    )
    
    
    Net loss
    
    $
    (2.29
    )
    
    $
    (4.60
    )
    
    $
    (1.25
    )Number of Shares Used for Computation:Basic and diluted
    
    
    24,092,000
    
    
    
    27,409,000
    
    
    
    27,409,000
 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, 2001, 2002 and 2003
(Dollars in Thousands) Preferred Stock
    
    Common Stock
    
    AdditionalPaid-in
    
    Settlement
    
    Deferred Stock
    
    AccumulatedShares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Obligation
    
    Compensation
    
    Deficit
    
    TotalBalances, December 31,
2000
    
    
    14,233
    
    
    $
    14,683
    
    
    
    19,102,728
    
    
    $
    191
    
    
    $
    323,190
    
    
    $
    2,303
    
    
    $
    (280
    )
    
    $
    (95,416
    )
    
    $
    244,671Stock options
exercised
    
    
    
    
    
    
    
    
    
    
    22,775
    
    
    
    
    
    
    
    232
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    232Amortization of
deferred stock
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    75Dividend requirement
    
    
    
    
    
    
    550
    
    
    
    
    
    
    
    
    
    
    
    (550
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of
preferred stock to
common stock
    
    
    (14,233
    )
    
    
    (15,233
    )
    
    
    2,115,749
    
    
    
    21
    
    
    
    15,212
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of
Convertible Notes
to common stock,
net of debt
issuance costs of
$1,635
    
    
    
    
    
    
    
    
    
    
    5,940,837
    
    
    
    60
    
    
    
    59,615
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,675Distribution to
former owner of
K*TEC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,000
    )Common stock
issued in lawsuit
settlement
    
    
    
    
    
    
    
    
    
    
    227,500
    
    
    
    2
    
    
    
    2,301
    
    
    
    (2,303
    )
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (54,521
    )
    
    
    (54,521
    )Balances, December 31,
2001
    
    
    
    
    
    
    
    
    
    
    27,409,589
    
    
    
    274
    
    
    
    380,000
    
    
    
    
    
    
    
    (205
    )
    
    
    (149,937
    )
    
    
    230,132Compensation cost
related to stock
options granted to
employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    233
    
    
    
    
    
    
    
    (233
    )
    
    
    
    
    
    
    Amortization
(write-off) of
deferred stock
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    
    
    
    
    87
    
    
    
    
    
    
    
    31Fractional shares
retired
    
    
    
    
    
    
    
    
    
    
    (251
    )
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (126,150
    )
    
    
    (126,150
    )Balances, December 31,
2002
    
    
    
    
    
    
    
    
    
    
    27,409,338
    
    
    
    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
    
    
    
    
    
    $
    
    
    
    
    27,409,338
    
    
    $
    274
    
    
    $
    380,804
    
    
    $
    
    
    
    $
    (754
    )
    
    $
    (310,375
    )
    
    $
    69,949
 The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements. F-6




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) Year Ended December 31,2001
    
    2002
    
    2003Cash Flows from Operating Activities:Net loss
    
    $
    (54,521
    )
    
    $
    (126,150
    )
    
    $
    (34,288
    )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
    
    
    25,064
    
    
    
    21,987
    
    
    
    22,133Amortization of debt issuance costs
    
    
    3,755
    
    
    
    995
    
    
    
    954Impairment of property, plant and equipment
    
    
    1,329
    
    
    
    2,791
    
    
    
    40Change in accrued severance, retention and lease exit costs
    
    
    (2,595
    )
    
    
    8,483
    
    
    
    (9,767
    )Deferred income tax expense
    
    
    1,979
    
    
    
    
    
    
    
    Interest on exchangeable and convertible notes
    
    
    2,217
    
    
    
    
    
    
    
    Reduction of interest expense due to settlement
    
    
    
    
    
    
    (1,029
    )
    
    
    Loss (gain) on sale of assets
    
    
    (767
    )
    
    
    166
    
    
    
    (50
    )Stock-based compensation and services expense
    
    
    75
    
    
    
    31
    
    
    
    226Changes in operating assets and liabilities, net of effects of
purchase of businesses:Decrease (increase) in:Trade receivables
    
    
    83,052
    
    
    
    5,017
    
    
    
    (3,617
    )Inventories
    
    
    95,035
    
    
    
    42,942
    
    
    
    7,086Prepaid expenses and other
    
    
    627
    
    
    
    383
    
    
    
    (1,334
    )Increase (decrease) in:Accounts payable
    
    
    (64,805
    )
    
    
    1,457
    
    
    
    (855
    )Accrued compensation and benefits
    
    
    (1,776
    )
    
    
    (1,834
    )
    
    
    (197
    )Other accrued liabilities
    
    
    (13,126
    )
    
    
    (1,475
    )
    
    
    (99
    )Net cash provided (used) by operating activities
    
    
    75,543
    
    
    
    22,779
    
    
    
    (19,768
    )Cash Flows from Investing Activities:Proceeds from sale of assets, net of cash transferred
    
    
    1,505
    
    
    
    115
    
    
    
    23Cash acquired as part of business acquisition
    
    
    
    
    
    
    
    
    
    
    301Payments for acquisition of businesses
    
    
    
    
    
    
    (5,523
    )
    
    
    (205
    )Capital expenditures
    
    
    (18,277
    )
    
    
    (2,371
    )
    
    
    (2,924
    )Net cash used by investing activities
    
    
    (16,772
    )
    
    
    (7,779
    )
    
    
    (2,805
    )Cash Flows from Financing Activities:Proceeds from long-term debt
    
    
    628,506
    
    
    
    318,592
    
    
    
    333,382Principal payments on long-term debt
    
    
    (678,437
    )
    
    
    (344,896
    )
    
    
    (311,817
    )Payments for debt issuance costs
    
    
    (4,492
    )
    
    
    (347
    )
    
    
    (628
    )Increase (decrease) in outstanding checks in excess of cash balances
    
    
    (4,571
    )
    
    
    (900
    )
    
    
    41Proceeds from exercise of stock options and warrants
    
    
    232
    
    
    
    
    
    
    
    Distribution to former owner of K*TEC
    
    
    (20,000
    )
    
    
    
    
    
    
    Net cash provided (used) by financing activities
    
    
    (78,762
    )
    
    
    (27,551
    )
    
    
    20,978Net decrease in cash and equivalents
    
    
    (19,991
    )
    
    
    (12,551
    )
    
    
    (1,595
    )Cash and Equivalents:Beginning of year
    
    
    34,163
    
    
    
    14,172
    
    
    
    1,621End of year
    
    $
    14,172
    
    
    $
    1,621
    
    
    $
    26
 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
(Dollars in Thousands) Year Ended December 31,2001
    
    2002
    
    2003Supplemental Disclosure of Cash Flow Information:Cash paid for interest
    
    $
    5,924
    
    
    $
    2,175
    
    
    $
    1,579Cash received (paid) for income taxes
    
    $
    (221
    )
    
    $
    220
    
    
    $
    Supplemental Schedule of Non-cash Investing and
Financing Activities:Payable for acquisition of business
    
    $
    
    
    
    $
    
    
    
    $
    2,197Assumption of bank debt for acquisition of business
    
    $
    
    
    
    $
    
    
    
    $
    1,156Reduction of goodwill and note payable to Former
Parent due to settlement of dispute
    
    $
    
    
    
    $
    6,860
    
    
    $
    Issuance of 5,940,837 shares of common stock as a
result of conversion of Convertible Notes
    
    $
    61,310
    
    
    $
    
    
    
    $
    Issuance of 2,115,749 shares of common stock as a
result of conversion of Convertible Preferred
Stock
    
    $
    15,233
    
    
    $
    
    
    
    $
    Issuance of shares of common stock in connection
with lawsuit settlement
    
    $
    2,303
    
    
    $
    
    
    
    $
    
 The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements. F-8




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) 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 2 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 2. All material intercompany
balances and transactions have been eliminated in consolidation. The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the 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, determination of
impairment of long-lived assets, and the selection of estimated useful lives of
intangible assets and property, plant and equipment. Fiscal Year.The Companys fiscal quarters end on the Sunday closest to the
end of each calendar quarter, except for the fourth quarter which ends on
December 31st. Nature of Business.The Company is a provider of vertically integrated
electronics manufacturing solutions supplying high-mix services that target the
aerospace and defense, semiconductor capital equipment, industrial controls,
instrumentation, medical, networking, and telecommunications industries. The
Companys manufacturing services include printed circuit card assembly, cable
and harness production, plastic injection molding, sheet metal, 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 substantially all of its operations are 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 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 F-9




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) 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, 2002 and 2003. 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, 2001, 2002 and 2003, the Company
recognized depreciation and amortization expense of $21,315, $21,312 and
$21,577, 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
 Under Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets, which was adopted on
January 1, 2002, 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
(Dollars in Thousands, Except Per Share Amounts) Under Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible
Assets, which was
adopted on January 1, 2002, at least annually management reviews the carrying
value of acquired intangible assets that are being amortized to determine
whether impairment may exist. 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 being amortized can be recovered. If the Company determines
that the carrying value of intangible assets will not be recovered from the
undiscounted future cash flows of the acquired business, the Company considers
the carrying value of such intangible assets as impaired and reduces them by a
charge to operations in the amount of the impairment. An impairment charge is
measured as any deficiency in the amount of estimated undiscounted future cash
flows of the acquired business available to recover the carrying value related
to the intangible assets that are being amortized. Debt Issuance Costs.Debt issuance costs are being amortized over the
term of the related debt using the effective interest method. Goodwill. Through 2001, goodwill was amortized using the straight-line
method over 30 years. As discussed in Note 3, effective January 1, 2002 the
Company adopted Statement of Financial Accounting Standards No. 142 and ceased
amortizing goodwill. Instead of amortizing goodwill, Statement 142 requires 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.
Goodwill is tested for impairment at least annually. Impairment of Long-Lived Assets Prior to 2002.Before the adoption of
Statements 142 and 144, the Company assessed impairment whenever events or
changes in circumstances indicated that the carrying amount of a long-lived
asset, including goodwill and other identifiable intangible assets, may not be
recoverable. Assets held for sale were stated at the lower of the carrying
value or fair value (net of costs to sell). Recoverability of assets to be held
and used was measured by a comparison of the carrying amount of an asset to the
undiscounted future net cash flows, excluding interest expense, expected to be
generated by the asset. If such assets were considered to be impaired, the
impairment to be recognized was measured as the amount by which the carrying
amount of the asset exceeded its fair value. For purposes of evaluating
impairment of goodwill, management considered historical results and current
projections in estimating the future undiscounted cash flows of the business to
which the goodwill related. For purposes of determining the fair value of
impaired assets that were held and used, the projected cash flows were
discounted at a rate corresponding to the Companys estimated cost of capital. Revenue Recognition. The Company recognizes revenue from the sale of
products when the earnings process is considered complete and all of the
following criteria are satisfied: (i) pervasive evidence of an arrangement
exists, (ii) the selling price is fixed and determinable, (iii) the product has
been shipped, (iv) title has transferred to the customer, and (v) collection of
the selling price is considered probable. 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. The Company is generally not contractually obligated to accept returns,
except for defective products. Based upon historical experience the liability
for warranty claims has not been significant. Revenue is recorded net of
customer discounts taken or expected to be taken. F-11




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars 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 earnings (loss) per share (EPS) for the
years ended December 31, 2001, 2002 and 2003, would have been as follows: 2001
    
    2002
    
    2003Net Loss
    
    EPS
    
    Net Loss
    
    EPS
    
    Net Loss
    
    EPSAmounts reported
    
    $
    (54,521
    )
    
    $
    (2.29
    )
    
    $
    (126,150
    )
    
    $
    (4.60
    )
    
    $
    (34,288
    )
    
    $
    (1.25
    )Add stock-based employee
compensation recorded
under the intrinsic value
method
    
    
    75
    
    
    
    
    
    
    
    87
    
    
    
    
    
    
    
    196Less stock-based employee
compensation under the
fair value method
    
    
    (3,487
    )
    
    
    
    
    
    
    (2,574
    )
    
    
    
    
    
    
    (3,274
    )Pro forma under fair
value method
    
    $
    (57,933
    )
    
    $
    (2.43
    )
    
    $
    (128,637
    )
    
    $
    (4.69
    )
    
    $
    (37,366
    )
    
    $
    (1.36
    )
 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. F-12




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) Earnings Per Share. Basic earnings per share excludes dilution for potential
common shares and is computed by dividing net income or loss applicable to
common stockholders by the weighted average number of common shares outstanding
for the period. For the computation of basic earnings per share, accrued
dividends on preferred stock are deducted to arrive at net income or loss
applicable to common stockholders. 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 share are the same for the years ended December 31, 2001, 2002 and
2003, as all potential common shares were antidilutive. As of December 31,
2001, 2002 and 2003, common stock options and warrants that were excluded from
the calculation of earnings per share amounted to an aggregate of 1,960,000,
2,292,000 and 2,361,000 shares, respectively. For purposes of the weighted average share calculations, beginning on
August 31, 2000, 325,000 shares required to be issued in a lawsuit settlement
were treated as issued and outstanding. New Accounting Standards. In July 2002, the FASB issued Statement No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. This standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by this standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. Previous accounting guidance was provided by EITF Issue No.
94-3,Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). Statement 146 replaces Issue 94-3. The Company has applied
Statement 146 in accounting for all exit or disposal activities initiated after
December 31, 2002. During 2003, the Company recognized restructuring costs
(including severance, retention, lease exit costs, moving and relocation) under
Statement 146 of approximately $1,496, primarily due to consolidation of
manufacturing operations in Phoenix. During 2003, the Company also recognized
lease exit costs of $39 and a lease termination credit of $4,710 related to the
reversal of an accrual for exit and disposal activities that were initiated
prior to the adoption of Statement 146. The adoption of Statement 146 resulted
in a delay until the first quarter of 2004 in the recognition of lease exit
costs of approximately $400. Under Issue 94-3, these costs would have been
recognized in 2003. In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides
guidance on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into
in fiscal periods beginning after June 15, 2003. The provisions of EITF Issue
No. 00-21 did not have a material effect on the Companys consolidated
financial statements. On December 17, 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104 (SAB 104) Revenue Recognition, which updates
previous guidance contained in SAB 101, Revenue Recognition in Financial
Statements. SAB 104 provides additional clarification of the SEC Staffs
interpretation of EITF Issue No. 00-21 with respect to bill and hold
transactions, undelivered elements of a sale that are both inconsequential or
perfunctory and not essential to functionality, and the accounting for
nonrefundable upfront fees. The adoption of SAB 104 did not have a material
impact on the Companys consolidated financial statements. F-13




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) 2. 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 electronic manufacturing services 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. A special committee
comprised of EFTCs independent directors negotiated the terms of the Merger
Agreement on behalf of the minority stockholders of EFTC. On February 28, 2002,
EFTCs stockholders voted in favor of the business combination and the closing
occurred on that date. In connection with the signing of the Merger Agreement, EFTC entered into
a stockholder agreement, as amended (the Stockholder Agreement), with TBF,
TBF II and Suntron that required TBF to convert the Senior Subordinated
Convertible Notes and the Series B Preferred Stock discussed in Note 8, into
EFTC common stock on or before May 31, 2001. These conversions resulted in the
issuance of an aggregate of 8,056,586 additional shares of common stock to TBF. 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 accompanying
financial statements have been restated to 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 electronics manufacturing services
(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, which was paid
in cash through borrowings under the Companys revolving line of credit with
Citibank. Midwesterns results of operations have been included in the
consolidated financial statements since the date of acquisition. The following table presents the allocation of the acquisition cost to the
assets acquired and liabilities assumed, based on their fair values: F-14




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) 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 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. The initial purchase consideration was $855, which consisted of the assumption
and immediate repayment of $1,156 of Trilogics bank debt, offset by cash
acquired of $301. The net purchase consideration was funded through borrowings
under the Companys revolving line of credit with Citibank. Trilogics results
of operations have been included in the consolidated financial statements since
the date of acquisition. The purchase agreement provides 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, the Company recorded a payable of $2,197 as of December 31, 2003. The allocation of the acquisition cost resulted in goodwill of $2,649. 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 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
    
    
    57Goodwill
    
    
    2,649Bank debt assumed
    
    
    (1,156
    )Accounts payable assumed
    
    
    (2,022
    )Accrued liabilities assumed
    
    
    (340
    )Net assets acquired
    
    $
    2,197
 In July 2003, the Company purchased certain design and engineering assets
from an entity affiliated with Trilogic. The purchase price was $205, of which
$191 was allocated to software and equipment and $14 was allocated to goodwill. F-15




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) 3. Intangible Assets Goodwill.In July 2001, the Financial Accounting Standards Board issued
Statement No. 141, Business Combinations and Statement No. 142, Goodwill and
Other Intangible Assets. Statement No. 141 requires that the purchase method of
accounting be used for business combinations initiated after June 30, 2001,
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 on January 1, 2002 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 that was computed as
follows: Net carrying value of K*TEC goodwill, December 31, 2001
    
    $
    75,875Less effect of settlement of dispute discussed in Note 3
    
    
    (6,860
    )Impairment loss
    
    $
    69,015
 This impairment loss was recorded as the cumulative effect of a change in
accounting principle in the accompanying Consolidated Statement of Operations.
The following table presents reported net loss and loss per share exclusive of
goodwill amortization for the year ended December 31, 2001: Reported net loss
    
    $
    (54,521
    )Add back goodwill amortization
    
    
    2,905Adjusted net loss
    
    $
    (51,616
    )Basic and Diluted Loss Per Share:Reported net loss per common share
    
    $
    (2.29
    )Add back goodwill amortization
    
    
    0.12Adjusted net loss
    
    $
    (2.17
    )
 F-16




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) The changes in the carrying amount of goodwill for the years ended December 31,
2002 and 2003 are as follows: Reporting UnitNorthwest
    
    K*TEC
    
    Midwestern
    
    Trilogic
    
    TotalBalance, December 31, 2001
    
    $
    6,729
    
    
    $
    75,875
    
    
    $
    
    
    
    $
    
    
    
    $
    82,604Impact of dispute settlement
    
    
    
    
    
    
    (6,860
    )
    
    
    
    
    
    
    
    
    
    
    (6,860
    )Impairment loss
    
    
    
    
    
    
    (69,015
    )
    
    
    
    
    
    
    
    
    
    
    (69,015
    )Goodwill acquired during year
    
    
    
    
    
    
    
    
    
    
    235
    
    
    
    
    
    
    
    235Balance, December 31, 2002
    
    
    6,729
    
    
    
    
    
    
    
    235
    
    
    
    
    
    
    
    6,964Goodwill acquired during year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,663
    
    
    
    2,663Balance, December 31, 2003
    
    $
    6,729
    
    
    $
    
    
    
    $
    235
    
    
    $
    2,663
    
    
    $
    9,627
 Identifiable Intangible Assets.Identifiable intangible assets consist of the
following at December 31, 2002 and 2003: December 31, 2002
    
    December 31, 2003Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedCost
    
    Amortization
    
    Net
    
    Cost
    
    Amortization
    
    NetIntellectual property
    
    $
    4,662
    
    
    $
    3,207
    
    
    $
    1,455
    
    
    $
    4,662
    
    
    $
    3,510
    
    
    $
    1,152Customer agreement
    
    
    800
    
    
    
    547
    
    
    
    253
    
    
    
    800
    
    
    
    800
    
    
    
    Covenant not to
compete
    
    
    200
    
    
    
    200
    
    
    
    
    
    
    
    200
    
    
    
    200
    
    
    
    Other
    
    
    50
    
    
    
    50
    
    
    
    
    
    
    
    50
    
    
    
    50
    
    
    
    $
    5,712
    
    
    $
    4,004
    
    
    $
    1,708
    
    
    $
    5,712
    
    
    $
    4,560
    
    
    $
    1,152
 For the years ended December 31, 2001, 2002 and 2003, the Company recognized
amortization expense related to identifiable intangible assets of $844, $675
and $556, respectively. Estimated amortization expense for identifiable
intangible assets shown above for the years ending December 31, 2004, 2005,
2006, 2007 and 2008 amounts to approximately $277, $200, $200, $200 and $200,
respectively. 4. Inventories Inventories are summarized as follows: December 31,2002
    
    2003Purchased parts and completed sub-assemblies
    
    $
    47,686
    
    
    $
    43,113Work-in-process
    
    
    6,967
    
    
    
    10,044Finished goods
    
    
    12,728
    
    
    
    8,234Total
    
    $
    67,381
    
    
    $
    61,391
 For the years ended December 31, 2001, 2002 and 2003, the Company recognized
write-downs of excess and obsolete inventories resulting in charges of $14,502,
$5,427 and $3,321, respectively. F-17




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) 5. Debt Financing Long-term debt at December 31, 2002 and 2003 consists of the following: 2002
    
    2003Revolving line of credit payable to Citibank,
N.A., interest at variable rates (weighted
average rate of 5.1% at December 31, 2002 and
5.3% at December 31, 2003), collateralized by
substantially all assets, due April 2005
    
    $
    10,856
    
    
    $
    34,011
 Revolving Line of Credit.On February 28, 2002, the combination of EFTC
and K*TEC was completed, and EFTC and K*TEC became wholly owned subsidiaries of
Suntron. The credit facility with Citibank provides for a $75,000 revolving
line of credit. During 2002, the interest rate was the prime rate plus 2.00%
(6.25% at December 31, 2002) for Base Rate borrowings and the LIBOR rate plus
3.25% (weighted average rate of 4.7% at December 31, 2002) for LIBOR Rate
borrowings. The Company can periodically elect to use either the base rate or
LIBOR rate in connection with borrowings under the 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. Total borrowings are subject to limitation based on a percentage of eligible
accounts receivable, inventories, real estate, and equipment. Substantially all
of the Companys assets are pledged as collateral for outstanding borrowings.
The credit agreement requires compliance with certain financial and
non-financial covenants, including quarterly requirements related to tangible
net worth; earnings before interest, taxes, depreciation and amortization
(EBITDA); and limitations on the amount of capital expenditures. The credit
agreement also limits or prohibits the Company from paying dividends, incurring
additional debt, selling significant assets, or merging with other entities
without the consent of the lenders. As of December 31, 2003, the borrowing base
calculation permitted total borrowings of approximately $47,989. After
deducting outstanding letters of credit for $2,173 and the outstanding
principal balance of $34,011, the Company had net borrowing availability of
$11,805. On April 11, 2003, the Company and Citibank agreed to an amendment that
resulted in an increase of 0.5% from the interest rates that were in effect
during 2002, the calculation of the borrowing base was revised, and the
maturity date was extended until April 2005. At December 31, 2003, the
effective rate for Base Rate borrowings was 6.50% and the weighted average
rate in effect for LIBOR Rate borrowings was 4.9%. During the first quarter
of 2003, the Company also completed updated inventory and equipment appraisals
for purposes of determining the borrowing base. Interest Charge Resulting From 2001 Amendment.In connection with an amendment
to the credit agreement in November 2001, the borrowing commitment was reduced
and the maturity date was accelerated. Accordingly, the Company applied the
provisions of Emerging Issues Task Force Issue No. 98-14, Debtors Accounting
for Changes in Line-of-Credit or Revolving-Debt Arrangements to the
unamortized debt issuance costs related to this credit facility, which resulted
in additional amortization of $2,586. This amount is included in interest
expense in the accompanying consolidated statement of operations for the year
ended December 31, 2001. F-18




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) Operating Losses and Bank Covenant Violations.During 2003, the Company
incurred a net loss of $34,288. The Company also incurred net losses of $54,521
in 2001 and $126,150 (including $69,015 for the cumulative effect of a change
in accounting for goodwill) in 2002. 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 the future. Despite numerous and extensive actions that were taken
in 2002, the economic downturn has had a severe impact on several industries
that the Companys major customers are engaged in, resulting in a reduction in
net sales from $574,401 in 2001 to $370,797 in 2002 to $313,231 in 2003. As a result of the substantial net losses in the past three years, the Company
would have violated 2002 year-end restrictive covenants for EBITDA and tangible
net worth as defined in the credit agreement with Citibank. On March 31, 2003,
Citibank agreed to a permanent waiver of the 2002 year-end covenant violations,
as well as expected violations of the same covenants for the first quarter of
2003. In addition, the credit agreement was amended on April 11, 2003 to
provide financial covenants that are less restrictive whereby the Company has
complied with the revised covenants since the amendment. Management believes the Companys borrowing availability under the amended
credit agreement with Citibank will be sufficient to carry out planned
activities for 2004. However, in order to maintain the availability of this
credit facility, it is critical that the Company achieves its 2004 operating
plan to avoid any further covenant violations that could result in the
termination of the credit facility. If the credit facility is withdrawn, the
Company would be forced to consider alternative sources of financing and there
is no assurance that such financing would be available. 6. Income Taxes Actual income tax expense for the years ended December 31, 2001, 2002 and
2003 differs from the amounts computed using the federal statutory tax rate of
34%, as follows: 2001
    
    2002
    
    2003Income tax benefit (expense) at the statutory rate
    
    $
    18,531
    
    
    $
    42,891
    
    
    $
    11,658Benefit (expense) resulting from:State income taxes
    
    
    (485
    )
    
    
    
    
    
    
    Amortization of non-deductible goodwill
    
    
    (115
    )
    
    
    
    
    
    
    Change in law related to alternative minimum tax
    
    
    
    
    
    
    250
    
    
    
    Decrease (increase) in Federal valuation allowance
    
    
    (17,829
    )
    
    
    (43,114
    )
    
    
    (11,547
    )Other, net
    
    
    (122
    )
    
    
    249
    
    
    
    (111
    )Income tax benefit (expense)
    
    $
    (20
    )
    
    $
    276
    
    
    $
    
 F-19




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) Income tax benefit (expense) for the years ended December 31, 2001, 2002
and 2003, is comprised of the following: 2001
    
    2002
    
    2003Current:Federal
    
    $
    1,732
    
    
    $
    257
    
    
    $
    State
    
    
    227
    
    
    
    19
    
    
    
    Total current
    
    
    1,959
    
    
    
    276
    
    
    
    Deferred:Federal
    
    
    (1,730
    )
    
    
    
    
    
    
    State
    
    
    (249
    )
    
    
    
    
    
    
    Total deferred
    
    
    (1,979
    )
    
    
    
    
    
    
    Income tax benefit (expense)
    
    $
    (20
    )
    
    $
    276
    
    
    $
    
 At December 31, 2001, 2002 and 2003, the tax effects of temporary differences
that give rise to significant deferred tax assets and liabilities are presented
below: 2001
    
    2002
    
    2003Deferred tax assets:Federal net operating loss carryforwards
    
    $
    37,865
    
    
    $
    50,562
    
    
    $
    72,576State net operating loss carryforwards
    
    
    6,995
    
    
    
    8,701
    
    
    
    10,749Inventories
    
    
    14,948
    
    
    
    10,779
    
    
    
    9,818Intangible assets
    
    
    4,184
    
    
    
    33,859
    
    
    
    31,818Allowance for doubtful accounts receivable
    
    
    1,642
    
    
    
    978
    
    
    
    1,130Accrued compensation, benefits, severance
and lease exit costs
    
    
    1,519
    
    
    
    6,123
    
    
    
    1,913Property, plant and
equipment
    
    
    350
    
    
    
    1,733
    
    
    
    1,946Other
    
    
    3,018
    
    
    
    2,201
    
    
    
    386Total deferred tax assets
    
    
    70,521
    
    
    
    114,936
    
    
    
    130,336Less valuation allowance
    
    
    (66,824
    )
    
    
    (113,764
    )
    
    
    (130,336
    )Net deferred tax assets
    
    $
    3,697
    
    
    $
    1,172
    
    
    $
    Deferred tax liabilities:Accelerated depreciation and other basis
differences for property, plant and
equipment
    
    $
    (2,249
    )
    
    $
    (1,172
    )
    
    $
    Amortization of intangible assets
    
    
    (1,448
    )
    
    
    
    
    
    
    Total deferred tax liabilities
    
    $
    (3,697
    )
    
    $
    (1,172
    )
    
    $
    
 At December 31, 2003, the Company has a net operating loss carryforward
(NOL) for Federal income tax purposes of approximately $213,000. If not
previously utilized, this NOL will expire in 2019 through 2023. At December 31,
2003, approximately $43,000 of this NOL is 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 $170,000 NOL can be
utilized to offset future taxable income that may be generated in the Companys
continuing business activities. F-20




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) 7. Stock-based Compensation Stock Options.In June 2002, shareholders approved the Amended and
Restated 2002 Stock Option Plan (the Plan), which provides that options for
5,000,000 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 2. At December 31, 2003, approximately
2,639,000 shares were available for grant under the Plan. The following summarizes activity related to all stock options granted
under the Plan and the Predecessor Plans for the years ended December 31, 2000,
2001 and 2002: Weighted AverageShares
    
    Exercise PriceOutstanding, December 31, 2000
    
    
    1,088,936
    
    
    $
    15.12Granted
    
    
    863,678
    
    
    
    14.29Exercised
    
    
    (22,775
    )
    
    
    10.36Canceled
    
    
    (122,955
    )
    
    
    16.97Outstanding, December 31, 2001
    
    
    1,806,884
    
    
    
    14.67Granted
    
    
    808,750
    
    
    
    8.49Canceled
    
    
    (477,126
    )
    
    
    15.93Outstanding, December 31, 2002
    
    
    2,138,508
    
    
    
    12.04Granted
    
    
    437,021
    
    
    
    3.15Canceled
    
    
    (214,424
    )
    
    
    13.25Outstanding, December 31, 2003
    
    
    2,361,105
    
    
    
    10.28
 The following table summarizes information about stock options outstanding at
December 31, 2003: Stock Options OutstandingExercise Prices
    
    Remaining
    
    
    
    
    
    Stock Options ExercisableRange
    
    Weighted
    
    Contractual Life
    
    Number of
    
    Weighted Average
    
    Number ofLow
    
    High
    
    Average
    
    (Years)
    
    Shares
    
    Exercise Price
    
    Shares$0.01
    
    $
    0.01
    
    
    $
    0.01
    
    
    
    10.0
    
    
    
    138,600
    
    
    $
    
    
    
    
    2.83
    
    
    3.74
    
    
    
    3.71
    
    
    
    8.9
    
    
    
    245,828
    
    
    
    3.67
    
    
    
    64,8124.30
    
    
    4.40
    
    
    
    4.40
    
    
    
    9.9
    
    
    
    272,588
    
    
    
    
    
    
    
    7.36
    
    
    11.00
    
    
    
    10.52
    
    
    
    7.5
    
    
    
    1,092,250
    
    
    
    10.52
    
    
    
    484,09211.40
    
    
    16.00
    
    
    
    14.89
    
    
    
    6.9
    
    
    
    490,610
    
    
    
    14.70
    
    
    
    261,70217.24
    
    
    57.24
    
    
    
    27.82
    
    
    
    4.8
    
    
    
    121,229
    
    
    
    27.82
    
    
    
    121,2290.01
    
    
    57.24
    
    
    
    10.28
    
    
    
    7.8
    
    
    
    2,361,105
    
    
    
    13.47
    
    
    
    931,835
 The Company uses the intrinsic value method to account for stock-based
compensation. During 2002, the Company granted 250,000 options with an
intrinsic value of $233 on the measurement date. During 2003, F-21




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) the Company granted 138,600 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. In June 2002, option holders were given the opportunity to exchange certain
options for an aggregate of 476,285 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 will 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 $75,
$31 and $196 for the years ended December 31, 2001, 2002 and 2003,
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 12,116 shares and
the Company recognized a compensation charge of $30. The weighted average fair value of options granted for the years ended
December 31, 2001, 2002 and 2003 was $10.44, $5.06 and $3.83, 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 31,2001
    
    2002
    
    2003Dividend yield
    
    
    
    
    
    
    
    
    
    
    Expected volatility
    
    
    94.7
    %
    
    
    110.5
    %
    
    
    122.5
    %Risk-free interest rate
    
    
    4.8
    %
    
    
    4.1
    %
    
    
    2.9
    %Expected lives (years)
    
    
    5.3
    
    
    
    5.1
    
    
    
    4.3
 8. Recapitalization On March 30, 2000, EFTC completed the first stage of a recapitalization
transaction with Thayer-Blum Funding, L.L.C. (Thayer-Blum Funding), an entity
formed by affiliates of Thayer Capital Partners (Thayer) and Blum Capital
Partners (Blum). The first stage of the recapitalization involved the
issuance of a total of $54,000 in Senior Subordinated Exchangeable Notes (the
March Exchangeable Notes), which was closed on March 30, 2000. On July 14,
2000, EFTC issued an additional $14,000 of Senior Subordinated Exchangeable
Notes (the July Exchangeable Notes) to Thayer-Blum Funding in the second
stage of the transaction. Upon receipt of EFTC stockholders approval on August
23, 2000, the March and July Exchangeable Notes were exchanged for the Senior
Subordinated Convertible Notes (the Convertible Notes) and Series B
Convertible Preferred Stock (the Series B Preferred Stock), respectively. The
recapitalization also involved a tender offer by Thayer-Blum Funding that was
completed on August 23, 2000 for 1,406,250 shares of the Companys outstanding
common stock at a price of $16.00 per share. The Convertible Notes provided for interest at 8.875%, payable in kind, and
were convertible into the Companys common stock at $10.32 per share, subject
to adjustment. The Series B Preferred Stock accrued dividends, compounded
quarterly, at 8.875% per annum on the liquidation preference, which was $1,000
per share plus accrued and unpaid dividends. Each share of Series B Preferred
Stock was convertible into common stock at a conversion price of $7.20 per
share, subject to adjustment. As described in Note 2, in F-22




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) May 2001 the outstanding principal and accrued interest related to the
Convertible Notes was converted into 5,940,837 shares of common stock, and the
Series B Convertible Preferred Stock was converted into 2,115,749 shares of
common stock, for total conversions into 8,056,586 shares of common stock. 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. Inventory purchases.For the years ended December 31, 2001, 2002 and
2003, the Company purchased inventories from an affiliate of the Companys
majority shareholder for $241, $59 and $481, respectively. Consulting and Employment Agreements.The Company has entered into employment
agreements with two executive officers that provides for aggregate monthly
payments of $50. These employment agreements expired in December 2003. Certain
provisions of these agreements 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 $520. During 2002, a director of the Company provided
consulting services for $15. Management Fees.During 2001, 2002 and 2003, the Company incurred
management fees of $1,250, $835 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. Acquisition and Financing Fees.During 2001, the Company incurred
acquisition and financing fees of $2,500 for services provided by affiliates of
the Companys majority stockholder. Distribution.In April 2001, K*TEC paid a dividend of $20,000 to its sole
owner. 10. Sale of Assets, Facility Closures, Recapitalization and Relocation
Activities The Company periodically takes actions to increase capacity utilization
through the closure of facilities and the sale of assets. During 2001, the
Company initiated actions to complete the business combination discussed in
Note 2 and which was accounted for as a reorganization of entities under common
control. F-23




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) The results of operations related to these activities for the years ended
December 31, 2001, 2002 and 2003 are summarized as follows: 2001
    
    2002
    
    2003Cost of goods sold:Impairment of manufacturing assets
    
    $
    1,329
    
    
    $
    2,770
    
    
    $
    40Severance and retention costs
    
    
    1,366
    
    
    
    565
    
    
    
    803Lease exit costs
    
    
    116
    
    
    
    10,093
    
    
    
    462Moving and relocation costs
    
    
    
    
    
    
    131
    
    
    
    150Accelerated depreciation of leasehold
improvements
    
    
    
    
    
    
    
    
    
    
    1,257Reversal of previously accrued lease
exit cost upon termination of lease
    
    
    
    
    
    
    
    
    
    
    (4,710
    )2,811
    
    
    
    13,559
    
    
    
    (1,998
    )Selling, general and administrative:Severance, retention and relocation costs
    
    
    228
    
    
    
    169
    
    
    
    124Impairment of long-lived assets
    
    
    
    
    
    
    21
    
    
    
    Reorganization transaction costs
    
    
    2,375
    
    
    
    312
    
    
    
    Total Expense (Benefit)
    
    $
    5,414
    
    
    $
    14,061
    
    
    $
    (1,874
    )Gain on sale of Services business
    
    $
    574
    
    
    $
    
    
    
    $
    
 Presented below is a description of the reorganization costs, significant asset
sales, impairments, facility closures, restructuring and relocation activities: Reorganization Transaction Costs.In connection with the business
combination discussed in Note 2, the Company incurred $2,375 and $312 during
2001 and 2002, respectively. These costs include fees related to a fairness
opinion and professional fees related to the preparation of a proxy statement
for the merger. Since this merger was accounted for as a reorganization of
entities under common control, these costs were charged to operations in the
period in which they were incurred. Sale of Services Division.In September 1999, the Company sold substantially
all of the assets of its Services Division subject to an Earn-out Contingency
(the EC). Under the EC, if the earnings related to the division sold for the
year ended August 31, 2000 exceeded $4,455 (Target Earnings), the Company was
entitled to an additional payment equal to three times the difference between
the actual earnings and Target Earnings. In the fourth quarter of 2000, the
Company notified the purchaser that the Company disputed the calculation of the
EC. In April 2001, the Company entered into a settlement agreement with respect
to the EC and received a final payment of $574, which is included in the gain
on sale of assets in 2001. 2001 Impairment of Long-lived Assets.During 2001, the Company recognized
impairment of $1,329, which is included in cost of good sold since the assets
were previously used in manufacturing operations. This charge consisted of $305
for materials management software that was expected to be abandoned, $308 for
equipment that would not be used upon relocation to a new facility in the
Northeast, $326 for intellectual property that was impaired due to termination
of a customer relationship, and $390 for other assets no longer used in the
Companys business. F-24




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) 2001 Reductions in Force.During 2001, the Company incurred charges of $1,583
for severance and retention costs ($217 included in selling, general and
administrative expenses and $1,366 included in cost of goods sold) related to
approximately 800 employees. All of these amounts were paid in 2001 except for
$22. These severance costs related to the Dallas plant closure and other
reductions in force that occurred in 2001. 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 values of some of the underlying
assets exceeded their fair values. Consequently, the Company recorded an
impairment charge of $2,791 (including $2,770 charged to 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 that is held for sale at December 31, 2003, and
$1,397 for equipment that is no longer being used, and $100 related to
equipment that is continuing to be used in operations. The fair value of
impaired assets that is 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. During 2002, the Company incurred charges of $674 for severance costs ($109
included in selling, general and administrative expenses and $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 accompanying
consolidated statement of operations for the year ended December 31, 2003. 2003 Plant Consolidations. In June 2003, the Company initiated actions to
consolidate its Phoenix operations 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 will continue to be used in the business. 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 initial phase of the consolidation of manufacturing
operations in Phoenix. Management expects that further lease exit charges
related to the Phoenix consolidation of approximately $400 will be incurred
when the Company ceases use of additional leased space, which is expected to
occur in the first quarter of 2004. F-25




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) During 2003, the Company incurred charges of $917 for severance costs ($124
included in selling, general and administrative expenses and $793 included in
cost of goods sold) related to approximately 360 employees, of which $862 was
paid in 2003. These severance costs related to the Phoenix consolidation and
other reductions in force that occurred in 2003. 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, 2001
    
    $
    1,900
    
    
    $
    22Accrued expense for restructuring activities
    
    
    9,686
    
    
    
    674Cash receipts under subleases
    
    
    457
    
    
    
    Cash payments
    
    
    (2,189
    )
    
    
    (635
    )Expense due to change in previous estimates
    
    
    467
    
    
    
    Balance, December 31, 2002
    
    
    10,321
    
    
    
    61Accrued expense for restructuring activities
    
    
    423
    
    
    
    1,079Cash receipts under subleases
    
    
    409
    
    
    
    Cash payments
    
    
    (5,876
    )
    
    
    (1,085
    )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
    
    
    $
    55
 Accrued lease exit costs are expected to be paid through July 2007. As
shown in the accompanying consolidated balance sheet as of December 31, 2003,
$900 of this obligation is included in current liabilities and $117 is included
in long-term liabilities. 11. Business and Credit Concentrations The Company operates in the electronic manufacturing services segment of
the electronics industry. Substantially all of the Companys customers are
located in the United States. For the years ended December 31, 2001, 2002 and
2003, the Companys net sales were derived from companies engaged in the
following industries: Semiconductor
    
    Networking &Year
    
    Aerospace
    
    Capital Equipment
    
    Telecommunications2001
    
    
    51
    %
    
    
    17
    %
    
    
    21
    %2002
    
    
    42
    %
    
    
    25
    %
    
    
    18
    %2003
    
    
    33
    %
    
    
    24
    %
    
    
    15
    %
 Sales to significant customers as a percentage of net sales for the years
ended December 31, 2001, 2002 and 2003, were as follows: F-26




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) Honeywell
    
    Applied
    
    EmulexYear
    
    International, Inc.
    
    Materials, Inc.
    
    Corporation2001
    
    
    50
    %
    
    
    15
    %
    
    
    11
    %2002
    
    
    42
    %
    
    
    22
    %
    
    
    9
    %2003
    
    
    29
    %
    
    
    18
    %
    
    
    4
    %
 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. At December 31, 2002 and 2003, approximately 20% and 13%, respectively, of the
Companys net trade receivables were due from Honeywell International, Inc. At
December 31, 2003, Applied Materials, Inc. comprised approximately 10% of net
trade receivables. The Company does not require collateral to support trade
receivables. The Company maintains its cash in bank deposit accounts that, at times, may
exceed federally insured limits. At December 31, 2002 and 2003, the Company had
approximately $2,174 and $477, respectively, in excess of federally insured
limits. The difference between these amounts and the amount of cash and
equivalents shown in the accompanying 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, 2003,
the Company had approximately $3,000 of inventories and $1,000 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. F-27




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) 12. Commitments and Contingencies Operating Leases.The Company has noncancelable operating leases for
facilities and equipment that expire in various years through 2007. Lease
expense under all operating leases (excluding charges for lease exit costs
discussed in Note 10) amounted to $11,927, $9,602 and $6,727 for the years
ended December 31, 2001, 2002 and 2003, respectively. At December 31, 2003,
future minimum lease payments for operating leases are as follows: Year Ending December 31:2004
    
    $
    4,6762005
    
    
    3,6342006
    
    
    3,0972007
    
    
    2,1052008
    
    
    1,051After 2008
    
    
    1,224$
    15,787
 The amounts shown in the table above include $1,295 of future lease payments
that were included in the determination of lease exit liabilities that are
recorded in the accompanying 2003 balance sheet. This amount consists of future
lease payments of $540, $301, $287 and $167 for the years ending December 31,
2004, 2005, 2006 and 2007, respectively. Employee Benefit Plan.The Company has a 401(k) Savings Plan covering
substantially all employees. During 2001 and 2002, the Company matched 50% of
an employees contributions, up to a maximum matching contribution of 3% 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, 2001 and 2002, total contributions by the Company to the Plan were
approximately $1,712 and $1,416, respectively. Effective January 1, 2003, the
Company suspended the 50% matching contributions. Legal Proceedings.The Company is subject to litigation, claims and
assessments that 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. F-28




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) 13. Quarterly Financial Information (Unaudited) Presented below is selected unaudited quarterly financial information: Year Ended December 31, 2002
    
    Year Ended December 31, 2003Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4Net sales
    
    $
    92,608
    
    
    $
    100,387
    
    
    $
    99,535
    
    
    $
    78,267
    
    
    $
    80,164
    
    
    $
    74,845
    
    
    $
    79,638
    
    
    $
    78,584Cost of
goods sold
    
    
    95,182
    
    
    
    100,099
    
    
    
    117,095
    
    
    
    86,391
    
    
    
    84,451
    
    
    
    78,840
    
    
    
    80,780
    
    
    
    77,528Gross profit (loss)
    
    
    (2,574
    )
    
    
    288
    
    
    
    (17,560
    )
    
    
    (8,124
    )
    
    
    (4,287
    )
    
    
    (3,995
    )
    
    
    (1,142
    )
    
    
    1,056Selling,
general and administrative
    
    
    (7,230
    )
    
    
    (7,294
    )
    
    
    (6,864
    )
    
    
    (6,036
    )
    
    
    (5,627
    )
    
    
    (5,715
    )
    
    
    (5,039
    )
    
    
    (6,391
    )Reorganization costs
    
    
    (265
    )
    
    
    (32
    )
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Related party expenses
    
    
    (271
    )
    
    
    (188
    )
    
    
    (188
    )
    
    
    (188
    )
    
    
    (188
    )
    
    
    (187
    )
    
    
    (188
    )
    
    
    (187
    )Operating loss
    
    
    (10,340
    )
    
    
    (7,226
    )
    
    
    (24,627
    )
    
    
    (14,348
    )
    
    
    (10,102
    )
    
    
    (9,897
    )
    
    
    (6,369
    )
    
    
    (5,522
    )Interest expense
    
    
    (1,234
    )
    
    
    (477
    )
    
    
    (411
    )
    
    
    (446
    )
    
    
    (480
    )
    
    
    (700
    )
    
    
    (761
    )
    
    
    (755
    )Reduction of interest expense
due to settlement of dispute
    
    
    1,029
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain (loss) on sale of assets
    
    
    (149
    )
    
    
    (8
    )
    
    
    (5
    )
    
    
    (4
    )
    
    
    29
    
    
    
    7
    
    
    
    6
    
    
    
    8Other, net
    
    
    38
    
    
    
    124
    
    
    
    525
    
    
    
    148
    
    
    
    23
    
    
    
    63
    
    
    
    4
    
    
    
    158Loss before income taxes and
cumulative effect
adjustment
    
    
    (10,656
    )
    
    
    (7,587
    )
    
    
    (24,518
    )
    
    
    (14,650
    )
    
    
    (10,530
    )
    
    
    (10,527
    )
    
    
    (7,120
    )
    
    
    (6,111
    )Income tax benefit
    
    
    236
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss before cumulative
effect of change in
accounting principle
    
    
    (10,420
    )
    
    
    (7,587
    )
    
    
    (24,478
    )
    
    
    (14,650
    )
    
    
    (10,530
    )
    
    
    (10,527
    )
    
    
    (7,120
    )
    
    
    (6,111
    )Cumulative effect of change
in accounting principle
    
    
    (69,015
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (79,435
    )
    
    $
    (7,587
    )
    
    $
    (24,478
    )
    
    $
    (14,650
    )
    
    $
    (10,530
    )
    
    $
    (10,527
    )
    
    $
    (7,120
    )
    
    $
    (6,111
    )Basic and diluted loss per
share applicable to common
stockholders-Before cumulative effect
of
change in accounting
principle
    
    $
    (0.38
    )
    
    $
    (0.28
    )
    
    $
    (0.89
    )
    
    $
    (0.53
    )
    
    $
    (0.38
    )
    
    $
    (0.38
    )
    
    $
    (0.26
    )
    
    $
    (0.22
    )Cumulative effect of
change
in accounting principle
    
    
    (2.52
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (2.90
    )
    
    $
    (0.28
    )
    
    $
    (0.89
    )
    
    $
    (0.53
    )
    
    $
    (0.38
    )
    
    $
    (0.38
    )
    
    $
    (0.26
    )
    
    $
    (0.22
    )
 F-29




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##### Table of Contents



SUNTRON CORPORATION AND SUBSIDIARIES
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
Accounts 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
    
    Year2001
    
    $
    4,588
    
    
    $
    2,387
    
    
    $
    
    
    
    $
    1,339
    (2)
    
    $
    5,6362002
    
    
    5,636
    
    
    
    117
    
    
    
    1,308
    (1)
    
    
    5,321
    (3)
    
    
    1,7402003
    
    
    1,740
    
    
    
    2,694
    
    
    
    31
    (1)
    
    
    1,567
    (4)
    
    
    2,898
   (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 $675 and recoveries of $664.(3)
    
    Deductions consist of write-offs of $3,213 and recoveries of
$2,108.(4)
    
    Deductions consist of write-offs of $345 and recoveries of $1,222. F-30




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##### Table of Contents



Exhibit Index 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
    
    Module Supplier Agreement dated as of February 2, 2000 by and between
Applied Materials, Inc. and K*TEC Electronics Corporation. (1)10.4
    
    Comprehensive Supplier Agreement #305038 dated as of August 3, 1997 by
and between Applied Materials, Inc. and K*TEC Electronics Corporation. (1)10.5
    
    Employment Agreement dated as of June 23, 2000 by and between James Bass
and EFTC Corporation. (1)10.6
    
    Lease Agreement dated as of May 10, 1999 by and between Orsett/I-17
L.L.C. and EFTC Corporation. (1)10.7
    
    Industrial Lease dated December 18, 1998 by and between Buckhorn Trading
Co., LLC and EFTC Corporation. (1)10.8
    
    Commercial/Industrial Lease dated as of April 1, 2001 by and between EFTC
Corporation and H. J. Brooks, LLC. (1)10.9
    
    Consulting Services Agreement dated as of April 24, 2002 by and between
Suntron Corporation and Allen S. Braswell, Jr. (3)10.10
    
    Management and Consulting Agreement by and between Suntron Corporation
and Thayer-Blum Funding III, L.L.C. (3)10.11
    
    Amended and Restated Credit Agreement dated April 11, 2003 between
Suntron Corporation and Citicorp USA. (4)21
    
    List of Subsidiaries of the registrant.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.(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
May 13, 2003