Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 1-1000
SPARTON CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 38-1054690
------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2400 EAST GANSON STREET, JACKSON, MICHIGAN 49202-3795
-----------------------------------------------------
(Address of Principal Executive Offices)
(517) 787-8600
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $1.25 Par Value NEW YORK STOCK EXCHANGE
----------------------------- -----------------------
(Title of each class) (Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in Part III of this Form 10-K or any amendment
to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
State the aggregate market value of the voting common stock held by
non-affiliates computed by reference to the price at which the common stock was
last sold, or the average bid and asked price of such common stock, as of the
last business day of the registrant's most recently completed second fiscal
quarter: The aggregate market value of voting common stock held by
non-affiliates was $40,710,462, based on the closing price of common shares as
of December 31, 2002, which was $7.90 per share.
The number of shares of common stock outstanding as of August 29, 2003, was
7,943,671.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the definitive Proxy Statement for the fiscal year ended
June 30, 2003, to be delivered to shareholders in connection with the Annual
Meeting of Shareholders to be held October 22, 2003, are incorporated by
reference into Part III of this Form 10-K.
NYSE:SPA [SPARTON LOGO]
(This Page Intentionally Left Blank)
NYSE:SPA [SPARTON LOGO]
TABLE OF CONTENTS
PART I
Item 1. Business .............................................................................................. 1
Item 2. Properties ............................................................................................ 2
Item 3. Legal Proceedings ..................................................................................... 2
Item 4. Submission of Matters to a Vote of Security Holders ................................................... 3
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................................. 4
Item 6. Selected Financial Data ............................................................................... 5
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ................. 6
Item 7(a). Qualitative and Quantitative Disclosures About Market Risk ............................................ 10
Item 8. Financial Statements and Supplementary Data ........................................................... 11
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................. 26
Item 9(a). Controls and Procedures ............................................................................... 26
PART III
Item 10. Directors and Executive Officers of the Registrant .................................................... 26
Item 11. Executive Compensation ................................................................................ 26
Item 12. Security Ownership of Certain Beneficial Owners and Management ........................................ 26
Item 13. Certain Relationships and Related Transactions ........................................................ 27
Item 14. Principal Accountant Fees and Services ................................................................ 27
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ...................................... 27
Signatures ........................................................................................................ 28
NYSE:SPA [SPARTON LOGO]
i
(This Page Intentionally Left Blank)
NYSE:SPA [SPARTON LOGO]
PART I
ITEM 1. BUSINESS
The Company has been in continuous existence since 1900. It was last reorganized
in 1919 as an Ohio corporation. The Company's operations are in one line of
business, electronic contract manufacturing services (EMS). Products and
services include complete "Box Build" products for Original Equipment
Manufacturers, microprocessor-based systems, transducers, printed circuit boards
and assemblies, sensors and electromechanical devices for the
telecommunications, medical/scientific instrumentation, electronics, aerospace,
and other industries, as well as engineering services relating to these
products. The Company also develops and manufactures sonobuoys, anti-submarine
warfare (ASW) devices, used by the U.S. Navy and other free-world countries. See
Note 11 to the Consolidated Financial Statement included in Item 8 for
information regarding the Company's products. The Company's website address is
www.sparton.com. The Company provides, free of charge, the Company's periodic
and current reports (e.g., Forms 10-K, 10-Q and 8-K) and amendments to such
reports that are filed with the Securities and Exchange Commission (SEC).
Reports are available as soon as reasonably practicable after such reports are
filed with or furnished to the SEC, either at the Company's website or through a
link to the SEC's site.
Electronic Contract Manufacturing Services
Historically, the Company's principal electronics product has been sonobuoys,
which are ASW devices used by the U.S. Navy and other free-world military
organizations. The Company competes with a very limited number of qualified
manufacturers for sonobuoy procurements by the U.S. and select foreign
governments. Contracts are obtained through competitive bid or direct
procurement.
The Company continues to focus on substantially expanding sales in the high mix,
low and medium volume non-sonobuoy EMS markets. This is where the Company
expects substantial future revenue growth, with emphasis on government,
telecommunications, aerospace, medical/scientific instrumentation and industrial
controls. Many of the physical and technical attributes in the production of
electronics for sonobuoys are the same as those required in the production of
other electronics products. The Company's EMS business includes design and/or
manufacture of a variety of electronic and electromechanical products and
assemblies. Sales are generally obtained on a competitive basis. Competitive
factors include technical ability, customer service, product quality, timely
delivery and price.
As non-sonobuoy EMS business has grown, there has been an increasing need to
provide centralized design services. In 2001, the Company formed the Corporate
EMS Engineering group. Prior to the reorganization, engineering capabilities
were facility specific with the various design groups operating independently.
Engineering now has centralized staff management, but with a continued presence
in five of the six locations. The new engineering organization allows the
Company to deliver products and services in a more efficient manner and enhances
the Company's focus on new and expanding technologies. Non-sonobuoy electronic
contract manufacturing and services are sold primarily through a direct sales
force. In the commercial EMS business, Sparton must compete with a significant
number of domestic and foreign manufacturers, some of which are much larger in
terms of size and/or financial resources. The Company generally contracts with
its customers to manufacture products based on the customer's design,
specifications and shipping schedules. Normally, EMS programs do not require the
Company's direct involvement in product marketing. Material cost and
availability and product quality, delivery and reliability are all very
important factors in the commercial EMS business. In general, margins within the
non-sonobuoy EMS markets are lower than those historically obtained in the ASW
or proprietary electronics market. The lower margins are primarily due to
intense competition and the higher material content of the products sold.
At June 30, 2003 and 2002, the government backlog was approximately $51 million
and $60 million, respectively. A majority of the fiscal 2003 backlog is expected
to be realized in fiscal 2004. Commercial EMS sales are not included in the
backlog. The Company does not believe the amount of backlog of commercial sales
covered by firm purchase orders is a meaningful measure of future sales, as such
orders may be rescheduled or cancelled without significant penalty.
Other
One of Sparton's largest customers is the U.S. Navy. While the loss of U.S.
government sonobuoy sales would have a material adverse financial effect on the
Company, the loss of any one of several other customers, including Honeywell,
General Electric, Raytheon, Waters, and Smith Detection, could also have a
significant financial impact. The Company continues to grow its non-sonobuoy EMS
sales with the objective of expanding the customer base, thus reducing the
Company's exposure to any single customer.
Materials for the electronics operations are generally available from a variety
of worldwide sources, except for selected components. Access to competitively
priced materials is critical to success in the EMS business. In certain markets,
the volume purchasing power of the larger competitors creates a cost advantage
for them. Although the electronics industry has experienced spot shortages, the
Company does not expect to encounter significant long-term problems in obtaining
sufficient raw materials. The risk of material obsolescence in the contract EMS
business is less than it is in many other markets because raw materials and
component parts are generally only purchased upon receipt of a customer's order.
However, excess material resulting from order lead-time is a risk factor due to
potential order cancellation or design changes by customers. While overall sales
fluctuate during the year, such fluctuations do not reflect a definitive
seasonal pattern or tendency.
NYSE:SPA [SPARTON LOGO]
1
Research and development (R&D) expenditures, with a focus on product
development, amounted to approximately $2,775,000 in fiscal 2003, $2,818,000 in
fiscal 2002, and $1,669,000 in fiscal 2001. Substantially all R&D costs are
reimbursed, with approximately $2,435,000, $2,480,000, and $884,000 of these
expenditures, respectively, customer funded. The net amount of these expenses is
included in costs of goods sold. R&D costs are funded primarily through
cost-reimbursement contracts for the customer for whom the work was performed.
There are approximately 36 employees involved in R&D activities. Few, if any,
devote all of their time to such efforts.
Sparton employed approximately 1,200 people at June 30, 2003. The Company has
one operating division and three wholly-owned active operating subsidiaries.
ITEM 2. PROPERTIES
The following is a listing of the principal properties owned by Sparton, which
provide a total of approximately 805,000 square feet of manufacturing and
administrative space. There are manufacturing and/or office facilities at each
location. Reflective of the current economic environment, Sparton's
manufacturing facilities are currently underutilized. Underutilized percentage
varies by plant; however, ample space exists to accommodate expected near term
growth. Sparton believes these facilities are suitable for its operations.
Jackson, Michigan London, Ontario, Canada
DeLeon Springs, Florida (2 plants) Rio Rancho, New Mexico
Brooksville, Florida Deming, New Mexico
Not included above with the Company's other owned properties is the Company's
Coors Road, Albuquerque, New Mexico, facility, which is under a long-term lease
to another company, with an option to buy.
ITEM 3. LEGAL PROCEEDINGS
Various litigation is pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company and in
others presenting allegations that are non-routine. The Company and its
subsidiaries are also involved in certain compliance issues with the United
States Environmental Protection Agency (EPA) and various state agencies,
including being named as a potentially responsible party at several sites.
Potentially responsible parties (PRPs) can be held jointly and severally liable
for the clean-up costs at any specific site. The Company's past experience,
however, has indicated that when it has contributed only relatively small
amounts of materials or waste to a specific site relative to other PRPs, its
ultimate share of any clean-up costs has been minor. Based upon available
information, the Company believes it has contributed only small amounts to those
sites in which it is currently viewed as a PRP.
In February 1997, several lawsuits were filed against Sparton's wholly-owned
subsidiary, Sparton Technology, Inc. (STI), alleging that STI's Coors Road
facility presented an imminent and substantial threat to human health or the
environment. On March 3, 2000, a Consent Decree was entered, settling the
lawsuits. The Consent Decree represents a judicially enforceable settlement and
contains work plans describing remedial activity STI agreed to undertake. The
remediation activities called for by the work plans have been installed and are
either completed or are currently in operation. It is anticipated that ongoing
remediation activities will operate for a period of time during which STI and
the regulatory agencies will analyze their effectiveness. The Company believes
that it will take at least three to five years from the date of the Consent
Decree, dated March 3, 2000, before the effectiveness of the groundwater
containment wells can be established. If ineffective, additional remedies may be
imposed at a significantly increased cost. There is no assurance that additional
costs greater than the amount accrued will not be incurred or that no adverse
changes in environmental laws or their interpretation will occur.
Upon entering into the Consent Decree, the Company reviewed its estimates of the
future costs expected to be incurred in connection with its remediation of the
environmental issues associated with its Coors Road facility over the next 30
years. The Company increased its accrual for the cost of addressing
environmental impacts associated with its Coors Road Plant by $10,000,000
(pre-tax) in December 1999. At June 30, 2003, the remaining undiscounted minimum
accrual for EPA remediation approximates $7,500,000. The Company's estimate is
based upon existing technology and current costs which have not been discounted.
The estimate includes equipment and operating and maintenance costs for the
onsite and offsite pump and treat containment systems, as well as continued
onsite and offsite monitoring. It also includes the required periodic reporting
requirements. This estimate does not include legal and related consulting costs
which are expensed as incurred. The estimate does not reflect any offset or
reduction for monies recovered from various parties which the Company is
currently pursuing as described below.
In 1998, STI commenced litigation in two courts against the United States
Department of Energy (DOE) and others seeking reimbursement of Sparton's costs
incurred in complying with, and defending against, federal and state
environmental requirements with respect to its former Coors Road facility.
Sparton also sought to recover future costs being incurred by the Company on an
ongoing basis as a result of continuing remediation at the Coors Road facility.
NYSE:SPA [SPARTON LOGO]
2
During the first quarter of fiscal 2003, Sparton reached an agreement with the
DOE and others to recover certain remediation costs. Under the agreement,
Sparton was reimbursed a portion of the costs the Company has incurred in its
investigation and site remediation efforts at the Coors Road facility. Under the
settlement terms, Sparton received $4,850,000 from the DOE and others in fiscal
2003, and is to receive an additional $1,000,000 in fiscal 2004. In addition,
the DOE has agreed to reimburse Sparton for 37.5% of certain future
environmental expenses in excess of $8,400,000 incurred at the site.
With the settlement, Sparton received cash and gained some degree of risk
protection, with the DOE sharing in costs incurred above the established level.
The financial impact of the settlement was recorded in the first quarter of
fiscal 2003, ending September 30, 2002. Most of the settlement proceeds
(approximately $5,500,000) were recorded as income.
In 1995, Sparton Corporation and STI filed a Complaint in the Circuit Court of
Cook County, Illinois, against Lumbermens Mutual Casualty Company and American
Manufacturers Mutual Insurance Company demanding reimbursement of expenses
incurred in connection with its remediation efforts at the Coors Road facility
based on various primary and excess comprehensive general liability policies in
effect between 1959 and 1975. In 1999, the Complaint was amended to add various
other excess insurers, including certain London market insurers and Fireman's
Fund Insurance Company. The case remains in pretrial activity.
In September 2002, STI filed an action in the U.S. District Court for the
Eastern District of Michigan to recover certain unreimbursed costs incurred as a
result of a manufacturing relationship with two entities, Util-Link, LLC
(Util-Link) of Delaware and National Rural Telecommunications Cooperative (NRTC)
of the District of Columbia. On or about October 21, 2002, the defendants filed
a counterclaim seeking money damages, alleging that STI breached its duties in
the manufacture of products for the defendants. The defendant Util-Link has
asked for damages in the amount of $25,000,000 for lost profits. The defendant
NRTC has asked for damages in the amount of $20,000,000 for the loss of its
investment in and loans to Util-Link. Sparton has not had an opportunity to
fully assess the respective claims, but believes that the damages sought by NRTC
are included in Util-Link's claim for damages and, as such, are duplicative.
Sparton believes the counterclaim to be without merit and intends to vigorously
defend against it. This case is in the initial stages of discovery.
At this time, the Company is unable to predict the amount of recovery, if any,
that may result from the pursuit of these two claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the last
quarter of the period covered by this report.
Executive Officers of the Registrant
Information with respect to executive officers of the Registrant is set forth
below. The positions noted have been held for at least five years, except where
noted.
Age
---
David W. Hockenbrocht, Chief Executive Officer since October 2000 and 68
President since January 1978.
Douglas E. Johnson, Chief Operating Officer and Executive Vice President 55
since February 2001 and Vice President since 1995.
Richard L. Langley, Chief Financial Officer since February 2001, Vice 58
President and Treasurer since 1990.
Joseph S. Lerczak, Secretary since June 2002 and Corporate Controller 46
since April 2000. Prior to these dates, Mr. Lerczak held the positions
of Manager of Internal Audit for ArvinMeritor, Inc., an automotive
supplier, from April 1998 to March 2000, and Assistant Treasurer for
Sparton Corporation from June 1990 to March 1998.
Michael G. Woods, Vice President since August 1999, and General Manager of 44
Sparton of Canada, Ltd. since November 1998. Prior to that date, Mr.
Woods held various positions including Controller and Director of
Electronics Manufacturing Services for Sparton of Canada.
Alan J. Houghtaling, Vice President, Director Business Development since 46
May 2000. Prior to that date, Mr. Houghtaling held various positions
including Director of Business Development ECM, Division Director of
Business Development and Director of ECM Business for Sparton.
NYSE:SPA [SPARTON LOGO]
3
Stephanie A. Martin, Vice President, Corporate Materials Acquisitions and 47
Logistics since May 2000. Prior to that date, Ms. Martin held various
positions since October 1996 including Director Corporate Materials
Acquisition and Logistics for Sparton Electronics Florida, Inc.
Charles A. Stranko, Vice President, Corporate Sales since July 2002. 45
Previously, Mr. Stranko held the position of Vice President, General Manager
Sparton Technology, Inc. since January 2001. Prior to that date, Mr. Stranko
held various managerial positions within the Company since January 1998.
Michael D. Sobolewski, Vice President, Engineering since July 2002. Prior to 39
that date, Mr. Sobolewski was Director of Electronic Contract Manufacturing
Engineering since July 1998.
There are no family relationships among the persons named above. All officers
are elected annually and serve at the discretion of the Board of Directors.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange under the
symbol SPA. On August 29, 2003, there were 627 registered holders of record of
the Company's common stock. The price of the Company's common stock as of August
29, 2003, was $10.68. The Company declared a 5% common stock dividend on January
21, 2003; for which cash was paid in lieu of fractional shares. The Company did
not pay dividends on its common stock in fiscal 2002. The high and low common
stock prices per share were as follows:
QUARTER ENDED: SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- -------- -------
Fiscal 2003 High $9.00 $8.40 $8.10 $8.80
Low 8.10 7.70 7.30 7.55
Fiscal 2002 High $7.50 $7.15 $9.40 $9.10
Low 6.50 6.50 7.38 8.35
See Item 12 for certain information concerning the Company's equity compensation
plans.
NYSE:SPA [SPARTON LOGO]
4
ITEM 6. SELECTED FINANCIAL DATA (3)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
OPERATING RESULTS
Net sales $ 169,861,287 $ 149,672,143 $ 187,620,426 $ 161,914,446 $ 131,900,489
Costs and expenses (1) 158,526,655 145,647,571 185,486,583 175,566,602 129,850,749
------------- ------------- ------------- ------------- -------------
11,334,632 4,024,572 2,133,843 (13,652,156) 2,049,740
Other income (expense)
Interest and investment income 664,835 442,632 355,626 666,253 1,503,982
Equity loss in investment (2) (28,000) (452,000) (504,000) (435,000) -
Other - net 261,805 53,000 159,568 713,169 23,359
------------- ------------- ------------- ------------- -------------
898,640 43,632 11,194 944,422 1,527,341
------------- ------------- ------------- ------------- -------------
Income (loss) from continuing
operations before income taxes 12,233,272 4,068,204 2,145,037 (12,707,734) 3,577,081
Provision (credit) for income taxes 3,241,000 1,140,000 844,000 (4,026,000) 1,818,000
------------- ------------- ------------- ------------- -------------
Income (loss) from continuing
operations 8,992,272 2,928,204 1,301,037 (8,681,734) 1,759,081
Income (loss) from discontinued
automotive operations,
net of income taxes - - - - (2,520,000)
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 8,992,272 $ 2,928,204 $ 1,301,037 $ (8,681,734) $ (760,919)
============= ============= ============= ============= =============
Weighted-average common shares outstanding:
Shares outstanding - basic 7,942,523 7,942,304 8,124,735 8,219,495 8,219,495
Shares outstanding - diluted 8,027,092 7,995,414 8,136,745 8,219,495 8,219,495
PER SHARE OF COMMON STOCK (basic and diluted)
Income (loss):
Continuing operations - basic $ 1.13 $ 0.37 $ 0.16 $ (1.06) $ 0.22
Discontinued operations - basic - - - - (0.31)
------------- ------------- ------------- ------------- -------------
Total $ 1.13 $ 0.37 $ 0.16 $ (1.06) $ (0.09)
============= ============= ============= ============= =============
Income (loss):
Continuing operations - diluted $ 1.12 $ 0.37 $ 0.16 $ (1.06) $ 0.22
Discontinued operations - diluted - - - - (0.31)
------------- ------------- ------------- ------------- -------------
Total $ 1.12 $ 0.37 $ 0.16 $ (1.06) $ (0.09)
============= ============= ============= ============= =============
Shareowners' equity $ 11.48 $ 10.28 $ 9.96 $ 9.92 $ 10.65
Cash dividends - - - - -
OTHER FINANCIAL DATA
Total assets $ 116,013,870 $ 102,401,248 $ 107,350,305 $ 111,434,236 $ 108,337,035
Working capital 77,982,082 70,710,441 65,977,180 64,778,574 68,578,975
Working capital ratio 5.33:1 6.27:1 4.21:1 4.00:1 4.85:1
Long-term debt - - - - -
Shareowners' equity $ 91,168,206 $ 81,614,417 $ 79,205,451 $ 81,535,150 $ 87,521,898
- --------------------
(1) As discussed in Note 9 to the Consolidated Financial Statements included in
Item 8, Costs and expenses includes income and expense related to the Coors Road
facility.
(2) As discussed in Note 3 to the Consolidated Financial Statements included in
Item 8, Equity loss in investment reflects the Company's equity investment in
Cybernet Systems Corporation.
(3) As discussed in Note 1 to the Consolidated Financial Statements included in
Item 8, all average outstanding shares and per share information has been
restated to reflect the impact of the 5% stock dividend declared in January
2003.
NYSE:SPA [SPARTON LOGO]
5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of certain significant
events affecting the Company's earnings and financial condition during the
periods included in the accompanying financial statements. The Company's
operations are in one line of business, electronic contract manufacturing
services (EMS). This includes the design, development and/or manufacture of
electronic parts and assemblies for both government and commercial customers
worldwide. Governmental sales are mainly sonobuoys. Commercial customers are in
general industrial markets, as well as the regulated aerospace and medical
markets.
The Private Securities Litigation Reform Act of 1995 reflects Congress'
determination that the disclosures of forward-looking information is desirable
for investors and encourages such disclosure by providing a safe harbor for
forward-looking statements by corporate management. The following discussion
about the Company's results of operations and financial condition contains
forward-looking statements that involve risk and uncertainty. The Company notes
that a variety of factors could cause the actual results and experience to
differ materially from anticipated results or other expectations expressed in
the Company's forward-looking statements. The risks and uncertainties that may
affect the operations, performance, growth forecasts and results of the
Company's business include, but are not limited to, timing and fluctuations in
U.S. and/or world economies, customer demand for products, competition in the
overall EMS business, availability of production labor and management services
under terms acceptable to the Company, Congressional budget outlays for sonobuoy
development and production, Congressional legislation, changes in the
interpretation of environmental laws and the uncertainties of environmental
remediation. An additional risk factor is the availability and cost of
materials. The Company has encountered availability and extended lead time
issues on some electronic components in the past, which have resulted in higher
prices and late deliveries. Finally, the timing of sonobuoy sales is dependent
upon access to, and successful passage of, product tests performed by the U.S.
Navy. Reduced governmental budgets have made access to the test range less
predictable and frequent than in the past. Management cautions readers not to
place undue reliance on forward-looking statements, which are subject to
influence by the enumerated risk factors as well as unanticipated future events.
FISCAL 2003 COMPARED TO FISCAL 2002
Sales for the year ended June 30, 2003, totaled $169,861,000, an increase of
$20,189,000 (13%) from fiscal 2002. Overall, sales were below the Company's
original plan, but in line with revised expectations given the continued
depressed economic environment. Government EMS sales decreased 3% to
$50,473,000, while other EMS sales increased 22%. Sales included $55,870,000,
$44,762,000 and $18,756,000 of industrial, aerospace and medical/scientific
instrumentation sales, respectively. While government sales declined slightly
from last year, the increase in other EMS sales reflects primarily strong demand
for homeland security products and the current focus to install detection
equipment in U.S. and Canadian airports. While homeland security product demand
may begin to slow in fiscal 2004, it is anticipated that other areas will
increase as the economy improves.
Operating profits of $11,335,000 and $4,025,000 were reported for the fiscal
years ended June 30, 2003, and 2002, respectively. Gross margins were consistent
with prior year. Margins on government programs improved as the Company
concluded production of several problem plagued sonobuoy contracts. These
contracts carried no gross margin and their revenues totaled $1.8 million for
fiscal 2003 and $8.9 million for fiscal 2002. At June 30, 2003, these contracts
were complete. One contract was completed during the first half of fiscal 2003.
Previously estimated rework was not required resulting in increased margins of
$489,000 during this period. Inventory and rework issues for two other customers
reduced margins by $825,000 during the year. Given the reduced level of sales,
the Company continues to experience underutilized capacity. Selling and
administrative expenses as a percentage of sales (7.7% in 2003 and 8.4% in 2002)
decreased slightly from last year as the Company continues to monitor expenses
with a focus on cost control. Included in 2003 operating income was a $5,500,000
recovery of certain remediation costs negotiated this year. It reflects
Sparton's settlement with the DOE and others regarding reimbursement of costs
incurred at the Company's Sparton Technology Coors Road facility. Also included
were current year charges related to the New Mexico environmental remediation
effort, principally litigation, of $260,000 in fiscal 2003 and $840,000 in
fiscal 2002. These EPA charges are more fully discussed in Note 9 to the
Consolidated Financial Statements included in Item 8.
Interest and Investment Income increased $222,000 to $665,000 in 2003, due to
increased funds available for investment. Investment securities are more fully
described in Note 3 to the Consolidated Financial Statements included in Item 8.
Other Income-Net was $262,000 and $53,000 in 2003 and 2002, respectively. Other
Income-Net in 2003 includes $440,000 of net transaction and translation gains
relating to the Company's Canadian subsidiary as a result of the stronger
Canadian dollar in fiscal 2003, primarily in the fourth quarter. Additionally,
$181,000 ($150,000 in 2002) of costs related to potential insurance adjustments
for the Company's previously owned automotive segment are included. Other
Income-Net in 2002 included a one time recovery of $292,000 when a former
insurer converted to a stock company (formerly a mutual company).
Equity loss in investment was $28,000 and $452,000 in fiscal 2003 and fiscal
2002, respectively. The Company's investment in Cybernet Systems Corporation
(Cybernet) represents a 14% ownership interest, which was acquired in June 1999.
NYSE:SPA [SPARTON LOGO]
6
The Company's effective tax rate for fiscal 2003 was 26.5%, compared to the
statutory U.S. federal tax rate of 34%. The favorable tax rate was principally
due to the tax benefit attributable to foreign sales and the utilization of a
contribution carryforward benefit from 2002. In addition, a portion of the
Canadian net operating loss carryforward (NOLCF) from prior years was utilized.
A 100% valuation allowance had been recorded on both of these carryforwards at
June 30, 2002. The tax effect of foreign currency transactions and translation
further reduced the effective tax rate. After provision for applicable income
taxes as discussed in Note 8 to the financial statements, the Company reported
net income of $8,992,000 ($1.13 per share; $1.12 diluted) in fiscal 2003,
compared to $2,928,000 ($0.37 per share, basic and diluted) in fiscal 2002.
Fiscal 2003 includes income related to the EPA settlement of $5,500,000,
$3,630,000 net of tax.
FISCAL 2002 COMPARED TO FISCAL 2001
Sales for the year ended June 30, 2002, totaled $149,672,000, a decrease of
$37,948,000 (20%) from fiscal 2001. Overall, sales were below the Company's
original plan, but in line with revised expectations given the economic
environment and events of September 11, 2001. Government EMS sales increased 30%
to $52,203,000, while other EMS sales declined 34%. Other sales included
$55,653,000, $35,612,000 and $6,204,000 of industrial, aerospace and
medical/scientific instrumentation sales, respectively. The increase in govern-
ment sales was due to accelerated sonobuoy production, and higher than expected
foreign sonobuoy sales. The decline in other EMS sales reflected the then market
uncertainties, particularly related to aerospace and the general economic
recession. The uncertainty of demand in the commercial markets led to additional
measures to monitor and control costs and expenses.
Operating profits of $4,025,000 and $2,134,000 were reported for the fiscal
years ended June 30, 2002, and 2001, respectively. Gross margins for the year
improved approximately 2%. The higher gross margin in fiscal 2002 was reflective
of a more favorable mix of government sales and continuing cost containment
measures. However, given the reduced level of sales the Company continued to
experience underutilized capacity. Margins on government programs improved as
the Company concluded production of sonobuoy contracts that were loss contracts.
These contracts carried no gross margin and their revenues totaled $8.9 million
for fiscal 2002 and $6.1 million for fiscal 2001. At June 30, 2002, the
remaining backlog of these loss contracts approximated $1.8 million. Selling and
administrative expenses were significantly below last year as the Company
continued to focus on cost control. Included were charges against income related
to the New Mexico environmental remediation effort, principally litigation, of
$840,000 in fiscal 2002 and $1,820,000 in fiscal 2001. These EPA charges are
more fully discussed in Note 9 to the Consolidated Financial Statements included
in Item 8.
Interest and Investment Income increased $87,000 to $443,000 in fiscal 2002.
Investment securities are more fully described in Note 3 to the Consolidated
Financial Statements included in Item 8. Other Income-Net was $53,000 in fiscal
2002, as previously discussed, and $160,000 in 2001.
Equity loss in investment was $452,000 and $504,000 in fiscal 2002 and fiscal
2001, respectively. At June 30, 2002, Sparton changed its method of accounting
for its investment in Cybernet Systems Corporation (Cybernet), which accounting
is further discussed in Note 3 to the Consolidated Financial Statements included
in Item 8.
The Company's effective tax rate for fiscal 2002 was 29%, compared to the
statutory U.S. federal tax rate of 34%. The favorable tax rate was principally
due to the tax benefit attributable to foreign sales. After provision for
applicable income taxes as discussed in Note 8 to the financial statements, the
Company reported net income of $2,928,000 ($0.37 per share) in fiscal 2002,
compared to $1,301,000 ($0.16 per share) in fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of liquidity and capital resources has historically been from
operations. Short-term credit facilities have been used in the past, but not
recently. Certain government contracts provide for interim progress billings
based on costs incurred. These progress billings reduce the amount of cash that
would otherwise be required during the performance of these contracts. As the
volume of U.S. defense-related contract work declines, so has the relative
importance of progress billings as a liquidity resource. At the present time,
the Company plans on using its investment securities to provide working capital
and to strategically invest in additional property, plant and equipment to
accommodate growth. Growth is expected to be achieved through internal expansion
and/or acquisition or joint venture. The Company is currently exploring the
possibility of a manufacturing facility in Asia. The Company has had no
short-term debt since December 1996, and currently has unused informal lines of
credit totalling $30 million with two banks.
Cash flows provided by operating activities were $13,802,000, $6,544,000 and
$5,981,000 in the fiscal years ended 2003, 2002 and 2001, respectively. The
increase in cash provided by operating activities in 2003 was mainly
attributable to the DOE settlement of $5,500,000. $4,850,000 of the settlement
was received, the remaining $1,000,000 of the settlement will be received in
fiscal 2004. In addition, a reduction in inventory levels provided operating
cash flow. Inventory reduction is a reflection of the Company's focus on
improving inventory turnover through ordering and usage efficiency gains in this
area over the past year. In addition, due to the higher fourth quarter sales,
inventory levels are lower than would normally be expected to occur. Other
primary sources included income from operations, and an increase in accounts
payable and accrued liabilities. Accounts payable and accrued liabilities
increased primarily due to deferred commissions from year end sales, deferred
revenue from one customer and inventory purchases at one location. In fiscal
2003, the primary cash flow use was an increase in accounts receivable,
reflecting high sonobuoy and homeland security product sales near year end.
NYSE:SPA [SPARTON LOGO]
7
Cash flows used by investing activities totaled $11,942,000 in fiscal 2003. The
major use of cash by investing activities was the purchase of investment
securities. Cash flows (used) provided by investing activities were
$(10,819,000) and $3,283,000 in the fiscal years ended 2002 and 2001,
respectively, primarily from purchase and sale of investment securities.
Cash flows provided by financing activities were $14,000, primarily resulting
from an exercise of stock options. Cash flows used by financing activities were
$72,000 and $1,282,000 in fiscal 2002 and 2001, respectively. These funds were
used to purchase shares of common stock for the treasury.
At June 30, 2003, the Company had $77,982,000 in working capital and total
shareowners' equity of $91,168,000.
CONTRACTUAL OBLIGATIONS
The Company's current obligations for the payment of accounts payable and
accruals totaling $18,015,000 at June 30, 2003, are reflected in the
Consolidated Balance Sheet included in Item 8. In addition, there are a number
of non-cancellable purchase orders that are payable within the next 12 months.
These contracts are not material to Sparton's operations or cash flow position.
As disclosed in Note 7 to the Consolidated Financial Statements included in Item
8, plan assets of the Company's defined benefits plan exceed the plan's benefit
obligation at June 30, 2003. At June 30, 2003, other contractual obligations and
long-term liabilities are as follows:
Payments due by Period
----------------------
Total < 1 year 1-3 years 3-5 years > 5 years
------------ ---------- ---------- ----------- -----------
Operating leases $ 5,766,000 $3,295,000 $2,170,000 $ 301,000 $ -
Environmental liabilities (1) 7,500,000 670,000 604,000 871,000 5,355,000
------------ ---------- ---------- ----------- ----------
Total $ 13,266,000 $3,965,000 $2,774,000 $ 1,172,000 $5,355,000
============ ========== ========== =========== ==========
(1) For a description of the accrual for environmental remediation, see Note 9
to the Consolidated Financial Statements included in Item 8 of this report.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates. The
Company believes that of its significant accounting policies (as discussed in
Note 1 to the Consolidated Financial Statements included in Item 8), the
following involve a higher degree of judgement and complexity.
Environmental Contingencies
One of Sparton's former manufacturing facilities, located in Albuquerque, New
Mexico (Coors Road), has been the subject of ongoing investigations and
remediation efforts conducted with the Environmental Protection Agency (EPA)
under the Resource Conservation and Recovery Act (RCRA). The investigation began
in the early 1980s and involved a review of onsite and offsite environmental
impacts.
In December 1999, the Company increased its accrual for the estimated cost of
addressing the environmental impacts associated with its Coors Road facility by
$10,000,000 (pre-tax). This increase was reflective of revised cost estimates in
conjunction with the negotiated Consent Decree that settled related lawsuits
then outstanding, as well as a related administrative enforcement action, and
covered activities expected to be incurred over the next thirty years.
As discussed in Note 9 to the Consolidated Financial Statements included in Item
8, Sparton has accrued its estimate of the minimum future non-discounted
financial liability. The estimate was developed using existing technology and
excludes legal and related consulting costs. The minimum cost estimate includes
equipment, operating and monitoring costs for both onsite and offsite
remediation. Sparton recognizes legal and consulting services in the periods
incurred and reviews its EPA accrual activity quarterly.
Uncertainties associated with environmental remediation contingencies are
pervasive and often result in wide ranges of reasonably possible outcomes.
Estimates developed in the early stages of remediation can vary significantly.
Normally a finite estimate of cost does not become fixed and determinable at a
specific point in time. Rather, the costs associated with environmental
remediation become estimable over a continuum of events and activities that help
to frame and define a liability. It is possible that cash flows and results of
operations could be materially affected by the impact of changes in these
estimates.
Government Contract Cost Estimates
Government production contracts are accounted for based on completed units
accepted with respect to revenue recognition and their estimated average cost
per unit regarding costs. Losses for the entire amount of the contract are
recognized in the period when such losses are determinable.
NYSE:SPA [SPARTON LOGO]
8
The Company formally reviews its costs incurred-to-date and estimated costs to
complete on all significant contracts on a quarterly basis, revised estimated
total contract costs are reflected in the financial statements.
Significant judgment is exercised in determining estimated total contract costs
including, but not limited to, cost experience to date, estimated length of time
to contract completion, costs for materials, production labor and support
services to be expended, and known issues on remaining units to be completed.
Estimated costs developed in the early stages of contracts can change
significantly as the contracts progress, and events and activities take place.
Significant changes in estimate can also occur when new designs are initially
placed into production. Depending upon the circumstances, it is possible that
the Company's financial position, results of operations and cash flows could be
materially affected by changes in estimated costs to complete on one or more
significant contracts.
Commercial Inventory Valuation Allowances
Contracts with commercial customers are based upon estimated quantities of
product manufactured for shipment over estimated time periods. Raw material
inventories are purchased to fulfill these customer requirements. Within these
arrangements, customer demand for products frequently changes, sometimes
creating excess and obsolete inventories.
The Company regularly reviews raw material inventories by customer for both
excess and obsolete quantities, with adjustments made accordingly. Wherever
possible, the Company attempts to recover its full cost of excess and obsolete
inventories from customers or, in some cases, through other markets. When it is
determined that the Company's carrying cost of such excess and obsolete
inventories cannot be recovered in full, a charge is taken against income and a
valuation allowance is established for the difference between the carrying cost
and the estimated realizable amount. Conversely, should the disposition of
adjusted excess and obsolete inventories result in recoveries in excess of these
reduced carrying values, the remaining portion of the valuation allowances are
reversed and taken into income when such determinations are made.
The establishment of inventory valuation allowances for commercial customer
inventories requires a significant degree of judgment and is influenced by the
Company's experience to date with both customers and other markets, prevailing
market conditions for raw materials, contractual terms and customers' ability to
satisfy these obligations, environmental or technological materials
obsolescence, changes in demand for customer products, and other factors
resulting in acquiring materials in excess of customer product demand. It is
possible that the Company's financial position, results of operations and cash
flows could be materially affected by changes to inventory valuation allowances
for commercial customer excess and obsolete inventories.
Allowance for Possible Losses on Receivables
Accounts receivable are customer obligations generally due under normal trade
terms for the industry. Credit terms are granted and periodically revised based
on evaluations of the customers' financial condition. The Company performs
ongoing credit evaluations of its customers and although the Company does not
generally require collateral, letters of credit may be required from customers
in certain circumstances. Receivables from foreign customers are generally
secured by letters of credit or cash advances.
The Company maintains an allowance for possible losses on receivables for
estimated losses resulting from the inability of its customers to make required
payments. The allowance is estimated based on historical experience of
write-offs, the level of past due amounts, information known about specific
customers with respect to their ability to make payments, and future
expectations of conditions that might impact the collectibility of accounts.
When management determines that it is probable that an account will not be
collected, it is charged against the allowance for possible losses. The Company
reviews the adequacy of its allowance monthly. If the financial conditions of
our customers were to deteriorate, resulting in an impairment of their ability
to make payment, additional allowances may be required.
Pension Obligations
Each year we calculate the cost of providing pension benefits under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 87, as
modified by SFAS Nos. 130 and 132. The key assumptions used in making these
calculations are disclosed in Note 7 to our Consolidated Financial Statements
included in Item 8. The most significant of these assumptions are the discount
rate used to value the future obligations and the expected return on pension
plan assets. The discount rate is commensurate with current market interest
rates on high-quality, fixed income investments. The expected return on assets
is based on our current view of long-term returns and assets held by the plan,
which is influenced by historical averages. If actual interest rates and returns
on plan assets materially differ from our assumptions, future adjustments to our
financial statements would be required. While changes in these assumptions can
have a significant effect on the pension benefit obligations reported in the
Consolidated Balance Sheets and the unrecognized gain or loss accounts discussed
below, the effect of changes in these assumptions is not expected to have a
significant effect on net periodic pension costs in the near term. While these
assumptions may change in the future based on changes in long-term interest
rates and market conditions, there are no known expected changes in these
assumptions as of June 30, 2003. As indicated above, to the extent our
assumptions differ from actual results, there would be a future impact on our
financial statements. The changes would not, however, have an immediate effect
in the period of change as expense determination under SFAS No. 87 includes
provisions that minimize the volatility of annual expense. The effect of these
assumptions versus actual differences accumulates over time in an "unrecognized
net gain or loss" account. To the extent the unrecognized account balance
exceeds certain thresholds as defined in the accounting standards, the excess is
amortized to or against expense in future
NYSE:SPA [SPARTON LOGO]
9
periods. The decrease in our discount rate assumption combined with a reduction
in our plan asset values due to market conditions over the past few years have
contributed to the increase in the unrecognized loss in our pension plan account
balance. At June 30, 2003, the balance was a net loss of $4,556,000 compared to
a net loss of $53,000 at June 30, 2002. The extent to which this unrecognized
net loss will result in future expense is not determinable at this time as it
will depend upon a number of variables, including trends in interest rates and
the actual return on plan assets. For example, an increase in the return on our
plan assets due to improved market conditions would reduce the unrecognized loss
account and thus reduce future expense.
OTHER
Litigation
One of Sparton's facilities, located in Albuquerque, New Mexico, has been the
subject of ongoing investigations conducted with the Environmental Protection
Agency (EPA) under the Resource Conservation and Recovery Act (RCRA). The
investigation began in the early 1980s and involved a review of onsite and
offsite environmental impacts.
At June 30, 2003, Sparton has an accrual of $7,500,000 as its estimate of the
future undiscounted minimum financial liability with respect to this matter. The
Company's cost estimate is based upon existing technology and excludes legal and
related consulting costs, which are expensed as incurred. The Company's estimate
includes equipment and operating costs for onsite and offsite operations and is
based on existing methodology. Uncertainties associated with environmental
remediation contingencies are pervasive and often result in wide ranges of
reasonably possible outcomes. Estimates developed in the early stages of
remediation can vary significantly. Normally a finite estimate of cost does not
become fixed and determinable at a specific point in time. Rather, the costs
associated with environmental remediation become estimable over a continuum of
events and activities that help to frame and define a liability. It is possible
that cash flows and results of operations could be affected by the impact of the
ultimate resolution of this contingency.
In 1995, Sparton Corporation and Sparton Technology, Inc. (STI) filed a
Complaint in the Circuit Court of Cook County, Illinois, against Lumbermens
Mutual Casualty Company and American Manufacturers Mutual Insurance Company
demanding reimbursement of expenses incurred in connection with its
remediation efforts at the Coors Road facility based on various primary and
excess comprehensive general liability policies in effect between 1959 and 1975.
In 1999, the Complaint was amended to add various other excess insurers,
including certain London market insurers and Fireman's Fund Insurance Company.
The case remains in pretrial activity.
In September 2002, STI filed an action in the U.S. District Court for the
Eastern District of Michigan to recover certain unreimbursed costs incurred as a
result of a manufacturing relationship with two entities, Util-Link, LLC
(Util-Link) of Delaware and National Rural Telecommunications Cooperative (NRTC)
of the District of Columbia. On or about October 21, 2002, the defendants filed
a counterclaim seeking money damages, alleging that STI breached its duties in
the manufacture of products for the defendants. The defendant Util-Link has
asked for damages in the amount of $25,000,000 for lost profits. The defendant
NRTC has asked for damages in the amount $20,000,000 for the loss of its
investment in and loans to Util-Link. Sparton has not had an opportunity to
fully assess the respective claims, but believes that the damages sought by NRTC
are included in Util-Link's claim for damages and as such, are duplicative.
Sparton believes the counterclaim to be without merit and intends to vigorously
defend against it. This case is in the initial stages of discovery.
At this time, the Company is unable to predict the amount of recovery, if any,
that may result from the pursuit of these two before-mentioned claims.
ITEM 7(a). QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK EXPOSURE
The Company manufactures its products in the United States and Canada. Sales of
the Company's products are made in the U.S. and Canada, as well as other foreign
markets. The Company is potentially subject to foreign currency exchange rate
risk relating to intercompany activity and balances and to receipts from
customers and payments to suppliers in foreign currencies. Also, adjustments
related to the translation of the Company's Canadian financial statements into
U.S. dollars are included in current earnings. As a result, the Company's
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in the foreign markets in
which the Company operates. However, minimal third party receivables and
payables are denominated in foreign currency and, historically, foreign
currency gains and losses related to intercompany activity and balances have not
been significant. The Company does not consider the market risk exposure
relating to currency exchange to be material.
The Company has financial instruments that are subject to interest rate risk,
principally short-term investments. Historically, the Company has not
experienced material gains or losses due to such interest rate changes. Based on
the current holdings of short-term investments, the interest rate risk is not
considered to be material.
NYSE:SPA [SPARTON LOGO]
10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORTS OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREOWNERS OF SPARTON CORPORATION
We have audited the accompanying consolidated balance sheet of Sparton
Corporation and subsidiaries as of June 30, 2003, and the related consolidated
statements of income, shareowners' equity, and cash flows for the year ended
June 30, 2003. Our audit also included the financial statement schedule (2003
column only) listed in the index at Item 15(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule (2003 column
only) based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sparton
Corporation and subsidiaries at June 30, 2003, and the consolidated results of
their operations and their cash flows for the year ended June 30, 2003, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule (2003 column
only), when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
(BDO SEIDMEN, LLP)
Grand Rapids, Michigan
August 13, 2003
The following audit report was previously issued by Ernst & Young LLP, the
Company's former independent accountants, in connection with the Company's
Annual Report on Form 10-K for the years ended June 30, 2002 and 2001. This
audit report has been reissued by Ernst & Young LLP, who has provided consent to
the inclusion of its report in this Form 10-K. The consolidated balance sheets
as of June 30, 2002 and 2001, the related consolidated statements of income,
shareowners' equity and cash flows for the years ended June 30, 2002 and 2001
and the information in the financial statement schedule (Schedule II - Valuation
and Qualifying Accounts) for the years ended June 30, 2002 and 2001, each of
which is referenced in the audit report, are included in the Company's Form 10-K
for the year ended June 30, 2003.
TO THE BOARD OF DIRECTORS AND SHAREOWNERS OF SPARTON CORPORATION
We have audited the accompanying consolidated balance sheets of Sparton
Corporation and subsidiaries as of June 30, 2002 and 2001, and the related
consolidated statements of income, shareowners' equity, and cash flows for the
years then ended. Our audits also included the financial statement schedule
(2002 and 2001 columns only) listed in the index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule (2002 and 2001 columns only) based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sparton
Corporation and subsidiaries at June 30, 2002 and 2001, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule (2002 and 2001
columns only), when considered in relation to the basic 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, in the year
ended June 30, 2002, the Company changed its method of accounting for its
investment in Cybernet Systems Corporation.
(ERNST & YOUNG LLP)
Toledo, Ohio
August 23, 2002, except for the fifth and sixth paragraphs of Note 9, as to
which the date is September 5, 2002.
NYSE:SPA [SPARTON LOGO]
11
SPARTON CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30
-----------------------------
2003 2002
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 10,562,222 $ 8,687,873
Investment securities (Note 3) 23,214,783 11,530,374
Accounts receivable:
Trade, less allowance of $739,000 ($649,000 in 2002) 18,096,299 12,558,067
U.S. and foreign governments 10,140,605 6,145,330
EPA settlement (Note 9) 1,000,000 -
Income taxes recoverable - 1,055,965
Inventories (Note 4) 31,809,088 41,929,559
Prepaid expenses (Note 8) 1,174,618 2,214,845
------------ ------------
Total Current assets 95,997,615 84,122,013
Pension asset (Note 7) 6,176,085 6,304,117
Other assets (Notes 3 and 8) 5,583,577 2,940,918
Property, plant and equipment, at cost:
Land and land improvements 1,579,601 1,580,900
Buildings and building equipment 13,016,148 12,336,205
Machinery and equipment 19,412,645 19,324,570
------------ ------------
34,008,394 33,241,675
Less accumulated depreciation (25,751,801) (24,207,475)
------------ ------------
Net Property, plant and equipment 8,256,593 9,034,200
------------ ------------
Total Assets $116,013,870 $102,401,248
============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Accounts payable $ 8,893,348 $ 7,762,357
Salaries and wages 3,879,947 3,545,045
Accrued liabilities 4,532,795 2,104,170
Income taxes payable 709,443 -
------------ ------------
Total Current liabilities 18,015,533 13,411,572
Environmental remediation (Note 9) 6,830,131 7,375,259
Commitments and contingencies (Note 9) - -
Shareowners' Equity: (Note 6)
Preferred stock, no par value;
200,000 shares authorized, none outstanding - -
Common stock, $1.25 par value;
15,000,000 shares authorized, 7,943,671 shares outstanding
(7,559,790 at June 30, 2002, after deducting 374,922 shares
in treasury) 9,929,589 9,449,738
Capital in excess of par value 3,015,989 477,493
Accumulated other comprehensive income (loss) (Note 2) 359,486 (172,000)
Retained earnings 77,863,142 71,859,186
------------ ------------
Total Shareowners' Equity 91,168,206 81,614,417
------------ ------------
Total Liabilities and Shareowners' Equity $116,013,870 $102,401,248
============ ============
See accompanying notes
NYSE:SPA [SPARTON LOGO]
12
SPARTON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30
-----------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net sales $169,861,287 $149,672,143 $187,620,426
Costs of goods sold 150,659,969 132,273,801 169,153,517
------------ ------------ ------------
19,201,318 17,398,342 18,466,909
Selling and administrative (income) expenses:
Selling and administrative 13,106,991 12,533,727 14,513,382
EPA related - net (Note 9) (5,240,305) 840,043 1,819,684
------------ ------------ ------------
7,866,686 13,373,770 16,333,066
------------ ------------ ------------
Operating income 11,334,632 4,024,572 2,133,843
Other income (expense):
Interest and investment income 664,835 442,632 355,626
Equity loss in investment (Note 3) (28,000) (452,000) (504,000)
Other - net 261,805 53,000 159,568
------------ ------------ ------------
898,640 43,632 11,194
------------ ------------ ------------
Income before income taxes 12,233,272 4,068,204 2,145,037
Provision for income taxes (Note 8) 3,241,000 1,140,000 844,000
------------ ------------ ------------
Net income $ 8,992,272 $ 2,928,204 $ 1,301,037
============ ============ ============
Earnings per share:
Basic $ 1.13 $ 0.37 $ 0.16
============ ============ ============
Diluted $ 1.12 $ 0.37 $ 0.16
============ ============ ============
See accompanying notes
NYSE:SPA [SPARTON LOGO]
13
SPARTON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income $ 8,992,272 $ 2,928,204 $ 1,301,037
Add (deduct) noncash items:
Depreciation, amortization and accretion 1,669,808 1,663,109 1,913,763
Deferred income taxes 251,000 1,627,000 9,000
EPA settlement due in fiscal 2004 (1,000,000) - -
Equity loss in investment 28,000 452,000 504,000
Change in pension asset 128,032 (163,435) (685,681)
Stock awarded 15,800 - -
Other 1,079 - 114,088
Add (deduct) changes in operating assets and liabilities:
Accounts receivable (9,533,507) 5,001,457 (3,027,573)
Income taxes recoverable 1,055,965 (1,055,965) -
Inventories and prepaid expenses 8,135,175 2,851,113 7,123,402
Accounts payable, salaries and wages, accrued liabilities
and income taxes 4,058,833 (6,759,048) (1,270,634)
------------ ------------ ------------
Net cash provided by operations 13,802,457 6,544,435 5,981,402
INVESTING ACTIVITIES:
Purchases of investment securities (13,816,635) (10,307,374) -
Proceeds from sale of investment securities 2,576,340 75,000 3,468,704
Purchases of property, plant and equipment (732,542) (698,293) (623,376)
Proceeds from sale of property, plant and equipment 20,849 111,553 -
Other, principally noncurrent other assets 9,648 - 437,405
------------ ------------ ------------
Net cash (used) provided by investing activities (11,942,340) (10,819,114) 3,282,733
FINANCING ACTIVITIES:
Stock dividend - cash in lieu of fractional shares (1,080) - -
Proceeds from the exercise of stock options 15,312 - -
Purchase of common stock for treasury - (72,238) (1,281,750)
------------ ------------ ------------
Net cash provided (used) by financing activities 14,232 (72,238) (1,281,750)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH 1,874,349 (4,346,917) 7,982,385
Cash at beginning of year 8,687,873 13,034,790 5,052,405
------------ ------------ ------------
CASH AT END OF YEAR $ 10,562,222 $ 8,687,873 $ 13,034,790
============ ============ ============
Supplemental disclosures of cash paid (refunded) during the year:
Income taxes - net $ 1,331,000 $ 806,000 $ 198,000
============ ============ ============
See accompanying notes
NYSE:SPA [SPARTON LOGO]
14
SPARTON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
Years ended June 30
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Common stock, $1.25 par value:
Shares
Balance, beginning of year 7,559,790 7,570,090 7,828,090
Purchase of common stock for treasury - (10,300) (258,000)
Stock dividend 378,131 - -
Stock awarded 2,000 - -
Stock options exercised 3,750 - -
------------ ------------ ------------
Balance, end of year 7,943,671 7,559,790 7,570,090
============ ============ ============
Amount
Balance, beginning of year $ 9,449,738 $ 9,462,613 $ 9,785,113
Purchase of common stock for treasury - (12,875) (322,500)
Stock dividend 472,664 - -
Stock awarded 2,500 - -
Stock options exercised 4,687 - -
------------ ------------ ------------
Balance, end of year 9,929,589 9,449,738 9,462,613
------------ ------------ ------------
Capital in excess of par value:
Balance, beginning of year 477,493 478,144 494,427
Purchase of common stock for treasury - (651) (16,283)
Stock dividend 2,514,571 - -
Stock awarded 13,300 - -
Stock options exercised 10,625 - -
------------ ------------ ------------
Balance, end of year 3,015,989 477,493 478,144
------------ ------------ ------------
Accumulated other comprehensive income (loss), net of tax (Note 2):
Balance, beginning of year (172,000) 275,000 2,623,986
Net unrealized gains (losses) on investment securities owned 399,069 78,000 (1,986)
Net unrealized gains (losses) on equity investment 138,000 (525,000) (2,457,000)
Reclassification adjustment for net (gains) losses realized
and reported in net income (5,583) - 110,000
------------ ------------ ------------
Balance, end of year 359,486 (172,000) 275,000
------------ ------------ ------------
Retained earnings:
Balance, beginning of year 71,859,186 68,989,694 68,631,624
Net income 8,992,272 2,928,204 1,301,037
Stock dividends (2,988,316) - -
Purchase of common stock for treasury - (58,712) (942,967)
------------ ------------ ------------
Balance, end of year 77,863,142 71,859,186 68,989,694
------------ ------------ ------------
Total Shareowners' Equity $ 91,168,206 $ 81,614,417 $ 79,205,451
============ ============ ============
See accompanying notes
NYSE:SPA [SPARTON LOGO]
15
SPARTON CORPORATION & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Sparton Corporation and all active subsidiaries and have been
prepared in accordance with accounting principles generally accepted in the
United States. All significant intercompany transactions and accounts have been
eliminated.
OPERATIONS - The Company's operations are in one line of business, electronic
contract manufacturing services (EMS). Products and services include complete
"Box Build" products for Original Equipment Manufacturers, microprocessor-based
systems, transducers, printed circuit boards and assemblies, sensors and
electromechanical devices for the telecommunications, medical/scientific
instrumentation, electronics, aerospace, and other industries. The Company
also develops and manufactures sonobuoys, anti-submarine warfare (ASW) devices,
used by the U.S. Navy and other free-world countries.
USE OF ESTIMATES - Accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the disclosure
of assets and liabilities and the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION - The Company's net sales are comprised primarily of product
sales, with supplementary revenues earned from engineering and design services.
Standard contract terms are FOB shipping point. Revenue from product sales is
generally recognized upon shipment of the goods; service revenue is recognized
as the service is performed or under the percentage of completion method,
depending on the nature of the arrangement. Long-term contracts relate
principally to government defense contracts. These contracts are accounted for
based on completed units accepted and their estimated average contract cost per
unit. Development contracts are accounted for based on percentage of completion.
Costs and fees billed under cost-reimbursement-type contracts are recorded as
sales. A provision for the entire amount of a loss on a contract is charged to
operations as soon as the loss is determinable. Shipping and handling costs are
included in costs of goods sold.
ACCOUNTS RECEIVABLE, CREDIT PRACTICES, AND ALLOWANCE FOR POSSIBLE LOSSES -
Products are sold principally in electronics manufacturing markets. Accounts
receivable are customer obligations generally due under normal trade terms for
the industry. Credit terms are granted and periodically revised based on
evaluations of the customers' financial condition. The Company performs ongoing
credit evaluations of its customers and although the Company does not generally
require collateral, letters of credit may be required from customers in certain
circumstances. Receivables from foreign customers are generally secured by
letters of credit or cash advances.
The Company maintains an allowance for possible losses on receivables for
estimated losses resulting from the inability of its customers to make required
payments. The allowance is estimated based on historical experience of
write-offs, the level of past due amounts, information known about specific
customers with respect to their ability to make payments, and future
expectations of conditions that might impact the collectibility of accounts.
When management determines that it is probable that an account will not be
collected, it is charged against the allowance for possible losses.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of cash and cash
equivalents, accounts receivable, and accounts payable approximate their
carrying value. Cash and cash equivalents consist of demand deposits and other
highly liquid investments with an original term of three months or less.
INVESTMENT SECURITIES - Investments in debt securities that are not cash
equivalents and marketable equity securities have been designated as available
for sale. Those securities are reported at fair value, with net unrealized gains
and losses included in accumulated other comprehensive income, net of applicable
taxes. Unrealized losses that are other than temporary are recognized in
earnings. Realized gains and losses on investments are determined using the
specific identification method. The Company's investment in Cybernet Systems
Corporation is accounted for under the equity method, as more fully described in
Note 3.
MARKET RISK EXPOSURE - The Company manufactures its products in the United
States and Canada. Sales of the Company's products are in the U.S. and Canada,
as well as other foreign markets. The Company is potentially subject to foreign
currency exchange rate risk relating to intercompany activity and balances,
receipts from customers, and payments to suppliers in foreign currencies. Also,
as discussed below, adjustments related to the translation of the Company's
Canadian financial statements into U.S. dollars are included in current
earnings. As a result, the Company's financial results could be affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in the foreign markets in which the Company operates. However,
minimal third party receivables and payables are denominated in foreign currency
and, historically, foreign currency gains and losses related to intercompany
activity and balances have not been significant. The Company does not consider
the market risk exposure relating to currency exchange to be material.
The Company has financial instruments that are subject to interest rate risk,
principally short-term investments. Historically, the Company has not
experienced material gains or losses due to such interest rate changes. Based on
the current holdings of short-term investments, the interest rate risk is not
considered to be material.
NYSE:SPA [SPARTON LOGO]
16
INVENTORIES - Customer contracts are based upon forecasted quantities of
product, manufactured for shipment over defined periods. Raw material
inventories are purchased to fulfill these customer requirements. Within these
arrangements, customer demand for products frequently change, sometimes creating
excess and obsolete inventories. When it is determined that the Company's
carrying cost of such excess and obsolete inventories cannot be recovered in
full, a charge is taken against income and a valuation allowance is established
for the difference between the carrying cost and the estimated realizable
amount. Conversely, should the disposition of adjusted excess and obsolete
inventories result in recoveries in excess of these reduced carrying values, the
remaining portion of the valuation allowances are reversed and taken into income
when such determinations are made. It is possible that the Company's financial
position, results of operations and cash flows could be materially affected by
changes to inventory valuation allowances for excess and obsolete inventories.
Inventories are valued at the lower of cost (first-in, first-out basis) or
market and include costs related to long-term contracts as disclosed in Note 4.
Inventories, other than contract costs, are principally raw materials and
supplies. The following are the major classifications of inventory:
2003 2002
---- ----
Raw materials $ 20,157,000 $23,353,000
Work in process and finished goods 11,652,000 18,577,000
------------ -----------
$ 31,809,000 $41,930,000
============ ===========
WORK IN PROGRESS AND FINISHED GOODS INVENTORIES INCLUDE $1.1 AND $7.5 MILLION OF
SONOBUOYS AT JUNE 30, 2003 AND 2002, RESPECTIVELY.
PROPERTY, PLANT, EQUIPMENT, AND DEPRECIATION - Property, plant, and equipment
are stated at cost less accumulated depreciation. Depreciation is provided over
estimated useful lives on accelerated methods, except for certain buildings,
machinery and equipment with aggregate historical costs at June 30, 2003, of
approximately $10,288,000, which are being depreciated on the straight-line
method. Estimated useful lives generally range from 5 to 50 years for buildings
and improvements, 3 to 16 years for machinery and equipment and 3 to 5 years for
test equipment. For tax purposes, accelerated depreciation methods with minimum
lives are utilized.
LONG-LIVED ASSETS - The Company reviews long-lived assets with finite lives and
that are not held for sale for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment is determined by comparing the carrying value of the
assets to their estimated future undiscounted cash flows. If it is determined
that an impairment of a long-lived asset has occurred, a current charge to
income is recognized.
DEFERRED INCOME TAXES - Deferred income taxes are based on enacted income tax
rates in effect on the dates temporary differences between the financial
reporting and tax bases of assets and liabilities reverse. The effect on
deferred tax assets and liabilities of a change in income tax rates is
recognized in income in the period that includes the enactment date. To the
extent that available evidence about the future raises doubt about the
realization of a deferred tax asset, a valuation allowance is established.
NEW ACCOUNTING STANDARDS - Effective July 1, 2002, the Company was required to
adopt Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting
for the Impairment of Long-Lived Assets" (SFAS No. 144), which supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and provides a single accounting model for long-
lived assets which are to be disposed of. The adoption of SFAS No. 121 did not
have a material effect on the Company's consolidated results of operation or
financial position.
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
(SFAS No. 148), which amends SFAS No. 123, "Accounting for Stock-Based
Compensation." The amendment permits two additional transition methods for a
voluntary change to the fair value based method of accounting for stock-based
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require more prominent and frequent disclosures about the
effects of stock-based compensation. SFAS No. 148 was effective for Sparton's
fiscal year end June 30, 2003. SFAS No. 123, as amended by SFAS No. 148, permits
companies to (i) recognize as expense the fair value of stock-based awards, or
(ii) continue to apply the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related Interpretations (APB
25), and provide pro forma net income and earnings per share disclosures for
employee stock compensation as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company does not intend to effect a voluntary
change in accounting to the fair value method at this time. The Company will
continue to apply the provisions of APB 25 and provide the pro forma disclosures
with respect to its stock-based compensation plans in accordance with the
provisions of SFAS Nos. 123 and 148. Accordingly, it is not anticipated that the
adoption of SFAS No. 148 will have a significant impact on the Company's future
results of operation or financial position.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45), which requires a guarantor to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. Adoption of FIN 45 did not have a material
effect on the Company's consolidated results of operation or financial position.
17
In January 2003, the FASB issued FIN 46 "Consolidation of Variable Interest
Entities," which requires variable interest entities, previously referred to as
special-purpose entities, or off-balance sheet structures, to be consolidated by
a company if that company is subject to a majority of the risk of loss from the
entity's activities or is entitled to receive a majority of the entity's returns
or both. The Company does not expect this Interpretation to have a significant
impact on its future results of operations or financial position, as variable
interest entities were not used in transactions.
TREASURY STOCK - The Company records treasury stock purchases at cost. In
recording the Company's treasury stock purchases, the excess of cost over par
value is allocated to capital in excess of par value based on the per share
amount of capital in excess of par value for all shares, with the difference
charged to retained earnings. There was no treasury stock held at June 30, 2003.
STOCK OPTIONS - The Company follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related Interpretations
in accounting for its employee stock options. Under APB 25, no compensation
expense is recognized as the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant.
The Company follows the disclosure requirements of Statement of Financial
Accounting Standards (SFAS) No.123, "Accounting for Stock-Based Compensation."
The following sets forth a reconciliation of net income and earnings per share
information for the fiscal years ended June 30, 2003, 2002 and 2001, as if the
Company had recognized compensation expense based on the fair value at the grant
date for awards under the plan.
2003 2002 2001
---- ---- ----
Net income, as reported $8,992,272 $ 2,928,204 $1,301,037
Deduct: Total stock-based compensation expense determined under
the fair value based method for all awards, net of tax effects 125,664 65,412 30,550
---------- ----------- ----------
Pro forma net income $8,866,608 $ 2,862,792 $1,270,487
========== =========== ==========
Pro forma earnings per share:
Basic earnings per share - after stock dividend $ 1.12 $ 0.36 $ 0.16
========== =========== ==========
Diluted earnings per share - after stock dividend $ 1.10 $ 0.36 $ 0.16
========== =========== ==========
EARNINGS PER SHARE - Basic and diluted earnings per share were computed based on
the following:
2003 2002 2001
---- ---- ----
Basic - weighted average shares outstanding 7,741,525 7,564,099 7,737,843
Weighted average shares outstanding with respect to
5% common stock dividend declared January 10, 2003 200,998 378,205 386,892
---------- ---------- ----------
7,942,523 7,942,304 8,124,735
Effect of dilutive stock options 84,569 53,110 12,010
---------- ---------- ----------
Weighted average diluted shares outstanding 8,027,092 7,995,414 8,136,745
========== ========== ==========
Basic earnings per share - after stock dividend $ 1.13 $ 0.37 $ 0.16
========== ========== ==========
Diluted earnings per share - after stock dividend $ 1.12 $ 0.37 $ 0.16
========== ========== ==========
All average outstanding shares and per share information have been restated to
reflect the impact of the 5% stock dividend declared in January 2003. For fiscal
2003 and 2001, options to purchase 3,150 and 137,025 shares of common stock were
not included in the computation of diluted earnings per share because such
option's exercise prices were greater than the average market price of the
Company's common stock and, therefore, the effect would be antidilutive. All
options were included for fiscal 2002.
RESEARCH AND DEVELOPMENT EXPENDITURES - Expenditures for research and
development, with a focus on product development, not funded by customers,
amounted to approximately $340,000 in fiscal 2003, $338,000 in fiscal 2002 and
$785,000 in fiscal 2001. R&D costs are included in costs of goods sold.
Substantially all of the Company's R&D costs are reimbursed.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS - For purposes of translating the
financial statements of the Company's Canadian operations, the U.S. dollar is
considered the functional currency. Related translation adjustments, along with
gains and losses from foreign currency transactions, are included in current
earnings and, in the aggregate, amounted to income (expense) of $440,000,
$17,000 and $(243,000) for the years ended June 30, 2003, 2002 and 2001,
respectively.
NYSE:SPA [SPARTON LOGO]
18
2. COMPREHENSIVE INCOME - Comprehensive income includes net income as well as
unrealized gains and losses, net of tax, which are excluded from net income.
They are, however, reflected as a direct charge or credit to shareowners'
equity. Total comprehensive income (loss) is as follows for the years ended June
30:
2003 2002 2001
---- ---- ----
Net income $8,992,000 $2,928,000 $ 1,301,000
Other comprehensive income, net of tax
Net unrealized gains (losses) - investment securities owned 399,000 78,000 (2,000)
Net unrealized gains (losses) - investment securities held by
investee accounted for by the equity method (Note 3) 138,000 (525,000) (2,457,000)
Plus: net reclassification adjustment for (gains) losses realized
and reported in net income (6,000) - 110,000
---------- ---------- -----------
Comprehensive income (loss) $9,523,000 $2,481,000 $(1,048,000)
========== ========== ===========
At June 30, 2003, shareowners' equity includes accumulated other comprehensive
income (loss) of $471,000 and $(112,000), which relate to unrealized gains, net
of tax, on investment securities owned and unrealized losses, net of tax, on
investment securities held by an investee accounted for the by equity method,
respectively. At June 30, 2002, these amounts were $78,000 and $(250,000)
respectively.
3. INVESTMENT SECURITIES - Details of the investment securities, which are
classified as available-for-sale, as of June 30, 2003 and 2002, are as follows:
Gross
Amortized Cost Unrealized Gains Estimated Fair Value
-------------- ---------------- --------------------
June 30, 2003:
Debt securities:
Corporate - primarily U.S. $ 9,457,000 $ 389,000 $ 9,846,000
U.S. government and federal agency 5,469,000 181,000 5,650,000
State and municipal 5,510,000 170,000 5,680,000
------------ ------------ ------------
Total debt securities 20,436,000 740,000 21,176,000
Equity securities - primarily preferred stock 2,031,000 8,000 2,039,000
------------ ------------ ------------
Total investment securities $ 22,467,000 $ 748,000 $ 23,215,000
============ ============ ============
June 30, 2002:
Debt securities:
Corporate - primarily U.S. $ 5,136,000 $ 53,000 $ 5,189,000
U.S. government and federal agency 2,268,000 37,000 2,305,000
State and municipal 3,817,000 32,000 3,849,000
------------ ------------ ------------
Total debt securities 11,221,000 122,000 11,343,000
Equity securities - primarily preferred stock 186,000 1,000 187,000
------------ ------------ ------------
Total investment securities $ 11,407,000 $ 123,000 $ 11,530,000
============ ============ ============
A daily market exists for all of the investment securities. The Company believes
that the impact of fluctuations in interest rates on its investment portfolio
should not have a material impact on financial position or results of
operations. It is the Company's intention to use these investment securities to
provide working capital, fund the expansion of its business and for other
business purposes.
The contractual maturities of debt securities as of June 30, 2003, are as
follows:
Years
-------------------------------------------------------------------
Within 1 1 to 5 5 to 10 Over 10 Total
- ----------------------------------------------------------------------------------------------------------
Debt securities
Corporate - primarily U.S. $ 1,539,000 $ 6,431,000 $ 1,876,000 $ - $ 9,846,000
U.S. government and federal agency 410,000 3,613,000 1,627,000 - 5,650,000
State and municipal 202,000 3,086,000 1,694,000 698,000 5,680,000
----------- ------------ ------------ --------- -----------
Total debt securities $ 2,151,000 $ 13,130,000 $ 5,197,000 $ 698,000 $21,176,000
=========== ============ ============ ========= ===========
For the years ended June 30, 2003 and 2002, the Company had purchases of
investment securities totaling $13,817,000 and $10,307,000 and proceeds from
investment securities sales totaling $2,576,000 and $75,000, respectively.
NYSE:SPA [SPARTON LOGO]
19
In June 1999, the Company purchased a 14% interest, 12% on a fully diluted
basis, in Cybernet Systems Corporation (Cybernet) for $3,000,000. Cybernet is a
privately owned developer of hardware, software, next-generation network
computing, and robotics products. It is located in Ann Arbor, Michigan. At June
30, 2002, Sparton changed its method of accounting for its investment in
Cybernet. The investment is accounted for under the equity method and is
included in other assets on the balance sheets at June 30, 2003 and 2002. The
Company believes that the equity method is more appropriate given Sparton's
increasing involvement in Cybernet. The use of the cost method in the past was
appropriate, but reflective of the more passive involvement at that time. The
use of the equity method requires Sparton to record its share of Cybernet's
income or loss in earnings ("Equity income (loss) in investment") in Sparton's
income statement with a corresponding increase or decrease in the investment
account ("Other assets") in Sparton's balance sheets. In addition, Sparton's
share of unrealized gains (losses) on available-for-sale securities held by
Cybernet, is carried in accumulated other comprehensive income (loss) within the
shareowners' equity section of Sparton Corporation's balance sheets. The
unrealized gains (losses) on available-for-sale securities reflect Cybernet's
investment in Immersion Corporation, a publicly traded company. Effective June
30, 2002, the financial statements were retroactively adjusted to reflect
Sparton's share of Cybernet's losses and accumulated other comprehensive income
(loss) for all years presented, as required by Accounting Principles Board
Opinion No. 18, "The Equity Method of Accounting for Investments In Common
Stock."
4. LONG-TERM CONTRACTS - Government contracts allow for progress billings,
against inventory purchased by the Company for government jobs, to be submitted
for payment throughout the course of the job. Inventories include costs related
to long-term contracts of approximately $11,268,000 and $23,622,000 at June 30,
2003 and 2002, respectively, reduced by progress billings to the U.S. government
of approximately $8,317,000 and $6,275,000, respectively.
5. LEASE INFORMATION - The Company leases a substantial portion of its
production machinery, data processing equipment, and other equipment. Such
leases, some of which are noncancelable and in many cases include renewal
options, expire at various dates. Generally, the Company is responsible for
maintenance, insurance and taxes relating to these leased assets. Rent expense
under agreements accounted for as operating leases was $4,756,000 in fiscal
2003, $4,348,000 in fiscal 2002, and $3,697,000 in fiscal 2001. At June 30,
2003, future minimum lease payments for all noncancelable operating leases
totaled $5,766,000, and are payable as follows: 2004 - $3,295,000; 2005 -
$1,362,000; 2006 - $808,000; 2007 - $291,000; 2008 - $10,000.
6. STOCK OPTIONS - The Company has an incentive stock option plan under which
760,000 common shares are reserved for option grants to key employees and
directors at the fair market value of the stock at the date of the grant. This
plan, approved by shareowners in October 2001, amended and restated a previous
plan approved in October 1999. Under the plan, the options generally become
exercisable cumulatively, beginning one year after the date granted, in equal
annual installments, and generally terminate five years after the date of grant.
Under a previous plan, individual grants may have a stock appreciation rights
feature whereby optionees can surrender up to one-half of their unexercised
options to the extent then exercisable in exchange for cash or common shares
equal to the difference between the then-current market value and the option
prices for shares issuable upon surrender of such options. Information on
options is as follows:
Shares Under Option Price Range
------------------- -----------
Outstanding at June 30, 2000 166,425 $3.5625 to $7.9563
Granted 145,950 3.9188 to 4.0375
Exercised - -
Cancelled (21,525) 4.0375 to 7.9563
-------- ------------------
Outstanding at June 30, 2001 290,850 3.5625 to 7.9563
Granted 296,100 6.6595 to 8.2380
Exercised - -
Cancelled (119,175) 6.6595 to 7.9563
-------- ------------------
Outstanding at June 30, 2002 467,775 3.5625 to 8.2380
Granted 134,650 7.9300 to 8.0750
Exercised (3,750) 3.5625 to 4.0375
Cancelled (53,737) 4.0375 to 6.6595
-------- ------------------
Outstanding at June 30, 2003 544,938 $3.5625 to $8.2380
======== ==================
As of June 30, 2003, there were 142,013 shares under option outstanding at
prices ranging from $3.5625 to $4.0375 and 402,925 shares under option
outstanding at prices ranging from $6.6595 to $8.2380.
The per share weighted-average exercise price of options outstanding was $6.34,
$5.78, and $5.68 at June 30, 2003, 2002, and 2001, respectively.
Weighted-average remaining contractual life of options outstanding at June 30,
2003, is approximately 3.4 years. At June 30, 2003, there were 191,691 options
exercisable at the per share weighted-average exercise price of $5.41.
Exercisable options and per share weighted-average exercise price were 78,619
and $4.97, and 139,125 and $7.50, for June 30, 2002 and 2001, respectively.
Remaining shares available for grant under the plan were 211,312 at June 30,
2003.
NYSE:SPA [SPARTON LOGO]
20
Under SFAS No. 123, fair value was estimated at the date of grant using the
Black-Scholes option pricing model and the following weighted- average
assumptions for the options:
2003 2002 2001
---- ---- ----
Stock Options:
Expected option life 4 4 4
Expected volatility 35.0% 31.5% 36.7%
Risk-free interest rate 3.2 5.0 5.5
Dividend yield 0.0 0.0 0.0
Weighted-average fair value $ 2.63 $2.16 $1.53
7. EMPLOYEE BENEFIT PLANS
Pension Benefits
Prior to March 31, 2000, the Company maintained a contributory defined benefit
pension plan covering certain salaried and hourly employees. Pension benefits
were based on years of credited service. Additional benefits were available to
contributory participants based upon their years of contributory service and
compensation.
Effective April 1, 2000, the Company amended its defined benefit retirement plan
to determine future benefits using a cash balance formula. On March 31, 2000,
credited and contributory credited service under the plan's previous formula
were frozen and the benefit amount changed to be based on the final 5 years'
average compensation. Under the cash balance formula, each participant has an
account which is credited yearly with 2% of their salary, as well as the
interest earned on their previous year-end cash balance. In addition, a
transition benefit was added to eliminate the shortfall in projected benefits
that some eligible employees could experience. The Company's policy is to fund
the plan based upon legal requirements and tax regulations.
The following weighted-average assumptions were used as of June 30:
2003 2002
---- ----
Discount rate 6.25% 7.25%
Expected return on plan assets 7.50 7.50
Rate of compensation increase 5.00 5.00
Net periodic pension expense (income) of $128,000, $(163,000) and $(686,000) was
recognized in 2003, 2002 and 2001, respectively.
The components of net periodic pension expense (income) for each of the years
were as follows:
2003 2002 2001
---- ---- ----
Service cost $ 476,000 $ 483,000 $ 440,000
Interest cost 706,000 720,000 782,000
Expected return on plan assets (1,138,000) (1,144,000) (1,486,000)
Amortization of prior service cost 85,000 74,000 74,000
Amortization of transition asset (1,000) (296,000) (296,000)
Recognized net actuarial gain - - (200,000)
----------- ----------- -----------
Net periodic pension expense (income) $ 128,000 $ (163,000) $ (686,000)
=========== =========== ===========
The following tables summarize the changes in benefit obligations, plan assets
and funding status of the plan at March 31:
2003 2002
---- ----
Change in benefit obligations:
Benefit obligation at beginning of period $10,765,000 $11,158,000
Service cost 476,000 483,000
Interest cost 706,000 720,000
Amendments 127,000 -
Actuarial (gains) losses 1,057,000 (147,000)
Benefits paid (1,557,000) (1,449,000)
----------- -----------
Benefits obligation at end of period $11,574,000 $10,765,000
=========== ===========
NYSE:SPA [SPARTON LOGO]
21
2003 2002
---- ----
Change in plan assets:
Fair value of plan assets at beginning of period $ 16,291,000 $ 16,302,000
Actual return on plan assets (2,308,000) 1,438,000
Plan contributions - -
Benefits paid (1,557,000) (1,449,000)
------------- -------------
Fair value of plan assets at end of period $ 12,426,000 $ 16,291,000
============= =============
2003 2002
---- ----
Plan assets in excess of projected benefits obligations $ 852,000 $ 5,526,000
Unrecognized net actuarial losses 4,556,000 53,000
Unrecognized transition asset - (1,000)
Unamortized prior service cost 768,000 726,000
------------- -------------
Pension asset $ 6,176,000 $ 6,304,000
============= =============
Plan assets at June 30, 2003, consist principally of common stock (including
335,055 shares of the Company's common stock), corporate bonds and U.S.
government obligations.
Defined Contribution Plan
Effective with the change in the defined benefit plan, the Company expanded an
existing defined contribution plan to cover all U.S. based operating
subsidiaries. Through December 31, 2001, the Company matched 50 percent of
participants' basic contributions of up to 5 percent of their wages, with the
matching contribution consisting of cash. As of January 1, 2002, the matching
contribution was changed to be 50 percent of participants' basic contributions
of up to 6 percent of their wages, with the matching cash contributions directed
to be invested in Sparton Common Stock. During fiscal year 2003, 93,000 shares
of Sparton Stock were purchased by the plan using employer contributions. As of
June 30, 2003, 136,000 shares of Sparton Stock were held in the 401(K) plan. No
employee contributions are allowed to be invested in Sparton Stock. Amounts
expensed under the plan, or prior defined contribution plans, were approximately
$773,000, $741,000 and $744,000 for the years ended June 30, 2003, 2002 and
2001, respectively.
8. INCOME TAXES - Significant components of the Company's deferred tax assets
and liabilities at June 30, 2003 and 2002, are as follows:
2003 2002
---- ----
Deferred tax assets:
Environmental remediation $ 2,700,000 $ 2,853,000
Canadian tax carryovers 1,672,000 2,252,000
Inventories 1,003,000 1,046,000
Charitable contribution carryover 249,000 545,000
Equity investment 579,000 515,000
Employment and compensation 576,000 490,000
Other 60,000 420,000
Alternative minimum tax (AMT) credit carryovers - 174,000
------------ ------------
Total deferred tax assets 6,839,000 8,295,000
Less valuation allowances (1,399,000) (2,797,000)
------------ ------------
5,440,000 5,498,000
Deferred tax liabilities:
Pension asset 2,223,000 2,269,000
Property, plant and equipment 989,000 962,000
Unrealized foreign currency transaction gain 522,000 -
------------ ------------
Total deferred tax liabilities 3,734,000 3,231,000
------------ ------------
Net deferred tax assets $ 1,706,000 $ 2,267,000
============ ============
Deferred taxes are included in the balance sheets at June 30, 2003 and 2002, as
follows:
2003 2002
---- ----
Prepaid expenses $ 660,000 $ 1,968,000
Other assets 1,046,000 299,000
------------ ------------
$ 1,706,000 $ 2,267,000
============ ============
NYSE:SPA [SPARTON LOGO]
22
2003 2002 2001
---- ---- ----
Income (loss) before income taxes consists of the following:
United States $ 11,008,000 $ 4,308,000 $ 2,412,000
Canada 1,225,000 (240,000) (267,000)
------------- ----------- -----------
$ 12,233,000 $ 4,068,000 $ 2,145,000
============= =========== ===========
2003 2002 2001
---- ---- ----
The provision (credit) for income taxes consists of:
Current:
United States $ 2,919,000 $ (450,000) $ 738,000
States and local 71,000 (37,000) 97,000
------------- ----------- -----------
2,990,000 (487,000) 835,000
Deferred - United States 251,000 1,627,000 9,000
------------- ----------- -----------
$ 3,241,000 $ 1,140,000 $ 844,000
============= =========== ===========
The consolidated effective tax rate differs from the statutory U.S. federal tax
rate for the following reasons and by the following percentages:
2003 2002 2001
---- ---- ----
Statutory U.S. federal tax rate 34.0% 34.0% 34.0%
Significant increases (reductions) resulting from:
Charitable contributions (net of valuation allowance) (2.4) 5.2 -
Canadian tax loss carryovers (1.9) 1.8 3.4
Tax benefit of foreign sales (2.8) (9.8) (7.2)
Foreign currency transactions/translation (1.7) - -
State and local income taxes 0.6 (0.5) 2.4
Imputed interest on intercompany advances
to Canadian subsidiary - - 7.0
Other 0.7 (1.8) (0.7)
---- ---- ----
Effective tax rate 26.5% 28.9% 38.9%
==== ==== ====
During fiscal 2002, Sparton donated land and facilities, with a net book value
of $598,000, to the City of Flora, Illinois. This property, which had an
appraised value of $1,515,000, had been used in Sparton's discontinued
automotive operations. The charitable contributions carryover is available to
offset taxable income subject to limitations. Of the $1,515,000 available,
$823,000 was utilized in Fiscal 2003. The remaining carryover expires in 2007.
The related deferred tax benefit of $249,000 has been fully offset by a
valuation allowance at June 30, 2003. The benefit will be recognized as the
Company is able to deduct the carryover.
For Canadian income tax purposes, approximately $3,485,000 of noncapital losses
and $847,000 of scientific research and experimental development expenditures
are available at June 30, 2003, for carryover against income in future tax
years. The scientific research and experimental development expenditures have an
unlimited carryover period. The capital loss carryovers expire as follows:
$407,000 in 2004; $1,816,000 in 2006; $1,082,000 in 2007; $74,000 in 2008 and
$106,000 in 2009. In addition, unused investment tax credits of approximately
$113,000 at June 30, 2003, are available for carryover against tax liabilities
in future tax years. These carryover credits expire as follows: $38,000 in 2004;
$2,000 in 2005; $42,000 in 2006 and $31,000 in 2007. For financial reporting
purposes, a valuation allowance of $1,150,000 has been established for the tax
effect of the full amount of the available Canadian carryovers after deducting a
$522,000 Canadian deferred tax liability.
NYSE:SPA [SPARTON LOGO]
23
9. COMMITMENTS AND CONTINGENCIES - One of Sparton's former manufacturing
facilities, located in Albuquerque, New Mexico (Coors Road), has been the
subject of ongoing investigations conducted with the Environmental Protection
Agency (EPA) under the Resource Conservation and Recovery Act (RCRA). The
investigation began in the early 1980s and involved a review of onsite and
offsite environmental impacts.
In December 1999, the Company increased its accrual for the cost of addressing
environmental impacts associated with its Coors Road facility by $10,000,000
pre-tax. This increase was in response to a Consent Decree settling lawsuits, as
well as a related administrative enforcement action, and covered costs expected
to be incurred over the next thirty years.
At June 30, 2003, Sparton has a remaining accrual of $7,500,000 as its estimate
of the minimum future undiscounted financial liability with respect to this
matter, of which $670,000 is classified as a current liability and included on
the balance sheet in accrued liabilities. The Company's minimum cost estimate is
based upon existing technology and excludes legal and related consulting costs.
The Company's estimate includes equipment and operating costs for onsite and
offsite pump and treat containment systems, a soil vapor extraction program and
continued onsite and offsite monitoring. Legal and related consulting costs are
expensed as incurred.
Factors which cause uncertainties for the Company include, but are not limited
to, the effectiveness of the current work plans in achieving targeted results
and proposals of regulatory agencies for desired methods and outcomes. It is
possible that cash flows and results of operations could be significantly
affected by the impact of changes associated with the ultimate resolution of
this contingency. Uncertainties associated with environmental remediation
contingencies are pervasive and often result in wide ranges of reasonably
possible outcomes. Estimates developed in the early stages of remediation can
vary significantly. Normally a finite estimate of cost does not become fixed and
determinable at a specific point in time. Rather, the costs associated with
environmental remediation become estimable over a continuum of events and
activities that help to frame and define a liability. It is possible that cash
flows and results of operations could be materially affected by the impact of
the ultimate resolution of this contingency.
During the first quarter of fiscal 2003, Sparton reached an agreement with the
United States Department of Energy (DOE) and others to recover certain
remediation costs. Under the settlement terms, Sparton received $4,850,000 from
the DOE and others in fiscal 2003, plus an additional $1,000,000 is scheduled to
be received in fiscal 2004. In addition, the DOE has agreed to reimburse Sparton
for 37.5% of certain future environmental expenses in excess of $8,400,000
incurred at the site. The settlement concludes a very lengthy negotiation
process and two court actions, one in the Federal Court of Claims and one in the
Federal District Court in Albuquerque, New Mexico.
With the settlement, Sparton received cash and gained some degree of risk
protection, with the DOE agreeing to reimburse future costs incurred above the
established level. The financial impact of the settlement was recorded in the
first quarter of fiscal 2003. Most of the settlement proceeds (approximately
$5,500,000) were recorded as operating income. Included in current year charges
against operating income related to the New Mexico environmental remediation
effort, principally litigation, was $260,000. Charges of $840,000 and $1,820,000
were included in 2002 and 2001, respectively.
In 1995, Sparton Corporation and Sparton Technology, Inc. (STI) filed a
Complaint in the Circuit Court of Cook County, Illinois, against Lumbermens
Mutual Casualty Company and American Manufacturers Mutual Insurance Company
demanding reimbursement of expenses incurred in connection with its
remediation efforts at the Coors Road facility based on various primary and
excess comprehensive general liability policies in effect between 1959 and 1975.
In 1999, the Complaint was amended to add various other excess insurers,
including certain London market insurers and Fireman's Fund Insurance Company.
The case remains in pretrial activity.
In September 2002, Sparton Technology, Inc. (STI) filed an action in the U.S.
District Court for the Eastern District of Michigan to recover certain
unreimbursed costs incurred as a result of a manufacturing relationship with two
entities, Util-Link, LLC (Util-Link) of Delaware and National Rural
Telecommunications Cooperative (NRTC) of the District of Columbia. On or about
October 21, 2002, the defendants filed a counterclaim seeking money damages,
alleging that STI breached its duties in the manufacture of products for the
defendants. The defendant Util-Link has asked for damages in the amount of
$25,000,000 for lost profits. The defendant NRTC has asked for damages in the
amount $20,000,000 for the loss of its investment in and loans to Util-Link.
Sparton has not had an opportunity to fully assess the respective claims, but
believes that the damages sought by NRTC are included in Util-Link's claim for
damages and as such, are duplicative. Sparton believes the counterclaim to be
without merit and intends to vigorously defend against it. This case is in the
initial stages of discovery.
At this time, the Company is unable to predict the amount of recovery, if any,
that may result from the pursuit of these two before-mentioned claims.
The Company has had no short-term debt outstanding since December 1996, and
currently has unused informal lines of credit totaling $30 million through two
banks.
NYSE:SPA [SPARTON LOGO]
24
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - The following unaudited
information shows selected items by quarter for the years ended June 30, 2003
and 2002, respectively:
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Net sales:
2003 $ 36,767,907 $ 43,279,295 $ 40,841,367 $ 48,972,718
2002 40,810,080 41,065,819 34,970,080 32,826,164
Gross profit:
2003 $ 3,764,262 $ 5,765,067 $ 4,139,852 $ 5,532,137
2002 4,727,915 3,816,872 3,728,731 5,124,824
Net income:
2003 $ 3,577,835 $ 2,178,433 $ 670,530 $ 2,565,474
2002 786,810 549,814 534,234 1,057,346
Earnings per share - basic:
2003 $ 0.47 $ 0.27 $ 0.08 $ 0.31
2002 0.10 0.07 0.07 0.13
Earnings per share - diluted:
2003 $ 0.47 $ 0.27 $ 0.08 $ 0.30
2002 0.10 0.07 0.07 0.13
Net income increased in the fourth quarter of 2003 by $321,000 due to the lower
effective tax rate of 26.5%. See Note 8 for a reconciliation of the statutory
U.S. federal tax rate of 34% to the actual effective rate of 26.5%. The
effective tax rate for the year was lower than estimated through the third
quarter due to (1) higher than anticipated fourth quarter foreign sales, for
which the Company receives a tax benefit and (2) the net foreign currency
transaction and translation income, discussed below, for which no tax expense
was recorded due to the tax net operating loss carryover position of the
Company's Canadian subsidiary. Net income was increased in the fourth quarter of
2002 by $365,000 due to the lower effective tax rate of 28.9%.
Translation adjustments, along with gains and losses from foreign currency
transactions, are included in current earnings and, in the aggregate, amounted
to income (loss) of $506,000, $(58,000) and $(276,000) during the fourth quarter
of the fiscal years ended June 30, 2003, 2002 and 2001, respectively.
11. BUSINESS, GEOGRAPHIC, AND SALES CONCENTRATION - The Company operates in one
business segment, electronic contract manufacturing services (EMS).
Sales to individual customers in excess of 10% were as follows:
Customer 2003 2002 2001
- -------- ---- ---- ----
A 16% 16% 20%
B 11 * *
C * * 10
(*) denotes sales were below 10% of total.
Total direct sales on prime contracts to U.S. government agencies were
$27,729,000 in fiscal 2003, $38,826,000 in fiscal 2002 and $27,997,000 in fiscal
2001.
The Company's net sales were made to customers in the following countries:
2003 2002 2001
---- ---- ----
United States $136,252,000 $129,633,000 $167,407,000
Canada 18,158,000 3,684,000 8,535,000
Other foreign countries (1) 15,451,000 16,355,000 11,678,000
------------ ------------ ------------
Consolidated total $169,861,000 $149,672,000 $187,620,000
============ ============ ============
(1) No single country accounted for 10% or more of export sales in the fiscal
years ended 2003, 2002, or 2001.
Sales of anti-submarine warfare (ASW) devices and related engineering contract
services for the years 2003-2001 contributed approximately 29%, 35%, and 18%,
respectively, to total sales. Intercompany sales were not significant in any of
these years.
Long-lived assets of the Company located outside of the United States are
immaterial.
NYSE:SPA [SPARTON LOGO]
25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In June of 2002, the Board of Directors, including members of the Audit
Committee, met to review, among other matters, the accounting and auditing
services provided to the Company. After reviewing the subject, it was suggested
that as a matter of good corporate practice, the Company solicit proposals for
accounting and auditing services for the fiscal year ending June 30, 2003. In
October 2002, the Company commenced soliciting proposals from a number of firms,
including Ernst & Young LLP.
The Company received a letter from the Company's auditors, Ernst & Young LLP, on
November 19, 2002, indicating that they resigned as the Company's independent
public accountants effective on that date.
The reports of Ernst & Young LLP on the Company's financial statements for the
fiscal years ended June 30, 2001, and June 30, 2002, did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles.
In connection with the audits of the Company's financial statements for each of
the fiscal years ended June 30, 2001, and June 30, 2002, and in the subsequent
interim period that ended September 30, 2002, there were no disagreements
between the Company and Ernst & Young LLP on matters of accounting principles or
practices, financial statement disclosure or auditing scope or procedures which,
if not resolved to the satisfaction of Ernst & Young LLP, would have caused
Ernst & Young LLP to make reference to such matter in its reports on the
financial statements of the Company.
In connection with the audits of the Company's financial statements for each of
the fiscal years ended June 30, 2001, and June 30, 2002, and in the subsequent
interim period that ended September 30, 2002, there were no "reportable events"
within the meaning of Item 304(a)(1)(v) of the Securities and Exchange
Commission's Regulation S-K.
On November 21, 2002, the Company filed on Form 8-K, Item 4 Changes in
Registrant's Certifying Accountant, reporting the resignation of its certifying
accountant Ernst & Young LLP.
The Company's Board of Directors, upon the recommendation of the Audit
Committee, engaged BDO Seidman, LLP as of December 20, 2002, as the Company's
independent public accountants.
On December 20, 2002, the Company filed on Form 8-K, Item 4 Changes in
Registrant's Certifying Accountant, reporting the selection of its new
certifying accountant BDO Seidman, LLP.
ITEM 9(a). CONTROLS AND PROCEDURES - The Company maintains internal controls
over financial reporting intended to provide reasonable assurance, at
appropriate cost, that all material transactions are executed in accordance with
Company authorization and are properly recorded and reported in the financial
statements, and that assets are adequately safeguarded. The Company also
maintains a system of disclosure controls and procedures to ensure that
information required to be disclosed in Company reports, filed or submitted
under the Securities Exchange Act of 1934, is properly reported in the Company's
periodic and other reports.
As of June 30, 2003, an evaluation was updated by the Company's management,
including the CEO and CFO, on the effectiveness of the design and operation of
the Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures continue to be effective as of June 30, 2003.
There have been no significant changes in the Company's internal controls over
financial reporting that occurred during the last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Information with
respect to directors is included in the Proxy Statement under "Election of
Directors" and is incorporated herein by reference. Information concerning the
executive officers is included in Part I, Item 4.
ITEM 11. EXECUTIVE COMPENSATION - Information concerning executive compensation
is included under "Compensation of Executive Officers" in the Proxy Statement
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -
Information on management and certain other beneficial ownership of the
Company's common stock is included under "Outstanding Stock and Voting Rights"
in the Proxy Statement and is incorporated herein by reference.
NYSE:SPA [SPARTON LOGO]
26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Information as to
certain relationships and related transactions is included under "Certain
Relationships and Transactions" in the Proxy Statement and is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES - Information with respect to
principal accountant fees and services, as well as information regarding the
Audit Committee's pre-approved policies and procedures regarding audit and other
services, is included under "Relationship with Independent Auditors" in the
Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report on Form 10-K
1. Financial Statements and Schedules
The financial statements are set forth under Item 8 of this report on
Form 10-K.
2. Financial Statement Schedule(s):
Schedule II - Valuation and Qualifying Accounts (Consolidated)
Reserves deducted from assets in the balance sheets:
Inventory Reserve Accounts, Years ended June 30 : 2003 2002 2001
---------- ---------- ----------
Balance at beginning of period $2,874,000 $4,573,000 $4,540,000
Charged to costs and expenses 1,445,000 1,873,000 1,859,000
Deductions (*) (1,403,000) (3,572,000) (1,826,000)
---------- ---------- ----------
Balance at end of period $2,916,000 $2,874,000 $4,573,000
========== ========== ==========
(*) Deductions from the inventory reserve accounts represent obsolete or
unsaleable inventory written off and/or disposed of.
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
consolidated financial statements or the notes thereto.
3. Exhibits
A list of the Exhibits filed as part of this report is set forth in
the Exhibit Index that immediately precedes such Exhibits and is
incorporated herein by reference.
(b) Report(s) on Form 8-K
- On May 6, 2003, the Company filed on Form 8-K, Item 5, Other
Events; reporting that the Company issued a press release
announcing the financial results of the third quarter and nine
months ended March 31, 2003.
- On May 9, 2003, the Company filed on Form 8-K/A, Item 9,
Regulation FD Disclosure; amending the Form 8-K filed on May 6,
2003, which reported that the Company issued a press release
announcing the financial results of the third quarter and nine
months ended March 31, 2003, under Item 5. This information
should have been filed under Item 12, "Results of Operations and
Financial Condition." Accordingly, the Form 8-K was amended and
restated.
NYSE:SPA [SPARTON LOGO]
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: August 29, 2003
SPARTON CORPORATION
/s/ Richard L. Langley
Richard L. Langley, Chief Financial Officer
(Principal Accounting and Financial 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.
Signature and Title Date
------------------- ----
By /s/ BRADLEY O. SMITH August 29, 2003
- --------------------------------------------------------------------------------------
Bradley O. Smith, Chairman of the Board of Directors
By /s/ DAVID W. HOCKENBROCHT August 29, 2003
- --------------------------------------------------------------------------------------
David W. Hockenbrocht, Chief Executive Officer, President and Director
By /s/ RICHARD L. LANGLEY August 29, 2003
- --------------------------------------------------------------------------------------
Richard L. Langley, Chief Financial Officer, Vice President, Treasurer and Director
By /s/ JAMES N. DEBOER August 29, 2003
- --------------------------------------------------------------------------------------
James N. DeBoer, Director
By /s/ JAMES D. FAST August 29, 2003
- --------------------------------------------------------------------------------------
James D. Fast, Director
By /s/ DR. RICHARD J. JOHNS August 29, 2003
- --------------------------------------------------------------------------------------
Dr. Richard J. Johns, Director
By /s/ DAVID P. MOLFENTER August 29, 2003
- --------------------------------------------------------------------------------------
David P. Molfenter, Director
By /s/ WILLIAM I. NOECKER August 29, 2003
- --------------------------------------------------------------------------------------
William I. Noecker, Director
By /s/ W. PETER SLUSSER August 29, 2003
- --------------------------------------------------------------------------------------
W. Peter Slusser, Director
NYSE:SPA [SPARTON LOGO]
28
EXHIBIT INDEX
3 and 4 Amended Articles of Incorporation of the Registrant were filed with
Form 10-Q for the three-month period ended September 30, 2002, and are
incorporated herein by reference.
Amended Bylaws of the Registrant were filed with Form 10-Q for the
three-month period ended December 31, 2000, and are incorporated
herein by reference.
Amended Code of Regulations of the Registrant were filed with Form
10-Q for the three-month period ended September 30, 1982, and are
incorporated herein by reference.
22 Subsidiaries (filed herewith and attached).
23 Consent of independent auditors (filed herewith and attached).
31.1 Chief Executive Officer certification under Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer certification under Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Chief Financial Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
NYSE:SPA [SPARTON LOGO]
29