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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, 2002
[ ] 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
Incorporation or Organization) Identification No.)
2400 EAST GANSON STREET, JACKSON, MICHIGAN 49202-3795
(Address of principal executive offices, zip code)
(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 checkmark 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. [ X ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of August 30, 2002, was $43,417,829.
The number of shares of common stock outstanding as of August 30, 2002, was
7,563,540.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the definitive Proxy Statement for the fiscal year ended
June 30, 2002, to be delivered to shareholders in connection with the Annual
Meeting of Shareowners to be held on October 23, 2002, are incorporated by
reference into Part III of this Form 10-K.
NYSE: SPA [SPARTON Logo]
TABLE OF CONTENTS
PART I Page
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 7a. Qualitative and Quantitative Disclosures About Market Risk .............................. 9
Item 8. Financial Statements and Supplementary Data .............................................10
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....24
PART III
Item 10. Directors and Executive Officers of the Registrant ......................................24
Item 11. Executive Compensation ..................................................................24
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ...........................................................24
Item 13. Certain Relationships and Related Transactions ..........................................25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................25
Signatures .......................................................................................26
NYSE:SPA [SPARTON Logo]
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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 and engineering services. The Company also develops and
manufactures sonobuoys, anti-submarine warfare (ASW) devices, used by the U.S.
Navy and other free-world countries.
ELECTRONIC CONTRACT MANUFACTURING SERVICES
Historically, the Company's principal electronics product has been sonobuoys,
which are anti-submarine warfare (ASW) devices used by the U.S. Navy and other
free-world military organizations. It 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 directed procure-
ment.
The Company is now focused on substantially expanding sales in the high mix, low
and medium volume commercial and non-sonobuoy government EMS markets. This is
where the Company expects substantially all future revenue growth will occur
with emphasis on government, telecommunications, aerospace, medical/scientific
instrumentation and industrial controls. Many of the physical and technical
attributes used in the production of electronics for sonobuoys are also required
in the production of commercial electronics products. The Company's commercial
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 the commercial EMS business has grown, there has been an increasing need to
provide centralized design services. Last year, 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 an efficient manner and enhances the
Company's focus on new and expanding technologies. Commercial electronic
contract manufacturing and services are sold through a direct sales force and
manufacturer's representatives. 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 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 commercial EMS markets are lower than those historically obtained in
the governmental EMS markets of ASW or proprietary electronics. The lower
margins are primarily due to intense competition and the higher material content
of the products sold.
At June 30, 2002 and 2001, the government backlog was approximately $60 million
and $59 million, respectively. A majority of the fiscal 2002 backlog is expected
to be realized in fiscal 2003. 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, the
loss of any one of several other customers could also have a significant
financial impact. The Company continues to grow its commercial EMS sales with
the objective to expand the customer base, thus reducing this concentration.
Materials for the electronics operations are obtained 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 commercial 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 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
NYSE:SPA [SPARTON Logo]
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cancellation or design changes by customers. While overall sales fluctuate
during the year, such fluctuations do not reflect a definitive seasonal pattern
or tendency.
Research and development expenditures, with a focus on product development,
amounted to approximately $2,818,000 in fiscal 2002, $1,669,000 in fiscal 2001,
and $13,484,000 in fiscal 2000 (approximately $2,480,000, $884,000, and
$8,778,000 of these expenditures, respectively, were customer funded). There are
approximately 31 employees involved in research and development activities. Few,
if any, devote all of their time to such efforts.
Sparton employed approximately 1,200 people at June 30, 2002. The Company has
one operating division and three wholly owned active operating subsidiaries. In
addition, it has a foreign sales corporation (FSC).
ITEM 2. PROPERTIES
The table that follows lists the principal properties owned by Sparton. There
are manufacturing and/or office facilities at each location. 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
The Company's Coors Road, Albuquerque, New Mexico, facility 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 a potentially responsible party.
In February 1997, several lawsuits were filed against Sparton's wholly owned
subsidiary, Sparton Technology, Inc., alleging that Sparton Technology'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 as well as a related administrative enforcement action. The Consent
Decree represents a judicially enforceable settlement agreement under which
Sparton Technology paid $1,675,000 to resolve claims for damages, civil
penalties for alleged violations of state law, and for reimbursement of the
litigation costs of certain plaintiffs. The Consent Decree also contains work
plans describing remedial activity Sparton Technology agreed to undertake. The
remediation activities called for by the work plans have been installed and are
either completed, in the case of soil vapor extraction, or in operation, in the
case of offsite and onsite containment wells. It is anticipated that ongoing
remediation activities will operate for a period of time during which Sparton
Technology 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 changes in environmental laws or their interpretation will require that
additional amounts be spent.
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 Plant 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, 2002, the remaining undiscounted minimum
accrual for EPA remediation approximates $7,925,000. 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, a soil vapor extraction
program and 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.
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In 1995, Sparton Corporation and Sparton Technology, Inc. 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 is in the
discovery stage.
In 1998, Sparton Technology, Inc. commenced litigation in two courts seeking
reimbursement of Sparton's costs incurred in complying with, and defending
against, Federal and state environmental requirements with respect to its former
plant on Coors Road in Albuquerque, New Mexico. 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. The first suit was commenced
on February 11, 1998, in the United States Court of Federal Claims against the
United States Department of Energy (DOE), alleging that it is liable for
reimbursement of Sparton's environmental costs because the DOE prescribed
certain mandatory performance requirements which were then imposed on Sparton
Technology.
In the second lawsuit, filed on September 21, 1998, Sparton Technology also
sought to recover environmental costs incurred in connection with the Coors
Road facility. This suit named the DOE, as well as other defendants, and sought
recovery of Sparton's costs under both contract theories and Federal
environmental law theories.
Subsequent to June 30, 2002, Sparton reached an agreement with the DOE and
others to recover certain remediation costs. Under the agreement, Sparton will
be reimbursed for a portion of the costs the Company has incurred in its
investigation and site remediation efforts at the Coors Road site.
Under the settlement terms, Sparton will receive $4,850,000 from the DOE and
others in fiscal 2003, plus an additional $1,000,000 in fiscal 2004. In
addition, the DOE has agreed to reimburse Sparton 37.5% of certain future
environmental expenses in excess of $8,400,000 incurred at the site.
With the settlement, Sparton was able to receive cash and gain some degree of
risk protection, with the DOE sharing in costs incurred above an established
level. The financial impact of the settlement will be recorded in the first
quarter of fiscal 2003, ending September 30, 2002. Most of the settlement
proceeds received (approximately $5,500,000) will be recorded as income.
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
---
BRADLEY O. SMITH, Chairman of the Board since October 2000. Mr. Smith has served 57
as a Director since 1998. Formerly Owner and President of Tracy Products, Inc.
DAVID W. HOCKENBROCHT, Chief Executive Officer since October 2000 and President 67
since January 1978.
DOUGLAS E. JOHNSON, Chief Operating Officer and Executive Vice President 54
since February 2001 and Vice President since 1995.
RICHARD L. LANGLEY, Chief Financial Officer since February 2001, Vice President 57
and Treasurer since 1990.
JOSEPH S. LERCZAK, Secretary since June 2002 and Corporate Controller since April 2000. 45
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.
NYSE:SPA [SPARTON Logo]
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CHARLES A. STRANKO, Vice President, General Manager Sparton Technology, Inc. since 44
January 2001. Prior to that date, Mr. Stranko held various managerial positions
within Sparton Electronics since January 1998 and held the position of General Manager,
Contract Assembly Division for Hammon Electronics, from September 1995 to January 1998.
MICHAEL G. WOODS, Vice President since August 1999, and General Manager of 43
Sparton of Canada, Ltd. since November 1998. Prior to that date,
Mr. Woods held varying positions including Controller and Director of
Electronics Manufacturing Services for Sparton of Canada.
ALAN J. HOUGHTALING, Vice President, Director Business Development since May 2000. Prior 45
to that date, Mr. Houghtaling held varying positions including Director of Business
Development ECM, Division Director of Business Development and Director of
ECM Business for Sparton.
STEPHANIE A. MARTIN, Vice President, Corporate Materials Acquisitions and Logistics since 46
May 2000. Prior to that date, Ms. Martin held varying positions since October 1996
including Director Corporate Materials Acquisition and Logistics for Sparton Electronics.
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 30, 2002, there were 660 registered holders of record of
the Company's common stock. The recent price of the Company's common stock as of
August 30, 2002, was $8.35. The Company did not pay cash dividends on its common
stock. The high and low common stock prices per share were as follows:
QUARTER ENDED: SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
-------------- ------------ ----------- -------- -------
Fiscal 2002 High $7.50 $7.15 $9.40 $9.10
Low 6.50 6.50 7.38 8.35
Fiscal 2001 High $4.25 $6.00 $6.25 $7.25
Low 3.63 4.00 4.00 6.13
Fiscal 2000 High $6.63 $5.63 $6.13 $4.75
Low 5.63 4.63 4.50 3.75
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ITEM 6. SELECTED FINANCIAL DATA
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
OPERATING RESULTS
- -----------------
Net sales $ 149,672,143 $ 187,620,426 $ 161,914,446 $ 131,900,489 $ 145,935,583
Costs and expenses 145,647,571 185,486,583 175,566,602 129,850,749 141,753,150
------------- ------------- ------------- ------------- -------------
4,024,572 2,133,843 (13,652,156) 2,049,740 4,182,433
Other income (expense)
Interest and investment income 442,632 355,626 666,253 1,503,982 1,756,039
Equity loss in investment (Note 3) (452,000) (504,000) (435,000) -- --
Other - net 53,000 159,568 713,169 23,359 575,645
------------- ------------- ------------- ------------- -------------
43,632 11,194 944,422 1,527,341 2,331,684
------------- ------------- ------------- ------------- -------------
Income (loss) from continuing
operations before income taxes 4,068,204 2,145,037 (12,707,734) 3,577,081 6,514,117
Provision (credit) for income taxes 1,140,000 844,000 (4,026,000) 1,818,000 2,181,000
------------- ------------- ------------- ------------- -------------
Income (loss) from continuing operations 2,928,204 1,301,037 (8,681,734) 1,759,081 4,333,117
Income (loss) from discontinued
automotive operations, net of income taxes -- -- -- (2,520,000) (1,320,000)
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 2,928,204 $ 1,301,037 $ (8,681,734) $ (760,919) $ 3,013,117
============= ============= ============= ============= =============
Weighted-average
common shares outstanding 7,564,099 7,737,843 7,828,090 7,828,090 7,826,840
PER SHARE (basic and diluted) OF COMMON STOCK
- ---------------------------------------------
Income (loss):
Continuing operations $ 0.38 $ 0.17 $ (1.11) $ 0.22 $ 0.55
Discontinued operations -- -- -- (0.32) (0.17)
------------- ------------- ------------- ------------- -------------
Total $ 0.38 $ 0.17 $ (1.11) $ (0.10) $ 0.38
============= ============= ============= ============= =============
Shareowners' equity $ 10.80 $ 10.46 $ 10.42 $ 11.18 $ 11.29
Dividends -- -- -- -- --
OTHER FINANCIAL DATA
- --------------------
Total assets $ 102,401,248 $ 107,350,305 $ 111,434,236 $ 108,337,035 $ 111,212,335
Working capital $ 70,710,441 $ 65,977,180 $ 64,778,574 $ 68,578,975 $ 71,118,395
Working capital ratio 6.27:1 4.21:1 4.00:1 4.85:1 4.52:1
Long-term obligations -- -- -- -- --
Shareowners' equity $ 81,614,417 $ 79,205,451 $ 81,535,150 $ 87,521,898 $ 88,368,817
NYSE:SPA [SPARTON Logo]
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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.
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 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 commercial EMS sales declined 34%. The increase in
government sales was due to accelerated sonobuoy production, and higher than
expected foreign sonobuoy sales. The decline in commercial EMS sales reflects
the continued market uncertainties, particularly 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 for the current year was
reflective of a more favorable mix of government sales and continuing cost
containment measures. However, given the reduced level of sales the Company
continues to experience underutilized capacity. Margins on government programs
are improving as the Company concludes 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 continues 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 financial
statements.
Interest and Investment Income increased $87,000 to $443,000 in 2002. Investment
securities are more fully described in Note 3 to the financial statements. Other
Income-Net was $53,000 in 2002 and $160,000 in 2001.
Equity loss in investment was $452,000 and $504,000 in 2002 and 2001,
respectively. At June 30, 2002, Sparton changed its method of accounting for its
investment in Cybernet Systems Corporation (Cybernet). The investment in
Cybernet, which represents a 14% interest, was acquired in June 1999. Cybernet
is a privately held company, headquartered in Ann Arbor, Michigan. The Company
believes that the equity method is more appropriate given its increasing
involvement in the company. The use of the cost method in the past was appropri-
ate, but reflective of the more passive involvement at that time. The financial
statements were retroactively adjusted as required by Accounting Principles
Board Opinion No. 18 "The Equity Method of Accounting for Investments In Common
Stock". Without this change in accounting, net income for fiscal year 2002 would
have been $3.2 million ($0.42 per share). This adjustment resulted in a decrease
in previously reported net income of $318,000 ($0.04 per share) for the year
ended June 30, 2001.
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
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the financial statements, the Company reported net income of $2,928,000 ($0.38
per share) in fiscal 2002, compared to $1,301,000 ($0.17 per share) in fiscal
2001.
FISCAL 2001 COMPARED TO FISCAL 2000
- -----------------------------------
Sales for the year ended June 30, 2001, were $187,620,000, an increase of
$25,706,000 (16%) from fiscal 2000. Overall, commercial EMS sales increased 36%,
while governmental EMS sales decreased 22%. Governmental EMS sales in fiscal
2001 were below forecast due to qualification and production delays on several
major sonobuoy programs. All new production sonobuoy design programs are now
qualified and production ready.
Governmental sales in fiscal 2001 included shipments on several government
contracts which the Company expected to ship in fiscal 2000. These shipments
increased reported sales by $6,100,000 but carried no gross margin. Customer
orders and shipping schedules remained fairly consistent in fiscal 2001 despite
the slowing of the economy.
New program start-up and cost management continued to be areas of focus. These
efforts resulted in the identification and recovery of $1.9 million from one
customer in fiscal 2001. These efforts also contributed to the recovery of $2.3
million of material price variances incurred during fiscal 2001. Many electronic
components were in short supply and allocated. This drove up the prices of these
items. These market conditions eased somewhat by June 30, 2001, and the
availability and price of these components were at more traditional levels.
Selling and administrative expense decreased by $8,865,000 to $16,333,000 in
fiscal 2001. This decrease was largely due to the inclusion of a $10,000,000
charge for EPA remediation in the second quarter of fiscal 2000. Spending for
information technology increased in fiscal 2001 from fiscal 2000, as the Company
continued to upgrade its facilities and equipment.
Operating income of $2,134,000 was reported for fiscal 2001, compared to loss of
$13,652,000 last year. Included within these operating results were adverse
manufacturing variances of $7,148,000 and $3,337,000 for the fiscal years ended
2001 and 2000, respectively. The increased variances in fiscal 2001 were due to;
higher material acquisition overhead costs as the Company transitions processes,
increased lease costs for new SMT equipment, and lower than expected
production schedules, generally in the first half of the fiscal year. These
results also reflect Coors Road-related EPA costs and expenses of $1,820,000 and
$10,811,000 in the fiscal years ended 2001 and 2000, respectively. These EPA
charges are more fully described in Note 9 to the financial statements. During
the year the Company experienced a number of material pricing and availability
issues.
Interest and investment income decreased $311,000 to $356,000 in fiscal 2001.
This decrease was due to a loss on sale of equities during the year of $174,000,
as well as lower average investments. The investment securities are more fully
described in Note 3 to the financial statements. Other Income-net was $160,000
and $713,000 in the fiscal years ended 2001 and 2000, respectively. Included
within fiscal 2000 Other Income-net was a gain of $577,000 from the sale of
equipment and other assets at the Canadian operating unit.
Equity loss in investment was $504,000 and $435,000 in 2001 and 2000,
respectively, for the investment in Cybernet. The financial statements were
retroactively adjusted as required by Accounting Principles Board Opinion No. 18
"The Equity Method of Accounting for Investments In Common Stock". This resulted
in a decrease in previously reported net income of $318,000 ($0.04 per share)
and $274,000 ($0.04 per share) for the years ended June 30, 2001 and 2000,
respectively.
After provision for applicable income taxes as discussed in Note 8 to the
financial statements, the Company reported net income of $1,301,000 ($0.17 per
share) in fiscal 2001, compared to a net loss of $8,682,000 ($(1.11) per share)
in fiscal 2000.
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 to provide
added liquidity. The Company continues to experience a change in its liquidity
sources as the volume of U.S. defense-related contract work declines as a
percentage of total Company revenues. 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 perfor-
mance 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 in the EMS business. The
Company has had no short-term debt since December 1996, and currently has unused
informal lines of credit totalling $30 million with three banks.
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7
Cash flows provided by operating activities were $6,544,000 and $5,981,000 in
the fiscal years ended 2002 and 2001, respectively. In fiscal 2000 cash flows
used by operating activities were $12,755,000. In fiscal 2002 the primary cash
flow use was a reduction in accounts payable. Primary sources included income
from operations and reductions in accounts receivable and inventory.
Cash flows used by investing activities were $10,819,000 in fiscal 2002. The
major use of cash by investing activities was the purchase of investment
securities. Cash flows provided by investing activities were $3,283,000 and
$13,642,000 in the fiscal years ended 2001 and 2000, respectively, primarily
from the sale of investment securities.
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. No financing activities occurred in fiscal 2000.
At June 30, 2002, the Company had $70,710,000 in working capital and a total
shareowners' equity of $81,614,000.
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), the following may 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 plant 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, 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 and
operating and monitoring costs for both onsite and offsite remediation. Sparton
recognizes legal and consulting services in the periods incurred. Sparton
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.
The Company formally reviews, on a quarterly basis, costs incurred-to-date and
estimated costs to complete on all significant contracts. These revised
estimated 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
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8
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 change, 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.
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, 2002, Sparton has an accrual of $7,925,000 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. 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. This
estimate is based on existing methodology. Legal and related consulting costs
are expensed as incurred.
Subsequent to June 30, 2002, Sparton reached an agreement with the United States
Department of Energy (DOE) and others to recover certain remediation costs.
Terms of the settlement are more fully described in Item 3 of this Form 10-K.
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.
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 receipts from customers and payments to suppliers in foreign
currencies. As a result, the Company's financial results could be affected by
factors
NYSE:SPA [SPARTON Logo]
9
such as changes in foreign currency exchange rates or weak economic conditions
in the foreign markets in which the Company operates. However, minimal
receivables and payables are denominated in foreign currency. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
Management is responsible for preparing the Company's financial statements and
the other information that appears in this annual report. Management believes
that the financial statements fairly reflect the form and substance of
transactions and reasonably present the Company's financial condition and
results of operations in conformity with accounting principles generally
accepted in the United States. Management has included in the Company's
financial statements amounts that are based on estimates and judgements, which
it believes are reasonable under the circumstances.
The Company maintains a system of internal accounting policies, procedures, and
controls intended to provide reasonable assurance, at appropriate cost, that
transactions are executed in accordance with Company authorization and are
properly recorded and reported in the financial statements, and that assets are
adequately safeguarded.
Ernst and Young LLP audits the Company's financial statements in accordance with
auditing standards generally accepted in the United States.
The Sparton Corporation Board of Directors has an Audit Committee composed of
non-management Directors. The Committee meets with financial management and the
independent auditors to review internal accounting controls and accounting,
auditing, and financial reporting matters.
/s/ David W. Hockenbrocht /s/ Richard L. Langley
David W. Hockenbrocht Richard L. Langley
President and CEO Vice President and CFO
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10
REPORT OF INDEPENDENT AUDITORS
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 operations, shareowners' equity, and cash flows for
each of the three years in the period ended June 30, 2002. Our audits also
included the financial statement schedule listed in the index at Item 14(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 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 each of the three years in
the period ended June 30, 2002, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, 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.
/s/ Ernst & Young LLP
Toledo, Ohio
August 23, 2002, except for Note 12, as to which the date is September 5, 2002.
NYSE:SPA [SPARTON Logo]
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SPARTON CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30
-------------------------------
ASSETS 2002 2001
---- ----
Current assets:
Cash and cash equivalents $ 8,687,873 $ 13,034,790
Investment securities (Notes 1 and 3) 11,530,374 1,175,000
Accounts receivable:
Trade, less allowance of $649,000 ($615,000 in 2001) 12,558,067 21,477,330
U.S. and foreign governments 6,145,330 2,227,524
Income taxes recoverable (Note 8) 1,055,965 --
Inventories (Notes 1 and 4) 41,929,559 44,912,886
Prepaid expenses (Note 8) 2,214,845 3,685,831
------------- -------------
Total Current assets 84,122,013 86,513,361
Pension asset (Note 7) 6,304,117 6,140,682
Other assets (Notes 3 and 8) 2,940,918 4,585,693
Property, plant and equipment, at cost (Note 1):
Land and land improvements 1,580,900 1,590,797
Buildings and building equipment 12,336,205 11,965,497
Machinery and equipment 19,324,570 19,098,641
------------- -------------
33,241,675 32,654,935
Less accumulated depreciation (24,207,475) (22,544,366)
------------- -------------
Net Property, plant and equipment 9,034,200 10,110,569
------------- -------------
Total Assets $ 102,401,248 $ 107,350,305
============= =============
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Accounts payable $ 7,762,357 $ 13,329,356
Salaries and wages 3,545,045 2,902,324
Accrued liabilities 2,104,170 4,187,044
Income taxes payable -- 117,457
------------- -------------
Total Current liabilities 13,411,572 20,536,181
Environmental remediation (Note 9) 7,375,259 7,608,673
Commitments and contingencies (Note 9) -- --
Shareowners' Equity (Notes 1 and 6):
Preferred stock, no par value;
200,000 shares authorized, none outstanding
Common stock, $1.25 par value;
8,500,000 shares authorized, 7,559,790 shares outstanding
(7,570,090 at June 30, 2001) after deducting 374,922 shares
(364,622 at June 30, 2001) in treasury (Note 1) 9,449,738 9,462,613
Capital in excess of par value 477,493 478,144
Accumulated other comprehensive income (loss) (172,000) 275,000
Retained earnings 71,859,186 68,989,694
------------- -------------
Total Shareowners' Equity 81,614,417 79,205,451
------------- -------------
Total Liabilities and Shareowners' Equity $ 102,401,248 $ 107,350,305
============= =============
See accompanying notes
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12
SPARTON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30
-----------------------------------------------
2002 2001 2000
------------- ------------- -------------
Net sales $ 149,672,143 $ 187,620,426 $ 161,914,446
Costs of goods sold 132,273,801 169,153,517 150,368,886
------------- ------------- -------------
17,398,342 18,466,909 11,545,560
Selling and administrative expenses 13,373,770 16,333,066 25,197,716
------------- ------------- -------------
4,024,572 2,133,843 (13,652,156)
Other income (expense):
Interest and investment income 442,632 355,626 666,253
Equity loss in investment (Note 3) (452,000) (504,000) (435,000)
Other - net 53,000 159,568 713,169
------------- ------------- -------------
43,632 11,194 944,422
------------- ------------- -------------
Income (loss) before income taxes 4,068,204 2,145,037 (12,707,734)
Provision (credit) for income taxes 1,140,000 844,000 (4,026,000)
------------- ------------- -------------
Net income (loss) $ 2,928,204 $ 1,301,037 $ (8,681,734)
============= ============= =============
Basic and diluted earnings per share: $ 0.38 $ 0.17 $ (1.11)
============= ============= ============
See accompanying notes
NYSE:SPA [SPARTON Logo]
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SPARTON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 2,928,204 $ 1,301,037 $(8,681,734)
Add (deduct) noncash items:
Depreciation 1,663,109 1,913,763 2,371,871
Deferred income taxes (Note 8) 1,627,000 9,000 (3,591,000)
Equity loss in investment (Note 3) 452,000 504,000 435,000
Pension (163,435) (685,681) (623,593)
Environmental charge (Note 9) -- -- 10,000,000
Other -- 114,088 (60,735)
Add (deduct) changes in operating assets and liabilities:
Accounts receivable 5,001,457 (3,027,573) (4,451,038)
Inventories and prepaid expenses (Note 8) 2,851,113 7,123,402 (11,179,926)
Income taxes recoverable (1,055,965) -- 138,485
Accounts payable, salaries and wages, accrued liabilities
and income taxes (6,759,048) (1,270,634) 2,887,232
------------ ------------ ------------
Net cash provided (used) by operating activities 6,544,435 5,981,402 (12,755,438)
INVESTING ACTIVITIES:
(Purchases) proceeds from investment securities - net (10,232,374) 3,468,704 15,479,198
Purchases of property, plant and equipment (698,293) (623,376) (2,398,139)
Other, principally noncurrent other assets -- 437,405 416,443
Proceeds from sale of property, plant and equipment 111,553 -- 144,583
------------ ------------ ------------
Net cash (used) provided by investing activities (10,819,114) 3,282,733 13,642,085
NET CASH USED BY FINANCING ACTIVITIES:
Purchase of common stock for treasury (72,238) (1,281,750) --
------------ ------------ ------------
(DECREASE) INCREASE IN CASH (4,346,917) 7,982,385 886,647
Cash at beginning of year 13,034,790 5,052,405 4,165,758
------------ ------------ ------------
CASH AT END OF YEAR $ 8,687,873 $ 13,034,790 $ 5,052,405
============ ============ ============
Supplemental disclosures of cash paid (refunded) during the year:
Income taxes - net $ 806,000 $ 198,000 $ (564,000)
============ ============ ============
See accompanying notes
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SPARTON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
Years ended June 30
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Common stock, $1.25 par value:
SHARES
Balance, beginning of year 7,570,090 7,828,090 7,828,090
Purchase of common stock for treasury (10,300) (258,000) --
------------ ------------ ------------
Balance, end of year 7,559,790 7,570,090 7,828,090
============ ============ ============
AMOUNT
Balance, beginning of year $ 9,462,613 $ 9,785,113 $ 9,785,113
Purchase of common stock for treasury (12,875) (322,500) --
------------ ------------ ------------
Balance, end of year 9,449,738 9,462,613 9,785,113
------------ ------------ ------------
Capital in excess of par value:
Balance, beginning of year 478,144 494,427 494,427
Purchase of common stock for treasury (651) (16,283) --
------------ ------------ ------------
Balance, end of year 477,493 478,144 494,427
------------ ------------ ------------
Accumulated other comprehensive income (loss), net of tax:
Balance, beginning of year 275,000 2,623,986 (71,000)
Net unrealized gains (losses) on investment securities owned 78,000 (1,986) (37,014)
Net unrealized gains (losses) on equity investment (Note 3) (525,000) (2,457,000) 2,732,000
Other -- 110,000 --
------------ ------------ ------------
Balance, end of year (172,000) 275,000 2,623,986
------------ ------------ ------------
Retained earnings:
Balance, beginning of year 68,989,694 68,631,624 77,313,358
Net income (loss) 2,928,204 1,301,037 (8,681,734)
Purchase of common stock for treasury (58,712) (942,967) --
------------ ------------ ------------
Balance, end of year 71,859,186 68,989,694 68,631,624
------------ ------------ ------------
Total Shareowners' Equity $ 81,614,417 $ 79,205,451 $ 81,535,150
============ ============ ============
See accompanying notes
[SPARTON Logo]
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. 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 - 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 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 of product sales and
revenue earned from engineering and design services. 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
to government defense contracts. Government contracts are accounted for based on
completed units accepted and their estimated average 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.
CREDIT PRACTICES - The Company sells products principally in the commercial and
governmental electronics manufacturing markets. Credit terms are granted and
periodically revised based on evaluations of the customers' financial condition,
with collateral generally not required. Receivables from foreign customers are
generally secured by letters of credit or cash advances.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of demand deposits
and other highly liquid investments.
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.
NEW ACCOUNTING STANDARD - Effective July 1, 2002, the Company is 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 Company does not expect the adoption of
SFAS No.144 to have a material effect on its consolidated results of operation
or financial position.
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 receipts from customers and
payments to suppliers in foreign currencies. 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 receivables and payables are
denominated in foreign currency. 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.
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16
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:
2002 2001
---- ----
Raw materials $23,353,000 $30,122,000
Work in process and finished goods 18,577,000 14,791,000
----------- -----------
$41,930,000 $44,913,000
=========== ===========
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",
as discussed in Note 6.
DEPRECIATION - Depreciation is provided over estimated useful lives on
accelerated methods, except for certain buildings, machinery and equipment with
aggregate costs at June 30, 2002, of approximately $10,062,000 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.
RESEARCH AND DEVELOPMENT EXPENDITURES - Expenditures for research and
development, with a focus on product development, not funded by customers
amounted to approximately $338,000 in fiscal 2002, $785,000 in fiscal 2001 and
$4,707,000 in fiscal 2000.
TREASURY STOCK - The Company records treasury stock purchases at cost. 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.
EARNINGS PER SHARE - Basic and diluted earnings per share were computed based on
the following:
2002 2001 2000
---- ---- ----
Basic - weighted average shares outstanding 7,564,099 7,737,843 7,828,090
Effect of dilutive stock options 50,581 11,438 --
--------- --------- ---------
Weighted average diluted shares outstanding 7,614,680 7,749,281 7,828,090
========= ========= =========
For fiscal 2002, 2001 and 2000, options to purchase 3,000, 130,500, and 148,500
shares of common stock were not included in the computation of diluted earnings
per share. 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.
2. COMPREHENSIVE INCOME
Comprehensive income includes net income, as well as unrealized gains and
losses, which are excluded from net income. They are, however, reflected as a
direct charge or credit to shareowners' equity.
Total comprehensive income (loss) for the years ended June 30 are as follows:
2002 2001 2000
---- ---- ----
Net income (loss) $ 2,928,000 $ 1,301,000 $(8,682,000)
Other comprehensive income, net of tax
Net unrealized gains (losses) - investment securities owned 78,000 (2,000) (37,000)
Net unrealized gains (losses) - investment securities held by
an equity method investee (Note 3) (525,000) (2,457,000) 2,732,000
Plus: net reclassification adjustment for losses realized
and reported in net income -- 110,000 --
----------- ----------- -----------
Comprehensive income (loss) $ 2,481,000 ($1,048,000) $(5,987,000)
=========== =========== ===========
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3. INVESTMENT SECURITIES
Details of the investment securities portfolio as of June 30, 2002 and 2001, are
as follows:
Gross Estimated
Amortized Cost Unrealized Gains Fair Value
-------------- ---------------- ------------
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
Equity securities - primarily preferred stock 186,000 1,000 187,000
------------ -------- ------------
$ 11,407,000 $123,000 $ 11,530,000
============ ======== ============
June 30, 2001:
Debt securities:
State and municipal $ 1,175,000 $ -- $ 1,175,000
============ ======== ============
The investment portfolio has original maturity dates between 2 and 30 years and
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.
For the year ended June 30, 2002, the Company had net purchases of investment
securities totaling $10,307,000. The Company had no net purchases of investment
securities for fiscal 2001. Net sales of investment securities totaled $75,000
and $3,469,000 in the fiscal years ended 2002 and 2001, respectively.
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, 2002 and 2001. 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's balance sheets. The unrealized gains
(losses) on available-for-sale securities reflect Cybernet's investment in
Immersion Corporation, a publicly traded company. 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
Inventories include costs related to long-term contracts of approximately
$23,622,000 and $21,225,000 at June 30, 2002 and 2001, respectively, reduced by
progress billings to the United States Government of approximately $6,275,000
and $11,234,000, respectively.
5. LEASE INFORMATION
The Company leases a substantial portion of its production machinery, data
processing equipment, vehicles and other equipment. Such leases, some of which
are noncancelable and which in many cases, include renewal options, expire at
various dates. The Company is responsible for most maintenance, insurance and
taxes relating to these leased assets. Rent expense under agreements accounted
for as operating leases was $4,348,000 in fiscal 2002, $3,697,000 in fiscal
2001, and $2,098,000 in fiscal 2000. At June 30, 2002, future minimum lease
payments for all noncancelable operating leases totaled $8,218,000, and are
payable as follows: 2003-$4,217,000, 2004-$2,331,000, 2005-$901,000,
2006-$490,000, 2007-$279,000.
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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, begin-
ning 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, 1999 171,000 $ 6.625 to 8.375
Granted 10,000 3.750
Exercised -- --
Cancelled (22,500) 8.375
------- -----------------
Outstanding at June 30, 2000 158,500 3.750 to 8.375
Granted 139,000 4.125 to 4.250
Exercised -- --
Cancelled (20,500) 4.250 to 8.375
------- -----------------
Outstanding at June 30, 2001 277,000 3.750 to 8.375
Granted 282,000 7.010 to 8.650
Exercised -- --
Cancelled (113,500) 7.010 to 8.375
------- -----------------
Outstanding at June 30, 2002 445,500 $3.750 to 8.650
======= =================
At June 30, 2002, the per share weighted-average exercise price of options
outstanding was $6.07. The weighted-average remaining contractual life of those
options is approximately 3.8 years. At June 30, 2002, there were 74,875 options
exercisable at the per share weighted-average exercise price of $5.22. Remaining
shares available for grant under the plan were 346,500 at June 30, 2002.
Had the compensation cost for the stock options been determined based on the
fair value at the grant date consistent with the fair value method of SFAS 123,
the Company's net earnings would have been reduced by $82,000 ($.01 per share)
in fiscal 2002, $50,000 ($.01 per share) in fiscal 2001, and $70,000 ($.01 per
share) in fiscal 2000.
Under SFAS 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:
2002 2001 2000
----- ---- ----
Stock Options:
Expected option life 4 4 4
Expected volatility 31.5% 36.7% 36.3%
Risk-free interest rate 5.0 5.5 6.5
Dividend yield 0.0 0.0 0.0
Weighted-average fair value $2.16 $1.53 $1.41
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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:
2002 2001
---- ----
Discount rate 7.25% 7.25%
Expected return on plan assets 7.50 7.50
Rate of compensation increase 5.00 5.00
Net periodic pension income of $163,000, $686,000 and $624,000 was recognized in
2002, 2001 and 2000, respectively.
The components of net periodic pension income for each of the years were as
follows:
2002 2001 2000
---- ---- ----
Service cost $ 483,000 $440,000 $ 386,000
Interest cost 720,000 782,000 757,000
Expected return on plan assets (1,144,000) (1,486,000) (1,413,000)
Amortization of prior service cost 74,000 74,000 27,000
Amortization of transition assets (296,000) (296,000) (296,000)
Recognized net actuarial gain - (200,000) (85,000)
------------ --------- -----------
Net periodic pension income $ (163,000) $(686,000) $ (624,000)
============ ========= ===========
The following tables summarize the changes in benefit obligations, plan assets
and funding status of the plan at March 31:
2002 2001
----------- -----------
Change in benefit obligations:
Benefit obligation at beginning of period $11,158,000 $10,993,000
Service cost 483,000 440,000
Interest cost 720,000 782,000
Actuarial (gains) losses (147,000) 17,000
Benefits paid (1,449,000) (1,074,000)
----------- -----------
Benefits obligation at end of period $10,765,000 $11,158,000
=========== ===========
2002 2001
---- ----
Change in plan assets:
Fair value of plan assets at beginning of period $16,302,000 $ 20,949,000
Actual return on plan assets 1,438,000 (3,614,000)
Plan contributions - 41,000
Benefits paid (1,449,000) (1,074,000)
----------- ------------
Fair value of plan assets at end of period $16,291,000 $ 16,302,000
=========== ============
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7. EMPLOYEE BENEFIT PLANS (continued)
2002 2001
---- ----
Plan assets in excess of projected benefits obligations $5,526,000 $5,144,000
Unrecognized net actuarial losses 53,000 494,000
Unrecognized transition asset (1,000) (297,000)
Unamortized prior service cost 726,000 800,000
---------- ----------
Pension asset $6,304,000 $6,141,000
========== ==========
Plan assets at end of period consist principally of common stock (including
319,100 shares of the Company's common stock), corporate bonds and U.S.
Government obligations.
Retirement Savings Plan
Effective with the change in the defined benefit plan, the Company expanded its
defined contribution plan to cover all U.S. based operating subsidiaries.
Through December 31, 2001, the Company matched 50 percent of participants' basic
contributions, 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, up to 6 percent of their
wages, with the matching cash contributions directed to be invested in Sparton
Common Stock. Amounts expensed under the plan, or prior defined contribution
plans, were approximately $741,000, $744,000 and $270,000 for the years ended
June 30, 2002, 2001 and 2000, respectively.
8. INCOME TAXES
Deferred tax assets and liabilities are determined based on differences between
financial reporting and the tax bases of assets and liabilities. Significant
components of the Company's deferred tax assets and liabilities at June 30, 2002
and 2001, are as follows:
2002 2001
---- ----
Deferred tax assets:
Environmental remediation $ 2,853,000 $ 3,081,000
Canadian tax carryovers 2,252,000 2,450,000
Inventories 1,046,000 2,061,000
Charitable contribution carryover 545,000 --
Equity investment 515,000 347,000
Employment and compensation 490,000 440,000
Other 380,000 467,000
Alternative minimum tax (AMT) credit carryovers 174,000 135,000
Loss contracts 25,000 192,000
Capital loss carryovers 15,000 114,000
----------- -----------
Total deferred tax assets 8,295,000 9,287,000
Less valuation allowances (2,797,000) (2,450,000)
----------- -----------
5,498,000 6,837,000
Deferred tax liabilities:
Pension asset 2,269,000 2,211,000
Property, plant and equipment 962,000 997,000
----------- -----------
Total deferred tax liabilities 3,231,000 3,208,000
----------- -----------
Net deferred tax assets $ 2,267,000 $ 3,629,000
=========== ===========
Deferred taxes are included in the balance sheets at June 30, 2002 and 2001, as
follows:
2002 2001
---- ----
Prepaid expenses $ 1,968,000 $ 3,571,000
Other assets 299,000 58,000
----------- -----------
$ 2,267,000 $ 3,629,000
=========== ===========
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8. INCOME TAXES (continued)
Income (loss) before income taxes consists of the following:
2002 2001 2000
---- ---- ----
United States $ 4,307,880 $ 2,412,034 $(11,687,494)
Canada (239,676) (266,997) (1,020,240)
------------ ------------ ------------
$ 4,068,204 $ 2,145,037 $(12,707,734)
============ ============ ============
The provision (credit) for income taxes consists of:
2002 2001 2000
---- ---- ----
Current:
United States $ (450,000) $ 738,000 $ (304,000)
States and local (37,000) 97,000 (131,000)
------------ ------------ ------------
(487,000) 835,000 (435,000)
Deferred - United States 1,627,000 9,000 (3,591,000)
------------ ------------ ------------
$ 1,140,000 $ 844,000 $ (4,026,000)
============ ============ ============
The consolidated effective tax rate differs from the statutory U.S. Federal tax
rate for the following reasons and by the following percentages:
2002 2001 2000
---- ---- ----
Statutory U.S. Federal tax (benefit) rate 34.0% 34.0% (34.0%)
Significant increases (reductions) resulting from:
Charitable contributions (net of valuation allowance) 5.2 -- --
Canadian tax loss carryovers and other 1.8 3.4 2.8
State and local income taxes (0.5) 2.4 (0.7)
Tax benefit of foreign sales (9.8) (7.2) (1.3)
Imputed interest on intercompany advances
to Canadian subsidiary -- 7.0 2.0
Other (1.8) (0.7) (0.3)
---- ---- ------
Effective tax (benefit) rate 28.9% 38.9% (31.5%)
==== ==== ======
For U.S. income tax purposes, approximately $174,000 of AMT credits are
available to offset regular tax in future years. These credits do not expire.
During fiscal 2002 Sparton donated land and facilities, located in Flora,
Illinois, with a net book value of $598,000, to the City of Flora. 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 future taxable income subject to limitations. This carryover
expires in 2007. The related deferred tax benefit of $545,000 has been fully
offset by a valuation allowance at June 30, 2002. The benefit will be recognized
as the Company is able to deduct the carryover.
For Canadian income tax purposes, approximately $5,386,000 of noncapital losses
and scientific research and experimental development expenditures are available
at June 30, 2002, for carryover against income in future tax years. These
carryovers will begin to expire in fiscal 2003. In addition, unused investment
tax credits of approximately $313,000 at June 30, 2002, are available for
carryover against tax liabilities in future tax years. These carryover credits
will begin to expire in 2004. For financial reporting purposes, a valuation
reserve of $2,252,000 has been established for the full amount of the Canadian
carryovers.
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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 plant 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, 2002, Sparton has a remaining accrual of $7,925,000 as its estimate
of the minimum future undiscounted financial liability with respect to this
matter, of which $550,000 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.
Subsequent to June 30, 2002, Sparton reached an agreement with the United States
Department of Energy (DOE) and others to recover certain remediation costs. This
settlement is more fully disclosed in Note 12, subsequent event.
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.
In addition to the $10,000,000 (pre-tax) charge in December 1999 described
above, amounts charged to operations, principally legal and consulting, for the
years ended June 30, 2002, 2001 and 2000, were $840,000, $1,820,000, and
$811,000, respectively.
The Company has had no short-term debt outstanding since December 1996, and
currently has unused informal lines of credit totaling $30 million through three
banks.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following unaudited information shows selected items by quarter for the
years ended June 30, 2002 and 2001, respectively:
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Net sales:
2002 $40,810,080 $41,065,819 $34,970,080 $32,826,164
2001 42,682,312 46,556,366 46,457,914 51,923,834
Gross profit:
2002 4,727,915 3,816,872 3,728,731 5,124,824
2001 2,121,521 5,704,101 3,372,730 7,268,557
Income (loss):
2002 786,810 549,814 534,234 1,057,346
2001 (1,188,547) 671,050 487,570 1,330,964
Basic and diluted earnings (loss) per share:
2002 $0.10 $0.07 $0.07 $0.14
2001 (0.15) 0.08 0.07 0.17
Net income (loss) and earnings (loss) per share for fiscal 2002 and 2001, were
restated to reflect the use of the equity method of accounting for the Company's
investment in Cybernet, as more fully disclosed in Note 3. This adjustment
resulted in a reduction to income of $71,000 ($0.01 per share) and $79,000
($0.01 per share) in each quarter for fiscal 2002 and 2001.
NYSE:SPA [SPARTON Logo]
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Fiscal 2001 fourth quarter gross profits were reduced by $730,000 due to the net
impact of adjustments to certain inventories and revisions in estimated
completion costs on government defense contracts.
Net income was increased in the fourth quarter of fiscal 2002 by $365,000 due to
the lower effective tax rate of 28.9%.
11. BUSINESS SEGMENT AND CONCENTRATION SALES
The company operates in one business segment, electronic contract manufacturing
services (EMS).
Total direct sales on prime contracts to United States government agencies were
$38,826,000 in fiscal 2002, $27,997,000 in fiscal 2001 and $33,715,000 in fiscal
2000. One commercial customer accounted for 16% and 11% of consolidated sales in
fiscal 2002 and 2000, respectively. In fiscal 2001, two commercial customers
accounted for 20% and 10%, respectively, of consolidated sales. Foreign export
sales by U.S. operations to unaffiliated customers were $17,541,000 in fiscal
2002, $17,651,000 in fiscal 2001, and $32,072,000 in fiscal 2000. No single
country accounted for 10% or more of export sales in the fiscal years ended
2002, 2001, or 2000.
Sales of anti-submarine warfare (ASW) devices and related engineering contract
services for the fiscal years 2002-2000 contributed approximately 35%, 18%, and
31%, respectively, to total sales. Intercompany sales were not significant in
any of these years.
12. SUBSEQUENT EVENT
Subsequent to June 30, 2002, Sparton reached an agreement with the United States
Department of Energy (DOE) and others to recover certain remediation costs.
Under the agreement, Sparton will be reimbursed for a portion of the costs the
Company has incurred in its investigation and site remediation efforts at the
Sparton Technology, Inc. Coors Road site, located in Albuquerque, New Mexico.
The remediation efforts began in 1983. 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.
Under the settlement terms, Sparton will receive $4,850,000 from the DOE and
others in fiscal 2003, plus an additional $1,000,000 in fiscal 2004. In
addition, the DOE has agreed to reimburse Sparton 37.5% of certain future
environmental expenses in excess of $8,400,000 incurred at the site.
The financial impact of the settlement will be recorded in the first quarter of
fiscal 2003, that ends September 30, 2002. Most of the settlement proceeds
received (approximately $5,500,000) will be recorded as income.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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.
Information set forth under "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement is incorporated herein by reference.
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 AND
RELATED STOCKHOLDER MATTERS
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.
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24
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.
PART IV
ITEM 14. 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: 2002 2001 2000
---- ---- ----
Balance at beginning of period $ 4,573,000 $ 4,540,000 $ 3,580,000
Charged to costs and expenses 1,873,000 1,859,000 2,246,000
Deductions (*) (3,572,000) (1,826,000) (1,286,000)
------------ ----------- -----------
Balance at end of period $ 2,874,000 $ 4,573,000 $ 4,540,000
============ =========== ===========
(*) 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 on Form 8-K
The Company did not file any reports on Form 8-K during the
fourth quarter of its fiscal year ended June 30, 2002.
NYSE:SPA [SPARTON Logo]
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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: September 27, 2002 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 September 27, 2002
- -----------------------------------------------------------------------------------------
Bradley O. Smith, Chairman of the Board of Directors
By /s/ DAVID W. HOCKENBROCHT September 27, 2002
- -----------------------------------------------------------------------------------------
David W. Hockenbrocht, Chief Executive Officer, President and Director
By /s/ RICHARD L. LANGLEY September 27, 2002
- -----------------------------------------------------------------------------------------
Richard L. Langley, Chief Financial Officer, Vice President, Treasurer and Director
By /s/ JAMES N. DEBOER September 27, 2002
- -----------------------------------------------------------------------------------------
James N. DeBoer, Director
By/s/ JAMES D. FAST September 27, 2002
- -----------------------------------------------------------------------------------------
James D. Fast, Director
By /s/ ROBERT J. KIRK September 27, 2002
- -----------------------------------------------------------------------------------------
Robert J. Kirk, Director
By /s/ DAVID P. MOLFENTER September 27, 2002
- -----------------------------------------------------------------------------------------
David P. Molfenter, Director
By /s/ WILLIAM I. NOECKER September 27, 2002
- -----------------------------------------------------------------------------------------
William I. Noecker, Director
By /s/ W. PETER SLUSSER September 27, 2002
- -----------------------------------------------------------------------------------------
W. Peter Slusser, Director
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26
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David W. Hockenbrocht, certify that:
1. I have reviewed this annual report on Form 10-K of Sparton Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: September 27, 2002 SPARTON CORPORATION
/s/ David W. Hockenbrocht
David W. Hockenbrocht, Chief Executive Officer
-----------------------------------------
I, Richard L. Langley, certify that:
1. I have reviewed this annual report on Form 10-K of Sparton Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: September 27, 2002 SPARTON CORPORATION
/s/ Richard L. Langley
Richard L. Langley, Chief Financial Officer
NYSE:SPA [SPARTON Logo]
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EXHIBIT INDEX
3 and 4 Articles of Incorporation of the Registrant were filed with Form 10-K
for the year ended June 30, 1981, and an amendment thereto was filed
with Form 10-Q for the three-month period ended September 30, 1983, and
are incorporated herein by reference.
Bylaws of the Registrant were filed with Form 10-K for the year ended
June 30, 1981, and an amendment thereto was filed on Form 10-Q for the
three-month period ended December 31, 2000, and are incorporated herein
by reference.
Code of Regulations of the Registrant were filed with Form 10-K for the
year ended June 30, 1981, and an amendment thereto was 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).
- -------------------------------------------------------------------------------
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