<PAGE> 1
Exhibit 13
1900 - 2000
CELEBRATING 100 CONSECUTIVE YEARS
CAPTURING YOUR IMAGINATION.
CREATING SOLUTIONS.
2000 ANNUAL REPORT
[SPARTON ICON]
<PAGE> 2
INDEX
FINANCIAL HIGHLIGHTS.............................................1
SHAREOWNERS' LETTER..............................................2
SPARTON OPERATIONS...............................................4
FINANCIAL PERFORMANCE...........................................17
DIRECTORS, OFFICERS AND GENERAL MANAGERS........................35
SPARTON FACILITIES..............................................36
ANNUAL MEETING NOTIFICATION.....................................36
<PAGE> 3
FINANCIAL HIGHLIGHTS
SPARTON CORPORATION & SUBSIDIARIES FOR YEARS ENDED JUNE 30
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 161,914,446 $ 131,900,489 $ 145,935,583
Net income (loss):
Continuing operations $ (8,407,734) $ 1,759,081 $ 4,333,117
Discontinued operations -- (2,520,000) (1,320,000)
------------- ------------- -------------
$ (8,407,734) $ (760,919) $ 3,013,117
============= ============= =============
Working capital $ 64,778,574 $ 68,578,975 $ 71,118,395
Working capital ratio 4.00:1 4.85:1 4.52:1
Common shares outstanding at June 30 7,828,090 7,828,090 7,828,090
Basic and diluted earnings per share:
Income (loss):
Continuing operations $ (1.07) $ 0.22 $ 0.55
Discontinued operations -- (0.32) (0.17)
------------- ------------- -------------
$ (1.07) $ (0.10) $ 0.38
============= ============= =============
Additional per share information:
Working capital $ 8.28 $ 8.76 $ 9.09
Shareowners' equity 10.10 11.18 11.29
Dividends -- -- --
</TABLE>
MARKET DATA
Price range
New York Stock Exchange
YEARS ENDED JUNE 30
-------------------------------------------------------
2000 1999 1998
---------------- --------------- ------------------
Quarter ended: High Low High Low High Low
---------------- --------------- ------------------
September 30 $6 5/8 $5 5/8 $8 7/8 $5 3/4 $15 1/4 $10 7/8
December 31 5 5/8 4 5/8 6 3/8 5 5/8 16 1/2 10 1/4
March 31 6 1/8 4 1/2 7 1/2 6 10 1/4 8 7/8
June 30 4 3/4 3 3/4 6 3/8 5 7/8 9 7/8 8 3/8
Recent price as of August 31, 2000 ..............$4.13
Shareowners of record .............................750
[SPARTON ICON]
<PAGE> 4
SHAREOWNERS' LETTER
To Our Shareowners:
In January 2000, Sparton Corporation entered its 100(th) year of continuous
business operations as an independent company. With this milestone, Sparton has
joined a relatively exclusive group in the United States. Few companies today
can make such a claim of longevity. During its history, Sparton has undergone
many business evolutions. Today, we find ourselves in the embryonic stage of
carving out a leadership position in the fast growing Electronic Manufacturing
Services (EMS) marketplace. Sparton is a mid-size niche player in this $75
billion worldwide market. Our focus is on the high-mix portion of the electronic
outsourcing industry, principally in regulated marketplaces, illustrated by
original equipment manufacturers (OEMs) in avionics, medical,
telecommunications, governmental and other markets. Sparton's business process
and information system is focused on the aforementioned markets to the exclusion
of others. Sparton is large enough to campaign a full range of design
engineering and manufacturing services, yet small enough to deliver personalized
service to its customers. This strategic combination enables the small to
midsize customer to "find a home at Sparton."
Fiscal 2000 showed strong sales growth in our Electronics Manufacturing Services
business, which has been in the building process for five years. Sparton did,
however, experience the negative earnings effects of several significant events,
described later.
Sales for the year just closed were $161,914,000. This was an increase of
$30,014,000 (23%) from the previous year's $131,900,000. The net loss for the
year was $8,408,000 ($1.07 per share) compared to a net loss of $761,000 ($0.10
per share) last year.
Sales for the fourth quarter increased 46% to $48,946,000 from the same quarter
last year. These sales compare to $34,474,000, $36,737,000 and $41,757,000 in
the first, second and third quarters, respectively.
The net loss for fiscal 2000 in part reflects the $10 million EPA charge against
operations recorded in the second quarter. The charge against operations was a
direct result of the settlement terms of Sparton's 17-year negotiations and
resulting litigation with the United States Environmental Protection Agency
(EPA) concerning environmental cleanup activities at our Coors Road facility in
Albuquerque, New Mexico. Total EPA costs for the year were $10.8 million versus
$1.8 million last year. The amount accrued at June 30, 2000, $9.2 million,
represents our best minimum cost estimate for site remediation, which will occur
over the next 25 to 30 years.
Sparton's management continues to address cost issues on several programs that
have adversely affected operational earnings and temporarily inflated
inventories. Costs on two sonobuoy development programs and one sonobuoy
production program were higher than anticipated. Cost estimates to complete
these government programs increased $1.2 million in the fourth quarter and $4.5
million for the year. In addition, a major commercial program at the Jackson,
Michigan, facility adversely impacted margins with higher than expected startup
costs of $800,000 in the fourth quarter and $2.5 million for the year.
Negotiations are underway to collect cost overruns from the customer.
Sparton continues to proactively monitor and deal with the unprecedented,
industry-wide shortages now being encountered on many electronic components.
These shortages have led to delays in customers' shipments and price increases,
which in some cases have been substantial. Our objective is to pass these
increases in material costs to our customers via contract terms or negotiations.
Industry sources advise that these conditions are expected to continue for at
least another year and, in the case of some components, possibly two years.
Future financial results will be impacted by the availability of materials as
well as Sparton's success in recovering component cost variances from customers.
At June 30, 2000, total shareowners' equity was $79.1 million. The Company had
no outstanding long- or short-term bank debt and cash equivalents and
investments securities totaled $9.7 million.
Government EMS sales backlog at the end of June totaled $67.1 million compared
to $70.0 million at last year.
WWW.SPARTON.COM 2
<PAGE> 5
At June 30, 2000, inventory was $51.2 million compared to $40.2 million at June
30, 1999. The reasons for the higher inventories at June 30, 2000, were advanced
buying of some electronic components in short supply and a number of new EMS
startups for which materials are being acquired in advance of production.
The Company is reorganizing around a central management focus. This change
should improve efficiency and reduce overall costs. As part of the
reorganization plan, Sparton's first Chief Information Officer, Deborah Brown,
was hired; Sparton's Materials and Logistics functions were organized under one
Corporate Vice President, Stephanie Martin, and Business Development was placed
under a Corporate Vice President, Alan Houghtaling. Our local manufacturing
organizations now have as their single focus the delivery of superior service to
our growing list of customers, executing our contracts to the bid margins and
accessing corporate services on an as-needed basis.
Sparton expects to have in place before January 2001, an Internet website with
"Partner Server" capabilities, allowing selected suppliers and customers access
to their Sparton data at any time. The information will be password protected
and network secure. Eventually, Sparton suppliers will be able to download
product "demand" schedules electronically, reducing transactional costs and
improving response time.
A major plant remodeling was completed at our Jackson, Michigan, facility. Over
11,000 square feet were added to the previous 26,000 square feet of
manufacturing space. Our Canadian facility was remodeled and now has a total of
35,000 square feet of prime manufacturing space available.
At the time of this briefing, modifications to the DeLeon Springs, Florida,
facilities are underway, enabling EMS manufacturing in that facility. Current
growth rates indicate that our Brooksville, Florida facility will be at or near
capacity in the spring or summer of 2001. Expansion of the DeLeon Springs
facility will provide additional manufacturing space for our southeastern EMS
operations.
During the year, Sparton completed the sale of our acoustics business in Canada.
The sale added $500,000 to our operating results and enabled our Canadian
operations to focus exclusively on our EMS business in both Canada and the
United States.
Although there is some evidence of a slowdown in the general economy, we
continue to see a high number of new business opportunities emerging in our
chosen EMS markets. OEMs continue to outsource major components of their
business, thereby reducing their investments that focus on non-core
manufacturing activities. Market analysts within the electronics industry do not
anticipate any changes in this phenomenon for the next 5 - 7 years. We expect
that Sparton's sales will continue to grow in line with overall industry
projections - assuming we can add capacity, hire outstanding associates and
secure necessary components and materials. Our earnings, however, will continue
to reflect the input of our investments in personnel and systems development,
particularly e-commerce.
The past several years have been extremely challenging as Sparton continues to
reposition itself in a dynamic and fast moving business, while at the same time
facing the tightest labor market in many years. We expect that the new year will
show continued progress towards achieving our objective of being a leader in the
high-mix arena of contract electronic outsourcing.
We are grateful to our customer partners, our Sparton associates, our Alliance
partners, our strategic suppliers and you, our shareowners, for standing with us
during these times of transition for the Company.
Sincerely, /s/ John J. Smith /s/ David W. Hockenbrocht
-------------------- ------------------------
John J. Smith David W. Hockenbrocht
[SPARTON ICON]
3
<PAGE> 6
SPARTON CORPORATION HAS EVOLVED FROM AN AGRICULTURAL IMPLEMENT MANUFACTURER IN
THE EARLY 1900S INTO A WORLD-CLASS ELECTRONIC MANUFACTURING SERVICE PROVIDER
WITH CUSTOMERS IN NUMEROUS INDUSTRIES.
<PAGE> 7
THE ELECTRONIC ENVIRONMENT
The explosion of technology has placed Sparton in the center of a drastically
changing and challenging business environment with many opportunities for
business process improvement. Sparton is implementing new business practices and
systems to improve efficiencies and reduce costs. We call this strategy
"Electronic Everything."
FACILITY IMPROVEMENTS
In fiscal 2000, Sparton received thirty-four new customer contracts. With these
added contracts in addition to existing production levels, Sparton needed to
make significant improvements to its facilities to meet the needs of the new as
well as existing customers. By June 30, 2001, Sparton will have increased
manufacturing floor space by 54,000 square feet and expects to add over forty
different pieces of manufacturing support equipment throughout its six
locations. Some of the equipment will be used to increase capacity, while others
will upgrade existing technology.
TECHNOLOGICAL IMPROVEMENTS
Sparton remains committed to enhancing communications throughout its facilities.
Major tasks include upgrading the access speed of the local area network,
increasing the electronic transmission rate more than four times. Sparton is in
negotiations with its enterprise resource planning (ERP) system supplier for
additional tools including full-implementation of an Internet-based interface
between workstations and the data source, training for staff, documentation and
service. These improvements are designed to increase the speed of service and
lower costs.
SECURITY AND RELIABILITY
Security and reliability of systems has been addressed as a necessity for
unparalleled service to customers and to suppliers. Transmission time and level
of security provided to Sparton partners are of the utmost importance. Soon,
many customers and suppliers will be provided access to their own specific data
through a virtual private network. This is a secured venue which partners will
be able to operate as an extension of Sparton operations. Sparton also continues
to upgrade its electronic data interface (EDI) capabilities for easier and
faster access for both sending and receiving data and files within Sparton.
[SPARTON ICON]
5
<PAGE> 8
SPARTON ENJOYS A STRONG RELATIONSHIP WITH ONE OF THE WORLD'S LEADING
MANUFACTURERS OF HIGH PERFORMANCE LIQUID CHROMATOGRAPHY (HPLC) EQUIPMENT - A
CHEMISTRY BASED TOOL FOR QUANTIFYING AND ANALYZING MIXTURES OF CHEMICAL
COMPOUNDS.
<PAGE> 9
In Sparton, this acknowledgement of the importance of security and reliability
has led to a doubling of the resources that house the enterprise resource
planning system. With a mirrored system expected to be operational in fiscal
2001, Sparton can then assure customers and suppliers that reliable information
will be available regardless of almost any external factor that may affect daily
operations.
PEOPLE
The progress made in electronic commerce and related supporting systems is
directly attributable to the personnel Sparton has put into place to maintain
and enhance these operations. The progression toward electronic business
requires highly talented personnel to support Sparton's growth in EMS. As an
example, Sparton's network in the Jackson, Michigan, facility is managed by a
Master Certified Novell Engineer (Master CNE). This certification recognizes an
elite level of expertise among network administrators.
WORKFLOW MONITORING
Sparton is aggressively assessing the monitoring workflow of customer projects.
Monitoring product throughout work cells will provide customers with a clearer
understanding of the status of their product development. Work-cell monitoring
also allows for greater inventory control. Key suppliers will be able to
establish stock levels and adjust their shipments to Sparton accordingly.
INTEGRATED EQUIPMENT AND SOFTWARE
As Sparton increases its reliance on its enterprise resource planning software,
it is also integrating equipment to operate as an extension of the reporting
system. Data is currently transferred between the production floor systems and
the database, communicating inventory transactions for pull and return on
components.
Other areas of interaction between the manufacturing floor and the ERP system
include the use of bar coding. Research has been conducted to identify a system
where bar coding is used in conjunction with inventory logistics for more
accurate flow of materials. Beyond inventory control, the use of bar-coded
badges will replace time cards in an automated reporting system, tracking both
time and attendance of all manufacturing associates.
7
[SPARTON ICON]
<PAGE> 10
SALES MANAGEMENT TOOLS
As customers become more diverse and global, Sparton's sales force has the
increased responsibility for inputting, retrieving and maintaining necessary
information within a universally accessible package. In fiscal 2001, Sparton
will implement a new sales management software package. This package will
provide a universal platform for housing all client data and will be accessible
through the Internet.
Throughout fiscal 2000, Sparton invested in the electronic production of sales
and marketing material. Staff and software will continue to improve marketing
communications by replacing printed materials with multimedia presentations. The
advantages of multimedia presentations over traditional printed formats include
more flexibility in creating and maintaining the presentation and a less
expensive format for reproduction.
THE CIRCUIT
Sparton continues to seek out more efficient and faster methods to retrieve and
store critical partner data, which it seeks to pass on to its partners. With
current technologies, Sparton has developed "The Circuit" - customer and
supplier access to account-specific information through the Internet.
"The Circuit" is a secure website that offers customers the opportunity to
access sales order information, invoice history, purchase order verification and
shipping status. Customers will have the opportunity to gather information at
their convenience and during non-business hours without the intervention of a
Sparton employee.
Later, we expect that "The Circuit" will be replaced by a business to business
(B2B) website that allows customers and suppliers access to information, place
new orders, update existing orders and change manufacturing schedules. The
transactions that take place through "The Circuit" will automatically update
Sparton's enterprise resource planning database.
E-COMMERCE FOR SUPPLY CHAIN MANAGEMENT
Throughout fiscal 2001, an objective will be to reduce costs associated with the
logistics of components and materials. Throughout this past year, Sparton
started to implement FlexLink(R). FlexLink(R) is a supplier's exclusive look
at Sparton's qualified manufacturer lists, part information and quality reports.
Part information is provided to suppliers through a secured portal for
convenient and immediate access.
The expected second phase of FlexLink(R) will be the development of an online
quoting system. This online quoting system will access thousands of parts and
automatically generate a material cost estimate. Other features will include an
automatic, electronic update to the supplier indicating the need to replenish
the stock levels of components that they have been preauthorized to supply.
WWW.SPARTON.COM 8
<PAGE> 11
The suppliers will be able to access their own account information over the
Internet. In this system, current stock levels will be available along with the
capabilities to generate a electronic purchase order to the supplier. If the
supplier does not accept the purchase order, another supplier will be contacted.
The e-commerce initiative will be a significant determinant to Sparton's success
in the future. While management recognizes the importance of the new business
economy, Sparton remains committed to the continuous improvement of the one
factor that has remained a constant for 100 years: exceptional service to our
customer and supplier partners.
As with most Electronic Manufacturing Service providers, technological
improvements can be seen throughout Sparton, but a century of experience has
proven that the true measure of success is a satisfied customer. The new
millennium marks a different era at Sparton - a corporation utilizing
technological advances to cultivate relationships among customers, vendors,
associates and Alliance partners.
DEVELOPING A PARTNERSHIP
Sparton has established a highly focused vision for the definition of a
partnership. A partnership between Sparton and a customer or supplier is evident
when it becomes difficult to discern one organization's operating lines from the
other. By developing an integrated business process with both customers and
suppliers, resources and information flow freely and quickly between entities
creating a higher value added result for all.
THE CUSTOMER
Because of Sparton's philosophy toward cultivating partners, a thorough process
has been developed to identify potential customers. Business Development
Managers, along with other Sparton associates, diligently research a customer's
potential to Sparton. Current and historical financial information is reviewed.
A customer's strategic direction is also a consideration in the selection
process. Members of the sales and marketing teams will review industry forecasts
to determine the strength and viability of working in a particular market.
Sparton seeks only customers whose vision is consistent with the corporate
culture and strategic direction of Sparton Corporation.
Once Sparton and a customer agree to a business relationship, a Sparton internal
customer service staff is assigned. All new partnerships begin with a Sparton
response team. This team consists of key members within both Sparton and the
customer's organization, who will be responsible for the integrity of the
program. Sparton begins the process by engaging in an exploratory meeting. The
expected outcome is to establish a benchmark of goals, objectives, resources and
needs that Sparton must address as the EMS provider. The Sparton response team
also seeks to establish a two-way communication channel to strengthen the
relationship.
9
[SPARTON ICON]
<PAGE> 12
SPARTON'S EXPERIENCE IN AVIONICS AND EXTENSIVE ENGINEERING CAPABILITIES HAS LED
TO CUSTOMER PARTNERSHIPS IN THE AIR TRANSPORTATION INDUSTRY.
<PAGE> 13
Team members communicate to establish schedules, forecasts, coordination and
procurement. Sparton is represented by associates with expertise in purchasing,
design, manufacturing, scheduling and logistics. By exchanging information and
developing communications links, Sparton effectively becomes an extension of the
customer's operations. Implementing the latest technology, such as Electronic
Data Interface (EDI), the Internet and shared networks, has shortened the
information pipeline. Sharing information and resources electronically results
in shorter "Time-To-Market" cycles promoting cost savings.
Once the requirements of the partner are established, a plan is developed.
Depending upon the specific services a partner needs, Sparton has the available
expertise - engineering, manufacturing, testing, procurement, distribution and
circuit board redesigns.
In specific circumstances, Sparton has staffed a customer's facility with a
customer service planner who directly communicates all schedules and logistics.
This service includes providing forecast and purchase orders to Sparton under
the supervision of the partner's management.
The leader of the customer partner program is the Customer Business Manager
(CBM). The CBM is the primary contact between Sparton and the customer. A
successful CBM is knowledgeable in all levels of the product life cycle.
However, the most important characteristic a CBM must possess is the ability to
effectively communicate with all parties responsible for the success of the
program. A Sparton CBM stays in constant communication with the customer, often
daily contact, to ensure that all phases of a project are running smoothly and
correctly.
Sparton has on occasion opened a manufacturing plant during holiday periods to
accommodate the needs of its clients. CBMs have hand delivered products to
distant customers; and at times, have gone to even greater lengths to satisfy
the needs of a partner. For instance, Sparton serves a number of clients in
industries that are subject to highly competitive and unstable markets. This
environment often requires an unusually rigid demand for on-time delivery of
product. One particular customer altered the design of a printed circuit board
(PCB) after Sparton had already assembled and shipped the product. In response
to this need, the Customer Business Manager flew a technician to the customer's
premises to solder components onto the printed circuit boards as they were being
installed in the final product.
11
[SPARTON ICON]
<PAGE> 14
SPARTON CONTINUES TO INVEST IN TECHNOLOGICAL ADVANCES IN NEARLY ALL FACETS OF
ITS OPERATIONS.
<PAGE> 15
As Sparton evolves toward becoming a world class EMS provider, management
realized that it needed to expand its expertise in such areas as engineering and
materials acquisition.
Sparton has one of the most advanced and diverse engineering groups in the
contract manufacturing industry. Sparton engineering services include:
- Product Development
- Printed Circuit Board Layout
- Design for Manufacturability
- Design for Testing
- Design for Maintainability
- Cost Reduction Engineering
- Sustaining Engineering
THE SUPPLIER
The last decade of the 20th Century has seen an explosion of product
development, particularly a wide variety of new communication products. This has
resulted in a materials "supply and demand" imbalance. With many electronic
materials now in limited supply, an "allocation" market now exists which is
expected to continue into 2001. Sparton has launched several strategies to best
align our partners and Sparton for success in this most difficult marketplace.
It is essential that Sparton function with our customer interactively - sharing
resources toward the common goal of customer success. Sparton strives to provide
the highest level of customer service possible in this quest - to become an
extension of our customer's business operation. With customer participation,
Sparton works toward the synergistic result of maximizing materials "Supply
Chain" success.
Sparton has progressed in fostering and developing strategic relationships with
core component vendors referred to as "Strategic Suppliers." Similar to
Sparton's relationship with its customers, information sharing is vital if
suppliers are to become an extension of Sparton's operations. A volatile
marketplace and an evolving electronics industry have emphasized the need for
creative solutions to establishing and maintaining a manufacturer's materials
supply chain.
13
[SPARTON ICON]
<PAGE> 16
This environment has led to the development of FlexLink(R). FlexLink(R) is
Sparton's business to business program, a complex model for supply chain
management, which positively connects the services Sparton offers, linking the
needs of the customer and the materials support services provided by Sparton's
strategic suppliers. By utilizing customer forecasts, FlexLink(R) gives
strategic suppliers the information necessary to provide a continuous materials
flow to Sparton's manufacturing operations. This process also assists Sparton's
suppliers in managing their own businesses more effectively and at lower cost.
A key element of FlexLink(R) is the use of electronic data interface (EDI). The
electronic transmission of data reduces transactional costs to a fraction of
traditional buyer and seller transaction costs. FlexLink(R) implementation is
well underway at Sparton, and expected to gain popularity, furthering the
success of Sparton and its partners.
Sparton proactively monitors for customers the availability of the components
and materials needed to complete a program. Sparton has the ability to analyze a
customer bill of materials for current and future component obsolescence.
Because of today's dynamic technological markets, the life cycle of many
components has been drastically reduced as components are redesigned for optimum
performance and smaller packaging requirements. Sparton's component obsolescence
expertise has proved invaluable to our customer's product design effort. Product
life, obsolescence exposure and related design contingencies are analyzed as
early as possible in any product design. Sparton's material team will actively
monitor assemblies, boards and programs. We will alert a customer as to the need
for component redesign so as not to halt production.
As a leader in the high-mix, low to medium volume EMS market, Sparton has
continually upgraded its manufacturing capabilities to include the latest
technologies. In fiscal 2000, Sparton increased its printed circuit board
assembly lines from eleven to sixteen in its six facilities. Along with
increased capacity, Sparton continues to update its equipment. These
improvements include surface mount, pick and place systems with a fine pitch
vision module enhancing ball grid array (BGA) and fine pitch placement, and a
modular changeover table that dramatically reduces set-up time and facilitates
the low- to medium-volume/high mix manufacturing process.
WWW.SPARTON.COM 14
<PAGE> 17
Sparton provides a visual printed circuit board (PCB) inspection system. This
system detects flaws other test procedures would not find; such as the presence,
position and correctness of components, as well as defects such as skew and
solder bridges. Sparton's high-performance, real-time X-ray inspection system is
a powerful inspection and quality assurance tool. This system provides a
non-destructive testing option that handles different component placement
techniques such as BGA, Flip Chip and QFP. Sparton's single-site soldering
system offers precise soldering and de-soldering of fine pitch, BGA and flip
chip PCBs, as well as component rework services.
THE SPARTON ALLIANCE COMPANY
Within the last two years, Sparton realized the need to provide a quicker
response time to customers needs. The Sparton Alliance program was created to
satisfy this need. Sparton has created alliances with local EMS providers
throughout the United States and Europe. The Sparton Alliance network provides
Sparton with a local presence in select high technology centers in the United
States and Europe. By aligning with local EMS providers, Sparton reduces
response time and improves customer service. The Sparton Alliance partner, in
return, gains access to Sparton's enterprise resource planning (ERP) system,
Sparton's strategic relationship with suppliers and name association with a
world-class manufacturer.
THE SPARTON ASSOCIATE
A constant factor throughout Sparton's 100 years of existence has been the need
for highly qualified, technical and support personnel. As with customers,
suppliers and Sparton Alliance companies, Sparton has been active in building
partnerships with its associates. Training, technology and benefits have been
revamped to attract and retain the best possible workforce.
Recent studies have revealed that the vast majority of workers feel the need to
learn new skills. They associate the learning opportunities with greater job
satisfaction and less stress in their personal lives. According to these
studies, the main contributor to job burnout is the lack of opportunities for
job enrichment. The factors that positively affect the attitude of employees
toward their work include:
- Job autonomy
- Learning opportunities
- Meaningfulness of the job
- Job security
- Opportunities for advancement
15
[SPARTON ICON]
<PAGE> 18
A top priority at Sparton is to promote a constantly challenged employee who is
being developed in a constructive learning environment. Training and the
opportunity for continuing education are highly valued at Sparton. Employment
candidates who decide to partner with Sparton realize Sparton is committed to
in-house training activities and tuition reimbursement for outside programs.
Sparton understands some of the psychological needs of its associates and is
creating more opportunities to capitalize on those needs through the use of
technology, such as corporate Intranet training centers. Sparton will be
creating learning centers at all six of its facilities. These centers are being
equipped with computer terminals with access to the Internet and the Company
Intranet. Libraries are being created to include electronic training tools for
computer-based training. Videos, books and periodicals that relate to
electronics contract manufacturing will be available to all employees. Sparton
is also working with several colleges and universities to access on-line
continuing education and leadership programs. Continuing education creates an
employee that will have the education to adapt to technological change and allow
Sparton to create a talent pool that can support continued growth.
Sparton believes that increasing the opportunity to enhance overall skills of
our associate partners is an investment in the Company's future. A skilled and
creative workforce is better able to recognize and satisfy the changing
requirements of our customers.
As the importance of business communication continues to grow in significance,
Sparton will continue to invest heavily in information and electronic commerce
to enhance service to all of its partners. Today, customers, suppliers,
associates and Sparton Alliance partners enjoy the advantages of EDI. In the
near future, Sparton anticipates establishing Virtual Private Networks, where
Sparton and its partners can have access to all relevant information.
Sparton enters its second century of operation with the knowledge that business
and technology will continue evolving at great speed. However, Sparton believes
that ultimate success will remain a direct function of the partnerships
developed between Sparton, its customers, its suppliers, its Alliance companies
and its associates.
WWW.SPARTON.COM 16
<PAGE> 19
FINANCIAL PERFORMANCE
Financial Trends at a Glance ........................... 18
Consolidated Balance Sheets ............................ 18
Consolidated Statements of Operations .................. 20
Consolidated Statements of Cash Flows .................. 21
Consolidated Statements of Shareowners' Equity ......... 22
Report of Independent Auditors ......................... 22
Notes to Consolidated Financial Statements ............. 23
Selected Financial Data ................................ 30
Management's Discussion and Analysis
of Financial Condition and Results of Operations .... 31
Directors, Officers and General Managers ............... 35
Facilities ............................................. 36
Notice of Annual Meeting ............................... 36
<PAGE> 20
CONSOLIDATED BALANCE SHEETS
SPARTON CORPORATION & SUBSIDIARIES JUNE 30
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
ASSETS (Note 1)
Current assets:
Cash and cash equivalents $ 5,052,405 $ 4,165,758
Investment securities (Notes 1 and 3) 4,643,704 20,122,902
Income taxes recoverable 483,598 622,083
Accounts receivable:
Trade, less allowance of $365,000 ($175,000 in 1999) 14,937,185 11,795,601
U.S. and foreign governments 5,740,096 5,545,775
Inventories (Notes 1 and 4) 51,189,623 40,201,131
Prepaid expenses (Note 8) 4,295,496 3,959,862
------------- -------------
Total current assets 86,342,107 86,413,112
Deferred income taxes (Note 8) 304,800 --
Other assets (Note 3 and 7) 10,922,299 9,600,216
Property, plant and equipment, at cost (Note 1):
Land and land improvements 1,515,856 1,764,657
Buildings and building equipment 11,822,327 10,779,063
Machinery and equipment 18,719,312 21,123,207
------------- -------------
32,057,495 33,666,927
Less accumulated depreciation (20,650,465) (21,343,220)
------------- -------------
Net property, plant and equipment 11,407,030 12,323,707
------------- -------------
$ 108,976,236 $ 108,337,035
============= =============
</TABLE>
FINANCIAL TRENDS AT A GLANCE
NET SALES (IN MILLIONS OF DOLLARS)
[LINEGRAPH]
$102.8 142.7 145.9 131.9 161.9
1996 1997 1998 1999 2000
INCOME (LOSS) PER COMMON SHARE-CONTINUING
OPERATIONS
[LINEGRAPH]
$(.36) .29 .55 .22 (1.07)
1996 1997 1998 1999 2000
WWW.SPARTON.COM 18
<PAGE> 21
SPARTON CORPORATION & SUBSIDIARIES JUNE 30
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREOWNERS' EQUITY (Note 1)
Current liabilities:
Accounts payable $ 14,251,023 $ 8,884,332
Salaries and wages 3,145,222 3,708,857
Accrued liabilities 4,167,288 5,240,948
------------- -------------
Total current liabilities 21,563,533 17,834,137
Deferred Income taxes (Note 8) -- 2,981,000
Environmental remediation (Note 9) 8,335,553 --
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, 7,828,090 shares
outstanding after deducting 106,622 shares in treasury 9,785,113 9,785,113
Capital in excess of par value 494,427 494,427
Accumulated other comprehensive loss (108,014) (71,000)
Retained earnings 68,905,624 77,313,358
------------- -------------
Total shareowners' equity 79,077,150 87,521,898
------------- -------------
$ 108,976,236 $ 108,337,035
============= =============
</TABLE>
See accompanying notes.
FINANCIAL TRENDS AT A GLANCE (CONTINUED)
EQUITY PER COMMON SHARE
[LINEGRAPH]
$6.60 10.90 11.29 11.18 10.10
1996 1997 1998 1999 2000
WORKING CAPITAL (IN MILLIONS OF DOLLARS)
[LINEGRAPH]
$29.9 68.8 71.1 68.6 64.8
1996 1997 1998 1999 2000
19
[SPARTON ICON]
<PAGE> 22
CONSOLIDATED STATEMENTS OF OPERATIONS
SPARTON CORPORATION & SUBSIDIARIES FOR YEARS ENDED JUNE 30
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 161,914,446 $ 131,900,489 $ 145,935,583
Cost and expenses:
Costs of goods sold 150,368,886 112,092,367 123,401,850
Selling and administrative 25,197,716 17,758,382 18,351,300
------------- ------------- -------------
175,566,602 129,850,749 141,753,150
------------- ------------- -------------
(13,652,156) 2,049,740 4,182,433
Other income (expense):
Interest and investment income (Note 3) 666,253 1,503,982 1,756,039
Interest expense -- (416) (26,845)
Other - net 713,169 23,775 602,490
------------- ------------- -------------
1,379,422 1,527,341 2,331,684
------------- ------------- -------------
Income (loss) from continuing operations before income taxes (12,272,734) 3,577,081 6,514,117
Provision (credit) for income taxes (Note 8) (3,865,000) 1,818,000 2,181,000
------------- ------------- -------------
Income (loss) from continuing operations (8,407,734) 1,759,081 4,333,117
Discontinued operations:
Loss on disposal of discontinued automotive operations, net
of applicable income tax credits of $1,480,000 and
$680,000 in 1999 and 1998, respectively -- (2,520,000) (1,320,000)
------------- ------------- -------------
Net income (loss) $ (8,407,734) $ (760,919) $ 3,013,117
============= ============= =============
Basic and diluted earnings per share:
Continuing operations $ (1.07) $ 0.22 $ 0.55
Discontinued operations -- (0.32) (0.17)
------------- ------------- -------------
Net income (loss) $ (1.07) $ (0.10) $ 0.38
============= ============= =============
</TABLE>
See accompanying notes.
FINANCIAL TRENDS AT A GLANCE (CONTINUED)
GOVERNMENT SALES (IN MILLIONS OF DOLLARS)
[LINEGRAPH]
$39.1 55.9 60.8 47.1 56.2
1996 1997 1998 1999 2000
COMMERCIAL SALES (IN MILLIONS OF DOLLARS)
[LINEGRAPH]
$63.7 86.8 85.1 84.8 105.7
1996 1997 1998 1999 2000
WWW.SPARTON.COM 20
<PAGE> 23
CONSOLIDATED STATEMENTS OF CASH FLOWS
SPARTON CORPORATION & SUBSIDIARIES FOR YEARS ENDED JUNE 30
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Income (loss) from continuing operations $ (8,407,734) $ 1,759,081 $ 4,333,117
Add (deduct) noncash items affecting continuing operations:
Depreciation 2,371,871 2,101,262 1,868,208
Deferred income taxes (3,430,000) 513,000 1,102,000
Pension (623,593) (665,564) (489,257)
(Gain) loss on sale of property, plant and equipment (23,719) 51,739 (560,126)
Environmental charge 10,000,000 -- --
Other (37,016) (85,998) 47,000
Add (deduct) changes in operating assets and liabilities:
Accounts receivable (4,451,038) 7,275,926 183,602
Inventories and prepaid expenses (11,179,926) (8,140,631) (3,171,981)
Income taxes recoverable 138,485 (622,083) --
Accounts payable, salaries and wages, accrued liabilities
and income taxes 2,887,232 (2,386,883) (2,298,458)
------------ ------------ ------------
Net cash provided (used) by continuing operations (12,755,438) (200,151) 1,014,105
Income taxes on discontinued operations -- 1,480,000 680,000
Cash flow provided (used) by discontinued operations -- 597,788 (2,497,758)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (12,755,438) 1,877,637 (803,653)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,398,139) (2,908,852) (4,078,602)
Proceeds from sale of assets of discontinued operations -- 1,216,890 2,283,164
Proceeds from (purchases of) investment securities - net 15,479,198 3,530,227 (1,726,280)
Other, principally noncurrent other assets 416,443 (3,470,645) 143,774
Proceeds from sale of property, plant and equipment 144,583 -- 575,190
Discontinued operations, principally purchases of property,
plant and equipment -- (39,772) (236,447)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 13,642,085 (1,672,152) (3,039,201)
FINANCING ACTIVITIES:
Common stock transactions, principally from exercise of stock options -- -- 66,250
Principal payments on long-term borrowings, discontinued operations -- (123,000) (161,743)
------------ ------------ ------------
NET CASH USED BY FINANCING ACTIVITIES -- (123,000) (95,493)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH 886,647 82,485 (3,938,347)
Cash at beginning of year 4,165,758 4,083,273 8,021,620
------------ ------------ ------------
CASH AT END OF YEAR $ 5,052,405 $ 4,165,758 $ 4,083,273
============ ============ ============
Supplemental disclosures of cash paid (refunded) during the year:
Interest expense $ -- $ 1,000 $ 6,000
============ ============ ============
Income taxes - net $ (564,000) $ 350,000 $ 2,364,000
============ ============ ============
</TABLE>
See accompanying notes.
21
[SPARTON ICON]
<PAGE> 24
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
SPARTON CORPORATION & SUBSIDIARIES FOR YEARS ENDED JUNE 30
<TABLE>
<CAPTION>
COMMON STOCK, ACCUMULATED
$1.25 PAR VALUE CAPITAL IN OTHER
-------------------------- EXCESS OF COMPREHENSIVE RETAINED
SHARES AMOUNT PAR VALUE INCOME (LOSS) EARNINGS TOTAL
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance June 30, 1997 7,818,090 $ 9,772,613 $ 440,677 $ (32,000) $75,061,160 $85,242,450
Exercise of stock options 10,000 12,500 53,750 66,250
Net income 3,013,117 3,013,117
Other comprehensive income:
Net unrealized gains in marketable
securities (Note 3) 47,000 47,000
-----------
Comprehensive net income 3,060,117
----------- ----------- ----------- ----------- ----------- -----------
Balance June 30, 1998 7,828,090 9,785,113 494,427 15,000 78,074,277 88,368,817
Net loss (760,919) (760,919)
Other comprehensive income:
Net unrealized losses in marketable
securities (Note 3) (86,000) (86,000)
-----------
Comprehensive net loss (846,919)
----------- ----------- ----------- ----------- ----------- -----------
Balance June 30, 1999 7,828,090 9,785,113 494,427 (71,000) 77,313,358 87,521,898
Net loss (8,407,734) (8,407,734)
Other comprehensive income:
Net unrealized losses in marketable
securities (Note 3) (37,014) (37,014)
-----------
Comprehensive net loss (8,444,748)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE JUNE 30, 2000 7,828,090 $ 9,785,113 $ 494,427 $ (108,014) $68,905,624 $79,077,150
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREOWNERS
SPARTON CORPORATION
We have audited the accompanying consolidated balance sheets of Sparton
Corporation and subsidiaries as of June 30, 2000 and 1999, and the related
consolidated statements of operations, shareowners' equity, and cash flows for
each of the three years in the period ended June 30, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2000, in conformity with accounting principles
generally accepted in the United States.
Toledo, Ohio
/s/Ernst & Young LLP
August 25, 2000
WWW.SPARTON.COM 22
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Sparton Corporation and all subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
The June 30, 1999, balance sheet has been reclassified to conform to the June
30, 2000, presentation. Amounts previously reported as discontinued operations
have been reclassified as they are no longer deemed material.
OPERATIONS - The Company's operations are in one line of business, electronic
manufacturing services (EMS). Products and services include microprocessor-based
systems, transducers, printed circuit boards and assemblies, sensors and
electromechanical devices for the telecommunications, medical, electronics and
other industries. The Company also develops and manufactures sonobuoys, air
deployed anti-submarine warfare (ASW) devices, used by the U.S. Navy and other
free-world countries.
USE OF ESTIMATES - The preparation of the financial statements in conformity
with generally accepted accounting principles 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 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. Contracts are accounted for based on completed units shipped 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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", which
clarifies certain conditions to be met in order to recognize revenue.
Implementation is to be no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. SAB 101 is not expected to have a material
effect on the Company's financial position or results of operations.
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 with an original maturity date of less than
three months.
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 equity, 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.
In June 1999, the Company acquired a 12% interest, on a fully dilutive basis, in
Cybernet Systems Corporation, a privately held company headquartered in Ann
Arbor, Michigan. This investment is carried at cost, as there is no established
market price for shares held, and is included in other assets.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). This accounting standard, which is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000,
requires that all derivatives be recognized as either assets or liabilities at
estimated fair value. The adoption of SFAS No. 133 is not expected to have any
effect on the Company's financial position or results of operations.
MARKET RISK EXPOSURE - The Company manufactures its products in the United
States and Canada. Sales of the Company's products are to 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.
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:
2000 1999
----------- -----------
Raw materials $42,419,000 $34,936,000
Work in process
and finished goods 8,771,000 5,265,000
----------- -----------
$51,190,000 $40,201,000
=========== ===========
23
[SPARTON ICON]
<PAGE> 26
STOCK OPTIONS - The Company has elected to follow 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."
DEPRECIATION - Depreciation is provided over estimated useful lives on
accelerated methods, except for certain buildings, machinery and equipment with
aggregate costs at June 30, 2000, of approximately $9,664,000 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 not funded by customers amounted to approximately $4,707,000 in
2000, $2,079,000 in 1999 and $1,049,000 in 1998.
EARNINGS PER SHARE - Basic earnings per share were computed using the
weighted-average number of shares outstanding of 7,828,090 in both 2000 and
1999, and 7,826,840 in 1998. Differences in the weighted-average number of
shares outstanding for purposes of computing diluted earnings per share were due
to the inclusion of the dilutive effect of employee incentive stock options
previously granted of 602 in 2000 and 164,043 in 1998. These differences in the
weighted-average number of shares outstanding for the calculation of basic and
diluted earnings per share were not material in any of the reporting periods
within fiscal year 2000 or 1998, and resulted in no differences between basic
and diluted earnings per share. Options to purchase 148,500 shares in 2000 and
171,000 shares in 1999 of common stock were outstanding but were not included in
the computation of diluted earnings per share because the options exercise price
was greater than the average market price of the common shares and, therefore,
the effect would be antidilutive.
2. COMPREHENSIVE INCOME
The reporting of comprehensive income requires disclosure of total
non-stockholder changes in equity in interim periods and additional disclosures
of the components of non-stockholder changes in equity on an annual basis. Total
non-stockholder changes in equity includes all changes in equity during a period
except those resulting from investments by and distributions to stockholders.
Total comprehensive income (loss) for the years ended June 30 are as follows:
2000 1999 1998
----------- ----------- -----------
Net income (loss) $(8,408,000) $ (761,000) $ 3,013,000
Other Comprehensive Income:
Unrealized gains (losses) on
investment securities (37,000) (86,000) 47,000
----------- ----------- -----------
Comprehensive income (loss) $(8,445,000) $ (847,000) $ 3,060,000
=========== =========== ===========
3. INVESTMENT SECURITIES
Details of the investment securities portfolio as of June 30, 2000 and 1999, are
as follows:
GROSS
AMORTIZED UNREALIZED ESTIMATED
JUNE 30, 2000: COST LOSSES FAIR VALUE
-------------- ----------- ----------- -----------
Debt securities:
Corporate - primarily U.S. $ 2,046,000 $ (29,000) $ 2,017,000
U.S. Government and
federal agency 119,000 (5,000) 114,000
State and municipal 1,250,000 -- 1,250,000
Equity securities - primarily
preferred stock 1,400,000 (137,000) 1,263,000
----------- ----------- -----------
$ 4,815,000 $ (171,000) $ 4,644,000
=========== =========== ===========
Gross
Amortized Unrealized Estimated
June 30, 1999: Cost Losses Fair Value
-------------- ------------ ------------ ------------
Debt securities:
Corporate - primarily U.S. $ 11,698,000 $ (83,000) $ 11,615,000
U.S. Government and
federal agency 2,895,000 (15,000) 2,880,000
State and municipal 3,166,000 (2,000) 3,164,000
Equity securities - primarily
preferred stock 2,476,000 (12,000) 2,464,000
------------ ------------ ------------
$ 20,235,000 $ (112,000) $ 20,123,000
============ ============ ============
A large majority of the investment portfolio has an original maturity date of
less than two 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 general purposes.
The Company had no gross purchases of investment securities in 2000 and
$26,347,000 in 1999. Gross sales of investment securities totaled $15,479,000
and $29,877,000 in 2000 and 1999, respectively.
In June 1999, the Company purchased an investment in Cybernet Systems for
$3,000,000. Cybernet is a privately owned developer of hardware, software,
next-generation network computing, and robotics products. The investment is
carried at cost and included in other assets on the balance sheet at June 30,
2000 and 1999.
4. LONG-TERM CONTRACTS
Inventories include costs related to long-term contracts of approximately
$18,847,000 and $19,239,000 at June 30, 2000 and 1999, respectively, reduced by
progress billings to the United States Government of approximately $3,309,000
and $1,026,000, respectively.
WWW.SPARTON.COM 24
<PAGE> 27
5. LEASE INFORMATION
The Company leases certain 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
$2,094,000 in 2000, $1,920,000 in 1999 and $1,036,000 in 1998. At June 30, 2000,
future minimum lease payments for all noncancelable operating leases totaled
$11,671,000 and was payable as follows: 2001-$3,208,000, 2002-$3,001,000,
2003-$2,953,000, 2004-$1,772,000, 2005-$737,000.
6. STOCK OPTIONS
The Company has an incentive stock option plan under which 500,000 common shares
were reserved for option grants to key employees at the fair market value of the
stock at the date of the grant. This plan, approved by shareowners in October
1999, replaced a similar incentive stock option plan which had expired. Under
the plan, the options generally become exercisable cumulatively, beginning one
year after the date granted, in equal annual installments, and generally
terminate five years after the date of grant. 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 30,1997 238,500 $ 6.625 to 8.375
Granted -- --
Exercised (10,000) 6.625
Cancelled (15,000) 8.375
-------- ---------------
Outstanding at June 30, 1998 213,500 6.625 to 8.375
Granted -- --
Exercised -- --
Cancelled (42,500) 8.375
-------- ---------------
Outstanding at June 30, 1999 171,000 6.625 to 8.375
Granted 10,000 3.813
Exercised -- --
Cancelled (22,500) 8.375
-------- ---------------
OUTSTANDING AT JUNE 30, 2000 158,500 $3.813 TO 8.375
======== ===============
At June 30, 2000, the per share weighted-average exercise price of options
outstanding was $7.73. The weighted-average remaining contractual life of those
options is approximately 2.0 years. At June 30, 2000, there were 95,250 options
exercisable at the per share weighted-average exercise price of $7.55. The
weighted-average fair value under SFAS 123 of the options was $2.90. Remaining
shares available for grant under the plan were 490,000 at June 30, 2000. 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 $70,000 ($.01 per share) in
2000, 1999 and 1998.
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:
risk-free interest rate of 5.92%, dividend yield of 0.0%, expected volatility of
32.7% and an expected option life of four years.
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 that benefit amount changed to be based on the final 5 years
average compensation instead of the previously used final 10 years. 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:
2000 1999
---- ----
Discount rate 7.75% 7.0%
Expected return on plan assets 7.5 7.5
Rate of compensation increase 5.0 5.0
Net periodic pension income of $624,000, $666,000 and $489,000 was recognized in
2000, 1999 and 1998, respectively.
25
[SPARTON ICON]
<PAGE> 28
The components of net periodic pension income for each of the years were as
follows:
2000 1999 1998
----------- ----------- -----------
Service cost $ 386,000 $ 355,000 $ 314,000
Interest cost 757,000 626,000 629,000
Expected return on
plan assets (1,413,000) (1,282,000) (1,099,000)
Amortization of
prior service cost 27,000 (6,000) (6,000)
Amortization of
transition assets (296,000) (296,000) (296,000)
Recognized net
actuarial gain (85,000) (63,000) (31,000)
----------- ----------- -----------
Net periodic pension income $ (624,000) $ (666,000) $ (489,000)
=========== =========== ===========
The following tables summarize the changes in benefit obligations, plan assets
and funding status of the plan at March 31:
2000 1999
------------ ------------
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligation at beginning of period $ 10,489,000 $ 9,335,000
Service cost 921,000 878,000
Interest cost 757,000 626,000
Amendments 942,000 --
Actuarial (gains) losses (351,000) 361,000
Benefits paid (1,765,000) (711,000)
------------ ------------
Benefit obligation at end of period $10,993,000 $ 10,489,000
============ ============
2000 1999
------------ ------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at
beginning of period $ 19,475,000 $ 17,559,000
Actual return on plan assets 2,741,000 2,145,000
Plan participants' contributions 498,000 482,000
Benefits paid (1,765,000) (711,000)
Fair value of plan assets at end of
period, consisting principally of
common stock (including 319,100
shares of the Company's common
stock), corporate bonds and U.S.
------------- ------------
Government obligations $ 20,949,000 $ 19,475,000
============= ============
Plan assets in excess of projected
benefit obligations $ 9,956,000 $ 8,986,000
Unrecognized net actuarial gains (4,782,000) (3,224,000)
Unrecognized transition asset (593,000) (889,000)
Unamortized prior service cost 874,000 (41,000)
------------ ------------
Prepaid benefit cost included in other
assets $ 5,455,000 $ 4,832,000
============ ============
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 employees of the Company. The
Company matches 50 percent of participants' basic contributions of up to 5
percent of their wages. Amounts expensed under the plan were approximately
$270,000, $111,000 and $106,000 for the years ended June 30, 2000, 1999 and
1998, 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, 2000
and 1999, are as follows:
2000 1999
----------- -----------
Deferred tax assets:
Accrual for environmental
remediation $ 3,298,000 $ 513,000
Canadian tax carryovers 2,730,000 2,613,000
Inventories 1,844,000 1,285,000
U.S. net operating losses 544,000 --
Employment and compensation 444,000 468,000
Other 486,000 485,000
Accrued liabilities on long-term loss
contracts 16,000 439,000
----------- -----------
Total deferred tax assets 9,362,000 5,803,000
Less valuation reserve for
Canadian tax carryovers (2,730,000) (2,613,000)
----------- -----------
6,632,000 3,190,000
Deferred tax liabilities:
Prepaid pension costs 1,964,000 1,739,000
Property, plant and equipment 1,029,000 1,242,000
----------- -----------
Total deferred tax liabilities 2,993,000 2,981,000
----------- -----------
Net deferred tax assets $ 3,639,000 $ 209,000
=========== ===========
Deferred taxes are included in the balance sheet at June 30, 2000 and 1999, as
follows:
2000 1999
----------- -----------
Prepaid expenses $ 3,334,000 $ 3,190,000
Deferred income taxes, noncurrent 305,000 --
Deferred tax liabilities -- 2,981,000
----------- -----------
$ 3,639,000 $ 209,000
=========== ===========
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<PAGE> 29
Income (loss) before income taxes consists of the following:
2000 1999 1998
------------ ------------ ------------
Continuing operations:
United States $(11,252,494) $ 5,489,104 $ 6,141,769
Canada (1,020,240) (1,912,023) 372,348
------------ ------------ ------------
(12,272,734) 3,577,081 6,514,117
Discontinued operations -- (4,000,000) (2,000,000)
------------ ------------ ------------
$(12,272,734) $ (422,919) $ 4,514,117
============ ============ ============
The provision (credit) for income taxes consists of:
2000 1999 1998
----------- ----------- -----------
Current:
United States $ (304,000) $ 1,246,000 $ 969,000
States and local (131,000) 59,000 110,000
----------- ----------- -----------
(435,000) 1,305,000 1,079,000
Deferred - United States (3,430,000) 513,000 1,102,000
----------- ----------- -----------
$(3,865,000) $ 1,818,000 $ 2,181,000
=========== =========== ===========
The consolidated effective tax rate differs from the statutory U.S. Federal tax
rate for the following reasons and by the following percentages:
2000 1999 1998
------ ------ ------
Statutory U.S. Federal
tax (benefit) rate (34.0%) 34.0% 34.0%
Significant increases
(reductions) resulting from:
Canadian tax loss
carryovers and other 2.8 18.2 (0.2)
Tax benefits of foreign
sales corporation (1.3) (6.2) (4.2)
State and local income
taxes (0.7) 1.1 2.0
Other 1.7 3.7 1.9
------ ------ ------
Effective tax (benefit) rate (31.5%) 50.8% 33.5%
====== ====== ======
For U.S. income tax purposes, approximately $1,600,000 of noncapital losses are
available at June 30, 2000, for carryover against income in future tax years.
These carryovers expire in the year 2020.
For Canadian income tax purposes, approximately $6,680,000 of noncapital losses
and scientific research and experimental development expenditures is available
at June 30, 2000, for carryover against income in future tax years. These
carryovers began to expire in the year 2000. In addition, unused investment tax
credits of approximately $326,000 at June 30, 2000, are available for carryover
against tax liabilities in future tax years. These carryover credits will begin
to expire in the year 2004. For financial reporting purposes, a valuation
reserve of $2,730,000 has been established for the full amount of the Canadian
carryovers.
9. COMMITMENTS AND CONTINGENCIES
One of Sparton's facilities, located in Albuquerque, New Mexico, has been the
subject of ongoing investigations conducted with the United States Environmental
Protection Agency (EPA) under the Resource Conservation and Recovery Act (RCRA).
This EPA compliance issue involves an idled facility now leased to others. The
investigation began in the early 1980s and involved a review of on-site and
off-site environmental impacts.
On January 18, 2000, a Consent Decree was lodged with the Federal District Court
in Albuquerque that resolved all disputes related to the Final Administrative
Order dated February 10, 1998. As a result of the execution of the Consent
Decree, the Company revised its estimate of the future minimum costs expected to
be incurred, as well as the time period involved. The change in estimate
resulted in a $10,000,000 pre-tax charge to operations in December 1999.
At June 30, 2000, Sparton has a remaining accrual of $9,162,000 as its estimate
of the future undiscounted minimum financial liability for remediation. This
amount is after payment of $1,675,000, in March, 2000, to resolve claims for
damages to natural resources, civil penalties and costs, which were paid to
various governmental agencies as part of the final terms of the Consent Decree.
Cash expenditures for remediation activities are expected to be incurred over
the next thirty years. The accrual reflects the Company's estimate of the
minimum amount it will incur under the agreed upon work plans. 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 on-site and off-site pump and treat containment systems, a soil vapor
extraction program and continued on-site and off-site monitoring.
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.
Factors which cause uncertainties for the Company include, but are not limited
to, the effectiveness of the current work plans in achieving targeted results
and proposals of regulatory agencies for desired methods and outcomes. It is
possible that cash flows and results of operations could be affected by the
impact of the ultimate resolution of this contingency.
In addition to the $10,000,000 pre-tax charge described above, amounts charged
to operations, principally legal and consulting, for the years ended June 30,
2000, 1999 and 1998, were $811,000, $1,756,000 and $1,821,000, respectively.
27
[SPARTON ICON]
<PAGE> 30
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following unaudited information shows selected items by quarter for the
years ended June 30, 2000 and 1999, respectively.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales:
2000 $ 34,473,957 $ 36,737,575 $ 41,756,764 $ 48,946,150
1999 32,449,428 38,974,458 26,981,204 33,495,399
Gross profit:
2000 3,096,937 1,974,277 360,488 6,113,858
1999 3,867,913 5,625,243 2,601,489 7,713,477
Income (loss):
2000: (all continuing operations) $ 76,168 $ (7,525,638) $ (2,094,715) $ 1,136,451
============ ============ ============ ============
1999:
Continuing operations $ 109,489 $ 1,210,912 $ (632,359) $ 1,071,039
Discontinued operations -- -- (2,520,000) --
------------ ------------ ------------ ------------
$ 109,489 $ 1,210,912 $ (3,152,359) $ 1,071,039
Income (loss) basic and diluted earnings per share:
2000: (all continuing operations) $ 0.01 $ (0.96) $ (0.27) $ 0.15
============ ============ ============ ============
1999:
Continuing operations $ 0.01 $ 0.15 $ (0.08) $ 0.14
Discontinued operations -- -- (0.32) --
------------ ------------ ------------ ------------
$ 0.01 $ 0.15 $ (0.40) $ 0.14
============ ============ ============ ============
</TABLE>
In the fourth quarter, gross profits were increased by $380,000 and $730,000 in
2000 and 1999, respectively, due to the net impact of reversals of certain
inventory reserves established throughout the preceding three fiscal quarters
and revisions in estimated completion costs on government defense contracts.
The results for the fourth quarter of 2000 and 1999 were reduced by $833,000 and
$151,000, respectively, after adjusting the Company's full-year effective tax
rate (benefit) to (31.5)% and 50.8%. The increased tax rate is due to the higher
than expected losses at Sparton of Canada.
The Company also recorded a net loss on disposal of discontinued operations of
$4,000,000 ($2,520,000 after tax) in the third quarter of 1999.
Finally, the results decreased $10,000,000 in the second quarter of 2000, and
$570,000 in the third quarter of 1999 due to the Company's adjusting its accrual
for EPA-related costs as described in Note 9.
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<PAGE> 31
11. BUSINESS SEGMENT AND CONCENTRATION OF SALES
The Company operates in one business segment, commercial and government
electronic manufacturing services.
Total direct sales on prime contracts to United States government agencies were
$33,715,000 in 2000, $25,754,000 in 1999 and $25,326,000 in 1998. In both 2000
and 1999, one commercial customer accounted for 11% of consolidated sales. There
were no other customers in 1998 that accounted for 10% or more of consolidated
sales. Foreign export sales by U.S. operations to unaffiliated customers were
$32,072,000 in 2000, $27,891,000 in 1999 and $45,684,000 in 1998. No single
country accounted for 10% or more of export sales in 2000, 1999 or 1998.
Sales of ASW devices and related engineering contract services for the years
2000-1998 contributed approximately 31%, 30% and 36%, respectively, to total
sales. Intercompany sales were not significant in any of these years.
29 [SPARTON ICON]
<PAGE> 32
SELECTED FINANCIAL DATA
SPARTON CORPORATION & SUBSIDIARIES FOR YEARS ENDED JUNE 30
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $ 161,914,446 $ 131,900,489 $ 145,935,583 $ 142,736,800 $ 102,824,946
Costs and expense 175,566,602 129,850,749 141,753,150 139,451,913 104,926,455
------------- ------------- ------------- ------------- -------------
(13,652,156) 2,049,740 4,182,433 3,284,887 (2,101,509)
Other income (expense):
Interest and investment income 666,253 1,503,982 1,756,039 1,211,233 101,586
Interest expense -- (416) (26,845) (896,010) (1,202,143)
Other - net 713,169 23,775 602,490 12,793 (117,728)
------------- ------------- ------------- ------------- -------------
1,379,422 1,527,341 2,331,684 328,016 (1,218,285)
------------- ------------- ------------- ------------- -------------
Income (loss) from continuing operations
before income taxes (12,272,734) 3,577,081 6,514,117 3,612,903 (3,319,794)
Provision (credit) for income taxes (3,865,000) 1,818,000 2,181,000 1,371,000 (509,000)
------------- ------------- ------------- ------------- -------------
Income (loss) from continuing operations (8,407,734) 1,759,081 4,333,117 2,241,903 (2,810,794)
Income (loss) from discontinued automotive
operations, net of income taxes -- (2,520,000) (1,320,000) 31,458,637 (1,269,390)
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (8,407,734) $ (760,919) $ 3,013,117 $ 33,700,540 $ (4,080,184)
============= ============= ============= ============= =============
Weighted-average common shares outstanding 7,828,090 7,828,090 7,826,840 7,816,417 7,811,370
PER SHARE OF COMMON STOCK
Income (loss):
Continuing operations $ (1.07) $ 0.22 $ 0.55 $ 0.29 $ (0.36)
Discontinued operations -- (0.32) (0.17) 4.02 (0.16)
------------- ------------- ------------- ------------- -------------
$ (1.07) $ (0.10) $ 0.38 $ 4.31 $ (0.52)
============= ============= ============= ============= =============
Shareowners' equity $ 10.10 $ 11.18 $ 11.29 $ 10.90 $ 6.60
Dividends -- -- -- -- --
OTHER FINANCIAL DATA
Total assets $ 108,976,236 $ 108,337,035 $ 111,121,335 $ 114,177,087 $ 119,270,663
Working capital 64,778,574 68,578,975 71,118,395 68,760,933 29,940,793
Working capital ratio 4.00:1 4.85:1 4.52:1 3.53:1 1.47:1
Long-term obligations -- -- --
-- $ 75,000
Shareowners' equity 79,077,150 87,521,898 88,368,817 85,242,450 51,529,879
</TABLE>
WWW.SPARTON.COM 30
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 manufacturing services (EMS).
This includes the design, development and/or manufacture of electronic parts
and assemblies for both government and commercial customers worldwide. In August
1996, the Company formalized its decision to offer for sale its automotive
operations. Accordingly, these operations, formerly classified as the Automotive
and Industrial Products segment, were reclassified and reported as discontinued
operations.
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 and in customer demand for products, competition in
the overall EMS business, the availability and cost of materials, 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. The Company began to
encounter material availability and extended lead time issues on electronic
components. Shortages on some key electronic components has resulted in higher
prices. This shortage on some critical electronic components could impact the
electronics industry, and Sparton specifically, for some time. Availability of
material components could adversely affect the Company's ability to meet
customers' production schedules. In addition, the ability to recover increasing
material costs from customers will be a factor in future operating results.
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 2000 COMPARED TO FISCAL 1999
Sales for the year ended June 30, 2000, were $161,914,000, an increase of
$30,014,000 (23%) from 1999. Governmental EMS sales increased $9,140,000. These
sales were below expectations. Commercial EMS sales of $105,671,000 increased
$20,874,000. Sales increased $34,385,000 (32%) to $142,751,000 at Sparton
Electronics due to higher commercial sales and increased shipments of sonobuoys.
Sales increased $2,199,000 (10%) to $23,742,000 at Sparton Technology primarily
as a result of increased wiring harness sales. Canadian revenues totaled
$4,313,000, an increase of 73% from last year.
The Company continues to address cost control measures on programs that have
adversely affected operational costs. Costs on several development and
production sonobuoy programs were higher than anticipated and estimates to
complete the programs increased $1,200,000 in the fourth quarter and $4,500,000
year-to-date. In addition, a major commercial program adversely impacted margins
with higher than expected startup costs of $2,500,000 year-to-date.
An operating loss of $13,652,000 was reported for 2000 compared to income of
$2,050,000 last year. The 2000 results were lower than expected. Included within
these operating results were adverse capacity variances of $3,337,000 and
$3,646,000 for 2000 and 1999, respectively, caused by underutilized capacity at
several production facilities. These results also reflect Coors Road-related EPA
costs and expenses of $10,811,000 and $1,756,000 in 2000 and 1999, respectively.
This EPA charge is more fully described in Note 9 to the financial statements.
Selling and administrative expense increased by $7,439,000 to $25,198,000 in
2000. The largest expense incurred was $10,811,000 for environmental remediation
issues, including the $10,000,000 increase to the EPA reserve reported in the
second quarter. Without the increase in the EPA expense, selling and
administrative costs were significantly below last year, mainly due to
consolidation of operations.
Interest and investment income decreased $838,000 to $666,000 in 2000 due to
lower average investments. These investment securities are more fully described
in Note 3 to the financial statements.
The Company has been a policyholder in Metropolitan Life Insurance Company
(MetLife) since 1927. Recently MetLife changed from a mutual to a stock company.
In the fourth quarter of 2000, the Company received approximately $1,500,000
upon the sale of its shares in the new company which proceeds were reported as a
return of premium and included in operating income. Of the $1,500,000, $221,000
was credited as a reduction to administrative expense, with the balance to cost
of sales.
After provision for applicable income taxes as discussed in Note 8 to the
financial statements, the Company reported a
31
[SPARTON ICON]
<PAGE> 34
loss from continuing operations of $8,408,000 ($(1.07) per share) in 2000
compared to income of $1,759,000 ($.22 per share) in 1999.
A net loss of $8,408,000 ($(1.07) per share) was reported in 2000 compared to a
net loss of $761,000($(.10) per share) in 1999.
FISCAL 1999 COMPARED TO FISCAL 1998
Sales for the year ended June 30, 1999 were $131,900,000, a decrease of
$14,035,000 (10%) from 1998. Governmental EMS sales declined $13,792,000. These
sales were below expectations. Commercial EMS sales of $84,797,000 were
essentially unchanged. Sales decreased $15,653,000 (13%) to $108,366,000 at
Sparton Electronics due to lower sonobuoy sales. Sales increased $2,724,000
(13%) to $21,543,000 at Sparton Technology mainly as a result of increased
wiring harness sales. Canadian revenues totaled $2,494,000, a decrease of 44%
from last year. Sparton of Canada continues to be challenged in replacing
government defense sales.
Operating income of $2,050,000 was reported for 1999 compared to income of
$4,182,000 in 1998. These results were lower than expected. Included within
these operating results were adverse capacity variances of $3,646,000 and
$1,844,000 for 1999 and 1998, respectively, caused by underutilized capacity at
several production facilities. These results also reflect Coors Road-related EPA
costs and expenses of $1,756,000 and $1,821,000 in 1999 and 1998, respectively.
Selling and administrative expense decreased by $593,000 to $17,758,000 in 1999.
Several factors contributed to this decrease, the largest being the decrease in
expenditures relating to the implementation of the new computer system this
past year as the implementation work was completed in fiscal 1998.
Interest and investment income decreased $252,000 to $1,504,000 in 1999 due to
lower average investments and a decline in interest rates. These investment
securities are more fully described in Note 3 to the financial statements.
After provision for applicable income taxes as discussed in Note 8 to the
financial statements, the Company reported income from continuing operations of
$1,759,000 ($.22 per share) in 1999 compared to income from continuing
operations of $4,333,000 ($.55 per share) in 1998.
In recording the gain on sale of the discontinued automotive operations in
December 1996, the Company included estimates of the potential sales value and
operating losses that would be incurred by Sparton Engineered Products,
Inc.-Flora Group through the date of expected disposal. At the time, these
estimates were tentative because the Company had focused its efforts on the sale
of the larger automotive business, KPI Group, and had not received competitive
responses from potential buyers for the Flora Group. In December 1996, the
Company received an initial letter of intent for the purchase of the Flora
Group. Extended and protracted negotiations for over a year failed to result in
an acceptable agreement with this buyer. At the same time, the Company continued
to pursue other competitive offers.
After extensive efforts to sell the Flora operations proved unsuccessful, the
Board of Directors approved the closing of the facility in August 1998. In
December 1998, Flora production ceased. An auction of inventory and equipment
was held in January 1999. Both inventory and equipment were expected to be sold
in groupings by product line thereby maximizing the value received for both
inventory and equipment. Seventy five percent or more of the book value of
inventory and equipment was expected to be recovered through sales by product
line. However, the sales of various product lines did not materialize. At
auction, individual items were sold essentially for scrap value. As a result, a
pre-tax charge of $4,000,000 ($2,520,000 after-tax) was recognized for the year
ended June 30, 1999. An auction in February 1999 did not generate sufficient
interest in the Flora real property, and the property will be placed for sale
with a real estate broker.
The Company reported a net loss of $761,000 ($(.10) per share) in 1999 compared
to a net income of $3,013,000 ($.38 per share) in 1998.
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
performance of these contracts. As the volume of U.S. defense-related contract
work declines, so has the relative importance of progress billings as a
liquidity resource. At the present time, the Company plans on using its
investment securities to provide working capital and to strategically invest in
additional property, plant and equipment to accommodate growth in the EMS
business. While the Company has had no short-term debt outstanding or credit
agreements since December 1996, management believes that it could secure credit
facilities under terms acceptable to the Company should the need arise.
Cash flows used by continuing operating activities were $12,755,000 and $200,000
in 2000 and 1999, respectively. Cash flows provided were $1,014,000 in 1998. The
primary use of 2000 cash flows was an increase in inventory. Primary sources
included an increase in accounts payable.
Cash flows provided by investing activities were $13,642,000 in 2000. Cash flows
used were $1,672,000 in 1999 and $3,039,000 in 1998. Cash flows were primarily
provided by the sale of investment securities. The major use of cash by
investing activities was the purchase of equipment to update and expand the
Company's production capabilities in its continuing electronics business.
Additionally, the Company acquired an investment in Cybernet Systems for
$3,000,000 in 1999. Cybernet is a privately owned developer of hardware,
software and next-generation network computing and robotics products. Sparton
may potentially manufacture one or
WWW.SPARTON.COM 32
<PAGE> 35
more of several new products in development by Cybernet. This investment is an
additional way for Sparton to develop its strength in emerging fields of
technology.
There were no financing activities in 2000. Cash flows used by financing
activities were $123,000 in 1999, and $95,000 in 1998.
At June 30, 2000, the Company had $64,779,000 in working capital.
Market Risk Exposure
--------------------
The Company manufactures its products in the United States and Canada. Sales of
the Company's products are to 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.
OTHER
Litigation
----------
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 cleanup 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 cleanup 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, three lawsuits were filed against Sparton's wholly owned
subsidiary, Sparton Technology, Inc., in Federal District Court in Albuquerque,
one by the United States on behalf of the EPA, the second by the State of New
Mexico and the third by the City of Albuquerque and the County of Bernalillo.
All three actions alleged that the impacts to soil and groundwater associated
with 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 has
paid $1,000,000 to resolve claims for damages to natural resources, $475,000 to
resolve claims for civil penalties for alleged violations of state law and an
order entered in the related administrative enforcement action, and $200,000 for
reimbursement of the litigation costs of certain plaintiffs. The Consent Decree
also contains work plans describing remedial activity Sparton Technology agreed
to undertake. In exchange for the monetary payment and an agreement to implement
the work plans, Sparton Technology is receiving covenants not to sue that,
except in fairly extraordinary circumstances, prevent any further administrative
or judicial action by state and federal entities in connection with the impacts
to the environment associated with past activities at the Coors Road facility
that was the subject of the existing legal proceedings.
The work plans provide for the installation of an off-site containment well
(already completed and operating), enhancement to an on-site soil vapor
extraction system (in operation) and an on-site containment well. It is
anticipated that these 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 before the effectiveness of the groundwater extraction wells can be
established.
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, 2000, the remaining undiscounted minimum
accrual for EPA remediation approximates $9,162,000. This balance is after pay-
ment of the $1,675,000 in costs and damages, described above, payable to the
various plaintiff parties, which amount was paid in March 2000. 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 on-site and off-site pump and treat containment systems, a soil vapor
extraction program and continued on-site and off-site monitoring. It also
includes the required periodic reporting requirements. This estimate does not
include legal and related consulting costs which are expensed as incurred. The
estimate does not reflect any offset or reduction for monies recovered from
various parties which the Company is currently pursuing as described below.
In 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
33
[SPARTON ICON]
<PAGE> 36
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 currently in the discovery stage.
On February 11, 1998, Sparton Technology, Inc. commenced litigation in the
United States Court of Federal Claims alleging that the Department of Energy
(DOE), acting through its contractors, Sandia Corporation and Allied Signal,
Inc., is liable for reimbursement of Sparton's costs incurred in defending
against and complying with federal and state regulatory requirements. The DOE
prescribed certain mandatory performance requirements that were then imposed
upon Sparton Technology through its agreements with Sandia Corporation and
Allied Signal, Inc. On February 9, 1999, the Court of Federal Claims dismissed
Sparton Technology's complaint on the basis of a lack of jurisdiction concluding
that an agency relationship did not exist between Sandia Corporation and Allied
Signal, Inc. and the United States for purposes of reimbursing costs incurred
during litigation. Sparton Technology believed that the court erred in its
decision and filed its notice of appeal on April 9, 1999. On April 18, 2000, the
Federal Circuit reversed the lower court's decision and reinstated Sparton
Technology's claim for purposes of examining whether the Court of Federal Claims
does indeed have jurisdiction. Sparton Technology is now proceeding with
discovery on the jurisdiction related issues.
Sparton Technology, Inc. filed a complaint on September 21, 1998, against Allied
Signal, Inc. in U.S. District Court in Kansas City seeking to recover costs
incurred to investigate and remediate impacts to the environment at its Coors
Road facility. In July 1999, the Court allowed Sparton Technology to amend its
complaint to add Sandia Corporation and the DOE as defendants. In March 2000,
the case was transferred to the United States District Court in Albuquerque, New
Mexico. Written discovery has commenced, but all further discovery has been
stayed as of July 13, 2000, pursuant to an Order of the Court. The Company and
the three defendants are now engaged in a Court ordered mediation to determine
whether the case can be settled. No time deadline on the mediation and no trial
date have been set for the case, in the event the case cannot be settled.
At this time, the Company is unable to predict the amount or timing of recovery,
if any, that may result from the pursuit of these before-mentioned three claims.
WWW.SPARTON.COM 34
<PAGE> 37
DIRECTORS, OFFICERS AND GENERAL MANAGERS
DIRECTORS:
JAMES N. DEBOER (2,3)
Partner
Law Firm of Varnum, Riddering,
and Howlett, LLP
Grand Rapids, Michigan
DAVID W. HOCKENBROCHT (2,3)
President
Sparton Corporation
ROBERT J. KIRK (1)
Financial Consultant
Toledo, Ohio
WILLIAM I. NOECKER (1)
Director of Program Management
Fisher Dynamics Corporation
St. Clair Shores, Michigan
Chairman
Brasco International Inc.
Detroit, Michigan
RORY B. RIGGS (2,3)
President
Biomatrix, Inc.
Richfield, New Jersey
W. PETER SLUSSER (2)
President
Slusser & Associates Inc.
New York, New York
BRADLEY O. SMITH (1,3)
Private Investor
Grand Rapids, Michigan
JOHN J. SMITH (2,3)
Chairman
Sparton Corporation
OFFICERS:
SPARTON CORPORATION
JOHN J. SMITH
Chairman and Chief Executive Officer
DAVID W. HOCKENBROCHT
President and Chief Operating Officer
RICHARD L. LANGLEY
Vice President, Treasurer and Assistant Secretary
R. JAN APPEL
Vice President, General Counsel and Secretary
DEBORAH G. BROWN
Chief Information Officer
ALAN J. HOUGHTALING
Vice President, Director Business Development
STEPHANIE A. MARTIN
Vice President, Corporate Materials, Acquisitions
and Logistics
DOUGLAS E. JOHNSON
Vice President, General Manager
Sparton Electronics
RICHARD D. MICO
Vice President, General Manager
Sparton Technology, Inc.
MICHAEL G. WOODS
Vice President, General Manager
Sparton of Canada, LTD.
COMMITTEE ASSIGNMENTS:
(1) Audit committee
(2) Compensation committee
(3) Executive committee
[SPARTON ICON]
35
<PAGE> 38
FACILITIES
SPARTON ELECTRONICS
Administrative Office
Johnson Lake Rd.
DeLeon Springs, FL 32130
Manufacturing Facilities:
Jackson, MI
DeLeon Springs, FL
Brooksville, FL
SPARTON OF CANADA, LTD.
99 Ash Street
London, Ontario N5Z 4V3
SPARTON TECHNOLOGY, INC.
Administrative Office
4901 Rockaway Blvd., S.E.
Rio Rancho, NM 87124
Manufacturing Facilities:
Deming, NM
Rio Rancho, NM
CORPORATE OFFICES
SPARTON CORPORATION
2400 E. Ganson Street
Jackson, MI 49202
Phone: (517) 787-8600
Watts: (800) 248-9579
Fax: (517) 787-1822
WEBSITE:
HTTP://WWW.SPARTON.COM
COMMON STOCK LISTING:
New York Stock Exchange under the symbol SPA.
Transfer Agent/Registrar:
PRINCIPAL TRANSFER AGENT:
Illinois Stock Transfer Company
209 West Jackson Blvd., Suite 903
Chicago, IL 60606-6905
(312) 427-2953
(800) 757-5755
REGISTRAR:
HSBC Bank USA
Issuers Services
140 Broadway - Lower Level A
New York, NY 10005-1180
FORM 10-K AVAILABLE:
A copy of Sparton Corporation's annual report on Form 10-K for the year ended
June 30, 2000, filed with the Securities and Exchange Commission, will be
furnished without charge to any shareowner upon written request to Richard L.
Langley, Vice President-Treasurer, Sparton Corporation, 2400 E. Ganson St.,
Jackson, MI 49202.
NOTICE OF ANNUAL MEETING:
The Annual Meeting of Sparton Corporation will be held at 10:00 a.m. on October
25, 2000, in the Company offices, 2400 E. Ganson St., Jackson, Michigan.
It is Sparton Corporation's policy to afford equal employment opportunity to all
employees and qualified applicants for employment without regard to race,
religion, creed, color, sex, national origin, age, handicap or veteran status.
WWW.SPARTON.COM 36
<PAGE> 39
THE SPARTON ALLIANCE NETWORK
[AXIOM LOGO] [CIRTRONICS CORPORATION LOGO]
AXIOM CIRTRONICS CORPORATION
NORTH CAROLINA NEW HAMPSHIRE
704.398.0887 603.654.6125
WWW.AXIOMID.COM WWW.CIRTRONICS.COM
[MICRO DYNAMICS CORPORATION LOGO] [OCM TECHNOLOGY INC LOGO]
MICRO DYNAMICS CORPORATION OCM TECHNOLOGY INC
MINNESOTA CANADA
612.941.8071 613.736.5665
WWW.MICRODYNAMICS.COM WWW.OCMTECH.COM
[SIMCLAR INTERNATIONAL LTD LOGO] [TEXATRONICS CORPORATION LOGO]
SIMCLAR INTERNATIONAL LTD TEXATRONICS CORPORATION
SCOTLAND TEXAS
01383 735161 972.479.1466
WWW.SIMCLAR.COM WWW.TEXATRONICS.COM
<PAGE> 40
[SPARTON LOGO]
SPARTON CORPORATION
2400 EAST GANSON STREET
JACKSON, MICHIGAN 49202
800.248.9579
SPARTON ELECTRONICS
30167 POWER LINE ROAD
BROOKSVILLE, FLORIDA 34602
352.799.6520
SPARTON ELECTRONICS
5612 JOHNSON LAKE ROAD
DELEON SPRINGS, FLORIDA 32130
904.985.4631
SPARTON ELECTRONICS
2400 EAST GANSON STREET
JACKSON, MICHIGAN 49202
517.787.8600
SPARTON ELECTRONICS
4901 ROCKAWAY BLVD., NE
RIO RANCHO, NEW MEXICO 87124
505.892.5300
SPARTON ELECTRONICS
99 ASH STREET
LONDON, ONTARIO, CANADA N5Z 4V3
519.455.6320
SPARTON MEDICAL SOLUTIONS
5612 JOHNSON LAKE ROAD
DELEON SPRINGS, FLORIDA 32130
904.985.4631
SPARTON MEDICAL SOLUTIONS
RESEARCH TRIANGLE PARK
4819 EMPEROR BLVD., FOURTH FLOOR
DURHAM, NORTH CAROLINA 27703
919.313.4570
SPARTON TECHNOLOGY, INC.
4901 ROCKAWAY BLVD., NE
RIO RANCHO, NEW MEXICO 87124
505.892.5300
