SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
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SPARTON CORPORATION
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SPARTON CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Our Shareholders:
Notice is hereby given that the Annual Meeting of Shareholders of Sparton
Corporation will be held at the offices of the Company's subsidiary, Sparton
Electronics Florida, Inc., 5612 Johnson Lake Road, DeLeon Springs, Florida
32130, on Wednesday, October 22, 2003, at 10:00 a.m., Eastern Daylight Time, for
the following purposes:
(1) To elect three directors each for a term of three years as set
forth in the Proxy Statement.
(2) To transact such other business as may properly come before the
meeting or at any adjournments thereof.
Only holders of Common Stock of record at the close of business on
September 12, 2003, are entitled to notice of and to vote at the meeting.
By Order of the Board of Directors
-S- Joseph S. Lerczak
JOSEPH S. LERCZAK,
Secretary
Jackson, Michigan
September 26, 2003
IMPORTANT
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING. WHETHER OR
NOT YOU PLAN TO ATTEND IN PERSON, YOU ARE URGED TO SIGN AND DATE THE PROXY
ENCLOSED AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED. This will assure your
representation and a quorum for the transaction of business at the meeting. If
you do attend the meeting in person, the Proxy will not be used if you so
request by revoking it as described in the Proxy Statement.
TABLE OF CONTENTS
SOLICITATION................................................ 1
OUTSTANDING STOCK AND VOTING RIGHTS......................... 1
Principal Shareholders.................................... 2
Security Ownership of Management.......................... 3
ELECTION OF DIRECTORS....................................... 5
Board Recommendations....................................... 5
Corporate Governance........................................ 8
Audit Committee Report...................................... 8
Relationship with Independent Auditors...................... 9
COMPENSATION OF EXECUTIVE OFFICERS.......................... 9
Compensation Committee Report............................... 10
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION............................................. 10
EXECUTIVE COMPENSATION...................................... 11
Summary Compensation Table................................ 11
Option Grants in Last Fiscal Year......................... 12
Option/SAR Exercises and Holdings......................... 12
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES......................... 13
Retirement Programs......................................... 13
Section 16(a) Beneficial Ownership Reporting Compliance..... 14
Performance Graph........................................... 15
CERTAIN RELATIONSHIPS AND TRANSACTIONS...................... 15
INDEPENDENT AUDITORS........................................ 16
SHAREHOLDER PROPOSALS - 2004 ANNUAL MEETING................. 16
APPENDIX A.................................................. A-1
SPARTON CORPORATION
2400 East Ganson Street
Jackson, Michigan 49202
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON OCTOBER 22, 2003
SOLICITATION
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of SPARTON CORPORATION, an Ohio corporation (the
"Company"), of proxies for use at the 2003 Annual Meeting of Shareholders of the
Company (the "Annual Meeting") to be held at the offices of the Company's
subsidiary, Sparton Electronics Florida, Inc., 5612 Johnson Lake Road, DeLeon
Springs, Florida 32130, on October 22, 2003, at 10 a.m., Eastern Daylight Time,
and at any and all adjournments thereof. The cost of solicitation will be paid
by the Company. In addition, officers and employees of the Company and its
subsidiaries may solicit proxies personally, by telephone, facsimile or other
means, without additional compensation. This Proxy Statement and the form of
Proxy are being mailed to shareholders on or about September 26, 2003.
At the meeting, the Company's shareholders will act upon the election of
three directors, each to serve for a three year term until the annual meeting
held in the year 2006 or until their successors are elected and qualified, as
described in more detail in this Proxy Statement.
OUTSTANDING STOCK AND VOTING RIGHTS
In accordance with the Code of Regulations of the Company, the Board of
Directors has fixed the close of business on September 12, 2003, as the record
date for determination of shareholders entitled to notice of, and to vote at,
the Annual Meeting. Only shareholders of record on that date will be entitled to
vote. As of September 12, 2003, the record date for the Annual Meeting, the
Company had outstanding 7,943,671 shares of Common Stock, each entitled to one
vote at the Annual Meeting. Votes cast at the meeting and submitted by proxy are
counted by the inspectors of the meeting, who are appointed by the Company.
1
PRINCIPAL SHAREHOLDERS:
As of August 29, 2003, the persons named in the following table were known
by management to be the beneficial owners of more than 5% of the Company's
outstanding Common Stock:
AMOUNT AND
NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT
OF BENEFICIAL OWNER OWNERSHIP OF CLASS
------------------- ------------- --------
John J. Smith Trust 971,355(1) 12.2%(1)
Bradley O. Smith
6043 N. Gatehouse, SE
Grand Rapids, Michigan 49546 1,128,206(2) 14.2 (2)
Dimensional Fund Advisors, Inc.
1299 Ocean Avenue, llth Fl.
Santa Monica, California 90401 554,085(3) 7.0 (3)
Lawndale Capital Management, Inc.
One Samsome Street, Suite 3900
San Francisco, California 94111 549,440(4) 6.9 (4)
Judith A. Sare
4302 Channel Drive
Akron, Ohio 44319 473,566(5) 6.0 (5)
Donald Smith & Co., Inc.
East 80 Route 4 Suite 360
Paramus, New Jersey 07652 401,835(6) 5.1 (6)
---------------
(1) Bradley O. Smith is a co-trustee and a beneficiary of the John J. Smith
Trust and shares voting and investment power over the shares held by the
trust.
(2) Includes 538,479 shares owned individually by Mr. Bradley O. Smith, 197,549
shares owned by Mr. Smith jointly with his wife, Sharon A. Smith, and
106,976 shares owned by the Lawson K. Smith Trust for which Mr. Smith serves
as the trustee with sole voting and investment power over such shares. Also
includes 273,134 shares held by the Lawson and Margaret Smith Irrevocable
Trust, of which Mr. Smith is a beneficiary, and has sole voting and
investment power and 11,644 shares owned by Mr. Smith's wife, Sharon A.
Smith. Also includes 424 shares which are held in the Company's 401(k) plan.
Does not include the 971,355 shares owned by the John J. Smith Trust,
discussed above, the voting and investment powers for which are shared by
Mr. Smith as a co-trustee.
(3) Shares presented are according to information included in the Form 13G
Report filed as of February 11, 2003, by Dimensional Fund Advisors Inc.
("Dimensional"), a registered investment advisor, adjusted to reflect the 5%
common stock dividend distributed on February 18, 2003. Dimensional is
deemed to have beneficial ownership of 554,085 shares of Common Stock, all
of which shares are held in portfolios of DFA Investment Dimensions Group
Inc., a registered open-end investment company, or in series of the DFA
Investment Trust Company, a Delaware business trust, or the DFA Group Trust
and DFA Participation Group Trust, investment vehicles for qualified
employee benefit plans, to all of which Dimensional Fund Advisors Inc.
serves as investment manager. Dimensional possesses sole voting and
investment power over all such shares. Dimensional disclaims beneficial
ownership of all such shares. The 7.0% of class is based on Dimensional's
reporting of shares held at February 11, 2003, adjusted to reflect the 5%
dividend, and shares outstanding as of August 29, 2003.
(4) According to information in the Form 13G Report filed as of March 6, 2003,
by Lawndale Capital Management, LLC ("Lawndale"), a registered investment
advisor, Lawndale is
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deemed to have beneficial ownership of 549,440 shares of common stock. The
6.9% of class is based on Lawndale's reporting of shares held at February
27, 2003, and shares outstanding as of August 29, 2003.
(5) According to information in the Form 13G Report filed as of March 6, 2003,
by Judith A. Sare, and subsequent information the Company became aware of,
Mrs. Sare is deemed to have beneficial ownership of 473,566 shares of common
stock. This includes 413,788 shares owned individually by Mrs. Sare and
56,313 shares owned by Mrs. Sare jointly with her husband Paul W. Sare. It
also includes 3,465 shares owned by Mrs. Sare's husband Paul W. Sare. Judith
A. Sare is the sister of Bradley O. Smith.
(6) Shares presented are according to information in the Form 13G Report filed
as of January 23, 2003, by Donald Smith & Co., Inc., a registered investment
advisor, adjusted to reflect the 5% common stock dividend distributed on
February 18, 2003. Donald Smith & Co. is deemed to have beneficial ownership
of 401,835 shares of Common Stock. The 5.1% of class is based on Donald
Smith & Co.'s reporting of shares held at January 23, 2003, adjusted to
reflect the 5% dividend, and shares outstanding as of August 29, 2003.
Donald Smith & Co., Inc. is no relation to Mr. Bradley O. Smith or Mrs.
Judith A. Sare.
SECURITY OWNERSHIP OF MANAGEMENT:
As of August 29, 2003, the following table shows the shares of the
Company's Common Stock beneficially owned (except as noted) by the Named
Executives identified in the Compensation Table shown later in this Proxy
Statement and all officers and directors of the Company as a group:
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS(7)
------------------------ --------------------- ----------
David W. Hockenbrocht 434,658(1) 5.4%
Douglas E. Johnson 19,944(2) *
Richard L. Langley 45,745(3) *
Michael D. Sobolewski 3,146(4) *
Charles A. Stranko 6,835(5) *
All Officers and Directors 2,668,313(6) 33.0%
---------------
* denotes a percentage of less than 1%.
(1) Includes 39,375 shares, which Mr. Hockenbrocht has the right to acquire
pursuant to options exercisable within 60 days. The amount also includes
335,055 shares held by one of the Company's retirement plans, as to which
Mr. Hockenbrocht holds voting and investment power in his capacity as Chief
Executive Officer of the Company. Although Mr. Hockenbrocht is a participant
in the plan, he disclaims beneficial ownership of the shares held by the
plan. Finally, 1,306 shares are included which are held in his name by the
Company's 401(k) plan.
(2) Includes 13,781 shares, which Mr. Johnson has the right to acquire pursuant
to options exercisable within 60 days. Also includes 913 shares, which are
held in the Company's 401(k) plan.
(3) Includes 29,532 shares, which Mr. Langley has the right to acquire pursuant
to options exercisable within 60 days. Also includes 779 shares, which are
held in the Company's 401(k) plan.
(4) Includes 2,625 shares, which Mr. Sobolewski has the right to acquire
pursuant to options exercisable within 60 days. Also includes 521 shares,
which are held in the Company's 401(k) plan.
3
(5) Includes 6,234 shares, which Mr. Stranko has the right to acquire pursuant
to options exercisable within 60 days. Also includes 601 shares, which are
held in the Company's 401(k) plan.
(6) Includes 135,385 shares under options held by all officers and directors
exercisable within 60 days and 971,355 shares held by the John J. Smith
Trust of which Bradley O. Smith is co-trustee. Mr. Smith shares voting and
investment power over the shares held by the trust.
(7) Calculation is based on total shares outstanding plus the shares subject to
options exercisable within 60 days as described in this Proxy Statement.
The following table gives information about the Company's Common Stock that
may be issued upon the exercise of options, warrants and rights under all of the
Company's equity compensation plans as of June 30, 2003.
NUMBER OF
SECURITIES
NUMBER OF WEIGHTED- REMAINING AVAILABLE
SECURITIES TO BE AVERAGE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE PRICE OF UNDER EQUITY
EXERCISE OF OUTSTANDING COMPENSATION PLANS
OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
OPTIONS, WARRANTS WARRANTS REFLECTED IN
PLAN CATEGORY AND RIGHTS AND RIGHTS COLUMN (a))
------------- ----------------- ----------------- ---------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 544,938 $6.34 211,312
Equity compensation plans not
approved by security holders -- -- --
Any Proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing a
written notice of revocation with the Chairman or Secretary of the Company, at
or before the Annual Meeting, (ii) duly executing a subsequent proxy relating to
the same shares and delivering it to the Chairman or Secretary of the Company at
or before the Annual Meeting or (iii) attending the Annual Meeting and voting in
person with adequate notification (although attendance at the Annual Meeting
will not in and of itself constitute a revocation of a proxy). Unless revoked,
the shares represented by the enclosed Proxy will be voted at the meeting in
accordance with any specification made thereon, if the Proxy is returned
properly executed and delivered in time for voting. Unless otherwise specified,
the Proxy will be voted "FOR" the election of the three director nominees.
Management does not intend to present, and does not know of anyone who
intends to present, any matters at the meeting to be acted upon by the
shareholders not referred to in the Notice and this Proxy Statement. If any
other matters should properly come before the meeting, it is the intention of
the persons named in the Proxy to vote in accordance with their judgment on such
matters.
The shareholders of the Company have cumulative voting rights in the
election of directors at the Annual Meeting if notice in writing is given by any
shareholder to the President, a Vice President or the Secretary of the Company
not less than 48 hours before the time fixed for holding the Annual Meeting that
the shareholder desires that the voting at such election shall be cumulative. An
announcement of the giving of such notice shall be made upon the convening of
the Annual Meeting by the Chairman or Secretary.
If voting for the election of directors at the Annual Meeting is
cumulative, each shareholder will have the right to cast that number of votes
which equals the number of shares owned by the shareholder multiplied by the
number of directors to be elected, and the shareholder may cast all such votes
for one candidate or distribute such votes among any number of candidates as the
shareholder elects. The actual number of shares required for election of a
candidate will vary
4
depending upon the total number of shares voted. However, shareholders owning
1,985,918 shares, or approximately 25% of the Company's outstanding shares,
could elect at least one director to the class of three directors to be elected
at the 2003 Annual Meeting if there are four nominees.
ELECTION OF DIRECTORS
The following directors, whose terms of office expire at the Annual
Meeting, Messrs. James N. DeBoer, David W. Hockenbrocht, and James D. Fast are
nominees for election to a three (3) year term expiring in 2006. The following
portion of this Proxy Statement contains additional information about these
nominees.
A plurality of the votes cast at the meeting is required to elect the
nominees as directors of the Company. As such, the three individuals who receive
the greatest number of votes cast by the holders of Common Stock will be elected
as directors. Shares not voted at the Annual Meeting, whether by abstention,
broker non-vote, or otherwise, will not be treated as votes cast at the meeting.
It is believed that all three nominees are, and will be at the time of the
Annual Meeting, available for election; and, if elected, will serve. However, in
the event one or more of them is or should become unavailable, or should decline
to serve, it is intended that the proxies will be voted for the balance of the
nominees and for such substitute nominee or nominees as the proxy holders may in
their discretion select.
BOARD RECOMMENDATIONS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE
THREE NOMINEES, MESSRS. JAMES N. DEBOER, DAVID W. HOCKENBROCHT, AND JAMES D.
FAST. Unless otherwise directed by marking the accompanying proxy, the proxy
holders named therein will vote FOR the election of the three nominees.
In the following table, the column "Amount and Nature of Beneficial
Ownership" relates to common shares of the Company beneficially owned by the
directors and nominees as of August 29, 2003, and is based upon information
furnished by them.
HAS
SERVED AMOUNT AND
AS A NATURE
DIRECTOR OF BENEFICIAL PERCENT OF
NAME AGE PRINCIPAL OCCUPATION SINCE OWNERSHIP (1) CLASS (1)
---- --- ------------------------------------- -------- ------------- ----------
NOMINEES FOR ELECTION AS DIRECTORS FOR TERMS EXPIRING IN 2006
James N. DeBoer........ 78 Partner, law firm of Varnum, 1971 4,588 *
Riddering, Schmidt & Howlett, LLP,
Grand Rapids, Michigan.
David W. Chief Executive Officer since October 1978 434,658(2) 5.4%
Hockenbrocht......... 68 2000 and President of Sparton
Corporation, Jackson, Michigan since
1978.
James D. Fast.......... 55 Chief Executive Officer and President 2001 1,260 *
of Ionia County National Bank, Ionia,
Michigan.
5
HAS
SERVED AMOUNT AND
AS A NATURE
DIRECTOR OF BENEFICIAL PERCENT OF
NAME AGE PRINCIPAL OCCUPATION SINCE OWNERSHIP (1) CLASS (1)
---- --- ------------------------------------- -------- ------------- ----------
DIRECTORS WHOSE TERMS EXPIRE IN 2004
David P. Molfenter..... 58 Retired since August 2000, formerly 2000 1,050 *
Vice President Command, Control,
Communication and Information Systems
Segment, Raytheon Systems Company, a
high technology company specializing
in defense electronics, Fort Wayne,
Indiana; December 1997-August 2000.
Vice President and General Manager
Hughes Aircraft, a defense
electronics contractor, December
1995-December 1997.
W. Peter Slusser....... 74 President, Slusser Associates, Inc., 1997 1,050 *
Investment Banking, New York, New
York.
Bradley O. Smith....... 58 Chairman of the Board, Sparton 1998 1,128,206(3) 14.2%
Corporation, Jackson, Michigan since
October 2000. Private Investor since
May 1998. For the preceding 24 years,
owner and President of Tracy
Products, Inc., an automotive metal
stamping company, Ionia, Michigan.
DIRECTORS WHOSE TERMS EXPIRE IN 2005
Richard J. Johns, Distinguished Service Professor, 2002 -- *
M.D. ................ 78 Professor of Biomedical Engineering,
Professor of Medicine, Johns Hopkins
University School of Medicine since
1991. Dr. Johns is also a Physician
on staff at Johns Hopkins Hospital.
Richard L. Langley..... 58 Chief Financial Officer, Vice 2001 45,745(4) *
President and Treasurer of Sparton
Corporation, Jackson, Michigan.
William I. Noecker..... 54 Chairman of Brasco International 1999 -- *
Inc., an aluminum fabricator,
Detroit, Michigan since 1993.
---------------
* denotes a percentage of less than 1%.
(1) Unless otherwise indicated by footnote, each director or nominee has sole
voting power and owns the shares directly, or shares voting and investment
power with his spouse or other family members under joint ownership.
(2) Reference is made to note (1) under the heading "Security Ownership of
Management" on page 3.
(3) Reference is made to note (2) under the heading "Principal Shareholders" on
page 2.
(4) Reference is made to note (3) under the heading "Security Ownership of
Management" on page 3.
Except as noted, the principal occupations referred to have been held by
the foregoing nominees and directors for at least five years.
Mr. W. Peter Slusser is a director of Ampex Corporation, a manufacturer of
high performance Digital Storage equipment.
6
Mr. James Fast is a director of ICNB Financial Corporation. ICNB Financial
Corporation is the holding corporation for Ionia County National Bank.
The Board of Directors, which had six (6) meetings during the past year,
has standing Audit, Compensation, Executive and Nominating Committees.
The Audit Committee met six (6) times last year and consisted of Messrs.
William I. Noecker, James D. Fast, and David P. Molfenter. This committee
operates under a written charter and oversees auditing, financial reporting and
internal control matters. It also recommends the firm that Sparton should retain
as its independent auditors. The Committee consults with the independent
auditors and reviews their audit and other work. The Committee also consults
with the Chairman of the Board, President, and Vice President-Treasurer and
oversees those individuals who review Sparton's internal controls and compliance
with policies. The members of the Audit Committee are independent, as defined
under the New York Stock Exchange listing standards. The independent auditors
have access to the Committee without any other members of management being
present. The Audit Committee met with management and the independent accountants
before the announcement of earnings each quarter. The Committee also reviewed
annual results and the Audit Committee report before filing. The functions and
qualifications for membership are set forth in its charter, a copy of which was
filed with the fiscal 2001 Proxy Statement.
The Compensation Committee, which held four (4) meetings last year and
consisted of Messrs. James N. DeBoer, David W. Hockenbrocht, David P. Molfenter,
and W. Peter Slusser, monitors the remuneration, including stock options, for
the Company's executive officers. Mr. Hockenbrocht is a non-voting member of the
Committee.
The Executive Committee, which consisted of Messrs. James N. DeBoer, David
W. Hockenbrocht, and Bradley O. Smith, did not meet last year.
The Nominating Committee, which consisted of Messrs. David W. Hockenbrocht,
David P. Molfenter, and Bradley O. Smith, held two (2) meetings last year. The
Nominating Committee reviews the makeup of the existing board of directors and
the tenure of its members consistent with appropriate principles of corporate
governance and applicable regulations. The Committee also considers and
recommends candidates for election to the board consistent with the needs of the
Company, regulatory requirements, and the qualifications of the candidates. The
Committee is implementing a formal process for consideration of candidates.
All directors attended at least 75% of the meetings of the Board and
committees on which they serve.
Non-employee directors received an annual base retainer of $7,200.
Non-employee directors also received $600 for each regularly scheduled Board
Meeting, $350 for each committee meeting attended the same day as a regularly
scheduled Board Meeting, and $500 for each special Board Meeting. Directors who
are employees of the Company are to be paid $500 for each Board Meeting
attended. In addition, non-employee directors Messrs. James N. DeBoer, James D.
Fast, David P. Molfenter, William I. Noecker, and W. Peter Slusser were awarded
stock options for 1,000 shares in fiscal 2003. Richard J. Johns, M.D. was
awarded stock options for 3,100 shares in fiscal 2003.
In addition to his directors' fees, Mr. Bradley O. Smith is compensated for
services rendered as Chairman of the Board of Directors. Such compensation
totaled $162,402 for fiscal 2003. Mr. Smith was also awarded stock options for
9,500 shares during the fiscal year ended June 30, 2003, 7,500 of which were
subsequently adjusted to 7,875 as a result of the 5% stock dividend distributed
on February 18, 2003.
In addition to his directors' fees, Richard J. Johns, M.D. received a total
of $4,300 for services plus related expenses as a consultant to the Company. Mr.
Johns is a consultant to the
7
Company on medical issues related to the regulated medical industry that the
Company serves. These services are performed and compensated on an as used
basis.
CORPORATE GOVERNANCE
The Sarbanes-Oxley Act of 2002 was enacted on July 30, 2002. The statute
addresses, among other issues, corporate governance, auditing and accounting,
executive compensation, and enhanced and timely disclosure of corporate
information. The New York Stock Exchange has proposed corporate governance
rules, subsequently amended, that were submitted to the Securities and Exchange
Commission for review and approval. These proposed rules specifically address
director independence and corporate accountability. The proposed changes are
intended to allow stockholders to more easily and efficiently monitor the
performance of companies and directors.
Sparton's Board of Directors is developing a series of changes to address
the requirements. A revised charter for the Audit Committee was filed with the
Fiscal 2001 Proxy Statement. The Audit Committee has adopted a policy for
pre-approving all services, audit and non-audit, performed by the Independent
Auditors. This policy is attached as Appendix A. In addition, the Board of
Directors is currently developing charters for the Compensation, Executive, and
Nominating Committees. These charters will address issues such as independence
of the committee members, committee organization and powers, member
qualifications, duties and responsibilities, and Corporate Governance. The
Company is formally defining its Corporate Governance policies and practices and
their place within the Board's committee structure.
Code of Ethics
"The Sparton Way" governs the actions and working relationships of Sparton
employees, officers and directors. The Sparton Way endorses the highest level of
ethical standards, along with addressing other issues such as corporate
opportunities, confidentiality, and the protection and proper use of corporate
assets. The Company is currently in the process of reviewing and updating its
long standing Code of Ethics in light of current regulatory requirements.
AUDIT COMMITTEE REPORT
The Audit Committee has reviewed and discussed Sparton's audited financial
statements for the fiscal year ended June 30, 2003, with management and with
Sparton's independent auditors, BDO Seidman, LLP. Management is responsible for
Sparton's internal controls and the financial reporting process. The independent
auditors are responsible for performing an independent audit of Sparton's
consolidated financial statements in accordance with auditing standards
generally accepted in the United States and for issuing a report thereon.
The Audit Committee has discussed with BDO Seidman, LLP the matters
required to be discussed by Statement on Auditing Standards No. 61, as amended,
relating to the conduct of the audit. The Audit Committee has received the
written disclosures from BDO Seidman, LLP required by Independence Standards
Board Standard No. 1 (Independence Discussion with Audit Committees), discussed
with BDO Seidman, LLP their independence, and considered the compatibility of
non-audit services provided by BDO Seidman, LLP with their independence.
Based on the review and discussion described above, the Audit Committee
recommended to the Board of Directors that the audited financial statements for
the fiscal year ended June 30, 2003, be included in Sparton's Annual Report on
Form 10-K for the fiscal year ended June 30, 2003, for filing with the
Securities and Exchange Commission.
William I. Noecker, Chairman
James D. Fast
David P. Molfenter
8
RELATIONSHIP WITH INDEPENDENT AUDITORS
The Audit Committee recommends, and the Board of Directors selects,
independent public auditors for Sparton. In addition to performing the audit of
the Company's consolidated financial statements, BDO Seidman, LLP provided
various other services during 2003. The Audit Committee has considered the
provision of all non-audit services performed by BDO Seidman, LLP with respect
to maintaining auditor independence. The Audit Committee reviewed and pre-
approved all professional services requested of, and performed by, BDO Seidman,
LLP. The Pre-Approval Policy for audit and non-audit services is attached as
Appendix A. The aggregate fees billed for fiscal 2003 and 2002 for each of the
following categories of services are set forth below:
FISCAL 2003
Audit Fees -- The aggregate fees of BDO Seidman, LLP and Ernst and
Young, LLP for professional services rendered for the audit of Sparton's
annual financial statements for the fiscal year ended June 30, 2003, and
the reviews of the financial statements included in the Company's Quarterly
Reports on Form 10-Q for that fiscal year were $208,000.
Audit-related Fees -- The aggregate audit-related fees of BDO Seidman,
LLP and Ernst & Young, LLP for professional services rendered, primarily
for the audit of the Company's employee benefit plans, for the fiscal year
ended June 30, 2003, were $48,000.
Tax Fees -- The aggregate fees of BDO Seidman, LLP and Ernst & Young,
LLP for tax services, preparation and review, rendered for the fiscal year
ended June 30, 2003, were $32,000.
All Other Fees -- There were no fees for other services billed by BDO
Seidman, LLP or Ernst & Young, LLP for the fiscal year ended June 30, 2003,
and there were no Financial Information Systems Design and Implementation
services provided.
FISCAL 2002
Audit Fees -- The aggregate fees of Ernst and Young, LLP for
professional services rendered for the audit of Sparton's annual financial
statements for the fiscal year ended June 30, 2002, and the reviews of the
financial statements included in the Company's Quarterly Reports on Form
10-Q for the fiscal year were $250,000.
Audit-related Fees -- The aggregate audit-related fees of Ernst &
Young, LLP for professional services rendered, primarily for the audit of
the Company's employee benefit plans, for the fiscal year ended June 30,
2002, were $22,000.
Tax Fees -- The aggregate fees of Ernst & Young, LLP for tax services,
preparation and review, rendered for the fiscal year ended June 30, 2002,
were $57,000.
All Other Fees -- Fees for additional services billed by Ernst &
Young, LLP for the fiscal year ended June 30, 2002, primarily related to
Canadian Stock Subscription issues, were $28,000. There were no Financial
Information Systems Design and Implementation services provided.
COMPENSATION OF EXECUTIVE OFFICERS
The following tables provide certain data and information on the
compensation of the Company's Chief Executive Officer and its four most highly
compensated executive officers (other than the CEO) whose annual salary and
bonus exceeded $100,000 (collectively referred to as the "Named Executives").
This report addresses the Company's compensation policies and programs for the
fiscal year ended June 30, 2003, the details of which are reflected in the
tables
9
set forth in the following pages of this Proxy Statement. The Company's and the
Board's policies and practices pertaining to the compensation of executive
officers and management have been in effect for a number of years.
COMPENSATION COMMITTEE REPORT
Decisions on the compensation of the Company's executive officers are
monitored by the Board's Compensation Committee. This Committee is composed of
three non-employee directors; Messrs. James N. DeBoer, David P. Molfenter and W.
Peter Slusser. In addition, Mr. David W. Hockenbrocht, Chief Executive Officer
and President, consults as a non-voting member.
The Company has long-established policies and practices intended to
compensate its salaried employees in a manner that will enable the Company to
attract, retain and motivate them to accomplish corporate goals and objectives.
These policies and practices encourage management to remain dedicated to the
maximization of shareholder value.
The Company's compensation program encompasses several elements: cash
compensation (including salary and incentive bonus), incentive stock options and
defined benefit and defined contribution retirement plans. Reflective of the
Company's goal of relating compensation to corporate performance, the incentive
bonus compensation plan permits certain executive officers to earn additional
compensation if the pre-tax earnings of their operating unit are in excess of an
established goal. The performance goals for this plan are reviewed and approved
annually by the Compensation Committee. In addition, at the discretion of the
Committee, bonuses may be paid in addition to or in lieu of bonuses earned under
the incentive bonus plan based on the Committee's evaluation of the employee's
individual performance, level of responsibility and experience. During the past
fiscal year, discretionary bonuses, as well as bonuses under the incentive bonus
compensation plan, were paid.
The Committee members, who are non-employee directors, use the same
procedures described above in setting the annual salary, bonus, and incentive
stock option grants for Mr. David W. Hockenbrocht, the Company's Chief Executive
Officer. These Committee members evaluate the performance of Mr. Hockenbrocht at
least annually based on both the Company's financial performance and the extent
to which the strategic and business goals established for the Company are met.
Mr. Hockenbrocht does not have an employment agreement with the Company.
Mr. Hockenbrocht's annual base salary for the fiscal year ended June 30,
2003, was $315,000. In addition, Mr. Hockenbrocht was awarded a bonus of
$131,890. Mr. Hockenbrocht was also awarded stock options for 35,000 shares of
the Company's Common Stock during the fiscal year, 25,000 of which were
subsequently adjusted to 26,250 as a result of the 5% stock dividend distributed
on February 18, 2003.
W. Peter Slusser, Chairman James N. DeBoer
David W. Hockenbrocht David P. Molfenter
The Executive Compensation Committee Report and Performance Graph set forth
herein are not deemed to be soliciting material or to be filed with the
Securities and Exchange Commission under the Securities Act of 1933 or the
Securities Exchange Act of 1934 or incorporated by reference in any document so
filed.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. David W. Hockenbrocht, the Company's Chief Executive Officer and
President, is a non-voting member of the Compensation Committee and as such
participates in establishing compensation for executives of the Company. Mr.
Hockenbrocht does not participate in Committee matters involving his personal
compensation.
10
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Summary Compensation Table shows certain compensation information for
the Named Executives for services rendered in all capacities during the fiscal
years ended June 30, 2003, 2002, and 2001.
LONG TERM
COMPENSATION
ANNUAL ------------
COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS OPTIONS(1) COMPENSATION
--------------------------- ----------- -------- -------- ------------ ------------
David W. Hockenbrocht 2003 $315,000 $131,890 36,250 $35,709(2)
Chief Executive Officer 2002 300,000 65,600 47,250 8,143(3)
and President 2001 284,767 50,000 42,000 9,565(4)
Douglas E. Johnson 2003 163,883 58,983 7,875 4,289(5)
Chief Operating Officer and 2002 160,548 47,791 26,250 4,332(5)
Executive Vice President 2001 138,091 33,000 10,500 3,452(5)
Richard L. Langley 2003 136,400 69,135 8,875 6,777(6)
Chief Financial Officer, 2002 131,200 39,967 21,000 6,382(7)
Vice President and Treasurer 2001 125,000 25,000 36,750 3,815(8)
Michael D. Sobolewski 2003 114,316 15,355 5,750 3,166(5)
Vice President, Engineering 2002 110,381 8,749 5,250 1,100(5)
2001 99,384 3,000 -0- 991(5)
Charles A. Stranko 2003 106,600 20,472 6,250 3,198(5)
Vice President, Corporate Sales 2002 104,982 541 2,625 2,663(5)
2001 100,502 -0- 2,625 1,241(5)
---------------
(1) Option information reflects adjustments resulting from the 5% stock dividend
distributed on February 18, 2003.
(2) Directors' fees of $3,000, Company contribution to defined contribution
benefit plan of $5,909, and income from the exercise of stock appreciation
rights on options for 32,000 shares of $26,800.
(3) Directors' fees of $2,850 plus Company contribution to defined contribution
benefit plan of $5,293.
(4) Directors' fees of $2,450 plus Company contribution to defined contribution
benefit plan of $7,115.
(5) Company contributions to the employee's defined contribution benefit plan.
(6) Directors' fees of $3,000 plus Company contribution to defined contribution
benefit plan of $3,777.
(7) Directors' fees of $2,850 plus Company contribution to defined contribution
benefit plan of $3,532.
(8) Directors' fees of $700 plus Company contribution to defined contribution
benefit plan of $3,115.
11
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS (1)
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS/SAR'S EXERCISE STOCK
UNDERLYING GRANTED TO OR PRICE APPRECIATION
OPTIONS/SAR'S EMPLOYEES IN BASE PRICE FOR
NAME GRANTED(2) FISCAL YEAR(3) PER SHARE EXPIRATION DATE(4) OPTION TERM(5)
---- ------------- ---------------- ----------- ------------------ -------------------
5% 10%
------- --------
David W. Hockenbrocht 26,250 19.49% $8.10 8/23/07 $58,685 $129,914
10,000 7.43 7.93 4/25/13 49,880 126,404
Douglas E. Johnson 7,875 5.85 8.10 8/23/07 17,605 38,974
-0- -0- 7.93 4/25/13 -0- -0-
Richard L. Langley 7,875 5.85 8.10 8/23/07 17,605 38,974
1,000 0.74 7.93 4/25/13 4,988 12,640
Michael D. Sobolewski 5,250 3.90 8.10 8/23/07 11,737 25,983
500 0.37 7.93 4/25/13 2,494 6,320
Charles A. Stranko 5,250 3.90 8.10 8/23/07 11,737 25,983
1,000 0.74 7.93 4/25/13 4,988 12,640
---------------
(1) Option information has been adjusted to reflect the 5% stock dividend
distributed on February 18, 2003.
(2) These options were granted under the Company's Amended and Restated Stock
Incentive Plan dated October 24, 2001, and have a five or ten-year term.
Options become exercisable cumulatively beginning one year after the date
granted, in four equal annual installments.
(3) During the fiscal year ended on June 30, 2003, options to purchase an
aggregate of 134,650 shares of Common Stock of the Company were granted to
various employees and non-employee directors.
(4) Options may terminate before their expiration dates if the optionee's status
as an employee is terminated, or upon the optionee's death.
(5) These columns show the increase in value that could accrue for the
respective options, assuming that the market price of Sparton Common Stock
appreciates from the date of grant over a 5 or 10 year period at an
annualized rate of 5% and 10%, respectively. If stock prices do not increase
above the exercise price at the time of exercise, realized value to the
Named Executive from these options will be zero. These values do not reflect
the Company's estimate of future stock appreciation.
OPTION/SAR EXERCISES AND HOLDINGS
The following table sets forth information, with respect to the Named
Executives, concerning the exercise of stock options or stock appreciation
rights ("SARs") during the year and unexercised options held at June 30, 2003.
There were no SAR's held as of June 30, 2003.
12
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED IN THE
UNEXERCISED OPTIONS MONEY OPTIONS AT
AT FISCAL YEAR-END(1) FISCAL YEAR-END(L)(2)
SHARES ----------------------------- -----------------------------
ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISEABLE UNEXERCISEABLE EXERCISEABLE UNEXERCISEABLE
---- ----------- -------- ------------ -------------- ------------ --------------
David W.
Hockenbrocht(3)....... -0- $26,800 39,376 86,124 $125,450 $188,745
Douglas E. Johnson...... -0- -0- 13,782 30,843 38,851 67,724
Richard L. Langley...... -0- -0- 29,532 37,093 116,959 103,733
Michael D. Sobolewski... -0- -0- 2,625 8,375 3,438 10,702
Charles A. Stranko...... 1,250 6,325 6,236 9,202 23,372 18,258
---------------
(1) Option information is reflective of the 5% stock dividend distribution on
February 18, 2003.
(2) The value of unexercised options reflects the increase in market value of
the Company's Common Stock from the date of grant through June 30, 2003,
when the closing price of the Company's stock was $8.70 per share. The value
actually realized upon exercise by the Named Executives will depend on the
value of the Company's Common Stock at the time of exercise.
(3) Mr. Hockenbrocht exercised stock option appreciation rights on 32,000 shares
resulting in a cash distribution of $26,800. No shares were issued.
RETIREMENT PROGRAMS
The Company maintains a defined benefit retirement plan for domestic
employees of the Company which provides for monthly pensions following
retirement. During the past year, no cash contributions were made by the Company
to the plan as in the judgment of the Company's independent actuaries, the
pension plan was fully funded. The plan provides a basic benefit of $2.25 per
month for each year of credited service up to a maximum of $90 per month. In
addition, for those participants who contributed 5% of their monthly
compensation (excluding bonuses) per month, the plan provides for an additional
monthly pension amount equal to 1 1/2% of the participant's final five-year
average monthly compensation (excluding bonuses) times the participant's years
of contributory credited service to a maximum of 30 years. Effective April 1,
2000, the Company amended its defined benefit retirement plan to determine
benefits by a cash balance formula. Under the cash balance formula, each
participant has a benefit equal to their cash balance account which is credited
yearly with 2% of their salary, as well as the interest earned on their previous
year-end cash balance. Service under the Company's prior salary-based formula
was frozen as of March 31, 2000, and the benefit formula amended to calculate
the monthly pension based upon the participant's final five-year average
earnings as defined.
The following table shows the estimated annual retirement benefits, payable
under the prior salary-based formula, in specified remuneration and service
classifications upon normal retirement at age 65 (or June 30, 2003, if the
individual is currently age 65 or older). The benefits shown are not subject to
any deduction for Social Security or other offset amounts. The maximum amount of
annual compensation allowed to be included in determining final average
13
compensation has been limited by Federal statute to $200,000 for 2003. This
amount is subject to future adjustment by the Internal Revenue Service.
FINAL 5-YEAR AVERAGE YEARS OF CONTRIBUTORY AND CREDITED SERVICE AT AGE 65
ANNUAL EARNINGS ----------------------------------------------------
(EXCLUDES BONUSES) 5 10 15 20 25
-------------------- -------- -------- -------- -------- --------
$ 60,000 $ 4,635 $ 9,270 $13,905 $18,540 $23,175
80,000 6,135 12,270 18,405 24,540 30,675
100,000 7,635 15,270 22,905 30,540 38,175
120,000 9,135 18,270 27,405 36,540 45,675
140,000 10,635 21,270 31,905 42,540 53,175
160,000 12,135 24,270 36,405 48,540 60,675
180,000 13,635 27,270 40,905 54,540 68,175
200,000 15,135 30,270 45,405 60,540 75,675
The following Named Executives have years of contributory credited service
under the plan as of June 30, 2003, as follows:
YEARS OF CONTRIBUTORY
OFFICER CREDITED SERVICE
------- ---------------------
David W. Hockenbrocht 22.25
Douglas E. Johnson 11.75
Richard L. Langley 13.75
Michael D. Sobolewski --
Charles A. Stranko --
In addition to benefits payable under the salary-based formula of the
defined benefit plan, benefits are available under the cash balance formula.
Estimated lump sum benefits equal to their cash balance account under the cash
balance pension plan upon retirement at age 65 (or June 30, 2003, if the
individual is currently age 65 or older) for Messrs. Hockenbrocht, Johnson,
Langley, Sobolewski and Stranko are, $13,883, $61,095, $35,416, $160,974, and
$98,098 respectively, assuming each Named Executive receives no pay increase and
cash balances are credited with interest at a rate of 6% per annum.
The Company also maintains a 401(k) defined contribution plan. The
Company's matching contribution is 50% of a participants' cash contribution of
up to 6% of their wages. The Company's matching cash contribution is directed to
be invested in Sparton Common Stock. Contributions paid on behalf of the Named
Executives are detailed in the Summary Compensation Table.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file reports of ownership and changes in
ownership to the Securities and Exchange Commission (SEC). Officers, directors,
and greater than 10% stockowners are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file. Based solely upon a
review of the copies of the forms furnished to the Company, and/or written
representations from certain reporting persons, during the fiscal year ended
June 30, 2003, the Company believes that all filing requirements applicable to
its officers and directors were complied with, except for one late Form 4 for
Mr. Charles Stranko (with respect to the exercise of an option and subsequent
sale) and one late Form 4 for Mr. William Noecker, reflecting a single
transaction in his IRA account.
14
PERFORMANCE GRAPH
The following is a line-graph presentation comparing cumulative, five-year
shareholder returns, on an indexed basis, of the Company's Common Stock with
that of a broad market index (the S&P 500 Composite Index) and the Electronics
Component of the NASDAQ. The comparison assumes a $100 investment on June 30,
1998, and the reinvestment of dividends.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG
SPARTON CORPORATION, S&P INDEX AND INDUSTRY INDEXES
(INDEX JUNE 30, 1998 = 100)
[GRAPH]
NASDAQ S&P 500 INDEX SPARTON CORPORATION
------ ------------- -------------------
1998 100.00 100.00 100.00
1999 178.00 121.00 72.00
2000 441.00 128.00 50.00
2001 163.00 108.00 83.00
2002 99.00 87.00 108.00
2003 111.00 86.00 105.00
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Mr. David W. Hockenbrocht is a member of the Board of Directors of Cybernet
Systems, Inc. (Cybernet). The Company receives the Director's fee for the Board
Meetings attended by Mr. Hockenbrocht. The Company owns 14% of Cybernet's
outstanding common stock.
15
INDEPENDENT AUDITORS
In June of 2002, the Board of Directors, including members of the Audit
Committee, met to review, among other matters, the accounting and auditing
services provided to the Company. After reviewing the subject, it was suggested
that as a matter of good corporate practice, the Company solicit proposals for
accounting and auditing services for the fiscal year ending June 30, 2003. In
October 2002, the Company commenced soliciting proposals from a number of firms,
including Ernst & Young LLP, the Company's auditors at that time.
The Company received a letter from Ernst & Young LLP, on November 19, 2002,
indicating that they resigned as the Company's independent public accountants
effective on that date.
The reports of Ernst & Young LLP on the Company's financial statements for
the fiscal years ended June 30, 2001, and June 30, 2002, did not contain any
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope or accounting principles.
In connection with the audits of the Company's financial statements for
each of the fiscal years ended June 30, 2001, and June 30, 2002, and in the
subsequent interim period that ended September 30, 2002, there were no
disagreements between the Company and Ernst & Young LLP on matters of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures which, if not resolved to the satisfaction of Ernst & Young LLP,
would have caused Ernst & Young LLP to make reference to such matter in its
reports on the financial statements of the Company.
In connection with the audits of the Company's financial statements for
each of the fiscal years ended June 30, 2001, and June 30, 2002, and in the
subsequent interim period that ended September 30, 2002, there were no
"reportable events" within the meaning of Item 304(a)(1)(v) of the Securities
and Exchange Commission's Regulation S-K.
On November 21, 2002, the Company filed on Form 8-K, Item 4 Changes in
Registrant's Certifying Accountant, reporting the resignation of its certifying
accountant Ernst & Young LLP. The Company's Board of Directors, upon the
recommendation of the Audit Committee, engaged BDO Seidman, LLP as of December
20, 2002, as the Company's independent public accountants.
On December 20, 2002, the Company filed on Form 8-K, Item 4 Changes in
Registrant's Certifying Accountant, reporting the selection of its new
certifying accountant BDO Seidman, LLP.
Representatives of BDO Seidman, LLP, the Company's independent auditors,
are expected to be present at the Annual Meeting. They will have an opportunity
to make a statement if they desire to do so and are expected to be available to
respond to appropriate questions.
SHAREHOLDER PROPOSALS -- 2004 ANNUAL MEETING
Shareholder proposals intended to be included in the Proxy Statement and
the Proxy for the 2004 Annual Meeting of Shareholders of the Company must be
received by the Company not later than May 30, 2004, at its principal executive
offices, 2400 East Ganson Street, Jackson, Michigan 49202, Attention: Secretary.
Shareholder proposals to be presented at the 2004 Annual Meeting which are not
to be included in the Company's Proxy Statement must be received by the Company
at this address no later than August 12, 2004.
By Order of the Board of Directors
-S- Joseph S. Lerczak
JOSEPH S. LERCZAK,
Secretary
Dated: September 26, 2003.
16
APPENDIX A
SPARTON CORPORATION
PRE-APPROVAL POLICY FOR AUDIT AND NON-AUDIT SERVICES
I. STATEMENT OF PRINCIPLES
Under the Sarbanes-Oxley Act of 2002, the Audit Committee of the Board of
Directors is responsible for the appointment, compensation and oversight of the
independent auditors. As part of that responsibility, the Audit Committee is
required to pre-approve the audit and non-audit services performed by its
independent auditors in order to ensure that the provision of such services does
not impair the auditors' independence from the Company. Unless a type of service
to be provided by the independent auditors has received general pre-approval, it
will require specific pre-approval by the Audit Committee.
For both general and specific pre-approvals of services, the Audit
Committee will consider whether such services are consistent with the SEC's
rules on auditor independence and whether the independent auditors should be
precluded from performing any particular service, even if otherwise permitted by
the SEC's independence rules. The Audit Committee is also mindful of the
relationship between fees for audit and non-audit services in deciding whether
to pre-approve such services.
Section 1 to this Policy describes the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
Audit Committee will annually review and pre-approve the services that may be
provided by the independent auditor without obtaining specific pre-approval from
the Audit Committee, and such services will be considered approved through the
next annual review. The Audit Committee will revise the list of general
pre-approved services from time to time, based on subsequent determinations. The
Audit Committee does not delegate its responsibilities to pre-approve services
performed by the independent auditors to management.
II. DELEGATION
The Audit Committee may delegate pre-approval authority to one or more of
its members. The member or members to whom such authority is delegated shall
report any pre-approval decisions to the Audit Committee at its next scheduled
meeting. Unless otherwise decided, the Chairman of the Audit Committee is
delegated with such pre-approval authority.
III. AUDIT SERVICES
The annual Audit services engagement letter, which incorporates the terms
and fees related to Audit, Audit-related and All Other services, as applicable,
will be subject to the specific pre-approval of the Audit Committee. The Audit
Committee will approve, if necessary, any changes in terms, conditions and fees
resulting from changes in scope, the Company's structure or other matters.
In addition to the annual Audit services engagement specifically approved
by the Audit Committee, the Audit Committee may grant general pre-approval for
other Audit services, which are those services that only the independent
auditors reasonably can provide. The Audit Committee has pre-approved the Audit
services listed in Section 1. Any other Audit services not listed in Section 1
must be specifically pre-approved by the Audit Committee.
IV. AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are
reasonably related to the performance of the audit or review of the Company's
consolidated financial statements or that are traditionally performed by the
independent auditors. The Audit Committee believes that the
A-1
provision of the Audit-related services does not impair the independence of the
independent auditors, and has pre-approved the Audit-related services listed in
Section 1. Any other Audit-related services not listed in Section 1 must be
specifically pre-approved by the Audit Committee.
V. TAX SERVICES
The annual Tax services engagement letter, which incorporates the terms and
fees related to Tax services, will be subject to the specific pre-approval of
the Audit Committee. The Audit Committee will approve, if necessary, any changes
in terms, conditions and fees resulting from changes in scope, the Company's
structure or other matters.
The Audit Committee believes that the independent auditors can provide Tax
services to the Company such as tax compliance, tax planning and tax advice
without impairing the auditors' independence. However, the Audit Committee will
not permit the retention of the independent auditors in connection with a
transaction initially recommended by the independent auditors, the sole business
purpose of which may be tax avoidance and the tax treatment of which may not be
supported by the Internal Revenue Code and related regulations. The Audit
Committee has pre-approved the Tax services listed in Section 1. Any Tax
services not listed in Section 1 must be specifically pre-approved by the Audit
Committee.
VI. ALL OTHER SERVICES
The Audit Committee may grant general pre-approval to those permissible
non-audit services classified as All Other services that it believes are routine
and recurring services, and would not impair the independence of the independent
auditors. The Audit Committee has pre-approved the All Other services listed in
Section 1. Any permissible Other services not listed in Section 1 must be
specifically pre-approved by the Audit Committee.
A list of the SEC's prohibited non-audit services is included in Section 2.
The SEC's rules and relevant guidance will be consulted to determine the precise
definitions of these services and the applicability of exceptions to certain of
the prohibitions.
VII. ENGAGEMENT TERMS AND FEE ARRANGEMENTS
Engagement terms, including fee arrangements, for all services to be
provided by the independent auditors will be approved annually by the Audit
Committee. Any proposed changes in terms outside the pre-approved terms will
require specific pre-approval by the Audit Committee.
VIII. PROCEDURES
Requests or applications to provide services that require specific approval
by the Audit Committee will be submitted to the Audit Committee by both the
independent auditors and the Company's Chief Financial Officer and must include
a joint statement as to whether, in their view, the request or application is
consistent with the SEC's rules on auditor independence. Procedures for
notification and pre-approval of services for other domestic and international
offices and other departments (e.g., tax department) of the independent auditors
will be coordinated through the lead domestic audit partner.
IX. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibilities to oversee the work of the independent
auditors and to ensure the auditors' independence from the Company, such as
reviewing a formal written statement from the independent auditors describing
all relationships between the independent auditors and the
A-2
Company, consistent with Independence Standards Board Standard No. 1, and
discussing with the independent auditors its methods and procedures for ensuring
independence.
SECTIONS
SPARTON CORPORATION
PRE-APPROVAL POLICY FOR AUDIT AND NON-AUDIT SERVICES
SECTION 1
The following services do not involve prohibited services as established by
the SEC.
PRE-APPROVED AUDIT SERVICES
- Audit of consolidated financial statements
- Quarterly reviews
- Agreed-upon procedures report related to the financial assurance letter
addressed to the Environmental Protection Agency and the New Mexico
Environmental Department
- Financial or statutory audits, and quarterly reviews, for the Company's
domestic and international subsidiaries and affiliates
- Reporting on management's report on internal controls
- Services associated with SEC registration statements, periodic reports
and other documents filed with the SEC or other documents issued in
connection with securities offerings (e.g., comfort letters, consents),
and assistance in responding to SEC comment letters
- Consultations by the Company's management as to the accounting or
disclosure treatment of transactions or events (including those related
to the Company's proposed business ventures) and/or the actual or
potential impact of final or proposed rules, standards or interpretations
by the SEC, FASB, or other regulatory or standard setting bodies (Note:
Under the SEC's rules, some consultations may be "audit-related" services
rather than "audit" services.)
PRE-APPROVED AUDIT-RELATED SERVICES
- Internal control reviews and assistance with internal control reporting
requirements
- Audit and report on the financial statements of the following employee
benefit plans:
- Sparton Corporation Pension Plan
- Sparton Corporation 401(k) Plan
- Consultations by the Company's management as to the accounting or
disclosure treatment of transactions or events (including those related
to the Company's proposed business ventures) and/or the actual or
potential impact of final or proposed rules, standards or interpretations
by the SEC, FASB, or other regulatory or standard setting bodies (Note:
Under the SEC's rules, some consultations may be "audit" services rather
than "audit-related" services.)
- General assistance with implementation of the requirements of SEC rules
or listing standards promulgated pursuant to the Sarbanes-Oxley Act or
stock exchanges
A-3
PRE-APPROVED TAX SERVICES
- U.S. federal, state, local and international tax compliance for the
Company and its domestic and international subsidiaries and affiliates,
including the Company's proposed business ventures
- U.S. federal, state, local and international tax planning and advice for
the Company and its domestic and international subsidiary and affiliates,
including the Company's proposed business ventures
Note: Tax compliance generally includes preparation of original and
amended tax returns, claims for refunds and tax payment-planning services. Tax
planning and tax advice include a range of services such as assistance with tax
audits and appeals; tax advice related to mergers and acquisitions; tax advice
and assistance regarding statutory, regulatory or administrative developments;
tax advice related to employee benefit plans; and requests for rulings or
technical advice from taxing authorities.
PRE-APPROVED ALL OTHER SERVICES
- Business consulting, for other than accounting and tax related matters,
with respect to the Company's proposed business ventures
SECTION 2
PROHIBITED NON-AUDIT SERVICES
- Bookkeeping or other services related to the accounting records or
financial statements of the audit client
- Financial information systems design and implementation
- Appraisal or valuation services, fairness opinions or
contribution-in-kind reports
- Actuarial services
- Internal audit outsourcing services
- Management functions
- Human resources
- Broker-dealer, investment advisor or investment banking services
- Legal services
- Expert services unrelated to the audit
A-4
September 26, 2003
Dear Shareholder,
The Annual Meeting of your Company will be held at 10:00 a.m., Eastern Daylight
Time, on October 22, 2003. THE MEETING WILL BE HELD AT THE OFFICES OF THE
COMPANY'S SUBSIDIARY, SPARTON ELECTRONICS FLORIDA, INC., 5612 JOHNSON LAKE ROAD,
DELEON SPRINGS, FLORIDA 32130. At this meeting, we will be electing three
directors for a term of three years as set forth in the Proxy Statement.
We ask your support by signing, dating and returning the attached proxy card in
the postage paid envelope as soon as possible. Your vote is important,
regardless of the number of shares that you own.
If your shares are held in the name of a bank or brokerage firm, only that firm
can execute a proxy on your behalf. Please contact the person responsible for
your account with your voting instructions.
Very truly yours,
/s/ Bradley O. Smith
Bradley O. Smith, Chairman
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DETACH PROXY CARD HERE
REVOCABLE PROXY
SPARTON CORPORATION
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF SPARTON CORPORATION
Bradley O. Smith, David W. Hockenbrocht and Joseph S. Lerczak, and each of them,
are hereby appointed proxies of the undersigned with full power of substitution,
to represent the undersigned at the Annual Meeting of Shareholders of SPARTON
CORPORATION on October 22, 2003, at 10:00 a.m., Eastern Daylight Time, and any
and all adjournments thereof, and to vote thereat as designated on this Proxy,
all the shares of said Corporation which the undersigned would be entitled to
vote if personally present.
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder and as described in the Proxy Statement. IF NO
DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" THE ELECTION OF ALL NOMINEES
AS DESCRIBED IN ITEM 1.
The Board of Directors recommends a vote "FOR" the election of the three named
nominees.
FOR WITHHELD
1. Election of Directors: James N. DeBoer ______ ____________
David W. Hockenbrocht ______ ____________
James D. Fast ______ ____________
2. To transact such other business as may properly come before the meeting or
at any adjournments thereof.
SIGNATURE (S) Dated:
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SIGNATURE (S) Dated:
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PLEASE NOTE THAT THE COMPANY'S ANNUAL MEETING WILL BE HELD AT THE OFFICES OF THE
COMPANY'S SUBSIDIARY, SPARTON ELECTRONICS FLORIDA, INC., 5612 JOHNSON LAKE ROAD,
DELEON SPRINGS, FLORIDA 32130.
Please sign and date this Proxy exactly as your name(s) appears herein and
return in the enclosed envelope, which requires no postage. If executing on
behalf of a corporation, minor, etc., sign that name and add signature and
capacity of authorized signer.
IMPORTANT:
THE PROMPT RETURN OF PROXIES WILL SAVE THE CORPORATION THE EXPENSE OF FURTHER
REQUESTS FOR PROXIES TO ENSURE A QUORUM AT THE MEETING.
A SELF ADDRESSED, POSTAGE PRE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.