Sypris Solutions, Inc. Annual Report 2000

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FY2000 Annual Report · Sypris Solutions, Inc.

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S
I
R
P
Y
S

Providing

Customers

with

Solutions

S y p r i s S o l u t i o n s
R e p o r t 2 0 0 0

A n n u a l

Sypris Annual 2000
Sypris Annual 2000

Sypris Solutions is a diversified provider

of technology-based outsource services and

specialized industrial products. The Company

performs a wide range of manufacturing and

technical services, typically under long-term

contract with major corporations. We also

manufacture and sell complex data storage

systems, magnetic instruments, current

sensors and a variety of other industrial

products. Our mission is to become the

leading supply chain partner in each of our

technically sophisticated niche markets.

Contents

2 Letter to Shareholders
4 Solutions for our Customers
16 Solutions at a Glance
18 Management’s Discussion and Analysis
23 Financial Statements and Notes
40 Report of Independent Accountants

41 Selected Financial Data
42 Corporate Directory
43 Company Locations
44 Common Stock Information
45 Investor Information

Financial Highlights

Years ended December 31
(in thousands, except for per share data)
Income Statement Data:
Net revenue
Gross profit
Operating income
Net income
Per Share Data:
Net income:

Basic
Diluted

December 31
(in thousands)
Balance Sheet Data:
Working capital
Total assets
Total debt
Total shareholders’ equity

2000

1999

1998

1997

$
$

216,571
40,313
5,477
3,184

0.33
0.32

2000

58,602
179,122
65,000
64,205

$ 202,130
44,949
14,166
9,556

$
$

1.00
0.97

1999

53,705
148,564
54,400
60,820

$ 211,625
47,923
12,851
7,446

$
$

0.79
0.76

1998

32,121
121,119
28,583
49,359

$ 217,355
32,135
1,785
5,344

$
$

0.50
0.48

1997

35,123
120,608
31,340
27,728

See accompanying Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Net Revenue
(in millions)

Diluted Earnings
Per Share

Order Backlog
(in millions)

Capital Investment
(in millions)

Book Value
Per Share

$217

$212

$217

$202

$0.97

$0.76

$0.48

$0.32

$127

$106

$87

$161

$23.9

$6.44

$6.17

$5.04

$14.4

$2.82

$5.7

$5.8

Sypris Annual Report 2000

We began the year 2000 in terrific shape. Record backlog
and strong earnings combined with a number of significant
new business development opportunities to support a very
positive outlook for the coming year.

The trend toward outsourcing continued to grow and spread
across a progressively wider range of industries. An
increasing number of original equipment manufacturers
embraced the use of supply chain specialists to increase
flexibility, reduce costs and improve responsiveness to the
needs of their customers.

By all measures, Sypris was well positioned to benefit from
these factors during 2000, since approximately 80 percent
of our revenue is derived from providing some form of
manufacturing or technical service to others.

Unfortunately, this was not to be the case. Shortages in the
supply of electronic components, the steep decline in the
production of heavy-duty trucks and higher-than-planned
consolidation costs and related production inefficiencies in
our data systems business had a material effect on the
Company’s financial performance for the year.

The impact of these events was further magnified by the
need to increase our investment in people, systems and
technology to support upcoming contractual commitments.
Program logic control engineers, automated equipment, a
variety of robotics, and advanced planning and scheduling
systems had to be secured and installed to meet the future
production requirements of these new agreements despite
the negative effect on short-term earnings.

As a result, while revenue increased 7 percent to $217
million from $202 million for the prior year, earnings
declined to $0.32 per share from $0.97 per share in 1999.
The decline in earnings would have been more pronounced
had it not been for the recognition of certain tax credits and
the reduction of a deferred tax valuation allowance.

We are pleased to report, however, that we were much
more successful in a number of other areas, the result of
which has been to strengthen the Company for the future.

To begin with, the growth of the Company’s backlog
accelerated during 2000, increasing 27 percent to a record
$161 million from $127 million in 1999. The double-digit
increase was driven primarily by the continued growth in
demand for our manufacturing services.

Shareholders’ equity increased to $64 million from $61
million at year-end 1999 and book value per share increased
to $6.43 from $6.17 at the end of 1999.

Capital investment increased substantially during the year,
reaching almost $24 million, as the Company invested in the
advanced technology and production capability required to
meet the needs of newly awarded long-term manufacturing
agreements. Shipments associated with much of this
investment are not expected to begin until late 2001, but
once at full production, are expected to contribute in a
meaningful way to both revenue and earnings.

During the year, Sypris was awarded a number of important
long-term manufacturing and service agreements, including
the following:

" A five-year agreement with ArvinMeritor to forge and

machine heavy-duty truck axles. Estimated contract
value: $120 million.

" Five new contracts with Raytheon to provide circuit

card assemblies for a variety of programs. Estimated
contract value: $24 million.

" A multi-year agreement with Boeing to supply circuit
card assemblies for use in the Brimstone missile
guidance system. Estimated contract value: $23 million.

" A two-year agreement with Eldec to supply fully tested

integrated circuits for use in commercial avionics power
supplies. Estimated contract value: $5 million.

fellow

shareholders

" A contract with Northrop Grumman to supply electronic

circuit boards for use in certain smart weapons.
Estimated contract value: $3 million.

" Two contracts with Litton to supply circuit card

assemblies for use in portable, lightweight laser
rangefinders and integrated guidance systems.
Estimated contract value: $3 million.

" An agreement with Honeywell to provide circuit card

assemblies for use in the digital flight control
computers of F-16 jet fighters. Estimated contract value:
$2 million.

The successful pursuit of multi-year, sole source agreements
is an important part of our strategy to increase the reliability
of our Company’s future financial results. The award of
these and other similar agreements represents a significant
milestone in these ongoing efforts.

During the year, we also entered into an agreement with
i2 Technologies to install finite capacity planning
and advanced scheduling systems at certain of our
manufacturing operations. We believe this investment
will further enhance our ability to offer our customers
state-of-the-art manufacturing services.

The pursuit of synergistic acquisitions remains a key
component of our strategy to build a larger, stronger
business. At the close of 1999, we announced the
completion of the purchase of the Mobile Calibration and
Repair Service division of Lucent Technologies. We are
pleased to report that the integration of the division has
gone extremely well and its performance has exceeded
our expectations.

As we look to the future, we expect the near-term financial
results of the Company will continue to reflect the effects of
the component parts shortage and the downturn in the
heavy-duty truck market. Higher component costs,
production inefficiencies and expenses related to the

under absorption of overhead are expected to continue to
place pressure on margins and earnings.

Longer-term, however, we believe the pressures from these
external events will abate and our proven success in
booking long-term agreements, combined with the results
of our significant investment in people, systems and
technology, will bear fruit in the form of vastly improved
financial results.

In the very near future, we will be changing the name of our
subsidiaries to incorporate the Sypris brand name and logo.
Bell Technologies will become Sypris Test & Measurement,
Group Technologies will become Sypris Electronics,
Metrum-Datatape will become Sypris Data Systems and
Tube Turns will become Sypris Technologies. We believe
that the use of the Sypris name by all subsidiaries will
improve our brand recognition with customers, suppliers,
employees and investors. The change is expected to be
complete by January 2002.

In closing, we want to thank our employees for their
dedication and hard work over this past year. The
achievements of 2000 would not have been possible without
their commitment. We also want to thank our customers
for the opportunity to serve them. We are dedicated to
providing each of them with an ever-increasing
competitive advantage.

We sincerely appreciate your investment in Sypris Solutions
and encourage you to contact us. We would be pleased to
answer your questions and look forward to your comments.

Jeffrey T. Gill
President & CEO

Robert E. Gill
Chairman

Sypris Annual Report 2000

Business has never
been more competitive.

Sypris Solutions
is here to help.

Global over-capacity, rapid technological change, record low unemployment,
intense international competition and unforgiving capital markets have
combined to place unrelenting pressure on margins.

And along comes the Internet. The Web is turning established business
models upside down, creating tremendous uncertainty at a time when
decisiveness has never been of greater importance.

Our job is to provide customers with solutions to succeed in this rapidly
changing business environment.

How? By investing in leading edge production capacity to provide them with
a competitive advantage. By supporting their needs for service, even in the
most remote of locations. By applying advanced technology to drive down
the cost, increase the capability and extend the life of their existing systems.
And by becoming an integral partner, one that consistently and reliably
addresses their mission-critical needs.

Over the next several pages, the leaders of our business will illustrate some
of the ways in which we are providing customers with solutions.

Sypris Annual Report 2000

We believe that competitive advantage should be
measured in terms of cost, quality, speed and flexibility.

schedules quickly and efficiently to meet the increasingly
dynamic needs of our customers.

At Sypris, we are committed to making the investments
required to improve the competitive advantage of each of
our customers. These investments can take many forms,
but our recent commitment to support two of our major
customers serves as an excellent illustration.

The productive utilization of the new equipment is not
scheduled to begin until the second half of 2001, but the
importance of our willingness to invest in technology,
people and systems in support of their needs has not
been lost on our customers. For example:

Sypris has been a major provider of truck axles for years
through its Tube Turns Technologies subsidiary. The
operation was efficient and competitive, but with our
customers facing increasingly intense competition in the
automotive parts industry, they needed our help.

We stepped up to the plate early in the year 2000. In
return for long-term manufacturing agreements, we
committed to invest approximately $45 million to
create one of the most advanced forging and machining
operations for the production of truck axles in
North America.

The equipment list was long and extensive. We invested
in the addition of 24 new robots, three new automated
forging presses, two new cold extrusion presses, four new
induction heating units, three new in-line shear systems
and two new fully automated machining cells.

We invested in the professionals who were necessary to
expand our technical expertise and capability. Machining
engineers, program logic control engineers, forging
engineers, and metallurgists were hired from around the
country to complement this state-of-the-art operation.

And we invested in finite capacity planning and
scheduling systems from i2 Technologies to provide us
with the ability to plan, control and change production

" The new equipment is expected to increase produc-
tivity by a factor of 2 to 1 for some operations to as
much as 7 to 1 for the finish machining of axles. The
resulting cost-savings are expected to be substantial.

" The equipment and the cells are highly flexible and

can be reconfigured quickly, therefore reducing set up
times and the cost associated with the changeover of
production for new parts.

" The location of forging and machining operations at
a single site is expected to lower the total cost of the
product further by reducing transportation and
handling charges, cycle times and working capital.

" Our technical experts have collaborated with our

customers to identify process changes that are
expected to reduce the material content and improve
the yields on a number of their products.

When fully operational later in 2001, our customers will
reap the competitive advantage associated with these
new capabilities and will no longer be reliant upon or
have to support older, less efficient technology. Perhaps
just as importantly, these new capabilities can be
leveraged for the benefit of future customers as well.

This is just one example of our commitment to grow with
and invest in the support of our customers. By providing

each of them with a distinct
competitive advantage in terms of
cost, quality, speed and flexibility,
we believe that Sypris can and will
continue to prosper for many years
to come.

Jack Kramer
President and CEO
Tube Turns Technologies

How are we investing to create a

competitive advantage

for our customers?

Sypris Annual Report 2000

Some customers have mission-critical charters that
take them to the far reaches of the globe. For
customers such as these, the ability to meet their
service requirements on a cost-effective, timely basis
takes on an added dimension.

The National Weather Service, the Federal Aviation
Administration and AT&T represent three such
customers.

The National Weather Service operates 119 advanced
warning weather service radar stations in 45 states,
the Caribbean and Guam. Many of these stations are
located on isolated mountaintops, such as Francis Peak,
Utah and contain equipment of immense sophistica-
tion, including NEXRAD and Doppler radar systems.

The National Weather Service needs an economical
means for making certain that the test and
measurement equipment of its field technicians is
correctly calibrated and certified without having to
remove the equipment from the field. The risk
associated with missing a potential storm warning
is simply unacceptable.

Sypris satisfies this need through its Bell Technologies
subsidiary. Bell operates the most advanced fleet of
self-contained, temperature controlled, ISO certified
mobile calibration laboratories in the country. Through
our investment in these mobile labs, we are able to
service the needs of the National Weather Service at its
remote locations without having to remove mission-
critical equipment from the field.

The Federal Aviation Administration has a similar set of
unique requirements. The FAA operates flight control
radar systems at over 400 airports in the United States,
the Caribbean and the South Pacific.

The challenge is to calibrate and certify the accuracy of
the test and measurement equipment that is used to
maintain the air traffic and control tower radar and
directional beacons at each of these airports, whether
they are located in Southern California, the Alaskan
tundra, the Kansas plains, or the island of Samoa.

We meet this challenge through the use of our mobile
calibration service capabilities and as a result, the FAA
is spared the need to invest in redundant test,
measurement and diagnostic equipment at each of
these 400 locations.

The explosive growth in telecommunications, data and
wireless networks has been well documented, but how
do companies such as AT&T keep up with the
maintenance requirements of these systems?

The answer is through the use of services provided by
Sypris Solutions. We fulfill the calibration requirements
of AT&T at over 600 of its central and field switching
stations located in the United States and overseas, as
well as the needs of many of its domestic cellular
transmission stations.

In addition to our fleet of 15 mobile calibration
laboratories, Sypris operates 17 separate calibration
and repair laboratories located throughout the United
States, manages the on-site service requirements for
customers such as Bose, Square-D and Delphi, and
maintains its own independent primary standards lab
that is traceable to the National Institute of Standards
and Technology.

We are committed to do whatever is necessary to meet
the service needs of our customers on a cost-effective
basis. By using our unique fleet
of advanced mobile calibration
laboratories, we are able to meet
the mission-critical readiness
requirements of our customers -
even in some of the most remote
regions of the world.

H. L. Singer
President and CEO
Bell Technologies

What are we doing to support the unique
service needs

of our customers?

Sypris Annual Report 2000

We are currently developing a family of high data
rate products based upon commercially available
technology for use by our missile and aircraft test
range customers. These products will be able to be
incorporated with their existing proprietary systems,
regardless of manufacturer, and will be able to store
analog and digital information in a digital format.

The potential benefits to our customers are
significant. They will be able to convert all existing
tape libraries into digital formats, thereby saving
money on maintenance and storage. They will be
able to share all existing and future data over
networks and they will be able to parse the data for
analysis, thereby saving precious time. They will be
able to keep their existing systems in place and will
be able to upgrade easily and inexpensively in the
future.

Our customers in the intelligence field face similar
issues with regard to life cycle costs and they too
will benefit greatly from the ability to store, analyze
and share data as a result of its having been digitized
economically. For these customers, however, we are
leveraging this advanced technology to satisfy their
requirements for data rates well in excess of 1 Giga
bit per second. The cost savings are expected to be
significant when compared to existing proprietary
solutions.

We believe that the ability to extend the life and
increase the capability of our customers’ existing
investments in data systems will be crucial to their
future success. By doing so with commercially
available technology, we are able to provide them
with cost-effective, open solutions that can be
implemented quickly, efficiently and with minimal
interruption to existing service.

Technology plays an increasingly important role in
our society today and its applications can take many
forms. But technology, especially proprietary
technology, can also create unnecessary roadblocks
that result in prohibitive service and migration costs.

Our customers in the intelligence, missile and aircraft
test range markets are being confronted with just
such a situation. These customers have invested
heavily over the years in expensive, proprietary
systems to gather, analyze and store highly
sensitive data.

The challenges with these systems today are
numerous. The life cycle costs (maintenance, parts
and spares) are extremely high, the speed at which
the systems record data is falling behind current
transfer rates, gaining access to stored data is
expensive and time consuming, and data cannot be
shared on networks or between systems of different
manufacturers.

Sypris has been a leader in the development and
maintenance of advanced data acquisition and
storage systems for over 40 years through our
Metrum-Datatape subsidiary. Our products, systems
and software are used to gather sonar data from
submarines, test data from aircraft, biological data
from space flights, performance data from missiles
and a variety of data from intelligence networks.

We are guided by three principles in our
development of technologically advanced solutions
for use by our customers:

" Best of Breed. The solution must incorporate

components, peripherals and software that
reflect the best technology available, regardless
of manufacturer.

" Open and Flexible. The solution must utilize a
common platform and be interoperable,
available in a variety of configurations and easily
upgradeable.

" Ease of Implementation. The solution must be

able to be installed or implemented quickly and
efficiently with minimal interruption to existing
service, while meeting ever-increasing demands
for faster data rates.

G. Darrell Robertson
President and CEO
Metrum-Datatape

How are we using

technology

to benefit our customers?

Sypris Annual Report 2000

The needs of our aerospace, defense and national
security customers are unique in that the price of failure
can often involve great expense, human life or both.
Reliability therefore is of paramount importance.

What does it take to become an integral partner with a
company or agency that participates in these markets?
Quite simply, it requires the ability to consistently
deliver a product or service as contracted and within the
prescribed framework of rigorous procedures, extensive
testing, exacting documentation and tight security.

At Sypris, we have a 35-year history of consistently
meeting the demanding requirements of these
customers through our Group Technologies subsidiary.
We understand the needs of and have the certifications
required to meet the restrictions imposed by these
frameworks, including those required by such diverse
agencies as NASA and the National Security Agency.

Our customers include Boeing, Honeywell, Lam
Research, Litton, Lockheed Martin, Northrop Grumman
and Raytheon. We currently manufacture complex circuit
cards and high level assemblies for use in a variety of
applications, including satellite communications
systems, missile guidance systems, commercial avionics,
ruggedized hand-held computers and secure
communications products.

For example, the circuit card assemblies that are used
in missile guidance systems must undergo rigorous
environmental testing to insure that they will not fail
under circumstances involving extreme temperature,
humidity, vibration, altitude and nuclear survivability.
The components in these applications must be able to
withstand an environment that is up to ten times the
severity experienced by that of a jet fighter.

We make the electronics for the
special cameras that are used on
Space Shuttle missions and we
supply the electronic assemblies

that are used in the exacting environments of
semiconductor processing equipment.

We employ 124 engineers, close to half of whom are
dedicated solely to the development of advanced
encryption software for use in national security
applications. In many instances, special security access
is required for these professionals to accomplish this
mission-critical task.

We have designed and currently manufacture a line of
secure voice and data encryption devices that deliver
the highest technically available solutions for network
security. The National Security Agency has endorsed
the use of these products, but only by companies and
agencies that have the appropriate level of security
clearance.

We are using our certified computer security analysts
to participate in the development of a patternless
intrusion detection system for use in network security.
If successful, such a system will provide an administrator
with a computerized view of the network and the
ability to move around visually through the network to
detect an intrusion. The additional application of
signature protocol will even enable the name of the
intruder to be identified.

The potential costs associated with the failure of a
satellite, the avionics of a commercial aircraft or the
guidance system of a tactical air-to-air missile are
extremely high, as are the costs associated with a
breach of network security. The process of developing,
manufacturing and delivering reliable components,
subassemblies and software for use in these applications
is absolutely essential.

James G. Cocke
President and CEO
Group Technologies

What are we doing to become an
integral partner

with our customers?

Sypris Annual Report 2000

Richard L. Davis
Senior Vice President

Anthony C. Allen
Vice President & Controller

David D. Johnson
Vice President & CFO

How are we using

solutions

The word solution is defined as the act or
process of solving a problem. We believe that
our long-term success is and will continue to
be dependent upon our ability to help solve the
problems and issues faced by our customers in
a manner that improves their chances of
success. Quickly, efficiently and cost effectively.

There are a number of other initiatives we have
underway that will have a direct impact on our
ability to deliver increasingly effective solutions
for our customers in the future.

We are in the process of establishing a customer
Web site that will enable our calibration and
repair customers to verify equipment records,
manage assets, schedule repairs, pay bills and
maintain certification records on-line. The site,
when completed during 2001, will greatly
improve the efficiency and reduce the cost
associated with the management and
certification of our customers’ equipment.

We are in the process of developing and
implementing Web-based systems that will
enable us to increase the efficiency and reduce
the cost of doing business, including the
processing of schedules, purchase orders,
invoices and payments.

And while doing all of the above, we will not
lose sight of the basics. We must and will
become ever more responsive and flexible to
the needs of our customers, including the
capability to deliver products and services more
cost-effectively, in a shorter period of time and
with the high degree of reliability that our
customers require.

We are committed to creating an ever-increasing
competitive advantage for our customers. If we
continue to do so with a single-minded focus on
the development of solutions, we are confident
that Sypris will remain successful for many
years to come.

to drive our future growth?

Sypris Annual Report 2000

S
I
R
P
Y
S

Solutions at a Glance

Manufacturing Services

Technical Services

Products

Electronic

Calibration and Repair

Data Systems

Integrated design and engineering
services, component selection, sourcing
and procurement, automated assembly,
design and implementation of product
testing, systems assembly, and repair and
warranty services.

APPLICATIONS AND USES

Electronic assemblies and subsystems
for use in missile guidance systems,
commercial avionics, satellite
communications systems, ruggedized
hand-held computers, semiconductor
processing equipment, and secure
communications networks and products.

SELECT CUSTOMERS

BAE, Boeing, FBI, Honeywell, Lam
Research, Litton Industries, Lockheed
Martin, National Security Agency,
Northrop Grumman, Raytheon, Rockwell
and U.S. Army.

Wireless communication test equipment,
control tower radar and direction beacon
test equipment, digital oscilloscopes,
microwave equipment and fiber optic
measuring equipment.

APPLICATIONS AND USES

Maintenance of cellular communications
systems, air traffic control systems,
broadband telecommunication systems
and quality certification programs in
manufacturing operations.

SELECT CUSTOMERS

AT&T, Bose, Delphi Automotive, FAA, Intel,
Lucent Technologies, National Weather
Service, Raytheon and Square-D.

Component Testing

RF, microwave and mixed signal
component testing, environmental testing,
dynamics testing and failure analysis.

Digital and analog recorders, multiplexers,
storage systems and touch screen control
software.

APPLICATIONS AND USES

Collection of sonar data from submarines,
test data from aircraft, biological data from
space flights, performance data from
missiles and voice data from intelligence
networks.

SELECT CUSTOMERS

Government of Israel, Johnson Space
Center, Lockheed Martin, National Security
Agency, Raytheon, U.S. Air Force, and
U.S. Navy.

Magnetics

Hall generators, current sensors,
autoprobes and gaussmeters.

APPLICATIONS AND USES

Industrial

Automated forging, machining, induction
hardening, cold extrusion and heat treating
services.

APPLICATIONS AND USES

Semiconductor manufacturing, aerospace
and satellite systems.

Current measurement applications in
locomotives, mass transit systems,
elevators, automotive diagnostic systems
and laboratory diagnostic systems.

APPLICATIONS AND USES

Heavy-duty truck axles, light-duty truck
and automotive axles, jet engine shafts
and construction vehicle components.

SELECT CUSTOMERS

Boeing, EFTC, Eldec, Honeywell, Lockheed
Martin, NASA, Raytheon and Texas
Instruments.

Adtranz, Agilent, Artesyn, Bombardier,
General Motors, Genie, IBM, Lockheed
Martin, Miltope, Snap-on and Toyo.

SELECT CUSTOMERS

Engineering Services

Specialty

ArvinMeritor, Caterpillar, John Deere, Pratt
& Whitney and Teledyne Technologies.

Encryption software design services and
contract design services.

High-pressure closures, transition joints
and insulated joints.

APPLICATIONS AND USES

Network and communications security.

Pipeline and chemical systems in the
energy and chemical industries.

SELECT CUSTOMERS

National Security Agency and U.S. Army.

SELECT CUSTOMERS

Chevron, Exxon and Shell Oil.

Financial Review

18 Management’s Discussion and Analysis of

Financial Condition and Results of Operations

24 Consolidated Income Statements
25 Consolidated Balance Sheets
26 Consolidated Statements of Cash Flows
27 Consolidated Statements of Shareholders’ Equity
28 Notes to Consolidated Financial Statements
40 Report of Independent Auditors
41 Financial Summary

Sypris Annual Report 2000

Management’s Discussion and Analysis

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.

Results of Operations

The following table sets forth certain data from the Company’s consolidated income statements for the years
ended December 31, 2000, 1999 and 1998, expressed as a percentage of net revenue:

Years ended December 31
Net revenue
Cost of sales

Gross profit

Selling, general and administrative expense
Research and development
Amortization of intangible assets
Special charges

Operating income

Net income

2000
100.0%
81.4%

18.6%

12.4%
1.6%
0.7%
1.4%

2.5%

1.5%

1999
100.0%
77.8%

22.2%

11.5%
3.2%
0.5%
—

7.0%

4.7%

1998
100.0%
77.4%

22.6%

13.3%
2.8%
0.4%
—

6.1%

3.5%

Year Ended December 31, 2000 Compared to Year Ended

acquired calibration business added a fleet of mobile

December 31, 1999

Net revenue totaled $216.6 million in 2000, an increase of

$14.5 million, or 7.1%, from $202.1 million in 1999. The

Electronics Group’s net revenue in 2000 was $182.1

million, an increase of $17.2 million or 10.4% from $164.9

million in 1999. The Industrial Group’s net revenue in

2000 was $34.5 million, a decrease of $2.7 million, or

7.3%, from $37.2 million in 1999. The Company’s book-

to-bill ratio during 2000 was 1.15 to 1, resulting in an

increase in backlog of $33.8 million to $160.8 million at

December 31, 2000. Backlog for the Electronics Group

and the Industrial Group at December 31, 2000 was

$143.2 million and $17.6 million, respectively.

The Electronics Group’s $17.2 million increase in net

revenue was generated primarily from new contracts for

manufacturing services and the expansion of calibration

services resulting from an acquisition completed in the

fourth quarter of 1999. Production on several new

manufacturing service contracts, mainly with defense

and aerospace customers, began to ramp-up during

2000, generating a $16.2 million increase in revenue. The

majority of the Electronics Group’s backlog consists of

manufacturing service contracts and shipments on these

contracts are expected to increase during 2001. The

calibration labs to the Electronics Group’s service

capabilities and accounted for an $8.4 million increase in

revenue during 2000. The increase in service revenue

was partially offset by a $6.5 million decrease in product

revenue due to reduced sales quantities for certain

product offerings. Demand for the Electronics Group’s

data storage products began to decline in 1999 and

continued to decline throughout 2000. The reduced level

of demand reflects an overall market decline and

increased competition arising from technological

advancements in the market. Market conditions for data

storage products are expected to stabilize during 2001

and sales volumes are expected to approximate the

levels of 2000. Other outsource services and product

sales for the Electronics Group accounted for a net $0.9

million decrease in net revenue during 2000.

The Industrial Group’s $2.7 million decrease in net

revenue was primarily due to a decline in outsource

services provided to customers in the heavy-duty truck

market. Market conditions in North America for heavy-

duty truck production were negatively impacted by oil

prices, interest rates and an excess inventory of new and

used trucks, resulting in an overall market decrease of

approximately 40%. This reduced the volume of forged

truck axles provided under manufacturing service

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of 2001.

for each segment.

agreements by the Industrial Group and accounted for

a $4.0 million decrease in net revenue, the majority of

which occurred during the second half of 2000. The

Company expects demand in the heavy-duty truck

market to remain weak during 2001, however, further

significant declines in demand are not anticipated.

Revenue derived from manufacturing services in other

markets served by the Industrial Group increased by

$0.5 million and fabricated product sales increased by

$0.8 million. During 1999 and 2000, the Industrial Group

invested approximately $22.6 million to expand its

forging capacity and add new machining capabilities.

The Industrial Group expects to invest approximately

$24 million during 2001 to complete this capital program.

Manufacturing service agreements are in place or are

being negotiated for substantially all of the additional

capacity. The Industrial Group expects to begin

production on certain new machining equipment in

the second quarter of 2001, with the majority of new

production anticipated to begin in the fourth quarter

Gross profit totaled $40.3 million in 2000, or 18.6% of

net revenue, as compared to $44.9 million, or 22.2% of

net revenue in 1999. The Electronics Group’s gross profit

in 2000 was $36.3 million, or 19.9% of net revenue, as

compared to $37.9 million, or 23.0% of net revenue in

1999. The Industrial Group’s gross profit in 2000 was $4.0

million, or 11.7% of net revenue, as compared to $7.0

million, or 19.0% of net revenue in 1999. The factors

impacting gross profit are discussed immediately below

Management’s Discussion and Analysis

million unfavorable cost variance associated with the

following three primary factors. First, shortages and

extended lead times for the purchase of certain electronic

components resulted in manufacturing inefficiencies due

to the unpredictability of scheduling receipts of allocated

components from vendors. Component supply levels

were low throughout 2000, however, the availability of

certain components began to improve during the fourth

quarter. While management believes that a sufficient

supply of components will be available to enable it to

substantially meet its customer delivery schedules for the

next twelve months, the Company’s results of operations

or financial position could be negatively impacted by

these component market conditions. Second, the number

of new program start-ups increased substantially during

2000 as compared to the prior year. Manufacturing

inefficiencies on new programs generally result in lower

gross margins during the start-up phase and margins

typically improve as the programs mature. And third,

additional costs incurred to make the necessary

investments in people, equipment and processes to

support the record level of backlog also reduced gross

profit in 2000. Management expects the factors affecting

gross profit in 2000 will begin to lessen during the first

half of 2001, as manufacturing efficiency improves on

new programs and shipments on contracts in backlog

begin to accelerate.

The Industrial Group’s $3.0 million decrease in gross

profit was primarily due to the downturn of the heavy-

duty truck market. The reduction in demand and

corresponding impact on shipments occurred as the

The Electronics Group’s $1.6 million decrease in
gross profit in 2000 was primarily due to unfavorable

organizational infrastructure to support future growth
plans was being developed. The increased cost structure

volume and cost variances on data storage products

associated with the additional people and systems

and unfavorable cost variances on manufacturing

required to meet future contractual requirements and the

service contracts. Volume declines for data storage

underabsorption of overhead due to the volume decline

products, related underabsorbed overhead costs and

resulted in low gross margin levels, particularly during

manufacturing inefficiencies arising from the transfer of

the second half of 2000. The Company expects gross

production following the consolidation of two facilities

profit will continue to be adversely effected as the truck

during the first half of 2000 contributed to a $5.0 million

market demand is not expected to increase during 2001.

decline in gross profit. This reduction was substantially

Selling, general and administrative expense in 2000

offset by increased gross profit from the growth in the

was $26.9 million, or 12.4% of net revenue, as compared

manufacturing and calibration service revenue. The

to $23.4 million, or 11.5% of net revenue in 1999. The

additional volume generated increased gross profit of

increase in selling, general and administrative expense

$4.4 million, however, this increase was offset by a $1.0

was attributable primarily to the Electronics Group,

Sypris Annual Report 2000

Management’s Discussion and Analysis

which reported an increase of $2.9 million. Investments

than doubled to approximately $58.7 million in 2000 from

by the Company in organizational infrastructure as

approximately $28.4 million in 1999. This increase

discussed above also include certain selling, general and

resulted primarily from the December 1999 acquisition

administrative expenses, the majority of which are within

by the Electronics Group, working capital funding related

the Electronics Group. Selling expenses incurred for

to the increase in revenue and order backlog and capital

marketing and bid and proposal activities during 2000

expenditures during 1999 and 2000 to support the

exceeded prior year amounts and were a contributing

Company’s new business opportunities. The weighted

factor to the increased orders and net revenue in 2000.

average interest rate for 2000 was approximately 8.3% as

Research and development expense in 2000 was

compared to approximately 6.1% for the prior year. The

$3.6 million, or 1.6% of net revenue, as compared to

year-to-year rate change includes an increase in the

$6.4 million, or 3.2% of net revenue in 1999. This

margin paid on outstanding borrowings of approximately

decrease was attributable to the Electronics Group, and

100 basis points under the terms of the Company’s credit

relates to the quantity and timing of new product

agreement with a syndicate of banks (the “Credit

releases for the data acquisition, storage and analysis

Agreement”), as amended in October 1999 and

product lines and the utilization of strategic alliances with

November 2000.

suppliers for product development.

An income tax benefit of approximately $1.4 million

Amortization of intangible assets in 2000 was $1.4

was recognized during 2000 as compared to income tax

million, an increase of $0.4 million, or 45.6% compared to

expense of $3.1 million during 1999. The tax benefit

$1.0 million in 1999. This increase resulted from the

during 2000 was primarily due to a $3.0 million reduction

amortization of goodwill recorded in connection with the

in the Company’s valuation allowance on deferred

December 1999 calibration business acquisition by the

tax assets. Certain issues related to the Company’s

Electronics Group.

consolidated federal taxable income were resolved

Special charges of $2.9 million were recognized

during 2000, which gave rise to the elimination of the

during 2000 for activities related to the consolidation of

valuation allowance for deferred tax assets related

certain operations within the Electronics Group.

to federal income tax temporary differences. The

Operations for the Electronics Group’s data acquisition,

Company also recognized a tax benefit during 2000 of

storage and analysis product lines have been conducted

approximately $0.3 million for research and development

at two facilities since the November 1997 acquisition that

tax credits. The provision for income taxes in 1999

expanded this business. Although several consolidation

included a reduction in the valuation allowance on

actions were implemented immediately following this

deferred tax assets of $1.9 million and a benefit for

acquisition, management identified potential cost savings

research and development tax credits of $0.6 million.

that could be realized through the elimination of
redundant manufacturing operations and staffing of

functional areas between the two facilities. The

consolidation activities were substantially completed

during the first nine months of 2000. The special charges

incurred for these activities include workforce reductions,

facilities rearrangement and relocation expenses, and

employment costs related to the transfer of production.

Interest expense in 2000 was $4.0 million, an

increase of $2.3 million, or 133%, from $1.7 million in

1999. The increase in interest expense was primarily due

to an increase in the weighted average debt outstanding

coupled with an increase in interest rates. The

Company’s weighted average debt outstanding more

Year Ended December 31, 1999 Compared to Year Ended

December 31, 1998

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Net revenue totaled $202.1 million in 1999, a decrease of

$9.5 million, or 4.5%, from $211.6 million in 1998. Net

revenue for the Electronics Group in 1999 was $164.9

million, a decrease of $9.5 million or 5.4% from $174.4

million in 1998 and net revenue for the Industrial Group

in 1999 was $37.2 million, unchanged from 1998. The

$9.5 million decrease in the Electronics Group’s net

revenue for 1999 was primarily a result of reduced

demand for certain product offerings. During the fourth

quarter of 1999, a portion of the government program

funding related to these products was delayed due to the
timing of the federal budget approval process and certain

other program spending was suspended prior to year-

end due to year 2000 concerns. The decrease in net

revenue for product sales in the fourth quarter of 1999

was offset by an increase in net revenue for manufacturing

services, which experienced increased sales volume

during the second half of 1999. The Electronics Group’s

net revenue for the first half of 1999 was $15.8 million

below the first half of 1998. However, net revenue

increased in the third and fourth quarters of 1999 by

$1.3 million and $5.0 million, respectively, over the

comparative prior year quarters. The growth that

occurred during the second half of 1999 was primarily

the result of management’s business development efforts

in manufacturing services that began during 1998,

specifically the transition from low-margin contracts to

new business opportunities aimed at improving

profitability. The Electronics Group’s backlog increased

from $76.7 million to $95.2 million to $107.7 million at

December 31, 1997, 1998 and 1999, respectively. The

backlog at December 31, 1999 also consisted of higher

margin contracts than those in place during 1998. The

Industrial Group continued to increase shipments of truck

axles during 1999, thereby offsetting declines in other

forged product lines provided to customers in the

aerospace industry and foreign markets of the oil and

gas industry.

Gross profit totaled $44.9 million in 1999, a decrease

of $3.0 million, or 6.3%, from $47.9 million in 1998. Gross

profit for the Electronics Group was $37.9 million in 1999,

a decrease of $3.5 million, or 8.5%, from $41.4 million in

Management’s Discussion and Analysis

1998 and gross profit for the Industrial Group was

$7.0 million in 1999, an increase of $0.5 million, or 8.5%,

from $6.5 million in 1998. The $3.5 million decrease in

the Electronics Group’s gross profit is comprised of a

$4.7 million decrease primarily due to the decline in

product sales described above, which was partially offset

by a $1.2 million increase primarily due to the improved

performance of manufacturing services. Operational and

financial control improvements over manufacturing

services reflects management’s actions to improve

profitability by focusing on specific manufacturing and

service opportunities in which the Company offers

value-added solutions under a competitive cost structure.

Additionally, the Electronics Group’s revenue mix for

1999 as compared to 1998 consisted of a higher

percentage of manufacturing services revenue and a

lower percentage of product sales, primarily due to

revenue mix changes during the fourth quarter of 1999.

Since the margins on manufacturing services are

typically lower than product sales, the Electronics

Group’s gross profit percentage decreased to 23.0% in

1999 from 23.7% in 1998. The $0.5 million increase in

the Industrial Group’s gross profit was primarily due to

manufacturing efficiencies in the production of forged

truck axles and the increased capacity utilization and cost

reductions on certain programs. The productivity and

utilization improvements resulted in an increase in the

Industrial Group’s gross profit percentage to 19.0% in

1999 from 17.5% in 1998.

Selling, general and administrative expense totaled

$23.4 million in 1999, a decrease of $4.8 million, or

17.1%, from $28.2 million in 1998. The consolidation of
certain functional activities was the primary cause of the

decrease in the year-to-year comparison. Workforce

reductions in certain operations associated with the

decrease in revenue and a strategic decision to align

costs with the revenue base resulted in a decrease of

approximately $0.5 million. Other contributing factors

included a reduction in selling expense attributable to the

decrease in net revenue and adjustments to the

Company’s estimated liability for the sale of certain

Sypris Annual Report 2000

Management’s Discussion and Analysis

assets of the Electronics Group in June 1997, for which

respectively, commensurate with the growth in the

a final settlement agreement was reached during the

Electronics Group’s service revenue. The increase in

second quarter of 1999. Also included in 1998 were legal,

accounts receivable also reflects the low volume of

accounting and other professional fees and other costs

shipments immediately prior to December 31, 1999,

totaling approximately $0.4 million associated with the

principally related to Year 2000 issues and related

Reorganization which were nonrecurring.

concerns by customers. During 2000, inventory increased

Research and development expense totaled

by $4.2 million in the Electronics Group and decreased

$6.4 million in 1999, an increase of $0.5 million, or 7.9%,

by $2.2 million in the Industrial Group. The increase in

from $5.9 million in 1998. This increase was generated

the Electronics Group’s inventory was primarily

by the Electronics Group, and reflected management’s

attributable to start-up programs for manufacturing

continued support and investment in the data

services, electronic component shortages and expected

acquisition, storage and analysis product lines.

shipments on certain contracts scheduled in the first half

Amortization of intangible assets totaled $1.0 million

of 2001. The decrease in the Industrial Group’s inventory

in 1999 and in 1998. The amortization was primarily

was primarily due to reduced demand in the heavy-duty

attributable to goodwill recorded in connection with

truck market.

the Reorganization.

Net cash used in investing activities was $14.9 million

Interest expense totaled $1.7 million in 1999, an

for 2000 as compared to $26.4 million for 1999. The

increase of $0.4 million, from $1.3 million in 1998.

Company had increased levels of capital expenditures

Average outstanding debt for 1999 exceeded 1998

in 2000 in both the Electronics Group and the Industrial

primarily due to working capital investments and capital

Group, which totaled $8.0 million and $15.5 million,

expenditures. The weighted average interest rate was

respectively. Capital expenditures for the Electronics

higher in 1999 than in 1998 due to increased rates and a

Group were principally comprised of facilities

pricing adjustment on the refinancing completed early in

improvements and manufacturing, assembly and test

the fourth quarter of 1999.

equipment. The Industrial Group’s capital expenditures

The provision for income taxes totaled $3.1 million in

included facilities improvements and new forging and

1999, a decrease of $1.2 million, from $4.3 million in 1998.

machining equipment to increase and expand the range

The Company’s effective tax rate in 1999 was 24.5% as

of production capabilities. During 2000, the Company also

compared to 36.7% in 1998. During the fourth quarter of

sold certain manufacturing equipment and concurrently

1999, the Company recognized a tax benefit of

leased the equipment back under operating lease

approximately $0.6 million related to a claim for research

agreements with terms ranging from five to nine years.

and development credits attributable to prior years. The

Proceeds from the sale and leaseback of the related

provision for income taxes during 1999 also reflected a
reduction in the valuation allowance on deferred tax assets

assets totaled $9.3 million. During 1999, the Company
completed the acquisition of the assets of two businesses

of $1.9 million as compared to $0.9 million in 1998.

for an aggregate purchase price of $11.6 million.

Liquidity, Capital Resources
and Financial Condition

Net cash provided by operating activities was

$8.1 million for 2000 as compared to net cash used in

operating activities of $2.1 million for 1999. Operating

results for 2000 accounted for $10.7 million of cash flow,

which was partially offset by a $2.6 million investment

in working capital. Accounts receivable and accounts

payable increased by $8.1 million and $9.3 million,

Net cash provided by financing activities was

$11.1 million during 2000 as compared to $26.5 million

during 1999. The Company’s debt outstanding under its

Credit Agreement increased $10.6 million during 2000,

primarily to fund capital expenditures. The Company’s net

borrowings increased $25.8 million during 1999 primarily

to fund two acquisitions and capital expenditures.

Under the terms of the Credit Agreement between

the Company and its lenders, the Company had total

availability for borrowings and letters of credit under its

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revolving credit facility of $35.0 million at December 31,

2000, which, when combined with the cash balance of

$14.7 million, provides for total cash and borrowing

capacity of $49.7 million. Maximum borrowings on the

revolving credit facility are $100.0 million, subject to a

$15.0 million limit for letters of credit. Borrowings under

the Credit Agreement may be used to finance working

capital requirements, eligible acquisitions as defined in

the Credit Agreement and for general corporate purposes,

including capital expenditures.

The Credit Agreement contains customary affirmative

and negative covenants, including financial covenants

requiring the maintenance of specified ratios and

minimum levels of net worth. The terms of the Credit

Agreement were last amended as of February 2001 to

modify certain financial ratios and include collateral

security, with substantially all other terms and conditions

of the Credit Agreement remaining in effect as set forth in

the original document. As a result of the February 2001

amendment, the Company was in compliance with all

covenants associated with the Credit Agreement as of

December 31, 2000 and expects to remain in compliance

for the remaining term of the Credit Agreement.

The Company’s principal commitments at December

31, 2000 consisted of repayments of borrowings under

the Credit Agreement and obligations under operating

leases for certain of its real property and equipment.

The Company also had purchase commitments for

manufacturing equipment totaling approximately $11.4

million at December 31, 2000.

The Company believes sufficient resources will be

available to satisfy the Company’s cash requirements for
at least the next twelve months. Cash requirements for

periods beyond the next twelve months depend on the

Company’s profitability, its ability to manage working

capital requirements and its rate of growth. If the

Company’s working capital and capital expenditure

requirements exceed expected levels during 2001 or in

the foreseeable future, it may require additional external

sources of capital.

Market Risk

The Company had no holdings of derivative financial or

commodity instruments at December 31, 2000. The

Company is exposed to financial market risks, including

changes in interest rates and foreign currency exchange

rates. All borrowings under the Company’s Credit

Agreement bear interest at a variable rate based on the

prime rate, the London Interbank Offered Rate, or certain

alternative short-term rates. An increase in interest rates

of 100 basis points would result in additional interest

expense of approximately $0.6 million on an annualized

basis, based upon the Company’s debt outstanding at

December 31, 2000. Substantially all of the Company’s
business is transacted in U.S. dollars. Accordingly,

foreign exchange rate fluctuations have never had a

significant impact on the Company, and they are not

expected to in the foreseeable future.

Sypris Annual Report 2000

Consolidated Income Statements

Years ended December 31

(in thousands, except for per share data)

NET REVENUE

Outsource services
Products

Total net revenue

COST OF SALES

Outsource services
Products

Total cost of sales

Gross profit

Selling, general and administrative expense
Research and development
Amortization of intangible assets
Special charges

Operating income

Interest expense, net
Other income, net

Income before income taxes

Income tax (benefit) expense

Net income

Net income per common share:

Basic
Diluted

Shares used in computing per common share amounts:

Basic
Diluted

2000

1999

1998

168,216
48,355

150,139
51,991

146,706
64,919

216,571

202,130

211,625

145,059
31,199

176,258

40,313

26,881
3,574
1,436
2,945

5,477

4,035
(344)

1,786

(1,398)

3,184

0.33
0.32

9,671
9,964

$
$

127,153
30,028

157,181

44,949

23,388
6,409
986
—

14,166

1,730
(219)

126,894
36,808

163,702

47,923

28,169
5,940
963
—

12,851

1,298
(204)

12,655

11,757

$
$

3,099

9,556

1.00
0.97

9,515
9,861

$
$

4,311

7,446

0.79
0.76

9,438
9,793

Cash and cash equivalents
Accounts receivable, net
Inventory, net
Other current assets

Total current assets

Property, plant and equipment, net

(in thousands, except for share data)

December 31

ASSETS

Current assets:

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Long-term debt
Other liabilities

Current liabilities:

Other assets

Total assets

Intangible assets, net

Total liabilities

Commitments and contingencies

Accounts payable
Accrued liabilities
Current portion of long-term debt

Total current liabilities

LIABILITIES AND SHAREHOLDERS’ EQUITY

SHAREHOLDERS’ EQUITY

Preferred stock, no par value, 1,000,000 shares authorized; no shares issued
Common stock, non-voting, par value $.01 per share, 10,000,000 shares

authorized; no shares issued

Common stock, par value $.01 per share, 20,000,000 shares authorized; 9,709,669
and 9,589,214 shares issued and outstanding in 2000 and 1999, respectively

Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)

Total shareholders’ equity

—

97
24,401
40,060
(353)

64,205

The accompanying notes are an integral part of the consolidated financial statements.

Sypris Annual Report 2000

Total liabilities and shareholders’ equity

179,122

148,564

Consolidated Balance Sheets

2000

1999

14,674
31,896
51,055
7,695

105,320

54,317

17,154

2,331

10,406
23,793
49,462
4,279

87,940

40,192

18,038

2,394

179,122

148,564

25,670
18,548
2,500

46,718

62,500
5,699

114,917

11,022
17,813
5,400

34,235

49,000
4,509

87,744

—

96
23,921
36,876
(73)

60,820

Consolidated Statements of Cash Flows

Years ended December 31

(in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

Net income
Adjustments to reconcile net income to net cash

provided by (used in) operating activities:

Depreciation and amortization
Deferred income taxes
Provision for excess and obsolete inventory
Provision for doubtful accounts
Other noncash charges (credits)

Changes in operating assets and liabilities, net of acquisitions:

Accounts receivable
Inventory
Other assets
Accounts payable
Accrued and other liabilities

Net cash provided by (used in) operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

Capital expenditures
Proceeds from sale of assets
Purchase of the net assets of acquired entities
Changes in nonoperating assets and liabilities

Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES

Net increase in debt under revolving credit agreements
Payments on long-term debt
Proceeds from issuance of common stock
Payments for redemption of common stock in subsidiaries, net

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

2000

1999

1998

3,184

9,556

7,446

9,351
(2,478)
453
18
202

(8,121)
(2,046)
(344)
9,274
(1,361)

8,132

(23,886)
9,292
—
(351)

(14,945)

10,600
—
481
—

11,081

4,268

10,406

7,582
(645)
446
(129)
133

2,619
(11,277)
(1,704)
(1,997)
(6,652)

6,909
989
851
135
(258)

1,727
4,245
(1,138)
(1,855)
(8,081)

(2,068)

10,970

(14,443)
14
(11,642)
(343)

(26,414)

28,280
(2,463)
684
—

26,501

(1,981)

12,387

(5,845)
380
—
(364)

(5,829)

720
(3,284)
40
(66)

(2,590)

2,551

9,836

(in thousands, except for share data)

Balance at January 1, 1998

Net income
Adjustment in minimum pension liability
Comprehensive income (loss)

Issuance of shares for conversion of GFP

no par value common stock to Sypris
$.01 par value common stock
Issuance of shares for conversion of

redeemable common stock to Sypris
$.01 par value common stock
Issuance of shares for acquisition of
minority interests in subsidiaries
Excess of fair value of common stock

issued over net assets acquired

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Purchase Plan
Exercise of stock options

Exercise of stock options

BALANCE AT DECEMBER 31, 1998

Net income
Adjustment in minimum pension liability
Comprehensive income

Issuance of shares under Employee Stock

BALANCE AT DECEMBER 31, 1999

Net income
Adjustment in minimum pension liability
Comprehensive income (loss)

Issuance of shares under Employee Stock

Purchase Plan
Exercise of stock options

205,074

893,822

—
9,688

9,450,593

—
—
—

15,600
123,021

9,589,214

—
—
—

35,290
85,165

Cash and cash equivalents at end of year

14,674

10,406

12,387

BALANCE AT DECEMBER 31, 2000

9,709,669

Consolidated Statements of Shareholders’ Equity

Common Stock
Amount

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income
(Loss)

Total
Shareholders’
Equity

314,196

7,892

— $

19,836

— $

27,728

—
—
—

7,446
—
7,446

—
(1,294)
(1,294)

7,446
(1,294)
6,152

8,027,813

(7,808)

7,808

—

—
—

—

—
—

—

701

3,569

11,169
40

661

3,560

11,169
40

23,238

27,320

(1,294)

49,359

—
—
—

99
584

9,556
—
9,556

—
—

—
1,221
1,221

—
—

9,556
1,221
10,777

99
585

23,921

36,876

(73)

60,820

—
—
—

273
207

3,184
—
3,184

—
—

—
(280)
(280)

—
—

3,184
(280)
2,904

273
208

24,401

40,060

(353)

64,205

—
—

—
—
—

—
1

—
—
—

—
1

The accompanying notes are an integral part of the consolidated financial statements.

Sypris Annual Report 2000

Notes to Consolidated Financial Statements

Note 1. Organization and Significant
Accounting Policies

determining the cost of inventory excluding contract
inventory and certain other inventory, which was
determined using the last-in, first-out method (see Note 5).

CONSOLIDATION POLICY
The accompanying consolidated financial statements
include the accounts of Sypris Solutions, Inc. and its
wholly-owned subsidiaries (collectively, “Sypris” or the
“Company”), Bell Technologies, Inc. (“Bell”), Group
Technologies Corporation (“GroupTech”), Metrum-
Datatape, Inc. (“Metrum-Datatape”), and Tube Turns
Technologies, Inc. (“Tube Turns”). All significant
intercompany accounts and transactions have been
eliminated.

NATURE OF BUSINESS
Sypris is a diversified provider of technology-based
outsource services and specialized industrial products.
The Company performs a wide range of manufacturing
and technical services, typically under long-term
contracts with major manufacturers. The Company also
manufactures and sells complex data storage systems,
magnetic instruments, current sensors, high-pressure
closures and a variety of other industrial products.

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 amounts reported in the financial statements
and accompanying notes. Actual results could differ from
those estimates.

CASH EQUIVALENTS
The Company considers all highly liquid investments
with a maturity of three months or less when purchased
to be cash equivalents.

INVENTORY
Contract inventory is stated at actual production costs,
reduced by the cost of units for which revenue has been
recognized. Gross contract inventory is considered work
in process. Progress payments under long-term contracts
are specified in the contracts as a percentage of cost and
are liquidated as contract items are completed and
shipped. Other inventory is stated at the lower of cost or
market. The first-in, first-out method was used for

PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated on the basis of
cost. Depreciation of property, plant and equipment is
generally computed using the straight-line method over
their estimated economic lives. For land improvements,
buildings and building improvements, the estimated
economic life is generally 40 years. Estimated economic
lives range from three to twelve years for machinery,
equipment, furniture and fixtures. Leasehold
improvements are amortized over the respective lease
term using the straight-line method. Expenditures for
maintenance, repairs and renewals of minor items
are expensed as incurred. Major renewals and
improvements are capitalized.

Interest cost is capitalized for qualifying assets
during the period in which the asset is being installed
and prepared for its intended use. Capitalized interest
cost is amortized on the same basis as the related
depreciation. Capitalized interest for the year ended
December 31, 2000 was $910,000.

INTANGIBLE ASSETS
Costs in excess of net assets of businesses acquired
(“goodwill”), patents, product drawings and similar
intangible assets are amortized over their estimated
economic lives. Goodwill is being amortized over a period
of fifteen years (see Notes 2 and 7). Other intangible
assets are being amortized over periods ranging from five
to fifteen years, using the straight-line method.

IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates long-lived assets, including
goodwill, for impairment and assesses their recoverability
based upon anticipated future cash flows. If facts and
circumstances lead the Company’s management to
believe that the cost of one of its assets may be impaired,
the Company will evaluate the extent to which that cost
is recoverable by comparing the future undiscounted
cash flows estimated to be associated with that asset to
the asset’s carrying amount and write down that carrying
amount to market value, or discounted cash flow value,
to the extent necessary.

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REVENUE RECOGNITION
A portion of the Company’s business is conducted
under long-term, fixed-price contracts with aerospace
and defense companies and agencies of the U.S.
Government. Contract revenue is included in the
consolidated income statements as units are completed
and shipped using the units of delivery, percentage of
completion method of accounting. The costs attributed to
contract revenue are based upon the estimated average
costs of all units to be shipped. The cumulative average
costs of units shipped to date is adjusted through current
operations as estimates of future costs to complete
change (see “Contract Accounting” below).

Revenue recognized under the percentage of
completion method of accounting totaled $105,535,000,
$90,819,000 and $56,867,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
Substantially all such amounts were accounted for under
the units of delivery method. All other revenue is
recognized as product is shipped and title passes, or
when services are rendered.

CONTRACT ACCOUNTING
For long-term contracts, the Company capitalizes in
inventory direct material, direct labor and factory
overhead as incurred. The Company also capitalizes
certain general and administrative costs for estimating
and bidding on contracts awarded (of which
approximately $210,000 remained in inventory at
December 31, 2000 and 1999). Selling costs are expensed
as incurred. Costs to complete long-term contracts are
estimated on a monthly basis. Estimated margins at
completion are applied to cumulative contract revenue to
arrive at costs charged to operations.

Accounting for long-term contracts under the
percentage of completion method involves substantial
estimation processes, including determining the
estimated cost to complete a contract. As contracts may
require performance over several accounting periods,
formal detailed cost-to-complete estimates are performed
and updated monthly via performance reports.
Management’s estimates of costs-to-complete change
due to internal and external factors, such as labor rate
and efficiency variances, revised estimates of warranty
costs, estimated future material prices and customer
specification and testing requirement changes. Changes
in estimated costs are reflected in gross profit in the

Notes to Consolidated Financial Statements

period in which they are known. If increases in projected
costs-to-complete are sufficient to create a loss contract,
the entire estimated loss is charged to operations in the
period the loss first becomes known. Provisions for losses
on firm fixed-priced contracts totaled $1,701,000, $807,000
and $907,000 in 2000, 1999 and 1998, respectively.

PRODUCT WARRANTY COSTS
The provision for estimated warranty costs is recorded
at the time of sale and periodically adjusted to reflect
actual experience. The accrued liability for warranty costs
is included in the caption “Accrued liabilities” in the
accompanying consolidated balance sheets.

CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the
Company to concentrations of credit risk consist of
accounts receivable. The Company’s customer base
consists of various departments or agencies of the
U.S. Government, aerospace and defense companies
under contract with the U.S. Government and a number
of customers in diverse industries across geographic
areas. At December 31, 2000, the Company did not have
significant credit risk concentrations. The Company
performs periodic credit evaluations of its customers’
financial condition and does not require collateral on its
commercial accounts receivable. Credit losses are
provided for in the financial statements and consistently
have been within management’s expectations.

The Company recognized revenue from contracts with

the U.S. Government and its agencies of approximately
$45,467,000, $53,244,000 and $47,178,000 during the years
ended December 31, 2000, 1999 and 1998, respectively.
The Company’s single largest customer for the year ended
December 31, 2000 was Raytheon Company, which
represented approximately 15% of the Company’s total net
revenue. No other single customer accounted for more
than 10% of the Company’s total net revenue for the years
ended December 31, 2000, 1999 or 1998.

STOCK BASED COMPENSATION
Stock options are granted under various stock
compensation programs to employees and independent
directors (see Note 13). The Company accounts for stock
option grants in accordance with Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”).

Sypris Annual Report 2000

Notes to Consolidated Financial Statements

ADOPTION OF RECENTLY ISSUED
ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards
(“SFAS”) No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS 133”). SFAS
133 was subsequently amended by two other statements
and is required to be adopted in years beginning after
June 15, 2000. Because of the Company’s minimal use of
derivatives, SFAS 133 did not have a material impact on
the Company’s consolidated financial statements when it
was adopted by the Company effective January 1, 2001.

The Reorganization was accounted for as a
downstream merger, in which the merger of GFP and
GroupTech was accounted for as a purchase of the
minority interests of GroupTech. The issuance of shares
in exchange for the redeemable common stock held by
the Bell and Tube Turns minority shareholders was
accounted for as a purchase, and accordingly, the excess
of the fair value of the common stock issued over the fair
market value of the proportional share of the net assets
of Bell and Tube Turns was allocated to the assets and
liabilities of Bell and Tube Turns and the excess was
allocated to goodwill, which totaled $6,118,000.

RECLASSIFICATIONS
Certain amounts in the Company’s 1999 and 1998
consolidated financial statements have been reclassified
to conform with the 2000 presentation.

Note 2. Acquisitions and Mergers

During 1999, the Company completed two transactions in
which it acquired the assets of the related businesses.
The transactions were accounted for as purchases, in
which the combined purchase price of $11,642,000 was
allocated based on the fair values of assets acquired,
with the excess amount allocated to goodwill, which
totaled $6,607,000. The results of operations of the
acquired businesses have been included in the
consolidated financial statements since the respective
acquisition dates. The acquisitions were financed by the
Company’s Credit Agreement (see Note 9).

Sypris was organized in 1997 and began business on

March 30, 1998 with the completion of the merger of
Group Financial Partners, Inc. (“GFP”) and two of its
subsidiaries, Bell and Tube Turns, with and into
GroupTech, a Nasdaq-traded company in which GFP
owned an approximate 80% interest. Effective
immediately thereafter, GroupTech was merged with and
into Sypris. As a result of these and other transactions
(collectively referred to herein as the “Reorganization”),
Sypris became the holding company for Bell, GroupTech,
Tube Turns and Metrum-Datatape, a wholly-owned
subsidiary of GFP prior to the Reorganization, and
succeeded to the listing of GroupTech on the Nasdaq
Stock Market under the new symbol SYPR.

Note 3. Special Charges

Special charges of $2,945,000 were recognized during the
year ended December 31, 2000 for activities related to the
consolidation of certain operations within the Electronics
Group. The special charges incurred and paid during
2000 include workforce reductions, related severance and
other benefit costs of $1,211,000, facilities rearrangement
and relocation costs of $480,000, and employment costs
related to the transfer of production of $1,254,000. The
workforce reductions resulted in the termination of 48
employees involved in manufacturing, engineering, sales
and administrative activities during 2000.

Note 4. Accounts Receivable

Accounts receivable consists of the following
(in thousands):

December 31
Commercial
U.S. Government

Allowance for doubtful accounts

2000
$ 26,262
6,313
32,575
(679)
$ 31,896

1999
$ 18,419
6,044
24,463
(670)
$ 23,793

Accounts receivable from the U.S. Government

includes amounts due under long-term contracts, all
of which are billed at December 31, 2000 and 1999, of
$4,864,000 and $4,282,000, respectively.

and programs

Note 5. Inventory

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Accumulated depreciation

Inventory consists of the following (in thousands):

December 31
Raw materials
Work in process
Finished goods
Costs relating to long-term contracts and
programs, net of amounts attributed
to revenue recognized to date

Progress payments related to long-term contracts

LIFO reserve
Reserve for excess and obsolete inventory

45,542

29,637

(14,011)
(1,059)
(3,004)
$ 51,055

(1,038)
(430)
(2,669)
$ 49,462

The preceding amounts include inventory valued

under the last-in, first-out (“LIFO”) method totaling
$5,365,000 and $7,582,000 at December 31, 2000 and
1999, respectively, which approximates replacement cost.

Note 6. Property, Plant and Equipment

Property, plant and equipment consists of the following
(in thousands):

December 31
Land and land improvements
Buildings and building improvements
Machinery, equipment, furniture and fixtures
Construction in progress

2000
1,032
14,979
77,901
18,561
112,473
(58,156)
$ 54,317

1999
1,024
13,392
70,173
6,327
90,916
(50,724)
$ 40,192

Depreciation expense totaled $7,906,000, $6,526,000
and $5,934,000 for the years ended December 31, 2000,
1999 and 1998, respectively. At December 31, 2000,
$5,372,000 and $2,093,000 was included in accounts
payable and accrued liabilities, respectively, for capital
expenditures.

Notes to Consolidated Financial Statements

Note 7. Intangible Assets

Intangible assets consists of the following (in thousands):

2000
$ 13,567
8,388
1,632

1999
$ 12,640
9,649
1,673

December 31
Costs in excess of net assets
of businesses acquired

Other

Accumulated amortization

2000

1999

$ 18,418
3,107
21,525
(4,371)
$ 17,154

$ 18,462
2,954
21,416
(3,378)
$ 18,038

Amortization expense totaled $1,445,000, $1,056,000

and $975,000 for the years ended December 31, 2000,
1999 and 1998, respectively.

Note 8. Accrued Liabilities

Accrued liabilities consists of the following
(in thousands):

December 31
Employee benefit plan accruals
Salaries, wages and incentives
Other

2000
4,770
2,921
10,857
$ 18,548

1999
5,007
3,694
9,112
$ 17,813

Included in other accrued liabilities are employee

payroll deductions, advance payments, accrued
operating expenses, accrued warranty expenses, accrued
interest and other items, none of which exceed 5% of
total current liabilities.

Note 9. Long-Term Debt

The Company has a credit agreement with a syndicate
of banks (the “Credit Agreement”) that was entered into
in October 1999 and amended as of November 2000 and
February 2001. The Credit Agreement provides for a
revolving credit facility with an aggregate commitment
of $100,000,000 through January 2005. Under the terms
of the Credit Agreement, interest rates are determined at
the time of borrowing and are based on the London
Interbank Offered Rate plus a margin of 1.0% to 3.25%;
or the greater of the prime rate or the federal funds rate
plus 0.5%, plus a margin up to 0.75%. The Company also
pays a fee of 0.2% to 0.5% on the unused portion of the
aggregate commitment. The margins applied to the
respective interest rates and the commitment fee are
adjusted quarterly and are based on the Company’s ratio

Sypris Annual Report 2000

Notes to Consolidated Financial Statements

of funded debt to earnings before interest, taxes,
depreciation and amortization. The weighted average
interest rate for outstanding borrowings at December 31,
2000 was 9.3%. The effective average interest rates for
borrowings during the years ended December 31, 2000
and 1999 were 8.3% and 6.1%, respectively. Current
maturities of long-term debt at December 31, 2000
and 1999 represent amounts due under a short-term
borrowing arrangement included in the Credit
Agreement. Standby letters of credit up to a maximum of
$15,000,000 may be issued under the Credit Agreement
and no amounts were outstanding at December 31, 2000
and 1999.

The Credit Agreement contains customary

affirmative and negative covenants, including financial
covenants requiring the maintenance of specified fixed
charge and leverage ratios and minimum levels of net
worth. The Credit Agreement is secured by substantially
all assets of the Company, including but not limited to
accounts receivable, inventory, equipment and real
estate, and is also guaranteed by the subsidiaries of the
Company. The asset collateralization requirement may be
eliminated after June 2002 in the event the Company
achieves certain financial ratios and remains in
compliance with all covenants.

The Credit Agreement was last amended as of
February 2001 to modify certain financial ratios and
include collateral security, with substantially all other
terms and conditions of the Credit Agreement remaining
in effect as set forth in the original document. As a result
of the February 2001 amendment, the Company was in
compliance with all covenants associated with the Credit
Agreement as of December 31, 2000 and expects to
remain in compliance for the remaining term of the
Credit Agreement.

Note 10. Fair Value of Financial Instruments

Cash, accounts receivable, accounts payable and accrued
liabilities are reflected in the financial statements at their
carrying amount which approximates fair value because
of the short-term maturity of those instruments. The
carrying amount of debt outstanding at December 31,
2000 and 1999 under the Credit Agreement approximates
fair value because borrowings are for terms less than six
months and have rates that reflect currently available
terms and conditions for similar debt.

Note 11. Employee Benefit Plans

The Company sponsors noncontributory defined benefit
pension plans (the “Pension Plans”) covering certain
employees of Tube Turns. The Pension Plans covering
salaried and management employees provide pension
benefits that are based on the employees’ highest
five-year average compensation within ten years before
retirement. The Pension Plans covering hourly
employees and union members generally provide
benefits at stated amounts for each year of service.
The Company’s funding policy is to make the minimum
annual contributions required by the applicable
regulations. The Pension Plans’ assets are primarily
invested in equity securities and fixed income securities.
The Company recorded a decrease of $280,000 and an
increase of $1,221,000 to its minimum pension liability
during 2000 and 1999, respectively. No tax effect was
recorded related to these adjustments.

The following table details the components of

pension expense (in thousands):

Years ended December 31

2000

1999

1998

Service cost benefits earned

Interest incurred during the years ended December

during the period

180

181

163

31, 2000, 1999 and 1998 totaled $5,260,000, $1,725,000
and $1,645,000, respectively. Interest paid during the
years ended December 31, 2000, 1999 and 1998 totaled
$5,063,000, $1,629,000 and $1,664,000, respectively.

Interest cost of projected

benefit obligation

Net amortizations and deferrals
Actual return on plan assets

1,409
(189)
(927)
473

1,283
554
(1,480)
538

1,312
474
(1,321)
628

The following are summaries of the changes in the

benefit obligations and plan assets and of the funded
status of the Pension Plans (in thousands):

Benefit obligation at beginning of year
Service cost
Interest cost
Plan amendments
Actuarial loss (gain)
Benefits paid
Benefit obligation at end of year

December 31
Change in benefit obligation:

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Funded status of the plans:

Assumptions at year end:

Change in plan assets:

Fair value of plan assets at beginning of year
Actual return on plan assets
Company contributions
Benefits paid
Fair value of plan assets at end of year

Benefit obligation at end of year
Fair value of plan assets at end of year
Funded status of plan (underfunded)
Unrecognized actuarial gain
Unrecognized prior service cost
Net liability recognized

Balance sheet liabilities (assets):

Accrued benefit liability
Intangible asset
Accumulated other comprehensive income (loss)
Net amount recognized

Discount rate used in determining present values
Rate of compensation increase
Expected long-term rate of return on plan assets

2000

1999

$ 17,859
180
1,409
798
131
(1,281)
$ 19,096

$ 19,185
181
1,283
—
(1,549)
(1,241)
$ 17,859

$ 14,329
927
1,181
(1,281)
$ 15,156

$ 13,146
1,480
944
(1,241)
$ 14,329

$ 19,096
15,156
(3,940)
(260)
1,166
$ (3,034)

$ 17,859
14,329
(3,530)
(821)
608
$ (3,743)

4,510
(1,123)
(353)
3,034

4,379
(563)
(73)
3,743

8.00%
4.25%
9.50%

8.00%
4.25%
8.50%

The Company sponsors a defined contribution plan

(the “Defined Contribution Plan”) for substantially all
employees of the Company. The Defined Contribution Plan
is intended to meet the requirements of Section 401(k) of
the Internal Revenue Code. The Defined Contribution Plan
allows the Company to match participant contributions
and provides discretionary contributions as approved by
the Company’s Board of Directors. Contributions to the
Defined Contribution Plan in 2000, 1999 and 1998 totaled
$3,459,000, $2,996,000 and $2,661,000, respectively.

During 1999 and 1998, the Company had partially
self-insured medical plans (the “Medical Plans”) covering

Notes to Consolidated Financial Statements

certain employees. Beginning January 1, 2000, the
Company expanded the coverage to cover substantially
all employees. The number of employees participating in
the Medical Plans was approximately 1,300 at December
31, 2000 as compared to approximately 600 at December
31, 1999. The Medical Plans limit the Company’s annual
obligations to fund claims to specified amounts per
participant and in the aggregate. The Company is
adequately insured for amounts in excess of these limits.
Employees are responsible for payment of a portion of the
premiums. During 2000, 1999 and 1998, the Company
charged $4,456,000, $2,802,000 and $2,407,000, respectively,
to operations related to reinsurance premiums, medical
claims incurred and estimated, and administrative costs
for the Medical Plans. Claims paid during 2000, 1999 and
1998 did not exceed the aggregate limits.

Note 12. Commitments and Contingencies

The Company leases certain of its real property and
certain equipment, vehicles and computer hardware
under operating leases with terms ranging from
month-to-month to ten years and which contain various
renewal and rent escalation clauses. Future minimum
annual lease commitments under operating leases that
have initial or remaining noncancelable lease terms in
excess of one year as of December 31, 2000 are as
follows (in thousands):

Years ending December 31
2001
2002
2003
2004
2005
2006 and thereafter

5,107
4,686
4,124
3,187
2,781
5,410
$ 25,295

Rent expense for the years ended December 31,
2000, 1999 and 1998 totaled $3,650,000, $3,858,000 and
$4,701,000, respectively.

The Company entered into agreements for the sale

and leaseback of certain specific manufacturing and
testing equipment during 2000. The terms of the
operating leases range from five to nine years and the
Company has the option to purchase the equipment at
the expiration of the respective lease at a fixed price
based upon the equipment’s estimated residual value.

Sypris Annual Report 2000

Notes to Consolidated Financial Statements

Proceeds from the sale and leaseback transactions
during 2000 were $9,251,000 and the transactions
resulted in a deferred loss of $351,000 that will be
amortized over the term of the respective leases. Future
minimum annual lease commitments related to these
leases are included in the above schedule.

As of December 31, 2000, the Company had
outstanding purchase commitments of approximately
$11,416,000, primarily for the acquisition of manufacturing
equipment, including certain equipment to be financed
under an operating lease agreement that becomes
effective when the equipment is placed in service in 2001.

Tube Turns is a co-defendant in two separate
lawsuits filed in 1993 and 1994, one pending in federal
court and one pending in state district court in Louisiana,
arising out of an explosion in a coker plant owned by
Exxon Corporation located in Baton Rouge, Louisiana.
The suits are being defended for Tube Turns by its
insurance carrier, and the Company intends to vigorously
defend its case. The Company believes that a settlement
or related judgment would not result in a material loss to
Tube Turns or the Company.

More specifically, according to the complaints, Tube
Turns is the alleged manufacturer of a carbon steel pipe
elbow which failed, causing the explosion which
destroyed the coker plant and caused unspecified
damages to surrounding property owners. One of the
actions was brought by Exxon and claims damages for
destruction of the plant, which Exxon estimates exceed
one hundred million dollars. In this action, Tube Turns is
a co-defendant with the fabricator who built the pipe line
in which the elbow was incorporated and with the
general contractor for the plant. The second action is a
class action suit filed on behalf of the residents living
around the plant and claims damages in an amount as
yet undetermined. Exxon is a co-defendant with Tube
Turns, the contractor and the fabricator in this action. In
both actions, Tube Turns maintains that the carbon steel
pipe elbow at issue was appropriately marked as carbon
steel and was improperly installed, without the
knowledge of Tube Turns, by the fabricator and general
contractor in a part of the plant requiring a chromium
steel elbow.

The Company is involved in certain litigation and
contract issues arising in the normal course of business.
While the outcome of these matters cannot, at this time,
be predicted in light of the uncertainties inherent therein,
management does not expect that these matters will
have a material adverse effect on the consolidated
financial position or results of operations of the
Company.

Note 13. Stock Option and Purchase Plans

The Company has certain stock compensation plans
under which options to purchase common stock may be
granted to officers, key employees and non-employee
directors. Options may be granted at not less than the
market price on the date of grant. Options are exercisable
in whole or in part up to two years after the date of grant
and ending ten years after the date of grant. The
following table summarizes option activity for the three
years ended December 31, 2000:

Exercise
Price Range

Weighted
Average
Exercise
Price

871,987
379,214
(9,688)
(13,125)

$ 1.72 - 31.00
7.00 - 9.13
2.76 - 4.36
3.52 - 15.76

$ 5.33
8.68
4.16
7.36

1,228,388
226,352
(123,021)
(19,259)

1,312,460
518,746
(114,246)
(163,223)

1.72 - 31.00
5.94 - 9.63
2.76 - 6.68
2.96 - 11.00

1.72 - 31.00
6.56 - 10.50
2.76 - 8.75
4.24 - 10.50

6.35
7.75
4.75
8.26

6.71
9.52
4.08
7.20

Options assumed pursuant

to the Reorganization effective
March 30, 1998

Granted
Exercised
Forfeited

Balance at December 31, 1998
Granted
Exercised
Forfeited

Balance at December 31, 1999
Granted
Exercised
Forfeited

Balance at December 31, 2000

1,553,737

$ 1.72 - 31.00

$ 7.79

$ 1.72

$ 10.06 - $ 15.76

$ 6.56 - $ 10.00

$ 4.24 - $ 6.24

$ 2.76 - $ 4.12

Exercise Price Range

December 31, 2000:

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$ 16.12 - $ 23.00

$ 25.52 - $ 31.00

Total

Notes to Consolidated Financial Statements

The following table summarizes certain weighted average data for options outstanding and currently exercisable at

Outstanding
Weighted Weighted Average
Remaining
Average
Contractual
Exercise
Life
Price

1.72

3.34

4.90

8.46

10.79

18.16

28.86

7.79

1.7

4.2

5.2

6.3

6.6

5.4

4.1

5.7

Exercisable
Weighted
Average
Exercise
Price

1.72

3.34

4.91

8.41

12.21

18.16

28.86

6.78

156,648

42,782

99,261

432,514

40,811

10,003

4,104

786,123

156,648

42,782

118,505

1,015,534

206,161

10,003

4,104

1,553,737

The Company’s stock compensation program also

provides for the grant of performance-based stock
options to key employees. The terms and conditions of
the performance-based option grants provide for the
determination of the exercise price and the beginning of
the vesting period to occur when the fair market value of
the Company’s common stock achieves certain targeted
price levels. Performance-based options to purchase
108,000 shares, 16,000 shares and 380,000 shares of
common stock were granted during 2000, 1999 and 1998,
respectively. Performance-based options to purchase
112,000 shares of common stock were forfeited in 2000.
None of the targeted price levels of the performance-
based options were achieved during 2000, 1999 or 1998
and, accordingly, these options are excluded from
disclosures of options outstanding at December 31,
2000, 1999 and 1998. The aggregate number of shares
of common stock reserved for issuance under the
Company’s stock compensation programs as of
December 31, 2000 was 3,000,000. The aggregate
number of shares available for future grant as of
December 31, 2000 was 899,566.

The Company applies APB 25 and related
interpretations in accounting for its employee stock
options because, as discussed below, the alternative fair
value accounting provided for under SFAS No. 123,
“Accounting for Stock-Based Compensation”
(“SFAS 123”), requires use of option valuation models
that were not developed for use in valuing employee

stock options. Under APB 25, when the exercise price of
the Company’s employee stock options is equal to the
market price of the underlying stock on the date of grant,
no compensation expense is recognized.

Pro forma information regarding net income and net
income per share is required by SFAS 123, and has been
determined as if the Company had accounted for its
employee stock options under the fair value method of
SFAS 123. The fair value for options granted by the
Company during 2000, 1999 and 1998 were estimated at
the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions:

Years ended December 31

2000

1999

1998

Expected life (years)
Expected volatility
Risk-free interest rates
Expected dividend yield

6
70.30%
4.98%
—

75.50% 94.20%
5.68%
6.30%
—
—

The weighted average Black-Scholes value of options

granted under the stock option plans during 2000, 1999
and 1998 was $7.05, $5.50 and $6.91, respectively.

The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require
the input of highly subjective assumptions including the
expected stock price volatility. Because the Company’s
employee stock options have characteristics significantly
different from those of traded options, and because

Sypris Annual Report 2000

Notes to Consolidated Financial Statements

changes in the subjective input assumptions can
materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee
stock options.

For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over the
options’ vesting period. The Company’s pro forma
information is as follows (in thousands, except for per
share data):

Years ended December 31

2000

1999

1998

Pro forma net income
Pro forma net income
per common share:

Basic
Diluted

2,086

8,533

5,989

$
$

0.22
0.21

$
$

0.90
0.87

$
$

0.63
0.61

Effective February 1, 1999, the Company adopted

a stock purchase plan to provide substantially all
employees who have satisfied the eligibility requirements
the opportunity to purchase shares of the Company’s
common stock on a compensation deduction basis. The
purchase price is the lower of 85% of the fair market
value of the common stock on the first or last business
day of the purchase period. Payroll deductions may not
exceed $6,000 for any six-month cycle. The stock
purchase plan expires January 31, 2006. At December 31,
2000 and 1999, there were 249,110 shares and 284,400
shares, respectively, available for purchase under the
plan. During 2000 and 1999, a total of 35,290 shares and
15,600 shares, respectively, were issued under the plan.

Note 14. Income Taxes

The Company accounts for income taxes in accordance
with SFAS No. 109, “Accounting for Income Taxes.”
Accordingly, deferred income taxes have been provided
for temporary differences between the recognition of
revenue and expenses for financial and income tax
reporting purposes and between the tax basis of assets
and liabilities and their reported amounts in the financial
statements.

The components of income tax (benefit) expense is

as follows (in thousands):

Years ended December 31

2000

1999

1998

Current:

Federal
State
Other

Deferred:
Federal
State

969
102
9
1,080

(2,351)
(127)
(2,478)
$ (1,398)

3,386
320
38
3,744

(630)
(15)
(645)
3,099

2,844
441
37
3,322

1,011
(22)
989
4,311

The Company files a consolidated federal income tax
return which includes all subsidiaries. Income taxes paid
during 2000, 1999 and 1998 totaled $1,347,000,
$2,136,000 and $5,329,000, respectively. During 2000, the
Company received $2,102,000 in federal income tax
refunds.

At December 31, 2000, the Company had

$17,771,000 of state net operating loss carryforwards
available to offset future taxable income. Such
carryforwards reflect income tax losses incurred
which will expire on December 31 of the following
years (in thousands):

December 31
2008
2009
2010
2011
2017

2,386
8,362
560
5,999
464
$ 17,771

The following is a reconciliation of income tax
(benefit) expense to that computed by applying the
federal statutory rate of 34% to income before income
taxes (in thousands):

Years ended December 31

2000

1999

1998

Federal tax at the statutory rate
State income taxes, net of federal

607

4,303

3,997

tax benefit

153

236

291

Change in valuation allowance for

deferred tax asset

Research and development tax credit
Non-deductible expenses
Other

(3,008)
(262)
240
872
$ (1,398)

(1,891)
(544)
135
860
3,099

(882)
—
166
739
4,311

Deferred income tax assets and liabilities are as

2000

1999

1,108
673
977
796
255
995
327
5,131
(977)
4,154

992
969
977
577
250
985
424
5,174
(3,985)
1,189

(1,981)
2,173

(1,494)
(305)

Compensation and benefit accruals
Inventory valuation
State net operating loss carryforwards
Contract provisions
Accounts receivable allowance
Defined benefit pension plan
Other

follows (in thousands):

December 31
Deferred tax assets:

S
I
R
P
Y
S

Deferred tax liabilities:

Valuation allowance

Depreciation

Net deferred tax asset (liability)

The valuation allowance for deferred tax assets
decreased by $3,008,000, $1,891,000 and $882,000 in
2000, 1999 and 1998, respectively. The majority of the
decrease in the valuation allowance in 2000 was
recorded during the fourth quarter to reflect adjustments
to the Company’s effective tax rate based upon income
before income taxes as reported for the fourth quarter
and year ended December 31, 2000. At December 31,
2000, the valuation allowance of $977,000 relates to
state tax net operating loss (“NOL”) carryforwards.
The utilization of the state NOL carryforwards is
uncertain because it is unlikely the losses will be utilized
within the carryforward periods prescribed by the
applicable taxing jurisdiction based upon the Company’s
current filing status. Management believes it is more
likely than not that the Company’s future earnings will
be sufficient to ensure the realization of deferred tax
assets for federal and state purposes, excluding the
state NOL carryforward.

Notes to Consolidated Financial Statements

Note 15. Net Income Per Common Share

Basic income per common share is calculated by dividing
net income available to common shareholders by the
weighted average number of common shares
outstanding during the year. Diluted income per common
share is calculated by using the weighted average
number of common shares outstanding adjusted to
include the potentially dilutive effect of outstanding stock
options. For the period prior to the Reorganization on
March 30, 1998, shares used in computing basic and
diluted income per common share include the
outstanding shares of Sypris common stock as of that
date and the dilution associated with common stock
options issued prior to that date.

The following table presents information necessary

to calculate net income per common share (in thousands,
except for per share data):

Years ended December 31

2000

1999

1998

Shares outstanding:

Weighted average shares

outstanding

9,671

9,515

9,438

Effect of dilutive employee

stock options

Adjusted weighted average
shares outstanding and
assumed conversions

293

346

355

9,964

9,861

9,793

Net income applicable to

common stock

3,184

9,556

7,446

Net income per common share:

Basic
Diluted

$
$

0.33
0.32

$
$

1.00
0.97

$
$

0.79
0.76

Sypris Annual Report 2000

Notes to Consolidated Financial Statements

Note 17. Quarterly Financial Information (Unaudited)

The following is an analysis of certain items in the consolidated income statements by quarter for the years ended
December 31, 2000 and 1999 (in thousands, except for per share data):

2000

1999

First
$ 50,697

Second
52,118

Third
$ 53,887

Fourth
59,869

First

Second

Third

Fourth

44,898

49,331

$ 48,291

$ 59,610

10,754

1,182

179

11,353

2,739

1,368

9,090

707

9,116

849

1,547

9,720

2,432

1,533

11,734

3,704

2,459

12,041

4,364

2,763

11,454

3,666

2,801

0.02

0.14

0.01

0.16

0.26

0.25

0.29

0.28

0.29

0.28

Net income per common share:

Basic

Net income

Gross profit

Net revenue

Operating income

S
I
R
P
Y
S

Diluted

Notes to Consolidated Financial Statements

Note 16. Segment Information

The Company’s operations are conducted in two
reportable business segments: the Electronics Group
and the Industrial Group. The segments are each
managed separately because of the distinctions between
the products, services, markets, customers, technologies
and workforce skills of the segments. The Electronics
Group provides a wide range of manufacturing and
technical services for a diversified customer base as an
outsource service provider. The Electronics Group also
manufactures complex data storage systems, magnetic
instruments, current sensors and other electronic

products. The Industrial Group provides manufacturing
services for a variety of customers that outsource forged
and finished steel components and subassemblies. The
Industrial Group also manufactures high-pressure
closures and other fabricated products. Revenue derived
from outsource services in 2000 for the Electronics
Group and the Industrial Group accounted for 66% and
12% of total net revenue, respectively. There was no
intersegment net revenue recognized for all years
presented. The following table presents financial
information for the reportable segments of the Company
(in thousands):

Years ended December 31

Net revenue from unaffiliated customers:

2000

1999

1998

Electronics Group
Industrial Group

Gross profit:

Electronics Group
Industrial Group

Operating income:

Electronics Group
Industrial Group
General, corporate and other

Total assets:

Electronics Group
Industrial Group
General, corporate and other

Depreciation and amortization:

Electronics Group
Industrial Group
General, corporate and other

Capital expenditures:
Electronics Group
Industrial Group
General, corporate and other

182,126
34,445
216,571

36,272
4,041
40,313

6,935
1,648
(3,106)
5,477

124,523
37,851
16,748
179,122

8,037
1,109
205
9,351

7,971
15,546
369
23,886

164,963
37,167
202,130

37,873
7,076
44,949

12,005
4,930
(2,769)
14,166

106,229
26,714
15,621
148,564

6,551
902
129
7,582

6,327
7,134
982
14,443

174,396
37,229
211,625

41,400
6,523
47,923

11,207
4,329
(2,685)
12,851

90,174
18,905
12,040
121,119

5,933
825
151
6,909

4,598
1,185
62
5,845

The Company attributes net revenue to countries based upon the location of its operations. Export sales from the

United States totaled $25,250,000, $30,061,000 and $25,551,000 in 2000, 1999 and 1998, respectively.

Sypris Annual Report 2000

Report of Independent Auditors

Board of Directors and Shareholders
Sypris Solutions, Inc.

We have audited the accompanying consolidated balance sheets of Sypris Solutions, Inc. as of December 31, 2000 and
1999, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the
three years in the period ended December 31, 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 consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Sypris Solutions, Inc. at December 31, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.

Louisville, Kentucky
February 16, 2001

(in thousands, except for per share data)

INCOME STATEMENT DATA

Gross profit

Net revenue

Years ended December 31

Operating income

S
I
R
P
Y
S

Basic
Diluted
Net income (loss):

PER SHARE DATA

Working capital

Basic
Diluted

Total assets

Net income

(in thousands)

December 31

BALANCE SHEET DATA

Total debt

Income (loss) from continuing operations

Discontinued operations, net of tax

Income (loss) from continuing operations:

Financial Summary

2000

1999

1998

1997

1996

$ 216,571

$ 202,130

$ 211,625

$ 217,355

$ 308,598

40,313

44,949

47,923

32,135

30,383

5,477

3,184

—

14,166

12,851

9,556

7,446

—

3,184

9,556

7,446

1,785

1,527

3,817

5,344

513

(2,536)

3,457

921

$
$

0.33
0.32

$
$

1.00
0.97

$
$

0.79
0.76

$
$

0.09
0.09

0.50
0.48

$
$

(0.45)
(0.43)

(0.08)
(0.08)

2000

1999

1998

1997

1996

58,602

53,705

32,121

35,123

6,337

179,122

148,564

121,119

120,608

132,960

65,000

54,400

28,583

31,340

46,597

Total shareholders’ equity

64,205

60,820

49,359

27,728

22,384

Sypris Annual Report 2000

See accompanying Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Corporate Directory

Board of Directors

Corporate Officers

Subsidiary Officers

ROBERT E. GILL (1†)
Chairman of the Board

ROBERT E. GILL (5)
Chairman of the Board

JEFFREY T. GILL (1)
President & CEO

JEFFREY T. GILL (5)
President & CEO

DAVID D. JOHNSON (5)
Vice President, CFO
& Treasurer

RICHARD L. DAVIS (5)
Senior Vice President
& Secretary

ANTHONY C. ALLEN (5)
Vice President, Controller
& Assistant Secretary

HENRY F. FRIGON (1,2†)
Chairman
CARSTAR, Inc.

R. SCOTT GILL (1)
Associate
Koenig & Strey, Inc.

WILLIAM L. HEALEY (2,3)
Private Investor & Consultant

ROGER W. JOHNSON (3†,4)
Private Investor, Consultant
& Educator

SIDNEY R. PETERSEN (2,4†)
Retired Chairman & CEO
Getty Oil, Inc.

ROBERT SROKA (3,4)
Managing Partner
Lighthouse Holdings, LLC

(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit and Finance Committee
(4) Member of Nominating and Governance Committee
(5) Executive Officer
† Committee Chairman

CYNTHIA Y. BELAK
Vice President of Finance
Metrum-Datatape Inc.

JAMES G. COCKE (5)
Vice President;
President & CEO
Group Technologies Corporation

STEPHEN W. ISLAS
Vice President
Metrum-Datatape Inc.

STUART W. JONES
Vice President of Finance
Bell Technologies Inc.

JOHN M. KRAMER (5)
Vice President;
President & CEO
Tube Turns Technologies Inc.

RAYMOND E. MINTER
Vice President of Business
Development
Group Technologies Corporation

G. DARRELL ROBERTSON (5)
Vice President;
President & CEO
Metrum-Datatape Inc.

HENRY L. SINGER II (5)
Vice President;
President & CEO
Bell Technologies Inc.

NORMAN E. ZELESKY
Vice President of Finance
Tube Turns Technologies Inc.

ALABAMA
Metrum-Datatape Inc.
3322 S. Memorial Pky.
Huntsville, AL 35801
Phone: (256) 881-2231

ARIZONA
Bell Technologies Inc.
2320 West Peoria Ave.
Building D-133
Phoenix, AZ 85029
Phone: (602) 395-5900

S
I
R
P
Y
S

CALIFORNIA
Bell Technologies Inc.
440 N. Bernardo Ave.
Mountain View, CA 94043
Phone: (650) 969-5500

Metrum-Datatape Inc.
Corporate Headquarters
605 East Huntington Dr.
Monrovia, CA 91016
Phone: (626) 358-9500

Bell Technologies Inc.
2102 Ringwood Ave.
San Jose, CA 95131
Phone: (408) 954-8050

Bell Technologies Inc.
16340 Roscoe Blvd., Suite 100
Van Nuys, CA 91406
Phone: (818) 830-9111

COLORADO
Metrum-Datatape Inc.
4800 East Dry Creek Road
Littleton, CO 80122
Phone: (303) 773-4700

Bell Technologies Inc.
4800 East Dry Creek Road
Littleton, CO 80122
Phone: (303) 773-4616

FLORIDA
Bell Technologies Inc.
Corporate Headquarters
6120 Hanging Moss Road
Orlando, FL 32807
Phone: (407) 678-6900

Company Locations

SOUTH CAROLINA
Bell Technologies Inc.
c/o Square D
8821 Garners Ferry Road
Columbia, SC 29209
Phone: (803) 695-7874

Bell Technologies Inc.
c/o Bose Facility
2000 Carolina Pines Drive
Blythewood, SC 29016
Phone: (803) 714-8397

TENNESSEE
Bell Technologies Inc.
305 Seaboard Lane, Suite 318
Franklin, TN 37067
Phone: (615) 771-2421

TEXAS
Bell Technologies Inc.
906 Trinity Drive, Suite H
Mission, TX 78572
Phone: (956) 585-6566

Bell Technologies Inc.
258 East Arapaho, Suite 150
Richardson, TX 75081
Phone: (972) 231-4443

Metrum-Datatape Inc.
5500-B Will Ruth Drive
El Paso, TX 79924
Phone: (915) 757-2547

Tube Turns Technologies Inc.
9801 Westheimer Drive
Suite 302
Houston, TX 77042
Phone: (713) 917-6878

Group Technologies
Corporation
Corporate Headquarters
10901 Malcolm McKinley Dr.
Tampa, FL 33612
Phone: (813) 972-6000

Metrum-Datatape Inc.
8 Eighth Street
Shalimar, FL 32579
Phone: (850) 651-5158

GEORGIA
Bell Technologies Inc.
1000 Cobb Place Blvd.
Building 200, Suite 240
Kennesaw, GA 30144
Phone: (770) 795-8092

ILLINOIS
Bell Technologies Inc.
2055 Army Trail Road
Suite 108
Addison, IL 60101
Phone: (630) 620-5800

KENTUCKY
Sypris Solutions Inc.
Corporate Headquarters
101 Bullitt Lane, Suite 450
Louisville, KY 40222
Phone: (502) 329-2000

Tube Turns Technologies Inc.
Corporate Headquarters
2820 West Broadway
Louisville, KY 40211
Phone: (502) 774-6011

MARYLAND
Bell Technologies Inc.
1321A Mercedes Drive
Hanover, MD 21076
Phone: (410) 850-5056

Metrum-Datatape Inc.
9020 Junction Drive
Annapolis Junction, MD 20701
Phone: (301) 470-0110

MASSACHUSETTS
Bell Technologies Inc.
53 Second Avenue
Burlington, MA 01803
Phone: (781) 272-9050

Bell Technologies Inc.
34 Simarano Drive
Marlborough, MA 01752
Phone: (508) 786-9633

MICHIGAN
Bell Technologies Inc.
24301 Catherine Industrial Road
Suite 116
Novi, MI 48375
Phone: (248) 305-5200

NEW JERSEY
Bell Technologies Inc.
650 Liberty Avenue
Union, NJ 07083
Phone: (908) 688-9779

Bell Technologies Inc.
1133 Route 23 South
Wayne, NJ 07470
Phone: (973) 628-1363

NEW YORK
Bell Technologies Inc.
c/o Delphi Harrison
200 Upper Mountain Road
Building 6, Plant Q
Lockport, NY 14094
Phone: (716) 438-4584

OHIO
Bell Technologies Inc.
925 Keynote Circle
Brooklyn Heights, OH 44131
Phone: (216) 741-7040

Bell Technologies Inc.
3162 Presidential Drive
Fairborn, OH 45234
Phone: (937) 427-3444

PENNSYLVANIA
Bell Technologies Inc.
389 Wolf Camp Road
Fair Hope, PA 15538
Phone: (814) 267-5408

Sypris Annual Report 2000

Common Stock Information

The Company’s common stock is traded on The Nasdaq Stock Market under the symbol “SYPR.” The following
table sets forth, for the periods indicated, the high and low sales prices per share of the common stock as reported
by The Nasdaq Stock Market.

Year ended December 31, 1999:

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Year ended December 31, 2000:

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

8.250
$
$
9.750
$ 11.000
$ 10.250

$ 11.000
$ 10.750
$ 10.625
8.750
$

Low

6.375
6.875
9.000
8.625

8.875
8.625
8.625
6.188

$
$
$
$

As of February 5, 2001, there were 1,014 holders of record of the Company’s common stock.

The Company has historically not declared or paid any cash dividend on its common stock. The Company presently
intends to retain all of its earnings for the future operation and growth of its business and does not intend to pay cash
dividends in the foreseeable future. The payment of cash dividends in the future will be dependent upon the Company’s
results of operations, earnings, capital requirements, contractual restrictions and other factors considered relevant by
the Board of Directors.

Sypris Annual Report 2000

Investor Information

CORPORATE ADDRESS
Sypris Solutions Inc.
101 Bullitt Lane
Suite 450
Louisville, KY 40222
Phone: (502) 329-2000
Fax: (502) 329-2050

ANNUAL MEETING
The Annual Meeting of Shareholders
will be held on Tuesday, May 1, 2001,
at 10:00 a.m. at 101 Bullitt Lane,
Lower Level Seminar Room,
Louisville, Kentucky.

FOR MORE INFORMATION
To learn more about Sypris Solutions
Inc., visit our site on the World Wide
Web at www.sypris.com.

FORWARD LOOKING STATEMENTS

This document contains various

forward-looking statements. Statements

in this document that are not historical

are forward-looking statements. Such

statements are subject to various risks

and uncertainties that could cause actual

results to vary materially from those

stated. Such risks and uncertainties

include: economic conditions in various

regions, product and price competition,

raw material prices, technology changes,

patent issues, litigation results, legal and

regulatory developments and other risks

and uncertainties described in

documents filed with the Securities and

Exchange Commission.

INVESTOR MATERIALS

The Sypris Web page –
www.sypris.com – is your entry point
for a vast array of information about
Sypris, including its products,
financial information, real-time stock
quotes, links to each of its subsidiary
operations and other useful
information.

For investor information, including
additional annual reports, 10-Ks, 10-
Qs or any other financial literature,
please contact Carroll A. Dunavent at
(502) 329-2000.

SYPRIS ON NASDAQ
The Common Stock of Sypris trades
on The Nasdaq Stock Market under
the symbol SYPR.

TRANSFER AGENT
First Chicago Trust Company of New
York, a division of Equiserve
P.O. Box 2500
Jersey City, NJ 07303
Phone: (800) 317-4445
Fax: (201) 222-4151
www.equiserve.com

INDEPENDENT AUDITORS
Ernst & Young LLP
400 West Market Street
Suite 2100
Louisville, KY 40202
Phone: (502) 585-1400
Fax: (502) 584-4221

CORPORATE COUNSEL
Wyatt, Tarrant & Combs
PNC Plaza, 28th Floor
Louisville, KY 40202
Phone: (502) 589-5235
Fax: (502) 589-0309

SYPRIS

S O L U T I O N S

101 BULLITT LANE, SUITE 450

LOUISVILLE, KENTUCKY 40222

Phone: (502) 329-2000

Fax: (502) 329-2050