<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the fiscal year ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
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Commission file number 1-1000
SPARTON CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 38-1054690
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(State of Incorporation) (IRS Employer Identification No.)
2400 East Ganson St., Jackson, Michigan 49202
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 787-8600
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) (Name of each exchange on which registered)
--------------------- -------------------------------------------
COMMON STOCK, $1.25 PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in Part III of this Form 10-K or any amendment
to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of August 30, 1996 was $29,100,000.
The number of shares of common stock outstanding as of August 30, 1996 were
7,811,370.
Documents incorporated in part by reference:
Parts II and IV - Portions of the 1996 Annual Report to Shareowners
of Sparton Corporation ("Annual Report") are filed as
Exhibit 13 herewith.
<PAGE> 2
PART I
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Item l. Business
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Except as otherwise indicated, the term "Company" refers to Sparton
Corporation, and the term "Sparton" refers to Sparton Corporation and its
consolidated subsidiaries.
The Company has been in continuous existence since 1900. It was last
reorganized in 1919 as an Ohio corporation. Sparton operates in one principal
line of business, electronics. In August 1996, the Company formalized its plan
to offer for sale its automotive and industrial products operations.
Accordingly, these operating results have been reclassified and reported in
discontinued operations. The Company is in the process of negotiating the sale
of these operations and expects that the sale will be completed in fiscal 1997.
A description of the major products of the Company's continuing operations,
electronics, is included in the Annual Report in Note 1, Statement of
Significant Accounting Policies, of the Notes to Consolidated Financial
Statements on Page 13 and are filed as part of Exhibit 13. Additional
information about this line of business is as follows.
Electronics
- -----------
Historically, the electronics segment's principal product has been
sonobuoys, which are air deployable anti-submarine warfare (ASW) devices used by
the U.S. Navy and other free world military organizations. It competes with a
limited number of qualified manufacturers for sonobuoy procurements by the U.S.
and selected foreign governments. Contracts are obtained through competitive bid
or directed procurement. Sales of sonobuoys have declined substantially in
recent years.
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Within the electronics line of business, the Company also designs and/or
manufactures a variety of electronic and electromechanical products for the
telecommunications, electronics and other industries. Many of the physical and
technical attributes used in the production of sonobuoys are required in the
production of these commercial products. The Company is focusing its resources
on substantially expanding revenues in these commercial areas, particularly in
electronic contract manufacturing. Sales are generally obtained on a competitive
basis. Competitive factors include technical ability, customer service, product
quality and price. A majority of the proprietary products, principally
transducers and condition monitoring systems, are sold to the telecommunications
industry worldwide. Commercial electronics products are distributed through a
direct sales force and through a small group of manufacturers' representatives.
The primary industries of the Company's electronic contract manufacturing (ECM)
business include telecommunications, medical and industrial controls and
scientific instrumentation. In the ECM business, it must compete with a number
of domestic and foreign manufacturers. Within the ECM business, the Company
contracts with its customers to manufacture products based on the customer's
design, specifications, and shipping schedules. Generally, ECM programs do not
require the Company's direct involvement in product marketing. Material
availability, product quality, delivery and cost are very important factors in
the ECM business. In general, margins within the ECM operations are lower than
those obtained in the Company's ASW or proprietary electronics areas, primarily
due to intense competition and the higher purchased parts component of products
shipped.
At June 30, 1996 and June 30, 1995, the aggregate backlog from
continuing operations was approximately $107 million and $90 million,
respectively. A majority of the 1996 backlog is expected to be realized in 1997.
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The Company's sales of sonobuoys, principally to the U.S. Navy, have
declined dramatically from $151,024,000 in 1992 to $35,589,000 in 1996. It is
expected that both the domestic and international demand for production
sonobuoys will continue at these reduced and unpredictable levels for the
foreseeable future. In response to this changing environment, the Company has
been developing commercial electronics opportunities which will utilize its
existing technological and manufacturing capabilities, largely in the North
American ECM markets. The Company's experience to date indicates that
significant commercial electronics opportunities exist. Because of the many new
customers and markets involved, management continues to be challenged with the
ability to forecast near-term sales and margins with accuracy. As with any
change of this magnitude, unanticipated problems can be reasonably expected to
occur. Investors should be aware of this uncertainty and make their own
independent evaluation.
Automotive and Industrial Products
- ----------------------------------
As previously discussed, the Company formalized its plan in August 1996
to offer for sale the automotive and industrial products segment, and
accordingly, these operations have been reported as discontinued operations.
Other Information
- -----------------
Sparton's principal sales are currently concentrated on a limited
number of customers and the loss of any one of them could have a material
adverse financial effect. Materials for the electronics operations are obtained
from a variety of worldwide sources, except for selected components. Access to
competitively priced materials is critical to success in the ECM business. While
Sparton holds a number of patents relating to its products and processes, none
are considered of material
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importance. Business operations have not encountered or expect to encounter
significant long-term problems in obtaining sufficient raw materials although
the commercial electronics industry has experienced occasional spot shortages of
key components. The risk of materials obsolescence in the ECM business is less
than normal because materials are generally not purchased until actually needed.
While overall sales fluctuate during the year, such fluctuations have not
historically reflected a definitive seasonal pattern or tendency.
Research and development expenditures amounted to approximately
$17,254,000 in 1996, $20,440,000 in 1995 and $19,621,000 in 1994 (approximately
$15,845,000, $15,985,000 and $16,197,000 of these expenditures, respectively,
were customer funded). There are approximately 300 employees involved in
research and development. Few, if any, devote all of their time to such efforts.
In addition, many of those involved in research and development do not have an
engineering or other technical background.
Sparton employed approximately 2,300 people at June 30, 1996. The
Company has one operating division and four wholly-owned active subsidiaries
within continuing operations and four wholly-owned active subsidiaries within
discontinued operations.
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Item 2. Properties
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The table below lists the principal properties of Sparton within
continuing operations. All are owned except as noted. There are manufacturing
and/or office facilities at each location. Sparton believes these facilities are
suitable for its operations, except as noted.
Jackson, Michigan
DeLeon Springs, Florida (2 plants)
Brooksville, Florida
London, Ontario
Albuquerque, New Mexico (see below)
Rio Rancho, New Mexico
Deming, New Mexico (lease/purchase, see below)
The Company leases the Deming, New Mexico facility under terms of a
capital lease and has exercised an option to purchase the facility at the end of
the lease term which expires on July 1, 1997. Future minimum payments under this
capital lease at June 30, 1996 are $80,000 in 1997 and $75,000 in 1998. Interest
of $5,000, payable over the remaining lease term at 6 1/8% per annum, was
deducted in arriving at the capitalized lease obligation liability at June 30,
1996. The Company's Coors Road, Albuquerque, New Mexico facility is not being
utilized and is offered for sale.
Item 3. Legal Proceedings
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Various litigation is pending against the Company, in many cases
involving ordinary and routine claims incidental to the business of the Company
and in others presenting allegations that are non-routine. The Company and its
subsidiaries are also involved in certain compliance issues with the United
States Environmental Protection Agency and various state agencies, including
being named as a potentially responsible party at several sites. Potentially
responsible parties (PRP's) can be
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held jointly and severally liable for the cleanup costs at any specific site.
The Company's past experience, however, has indicated that when it has
contributed only relatively small amounts of material or waste to a specific
site relative to other PRP's, its ultimate share of any cleanup costs has been
very minor. Based upon available information, the Company believes it has
contributed only small amounts to those sites in which it is currently viewed a
potentially responsible party.
One of Sparton's facilities located in New Mexico has been the subject
of ongoing investigations with the United States Environmental Protection Agency
(EPA) under the Resource Conservation and Recovery Act (RCRA). To date, this
work has involved, among other things, on-site and off-site investigations of
environmental impacts, negotiation and execution of an Administrative Order on
Consent (AOC) with the EPA and the installation of some on-site groundwater
recovery wells and air stripping equipment. A remedial investigation called for
in the AOC has been completed and approved. In May, 1996, Sparton submitted to
EPA a final Corrective Measures Study, based upon the results of its
investigation, as required in the AOC. In June, 1996, EPA issued its final
decision selecting remedies for corrective action at the site. EPA estimated
that the present value cost of its remedies would range from between $15,000,000
and $26,400,000 based on a 30-year time frame. In Sparton's judgment, the
remedies proposed by EPA are either unnecessary or technically impractical.
Sparton is vigorously challenging the EPA's remedy selection and has filed suit
in Federal District Court in Dallas asserting that EPA's decision on remedy
selection violates the AOC. Sparton is currently negotiating with other involved
regulatory agencies for alternative remedies that Sparton believes would protect
public health and the environment with estimated costs ranging from $500,000 to
$1,000,000. These negotiations have not yet been completed. Successful
resolution of these negotiations and Sparton's litigation
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with the EPA may be difficult given the simultaneous involvement of local, state
and federal governmental agencies. To date, Sparton has incurred approximately
$5,950,000 since this contamination problem was first identified in the early
1980's. $3,000,000 of this amount has been recovered from insurance companies. A
reserve was initiated in 1991 to cover the then estimated future minimum costs.
In 1996 and 1995, Sparton incurred $247,000 and $184,000 respectively, which was
charged against this reserve. At June 30, 1996, the remaining reserve to cover
future minimum costs totaled $444,000. If a remedy is ultimately imposed on
Sparton, other than the one is has proposed, the ultimate cleanup costs may
significantly increase. There is no assurance that additional costs above the
amount reserved will not be incurred or that significant changes in
environmental laws or their interpretation will not require that additional
amounts be spent.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matters were submitted to a vote of the security holders during the
last quarter of the period covered by this report.
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<PAGE> 9
Executive Officers
- ------------------
Information with respect to executive officers of the Registrant is set
forth below. The positions noted have been held for at least five years, except
where noted.
<TABLE>
<CAPTION>
Age
---
<S> <C>
JOHN J. SMITH, Chairman of the Board, Chief Executive Officer and 84
Director
DAVID W. HOCKENBROCHT, President, Chief Operating Officer and Director 61
LAWSON K. SMITH, Vice President, Secretary and Director 81
RICHARD L. LANGLEY, Vice President-Treasurer and Assistant Secretary 51
R. JAN APPEL, Vice President, General Counsel and Assistant Secretary 50
RICHARD D. MICO, Vice President and General Manager of Sparton Technology, 66
Inc.
DOUGLAS E. JOHNSON, Vice President and General Manager of Sparton 48
Electronics since July 1994. Prior to that date, Mr. Johnson was the
Assistant General Manager of Sparton Electronics and prior to August
1992, was employed by the Company in several capacities, principally
within engineering and manufacturing.
</TABLE>
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<PAGE> 10
<TABLE>
Age
---
<S> <C>
W. DAVID WEIND, Vice President and General Manager of Sparton of 49
Canada, Ltd. since June 1996. Prior to that date, Mr. Weind
was employed as President of GSW Construction Products.
JERRY R. GAUSE, Vice President and General Manager of Sparton Engineered 55
Products, Inc.-KPI Group
JOSEPH S. LERCZAK, Assistant Treasurer 39
</TABLE>
John J. Smith and Lawson K. Smith are brothers. There are no other
family relationships between the persons named above. John J. Smith is employed
as Chief Executive Officer under the terms of an employment agreement through
June 30, 1997. All other officers are elected annually and serve at the
discretion of the Board of Directors.
PART II
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Item 5. Market for the Registrant's Common Stock
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and Related Security Holder Matters
-----------------------------------
Information with respect to the market for the Company's stock,
including stock prices, stock exchange and number of shareowners, and quarterly
dividends for the two year period ended June 30, 1996, is included under
"Financial Highlights" on page 1 of the Annual Report and is included in Exhibit
13 filed herewith.
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Item 6. Selected Financial Data
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The "Selected Financial Data" on Page 18 of Exhibit 13 filed hereunder
is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of
- ------- ---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" on Pages 19-21 of Exhibit 13 filed hereunder is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
The consolidated financial statements of Sparton Corporation and
Subsidiaries and "Report of Independent Auditors" are included on Pages 8-17 and
12, respectively, in Exhibit 13 filed hereunder and are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
None.
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PART III
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Item 10. Directors and Executive Officers
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of the Registrant
-----------------
Information with respect to directors of the Registrant is set forth
below. Information concerning the executive officers is included in Part I on
Pages 8 and 9.
<TABLE>
<CAPTION>
Age
---
<S> <C>
JOHN J. SMITH, Chairman of the Board and Chief Executive Officer 84
of Sparton Corporation, Jackson, Michigan. Mr. Smith has
served as a Director since 1950 and his current term
expires in 1998.
DAVID W. HOCKENBROCHT, President and Chief Operating Officer 61
of Sparton Corporation, Jackson, Michigan. Mr. Hockenbrocht
has served as a Director since 1978 and his current term
expires in 1997.
LAWSON K. SMITH, Vice President and Secretary of Sparton 81
Corporation, Jackson, Michigan. Mr. Smith has served
as a Director since 1971 and his current term expires
in 1997.
</TABLE>
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<PAGE> 13
<TABLE>
<S> <C>
JAMES N. DEBOER, Partner, law firm of Varnum, Riddering, 71
Schmidt and Howlett, LLP, Grand Rapids, Michigan. Mr.
DeBoer has served as a Director since 1971 and his current term
expires in 1997.
ROBERT J. KIRK, Financial Consultant, Toledo, Ohio. Mr. Kirk 83
has served as a Director since 1978 and his current term
expires in 1996.
MARSHALL V. NOECKER, President and substantial owner of the 81
Marshall Noecker Group Companies (aluminum fabrication
and manufacturing companies and investment companies),
Garden City, Michigan. Mr. Noecker has served as a
Director since 1963 and his current term expires in 1996.
RORY B. RIGGS, President of Biomatrix, Inc., Richfield, New 43
Jersey, a medical biotechnology company since 1996, and
President, ITIM Corporation, New York, New York, an
investment advisory and venture capital firm since 1991.
Mr. Riggs was President and Chief Executive Officer of RF&P
Corporation, Richmond, Virginia, a real estate investment
</TABLE>
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<PAGE> 14
<TABLE>
<S> <C>
company, from 1991 to 1994. Mr. Riggs has served as a
Director since 1994 and his current term expires in 1997.
DAVID B. SCHOON, President, Stock Portfolio Management, Inc., 45
Grand Rapids, Michigan, a financial consulting services
company, since 1992, and was a Senior Stock Analyst
for other financial consulting services companies from 1986
to 1992. Mr. Schoon has served as a Director since 1994
and his current term expires in 1996.
BLAIR H. THOMPSON, formerly Vice President and Treasurer of 71
Sparton Corporation, Jackson, Michigan (retired in 1990).
Mr. Thompson has served as a Director since 1972 and his
current term expires in 1998.
</TABLE>
Mr. John J. Smith and Mr. Lawson K. Smith are brothers. There are no
other family relationships between the directors. Except as noted, the principal
occupations referred to have been held by the foregoing directors for at least
five years.
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<PAGE> 15
Mr. Robert J. Kirk is a director of Seaway Foodtown, Inc. Mr. David B.
Schoon is a director of California Micro Devices Corporation. Mr. Rory B. Riggs
is a director of Biomatrix, Inc.
Item 11. Executive Compensation
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The following tables provide certain data and information on the
compensation of the Company's Chief Executive Officer and its four most highly
compensation executive officers (other than the CEO) whose annual salary and
bonus exceeded $100,000 (collectively referred to as the "Named Executives").
This report addresses the Company's compensation policies and programs for the
year ended June 30, 1996, the details of which are reflected in the tables set
forth in the following sections. The Company's and the Board's policies and
practices pertaining to the compensation of executive officers and management
have been in effect for a number of years.
The Executive Compensation Committee Report and Performance Graph set
forth below are not deemed to be soliciting material or to be filed with the
Securities and Exchange Commission under the Securities Act of 1933 or the
Securities Exchange Act of 1934 or incorporated by reference in any document so
filed.
EXECUTIVE COMPENSATION COMMITTEE REPORT
Decisions on the compensation of the Company's executive officers are
made by the Board's Compensation Committee. This Committee is composed of Mr.
John J. Smith, Chairman of the Board and Chief Executive Officer and four
non-employee directors; Messrs. Noecker, Kirk, DeBoer and Thompson.
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The Company has long-established policies and practices intended to
compensate its salaried employees in a manner that will enable the Company to
attract, retain and motivate them to accomplish corporate goals and objectives.
These policies and practices encourage management to remain dedicated to the
maximization of shareholder value. The Compensation Committee establishes
compensation for its key executives through a comparison of its salary levels
with companies of comparable size, sales and profitability.
The Company's compenation program is comprised of several elements:
cash compensation (including salary and incentive bonus), incentive stock
options and defined benefit or defined contribution retirement plans. Reflective
of the Company's goal of relating compensation to corporate performance, the
incentive bonus compensation plan permits certain executive officers to earn
additional compensation if the pretax earnings of their operating unit is in
excess of an established goal. The bonus for all other key executives is a
subjective determination by the Compensation Committee based upon an evaluation
of the employees' individual performance, level of responsiblity and experience.
The Company's Chief Executive Officer is compensated pursuant to
employment agreements that have been in existence since 1950. A description of
the current employment agreement and related compensation of the Company's Chief
Executive Officer is set forth below under the caption "Employment Agreement and
Related Compensation."
Marshall V. Noecker Robert J. Kirk Blair H. Thompson
James N. DeBoer John J. Smith
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<PAGE> 17
EMPLOYMENT AGREEMENT AND RELATED COMPENSATION
The current agreement for Mr. John J. Smith, the Company's CEO, expires
on June 30, 1997. Under the terms of this contract, Mr. Smith's annual salary
for fiscal 1996 was to be $288,542. The contract also provides for an annual
cash bonus equal to 5% of the Company's pretax earnings in excess of $5,000,000
with the bonus limited to $150,000 for the fiscal year ended June 30, 1996. For
the year ended June 30, 1996, Mr. Smith voluntarily reduced his compensation to
a rate of $178,200 per annum. No bonus was payable under the terms of the
contract for fiscal year 1996.
Pursuant to prior employment agreements with Mr. Smith, a deferred
compensation account was established. Mr. Smith is entitled to receive payments
in monthly installments following termination of employment; or, subject to
prior approval of the Company's Board of Directors, from time to time in lump
sums upon Mr. Smith's request. No payments were made to Mr. Smith during fiscal
year 1996. The balance in Mr. Smith's deferred compensation account will be paid
in a lump sum upon his death. Beginning July 1, 1976, the Company agreed to
credit interest to Mr. Smith's deferred compensation account at the rate of
1-1/2% above the prime rate, but not exceeding 10%. However, if the prime rate
exceeds 10% then interest will be credited at the prime rate, but in no event at
a rate exceeding 14%. At June 30, 1996, the balance in Mr. Smith's deferred
compensation account was $2,180,903.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. John J. Smith and Mr. Blair H. Thompson (a former officer of the
Company) are members of the Compensation Committee and as such participate in
establishing compensation for executives of the Company.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Summary Compensation Table Shows certain compensation information
for the Named Executives for services rendered in all capacities during the
fiscal years ended June 30, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
All
Other
Name and Pricipal Fiscal Compen-
Position Year Salary Bonus sation
- --------------------- ------ ------ ----- -------
<S> <C> <C> <C> <C>
John J. Smith 1996 $178,200 -0- $ 1,750(1)
Chairman of the Board 1995 120,000 -0- 121,750(1)
and Chief Executive 1994 206,287 -0- 163,272(1)
Officer
David W. Hockenbrocht 1996 178,200 -0- 1,750(2)
President and Chief 1995 178,200 -0- 1,750(2)
Operating Officer 1994 196,350 -0- 2,100(2)
Richard D. Mico 1996 106,294 11,034 3,304(3)
Vice President and 1995 103,125 -0- 2,510(3)
General Manager 1994 98,405 -0- 1,971(3)
Jerry R. Gause 1996 94,577 24,000 4,256(3)
Vice President and 1995 88,723 21,000 3,553(3)
General Manager 1994 80,884 21,000 3,378(3)
Douglas E. Johnson 1996 100,000 -0- -0-
Vice President and 1995 93,572 -0- -0-
General Manager 1994 88,054 -0- -0-
<FN>
- --------
(1) Represents directors fees of $1,750 paid in 1996 and 1995, and $2,100 in
1994. The balance represents payments made pursuant to deferred
compensation arrangement discussed under the caption Employment Agreement
and Related Compensation above.
(2) Represents directors fees.
(3) Represents Company contributions to its employees' defined contribution
benefit plan.
</TABLE>
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<PAGE> 19
OPTION GRANTS IN LAST FISCAL YEAR
There were no options granted to any Company officers or other
employees for the fiscal year ended June 30, 1996.
OPTIONS/SAR EXERCISES AND HOLDINGS
The following table sets forth information, with respect to the Named
Executives, concerning the unexercised options and SARs held at June 30, 1996.
None of the Named Executives exercised any options for the purchase of Company
Common Stock during the past fiscal year.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SARs EXERCISED IN
LAST FISCAL YEAR AND FISCAL YEAR-END
OPTIONS/SAR VALUES
Number of Unexercised Value of Unexercised In
Options/SARs at Fiscal the Money Options/SARs
Year-End at Fiscal Year-End (1)
------------------------------ -------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John J. Smith -0- -0- $-0- $-0-
David W. Hockenbrocht 16,000 16,000 -0- -0-
Richard D. Mico 3,750 1,250 -0- -0-
Jerry R. Gause 3,750 1,250 -0- -0-
Douglas E. Johnson -0- -0- -0- -0-
<FN>
- ------------------------
(1) The closing price of the Company's Common Stock was $4.25 at June 28, 1996,
which price was less than the exercise price on outstanding stock options.
</TABLE>
RETIREMENT PROGRAMS
The Company maintains a defined benefit retirement plan for employees
of the Company and one subsidiary which provide for monthly pensions following
retirement. During the past year, no cash contributions were made by the Company
to the plan as
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<PAGE> 20
in the judgment of the Company's independent actuaries, the pension plan was
fully funded. The plan provides a basic benefit of $2.25 per month for each year
of credited service up to a maximum of $90 per month. In addition, for those
participant's who contribute 5% of thier monthly compentation (excluding
bonuses) per month, the plan provides for an additional monthly pension amount
equal to 1-1/2% of the particpant's final 10-year average monthly compensation
(excluding bonuses) times the participant's years of contributory and credited
service to a maximum of 30 years. The following table shows the estimated annual
retirement benefits in specified remuneration and service classifications upon
normal retirement at age 65. The benefits shown are not subject to any deduction
for Social Security or other offset amounts. (For fiscal years beginning after
June 30, 1993, the maximum amount of annual compensation allowed to be included
in determining final average compensation has been limited by statute to
$150,000. This amount is subject to future adjustment by the Internal Revenue
Service).
<TABLE>
<CAPTION>
Final 10-Year
Average
Annual Earnings Years of Contributory and Credited Service at Age 65
(Excludes Bonuses) 10 15 20 25 30
- ------------------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
$ 60,000 $ 9,270 $13,905 $18,540 $23,175 $27,810
80,000 12,270 18,405 24,540 30,675 36,810
100,000 15,270 22,905 30,540 38,175 45,810
120,000 18,270 27,405 36,540 45,675 54,810
140,000 21,270 31,905 42,540 53,175 63,810
160,000 24,270 36,405 48,540 60,675 72,810
180,000 27,270 40,905 54,540 68,175 81,810
</TABLE>
The following Named Executives have years of contributory credited
service under the plan and current annual earnings as of June 30, 1996:
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<PAGE> 21
<TABLE>
<CAPTION>
Current Annual
Years of Contributory Earnings (Excluding
Officer Credited Service Bonus)
- --------------------- --------------------- -------------------
<S> <C> <C>
David W. Hockenbrocht 18.50 $178,200
Douglas E. Johnson 8.00 100,000
</TABLE>
Mr. John J. Smith, Mr. Richard D. Mico and Mr. Jerry R. Gause do not
participate in the Company's defined benefit retirement plan.
PERFORMANCE GRAPH
The following is a line-graph presentation comparing cumulative,
five-year shareholder return, on an indexed basis, of the Company's Common Stock
with that of a broad market index (the S&P 500 Composite Index) and a weighted
index made up of selected S&P 500 indices including Electronics Defense (50%),
Automobiles (25%) and Industrials (25%). The Company selected this weighted
index because the companies included therein are engaged in operations similar
to the Company's operations. The comparison assumes a $100 investment on June
30, 1991, and the reinvestment of dividends.
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<PAGE> 22
Comparison of Five Year Cumulative Total Return Among
Sparton Corporation, S&P 500 Composite Index and an Industry Index
(Index June 30, 1991 = 100)
<TABLE>
<CAPTION>
June 30
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Sparton Corporation 100 123 88 96 85 71
S&P 500 Index 100 113 129 131 165 208
S&P Weighted Index 100 109 142 150 196 299
</TABLE>
<PAGE> 23
Item 12. Security Ownership of Certain
- -------- -----------------------------
Beneficial Owners and Management
--------------------------------
As of September 1, 1996, the Company had outstanding 7,811,370 shares
of Common Stock. As of that date, the persons named in the following table were
known by the management to be the beneficial owners of more than 5% of the
Company's outstanding Common Stock:
<TABLE>
<CAPTION>
Amount and
Nature Of
Beneficial
Name and Address of Beneficial Owner Ownership Percent of Class
- ------------------------------------ ----------- ----------------
<S> <C> <C>
John Smith(1) 2,100,000(2) 26.88%(2)
1839 S. Walmont
Jackson, Michigan 49203
Lawson K. Smith(1) 777,256(3) 9.95%(3)
717 Fourth Street
Lake Odessa, Michigan 48849
Dimensional Fund Advisors, Inc. 410,400(4) 5.25%(4)
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
<FN>
- ------------------------
(1) Mr. John J. Smith and Mr. Lawson K. Smith are brothers.
(2) Includes 1,920,000 shares owned directly by Mr. John J. Smith jointly with
his wife. An additional 180,000 shares are held in a trust over which Mr.
Smith has voting control. The amount does not include 433,600 shares held
by several of the Company's retirement plans as to which Mr. Smith holds
voting and investment powers in his capacity as Chief Executive Officer of
the Company. Mr. Smith has no pecuniary interest in these shares and
disclaims any beneficial ownership interest.
</TABLE>
-21-
<PAGE> 24
(3) Includes 358,966 shares and 418,290 shares held by the Lawson K. Smith
Trust and Margaret E. Smith Trust, respectively. Lawson K. Smith and his
wife, Margaret E. Smith, have voting and investment control over the shares
held in the trusts bearing their names.
(4) According to information included in the Form 13G Report filed by
Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, it is deemed to have beneficial ownership of 410,400 shares of
Common Stock, all of which shares are held in portfolios of DFA Investment
Dimensions Group Inc., a registered open-end investment company, or in
series of the DFA Investment Trust Company, a Delaware business trust, or
the DFA Group Trust and DFA Participation Group Trust, investment vehicles
for qualified employee benefit plans, all of which Dimensional serves as
investment manager. Dimensional disclaims beneficial ownership of all such
shares.
As of September 1, 1996, the following table shows the Company's Common
Stock beneficially owned by the Named Executives identified in the Compensation
Table, included in Item 11 of this report, and all officers and directors of the
Company as a group (16 persons):
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name Beneficial Ownership Class(6)
- ---------------- -------------------- -----------
<S> <C> <C>
John J. Smith 2,100,000(1) 26.88%(1)
David Hockenbrocht 77,535(2) .99
Richard D. Mico 17,000(3) .22
Jerry R. Gause 8,700(4) .11
Douglas E. Johnson 5,000 .06
All Officers & Directors 3,098,727(5) 39.48
</TABLE>
-22-
<PAGE> 25
- ----------------------------
(1) Reference is made to note (2) of the previous table.
(2) Includes 21,333 shares which Mr. Hockenbrocht has the right to acquire
pursuant to options exercisable within 60 days.
(3) Includes 5,000 shares which Mr. Mico has the right to acquire pursuant to
options exercisable within 60 days.
(4) Includes 5,000 shares which Mr. Gause has the right to acquire pursuant to
options exercisable within 60 days.
(5) Includes 38,333 shares under options held by officers and directors
exercisable within 60 days.
(6) Calculated based on total shares outstanding plus the shares subject to
options exercisable within 60 days as described in this statement.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
John J. Smith and his wife and Lawson K. Smith lease a manufacturing
facility located in White Cloud, Michigan to Sparton Engineered Products, Inc.
- - KPI Group (Michigan). John J. Smith and his wife also lease a facility
located in Grand Haven, Michigan to this subsidiary. Both the facilities are
occupied under lease agreements that allow termination by either party upon
ninety (90) days notice. These two lease agreements, the result of arms-length
type negotiations, grant the Company the option to acquire the properties
during the lease term for $252,600 and $223,200, respectively. The original
leases of these facilities were in existence prior to the Company's
acquisition of this subsidiary.
-23-
<PAGE> 26
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------- ----------------------------------------------------------------
(a) The following financial statements are filed as part of this
report on Form 10-K:
The following Consolidated Financial Statements of Sparton Corporation and
Subsidiaries and Report of Independent Auditors, included on Pages 8-17 and 12,
respectively, of Exhibit 13 filed hereunder are incorporated by reference in
Item 8.
<TABLE>
<CAPTION>
Page Reference
Annual Report
to Shareowners
<S> <C>
Data from the 1996 Annual Report to
Shareowners of Sparton Corporation:
Consolidated balance sheets at June 30, 8 - 9
1996 and 1995
For the years ended June 30, 1996, 1995,
and 1994:
Consolidated statements of operations 10
Consolidated statements of cash flows 11
Consolidated statements of share- 12
owners' equity
Notes to consolidated financial 13 - 17
statements
Report of Independent Auditors 12
Financial Statement Schedules
All prescribed schedules have been omitted since
the required information is not present or is not
present in amounts sufficient to require
submission of the schedule, or because the
information required is included in the
consolidated financial statements or the notes
thereto.
</TABLE>
-24-
<PAGE> 27
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed for the
three months ended June 30, 1996.
(c) Exhibits
See Exhibit Index on page 26
-25-
<PAGE> 28
Exhibit Index
- -------------
3 and 4 Articles of Incorporation of the Registrant were filed with
Form 10-K for the year ended June 30, 1981 and an amendment thereto
was filed with Form 10-Q for the three-month period ended September
30, 1983, and are incorporated herein by reference.
By-laws of the Registrant were filed with Form 10-K for the year ended
June 30, 1981, and are incorporated herein by reference.
Code of Regulations of the Registrant were filed with Form 10-K for
the year ended June 30, 1981 and an amendment thereto was filed with
Form 10-Q for the three-month period ended September 30, 1982, and are
incorporated herein by reference.
10 The employment agreement with John J. Smith was filed with Form 10-K
for the year ended June 30, 1981 and subsequent amendments thereto
were filed with Form 10-Q for the three-month period ended September
30, 1988, with Form 10-Q for the three-month period ended September
30, 1991 and with Form 10-Q for the three-month period ended September
30, 1994 and are incorporated herein by reference.
13 Portions of the 1996 Annual Report to Shareowners (filed herewith and
attached).
22 Subsidiaries (filed herewith and attached).
-26-
<PAGE> 29
23 Consent of independent auditors (filed herewith and attached).
27 Financial data schedule, submitted to the Securities and Exchange
Commission for its information.
-27-
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SPARTON CORPORATION
------------------------------------------
Date: September 27, 1996 By /s/ Richard L. Langley
------------------------------------------
Richard L. Langley, Vice President-
Treasurer (Principal Accounting and
Financial Officer)
-28-
<PAGE> 31
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature and Title Date
------------------- ----
By /s/ John J. Smith August 23, 1996
- --------------------------------------------- ---------------
John J. Smith, Chairman of the Board
of Directors and Chief Executive Officer
By /s/ David W. Hockenbrocht August 23, 1996
- --------------------------------------------- ---------------
David W. Hockenbrocht, President,
Chief Operating Officer and Director
By /s/ Lawson K. Smith August 23, 1996
- --------------------------------------------- ---------------
Lawson K. Smith, Vice President, Secretary
and Director
By /s/ James N. DeBoer August 23, 1996
- --------------------------------------------- ---------------
James N. DeBoer, Director
By /s/ Robert J. Kirk August 23, 1996
- --------------------------------------------- ---------------
Robert J. Kirk, Director
By /s/ Marshall V. Noecker August 23, 1996
- --------------------------------------------- ---------------
Marshall V. Noecker, Director
By /s/ Rory B. Riggs August 23, 1996
- --------------------------------------------- ---------------
Rory B. Riggs, Director
By /s/ David B. Schoon August 23, 1996
- --------------------------------------------- ---------------
David B Schoon, Director
By /s/ Michael N. Taglich August 23, 1996
- --------------------------------------------- ---------------
Michael N. Taglich, Director
By /s/ Blair H. Thompson August 23, 1996
- --------------------------------------------- ---------------
Blair H. Thompson, Director
-29-
<PAGE> 1
Exhibit 13
<TABLE>
<CAPTION>
Financial Highlights
SPARTON CORPORATION & SUBSIDIARIES For Years Ended June 30
===========================================================================================================================
1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C>
Net Sales $102,824,946 $ 94,514,784 $ 95,453,340
Income (Loss):
Continuing operations $ (2,810,794) $ (4,570,848) $ (5,104,892)
Discontinued operations (1,269,390) (1,889,873) 205,478
------------ ------------ ------------
$ (4,080,184) $ (6,460,721) $ (4,899,414)
============ ============ ============
Working Capital $ 29,940,793 $ 33,187,775 $ 42,204,541
Working Capital Ratio 1.47:1 1.66:1 2.00:1
Common Shares Outstanding at June 30 7,811,370 7,811,370 7,811,370
Long-Term Obligations - continuing operations $ 75,000 $ 150,000 $ 225,000
Per Common Share:
Income (Loss):
Continuing operations $ (.36) $ (.59) $ (.65)
Discontinued operations (.16) (.24) .02
------ ------ -------
$ (.52) $ (.83) $ (.63)
====== ====== ======
Working Capital $3.83 $4.25 $5.40
Shareowners' Equity 6.60 7.12 7.95
Dividends -- -- --
</TABLE>
<TABLE>
<CAPTION>
Market Data
PRICE RANGE
New York Stock Exchange YEARS ENDED JUNE 30
===========================================================================================================================
1996 1995 1994
===========================================================================================================================
Quarter Ended: High Low High Low High Low
---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
September 30 5 3/8 4 5 3/4 4 5/8 6 5/8 5 3/8
December 31 4 7/8 3 7/8 5 5/8 4 1/4 7 1/2 6
March 31 4 3/8 3 1/4 4 1/2 3 3/8 7 1/4 6 1/8
June 30 4 3/4 3 1/2 5 1/4 3 1/2 6 1/2 4 7/8
Recent Price as of August 30, 1996 6 1/8
Shareowners of record 995
</TABLE>
<PAGE> 2
[Photo] John J. Smith Chairman
[Photo] David W. Hockenbrocht President
SEPTEMBER 27, 1996
TO OUR SHAREOWNERS:
This year completed the fifth year of our transition toward the establishment
of Sparton as a leader in the field of Electronics Contract Manufacturing (ECM)
while at the same time continuing the development of our marketplace position in
telecommunications. We also expect that our historic defense contracts in the
Anti-Submarine Warfare (ASW) field will remain a part of the Corporation for
years to come. ASW will no longer, however, be the dominant business which it
was for nearly 40 years.
During the year, your management assessed its prospective future as an
automotive parts supplier in what is now a developing global supply base in an
ever increasingly competitive market. As a result of that assessment, the Board
of Directors have approved offering for sale all of Sparton's automotive
businesses. Discussions with several interested principals are ongoing. We
expect to be able to make definitive announcements concerning the sale very
shortly. It is our intent to use the proceeds from the sale to reduce debt and
to provide the necessary capital for expanding our Electronics Contract
Manufacturing businesses. Consistent with the offering for sale, the automotive
operations have been classified as discontinued operations in the accompanying
financial statements. Prior years' data has been similarly reclassified.
Sales from continuing operations increased $8,310,000 to $102,825,000 in
1996, an increase of 9%. We recorded a net loss from continuing operations of
$2,811,000 ($0.36 per share) in 1996 compared to a net loss of $4,571,000 ($0.59
per share) last year. Discontinued operations recorded net losses of $1,269,000
($0.16 per share) in 1996 and $1,890,000 ($0.24 per share) in 1995.
Sparton returned to profitability in April and remained profitable for the
entire fourth quarter. Sales from continuing operations for the quarter were
$36,179,000 compared to $25,464,000 last year. Net income, including
discontinued operations, was $543,000 ($0.07 per share) for the fourth quarter
of 1996. This compares to a net loss of $2,812,000 ($0.36 per share) for the
same quarter last year.
Our Electronics and Telecommunications sales backlog at June 30 totaled
approximately $107,222,000, compared to $89,212,000 at the same time last year.
Of the total backlog, $40,547,000 is commercial and $66,675,000 is defense
related. Backlog numbers do not include any automotive related sales.
In spite of losses in the three previous fiscal years, our financial
condition remains quite strong with shareowners' equity at June 30, 1996 of
$51,530,000 and short-term borrowings of $33,594,000.
ELECTRONICS
Sparton Electronics, with headquarters in DeLeon Springs, Florida and with
three manufacturing plants in DeLeon Springs, Florida, Brooksville, Florida and
Jackson, Michigan, remained unprofitable for the year. The operations continue
to have underutilized capacity. In early August, Sparton concluded negotiations
with an outside firm for the prospective sale of the remaining portions of the
FM pager inventory. Based upon this agreement, this should close out the last
remnants of this business. The remaining FM pager inventory of $1,066,000 was
written off.
The continued expansion of Electronic Contract Manufacturing with the
additional services of the Advanced Engineering Solutions (AES) section
(utilizing existing design engineering skills) produced substantial new bookings
and closed the year with sales of $48,645,000, up 11% from the previous year.
The two capabilities together offer complete turnkey product design and
manufacturing expertise. Emphasis is on expanding our box build customers (full
system rather than just printed circuit boards). Additional surface mount
manufacturing equipment was placed into service at our Brooksville, Florida and
Jackson, Michigan plants. This expands our capacity for quick response to our
growing list of customers while adding prototyping capability.
Anti-Submarine Warfare (ASW) will continue to be a part of Sparton
Electronics' activities though not as large as it was previously.
Defense-oriented sales were $33,902,000 and this area operated profitability.
2
<PAGE> 3
[Photo of Map with caption "Sparton's engineering and manufacturing facilities"]
Sales at Sparton of Canada (SoC) declined and the previous year's loss
widened despite continued inroads into Electronic Contract Manufacturing.
Several new contracts were awarded and production has begun. Significant strides
were made into the power electronics business with the completion of two new
products. A new electronic ballast holds much promise for us in the days ahead
as well as a power test system designed for a major company. SoC's backlog stood
at $2,088,000 at June 30, 1996 and further growth is anticipated during the
coming year.
Sparton Technology's (STI) year was highlighted with a sales increase of 26%
and tripling of profits when compared to the previous year. STI remains focused
on the worldwide telecommunications markets within its current areas of
competence as well as several new contracts in the field of Electronics Contract
Manufacturing. Important new customers were obtained on the commercial side of
its business. They should make substantial contributions to STI's financial
success in 1997.
AUTOMOTIVE AND INDUSTRIAL PRODUCTS
(DISCONTINUED OPERATIONS)
Sparton's worldwide automotive-oriented businesses experienced a 5% sales
growth but did not operate profitably as a whole. The combining of our Sparton
Engineered Products, Lake Odessa Group and our Sparton Engineered Products, KPI
Group, which became effective January 1, 1996, lowered administrative costs. KPI
Group and Flora Group combined to open a new sales office in Novi, Michigan,
near their automotive customers.
Our Sparton Engineered Products, Inc. - Flora Group, whose principal product
is automotive horns for the worldwide automotive OEM business, showed increased
sales for the year though it ended the fiscal year at a loss. The loss was
reduced substantially from the previous year through improved manufacturing
operations and the full-year effect of positive pricing adjustments received
from several customers.
Sparton Engineered Products, Inc. - KPI Group completed its restructuring
into strategic business units. The automotive transmission shifter and spare
tire carrier business continued to grow while airbag component sales declined
slightly. KPI operated profitably for the fiscal year.
As we enter our 97th continuous year in business, we are conscious of the
patience of our shareowners through the last three very tough years, the
sacrifices and dedication of our many faithful employees and the confidence
shown in us by our many old as well as new customers. It is our objective to
create a new company in a new field of endeavor that is worthy of this level of
confidence and trust.
At this writing, our annual meeting plans have not been completed.
Shareowners will be notified of its date and time as soon as these plans have
been finalized. We trust that many of you will take the time to attend. At that
meeting, we expect to ask for shareowner approval on one or more agreements
related to the sale of our automotive businesses.
Cordially yours,
/s/ John J. Smith
JOHN J. SMITH
Chairman
/s/ David W. Hockenbrocht
DAVID W. HOCKENBROCHT
President
3
<PAGE> 4
[Graphic] Industrial products represent nearly half of Sparton Electronics'
commercial contract manufacturing base. This printed circuit board
is used in a motor control device.
ELECTRONICS
SPARTON ELECTRONICS
Sparton Electronics entered the fifth year of its transition from a defense
contractor to being primarily a commercial contract electronics product
development and manufacturing firm. Commercial sales now represent more than
one-half of total revenues.
To provide additional services utilizing the group's strong design
engineering skills, the Advanced Engineering Solutions (AES) business section
was formed. The AES and Electronics Contract Manufacturing (ECM) areas now offer
Sparton's commercial accounts complete turnkey product design and manufacturing
capabilities.
Sparton Electronics returned to operational profitability during the fourth
quarter, but incurred a loss for the year. The fourth quarter profits were due
to increases in business and operational efficiencies. Total commercial and
governmental bookings were up over 19% for the year.
Negotiations were concluded in August 1996 with an outside firm for the
remaining portions of the FM pager inventory. This agreement should close out
the remnants of this business. The last pager inventory of $1,066,000 was
written off in June 1996.
Significant investments were made to expand throughput and the variety of
services offered by the ECM business section. Additionally, work began to
leverage the synergy between the ECM service offerings of Sparton Electronics,
Sparton Technology and Sparton of Canada. Sparton Electronics and Sparton of
Canada are teaming on several efforts where multinational build sites are
required to support the local content needs of Fortune 100 customers.
The ECM marketplace continues to grow rapidly. Unlike many contract
manufacturers who cultivated the computer industry and were subsequently
impacted by their cyclical downturn, Sparton Electronics' business base contains
customers within the telecommunications, instrumentation and medical
marketplaces. All of these fields continue to prosper. Sparton's ECM business
development strategy will continue to be focused on customers in these areas,
structuring service packages that meet their specialized needs. The year saw the
addition of several key customers from North America, Asia and Europe,
predominantly in the telecommunications and industrial control markets.
Major investments were made in capital equipment to increase capacity to
support customer demands and add assembly capabilities. These investments
included additional surface mount technology lines in Sparton's Brooksville,
Florida and Jackson, Michigan facilities. Also, a quickturn prototype/low volume
capability was added to the Brooksville facility.
Emphasis remains on developing customers requiring box build services. Box
build signifies full system, rather than just printed circuit board,
manufacturing. Currently, full system production customers represent nearly 60%
of its ECM business base.
Sparton Electronics is becoming increasingly involved in engineering
activities prior to production. The group is able to meet a wide range of
customer engineering needs including: 1) new product design and development, 2)
redesign for cost reduction or enhanced manufacturability, 3) redesign for
enhanced product functionality, and 4) redesign in support of product line
restructuring activity.
The ability to support all aspects of the product life cycle from development
through distribution to the end customer gives Sparton Electronics a strong
competitive advantage. Increasingly, customers who use contract manufacturing
strategically look to the lowest total cost rather than the cheapest piece
price. The result is growth in high value-added services such as product
development, repair depot support and end market distribution.
ECM should continue to grow in the coming year at Sparton Electronics.
Results have been positive for the AES section of the business. Its primary
emphasis is to provide product development services for companies, particularly
in the therapeutic and diagnostic medical equipment fields. New customers were
developed in 1996, enhancing the reputation of AES and leading to production
contracts on three of their designs.
[Graphic] Sparton's engineering team designed the electronics for this
security device. It is now in volume production in Sparton
Electronics' Brooksville, Florida facility.
[Graphic] The Jackson, Michigan staff of Sparton Electronics designed ,
performed FDA and UL regulatory testing and is now producing this
limb compression pump for a medical products manufacturer. The
microprocessor-based pump design offers physicians multiple
therapeutic options.
4
<PAGE> 5
[Graphic] Sparton's Brooksville, Florida facility recently began building this
new patient warming model for a medical products manufacturer.
Sparton has provided this customer with a full range of services
including complete system assembly, distribution to end markets
worldwide and repair depot support.
Bookings within the Governmental Products section increased over 40% during
1996. Its primary focus is Anti-Submarine Warfare (ASW), particularly the
development and production of sonobuoys. Funding by the U.S. Navy for these
expendable, submarine-detecting devices has increased from the levels of the
prior two years. Sparton was successful in the production start up of the new
Q62C sonobuoy in 1996. This is the current buoy of choice for the U.S. Navy.
Sparton Electronics was also awarded contracts for other production sonobuoys
and the next generation oceanographic devices including an environmental weather
monitoring buoy. Sonobuoy demand from the U.S. and NATO governments should be
steady for the foreseeable future.
Sparton Electronics' emphasis on quality continued. Its facilities passed a
variety of independent quality audits including ISO 9000 recertification, FDA
and UL.
SPARTON OF CANADA, LTD.
The transition from a defense supplier to a commercial electronics business
continued at Sparton of Canada (SoC). Sales declined and the unit reported an
operating loss. The loss was impacted by this transition and research and
development expenditures for several new contracts.
SoC continues to focus on four business areas - Electronics Contract
Manufacturing (ECM), power electronics, acoustics and oceanography.
A number of new ECM contracts were awarded. Agreements were finalized with
several customers for printed circuit board assembly. These customers were
attracted by SoC's new automated through hole insertion and surface mount
placement equipment, engineering capabilities and the London, Ontario location.
A sizable telecommunications company awarded Sparton of Canada a prototype
development contract and quality vendor status. ECM backlog stood at a record
level at June 30 and further growth is anticipated due to SoC's full service
design and manufacturing capabilities and ISO 9001 certification.
Progress was made on two vital power electronic products, an electronic
ballast and automotive power test system. Engineering design is nearing
completion on the high power electronic ballast and volume production should
commence in 1997. The ballast is used in ultraviolet water purification systems.
Applications for spin-off products using its unique technology are being
studied.
The electrical power test system was installed in a Canadian assembly plant
of a major automotive manufacturer. The system provides a rugged, mobile source
of DC voltage to vehicles during final assembly.
[Graphic] Sparton of Canada, located in London, Ontario, designed this
electronic ballast for new high intensity discharge lamps. The
initial contract is for the water purification industry. Worldwide
patents are pending.
5
<PAGE> 6
[Graphic] This portable receiver was designed and is manufactured by Sparton
Technology in Rio Rancho, New Mexico and is part of a complete
intrusion detection system built for geographical border protection.
Sea trials are now underway for a large acoustics program, a research
projector for a towed sonar system. The contract with the Australian Defence and
Technology Organisation (DSTO) should be completed in 1997.
Oceanographics was a disappointment in 1996. Sales of bathythermographs
(BT's), expendable devices that measure temperature as they descend through
water, declined markedly. SoC is reexamining its future strategy for this
product line at this time.
SPARTON TECHNOLOGY, INC.
Revenues at Sparton Technology, Inc. (STI) increased 26% and profits before
taxes more than tripled in 1996 compared to the prior year. Sales of
defense-related products declined and no longer make up a significant portion of
sales.
Export sales of STI's proprietary telecommunications products continue to
grow, particularly to mainland China. These transducers and systems are
primarily used to monitor cable pressure in telecommunications' lines. Pressure
monitoring, battery monitoring and PowerComTM power management equipment
international sales grew, especially in New Zealand, Columbia and Mexico.
Battery monitoring sales also increased in the United States.
The delivery of tone alert radios for the Chemical Stockpile Emergency
Preparedness Program (CSEPP) was delayed due to a change in UL requirements,
necessitating a design change. Shipments of these radios, which emit a loud
warning sound and subsequent message in the case of an emergency, should
commence in the second quarter of 1997.
A five-year contract for intrusion detection sensors was awarded by the
Immigration and Naturalization Service. Deliveries of these border protection
devices started in January 1996.
An ECM program with a video service company is progressing well. Sparton
Technology should begin shipments of a new commercial receiver model to the
customer during the first quarter of 1997. Their receiver downlinks information
from a satellite.
The bus wiring harness business grew significantly. A new program manager was
recently hired to develop new customers for this product line. The harnesses are
manufactured in the Deming, New Mexico, facility that was awarded ISO 9002
certification in 1996. The Rio Rancho plant successfully passed its ISO 9001
recertification.
Sparton Technology was honored to receive the Roadrunner Quality Award for
1995 from Quality New Mexico, a non-profit, membership organization, for the
second consecutive year. The award is given to companies that make significant
progress in building sound quality products..."through their commitment and
implementation of total quality principles."
[Graphic] Sparton Technology designed, developed and began selling this
low-cost battery monitoring system in 1996. It is used by
telecommunications customers worldwide.
6
<PAGE> 7
[Graphic] Sparton Electronics' Brooksville, Florida facility began
manufacturing this remote access server in 1996. This product is
part of our customer's worldwide distributed client server
networking solutions.
AUTOMOTIVE & INDUSTRIAL PRODUCTS
(DISCONTINUED OPERATIONS)
SPARTON ENGINEERED PRODUCTS, INC.-
KPI GROUP
In November 1995, a consolidation of two of the three Sparton automotive
companies was announced. The merger, effective January 1, 1996, combined the two
western Michigan companies, Sparton Engineered Products, Inc.-KPI Group and
Sparton Engineered Products, Inc.-Lake Odessa Group. The KPI name was retained.
The move was initiated to achieve economies of scale and to lower overall
administrative costs. The former headquarters of Lake Odessa Group in Kentwood,
Michigan was closed as a result of the merger.
Combined revenues for KPI Group for 1996 increased, compared to total
revenues for the two companies the previous year. Tight fiscal controls kept the
combined unit profitable.
Sparton's two automotive companies, KPI and Flora Groups, opened a joint
sales office during 1996. Located in Novi, Michigan, a suburb of Detroit, the
larger office is centrally located to service Sparton's U.S.-based automotive
customers.
KPI Group has completed its internal restructuring into strategic business
units. This program management system oversees all operations of KPI's
individual product lines - shifters, spare tire carriers, parking brakes, metal
airbag components, manual controls and miscellaneous automotive components.
Floor-mounted automatic shifters currently generate the largest revenues for
KPI. These are sold to Original Equipment Manufacturers (OEM's) in North America
and Europe. The shifter business remained strong in 1996 and featured the start
up of a major program at KPI's newest facility in Hartford City, Indiana.
Spare tire carriers are cabled winches installed under new light trucks, vans
and sport utility vehicles to secure and deploy the spare. This business
continues to grow for KPI. Development contracts for spare tire carriers were
awarded this year which should lead to large production contracts in model years
1998 and 1999. Tire carriers should be the fastest growing product line through
2000.
KPI's parking brake sales increased markedly. During 1996, the unit
inaugurated the delivery of foot-operated parking brakes for a domestic OEM's
largest North American automotive model line.
The consolidation with the former Lake Odessa Group put its brake/accelerator
pedal assemblies under KPI's product umbrella. The reorganization previously
mentioned brought an Asian transplant's 1997 accelerator pedal assembly to KPI.
The group will also launch a major brake/accelerator assembly program during
1997 for a domestic OEM's midsize cars.
Sales of the group's metal reaction canister products for passenger-side
front airbag systems declined during the year.
SPARTON ENGINEERED PRODUCTS, INC.-
FLORA GROUP
Sales increased at Sparton Engineered Products, Inc. - Flora Group (Flora).
Although Flora operated at a loss, the loss was reduced from the previous year.
The undercapacity, overtime and labor shortage challenges of 1995 were lessened
in 1996. Major restructuring at both plants reduced employment by nearly one
third and overtime by nearly 40%. At the same time, production increased by more
than 5%.
A new production line installed in Grayville, Illinois for vibrator horns in
December 1994 was moved to the Flora, Illinois location in the third quarter.
The relocation reduced manpower requirements and further lowered costs.
Electronic horn production increased with shipments to one automotive and
several industrial OEM manufacturers. Development of the next generation of
automotive horns is under way.
[Graphic] Sparton Electronics' DeLeon Springs and Brooksville, Florida
facilities team to provide the full system manufacture of this
electronic scale. Sparton's concurrent engineering team worked with
this customer's product development team in a redesign for
manufacturability and assembly.
7
<PAGE> 8
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SPARTON CORPORATION & SUBSIDIARIES June 30, 1996 and 1995
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995
===========================================================================================================================
ASSETS (Note 3)
<S> <C> <C>
Current assets:
Cash $ 718,363 $ 873,783
Income taxes recoverable 2,300,000 2,180,000
Accounts receivable:
Trade, less allowance of $175,000 ($85,000 in 1995) for doubtful accounts 10,033,548 11,341,587
U.S. and foreign governments 8,771,574 8,674,737
Inventories (Notes 1 and 2) 34,217,538 26,539,339
Prepaid expenses (Note 6) 2,840,189 3,405,279
Current assets of discontinued automotive operations (Note 7) 34,351,930 30,815,298
----------- -----------
Total current assets 93,233,142 83,830,023
Other assets (Note 5) 3,587,835 4,087,592
Property, plant and equipment, at cost (Note 1):
Land and land improvements 1,825,194 1,193,694
Buildings and building equipment 10,320,284 10,445,146
Machinery and equipment 17,365,275 14,585,456
----------- -----------
29,510,753 26,224,296
Less accumulated depreciation (20,108,470) (18,999,909)
----------- ------------
Net property, plant and equipment 9,402,283 7,224,387
Noncurrent assets, principally property, plant and equipment, of discontinued
automotive operations (Note 7) 13,047,403 15,512,770
------------ ------------
$119,270,663 $110,654,772
============ ============
</TABLE>
See accompanying notes
FINANCIAL TRENDS AT A GLANCE
[GRAPH INSERTED HERE]
<TABLE>
<CAPTION>
NET SALES - CONTINUING OPERATIONS INCOME (LOSS) PER COMMON SHARE -
(In Millions of Dollars) CONTINUING OPERATIONS
1992 1993 1994 1995 1996 1992 1993 1994 1995 1996
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$180.9 $147.5 $95.5 $94.5 $102.8 $1.12 $.60 .(65) (.59) (.36)
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
SPARTON CORPORATION & SUBSIDIARIES June 30, 1996 and 1995
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995
===========================================================================================================================
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
<S> <C> <C>
Notes payable (Note 3) $ 33,594,225 $ 25,580,740
Accounts payable (Note 2) 11,289,716 10,670,264
Salaries and wages 2,574,213 2,326,871
Income taxes 279,676 596,006
Accrued liabilities 3,553,664 4,119,634
Current liabilities of discontinued automotive operations (Note 7) 12,000,855 7,348,733
------------ ------------
Total current liabilities 63,292,349 50,642,248
Deferred compensation 2,180,903 1,976,593
Deferred income taxes (Note 6) 1,961,500 1,959,500
Long-term obligations, net of current maturities (Note 3) 75,000 150,000
Other liabilities of discontinued automotive operations (Note 7) 231,032 316,368
Commitments and contingencies (Note 8)
Shareowners' equity:
Preferred stock, serial, no par value; 200,000 shares authorized, none
outstanding -- --
Common stock, $1.25 par value; 8,500,000 shares authorized,
7,811,370 shares outstanding after deducting 123,342 shares
in treasury (Note 4) 9,764,213 9,764,213
Capital in excess of par value 403,067 403,067
Retained earnings 41,362,599 45,442,783
------------ ------------
Total shareowners' equity 51,529,879 55,610,063
------------ ------------
$119,270,663 $110,654,772
============ ============
</TABLE>
[GRAPH INSERTED HERE]
<TABLE>
<CAPTION>
EQUITY PER COMMON SHARE WORKING CAPITAL
(In Millions of Dollars)
1992 1993 1994 1995 1996 1992 1993 1994 1995 1996
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$7.74 $8.57 $7.95 $7.12 $6.60 $45.3 $51.2 $42.2 $33.2 $29.9
</TABLE>
9
<PAGE> 10
Consolidated Statements of Operations
<TABLE>
<CAPTION>
SPARTON CORPORATION & SUBSIDIARIES Years ended June 30, 1996, 1995 and 1994
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C>
Net sales $102,824,946 $ 94,514,784 $ 95,453,340
Costs and expenses:
Costs of goods sold 89,596,288 85,761,641 85,805,232
Selling and administrative 15,330,167 15,055,889 17,028,079
------------ ------------ ------------
104,926,455 100,817,530 102,833,311
------------ ------------ ------------
(2,101,509) (6,302,746) (7,379,971)
Other income (expense):
Interest (1,202,143) (948,800) (421,447)
Other-net (16,142) 592,698 476,526
------------ ------------ ------------
(1,218,285) (356,102) 55,079
------------ ------------ ------------
Loss from continuing operations before income tax credits (3,319,794) (6,658,848) (7,324,892)
Credits for income taxes (Notes 1 and 6) (509,000) (2,088,000) (2,220,000)
------------ ------------ ------------
Loss from continuing operations (2,810,794) (4,570,848) (5,104,892)
Income (loss) from discontinued automotive operations,
net of income taxes (credits) of $(771,000) in 1996,
$(966,000) in 1995 and $99,000 in 1994 (Note 7) (1,269,390) (1,889,873) 205,478
------------ ------------ ------------
Net loss $ (4,080,184) $ (6,460,721) $ (4,899,414)
============ ============= ============
Income (loss) per share of common stock:
Continuing operations $(.36) $(.59) $(.65)
Discontinued operations (.16) (.24) .02
----- ----- ------
$(.52) $(.83) $(.63)
===== ===== =====
</TABLE>
See accompanying notes
FINANCIAL TRENDS AT A GLANCE (continued)
[GRAPH INSERTED HERE]
<TABLE>
<CAPTION>
GOVERNMENTAL SALES COMMERCIAL SALES
(In Millions of Dollars) (In Millions of Dollars)
1992 1993 1994 1995 1996 1992 1993 1994 1995 1996
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$164.3 $110.9 $49.7 $38.3 $39.1 $16.6 $36.6 $45.8 $56.2 $63.7
</TABLE>
10
<PAGE> 11
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
SPARTON CORPORATION & SUBSIDIARIES Years ended June 30, 1996, 1995 and 1994
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
===========================================================================================================================
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Loss from continuing operations $ (2,810,794) $ (4,570,848) $ (5,104,892)
Add (deduct) non-cash items affecting continuing operations:
Depreciation 1,147,027 1,016,818 942,257
Deferred income taxes 307,000 (928,000) 102,000
Other (31,939) (362,783) (470,104)
Add (deduct) changes in operating assets and liabilities:
Income taxes recoverable (120,000) 411,000 (2,591,000)
Accounts receivable 1,939,730 (4,782,014) 2,565,688
Inventories and prepaid expenses (7,410,631) 6,250,539 5,040,905
Accounts payable, salaries and wages, accrued liabilities
and income taxes (16,483) 5,423,254 (9,476,774)
------------ ----------- ----------
Net cash provided (used) by continuing operations (6,996,090) 2,457,966 (8,991,920)
Cash flow provided (used) by discontinued operations 3,167,262 (1,084,197) (2,017,798)
------------ ----------- ----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (3,828,828) 1,373,769 (11,009,718)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,333,421) (2,083,838) (1,114,335)
Other 8,498 (31,133) 22,861
Discontinued operations, principally purchases of automotive
property, plant and equipment (855,324) (4,047,447) (5,725,311)
------------ ----------- ----------
NET CASH USED BY INVESTING ACTIVITIES (4,180,247) (6,162,418) (6,816,785)
FINANCING ACTIVITIES:
Increase in notes payable 8,013,485 4,966,190 16,734,550
Proceeds from the exercise of stock options -- -- 4,375
Principal payments on long-term borrowings (75,000) (75,000) (75,000)
Principal payments on long-term borrowings, discontinued operations (84,830) (84,173) (83,611)
------------ ----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,853,655 4,807,017 16,580,314
------------ ----------- ----------
INCREASE (DECREASE) IN CASH (155,420) 18,368 (1,246,189)
Cash at beginning of year 873,783 855,415 2,101,604
------------ ----------- ----------
CASH AT END OF YEAR $ 718,363 $ 873,783 $ 855,415
=========== =========== ===========
Supplemental disclosures of cash paid (refunded) during the year for:
Interest $ 2,237,131 $ 1,545,276 $ 672,199
=========== =========== ===========
Income taxes $(1,428,098) $(2,621,789) $ 984,844
=========== =========== ===========
</TABLE>
See accompanying notes
11
<PAGE> 12
Consolidated Statements of Shareowners' Equity
<TABLE>
<CAPTION>
SPARTON CORPORATION & SUBSIDIARIES Years ended June 30, 1996, 1995 and 1994
- ---------------------------------------------------------------------------------------------------------------------
COMMON STOCK
$1.25 PAR VALUE CAPITAL IN
------------------------ EXCESS OF RETAINED
SHARES AMOUNT PAR VALUE EARNINGS TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance July 1, 1993 7,810,370 $9,762,963 $399,942 $56,802,918 $66,965,823
Net loss (4,899,414) (4,899,414)
Exercise of stock options 1,000 1,250 3,125 4,375
---------- ---------- -------- ----------- -----------
Balance June 30, 1994 7,811,370 9,764,213 403,067 51,903,504 62,070,784
Net loss (6,460,721) (6,460,721)
---------- ---------- -------- ----------- ----------
Balance June 30, 1995 7,811,370 9,764,213 403,067 45,442,783 55,610,063
Net loss (4,080,184) (4,080,184)
---------- ---------- -------- ----------- ----------
Balance June 30, 1996 7,811,370 $9,764,213 $403,067 $41,362,599 $51,529,879
========== ========== ======== =========== ===========
</TABLE>
See accompanying notes
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareowners
Sparton Corporation
We have audited the accompanying consolidated balance sheets of Sparton
Corporation and subsidiaries as of June 30, 1996 and 1995, and the
related consolidated statements of operations, shareowners' equity, and
cash flows for each of the three years in the period ended June 30, 1996.
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Sparton Corporation and subsidiaries at June 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended June 30, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in the
year ended June 30, 1994, the Company changed its methods of accounting
for income taxes and postemployment benefits.
/s/ Ernst & Young LLP
Toledo, Ohio
August 23, 1996
12
<PAGE> 13
Notes to Consolidated Financial Statements
1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Sparton Corporation and all subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
OPERATIONS - The Company's continuing operations are principally in one line of
business, the development and manufacture of electronic parts and assemblies.
The Company's products and services include microprocessor-based systems,
transducers, printed circuit boards and assemblies, sensors and electronic and
electromechanical contract manufacturing for the telecommunications, medical,
electronics and other industries. The Company also manufactures and develops
sonobuoys, air deployed anti-submarine warfare devices, used by the U.S. Navy
and other free world countries.
USE OF ESTIMATES - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the disclosure of contingent assets and
liabilities and the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CONTRACT ACCOUNTING - Long-term contracts relate principally to government
defense and commercial contracts within the electronics line of business.
Production contracts are accounted for based on completed units and their
estimated average contract cost per unit. Development contracts are accounted
for based on percentage completion. Costs and fees billed under cost
reimbursement type contracts are recorded as sales. A provision for the entire
amount of a loss on a contract is charged to operations as soon as the loss is
determinable.
CREDIT PRACTICES - Credit terms are granted and periodically revised based on
evaluations of the customers' financial condition with collateral generally not
required. Receivables from foreign customers are generally secured by letters of
credit. Credit losses relating to customers consistently have been within
management's expectations.
INVENTORIES - Inventories are valued at the lower of cost (first-in, first-out
basis) or market and include costs related to long-term contracts as disclosed
in Note 2. Inventories, other than contract costs, are principally raw materials
and supplies. The nature of the Company's business is such that only
insignificant amounts of finished goods and non-contract related work-in-process
are maintained.
DEPRECIATION - Depreciation is provided over estimated useful lives on
accelerated methods, except for certain buildings, machinery and equipment with
aggregate costs at June 30, 1996 of approximately $6,876,000 which are being
depreciated on the straight-line method. Estimated useful lines generally range
from 10 to 40 years for buildings and improvements, 5 to 12 years for machinery
and equipment and 3 to 5 years for test equipment.
RESEARCH AND DEVELOPMENT EXPENDITURES - Expenditures for research and
development not funded by customers amounted to approximately $1,409,000 in
1996, $4,075,000 in 1995 and $2,189,000 in 1994.
EARNINGS PER SHARE - Earnings per share are computed using the weighted average
number of common shares outstanding of 7,811,370 in both 1996 and 1995 and
7,810,721 in 1994. Inclusion of outstanding stock options in the computation
would not result in any significant dilution.
CHANGES IN METHODS OF ACCOUNTING - Effective the first quarter of 1994, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities. They are measured using the enacted tax
rates and laws that will be in effect when such differences are expected to
reverse. The adoption of SFAS No. 109 has not changed the actual amount of
income tax paid by the Company. The cumulative effect of this accounting change
was to decrease the net loss for the first quarter of fiscal 1994 by $264,000
($.03 per share).
In the fourth quarter of 1994, the Company elected to early adopt Statement
of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits," retroactively as of July 1, 1993. Under this new
method of accounting, the Company accrues disability benefits when it becomes
probable that such benefits will be paid and when sufficient information exists
to make reasonable estimates of the amounts to be paid. The cumulative effect of
this accounting change was to increase the net loss for the first quarter of
1994 by $264,000 ($.03 per share), net of income tax effects of $149,000. The
effect of this accounting change on 1994 operations was not material.
These accounting changes offset each other and, therefore, had no effect on
the net loss reported for 1994.
2. LONG-TERM CONTRACTS
Inventories include costs related to long-term contracts of approximately
$30,236,000 and $17,265,000 at June 30, 1996 and 1995, respectively, reduced by
progress billings from the United States government of approximately $4,535,000
and $1,025,000, respectively.
Accounts payable includes billings in excess of costs of $2,914,000 and
$6,045,000 at June 30, 1996 and 1995, respectively.
3. DEBT AND LEASE INFORMATION
At June 30, 1996, the Company had a secured formal credit facility (the
Agreement) with a group of three banks which provides borrowings of up to
$36,000,000 through October, 1996. The Agreement, entered into in December 1995
and amended in June 1996, replaced unsecured, informal lines of credit totaling
$33,000,000. Interest is payable at least quarterly and at the Company's option,
is subject to several interest rate structures involving the prime and LIBOR
based rates. The Agreement also provides for a commitment fee of 1/2% per annum
on the unused portion of the credit facility. Borrowings under this formal
credit facility are secured by substantially all non real estate assets owned by
the Company. In addition, the Company is subject to loan covenant restrictions
related to additional indebtedness, the
13
<PAGE> 14
Notes to Consolidated Financial Statements (Continued)
acquisition and disposition of assets and the maintenance of defined minimum net
worth and working capital levels. Short-term borrowings outstanding had weighted
average interest rates of 8.31% and 7.20% at June 30, 1996 and 1995,
respectively. Carrying amounts of borrowings under the Agreement approximate
fair value due to the frequently redetermined interest rates.
Long-term obligations from continuing operations consist of a capitalized
lease obligation. Annual maturities of this long-term obligation, including the
principal portion of the capital lease, for the years subsequent to June 30,
1996 are $75,000 in both 1997 and 1998.
The Company leases various facilities and equipment under agreements
accounted for as operating leases. Rent expense amounted to approximately
$703,000, $531,000 and $1,251,000 in 1996, 1995 and 1994, respectively.
Commitments under these leases are not significant.
4. STOCK OPTIONS
The Company has an incentive stock option plan under which 400,000 common shares
were reserved for option grants to key employees at the fair market value of the
stock at the date of the grant. Under the plan, the options generally become
exercisable cumulatively, beginning one year after the date granted, in equal
annual installments. Individual grants may have a stock appreciation rights
feature whereby optionees can surrender up to one-half of their unexercised
options to the extent then exercisable in exchange for cash or common shares
equal to the difference between the then current market value and the option
prices for shares issuable upon surrender of such options. In addition, the plan
permits the Company to award restricted stock to eligible employees, providing
the recipient with limited ability to sell or otherwise transfer the restricted
shares.
<TABLE>
<CAPTION>
Information on options is as follows:
Shares
Under
Option Price Range
- ------------------------------------------------------------------------
<S> <C> <C>
Outstanding at July 1, 1993 121,800 $4.38 to $6.63
Exercised (1,000) 4.38
Cancelled (9,200) 4.38 to 6.63
------- --------------
Outstanding at June 30, 1994 111,600 4.38 to 6.63
Exercised as stock appreciation rights (7,500) 4.38
Cancelled or expired (55,100) 4.38 to 6.63
------- --------------
Outstanding at June 30, 1995 49,000 6.63
Exercised --
Cancelled --
------- --------------
Outstanding at June 30, 1996 49,000 $6.63
======= ==============
</TABLE>
At June 30, 1996 there were 341,500 shares reserved for option grants and
28,750 share options exercisable which expire in 1997 and 1999. The remaining
20,250 share options outstanding become exercisable beginning in 1997 and expire
through 1999.
5. EMPLOYEE BENEFIT PLANS
The Company has a contributory pension plan for the benefit of certain salaried
and hourly employees. Basic plan benefits are based upon the participants' years
of service. Additional benefits are available to contributory participants based
upon their years of contributory service and compensation. The Company's policy
is to fund the plan based upon legal requirements and tax regulations.
<TABLE>
<CAPTION>
The following major assumptions were used in the actuarial valuations:
<S> <C>
Long-term rate of investment return 8.0%
Long-term rate of increase in compensation levels 5.0%
Discount rate (8.0% for 1995) 7.5%
</TABLE>
Net periodic pension income of $236,000, $427,000 and $458,000 was
recognized in 1996, 1995 and 1994, respectively. The components of these credits
are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits
earned during the year $ 178,000 $ 239,000 $ 240,000
Interest on projected
benefit obligation 662,000 623,000 599,000
Actual return on
plan assets (3,149,000) 85,000 (251,000)
Net amortization
and deferral 2,073,000 (1,374,000) (1,046,000)
----------- ----------- ----------
Net periodic
pension income $ (236,000) $ (427,000) $ (458,000)
=========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes the funding status of the plan at March 31:
1996 1995
- -------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
<S> <C> <C>
Vested $ 6,831,000 $ 7,277,000
Nonvested 748,000 167,000
----------- -----------
$ 7,579,000 $ 7,444,000
=========== ===========
Projected benefit obligation $ 8,650,000 $ 8,532,000
Market value of plan assets consisting
principally of common stock
(including 319,100 shares of the
Company's common stock), corporate
bonds and U.S. Government obligations 13,544,000 11,485,000
----------- -----------
Excess of plan assets over projected
benefit obligation 4,894,000 2,953,000
Unrecognized net loss 471,000 2,537,000
Unrecognized net transition asset (1,778,000) (2,139,000)
----------- -----------
Prepaid pension cost included in
other assets $ 3,587,000 $ 3,351,000
=========== ===========
</TABLE>
14
<PAGE> 15
6. INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities. Significant
components of the Company's deferred tax assets and liabilities at June 30, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Canadian tax carryovers $ 2,340,000 $ 1,596,000
Employment and compensation 1,334,000 1,264,000
Inventories 1,786,000 2,243,000
Other 489,000 391,000
----------- -----------
Total deferred tax assets 5,949,000 5,494,000
Less valuation reserve for Canadian
tax carryovers (2,340,000) (1,596,000)
----------- -----------
3,609,000 3,898,000
Deferred tax liabilities:
Property, plant and equipment 1,551,000 1,618,000
Prepaid pension costs 1,292,000 1,207,000
----------- -----------
Total deferred tax liabilities 2,843,000 2,825,000
----------- -----------
Net deferred tax assets $ 766,000 $ 1,073,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Deferred taxes are included in the balance sheet at June 30, 1996 and 1995
as follows:
<S> <C> <C>
Prepaid expenses $2,727,500 $3,032,500
Deferred tax liabilities 1,961,500 1,959,500
---------- ----------
$ 766,000 $1,073,000
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Income (loss) before income taxes consists of the following:
1996 1995 1994
- ----------------------------------------------------------------
Continuing operations:
<S> <C> <C> <C>
United States $(1,348,317) $(5,860,569) $(5,929,714)
Canada (1,971,477) (798,279) (1,395,178)
------------ ----------- -----------
(3,319,794) (6,658,848) (7,324,892)
Discontinued operations (2,040,390) (2,855,873) 304,478
----------- ----------- -----------
$(5,360,184) $(9,514,721) $(7,020,414)
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
The related provision (credit) for income taxes consists of:
1996 1995 1994
- ------------------------------------------------------------
Current:
<S> <C> <C> <C>
United States $(881,000) $(1,222,000) $(2,496,000)
Canada -- -- (32,000)
State and local 65,000 62,000 206,000
--------- ----------- -----------
(816,000) (1,160,000) (2,322,000)
Deferred-United States 307,000 (928,000) 102,000
--------- ----------- -----------
$(509,000) $(2,088,000) $(2,220,000)
========= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
The consolidated effective tax rate differs from the statutory U.S. federal
tax rate for the following reasons and by the following percentages:
1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. federal
tax (benefit) rate (34.0%) (34.0%) (34.0%)
Significant increases
(reductions) resulting from:
Canadian tax loss
carryovers 20.2 4.1 6.0
Tax benefit of foreign
sales corporation (2.0) (2.2) (1.9)
State and local
income taxes (0.1) (1.1) (1.7)
Other 0.6 1.8 1.3
---- ----- ----
Effective tax (benefit) rate (15.3%) (31.4%) (30.3%)
==== ===== ====
</TABLE>
For Canadian income tax purposes, approximately $4,829,000 of non-capital
losses and scientific research and experimental development expenditures are
available at June 30, 1996 for carryover against income in future tax years.
These carryovers begin to expire in the year 2000. In addition, unused
investment tax credits of approximately $409,000 at June 30, 1996 are available
for carryover against tax liabilities in future tax years. These carryover
credits will begin to expire in the year 2004.
7. DISCONTINUED OPERATIONS
In August 1996, the Company formalized its plan to offer for sale its automotive
operations. Accordingly, operating results have been reclassified and reported
in discontinued operations. The Company is in the process of negotiating the
sale of these operations and expects that the sale will be completed in fiscal
1997. Management does not anticipate a loss on the sale and intends to use sale
proceeds to both reduce debt and provide working capital for its expanding ECM
business.
<TABLE>
<CAPTION>
Operating results of discontinued automotive operations are as follows:
1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $121,263,396 $115,015,984 $105,720,764
============ ============ ============
Income (loss) before
income taxes $ (2,040,390) $ (2,855,873) $ 304,478
Income taxes (credit) (771,000) (966,000) 99,000
------------ ------------ ------------
Net income (loss) $ (1,269,390) $ (1,889,873) $ 205,478
============ ============ ============
</TABLE>
Corporate office expenses and interest costs, historically allocated and
charged to the automotive operations, were reversed and allocated back to
continuing operations as these expenses were not considered to be directly
attributable to discontinued operations. Expenses allocated back to continuing
operations totaled $2,209,129 in 1996, $1,701,649 in 1995 and $1,439,749 in
1994.
15
<PAGE> 16
Notes to Consolidated Financial Statements (Continued)
Interest on borrowings under the Company's general credit facilities was
allocated to discontinued operations based on the ratio of the net assets of
discontinued automotive operations to the total net assets of the Company plus
existing debt under the Company's general credit facilities. Interest expense
allocated to discontinued automotive operations totaled $1,092,023 in 1996,
$707,047 in 1995 and $263,832 in 1994.
Assets and liabilities of discontinued automotive operations are as follows
at June 30:
1996 1995
- -----------------------------------------------------------------
Current assets:
Cash $ 21,841 $ 329,401
Accounts receivable 21,528,650 17,074,998
Inventories 12,423,376 13,069,473
Prepaid expenses 378,063 341,426
----------- ------------
$ 34,351,930 $ 30,815,298
============ ============
Noncurrent assets:
Property, plant and equipment,
at cost $ 37,308,326 $ 37,186,567
Less accumulated depreciation (24,260,923) (21,673,797)
------------ ------------
$ 13,047,403 $ 15,512,770
============ ============
Current liabilities:
Accounts payable $ 9,836,617 $ 5,500,312
Salaries and wages 751,529 816,153
Accrued liabilities 1,412,709 1,032,268
------------ ------------
$ 12,000,855 $ 7,348,733
============ ============
Long-term obligations, net of
current maturities $ 231,032 $ 316,368
============ ============
8. COMMITMENTS AND CONTINGENCIES
Various litigation is pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company and in
others presenting allegations that are non-routine. The Company and its
subsidiaries are also involved in certain compliance issues with the United
States Environmental Protection Agency and various state agencies, including
being named as a potentially responsible party at several sites. Potentially
responsible parties (PRP's) can be held jointly and severally liable for the
cleanup costs at any specific site. The Company's past experience, however, has
indicated that when it has contributed only relatively small amounts of material
or waste to a specific site relative to other PRP's, its ultimate share of any
cleanup costs has been minor. Based upon available information, the Company
believes it has contributed only small amounts to those sites in which it is
currently viewed a potentially responsible party.
One of Sparton's facilities located in New Mexico has been the subject of
ongoing investigations with the United States Environmental Protection Agency
(EPA) under the Resource Conservation and Recovery Act (RCRA). To date, this
work has involved, among other things, on-site and off-site investigations of
environmental impacts, negotiation and execution of an Administrative Order on
Consent (AOC) with EPA and the installation of some on-site groundwater recovery
wells and air stripping equipment. A remedial investigation called for in the
AOC has been completed and approved. In May 1996, Sparton submitted to EPA a
final Corrective Measures Study, based upon the results of its investigation, as
required in the AOC. In June 1996, EPA issued its final decision selecting
remedies for corrective action at the site. EPA estimated that the present value
cost of its remedies would range from between $15,000,000 and $26,400,000 based
on a 30-year time frame. In Sparton's judgment, the remedies proposed by EPA are
either unnecessary or technically impractical. Sparton is vigorously challenging
EPA's remedy selection and has filed suit in Federal District Court in Dallas
asserting that EPA's decision on remedy selection violates the AOC. Sparton is
currently negotiating with other involved regulatory agencies for alternative
remedies that Sparton believes would protect public health and the environment
with estimated costs ranging from $500,000 to $1,000,000. These negotiations
have not yet been completed. Successful resolution of these negotiations and
Sparton's litigation with EPA may be difficult, given the simultaneous
involvement of local, state and federal governmental agencies. To date, Sparton
has incurred approximately $5,950,000 since this contamination problem was first
identified in the early 1980's. $3,000,000 of this amount has been recovered
from insurance companies. A reserve was initiated in 1991 to cover the then
estimated future minimum costs. In 1996 and 1995, Sparton incurred costs of
$247,000 and $184,000 respectively, which were charged against this reserve. At
June 30, 1996, the remaining reserve to cover future minimum costs totaled
$444,000. If a remedy is ultimately imposed on Sparton, other than the one it
has proposed, the ultimate cleanup costs may significantly increase. There is no
assurance that additional costs greater than the amount reserved will not be
incurred or that significant changes in environmental laws or their
interpretation will not require that additional amounts be spent.
In the fourth quarter of 1995, the Company resolved litigation that arose
during the ownership of its oil and gas operations which were sold in 1991. The
Company had retained responsibility for resolving this litigation. Upon
resolution, income of $846,000 was recorded on the financial statements and
included in other income.
16
<PAGE> 17
9. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Notes
The following unaudited information shows selected items by quarter for the
years ended June 30, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales:
1996 $ 17,862,015 $ 23,598,769 $25,185,127 $36,179,035
1995 24,581,149 19,852,454 24,616,766 25,464,415
Gross profit:
1996 1,855,150 2,760,515 2,982,194 5,630,799
1995 3,218,746 2,629,307 3,793,543 (888,453)
Income (loss):
1996:
Continuing operations $ (1,482,828) $ (717,111) $ (485,167) $ (125,688)
Discontinued operations (1,186,564) (420,864) (331,108) 669,146
------------ ------------ ----------- -----------
$ (2,669,392) $ (1,137,975) $ (816,275) $ 543,458
============ ============ =========== ===========
1995:
Continuing operations $ (396,818) $ (926,658) $ (248,714) $(2,998,658)
Discontinued operations (854,400) (1,010,343) (212,062) 186,932
------------ ------------ ----------- -----------
$(1,251,218) $ (1,937,001) $ (460,776) $(2,811,726)
============ ============ =========== ===========
Income (loss) per common share:
1996:
Continuing operations $(.19) $(.09) $(.06) $(.02)
Discontinued operations (.15) (.06) (.04) .09
----- ----- ----- -----
$(.34) $(.15) $(.10) $ .07
===== ==== ===== =====
1995:
Continuing operations $(.06) $(.12) $(.03) $(.38)
Discontinued operations (.10) (.13) (.03) .02
----- ----- ----- -----
$(.16) $(.25) $(.06) $(.36)
===== ===== ===== =====
</TABLE>
The Company's gross margins were decreased approximately $1,066,000 in the
fourth quarter of 1996 and by approximately $5,500,000 in the fourth quarter of
1995 due to the writedown in carrying value of FM pager-related inventories. The
pager program was unique within the Company's Electronic Contract Manufacturing
(ECM) business as the Company unexpectedly became involved in the direct
marketing of a commercial/ consumer product on a worldwide basis. Normally, ECM
programs do not require the Company's direct involvement in product marketing.
In August 1996, the Company finalized a contract for the sale of up to
9,000 completed pager units. The cost of remaining pager inventories, valued at
$351,000, are expected to be recovered from pager transactions completed in 1997
under the terms of the contract. The 1995 charge resulted from a competitor's
actions in the Company's principal anticipated markets which resulted in a
writedown to the then estimated net realizable value of the inventory. Pager
marketing and development expenditures were not material to operating results in
either 1996 or 1995 and are expected to be insignificant in 1997.
10. SALES CONCENTRATION
Total direct sales on prime contracts to United States government agencies were
$27,809,000 in 1996, $25,692,000 in 1995 and $33,200,000 in 1994. Total sales to
the Foxboro Company were $7,375,000 in 1996, $11,199,000 in 1995 and $8,409,000
in 1994; total sales to Waters Corporation were $10,573,000 in 1996, $10,909,000
in 1995 and $6,102,000 in 1994; and total sales to Protel, Inc. were $7,302,000
in 1996, $6,104,000 in 1995 and $10,387,000 in 1994. No other customer accounted
for 10% or more of consolidated sales from continuing operations in 1996, 1995
or 1994.
Foreign export sales by U.S. continuing operations to unaffiliated
customers were $17,043,000 in 1996, $16,225,000 in 1995 and $18,552,000 in 1994.
Sales of ASW devices and related engineering contract services for the years
1996-1994 contributed approximately 34%, 37% and 50%, respectively, to total
sales.
17
<PAGE> 18
Selected Financial Data
SPARTON CORPORATION & SUBSIDIARIES Years Ended June 30
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
=====================================================================================================================
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $102,824,946 $ 94,514,784 $ 95,453,340 $147,457,053 $180,945,228
Costs and expenses 104,926,455 100,817,530 102,833,311 139,601,555 167,497,759
------------- ------------ ------------ ----------- -----------
(2,101,509) (6,302,746) (7,379,971) 7,855,498 13,447,469
Other income (expense):
Interest (1,202,143) (948,800) (421,447) (384,060) (708,459)
Other-net (16,142) 592,698 476,526 196,170 276,356
------------- ------------ ------------ ----------- -----------
(1,218,285) (356,102) 55,079 (187,890) (432,103)
------------- ------------ ------------ ----------- -----------
Income (loss) from continuing operations
before income taxes (3,319,794) (6,658,848) (7,324,892) 7,667,608 13,015,366
Provision (credit) for
income taxes (509,000) (2,088,000) (2,220,000) 3,022,000 4,262,000
------------- ------------ ------------ ----------- -----------
Income (loss) from continuing operations (2,810,794) (4,570,848) (5,104,892) 4,645,608 8,753,366
Income (loss) from discontinued
automotive operations, net of
income taxes (1,269,390) (1,889,873) 205,478 1,992,334 (785,075)
------------- ------------ ------------ ----------- -----------
Net income (loss) $ (4,080,184) $ (6,460,721) $ (4,899,414) $ 6,637,942 $ 7,968,291
============= ============= ============= =========== ===========
Weighted average common
shares outstanding 7,811,370 7,811,370 7,810,721 7,800,543 7,791,672
PER SHARE OF COMMON STOCK
Income (loss):
Continuing operations $ (.36) $ (.59) $ (.65) $ .60 $1.12
Discontinued operations (.16) (.24) .02 .25 (.10)
------- ------ ------ ----- ------
$ (.52) $ (.83) $ (.63) $ .85 $1.02
======= ====== ====== ===== ======
Shareowners' equity $6.60 $7.12 $7.95 $8.57 $7.74
Dividends -- -- -- -- --
OTHER FINANCIAL DATA
Total assets $119,270,663 $110,654,772 $108,721,940 $104,388,719 $ 98,571,080
Working capital 29,940,793 33,187,775 42,204,541 51,212,170 45,308,069
Working capital ratio 1.47:1 1.66:1 2.00:1 2.56:1 2.34:1
Long-term obligations $ 75,000 $ 150,000 $ 225,000 $ 300,000 $ 375,000
Shareowners' equity 51,529,879 55,610,063 62,070,784 66,965,823 60,275,943
</TABLE>
18
<PAGE> 19
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following is management's discussion and analysis of certain significant
events affecting the Company's earnings and financial condition during the
fiscal years included in the accompanying financial statements. The Company's
continuing operations have been classified as one segment, Electronics. In
August 1996, the Company formalized its plan to offer for sale its automotive
operations. Accordingly, these operations, formerly classified as the Automotive
and Industrial Products segment, have been reclassified and reported as
discontinued operations.
FISCAL 1996 COMPARED TO FISCAL 1995
Sales for the year ended June 30, 1996 totaled $102,825,000, an increase of
$8,310,000 (9%) from 1995. Revenues were below expectations, primarily in the
Electronic Contract Manufacturing (ECM) areas. Sales at Sparton Electronics were
$5,433,000 (7%) higher than last year, with primarily all of the increase
attributable to ECM revenues. Sales, however, fell below anticipated levels due
to the slow start up on a new production sonobuoy contract and the failure of
certain expected ECM revenues to materialize as planned. Sales increased 26% at
Sparton Technology, primarily due to strong foreign and proprietary product
revenues to the worldwide telecommunications industry. Revenues at the Canadian
business unit were below last year's levels as this unit continues to develop a
new commercial sales base.
The Company reported a loss from operations of $2,102,000 compared to a
loss of $6,303,000 last year. These results were below expectations. Sparton
Electronics generated an operating profit of $203,000 for the year compared to a
loss of $5,955,000 last year. Although this is a significant improvement over
the prior year, Sparton Electronics operations were unfavorably impacted by
multiple ECM program startups, delays in production startup on a defense
contract and continuing unfavorable capacity variances. Included within these
operating results were charges totaling $1,432,000 in 1996 and $5,500,000 in
1995 due to the writedown in carrying value of FM pager-related inventories. The
FM pager program was unique within the Company's ECM business as the Company
unexpectedly became involved in the direct marketing of a commercial/consumer
product. No other ECM contract has had this direct marketing requirement nor is
it anticipated that any existing or future ECM contracts will involve such a
requirement. In May 1996, the Company entered into negotiations for the sale of
up to 9,000 completed pager units, with terms of this contract finalized in
August 1996. The Company's gross margins in the fourth quarter of 1996 were
decreased $1,066,000 due to the writedown in carrying value of the pager related
inventories. After these charges, remaining pager inventories were valued at
$351,000. The cost of the remaining inventory is expected to be recovered from
pager transactions completed in 1997 under the terms of the contract. Pager
marketing and development expenditures were not material to operating results in
either 1996 or 1995 and are expected to be insignificant in 1997. Sparton
Technology reported a strong increase in operating profit for 1996 compared to
last year, primarily due to sustained sales growth and a favorable product mix.
The Canadian unit incurred a significant operating loss, greater than the
operating loss from last year, due to low sales volume.
In August 1996, the Company formalized its plan to offer for sale its
automotive operations. Accordingly, operating results have been reclassified and
reported as discontinued operations. The Company is in the process of
negotiating the sale of these operations and expects that the sale will be
completed in fiscal 1997. Management does not anticipate a loss on the sale and
intends to use sale proceeds to both reduce debt and provide working capital for
its expanding ECM business. Interest expense increased $253,000 to $1,202,000
due to higher average borrowings and higher borrowing costs. As detailed in Note
3 to these financial statements, the Company has a secured formal credit
facility (the Agreement) which provides borrowings up to $36,000,000 through
October 1996. The Agreement, entered into in December 1995 and amended in June
1996, replaced unsecured informal lines of credit totaling $33,000,000. Other
Expense was $16,000 compared to Other Income of $593,000 last year as 1995
included income from the resolution of litigation which arose during the
ownership of the oil and gas operations that were sold in 1991. After provision
for applicable income taxes, as discussed in Note 6 to the financial statements,
the Company incurred a loss from continuing operations of $2,811,000 ($.36 per
share) in 1996 compared to a loss of $4,571,000 ($.59 per share) in 1995. A loss
of $1,269,000 ($.16 per share) from discontinued automotive operations was
incurred in 1996 compared to a loss of $1,890,000 ($.24 per share) in 1995. The
Company's net loss was $4,080,000 ($.52 per share) for 1996 and $6,461,000 ($.83
per share) in 1995.
FISCAL 1995 COMPARED TO 1994
Sales for the year ended June 30, 1995 were $94,515,000, a decline of $939,000
(1%) from 1994. 1995 sales decreased $4,924,000 (6%) at Sparton Electronics
compared to 1994. Commercial sales volume continued to expand, but not at a
level sufficient to offset the long-term decline in defense-related revenues.
Early in the third quarter of 1995, Sparton Electronics was awarded a major
sonobuoy contract by the U.S. Navy with deliveries scheduled to begin late in
1996. Revenues increased at Sparton Technology, primarily due to expanding
proprietary product sales to the worldwide telecommunications industry. Sales
also increased significantly at the Canadian unit over the depressed levels of
the prior year.
19
<PAGE> 20
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The Company reported an operating loss from continuing operations of
$6,303,000 in 1995 compared to an operating loss of $7,380,000 in 1994. Sparton
Electronics incurred a loss for the current year that was larger than the loss
of the previous year. Margins were adversely impacted by increased costs
associated with lower overall sales volumes, unexpected production delays,
higher material costs and multiple program launches. The Company's gross margins
were decreased by $5,500,000 in the fourth quarter of 1995 and by $3,300,000 in
the fourth quarter of 1994 due to writedowns related to the FM pager program.
Until the fourth quarter of 1994, the Company had anticipated recovery of FM
pager-related costs, including development costs, based on binding agreements
with a customer. When it became apparent to the Company in May 1994 that the
customer was not financially able to meet the terms of the contracts, the
Company wrote off certain contract-related costs and discontinued accounting for
the pager under the contract method. Based on information then known to Company
management and into the fourth quarter of 1995, it was management's continued
assessment that the recoverability of the cost of the pager inventories was not
uncertain. Because of a competitor's actions in the Company's principal
anticipated markets, the $5,500,000 charge to operations became necessary.
Remaining pager-related inventories were valued at $1,783,000 at June 30, 1995
and were valued at the time based on then current negotiations with potential
customers.
Sparton Technology had an operating profit in 1995 compared to a loss in
1994. The Canadian unit incurred a loss in 1995, but this loss was significantly
less than that incurred in 1994. These improved operating results at Sparton
Technology and Canada were primarily due to higher sales volume, favorable
product mixes and previously instituted cost-cutting measures.
Interest expense increased $527,000 in 1995 to $949,000 due to
substantially higher average borrowings and rising interest rates. Other Income
increased $116,000 to $593,000 primarily due to the resolution of litigation
which arose during ownership of the oil and gas operations that were sold in
1991. After provision for applicable income taxes, as discussed in Note 6 to the
financial statements, the Company incurred a loss from continuing operations of
$4,571,000 ($.59 per share) in 1995 compared to a loss of $5,104,000 ($.65 per
share) in 1994. A loss of $1,890,000 ($.24 per share) from discontinued
automotive operations was reported in 1995 compared to income of $205,000 ($.02
per share) in 1994. The Company's net loss for 1995 was $6,461,000 ($.83 per
share) and $4,899,000 ($.63 per share) in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of cash and equivalents has historically been from
operations. Short-term credit facilities are used to provide added liquidity.
The Company is experiencing a change in its liquidity resources as the volume of
U.S. defense-related contract work declines. Certain contracts within the
defense operations of Sparton Electronics provide for interim progress billings
based on costs incurred. These progress billings reduce the amount of cash that
would otherwise be required during the performance of these contracts. As the
volume of U.S. defense-related contract work declines, so will the relative
importance of progress billings as a component of the Company's aggregate
liquidity resources. Unused amounts available under existing credit facilities
are the only immediate source of cash and equivalents.
Cash flows used by operating activities were $3,829,000 in 1996 compared to
cash flows provided by operating activities of $1,374,000 in 1995. Cash flows
used by operating activities were $11,010,000 in 1994. Primary uses of the 1996
net cash flows consumed by operating activities were operating losses and
increases in inventories offset by decreases in accounts receivable and cash
flows provided from discontinued operations.
Cash flows used for investing activities were $4,180,000 in 1996,
$6,162,000 in 1995 and $6,817,000 in 1994. Over this three-year period, the
Company's principal investing activity was the purchase of property, plant and
equipment for the discontinued automotive operations. There were also
significant investments made in equipment to accommodate the expanding
commercial electronics business. The Company will continue to strategically
invest in additional plant and equipment to accommodate additional electronics
business, particularly in the ECM area.
Cash flows from financing activities were $7,854,000 in 1996, $4,807,000 in
1995 and $16,580,000 in 1994. Over this three-year period, these increases were
due to additional short-term borrowings to fund the Company's operating and
investing activities. As discussed in Note 7 to the financial statements, it is
the Company's intention to use cash proceeds from the sale of the discontinued
automotive operations to both reduce debt and provide working capital for its
expanding ECM business. At June 30, 1996, the Company had $29,941,000 in working
capital.
20
<PAGE> 21
OTHER
Various litigation is pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company and in
others presenting allegations that are non-routine. The Company and its
subsidiaries are also involved in certain compliance issues with the United
States Environmental Protection Agency and various state agencies, including
being named as a potentially responsible party at several sites. Potentially
responsible parties (PRP's) can be held jointly and severally liable for the
cleanup costs at any specific site. The Company's past experience, however, has
indicated that when it has contributed only relatively small amounts of material
or waste to a specific site relative to other PRP's, its ultimate share of any
cleanup costs has been minor. Based upon available information, the Company
believes it has contributed only small amounts to those sites in which it is
currently viewed a potentially responsible party.
One of Sparton's facilities located in New Mexico has been the subject of
ongoing investigations with the United States Environmental Protection Agency
(EPA) under the Resource Conservation and Recovery Act (RCRA). To date, this
work has involved, among other things, on-site and off-site investigations of
environmental impacts, negotiation and execution of an Administrative Order on
Consent (AOC) with EPA, and the installation of some on-site groundwater
recovery wells and air stripping equipment. A remedial investigation called for
in the AOC has been completed and approved. In May 1996, Sparton submitted to
EPA a final Corrective Measures Study, based upon the results of its
investigation, as required in the AOC. In June 1996, EPA issued its final
decision selecting remedies for corrective action at the site. EPA estimated
that the present value cost of its remedies would range from between $15,000,000
and $26,400,000 based on a 30-year time frame. In Sparton's judgment, the
remedies proposed by EPA are either unnecessary or technically impractical.
Sparton is vigorously challenging EPA's remedy selection and has filed suit in
Federal District Court in Dallas asserting that EPA's decision on remedy
selection violates the AOC. Sparton is currently negotiating with other involved
regulatory agencies for alternative remedies that Sparton believes would protect
public health and the environment with estimated costs ranging from $500,000 to
$1,000,000. These negotiations have not yet been completed. Successful
resolution of these negotiations and Sparton's litigation with EPA may be
difficult, given the simultaneous involvement of local, state and federal
governmental agencies. To date, Sparton has incurred approximately $5,950,000
since this contamination problem was first identified in the early 1980's.
$3,000,000 of this amount has been recovered from insurance companies. A reserve
was initiated in 1991 to cover the then estimated future minimum costs. In 1996
and 1995, Sparton incurred costs of $247,000 and $184,000 respectively, which
were charged against this reserve. At June 30, 1996, the remaining reserve to
cover future minimum costs totaled $444,000. If a remedy is ultimately imposed
on Sparton, other than the one it has proposed, the ultimate cleanup costs may
significantly increase. There is no assurance that additional costs greater than
the amount reserved will not be incurred or that significant changes in
environmental laws or their interpretation will not require that additional
amounts be spent.
The Company's sales of sonobuoys, principally to the U.S. Navy, have
declined dramatically from $151,024,000 in 1992 to $35,589,000 in 1996. In
anticipation of this decline, the Company has been developing commercial
electronics opportunities which will utilize its existing technological and
manufacturing capabilities, largely in the U.S. and Canadian ECM markets. The
Company's experience to date indicates that significant commercial electronics
opportunities exist. Because of the many new customers and markets involved,
management continues to be challenged in its attempts to forecast near-term
sales and margins with accuracy. As with any change of this magnitude,
unanticipated problems can be reasonably expected to occur. Investors should be
aware of this uncertainty and make their own independent evaluation.
21
<PAGE> 22
Directors, Officers & General Managers
DIRECTORS
JAMES N. DEBOER, Partner
Law Firm of Varnum, Riddering,
Schmidt and Howlett, LLP
Grand Rapids, Michigan
DAVID W. HOCKENBROCHT, President
Sparton Corporation
*ROBERT J. KIRK, Financial Consultant
Toledo, Ohio
*MARSHALL V. NOECKER, Chairman
and substantial owner of the
Marshall Noecker Group Companies
Garden City, Michigan
RORY B. RIGGS, President
Biomatrix, Inc.
Richfield, New Jersey
DAVID B. SCHOON, President
Stock Portfolio Management, Inc.
Grand Rapids, Michigan
JOHN J. SMITH, Chairman
Sparton Corporation
LAWSON K. SMITH, Vice President-Secretary
Sparton Corporation
MICHAEL N. TAGLICH, Chairman & President
Taglich Brothers, D'Amadeo,
Wagner and Co., Inc.
New York, New York
BLAIR H. THOMPSON, Retired
Vice President-Treasurer
Sparton Corporation
*Audit Committee
OFFICERS AND GENERAL MANAGERS
SPARTON CORPORATION
JOHN J. SMITH
Chairman and Chief Executive Officer
DAVID W. HOCKENBROCHT
President and Chief Operating Officer
RICHARD L. LANGLEY
Vice President-Treasurer
LAWSON K. SMITH
Vice President-Secretary
R. JAN APPEL
Vice President, General Counsel and
Assistant Secretary
JOSEPH S. LERCZAK
Assistant Treasurer
ELECTRONICS
DOUGLAS E. JOHNSON
Vice President-General Manager
Sparton Electronics
RICHARD D. MICO
Vice President-General Manager
Sparton Technology, Inc.
W. DAVID WEIND
Vice President-General Manager
Sparton of Canada, Ltd.
DISCONTINUED OPERATIONS -
AUTOMOTIVE & INDUSTRIAL PRODUCTS
JERRY R. GAUSE
Vice President-General Manager
Sparton Engineered Products, Inc.-
KPI Group
WILLIAM L. MASTERSON
Acting General Manager
Sparton Engineered Products, Inc.-
Flora Group
22
<PAGE> 23
Business Units
ELECTRONICS
SPARTON ELECTRONICS
Administrative Office
Johnson Lake Rd.
DeLeon Springs, FL 32130
MANUFACTURING AND
ENGINEERING FACILITIES:
Jackson, MI
DeLeon Springs, FL
Brooksville, FL
SPARTON OF CANADA, LTD.
99 Ash St.
London, Ontario N5Z 4V3
SPARTON TECHNOLOGY, INC.
Administrative Office
4901 Rockaway Blvd., S.E.
Rio Rancho, NM 87124
MANUFACTURING FACILITIES:
Deming, NM
Rio Rancho, NM
CORPORATE OFFICE
SPARTON CORPORATION
2400 E. Ganson St.
Jackson, MI 49202
Phones (517) 787-8600 o (800) 248-9579
Fax (517) 787-1822
DISCONTINUED OPERATIONS -
AUTOMOTIVE & INDUSTRIAL PRODUCTS
SPARTON ENGINEERED PRODUCTS, INC.- FLORA GROUP
Administrative Office and Technical Center
Old U.S. Highway 50 W
Flora, IL 62839
MANUFACTURING FACILITIES:
Flora, IL
Grayville, IL
SALES-ENGINEERING OFFICE
41561 11 Mile Road
Novi, MI 48375
SPARTON ENGINEERED PRODUCTS, INC.- KPI GROUP
Administrative and Sales Offices
and Technical Center
427 N. Griffin St.
Grand Haven, MI 49417
MANUFACTURING FACILITIES:
Brownstown, IN
Hartford City, IN
White Cloud, MI
Spring Lake, MI
Lake Odessa, MI
Gladwin, MI
SALES-ENGINEERING OFFICE
41561 11 Mile Road
Novi, MI 48375
23
<PAGE> 24
COMMON STOCK LISTING
New York Stock Exchange
TRANSFER AGENT/REGISTRAR
KEYCORP SHAREHOLDER SERVICES, INC.
4900 Tiedeman Road
P.O. Box 6477
Cleveland, OH 44101-1477
(800) 542-7792
NEW YORK TRANSFER FACILITY
5 Hanover Square
10th Floor
New York, NY 10004
FORM 10-K AVAILABLE
A copy of Sparton Corporation's annual report on Form 10-K for the year ended
June 30, 1996, filed with the Securities and Exchange Commission, will be
furnished without charge to any shareowner upon written request to Richard L.
Langley, Vice President-Treasurer, Sparton Corporation, 2400 E. Ganson
St., Jackson, MI 49202
ATTENDANCE AT ANNUAL MEETING
Our annual meeting plans have not been completed. Shareowners will be notified
of its date and time as soon as these plans are finalized.
It is Sparton Corporation's policy to afford equal employment opportunity to all
employees and qualified applicants for employment without regard to race,
religion, creed, color, sex, national origin, age, handicap or veteran status.
24
<PAGE> 1
EXHIBIT 22
SPARTON CORPORATION
The Registrant, Sparton Corporation, an Ohio Corporation, had the following
subsidiaries at June 30, 1996:
Incorporated
Name In
- ----------------------------------------- ------------
Domestic:
Continuing Operations
Sparton Electronics Florida, Inc. Florida
Sparton Technology, Inc. New Mexico
Discontinued Operations
Sparton Engineered Products, Inc.-KPI Group Michigan
Sparton Engineered Products, Inc.-KPI Group Indiana
Sparton Engineered Products, Inc.-Lake
Odessa Group Michigan
Sparton Engineered Products, Inc.-Flora Group Illinois
Foreign (both continuing operations):
Sparton of Canada, Limited Ontario, Canada
Sparton Electronics International Sales, Ltd. Barbados
<PAGE> 1
EXHIBIT 23
SPARTON CORPORATION
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Sparton Corporation of our report dated August 23, 1996, included in the 1996
Annual Report to Shareowners of Sparton Corporation and subsidiaries.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-43703) pertaining to the Sparton Corporation 1989 Stock Option
Plan of our report dated August 23, 1996, with respect to the consolidated
financial statements of Sparton Corporation and subsidiaries incorporated by
reference in this Annual Report (Form 10-K) for the year ended June 30, 1996.
/s/ ERNST & YOUNG LLP
Toledo, Ohio
September 27, 1996
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