SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN
PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the registrant [ X ]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[X] Preliminary proxy statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
SPARTON CORPORATION
(Name of registrant as specified in its charter)
SPARTON CORPORATION
(Name of person(s) filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(l)(ii), 14a-6(i)(l), or 14a-6(i)(2)
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3)
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11
(1) Title of each class of securities to which transaction applies:
__________________________
(2) Aggregate number of securities to which transaction applies:
__________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:______________________
(4) Proposed maximum aggregate value of transaction:_______________
(5) Total fee paid:____________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:_________________________
(2) Form, schedule, or registration statement no.:_____________________
(3) Filing party:_____________________________
(4) Date filed:_______________________________
<PAGE>
Preliminary Proxy Statement: Dated October 3, 1996
SPARTON CORPORATION
2400 East Ganson Street
Jackson, Michigan 49202
PROXY STATEMENT
For the Annual Meeting of Shareholders to be Held on November , 1996
SOLICITATION
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of SPARTON CORPORATION, an Ohio corporation (the
"Company"), of proxies for use at the 1996 Annual Meeting of Shareholders of
the Company (the "Annual Meeting") to be held at the offices of the Company,
2400 East Ganson Street, Jackson, Michigan 49202, on November [ ], 1996 at
10 a.m., local time, and at any and all adjournments thereof. The cost of
solicitation will be paid by the Company. The Company has engaged Georgeson
and Company, specialists in proxy solicitation, to solicit proxies on its
behalf from brokers, bank nominees, and other institutional holders of its
Common Stock at an anticipated cost of $5,000, plus certain out-of-pocket
expenses. In addition, officers and employees of the Company and its
subsidiaries may solicit proxies personally, by telephone, facsimile or other
means, without additional compensation. This Proxy Statement and the form of
Proxy are being mailed to shareholders on or about October [ ], 1996.
At the Annual Meeting, the Company's shareholders will consider and vote
upon a proposal to approve the sale (the "Sale") by the Company of all shares
of two wholly owned subsidiaries; Sparton Engineered Products, Inc., KPI
Group, a Michigan corporation, and Sparton Engineered Products, Inc., KPI
Group, an Indiana corporation, and the sale of substantially all of the assets
of a third wholly owned subsidiary, Sparton Engineered Products, Inc., Lake
Odessa Group, a Michigan corporation (collectively the three subsidiaries are
referred to herein as the "Subsidiaries"), to Dura Automotive Systems, Inc.,
of 4508 IDS Center, Minneapolis, Minnesota 55402 ("Dura"), for consideration
equal to Eighty Million Five Hundred Thousand Dollars ($80,500,000). The
Company's Board of Directors has unanimously approved and recommends that the
Company's shareholders approve the Sale.
The terms and conditions of the Sale are set forth in the Stock and
Asset Purchase Agreement dated October 1, 1996, among the Company, Sparton
Engineered Products, Inc., Lake Odessa Group, and Dura (the "Purchase
Agreement"), a copy of which is attached hereto as Appendix A. This Proxy
Statement includes an explanation and summary of those terms and conditions,
which are qualified by and subject to, the information set forth in the
Purchase Agreement. The Sale will be a disposition of a substantial portion
of the Company's business and is important to the Company's shareholders.
You are therefore urged to read this Proxy Statement in its entirety and give
the Sale your careful consideration.
At the meeting, the Company's shareholders will also act upon the
election of three (3) directors to serve until the 1999 annual meeting or
until their successors are elected and qualified, as described in more detail
below.
<PAGE>
OUTSTANDING STOCK AND VOTING RIGHTS
In accordance with the Bylaws of the Company, the Board of Directors has
fixed the close of business on September [ ],1996, as the record date for
determination of shareholders entitled to notice of, and to vote at, the
Annual Meeting. Only shareholders of record on that date, will be entitled
to vote.
As of September [ ], 1996, the record date for the Annual Meeting, the
Company had outstanding 7,811,370 shares of Common Stock, each entitled to one
vote at the Annual Meeting. Votes cast at the meeting and submitted by proxy
are counted by the inspectors of the meeting, who are appointed by the
Company. As of September 1, 1996, 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>
Amount and
Nature
Name and Address of Beneficial Percent
of Beneficial Owner Ownership of Class
<S> <C> <C>
John J. 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 Fl.
Santa Monica, California 90401
- - - ---------------------------
(1) Mr. John J. Smith and Mr. Lawson K. Smith are brothers.
(2) Includes 1,920,000 shares owned by Mr. John J. Smith jointly with his
wife. An additional 180,000 shares are held by 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 power in his capacity as chief executive
officer of the Company. Mr. Smith has no pecuniary interest in these
shares and disclaims any beneficial interest.
(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 respective 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.
</TABLE>
<PAGE>
As of September 1, 1996, the following table shows the shares of the
Company's Common Stock beneficially owned by the Named Executives identified
in the Compensation Table shown later in this Proxy Statement and all officers
and directors of the Company as a group (16 persons):
<TABLE>
Name Amount and Nature of Percent of
Beneficial Ownership Class(6)
<S> <C> <C>
John J. Smith 2,100,000(1) 26.88%
David W. 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 and Directors 3,098,727(5) 39.48
- - - -------------------------------
(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 Proxy Statement.
</TABLE>
Any Proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by
(i) filing a written notice of revocation with the Chairman or Secretary of
the Company, at or before the Annual Meeting, (ii) duly executing a subsequent
proxy relating to the same shares and delivering it to the Chairman or
Secretary of the Company at or before the Annual Meeting or (iii) attending
the Annual Meeting and voting in person (although attendance at the Annual
Meeting will not in and of itself constitute a revocation of a proxy). Unless
revoked, the shares represented by the enclosed Proxy will be voted at the
meeting in accordance with any specification made thereon, if the Proxy is
returned properly executed and delivered in time for voting. Unless otherwise
specified, the Proxy will be voted "FOR" approval of the Sale and "FOR" the
election of the three (3) director nominees.
Management does not intend to present, and does not know of anyone who
intends to present any matters at the meeting to be acted upon by the
shareholders not referred to in the Notice and this Proxy Statement. If any
other matters should properly come before the meeting, it is the intention of
the persons named in the Proxy to vote in accordance with their judgment on
such matters.
The shareholders of the Company have cumulative voting rights in the
election of directors at the Annual Meeting if written notice is given by any
shareholder to the Chairman, President, a Vice President or the Secretary of
the Company not less than 48 hours before the time fixed for holding the
Annual Meeting that the shareholder desires that the voting at such election
shall be cumulative, provided that an announcement of the giving of such
notice is made upon the convening of the Annual Meeting by the Chairman or
Secretary or by or on behalf of the shareholder giving such notice. In
addition, each shareholder has the right to vote cumulatively his or her
own shares in the election of directors by satisfying the above-described
notice requirement, irrespective of whether an announcement of the notice by
a shareholder is given upon the convening of the Annual Meeting.
<PAGE>
If voting at the Annual Meeting is cumulative, each shareholder will have
the right to cast that number of votes which equals the number of shares owned
by the shareholder multiplied by the number of directors to be elected, and
the shareholder may cast all such votes for one candidate or distribute such
votes among any number of candidates as the shareholder elects. The actual
number of shares required for election of a candidate will vary depending upon
the total number of shares voted. However, shareholders owning 1,952,843
shares, or approximately 25% of the Company's outstanding shares, could elect
at least one director to the class to be elected at the 1996 annual meeting
for a term expiring in 1999.
ELECTION OF DIRECTORS
The following directors, previously elected by the Company's shareholders
and whose terms of office expire at the Annual Meeting, Messrs. Robert J.
Kirk, Marshall V. Noecker and David B. Schoon, are nominees for election to a
three (3) year term expiring in 1999. The following portion of this Proxy
Statement contains additional information about these nominees.
A plurality of the votes cast at the meeting is required to elect the
nominees as directors of the Company. As such, the three (3) individuals who
receive the greatest number of votes cast by the holders of Common Stock will
be elected as directors. Shares not voted at the Annual Meeting, whether by
abstention, broker nonvote, or otherwise, will not be treated as votes cast
at the meeting.
It is believed that all three (3) nominees are, and will be at the time
of the Annual Meeting, available for election; and, if elected, will serve.
However, in the event one or more of them is or should become unavailable, or
should decline to serve, it is intended that the proxies will be voted for
such substitute nominee or nominees as the persons named in the proxy may in
their discretion select.
In the following table, the column "Amount and Nature of Beneficial
Ownership" relates to common shares of the Company beneficially owned by the
directors and nominees as of September 1, 1996, and is based upon information
furnished by them.
<TABLE>
Amount
and
Has Nature
Served of
as a Beneficial Percent
Principal Director Owner of
Name Age Occupation Since ship(1) Class(1)
Nominees for Election as Directors for Terms Expiring in 1999
<S> <C> <C> <C> <C> <C>
Robert J. Kirk 83 Financial Consultant, 1978 6,000 .08%
Toledo, Ohio
Marshall V. Noecker 81 President and 1963 30,000 .38
substantial owner of
the Marshall Noecker
Group Companies
(aluminum fabrication
and manufacturing
companies and
investment companies),
Garden City, Michigan.
<PAGE>
David B. Schoon 45 President, Stock 1994 -0- -0-%
Portfolio Management,
Inc., Grand Rapids,
Michigan, a financial
consulting services
company, since 1992.
Senior Stock Analyst
for other financial
consulting services
companies, 1986-1992.
Directors Whose Terms Expire in 1998
John J. Smith(2) 84 Chairman of the Board 1950 2,100,000(3) 26.88
and Chief Executive
Officer of Sparton
Corporation,
Jackson, Michigan.
Blair H. Thompson 71 Formerly Vice President 1972 57,024 .73
and Treasurer of
Sparton Corporation,
Jackson, Michigan
(Retired in 1990).
Directors Whose Terms Expire in 1997
James N. DeBoer 71 Partner, law firm of 1971 4,370 .06
Varnum, Riddering,
Schmidt & Howlett, LLP,
Grand Rapids, Michigan.
David W. 61 President and Chief 1978 77,535(4) .99
Hockenbrocht Operating Officer
of Sparton Corporation,
Jackson, Michigan.
Lawson K. Smith(2) 81 Vice President and 1971 777,256(5) 9.95
Secretary of
Sparton Corporation,
President of
Sparton Engineered
Products, Inc. -
Lake Odessa Group, a
wholly owned
subsidiary of the
Company (manufacturer
of automotive parts and
accessories), Lake
Odessa, Michigan.
<PAGE>
Rory B. Riggs 43 President of Biomatrix, 1994 -0- -0-
Inc., Richfield, New
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 company, from
1991 to 1994.
- - - ---------------------------
(1) Unless otherwise indicated by footnote, each director or nominee has
sole voting power and owns the shares directly, or shares voting and
investment power with his spouse or other family members under joint
ownership.
(2) John J. Smith and Lawson K. Smith are "associates" of each other as
defined in Rule 14a-1 of Regulation 14A of the Securities and Exchange
Commission.
(3) Reference is made to note (2) on page ___________.
(4) Reference is made to note (2) on page ___________.
(5) Reference is made to note (3) on page ___________.
</TABLE>
Mr. John J. Smith and Mr. Lawson K. Smith are brothers. There are no
other family relationships between the nominees and the directors. Except as
noted, the principal occupations referred to have been held by the foregoing
nominees and directors for at least five years.
Mr. Robert J. Kirk is a director of Seaway Foodtown, Inc. Mr. Rory B.
Riggs is a director of Biomatrix, Inc. Mr. David B. Schoon is a director of
California Micro Devices Corporation.
The Board of Directors, which had five (5) meetings during the past year,
has standing audit and compensation committees. There is no nominating
committee. The responsibilities of the audit committee, which met two (2)
times last year and consists of Robert J. Kirk and Marshall V. Noecker,
include reviewing the general scope of the audit of the Company's financial
statements and the results of the audit with the auditors and management. The
compensation committee, which met once last year and consists of John J.
Smith, Robert J. Kirk, Marshall V. Noecker, James N. DeBoer and Blair H.
Thompson, establishes the remuneration, including stock options, to be paid
or offered to the Company's executive officers. All Directors attended at
least 75% of the meetings of the Board and committees on which they serve.
Directors who are not employees of the Company are compensated at the
rate of $350 per month and $500 for each directors' meeting attended. Members
of the audit committee receive $500 for each audit committee meeting attended.
Directors who are employees of the Company receive $350 for each directors'
meeting attended.
<PAGE>
PROPOSAL TO APPROVE
THE SALE OF THE SUBSIDIARIES
Disposition of the Company's Automotive Business; Reasons for the Sale
The Company's automotive operations are comprised of two management
units; Sparton Engineered Products--KPI Group ("KPI") and Sparton Engineered
Products, Inc.--Flora Group ("Flora"). The principal components of what
is now the KPI unit were acquired in 1986. The KPI unit is comprised of the
three operating Subsidiaries defined above, described in more detail below.
Flora consists of one operating subsidiary, incorporated in Illinois in 1959,
to continue the design and manufacture of automotive and other horn products
which have been produced by the Company for many years. For the year ended
June 30, 1996, revenues from the Company's automotive operations were
approximately $121.3 million or 54% of the Company's total revenues for the
year. The Company reported after-tax losses attributable to its automotive
operations of $1,269,000 for the year ended June 30, 1996.
KPI manufactures a number of products, principally for the North American
original equipment manufacturer ("OEM") automotive markets. These include
automotive transmission shifters, undercarriage spare tire carriers, parking
brakes, lever assemblies, metal air bag components, and brake/accelerator
pedal assemblies. Major customers include the Ford Motor Company, General
Motors Corporation, Chrysler Corp., and TRW. Sales attributable to the
operations of KPI for the year ended June 30, 1996, were $94,700,000, 42% of
the Company's total sales. Total assets at June 30, 1996, of the KPI unit
accounted for approximately 29% of the Company's total assets. Flora's
principal product is OEM horns, and its major customers are Chrysler Corp. and
Toyota Motor Corp. Sales attributable to Flora for the year ended June 30,
1996, were $26,600,000 or 12% of the Company's total sales, and Flora's total
assets accounted for approximately 11% of the Company's total assets at
June 30, 1996.
The decision of the Board of Directors to offer KPI and Flora for sale
followed months of deliberations in which the Board reviewed strategic
alternatives available to the Company. The Board concluded that the
disposition of KPI and Flora was in the best interests of its shareholders,
and in December of 1995 authorized Slusser Associates, Inc. ("Slusser") to
prepare confidential offering materials and solicit bids for the purchase of
KPI and Flora. Separate informational materials were prepared and distributed
for KPI and Flora. The discussions concerning KPI were carried out by Slusser
with over 45 parties, including automotive suppliers, financial buyers, and
foreign entities during the period beginning in April 1996 and ending in
July 1996. Discussions concerning Flora were held with over 65 parties
starting in February 1996. In response to these discussion, the Company
received four preliminary offers for the purchase of KPI, two of which
included the purchase of Flora. From these offers, the Board of Directors
selected the three parties who had submitted the highest proposed purchase
prices for KPI (two of which included an offer for Flora). In late July and
early August of 1996, management of the Company met with the three interested
parties to discuss the disposition of KPI and Flora and allowed each of them
to perform additional due diligence. Management was directed to pursue the
transaction that would achieve the highest value for the Company's
shareholders.
Following discussions with the interested parties, on August 23, 1996,
the Board instructed management and Slusser to negotiate the highest sale
price for KPI and Flora, but in an amount not less than $70 million.
Thereafter, discussions with two of the interested parties continued until
August 29, 1996, at the time when Dura submitted a formal offer to acquire
KPI (but not Flora) for $80,500,000. Dura was selected by the Company
after submitting the highest offer for KPI. In response to Dura's offer, the
Company granted Dura the exclusive right, until September 27, 1996, to
complete its due diligence. Negotiations for the sale of KPI to Dura were
completed on October 2, 1996, when the Purchase Agreement was signed.
Management and Slusser are continuing to have discussions with interested
parties concerning the possible sale of Flora, although no assurance can be
given that such sale will occur.
The disposition of the Company's automotive operations reflects the
Board's determination that the continuation of these operations is not in the
best interest of the Company's shareholders. In making this determination,
the Board analyzed the long term impact on the Company of the globalization
of the supply base demanded by substantially all worldwide automotive OEM
manufacturers. The nature of this customer demand has brought with it added
competitive pressures on already low profit margins, as well as creating the
necessity for substantial new capital investments to provide the required
global base of supply. In light of existing margins and perceived new
business opportunities, the <PAGE> Board has determined that such additional
capital investments are not justified. The Board has determined that there
are more attractive opportunities in the Company's electronic contract
manufacturing business and has elected to direct future capital investments
to this part of the Company's business. As a result, the Board elected to
dispose of the Company's automotive operations and use the capital from the
disposition of those assets to enhance the expansion of its electronic
contract manufacturing business.
Description of the Sale; Terms
The Company has agreed, subject to shareholder approval, to sell all of
its shares of two of its operating subsidiaries to Dura Automotive Systems,
Inc., a Delaware corporation, unaffiliated with the Company ("Dura"). The
two subsidiaries are Sparton Engineered Products, Inc., KPI Group, a Michigan
corporation and Sparton Engineered Products, Inc., KPI Group, an Indiana
corporation. The Company has also agreed, subject to shareholder approval, to
sell substantially all of the assets of a third subsidiary, Sparton Engineered
Products, Inc., Lake Odessa Group, a Michigan corporation, to Dura.
Collectively, the Subsidiaries comprise approximately 80% of the automotive
operations of the Company. The first two subsidiaries listed above are
sometimes referred to collectively in this Proxy Statement as "SEPI-KPI" and
the third subsidiary is sometimes referred to as "LAKO." The Sale does not
include the stock or assets of Flora, which will be held by the Company as a
discontinued operation until its disposition. The Company has no binding
commitments or other agreements relating to the sale of Flora. Subject to
adjustment for cash advances between the Company and the Subsidiaries between
July 1, 1996 and the closing date, the sale price for the stock and assets of
all three Subsidiaries is $80,500,000, all of which is payable in cash at the
closing of the transaction.
Dura is a leading designer and manufacturer of mechanical assemblies and
integrated systems for the global automotive industry. With revenues of
approximately $127 million for the six month period ended June 30, 1996, and
revenues of approximately $240 million for the 12 month period ended
December 31, 1995, Dura is a major supplier of both parking brake mechanisms
and parking brake cables to original equipment manufacturers in North America.
The Purchase Agreement among the Company, LAKO, and Dura is set forth in
attached Appendix A, and the description of the terms thereof contained herein
is qualified in its entirety by reference to Appendix A. The terms of the
Purchase Agreement were negotiated by representatives of the Company and of
Dura on an arm's length basis. The Board of Directors did not obtain the
opinion of an investment banking firm as to the fairness of the Sale, and no
appraisal or other valuation of the shares or assets of the Subsidiaries was,
or will be, obtained in determining the sale price.
Certain Covenants and Conditions to Consummation of the Sale
The Purchase Agreement obligates the Company, among other things, to
cause each of the Subsidiaries to conduct their respective businesses and
maintain their respective properties in the ordinary course of business
through the date of closing, and to cooperate with Dura in connection with
its due diligence review of the Company and in obtaining all required
governmental and third party consents and approvals necessary to consummate
the Sale. In addition, the Company is required to discontinue the Lake
Odessa plant operations of LAKO. In connection with the discontinuance of
those operations, the Company is obligated to resource all jobs, for which
it has active purchase orders, to other plants of the Subsidiaries and to
terminate purchase orders for customer jobs which have not been resourced.
In connection with the resourcing, the Company is required to transfer and
deliver to those plants all inventories, machinery, equipment, and all other
assets (excluding real estate) which are required to produce the customer jobs
and transfer all remaining machinery equipment to the Company. The real
estate of the Lake Odessa plant will remain in LAKO and will not be conveyed
to Dura.
In connection with the Sale, Dura has agreed to lease two parcels of real
estate previously leased by the Company from John J. Smith and his wife (the
"Grand Haven Facility") and John J. Smith and his wife, and Lawson Smith (the
"White Cloud Facility"). See "Certain Relationships and Transactions" below
for a description of the terms of the current leases with the Company. The
consummation of the sale is conditioned upon the execution of lease agreements
for the Grand Haven and White Cloud Facilities (collectively the "Real
Estate") between the owners of these Facilities and Dura. See "Management
Interest in the Sale."
<PAGE>
The Company has agreed, as part of the Sale, that it will not, for a
period of two consecutive years after closing (1) directly or indirectly
engage in any business which is the same or substantially similar to the
business now conducted by any of the subsidiaries (excluding an investment
of up to 5 percent of any outstanding voting securities of a public entity),
(2) induce or attempt to induce any employee of any of the Subsidiaries to
accept employment by the Company or one of its affiliated corporations, or
(3) induce or attempt to induce any customer or supplier of any of the
Subsidiaries to cease doing business with any of them, or to otherwise
interfere with the business relationship between any of the Subsidiaries,
its customers and suppliers.
The obligations of both parties to proceed with the Sale are subject,
among other things, to (1) the concurrent lease of the Real Estate to Dura,
(2) the absence of any litigation or other proceedings which seek to prevent
or delay the Sale, (3) the receipt of customary closing certificates and
legal opinions, and (4) Dura's receipt of financing pursuant to the Commitment
Letter. The obligations of Dura under the Purchase Agreement are subject,
among other things, to the Company's compliance with its obligations and
covenants under the Purchase Agreement (including but not limited to those
described above), satisfaction of all intercompany indebtedness between the
Company and the Subsidiaries at or prior to the closing date, approval of the
Sale by the Company's shareholders, and to the Company's representations
and warranties being true and correct as of the closing. The obligations of
the Company under the Purchase Agreement are subject to the approval of the
Sale by the shareholders of the Company, compliance by Dura with its
obligations under the Purchase Agreement and to Dura's representations and
warranties being true and correct as of the closing.
The sale of the stock of the Subsidiaries is subject to the requirements
of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "Hart-Scott-
Rodino Act") and the rules promulgated thereunder by the Federal Trade
Commission ("FTC"). This Act and its related regulations require the Company
and Dura to provide certain information to the Antitrust Division of the
Department of Justice and the FTC as a condition to consummation of the
transaction. The Company and Dura have filed the required reports under the
Hart-Scott-Rodino Act with the Antitrust Division and the FTC with respect to
the proposed Sale and the applicable waiting period is expected to expire on
____________________, 1996. Notwithstanding the expiration of the applicable
waiting period, at any time before or after the date of closing, the Antitrust
Division, the FTC or any third party can seek to delay, enjoin, or rescind
the Sale on antitrust or any related grounds. The Company and Dura believe
that the Sale will be in compliance with the antitrust laws; however, there
can be no assurance that such a challenge, if made, would not be successful.
It is a condition to consummation of the Sale that no action be pending or
threatened whereby an unfavorable result would prevent consummation of the
transaction or might adversely effect the right of Dura to own and operate or
control the Subsidiaries.
Management Interest in the Sale
As a condition to the Sale, (i) LAKO is required to purchase the
Subsidiaries' Grand Haven Facility from John J. Smith (the Company's CEO and
a director) and his wife, and the White Cloud Facility from Mr. and Mrs. John
Smith and Lawson Smith, an officer and director of the Company, and (ii) LAKO
is required to lease both of these facilities to Dura. The terms and
conditions of the sale of these facilities and the leases to Dura (the
"Leases") were arrived at upon arm's length negotiations among the Company,
John Smith, and Dura. The purchase price of the White Cloud Facility is
Three Hundred Fifty-two Thousand Dollars ($352,000), and the purchase price
of the Grand Haven Facility is Three Hundred Twenty-three Thousand Two
Hundred Dollars ($323,200). The Leases continue for five (5) year terms,
with an aggregate annual rental equal to One Hundred Thirty-five Thousand
Dollars ($135,000). The Leases also grant Dura the option to purchase both
(but not less than both) the Grand Haven Facility and White Cloud Facility for
a combined option price equal to Fifty Thousand Dollars ($50,000) at the end
of the original term of the Leases. The aggregate annual rental under the
lease agreements currently in place between the Smiths and KPI for the White
Cloud Facility and Grand Haven Facility equals _________________________
Dollars ($___________), with options to purchase during the lease term for
Two Hundred Fifty-two Thousand Six Hundred Dollars ($252,600) and Two Hundred
Twenty-three Thousand Two Hundred Dollars ($223,200), respectively, for the
White Cloud Facility and Grand Haven Facility. The existing lease agreements
are discussed in more detail below in the section entitled "Certain
Relationships and Transactions."
Closing; Termination and Waiver
The closing of the Sale is scheduled to take place within five business
days following the date on which all conditions to the Sale have been
satisfied or waived, including shareholder approval of the Sale, but in no
event later than December 31, 1996. Either party may waive any conditions to
its obligations under the Purchase Agreement. Although the Company does not
presently anticipate waiving any such condition, it will not seek further
shareholder approval if, in the judgment of the Company, any such waiver is
in the best interest of the Company and its shareholders and such waiver does
not constitute a material adverse change of the terms or conditions of the
Sale.
Indemnification
Under the Purchase Agreement, the Company and Dura each agreed to
indemnify the other against any losses, liabilities, deficiencies, damages or
expenses (collectively referred to as "Losses") arising out of the breach of
any representation, warranty, covenant or agreement contained in the Purchase
Agreement by the indemnifying party. In addition, Dura has agreed to
indemnify the Company against any losses, liabilities, damages or expenses
incurred by the Company arising out of its guarantee of certain obligations
of the Subsidiaries.
In general, the obligations to indemnify the other party will not arise
unless the aggregate amount of all such Losses exceeds $1 million (the
"Threshold Amount"). If the Threshold Amount is reached, indemnification is
limited to the amount by which the Losses exceed the Threshold Amount. The
Company's maximum indemnification obligation is limited to $15 million, except
that this cap on liability is increased to the amount of the purchase price
for the stock and assets of the Subsidiaries in the event the Losses arise
out of certain specified representations. In general, the Company's
obligation to indemnify Dura is conditioned upon its receipt of a notice of
claim for indemnification within 12 months after the date of closing. This
period is extended to (1) 24 months in the event of a breach of the Company's
representations as to undisclosed liabilities, litigation, and employee
benefit matters, (2) 42 months in the event of a breach of its representations
as to environmental matters, and (3) the applicable statute of limitations
period for a breach of its representations as to taxes and certain other
specified representations. There is no time limitation on any claims that
arise out of any breach of the Company's representation as to the
capitalization of the Subsidiaries. Dura's indemnification obligation is
also subject to achievement of the Threshold Amount.
Conduct of the Company's Business after the Sale
Other than the repayment of all of the Company's outstanding bank debt,
the Board of Directors of the Company has not determined the application of
the proceeds from the Sale and does not intend to do so until the Sale has
been consummated. Uses of the proceeds from the Sale, if consummated, that
may be considered by the Board include the development, acquisition and/or
investment in new products or businesses, distributions to the Company's
shareholders, repurchases of the Company's securities and general business
purposes. Such activities could include the acquisition of an entire company
or companies, or divisions thereof, either through a merger or a purchase of
assets, as well as investment in the securities of a company or companies, or
alternatively a combination with another business in which the Company would
not be the surviving corporation. The Company has not entered into any
negotiations concerning such acquisitions or investments. There can be no
assurance that the Company will be successful in such efforts, and
redeployment of the Company's assets into new businesses accordingly entails
an element of risk to the shareholders. While the Company does not presently
intend to spend in excess of the net cash proceeds available to it for such
acquisitions or investments, it is possible that such a transaction in the
future could require additional funds. Sources of such capital could include
bank borrowings of the sale of debt or equity securities; however, there can
be no assurance that the Company would be successful in obtaining such
additional funds, if required.
Additional Company Information
Appendix B to this Proxy Statement includes certain financial information
relevant to the proposed Sale. Included in such information is the Company's
historical and pro forma selected financial data, historical and pro forma
per share data and pro forma financial statements of the Company giving
effect to the proposed sale as if it were consummated June 30, 1996.
<PAGE>
This Proxy Statement is accompanied by the Company's Annual Report to
Shareholders for the fiscal year ended June 30, 1996. The Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996, is incorporated
by reference in this Proxy Statement. Also incorporated by reference in this
Proxy Statement is the Company's Annual Report to Shareholders, which
accompanies this Proxy Statement, excluding the information set forth under
the captions _____________________ and ______________________ appearing on
pages ____, which are not deemed 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 this Proxy Statement or any document so
filed. All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934, subsequent to the date
of this Proxy Statement and prior to the date on which the annual meeting of
shareholders is held, shall be deemed to be incorporated by reference in this
Proxy Statement and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Proxy Statement to the extent that statement contained herein or any other
subsequently filed document which is also incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as modified or superseded, to
constitute any part of this Proxy Statement.
The Company will furnish without charge to each person whose proxy is
being solicited, upon the written request of such person, a copy of the
Company's Annual Report on Form 10-K for the fiscal year ended June 1996, as
filed with the Securities and Exchange Commission, including the financial
statements and schedules thereto. Requests for copies of such report shall
be directed to Richard Langley, Vice President-Treasurer, Sparton Corporation,
2400 East Ganson Street, Jackson, Michigan 49202.
On October 2, 1996, the day preceding the public announcement of the
proposed Sale, the high and low bid prices of the Company's Common Stock were
$8.00 and $7.875, as reported by the New York Stock Exchange.
Federal Income Tax Consequences
The Sale will result in a taxable disposition for federal income tax
purposes. The Company expects to realize a gain on the Sale for federal
income tax purposes, the amount of which has not yet been determined. The
federal income tax consequences of a sale of the Subsidiaries other than
pursuant to the Purchase Agreement will depend upon the form of the
transaction. Neither the Sale nor any other sale by the Company involving
any Subsidiaries should by itself result in the imposition of federal income
taxes upon the Company's shareholders.
Dissenter's Rights of Appraisal
Ohio laws governs the rights of the Company's shareholders in connection
with the Sale. Pursuant to Ohio law each record holder of shares of the
Company as of September ____, 1996, is entitled to the rights of a dissenting
shareholder pursuant to the provisions of section 1701.85 of the Ohio General
Corporation Law. Any dissenting shareholder must not have voted in favor of
the Sale. Not later than ten (10) days after the date of the Annual Meeting,
a dissenting shareholder must deliver to the Company a written demand for
payment of the fair cash value of the shares as to which he or she seeks
relief. The demand must state the dissenting shareholder's address, the
number and class of such shares, and the amount claimed as the fair cash
value of the shares. Shareholders will not receive further notification of
the date such written demand is to be received by the Company. Although a
shareholder voting against the Sale will not be deemed to have waived his or
her appraisal rights, such a vote against the Sale will not satisfy the
foregoing notification requirements and a shareholder voting against the Sale
will be required to notify the Company of his exercise of appraisal rights.
The Company may send to each dissenting shareholder, at the address
specified in the demand, a request for certificate(s) representing the shares
as to which relief is sought and the dissenting shareholder, within fifteen
(15) days from the date of the sending of such request, must deliver to the
Company the certificate(s) requested so that the Company may endorse on them
a ledger to the effect that demand for the fair cash value of such shares has
been made. The Company will promptly return such endorsed certificates to the
dissenting shareholder. A dissenting shareholder's <PAGE> failure to deliver
certificate(s) terminates his or her right as a dissenting shareholder, at
the option of the Company, exercised by written notice sent to the dissenting
shareholder within twenty (20) days after the lapse of fifteen (15) day
period, unless a court for good cause shown otherwise directs. If shares
represented by a certificate on which such a legend has been endorsed are
transferred, each new certificate issued for them will bear a similar legend,
together with the name of the original dissenting holder of such shares. Upon
receiving a demand for payment from a dissenting shareholder who is a record
holder of uncertificated securities, the Company will make an appropriate
notation of the demand for payment in its shareholder records. If
uncertificated shares for which payment has been demanded are to be
transferred, any new certificate issued for the shares shall bear the legend
required for certificated securities. A transferee of shares so endorsed,
or of uncertificated shares where such notation has been made acquires only
such rights in the Company as the original dissenting holder of such shares
had immediately after the service of demand for payment of the fair cash value
of the shares. A request for share certificates by the Company hereunder is
not an admission by the Company that the shareholder is entitled to relief
under Ohio law.
Unless the Company or the dissenting shareholder come to an agreement on
the fair cash value per share of the shares as to which the dissenting
shareholder seeks relief, the dissenting shareholder or the Company, within
three (3) months after the service of the demand of the dissenting
shareholder, may file a complaint in the Court of Common Pleas of the county
of which the principal office of the Company is located. Other dissenting
shareholders, within that three (3) month period, may join as plaintiffs or
may be joined as defendants in any such proceeding, and any two or more
such proceedings may be consolidated. The complaint must contain a brief
statement of the facts, including the vote and the facts entitling the
dissenting shareholder to the relief demanded. No answer to such complaint
is required. Upon the filing of such a complaint the court, on motion of the
petitioner, shall enter an order fixing a date for a hearing on the complaint
and requiring a copy of the complaint and the notice of the filing and of
the date for hearing be given to the respondent or defendant in the matter
in which summons is required to be served or substituted service is required
to be made in other cases. On the day fixed for the hearing on the complaint
or any adjournment of it, the court shall determine from the complaint such
evidence as submitted by either party whether the dissenting shareholder is
entitled to be paid the fair cash value of any shares, and, if so, the number
in class of such shares. If the court finds the dissenting shareholder is
so entitled, the court may appoint one or more persons as appraisers to
receive evidence to recommend a decision of them all on a fair cash value.
The cost of the proceeding, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed an apportioned as
the court considers equitable. If, during the pendency of any proceeding
instituted under these provisions of Ohio law, suit or proceeding is or has
been instituted to enjoin or otherwise to prevent of the carrying out of the
action as to which the shareholder has dissented, the proceeding instituted
under these provisions of Ohio law shall be stayed until the final
determination of the other suit or proceeding. The fair cash value of the
shares that is agreed upon by the parties are fixed by the court shall be paid
within thirty (30) days after the date of final determination of such value,
or the commencement of any other action involved, whichever occurs last. Upon
the occurrence of the last such event, payment shall be made immediately to a
holder of uncertificated securities entitled to such payment. In the case of
holders of shares represented by certificates, payment shall be made only upon
and simultaneously with the surrender to the corporation of the certificates
representing the shares for which the payment is made.
Fair cash value as to those shareholders who have dissented shall be
determined as of the day prior to the day on which the vote of the
shareholders was taken. The fair cash value of a share for the purposes
hereof is the amount that a willing seller that is under no compulsion to
sell would be willing to accept and that a willing buyer who is under no
compulsion to purchase would be willing to pay, but in no event shall the
fair cash value of a share exceed the amount specified in the demand of the
particular shareholder. In computing such fair cash value, any appreciation
or depreciation in market value resulting from the proposal submitted to the
shareholder shall be excluded.
From the time the dissenting shareholders giving of the demand until the
determination of the rights and obligations arising from it or the purchase
of the shares by the Company, all of the rights accruing from such shares,
including voting and dividend or distributions rights, are suspended. If
during the suspension, any dividend or distribution is paid in money upon
shares of such class or any dividend, distribution, or interest is paid in
money upon any securities issued in extinguishment of or in substitution for
such shares, and won't equal to the dividend, distribution, or interest which,
except for the suspension, would have payable upon such shares of securities,
shall be paid to the holder of record as a credit upon the fair cash value
of the shares. If the right to receive fair cash value is terminated <PAGE>
other than by the purchase of the shares by the Company, all rights of the
holder shall be restored and all distributions which, except for the
suspension, would have been made shall be made to the holder of record of
shares at the time of termination.
The affirmative vote of two-thirds (2/3) of the holders of the
outstanding shares of Common Stock entitled to vote thereon is required to
approve the Sale. Unless otherwise directed by shareholder's proxy, the
persons named as proxy voters in the accompanying proxies will vote for
approval of the Sale. THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS APPROVAL OF THE SALE.
Directors and executive officers of the Company who beneficially own
approximately 40% of the outstanding shares of the Company's Common Stock
have agreed, in writing, to vote such shares in favor of the Sale. A more
detailed description of the stock ownership by these persons is set forth
above in the section entitled "Outstanding Stock and Voting Rights."
-------------------------
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.
---------------------------
COMPENSATION OF EXECUTIVE OFFICERS
The following tables provide certain data and information on the
compensation of the Company's Chief Executive Officer and its four most
highly compensated executive officers (other than the CEO) whose annual
salary and bonus exceeded $100,000 (collectively referred to as the "Named
Executives"). This report addresses the Company's compensation policies and
programs for the year ended June 30, 1996, the details of which are reflected
in the tables set forth in the following pages of this Proxy Statement. The
Company's and the Board's policies and practices pertaining to the
compensation of executive officers and management have been in effect for a
number of years.
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.
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 compensation 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
responsibility 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
James N. DeBoer John J. Smith
Blair H. Thompson
<PAGE>
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.
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>
Annual Compensation
Name and Principal Fiscal All Other
Position Year Salary Bonus Compensation
<S> <C> <C> <C> <C>
John J. Smith 1996 $178,200 $-0- $1,750(1)
Chairman of the Board and 1995 120,000 -0- 121,750(1)
Chief Executive Officer 1994 206,287 -0- 163,272(1)
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-
- - - ----------------------
<PAGE>
(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.
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.
Option/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>
<TABLE>
AGGREGATED OPTION/SARs EXERCISED IN
LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/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-
(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 in the judgment of the Company's independent actuaries,
the pension plan was fully funded. The plan provides a basic benefit of $2.25
per month for each year of credited service up to a maximum of $90 per month.
In addition, for those participants who contribute 5% of their monthly
compensation (excluding bonuses) per month, the plan provides for an
additional monthly pension amount equal to 1 1/2% of the participant's final
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.)
<PAGE>
<TABLE>
Final 10-Year Year of Contributory and Credited Service at Age 65
Average
Annual Earnings
(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:
<TABLE>
Current
Annual
Years of Earnings
Contributory (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.
Section 16(a) Beneficial Ownership Reporting Compliance
Pursuant to Section 16 of the Securities Exchange Act of 1934, the
Company's directors and executive officers, as well as any person holding more
than ten percent of a registered class of the Company's equity securities, are
required to report any changes in their ownership of the Company's securities
to the Securities and Exchange Commission and the New York Stock Exchange.
To the Company's knowledge, all required reports were properly filed by such
persons during the fiscal year ended June 30, 1996.
<PAGE>
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.
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>
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>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
John J. Smith and his wife and Lawson K. Smith lease a manufacturing
facility located in White Cloud, Michigan to KPI. 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 eitherparty 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.
INDEPENDENT AUDITORS
Representatives of Ernst & Young LLP, the Company's independent auditors
for many years, are expected to be present at the Annual Meeting. They will
have an opportunity to make a statement if they desire to do so and are
expected to be available to respond to appropriate questions.
<PAGE>
SHAREHOLDER PROPOSALS - 1997 ANNUAL MEETING
Shareholder proposals intended to be presented at the 1997 Annual Meeting
of Shareholders of the Company must be received by the Company not later than
May 31, 1997, at its principal executive offices, 2400 East Ganson Street,
Jackson, Michigan 49202, Attention: Secretary, for inclusion in the Proxy
Statement and Proxy relating to the 1997 Annual Meeting of Shareholders.
By Order of the Board of Directors
Lawson K. Smith, Secretary
Dated: October , 1996
<PAGE>
STOCK AND ASSET PURCHASE AGREEMENT
STOCK AND ASSET PURCHASE AGREEMENT dated as of October 3, 1996, among
SPARTON CORPORATION, an Ohio corporation ("Sparton"), SPARTON ENGINEERED
PRODUCTS, INC., LAKE ODESSA GROUP, a Michigan corporation ("Lako"), and DURA
AUTOMOTIVE SYSTEMS, INC., a Delaware corporation ("Buyer").
Recitals
Sparton owns 100 percent of the issued and outstanding capital stock of
each of the corporations listed on Exhibit A attached hereto (collectively,
the "KPI Subsidiaries"), consisting of the number of shares of common stock
set opposite the name of each (together, "Common Stock"). Upon the terms and
conditions set forth in this Agreement, Buyer desires to acquire from Sparton,
and Sparton desires to sell to Buyer, all of the Common Stock.
Sparton also owns 100 percent of the outstanding capital stock of Lako.
Upon the terms and conditions set forth in this Agreement, Buyer desires to
acquire from Lako, and Lako and Sparton desire that Lako sell to Buyer, the
business and certain of the assets of Lako which are operating as a going
concern, subject to certain liabilities.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF STOCK
1.1 Stock Purchase. Upon the terms and conditions set forth in this
Agreement, at the Closing (as defined in Article III), Buyer agrees to
purchase from Sparton and Sparton agrees to sell and transfer to Buyer all of
the Common Stock, free and clear of all liens, charges, security interests,
claims, pledges, taxes, options, warrants, rights, proxies, voting trusts,
voting agreements, and other encumbrances and restrictions ("Liens"). As
provided in Section 3.3, at the Closing the existing lien on the Common Stock
shall be released.
1.2 Asset Purchase; Assumption of Liabilities.
(a) Upon the terms and conditions set forth in this Agreement,
at the Closing (as defined in Article III), Buyer agrees to purchase
from Lako, and Lako agrees to sell, transfer, convey, and deliver to
Buyer, all right, title, and interest in and to the following assets
of Lako (collectively, the "Acquired Assets"), but excluding the
"Excluded Assets" defined below:
<PAGE>
(i) all cash, cash equivalents, accounts receivable,
and notes receivable;
(ii) all inventories of raw materials and supplies,
purchased and service parts, work-in-process, finished goods,
tooling, and all other items of inventory;
(iii) the land, building, and improvements located at
3741 Weber Road, Gladwin, Michigan (the "Gladwin Plant"),
and all licenses, rights of way, permits, and appurtenances
thereon;
(iv) all machinery, equipment, furniture, fixtures,
vehicles, tooling, molds, dies, and other tangible personal
property located at or used in the operations of the Gladwin
Plant;
(v) all Lako agreements, contracts, and purchase
orders related to or connected with operations at the Gladwin
Plant, including those listed on attached Schedule 6.16;
(vi) all prepayments and deposits made with respect to
operations at the Gladwin Plant to the extent any will inure to
the benefit of Buyer after Closing.
(vii) any permits, licenses, or other rights obtained
from governments or government agencies, including those listed
on attached Schedule 6.20;
(viii) all books, records, files, documents, drawings,
specifications, and other written materials, including copies of
financial and accounting books and records;
(ix) all other property, including all Intellectual
Property, in which Lako has an interest and which is connected
with the operations at the Gladwin Plant.
(b) The following assets of Lako ("Excluded Assets") shall be
excluded from the sale to Buyer of the Acquired Assets:
(i) all insurance policies;
<PAGE>
(ii) charter documents, minute books, stock transfer
records, corporate seal;
(iii) the land, building, and improvements comprising
Lako's plant located in Lake Odessa, Michigan (the "Lake
Odessa Plant"), and a parcel of unimproved land in the vicinity
of Lake Odessa;
(iv) all machinery, equipment, furniture, fixtures,
vehicles, tooling, molds, dies, and inventories located at the
Lake Odessa Plant (which are not to be transferred to the KPI
Subsidiaries pursuant to Section 5.6), a list of which has been
furnished to Buyer, and all other tangible personal property
located at the Lake Odessa Plant.
(c) Subject to the terms and conditions of this Agreement, Buyer
agrees to assume the following obligations of Lako connected with the
operations of the Gladwin Plant ("Assumed Liabilities"):
(i) all current liabilities, except "Excluded
Liabilities," defined below, recorded on the books and records
of Lako as of the Closing Date to the extent such current
liabilities have been incurred in the Ordinary Course of
Business, consistent with past custom and practice;
(d) Buyer does not assume and is not liable for the following
liabilities and obligations of Lako ("Excluded Liabilities"):
(i) except for obligations and liabilities incurred in
the Ordinary Course of Business with respect to operations at
the Gladwin Plant (other than cash advances which are dealt
with in Section 1.4), obligations or liabilities due to corporations
affiliated with Lako, including obligations or liabilities to
Sparton for funds advanced to Lako prior to the Closing Date;
(ii) obligations or liabilities connected with the
operations of the Lake Odessa Plant;
(iii) any other obligations or liabilities which are not
"Assumed Liabilities".
<PAGE>
1.3 Purchase Price. The total purchase price for the Common Stock and
the Acquired Assets shall be Eighty Million Five Hundred Thousand Dollars
($80,500,000) (the "Purchase Price"), subject to adjustment as provided in
Section 1.4, payable in cash at the Closing in immediately available funds,
plus or minus any adjustments to the Purchase Price provided for in this
Agreement. The Purchase Price shall be allocated between the Common Stock
and the Acquired Assets as provided as mutually agreed upon by Buyer and
Sparton.
1.4 Adjustment in Purchase Price. The purchase price shall be
increased dollar for dollar to the extent the sum of all cash advances by
Sparton to the KPI Subsidiaries and Lako exceeds the sum of all cash advances
by the KPI Subsidiaries and Lako to Sparton during the period beginning
July 1, 1996, to the Closing Date, or shall be decreased dollar for dollar to
the extent the sum of all cash advances by Sparton to the KPI Subsidiaries and
Lako is less than the sum of all cash advances by the KPI Subsidiaries and
Lako to Sparton during the same period. Such adjustment shall be determined
and paid by Buyer to Sparton or by Sparton to Buyer at the Closing. The
purchase price will be reduced to the extent that cash generated by the
Gladwin Plant, or any other KPI Subsidiary, was used to fund the operations
of the Lake Odessa Plant since July 1, 1996, to the Closing Date. From time
to time as reasonably requested by Buyer following the date of this Agreement
and as of and at the Closing, Sparton shall furnish to Buyer a detailed
accounting of all such cash advances and a computation of the amount of such
adjustment. If Buyer disputes the adjustment calculated by Sparton as of
Closing, then Deloitte & Touche shall determine the amount of such adjustment
and its determination shall be final and binding upon Sparton and Buyer.
ARTICLE II
LEASE OF LEASED REAL ESTATE
2.1 Lease of Leased Real Estate. KPI has leased from John J. Smith and
wife a parcel of real estate in Grand Haven, Michigan, and from Lawson K.
Smith and John J. Smith and wife a parcel of real estate in White Cloud,
Michigan (the "Leased Real Estate"). At or before the Closing, Lako will
purchase the Leased Real Estate. By separate customary agreements consistent
with the terms of this Agreement and to be mutually agreed upon by Buyer
and Lako, the Buyer and Lako will enter into leases providing for the lease
of the Leased Real Estate by Buyer from Lako. John J. Smith and wife and
Lawson K. Smith are collectively referred to herein as the "Smiths." The
lease agreements shall be "triple net" leases and shall provide for an
aggregate annual rental equal to One Hundred Thirty-five Thousand Dollars
($135,000). The leases shall also provide for a purchase option to be
exercised at the end of their five-year terms upon payment of an aggregate
option price equal to Fifty Thousand Dollars ($50,000). The purchase option
shall provide that both parcels of Leased Real Estate must be purchased if
the purchase option is exercised. The parties shall negotiate the definitive
lease agreements in good faith.
<PAGE>
ARTICLE III
CLOSING
3.1 Closing. The closing of the purchase and sale of the Common Stock
and Acquired Assets and Buyer's lease of the Leased Real Estate (the
"Closing") will be held at the offices of Varnum, Riddering, Schmidt &
Howlett, Grand Rapids, Michigan, at 10 a.m. on a date which is no later than
five (5) business days following the date on which all the conditions set
forth in Article IV hereof have been fully satisfied or waived, or at such
other place or on such other date as may be mutually agreeable to the Buyer
and Sparton. The date of closing is referred to herein as the Closing Date.
Subject to fulfillment of the conditions set forth in this Agreement, at the
Closing:
(a) Sparton will deliver stock certificates representing all
the shares of Common Stock, duly endorsed for transfer or accompanied
by duly executed stock powers, and Lako will deliver instruments of
transfer and conveyance of the Acquired Assets;
(b) Buyer will pay the Purchase Price as provided in Section 1.2
hereof, and deliver an instrument assuming the Assumed Liabilities;
3.2 Concurrent Closing. The closing of the purchase and sale of Common
Stock and Acquired Assets is conditioned upon the concurrent closing of the
lease of the Leased Real Estate and vice versa. The closing of each of the
transactions shall be effective simultaneously, and the closing of one shall
not be effective except upon the simultaneous closing of the others.
3.3 Release of Liens at Closing. At the Closing, Sparton agrees to
use a portion of the Purchase Price to obtain from lenders the release and
discharge of all security interests and liens then existing on the Common
Stock, the assets of the KPI Subsidiaries, and the Acquired Assets.
ARTICLE IV
CONDITIONS TO CLOSING
4.1 Conditions to Buyer's Obligations. The obligations of Buyer to
consummate the transactions contemplated by this Agreement are subject to the
satisfaction of the following conditions on or before the Closing Date:
<PAGE>
(a) The representations and warranties of Sparton in Article VI
hereof will be true and correct in all material respects at and as of
the Closing Date as though then made.
(b) Sparton will have performed and complied in all material
respects with all of the covenants and agreements required to be
performed by it under this Agreement prior to the Closing.
(c) All third-party consents, waivers, and approvals which are
required for the sale and transfer of the Common Stock, the Acquired
Assets, and the consummation of the transactions contemplated hereby
will have been obtained upon terms reasonably satisfactory to Buyer,
including the waiver of any right to terminate any contracts to which
any of the KPI Subsidiaries or Lako is a party to or is bound.
Consents to the assignment of customer purchase orders are waived by
Buyer and will not be required.
(d) All governmental filings, authorizations, and approvals which
are required for the sale and transfer of the Common Stock, the Acquired
Assets, and the consummation of the transactions contemplated hereby
will have been duly made and obtained on terms reasonably satisfactory
to Buyer.
(e) No action or proceeding before any court or government body
will be pending or threatened wherein an unfavorable judgment, decree,
injunction, or order would prevent the performance of this Agreement
or any of the transactions contemplated hereby, or which might
adversely affect the right of Buyer to own, operate, or control the
KPI Subsidiaries and the Acquired Assets.
(f) All intercompany indebtedness reflected in the advance account
between Sparton and the KPI Subsidiaries shall have been satisfied at
or prior to the Closing Date.
(g) The shareholders of Sparton shall have authorized the sale
of the Common Stock and Acquired Assets to the Buyer upon the terms
and conditions of this Agreement, as required by the applicable
provisions of the General Corporation Law of the state of Ohio.
(h) Buyer will have received the opinion addressed to Buyer,
dated the Closing Date, of Varnum, Riddering, Schmidt & Howlett LLP,
counsel for Sparton, with respect to the matters set forth in Exhibit B
attached hereto and in form and substance reasonably satisfactory to
Buyer and its counsel.
<PAGE>
(i) On or prior to the Closing Date, Sparton will have delivered,
or caused to be delivered, to Buyer all of the following:
(i) a certificate in the form set forth in Exhibit C
attached hereto, dated the Closing Date, stating that the
conditions specified in Sections 4.1(a) through (g) above,
inclusive, have been satisfied;
(ii) copies of all third-party and governmental
consents, approvals, and filings required in connection with
the consummation of the transactions contemplated herein;
(iii) certificates representing the Common Stock and
instruments of Lako's transfer and conveyance of the Acquired
Assets as required by Section 3.1(a);
(iv) the minute books, stock transfer records, and
corporate seals of the KPI Subsidiaries;
(v) resignations of the directors of the KPI
Subsidiaries, effective as of the Closing Date;
(vi) a good standing certificate for each of the KPI
Subsidiaries in their respective states of incorporation and good
standing certificates for each jurisdiction in which each is
required to be qualified to do business, dated as of a date within
ten (10) business days prior to the Closing Date;
(vii) the articles of incorporation of each of the KPI
Subsidiaries certified by its state of incorporation and bylaws of
each certified by its secretary;
(viii) the documents required by Sections 5.4 and 5.5
and, if required by Buyer's lenders, an estoppel letter from each
of the landlords of Leased Real Property and each other parcel
of real property leased by the KPI Subsidiaries or Lako, in form
and content reasonably satisfactory to Buyer and its lenders;
(ix) such other documents or instruments as Buyer
reasonably requests to effect the transactions contemplated
hereby.
<PAGE>
(j) The closing of Buyer's lease of the Leased Real Estate shall be
completed concurrently as contemplated by Section 3.2.
(k) The $100 million loan commitment issued to Buyer by Bank of
America, a copy of which has been furnished to Sparton, shall have been
funded at or before the Closing, or Buyer shall have obtained other
financing satisfactory to it needed to consummate the purchase of the
Common Stock and the Acquired Assets.
Any condition specified in this Section 4.1 may be waived in writing by
Buyer.
4.2 Conditions to the Obligations of Sparton. The respective
obligations of Sparton to consummate the transactions contemplated by this
Agreement are subject to the satisfaction of the following conditions on or
before the Closing Date:
(a) The representations and warranties of Buyer in Article VII
hereof will be true and correct in all material respects at and as of
the Closing Date.
(b) Buyer will have performed and complied in all material respects
with all of the covenants and agreements required to be performed by it
under this Agreement prior to the Closing.
(c) All governmental filings, authorizations, and approvals which
are required for the sale and transfer of the Common Stock and Acquired
Assets and the consummation of the transactions contemplated hereby will
have been duly made and obtained on terms reasonably satisfactory to
Sparton.
(d) All intercompany indebtedness reflected in the advance account
between Sparton and the KPI Subsidiaries shall have been satisfied at or
prior to the Closing Date.
(e) The shareholders of Sparton shall have authorized the sale of
the Common Stock and Acquired Assets to the Buyer upon the terms and
conditions of this Agreement, as required by the applicable provisions
of the General Corporation Law of the state of Ohio.
(f) Sparton shall have received an opinion, dated the Closing Date,
of Kirkland & Ellis, counsel to Buyer, with respect to the matters set
forth in Exhibit D attached hereto, and in form and substance reasonably
satisfactory to Sparton and its counsel.
<PAGE>
(g) On or prior to the Closing Date, Buyer will have delivered to
Sparton all of the following:
(i) a certificate from Buyer in the form set forth in
Exhibit E attached hereto, dated the Closing Date, stating that
the preconditions specified in Sections 4.2(a) through (c) above
have been satisfied;
(ii) certified copies of the resolutions of Buyer's Board
of Directors approving the transactions contemplated by this
Agreement;
(iii) an instrument assuming the Assumed Liabilities;
(iv) such other documents or instruments as Sparton
may reasonably request to effect the transactions contemplated
hereby; and
(v) the Purchase Price.
(h) The closing of Buyer's lease of the Leased Real Estate shall be
completed concurrently as contemplated by Section 3.2
Any condition specified in this Section 4.2 may be waived in writing by
Sparton.
ARTICLE V
COVENANTS PRIOR TO CLOSING
5.1 Operation of KPI Subsidiaries Since June 30, 1996. Since June 30,
1996, neither Lako nor the KPI Subsidiaries have, without Buyer's written
consent, changed any officer's compensation, incentive arrangements, or other
benefits, except for customary annual increases in compensation.
5.2 Affirmative Covenants of Sparton. Prior to the Closing, Sparton
covenants and agrees as follows:
(a) Sparton will cause Lako and each of the KPI Subsidiaries to
conduct its business and maintain its properties in the ordinary course
in <PAGE> accordance with past custom and practice, other than the
winding down of the affairs and relocation of jobs and assets of the
plant at Lake Odessa, Michigan.
(b) Sparton will, and will cause Lako and the KPI Subsidiaries
to, permit Buyer and its employees, agents, accounting and legal
representatives to have reasonable access at reasonable times and
in a manner so as not to interfere with the normal business operations
of Lako or the KPI Subsidiaries to their books, records, invoices,
contracts, leases, personnel, facilities, equipment, and other things
reasonably related to the business and assets of Lako and the KPI
Subsidiaries.
(c) Promptly after Sparton acquires knowledge thereof, it will
inform Buyer in writing if any representation or warranty contained in
Article VI hereof was when made, or has subsequently become, untrue in
any material respect, or if any covenant of Sparton has been breached
in any material respect.
(d) Sparton will, and will cause Lako and the KPI Subsidiaries to,
cooperate with Buyer and use their reasonable best efforts to obtain all
governmental, third-party, or other consents and approvals necessary for
the consummation of the transactions contemplated hereby and to cause
the other conditions to Buyer's obligation to close to be satisfied;
(e) As requested by Buyer from time to time, Sparton will confer
on a regular and reasonably frequent basis with representatives of Buyer
to report on operational matters and the general status of ongoing
operations;
(f) Sparton will maintain in effect until the Closing Date current
insurance policies providing coverage for the KPI Subsidiaries and the
Acquired Assets, or to replace such policies with coverage equal to or
greater than the coverage under the cancelled, terminated, or lapsed
policies; and
(g) Sparton will cause each of the KPI Subsidiaries and Lako to:
(i) use its best efforts to preserve intact its business
organization and goodwill, keep available the services of its
officers and employees as a group and maintain satisfactory
relationships with suppliers, distributors, customers, and others
having business relationships with it;
<PAGE>
(ii) not take any action which would render, or which
reasonably may be expected to render, any representation or
warranty made by Sparton in this Agreement untrue at, or prior
to, the Closing Date; and
(iii) notify Buyer of any emergency or other change in
the normal course of its business or in the operation of its
properties, or of any governmental or third-party complaints,
investigations, or hearings, if material to the operations or
financial condition of Lako and the KPI Subsidiaries as a whole,
or to Sparton's or Buyer's ability to consummate the transactions
contemplated by this Agreement.
(h) Sparton will, and will cause the KPI Subsidiaries and Lako to,
maintain the assets of the KPI Subsidiaries and the Acquired Assets in
good repair, order, and condition consistent with current needs, replace
in accordance with prudent practices its inoperable, worn out, or
obsolete assets with assets of good quality consistent with prudent
practices and current needs and, in the event of a casualty, loss, or
damage to any of such assets or properties prior to the Closing Date,
whether or not the KPI Subsidiaries or Acquired Assets are insured,
either repair or replace such damaged property or use the proceeds of
such insurance in such other manner as mutually agreed upon by Sparton
and Buyer.
5.3 Covenants of Buyer. Prior to the Closing, Buyer will:
(a) Promptly (once it has knowledge thereof) inform Sparton in
writing of any material variances from the representations and warranties
contained in Article VII hereof or any material breach of any covenant
hereunder by Buyer; and
(b) Cooperate with Sparton and use its reasonable best efforts to
obtain all governmental, third-party, or other consents and approvals
necessary for the consummation of the transactions contemplated hereby
and to cause the other conditions to Sparton's obligation to close to be
satisfied.
5.4 Title Insurance. At Sparton's and Buyer's equal expense, Sparton
shall, with respect to real estate constituting the Gladwin Plant and to each
parcel of real estate owned by the KPI Subsidiaries at Closing, procure prior
to the Closing and furnish to Buyer an Owner's Policy of Title Insurance
issued by a title insurer satisfactory to the Buyer, insuring title to each
such parcel to be, respectively, in Lako or in the KPI Subsidiaries as of the
<PAGE> Closing Date (subject only to the title exceptions described in
Schedule 6.9(b)). The real estate constituting the Gladwin Plant and each
parcel of real estate owned by the KPI Subsidiaries at the Closing Date are
also described in Schedule 6.9(b).
5.5 Surveys. With respect to the Gladwin Plant and each parcel of real
property owned by the KPI Subsidiaries and as to which a title insurance
policy is to be procured pursuant to Section 5.4 above, at Buyer's request
Sparton shall furnish to Buyer, prior to the Closing, a survey of the real
property, prepared by a licensed surveyor, disclosing the location of all
improvements, easements, roadways, utility lines and other matters shown
customarily on such surveys, and showing access to public streets and roads
(the "Survey"). The Survey shall not disclose any encroachment from or onto
the real property which has not been cured or insured over prior to the
Closing. The expense of such surveys shall be borne equally by Buyer and
Sparton.
5.6 Closing of Lake Odessa Plant. Prior to the Closing Date, Sparton
will cause Lako, at Sparton's expense, to:
(a) Discontinue operations at its plant in Lake Odessa, Michigan.
(b) Resource all customer jobs for which Lako has active purchase
orders, either to the Gladwin Plant or to other plants operated by the
KPI Subsidiaries, and terminate purchase orders for customer jobs which
are not resourced.
(c) Transfer and deliver to such plants all inventories, machinery,
equipment, and other assets (excluding real estate) owned by Lako which
are required to produce the customer jobs resourced to such plants.
Prior to the Closing, Sparton will offer to sell and transfer to
Buyer any of the machinery and equipment or other personal properties
remaining in the plant at Lake Odessa after the transfer of assets
contemplated by Section 5.6(b) has been completed. The cost of removing,
transporting, and reinstalling the machinery, equipment, or other
properties purchased by Buyer shall be borne by Buyer.
5.7 Negative Covenants of Lako and Sparton. Prior to the Closing,
without Buyer's prior written consent, Sparton shall cause Lako and the KPI
Subsidiaries not to, and Lako and the KPI Subsidiaries shall not, except as
expressly contemplated by this Agreement:
<PAGE>
(a) Terminate, modify, enter into any new, or amend any existing,
material contracts, agreements, commitments, or licenses to which Lako
or either of the KPI Subsidiaries is a party, except (i) in the ordinary
course of business consistent with past custom and practice (including,
as applicable, with respect to quantity and frequency) ("Ordinary Course
of Business"), and (ii) at arm's length with unaffiliated persons;
(b) Make any loans, enter into any transaction with any
stockholders, officers, directors, or affiliates of Sparton or the KPI
Subsidiaries other than intercompany transactions in the Ordinary Course
of Business among affiliates of Sparton and the KPI Subsidiaries, or
make, other than in the Ordinary Course of Business, or grant any
increase in any employee's or officer's compensation, or make or grant
any increase in any employee benefit plan, incentive arrangement or other
benefit covering any of the employees of Lako or the KPI Subsidiaries;
(c) Establish or, except in accordance with past practice,
contribute to any pension, retirement, profit sharing or stock bonus
plan or multiemployer plan covering the employees of Lako or the KPI
Subsidiaries;
(d) Sell, transfer, contribute, distribute, or otherwise dispose
of any securities or assets of the KPI Subsidiaries or connected with the
Gladwin Plant, or agree to do any of the foregoing to any person, or
negotiate or have any discussions with any person with respect to any of
the foregoing, other than transactions in the Ordinary Course of Business
and except as contemplated by this Agreement.
5.8 Proxy; Shareholders' Vote. Promptly upon execution of this
Agreement, Sparton shall file with the Securities Exchange Commission a
preliminary proxy statement which shall include a statement to the effect that
the Board of Directors of Sparton unanimously recommends that the shareholders
of Sparton vote in favor of and adopt and approve this Agreement and the sale
of the Common Stock and the sale of the Acquired Assets pursuant to this
Agreement, which unanimous recommendation shall not be withdrawn. Sparton
shall take all actions necessary in accordance with applicable law to call
and convene a meeting of the shareholders of Sparton to consider, act upon,
and vote upon the adoption and approval of this Agreement, the sale of the
Common Stock of the KPI Subsidiaries, and the sale of the Acquired Assets.
Sparton's shareholders' meeting shall be held as promptly as practicable.
Sparton shall ensure that the shareholders' meeting is called, held, and
conducted, and that all proxies solicited in connection therewith are
solicited in compliance with applicable law.
<PAGE>
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
CONCERNING SPARTON AND THE KPI SUBSIDIARIES
As a material inducement to Buyer to enter into this Agreement, Sparton
represents and warrants to Buyer:
6.1 Organization and Corporate Power. Lako and each of the KPI
Subsidiaries is a corporation duly organized, validly existing, and in good
standing under the laws of the state of its incorporation and is qualified to
do business in every jurisdiction in which the nature of its business or its
ownership of property requires it to be qualified. Each has full corporate
power and authority and all licenses, permits, and authorizations necessary to
own and operate its properties and to carry on its business as now conducted.
All such authorizations and licenses are in full force and effect and shall
remain in full force and effect until the consummation of the transactions
provided for in this Agreement. The copies of the articles of incorporation
and bylaws of each which have been furnished to Buyer are correct and
complete. The stock certificate books and the stock record books of the KPI
Subsidiaries are correct and complete. None of the KPI Subsidiaries or Lako
is in default under or in violation of its respective articles of
incorporation or bylaws.
6.2 Authorization of Transactions. Sparton and Lako have full power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby, subject to approval by Sparton's
shareholders as contemplated by Sections 4.1(g) and 4.2(e). This Agreement
has been duly executed and delivered by Sparton and Lako and constitutes the
valid and binding agreement of Sparton and Lako, enforceable in accordance
with its terms, except as enforceability hereof may be limited by bankruptcy
or other laws affecting creditors' rights generally and limitations on the
availability of equitable remedies.
6.3 Capitalization. The authorized and issued capital stock of the KPI
Subsidiaries is accurately described in Exhibit A. All of the issued shares
described therein are issued and outstanding and are owned of record by
Sparton in the number of shares set forth opposite their names, and at the
Closing Date will be free and clear of any security interests, claims, liens,
pledges, options, encumbrances, charges, voting trusts, proxies, or other
arrangements or restrictions whatsoever. All of the outstanding Common Stock
has been duly authorized by all necessary corporate action and is validly
issued, fully paid, and nonassessable. There are no outstanding or authorized
stock appreciation rights, phantom stock rights, or similar rights with
respect to any of the KPI Subsidiaries. There are no rights, subscriptions,
warrants, options, conversion rights or agreements of any kind outstanding
to purchase or otherwise acquire any shares of Common Stock or securities
or obligations of <PAGE> any kind convertible into or exchangeable or
exercisable for any shares of Common Stock, except pursuant to this Agreement.
No shares of the Common Stock are reserved for any purpose.
6.4 Subsidiaries. Neither of the KPI Subsidiaries has any subsidiaries.
6.5 Absence of Conflicts. The consummation of the transactions
contemplated hereby will not:
(a) Violate any constitution, statute, regulation, rule,
injunction, judgment, order, decree, ruling, or other restriction of
any government, governmental agency, regulatory body, or court to which
Sparton, Lako, or any of the KPI Subsidiaries is subject;
(b) Violate any provision of the articles of incorporation or
bylaws of Sparton, Lako, or any of the KPI Subsidiaries ;
(c) Conflict with, result in a breach of, constitute a default
under, or give any party the right to terminate any agreement, contract,
lease, license, instrument, or other arrangement to which Sparton, Lako,
or any of the KPI Subsidiaries is a party or by which any of them is
bound or to which any of their respective assets is subject; or
(d) Result in the imposition of any Liens upon any of the Acquired
Assets or any assets or the capital stock of any of the KPI Subsidiaries.
Except as set forth on Schedule 6.5 (the "Restrictions Schedule"), neither
Sparton, Lako, nor any KPI Subsidiary is required to give any notice, or
obtain the approval of any government or governmental agency in order for Lako
to transfer the Acquired Assets or for Sparton to transfer the Common Stock
or otherwise consummate the transactions contemplated by this Agreement.
6.6 Financial Statements. Sparton has furnished or prior to the Closing
Date will furnish Buyer with copies of the consolidated balance sheets and
statements of income and cash flow of Lako and the KPI Subsidiaries, unaudited
for the fiscal year ended June 30, 1995, and unaudited for the fiscal year
ended June 30, 1996, except for the KPI Subsidiaries, which are audited for
the fiscal year ended June 30, 1996. Each of the foregoing financial
statements (including the notes thereto) (the "Financial Statements") presents
fairly the financial condition and results of operations of Lako and the KPI
Subsidiaries as of the times and for the periods referred to therein, and has
been prepared in accordance with generally accepted accounting principles
consistently applied (except as noted therein). The balance <PAGE> sheet
as of June 30, 1996, is referred to herein as the "Latest Balance Sheet," and
June 30, 1996, as the "Balance Sheet Date."
6.7 Absence of Undisclosed Liabilities. Neither Lako, with respect to
the Assumed Liabilities, nor either of the KPI Subsidiaries has any obligation
or liability in excess of $50,000 (whether accrued or unaccrued, whether
absolute or contingent, whether liquidated or unliquidated, whether known or
unknown, whether due or to become due) except:
(a) Obligations under contracts or commitments, other than
breaches thereof, described in Schedule 6.7 ("Liability Schedule"),
or under contracts and commitments which are not required to be
disclosed thereon due solely to the specific dollar thresholds and
other requirements contained in Schedule 6.7;
(b) Liabilities reflected on the Latest Balance Sheet;
(c) Liabilities which have arisen after the date of the Latest
Balance Sheet in the Ordinary Course of Business or otherwise in
accordance with the terms and conditions of this Agreement, none of
which is a liability for breach of contract, breach of warranty, tort,
or environmental liability; and
(d) Liabilities otherwise expressly disclosed in Schedule 6.7
attached hereto.
With respect to product warranty claims, Sparton's liability under this
Section 6.7 is limited as provided in Section 9.10.
6.8 Absence of Certain Developments. Except as set forth in Schedule
6.8 (the "Developments Schedule"), and except as expressly contemplated by
this Agreement, since June 30, 1996, neither Lako nor either of the KPI
Subsidiaries has:
(a) Redeemed or repurchased, directly or indirectly, any shares
of capital stock or declared, set aside, or paid any dividends or made
any other distributions with respect to any shares of its capital stock,
except as contemplated by Sections 4.1(f) and 4.2(d);
(b) Issued or sold any notes, bonds, or other debt securities
or any equity securities, securities convertible, exchangeable, or
exercisable into equity securities, or warrants, options, or other
rights to acquire equity securities;
<PAGE>
(c) Mortgaged, pledged, or subjected to any lien, charge, or any
other encumbrance, any portion of its properties or assets;
(d) Entered into, amended, or terminated any lease, license,
agreement, or commitment involving more than $500,000 in the aggregate,
other than in the Ordinary Course of Business;
(e) Made or granted any bonus or any wage, salary, or compensation
increase in excess of $10,000 per year to any director, officer, or
employee, or modified or terminated any Plan (as defined in Section
6.22), other than in the usual and Ordinary Course of Business, including
bonuses paid or payable to employees for the fiscal year ended June 30,
1996, in an aggregate of not more than $130,000 (including $24,000 to
Mr. Gause);
(f) Made any capital expenditures or commitments therefor other
than capital expenditures in the Ordinary Course of Business, not
exceeding $500,000 in the aggregate.
(g) Suffered an adverse change to its business, assets, operations,
financial conditions, or operating results, or casualty loss or damage
or thefts of assets in excess of $50,000 (whether or not covered by
insurance) other than in the Ordinary Course of Business;
(h) Incurred or become subject to any liabilities, except
liabilities incurred in the Ordinary Course of Business;
(i) Discharged or satisfied any encumbrance or paid any obligation
or liability other than liabilities paid in the Ordinary Course of
Business, or prepaid any amount of indebtedness for borrowed money other
than adjustments of intercompany debt contemplated by this Agreement;
(j) Sold, leased, assigned, or transferred a portion of its
tangible assets, except in the Ordinary Course of Business, or cancelled
without fair consideration any debts or claims owing to or held by it; or
(k) Entered into any other material transaction or made any new
material investments, other than in the Ordinary Course of Business, or
materially changed any business practice.
<PAGE>
6.9 Real Property.
(a) Except as set forth in Schedule 6.9(a), neither Lako nor either
of the KPI Subsidiaries is a party to any real estate lease or sublease,
other than the leases of the Leased Real Estate.
(b) Schedule 6.9(b) attached hereto (the "Real Property Schedule")
lists and describes the Leased Real Estate, the Gladwin Plant, and all
real property which will be owned by the KPI Subsidiaries at the Closing
Date. With respect to each parcel of real property listed on Schedule
6.9(b) as owned by Lako or the KPI Subsidiaries:
(i) except as disclosed on Schedule 6.9(b), each
owner has good and marketable title to the parcel of real
property owned by it, free and clear of all mortgages, pledges,
security interests, encumbrances, charges or other liens,
easements and other restrictions, other than easements,
covenants, and restrictions which do not materially or
unreasonably impair the current use or marketability of title
of the property subject thereto;
(ii) the legal description for the parcel contained in the
deed thereof describes such parcel fully and adequately and,
except as described in Schedule 6.9(b), the buildings and
improvements are located within the boundary lines of the
described parcels of land and are not in violation of applicable
zoning laws and ordinances;
(iii) all facilities have received all approvals of
governmental authorities (including licenses and permits)
required in connection with the ownership or operation thereof
and have been operated and maintained in accordance with
applicable laws, rules, and regulations;
(iv) there are no leases, subleases, licenses,
concessions, or other agreements, written or oral, granting to
any party the right of use or occupancy of any portion of the
parcels of real property, except for the leases of the Leased Real
Estate;
<PAGE>
(v) there are no outstanding options or rights of first
refusal to purchase any parcel of real property, or any portion
thereof or interest therein;
(vi) there are no parties (other than Lako or the KPI
Subsidiaries) in possession of any parcel of real property;
(vii) all facilities located on the parcel of real property
are supplied with utilities and other services necessary for the
operation of such facilities as currently operated by Lako or the
KPI Subsidiaries, including gas, electricity, water, telephone,
and sanitary sewer;
(viii) each parcel of real property abuts on and has direct
vehicular access to a public road or access to a public road via
a permanent, irrevocable, appurtenant easement benefiting the
parcel of real property.
The representations in subsections (iii), (vii), and (viii) shall
also apply to the Leased Real Estate.
(c) There are no pending or, to Sparton's knowledge, threatened
condemnation proceedings, litigation, or administrative actions relating
to real property owned or leased by Lako or the KPI Subsidiaries.
6.10 Tangible Assets. The Acquired Assets and assets owned or leased by
the KPI Subsidiaries include all buildings, machinery, equipment, and other
tangible assets that are sufficient for the conduct of their businesses as
presently conducted, and such assets are, subject to normal wear and tear, in
good operating condition and repair.
6.11 Title to Personal Property. As of the Closing Date, Lako, with
respect to the Gladwin Plant, and each of the KPI Subsidiaries will have good
title to, or a valid leasehold interest in, all personal property used in
connection with the operation of its business. All personal property owned
by them will be free and clear of all Liens, except (a) as set forth in
Schedule 6.11 attached hereto (the "Encumbrances Schedule"), and (b) liens for
Taxes not yet due and payable or being contested in good faith by appropriate
proceedings and in respect of which adequate reserves have been established.
6.12 Environmental Matters. Except as set forth in Schedule 6.12
("Environmental Schedule"):
<PAGE>
(a) Lako (with respect to the Gladwin Plant) and each of the KPI
Subsidiaries has complied and is in compliance with all Environmental
and Safety Requirements (as defined in subsection (j) below).
(b) Lako (with respect to the Gladwin Plant) and each of the
KPI Subsidiaries has obtained and is in compliance with all permits,
licenses, and other authorizations that are required pursuant to
Environmental and Safety Requirements for the occupation of its
facilities and the operation of its business, a list of which is set
forth on Schedule 6.12.
(c) Neither Lako nor either of the KPI Subsidiaries (nor any of
their respective predecessors) has received any written or oral notice,
report, or information regarding actual or alleged violations of
Environmental and Safety Requirements or any liabilities or potential
liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise), including any investigatory, remedial, or corrective
obligations relating to it or its facilities arising under Environmental
and Safety Requirements, the subject of which has not been fully
resolved or settled.
(d) None of the following exists at any property or facility owned
or operated by Lako or the KPI Subsidiaries: (i) underground storage
tanks, or (ii) landfills, surface impoundments, or disposal areas.
(e) None of the KPI Subsidiaries, Lako, or their respective
predecessors has treated, stored, disposed of, arranged for or permitted
the disposal of, transported, handled, or released any substance,
including without limitation any hazardous substance, or owned or
operated any property or facility (and no such property or facility is
contaminated by any such substance) in a manner that has given or would
give rise to liabilities, including any liability for response costs,
corrective action costs, personal injury, property damage, natural
resources damages, or attorney fees, pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"), the Solid Waste Disposal Act, as amended ("SWDA"),
or any other Environmental and Safety Requirements.
(f) Neither this Agreement nor the consummation of the transaction
that is the subject of this Agreement will result in any obligations
for site investigation or cleanup, or notification to or consent of
government agencies, pursuant to any of the so-called "transaction-
triggered" or "responsible property transfer" Environmental and Safety
Requirements.
<PAGE>
(g) Neither Lako (with respect to the Gladwin Plant) nor either of
the KPI Subsidiaries nor their respective predecessors or affiliates,
either expressly or by operation of law, has assumed or undertaken any
liability, including without limitation any corrective or remedial
obligations of any other person or entity relating to Environmental and
Safety Requirements.
(h) No Environmental Lien has attached to any of the Acquired
Assets or any property owned, leased, or operated by any of the KPI
Subsidiaries.
(i) No facts, events, or conditions prior to Closing relating
to the past or present facilities, properties, or operations of the
KPI subsidiaries or any of their respective predecessors or affiliates
will prevent, hinder, or limit continued compliance with Environmental
and Safety Requirements in effect at the time of Closing, give rise
to any investigatory, remedial, or corrective obligations pursuant to
Environmental and Safety Requirements, or give rise to any other
liabilities (whether accrued, absolute, contingent, unliquidated, or
otherwise) pursuant to Environmental and Safety Requirements, including
without limitation any relating to onsite or offsite releases or
threatened releases of hazardous materials, substances or wastes,
personal injury, property damage, or natural resources damage.
(j) As used in this Agreement, the following terms shall have the
following respective meanings:
(i) "Environmental and Safety Requirements" shall
mean all federal, state, and local statutes, regulations,
ordinances, and similar provisions having the force or effect of
law, all judicial and administrative orders and determinations,
all contractual obligations, and all common law concerning
public health and safety, worker health and safety, and pollution
or protection of the environment in effect at or prior to the
Closing Date, including without limitation all those relating to
the presence, use, production, generation, handling, transport,
treatment, storage, disposal, distribution, labeling, testing,
processing, discharge, release, threatened release, control, or
cleanup of any hazardous or otherwise regulated materials,
substances, or wastes, chemical substances or mixtures,
pesticides, pollutants, contaminants, toxic chemicals, petroleum
products or byproducts, asbestos, polychlorinated biphenyls,
noise, or radiation,
<PAGE>
(ii) "Environmental Lien" shall mean a lien, either
recorded or unrecorded, in favor of any governmental entity
relating to any liability of Lako or either of the KPI
Subsidiaries arising under Environmental and Safety Requirements.
6.13 Accounts Receivable. Except as provided by Section 4.2(d), all of
the accounts receivable of Lako (of the kind to be included in the Acquired
Assets) and of the KPI Subsidiaries reflected on the Latest Balance Sheet and
to be reflected on their books and records as of the Closing Date have been
collected or will be collectible (net of the allowance for doubtful accounts
and for customary credits and allowances in the ordinary course consistent
with past practice) in the Ordinary Course of Business after the Closing Date
at the aggregate net amount recorded therefor on the books and records of Lako
or the KPI Subsidiaries as of the Closing Date. As of the Closing Date, no
person or entity will have any lien on such receivables or any part thereof.
At the Balance Sheet Date there were, and at the Closing Date Sparton
anticipates there will be, claims by Lako and the KPI Subsidiaries against
customers or others, and other receivables owed to them, relating to
transactions prior to the Closing Date which are not recorded or which are
underrecorded on their books and records at the Closing Date ("Unbooked and
Underbooked Receivables"). If, after the Closing Date, any Unbooked or
Underbooked Receivables are collected by the KPI Subsidiaries or the Buyer,
the Threshold Loss Amount stated in Section 9.3(b) shall be increased dollar
for dollar by the amount collected in excess of the amount recorded at the
Closing Date.
6.14 Inventory. The inventories of the KPI Subsidiaries reflected onthe
Latest Balance Sheet Date on the Closing Date will be, stated at the lower of
original cost or market value in accordance with generally accepted accounting
principles consistently applied. The inventories reflected on the Latest
Balance Sheet, net of reserves applicable thereto, have been or will be
utilized in the Ordinary Course of Business.
6.15 Taxes.
(a) Sparton has timely filed consolidated income Tax Returns for
itself and members of the Affiliated Group of which Sparton is the
common parent (the "Sparton Affiliated Group"), including Lako and the
KPI Subsidiaries, required to be filed under the Internal Revenue Code
of 1986, as amended ("Code"). All material federal income Taxes due
and payable by the Sparton Affiliated Group with respect to each
taxable period during which Lako and either of the KPI Subsidiaries was
a member of the Sparton Affiliated Group have been paid. The KPI
Subsidiaries have timely filed all Tax Returns required to be filed
by them. Each such Tax Return has been <PAGE> prepared in compliance
with all applicable laws and regulations, and all such Tax Returns
are true and accurate in all respects. All Taxes due and payable by
Lako and the KPI Subsidiaries have been paid, and all such Taxes accrued
but not yet due as of June 30, 1996, are accrued on the Latest Balance
Sheet. Since June 30, 1996, neither Lako nor either of the KPI
Subsidiaries has incurred any liability for Taxes other than in the
Ordinary Course of Business.
The following Section 6.15(b) relates to the Michigan SBT returns
and income Tax Returns required to be filed by the KPI Subsidiaries.
(b) Except as set forth in Schedule 6.15 (the "Taxes Schedule"):
(i) neither Lako nor either of the KPI Subsidiaries has
waived any statute of limitations in respect of Taxes or
requested or been granted an extension of the time for filing any
Tax Return which has not yet been filed;
(ii) there is no action, suit, taxing authority proceeding
or audit now in progress, pending or, to Sparton's knowledge,
threatened against Lako or either of the KPI Subsidiaries with
respect to their Tax Returns;
(iii) there is no unresolved claim by a taxing authority
that Lako or either of the KPI Subsidiaries may be subject to
Taxes in a jurisdiction where Tax Returns are not filed;
(iv) neither Lako nor either of the KPI Subsidiaries is
a party to or bound by any Tax allocation or Tax sharing
agreement or has any current or potential contractual obligation
to indemnify any other person with respect to Taxes;
(v) no deficiency or proposed adjustment which has
not been settled or otherwise resolved for (A) any amount of
Tax has been proposed, asserted, or assessed by any taxing
authority against Lako or either of the KPI Subsidiaries, or (B)
any material amount of federal income Tax has been proposed,
asserted, or assessed against the Sparton Affiliated Group with
respect to any taxable period during which Lako or either of the
KPI Subsidiaries was a member of such Affiliated Group;
<PAGE>
(vi) neither Lako nor either of the KPI Subsidiaries
will be required (A) as a result of a change in method of accounting
for a taxable period ending on or prior to the Closing Date, to include
any adjustment in taxable income for any taxable period (or portion
thereof) ending after the Closing Date, (B) as a result of any "closing
agreement" as described in Code Section 7121 (or any corresponding
provision of state, local, or foreign law), to include any item of
income in, or exclude any item of deduction from, taxable income for
any period (or portion thereof) ending after the Closing Date, or (C)
as a result of any deferred intercompany gain described in Treasury
Regulations Section 1.1502-13 (or any corresponding or similar
provision of state, local, or foreign law), to include any item of
income in taxable income for any period (or portion thereof) ending
after the Closing Date; and
(vii) since January 1, 1987, neither Lako nor either of
the KPI Subsidiaries has been a member of an Affiliated Group
other than Sparton Affiliated Group.
(c) The Buyer will not be required to deduct and withhold any
amount pursuant to Section 1445(a) of the Code upon the transfer of the
Common Stock to the Buyer.
(d) Schedule 6.15 contains a list of states, territories, and
jurisdictions (whether foreign or domestic) in which each of the KPI
Subsidiaries is required to file Tax Returns relating to its income
Taxes.
(e) As used in this Agreement, the following terms shall have the
following meanings:
(i) "Affiliated Group" means an affiliated group as
defined in Section 1504 of the Code (or any analogous
combined, consolidated, or unitary group defined under state,
local or foreign income Tax law).
(ii) "Tax" or "Taxes means any federal, state,
provincial, local, foreign, or other income, gross receipts, ad
valorem, franchise, profits, single business, sales or use,
transfer, registration, excise, utility, environmental,
communications, real or personal property, capital stock,
license, payroll, wage or other withholding, employment, social
security, severance, stamp, occupation, alternative, or add-on
minimum, estimated, or other Taxes of any kind whatsoever <PAGE>
(including, without limitation, deficiencies, penalties, additions
to Tax, and interest attributable thereto), whether disputed or
not.
(iii) "Tax Return" means any return, information
report, or filing with respect to Taxes, including any schedules
attached thereto and including any amendment thereof.
(iv) "Treasury Regulations" means the United States
Treasury Regulations promulgated under the Code, and any
reference to any particular Treasury Regulation section shall be
interpreted to include any final or temporary revision of or
successor to that section regardless of how numbered or
classified.
6.16 Contracts and Commitments.
(a) Except as specifically contemplated by this Agreement and
except as set forth or referred to in Schedule 6.16 (the "Contracts
Schedule"), neither Lako nor either of the KPI Subsidiaries is a party
to nor bound by, whether written or oral, any:
(i) collective bargaining agreement or contract with
any labor union;
(ii) contract for the employment of any officer,
individual employee, or other person, or any severance
termination agreements (other than at-will employment
agreements with its employees);
(iii) agreement under which Lako or either of the KPI
Subsidiaries has incurred, assumed, or guarantied any
indebtedness for borrowed money or any capitalized lease
obligation, or created or suffered to exist a security interest,
pledge, or other lien on any of its assets;
(iv) contract which prohibits it from freely engaging
in business anywhere in the world;
(v) agreement pursuant to which Lako or either of the
KPI Subsidiaries subcontracts work to third parties;
<PAGE>
(vi) other agreement material to it whether or not
entered into in the Ordinary Course of Business.
(vii) license or royalty agreements;
(viii) lease or agreement under which it is lessee
of, or holds or operates, any personal property owned by any other
party calling for payments in excess of $100,000 annually;
(ix) except for customer purchase orders, contract or
group of related contracts with the same party for the purchase
of supplies, products, or other personal property, or for the
receipt of services which either calls for performance over a
period of more than six (6) months or involves a sum of more
than $100,000, provided that the list of such contracts in this
Section 6.16(a)(ix) shall be delivered to Buyer after the date
hereof but prior to the date of Closing;
(x) take or pay contracts; or
(xi) contracts or agreements with any officers,
stockholder, or affiliate of Sparton, Lako, or the KPI
Subsidiaries.
(b) With respect to each agreement and contract required to be
disclosed on Schedule 6.16:
(i) such agreement or contract is legal, valid, binding,
and enforceable in accordance with its terms, and is in full force
and effect;
(ii) neither Lako nor either of the KPI Subsidiaries is
in breach or default of any such contract or agreement to which
it is a party and no event has occurred which with notice or lapse
of time would constitute a breach or default; or
(iii) to the best of Sparton's knowledge, no third party
is in breach or default of any such contract or agreement, and no
event has occurred which with notice or lapse of time would
constitute a breach or default by such third party.
<PAGE>
(c) Sparton, Lako, or the KPI Subsidiaries have provided Buyer with
a true and correct copy of all written contracts which are referred to on
Schedule 6.16, together with all amendments thereto.
6.17 Intellectual Property Rights.
(a) "Intellectual Property Rights" shall mean all of the following
items owned by, issued to, or licensed to each of Lako and the KPI
Subsidiaries, along with all income, royalties, and payments due or
payable at the Closing or thereafter; patents, patent applications,
patent disclosures and inventions (whether or not patentable and whether
or not reduced to practice) and any reissues, continuations,
continuations in part, revisions, extensions, or reexamintions thereof,
trademarks, service marks, logos, trade names, (but not corporate names),
together with all goodwill associated therewith, copyrights and
copyrightable works, Internet domain names, and all registrations,
applications, and renewals of any of the foregoing; trade secrets and
confidential business information; computer software; and any other
intellectual property rights, including without limitation those listed
on Schedule 6.17 (the "Intellectual Property Rights Schedule").
"Intellectual Property Rights" expressly do not include the right or
license to use the name "Sparton" in any trade name or otherwise, or to
use any other intellectual property rights owned by or licensed to
Sparton. The right of use of the name "Sparton" by the KPI Subsidiaries
shall terminate as of the Closing Date. The right to use the name
"Sparton" is not included in the Acquired Assets.
(b) The Intellectual Property Rights comprise all of the
intellectual property rights necessary for the operation of the business
of Lako and each of the KPI Subsidiaries as currently conducted or as
currently proposed to be conducted.
(c) Except as set forth in Schedule 6.17(c):
(i) as a group, Lako and the KPI Subsidiaries own
and at the Closing will own all right, title, and interest in and
to, or have a valid and enforceable license to use, the Intellectual
Property Rights, and no written claim by any third party
contesting the validity, enforceability, use, or ownership of any
of the Intellectual Property Rights has been made to an officer
or director of Lako or any of the KPI Subsidiaries;
<PAGE>
(ii) neither Lako nor either of the KPI Subsidiaries has
received any written notice of, nor, to the knowledge of their
respective directors and officers, is aware of any facts which
indicate the likelihood of, any infringement or misappropriation
by or conflict with any third party with respect to the Intellectual
Property Rights.
All of the Intellectual Property Rights are or will be owned by, or
properly assigned or licensed to, Lako or the KPI Subsidiaries at the time
of the Closing, as set forth in the Intellectual Property Rights Schedule.
Except as set forth in the Intellectual Property Rights Schedule, the
transactions contemplated by this Agreement will have no material adverse
effect on the right, title, and interest in and to the Intellectual Property
Rights or the validity and enforceability thereof. Lako and the KPI
Subsidiaries have taken all necessary and desirable action to maintain and
protect the Intellectual Property Rights and will continue to maintain and
protect the Intellectual Property Rights prior to the Closing so as to not
materially adversely affect the validity or enforceability of the Intellectual
Property Rights. To the best knowledge of Lako and the KPI Subsidiaries, the
owners of any Intellectual Property Rights licensed to them have taken all
necessary and desirable action to maintain and protect the Intellectual
Property Rights subject to such licenses.
6.18 Litigation; Proceedings. Except as set forth on Schedule 6.18 (the
"Litigation Schedule"), there are no actions, suits, proceedings, orders, or
investigations pending or, to the best of Sparton's knowledge, threatened
against Lako or either of the KPI Subsidiaries before any federal, state,
municipal, or other governmental department, commission, board, bureau,
agency, or instrumentality, domestic or foreign, and neither Lako nor the KPI
Subsidiaries is subject to any judicial orders, judgments, or decrees.
6.19 Brokerage. Except for claims under Sparton's agreement with Slusser
Associates, Inc., there are no claims for brokerage commissions, finder's
fees, or similar compensation in connection with the transactions contemplated
by this Agreement based on any arrangement or agreement made by or on behalf
of Sparton, Lako, or the KPI Subsidiaries.
6.20 Governmental Licenses and Permits. Schedule 6.20 (the "Licenses
Schedule") sets forth permits, licenses, approvals, and other authorizations
of federal, state, and local governments, or other similar rights
(collectively, the "Government Licenses") owned by Lako or the KPI
Subsidiaries or used in the conduct of their respective businesses. Except
as indicated on Schedule 6.20, Lako and each of the KPI Subsidiaries owns or
possesses all right, title, and interest in and to all of the government
licenses which are necessary to conduct its business as presently constituted.
No loss or expiration of any <PAGE> government license is pending or, to
Sparton's knowledge, threatened, other than expiration in accordance with
the terms thereof.
6.21 Employees. To Sparton's and Lako's knowledge, no key executive
employee and no group of employees of Lako or either of the KPI Subsidiaries
has any plans to terminate employment. Lako and each of the KPI Subsidiaries
has complied in all material respects with all applicable laws relating to the
employment of personnel and labor, including provisions thereof relating to
wages, hours, equal opportunity, collective bargaining, and the payment of
social security and other taxes.
Lako and each of the KPI Subsidiaries has complied with the requirements
of the Workers Adjustment and Retraining Notification Act (WARN) and all
similar state laws, and the closing of Lako's plant at Lake Odessa, Michigan,
will not result in any obligation to any of the KPI Subsidiaries under WARN
or similar state law.
6.22 Employee Benefit Plans.
(a) Schedule 6.22 (the "Employee Benefit Plans Schedule") contains
an accurate and complete list of all Plans, as defined below, maintained
by Lako or each of the KPI Subsidiaries. For purposes of this Agreement,
the term "Plans" shall mean:
(i) employee benefit plans as defined in the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"); and
(ii) fringe benefit plans, policies, programs, and
arrangements, including without limitation stock bonus, deferred
compensation, pension, severance, bonus, vacation, incentive,
and health and welfare plans.
Except as set forth on Schedule 6.22, neither Lako nor either of the KPI
Subsidiaries has any obligation to contribute to any "multiemployer
pension plan," as such term is defined in Section 3(37) of ERISA, or with
respect to any employee benefit plan of the type described in Sections
4063 and 4064 of ERISA or in Section 413(c) of the Code.
(b) Neither Lako nor either of the KPI Subsidiaries contributes
to any Plan which provides health, life insurance, accident, or other
"welfare-type" <PAGE> benefits to current or future retirees, their
spouses or dependents, other than in accordance with applicable federal
or state continuation coverage law.
(c) Each Plan and all related trusts, insurance contracts and funds
have been maintained, funded, and administered in compliance in all
respects with all applicable laws and regulations, including but not
limited to ERISA and the Code.
(d) Each Plan that is intended to be qualified under Section 401(a)
of the Code, and each trust (if any) forming a part thereof, has received
a favorable determination letter from the Internal Revenue Service
("IRS") as to the qualification under the Code of such Plan and the
tax-exempt status of such related trust, and nothing has occurred since
the date of such determination letter that could adversely affect the
qualification of such Plan or the tax-exempt status of such related
trust.
(e) With respect to each Plan, Sparton has provided Buyer with
true, complete and correct copies, to the extent applicable, of:
(i) all documents pursuant to which the Plans are
maintained, funded, and administered;
(ii) the June 30, 1995, annual report (Form 5500
series) filed with the IRS;
(iii) the June 30, 1995, financial statements;
(iv) all governmental rulings, determinations, and
opinions (and pending requests for governmental rulings,
determinations, and opinions); and
(f) None of the KPI Subsidiaries nor any member of the controlled
group of companies (within the meaning of Section 414 of the Code), which
includes the KPI Subsidiaries, has incurred any liability to the PBGC
(other than PBGC premiums) or otherwise under Title IV of ERISA, and no
event exists which would reasonably be expected to result in any such
liability.
6.23 Insurance. Schedule 6.23 attached hereto (the "Insurance Schedule")
sets forth the following information with respect to each insurance policy
insuring the properties, business, or assets of Lako and each of the KPI
Subsidiaries:
<PAGE>
(a) The name of the insurer, the name of the policyholder, and the
name of each covered insured;
(b) The scope, period, and amount of coverage; and
(c) A description of any retroactive premium adjustments or other
loss-sharing arrangements.
6.24 Officers and Directors; Bank Accounts. Schedule 6.24 attached
hereto (the "Officers and Directors Schedule") lists all officers and
directors of each of the KPI Subsidiaries and all of the bank accounts of
Lako and the KPI Subsidiaries (designating each authorized signatory).
6.25 Affiliate Transactions. Except for the sale of the Leased Real
Property by the Smiths to Lako and except as disclosed on Schedule 6.25
attached hereto (the "Affiliate Transactions Schedule"), no officer or
director of Sparton or Lako or any of the KPI Subsidiaries, or any person
related by blood or marriage to any such person or any entity in which any
such person owns any beneficial interest (collectively, the "insiders"), is
a party to any agreement, contract, commitment, or transaction with Lako or
either of the KPI Subsidiaries or has any interest in any property, real or
personal or mixed, tangible or intangible, used in or pertaining to the
business of Lako or any of the KPI Subsidiaries.
6.26 Compliance with Laws. Lako and each of the KPI Subsidiaries and
its officers, directors, agents, and employees have complied in all material
respects with all applicable laws and regulations of federal, state, and local
governments and all agencies thereof (other than Environmental and Safety
Requirements which are covered by Section 6.12) which affect their business,
and no claims have been filed against any of them alleging a violation of any
such laws or regulations.
6.27 Disclosure. Neither this Agreement, nor any of the schedules,
attachments, or exhibits hereto prepared by Sparton, contain any untrue
statement of a material fact with respect to Lako or the KPI Subsidiaries, or
omit a material fact necessary to make the statement contained herein or
therein, in light of the circumstances in which they were made, misleading.
6.28 Closing Date. All of the representations and warranties contained
in this Article VI and elsewhere in this Agreement and all information
delivered to Buyer in any schedule, attachment or exhibit hereto are true and
correct on the date of this Agreement and will be true and correct on the
Closing Date, except to the extent that Sparton has otherwise advised Buyer
in writing prior to the Closing.
<PAGE>
6.29 Product Warranties. Lako and the KPI Subsidiaries have not made
any warranties with respect to the products manufactured and/or sold by them
other than those warranties expressly made in the literature accompanying such
products, the purchase orders for such products, and warranties implied by
law.
6.30 Tooling Invoices. All invoices issued by the KPI Subsidiaries
prior to June 30, 1996, to customers for tooling costs correctly reflect the
amount owed for such tooling.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF BUYER
As a material inducement to Sparton to enter into this Agreement, Buyer
hereby represents and warrants to Sparton that:
7.1 Organization and Corporate Power. Buyer is a corporation duly
organized, validly existing, and in good standing under the laws of the state
of Delaware, with full corporate power and authority to enter into this
Agreement.
7.2 Authorization. The execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by all requisite corporate action on the
part of Buyer, and no other corporate proceedings on its part are necessary
to authorize the execution, delivery, or performance of this Agreement. This
Agreement constitutes a valid and binding obligation of Buyer, enforceable in
accordance with its terms, except as enforceability hereof may be limited by
bankruptcy or other laws affecting creditor's rights generally and limitations
on the availability of equitable remedies.
7.3 No Violation. Buyer is not subject to or obligated under its
articles of incorporation, its bylaws, any applicable law, or rule or
regulation of any governmental authority, or any agreement or instrument, or
any license, franchise, or permit, or subject to any order, writ, injunction,
or decree, which would be breached or violated by its execution, delivery, or
performance of this Agreement.
7.4 Governmental Authorities and Consents. Except for its filing under
the Hart-Scott-Rodino Act, Buyer is not required to submit any notice, report
or other filing with any governmental authority in connection with the
execution or delivery by it of this Agreement or the consummation of the
transactions contemplated hereby or thereby. No consent, approval, or
authorization of any governmental or regulatory authority or any other party
or person is required to be obtained by Buyer in connection with its
execution, delivery, and performance of this Agreement or the transactions
contemplated hereby or thereby.
<PAGE>
7.5 Brokerage. There are no claims for brokerage commissions, finders'
fees, or similar compensation in connection with the transactions contemplated
by this Agreement based on any arrangement or agreement made by or on behalf
of Buyer.
7.6 Litigation. There are no actions, suits, proceedings, orders, or
investigations pending or, to the best of Buyer's knowledge, threatened
against Buyer before any federal, state, municipal, or other governmental
department, commission, board, bureau, agency, or instrumentality, domestic
or foreign, which would adversely affect Buyer's performance under this
Agreement or the consummation of the transactions contemplated hereby.
7.7 Buyer's Investment Representations. Buyer represents that it is
acquiring the Common Stock purchased hereunder with the present intention of
holding such securities for investment purposes and that it has no intention
of selling such securities in a public distribution in violation of federal
or state securities laws; provided that nothing contained herein will prevent
Buyer from transferring such securities pursuant to:
(a) Public offerings registered under the Securities Act of 1933,
as amended;
(b) Rule 144 of the Securities and Exchange Commission (or any
similar rule then in force) if such rule is available; or
(c) Any other legally available means of transfer.
7.8 Disclosure. Neither this Agreement, nor any of the schedules,
attachments, or exhibits hereto prepared by Buyer, contain any untrue
statement of a material fact with respect to the Buyer or, omit a material
fact necessary to make the statements contained herein or therein, in light
of the circumstances in which they were made, misleading.
7.9 Closing Date. All of the representations and warranties contained
in this Article VII and elsewhere in this Agreement, and all information
delivered to Sparton in any schedule, attachment or exhibit hereto are true
and correct in all material respects on the date of this Agreement and will
be true and correct in all material respects on the Closing Date, except to
the extent that Buyer has advised Sparton otherwise in writing prior to the
Closing.
ARTICLE VIII
TERMINATION
8.1 Termination. This Agreement may be terminated at any time prior to
the Closing:
<PAGE>
(a) By mutual written consent of Buyer and Sparton; or
(b) By either Buyer or Sparton if the Closing has not occurred on
or prior to December 31, 1996, provided that neither Buyer nor Sparton
will be entitled to terminate this Agreement pursuant to this Section
8.1(b) if such person's willful breach of this Agreement has prevented
satisfaction of the conditions or the consummation of the transactions
contemplated hereby at or prior to such time.
8.2 Effect of Termination. If this Agreement is terminated as provided
above, this Agreement will forthwith become void and there will be no
liability on the part of any party hereto to any other party hereto, except
for the obligations of the parties hereto in Sections 9.4, 9.5, and 10.1, and
except that nothing herein will relieve any party from any breach of this
Agreement prior to such termination.
ARTICLE IX
ADDITIONAL AGREEMENTS
9.1 Survival. Subject to the limitations set forth in Section 9.3
below, all representations, warranties, covenants, and agreements set forth in
this Agreement or in any writing delivered in connection with this Agreement
will survive the Closing Date and the consummation of the transactions
contemplated hereby.
9.2 Sparton's Guaranty; Buyer's Indemnification. Schedule 9.2 sets
forth the obligations of any of the KPI Subsidiaries which are guarantied by
Sparton ("Guarantied Obligations"). Buyer agrees to indemnify Sparton and
hold it harmless against any loss, liability, damage, or expense (including
reasonable legal fees and costs) which Sparton may suffer, sustain, or become
subject to by reason of any claim, suit, action, or liability brought or
asserted against Sparton for payment of all or any part of the Guarantied
Obligations. The provisions in Section 9.3(d) relating to the defense of the
claim by Buyer, as the Indemnifying Party, and the rights of Sparton, as the
Indemnified Party, shall apply to claims, suits, actions, and liabilities
brought or asserted against Sparton relating to Guarantied Obligations.
9.3 General Indemnification.
(a) Subject to the limitations set forth in (b) below, Sparton
agrees to indemnify Buyer, its officers, directors, and stockholders (the
"Buyer Parties") and hold them harmless against any loss, liability,
deficiency, damage, or expense (including reasonable legal expenses and
costs) which <PAGE> Buyer Parties may suffer, sustain or become subject
to, as a result of (i) the breach of any representation or warranty made
by Sparton in Article VI of this Agreement, provided that, for purposes
of determining whether a breach of any representation or warranty set
forth in Section 6.12 of this Agreement has occurred, such representation
and warranty shall be read without any exception for disclosed matters,
and, in particular, any reference to the matters set forth on Schedule
6.12 shall be disregarded and ignored, (ii) the breach of any other
representation, warranty, covenant, or agreement made by Sparton in this
Agreement, and (iii) the Excluded Liabilities.
(b) The indemnification provided for by Sparton in Section
9.3(a)(i) above is subject to the following limitations:
(i) Sparton will be liable to Buyer Parties only if
Buyer gives Sparton written notice thereof within twelve (12)
months after the Closing Date; except for claims arising from
breaches of the representations and warranties; (A) set forth in
Section 6.12 as to which claims must be made within forty-two
(42) months after the Closing Date; (B) set forth in Sections 6.7,
6.18, and 6.22 as to which claims must be made within twenty-four
(24) months after the Closing Date;(C) set forth in Section 6.15
as to which claims must be made prior to the expiration of the
applicable statute of limitation with respect thereto; and (D)
set forth in Sections 6.1, 6.2, 6.3, 6.5 and 6.19 as to which
claims may be made at any time.
(ii) except for those matters set forth in Sections 6.15
and 6.18, Sparton will not be liable to Buyer Parties for any such
loss, liability, damage, or expense unless the aggregate amount
of all such losses, liabilities, damages, and expenses relating to
all such breaches exceeds $1,000,000 (the "Threshold Loss
Amount") and, in the event that the aggregate amount of all such
losses, liabilities, damages, and expenses exceeds the Threshold
Loss Amount, Sparton shall be liable only for the excess over
the Threshold Loss Amount and, in any event, Sparton's liability
for such losses, liabilities, damages, and expenses shall not
exceed $15 million (except that the limitation on Sparton's
liability to Buyer with respect to losses, liabilities, damages, and
expenses resulting from a breach of Sections 6.1, 6.2, 6.3, 6.5,
and 6.19 shall not exceed the Purchase Price and shall not be
subject to the condition of the Threshold Loss Amount). The <PAGE>
Threshold Loss Amount shall be increased dollar for dollar, both
as provided in Section 6.13, and, if after the Closing Date, any
liability recorded on the books and records of a KPI Subsidiary
at the Closing Date or included in the Acquired Assets is
satisfied for an amount less than the recorded amount.
(iii) If Sparton becomes liable to Buyer after the
aggregate amount of losses ($1,000,000) set forth in
subparagraph (ii) is exceeded, Sparton nevertheless shall not be
liable for any losses, liabilities, damages, or expenses the Buyer
Parties may suffer, sustain, or become subject to, if such losses,
liabilities, damages, or expenses resulting from a claim with
respect to any particular breach are less than $10,000; provided
that (A) if the losses, liabilities, damages, or expenses related to
such claim equals or exceeds $10,000, Sparton shall be liable for
the entire amount of the losses, liabilities, damages, or expenses
related thereto, and (B) for purposes of this provision, any claim
or series of claims arising out of or relating to the same, similar,
or related facts, circumstances, occurrences, transactions, or
conditions shall constitute one claim with respect to any
particular breach.
(iv) Sparton's agreement to indemnify Buyer against
losses, liabilities, deficiencies, damages, or expenses arising
from customer product liability claims shall be governed by and
limited as provided in Section 9.10.
(c) Buyer agrees to indemnity Sparton and hold it harmless against
any loss, liability, damage, or expense (including reasonable legal
expenses and costs) which Sparton may suffer, sustain, or become subject
to, as the result of a breach of any representation, warranty, covenant,
or agreement by Buyer contained in this Agreement; provided, however,
that Buyer will not be liable to Sparton for any such loss, liability,
deficiency, damage, or expense relating to breaches of Buyer's
representations and warranties contained in Article VII hereof unless
the aggregate amount of such losses, liabilities, deficiencies, damages,
or expenses resulting to Sparton from all breaches or claims exceeds
$1,000,000, and in the event that the aggregate amount of all such
losses, liabilities, damages, and expenses exceeds $1,000,000, Buyer
shall be liable only for the excess over $1,000,000; provided further,
that Buyer will not be liable for any loss, liability, deficiency,
damage, or expense relating to breaches of Buyer's representations and
warranties contained in Article VII <PAGE> (except Sections 7.1, 7.2,
and 7.3) hereof unless written notice of such breach is given by Sparton
to Buyer within two (2) years of the Closing Date.
(d) If a party hereto seeks indemnification under this Section 9.3
or Section 9.10, such party (the "Indemnified Party") shall give written
notice to the other party (the "Indemnifying Party") of the facts and
circumstances giving rise to the claim. If any suit, action, claim,
liability, or obligation shall be brought or asserted by any third party
which, if adversely determined, would entitle the Indemnified Party to
indemnity pursuant to this Section 9.3 or Section 9.10, the Indemnified
Party shall promptly notify the Indemnifying Party of the same in
writing, specifying in detail the basis of such claim and the facts
pertaining thereto and the Indemnifying Party, if it so elects, shall
assume and control the defense thereof (and shall consult with the
Indemnified Party with respect thereto),including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment
of expense. If the Indemnifying Party elects to assume and control the
defense, the Indemnified Party shall have the right to employ counsel
separate from counsel employed by the Indemnifying Party in any such
action and to participate in the defense thereof, but the fees and
expenses of such counsel employed by the Indemnified Party shall be at
the expense of the Indemnified party unless the Indemnifying Party has
failed to assume the defense or employ counsel reasonably acceptable to
the Indemnified Party. The Indemnifying Party shall not be liable for
any settlement of any such action or proceeding effected without the
written consent of the Indemnifying Party, provided that, if there
shall be a final judgment for the plaintiff in any such action, the
Indemnifying Party agrees to indemnify and hold harmless the Indemnified
Party from and against any loss or liability by reason of such judgment.
(e) The foregoing indemnification provisions are in addition to,
and not in derogation of, any statutory or common law remedy any party
may have for misrepresentation, breach of warranty, or breach of
covenant.
9.4 Investigation and Confidentiality.
(a) Prior to the Closing Date, Buyer may make or cause to be made
such investigation of the business and properties of the KPI Subsidiaries
and the Acquired Assets as it deems necessary or advisable to familiarize
itself therewith. Sparton agrees to permit Buyer, its representatives
and representatives of the financial institutions which are considering
participation in the financing of this transaction to (i) have full
access to the premises, books, and records of Lako and the KPI
Subsidiaries at reasonable hours, (ii) <PAGE> visit and inspect any of
their properties, and (iii) discuss their affairs, finances, and accounts
with the directors, officers, key employees, key customers, key
suppliers, and independent accountants.
(b) If the transactions contemplated by this Agreement are not
consummated, Buyer will not disclose or use at any time any information
and materials obtained during its investigation, and Buyer and its
representatives will return to Sparton originals of and destroy copies
of all memoranda, notes, plans, records, documentation, and other
materials obtained in connection with the transactions contemplated by
this Agreement no matter where such material is located and no matter
what form the material may be in, which Buyer may then possess or have
under its control. In the event of the breach of any of the provisions
of this Section 9.4, Sparton may apply to any court of law or equity of
competent jurisdiction for specific performance and/or injunctive or
other relief (without the posting of bond or other security) in order to
enforce or prevent any violations of the provisions hereof.
9.5 Expenses. Except as otherwise provided herein, Buyer will pay
all of its, and Sparton will pay all of its, expenses (including fees and
expenses of legal counsel, investment bankers, brokers, or other
representatives and consultants, and appraisal fees and expenses) incurred
in connection with the negotiation of this Agreement, the performance of its
obligations hereunder, and the consummation of the transactions contemplated
hereby.
9.6 Noncompete. Sparton and Lako agree that for a period of four (4)
years after the Closing Date, (a) they will not, directly or indirectly,
engage in any business which is the same or substantially similar to the
business now conducted at the Gladwin Plant or by any of the KPI Subsidiaries,
provided that Sparton may purchase up to an aggregate of 5 percent of the
outstanding voting securities of any entity whose securities are listed on a
national securities exchange or traded in the NASDAQ national market system,
(b) it will not induce or attempt to induce any employee at the Gladwin Plant
or of the KPI Subsidiaries to accept employment by Sparton or one of its
affiliated corporations, (c) induce or attempt to induce any customer or
supplier of Buyer as owner of the Acquired Assets or any of the KPI
Subsidiaries to cease doing business with any of them, or otherwise to
interfere with the business relationship between any of the customers and
suppliers of the KPI Subsidiaries or the Gladwin Plant, or (d) disclose to any
third party any confidential or proprietary information about the businesses
or operations of the KPI Subsidiaries.
9.7 Tax Matters.
(a) Tax Claims. Sparton is responsible for payment of all federal
and state income Taxes and state of Michigan SBT taxes owed for all
periods <PAGE> through June 30, 1996, and shall indemnify Buyer for
any such Income Taxes which are not accrued on the Latest Balance Sheet,
and for any income Taxes with respect to any consolidated Tax Return for
any period ending on or prior to the Closing Date, subject to Buyer's
obligation to indemnify Sparton for certain of such income Taxes and
state of Michigan SBT taxes as set forth in Section 9.7(c). Buyer agrees
that Sparton shall have the right and authority in its own name and in
the name of the KPI Subsidiaries both to defend claims by any taxing
authorities for additional Taxes with respect to such taxable periods,
and to pursue claims for refunds of Taxes paid or payable with respect
to such fiscal years. With respect to claims for refunds, Sparton shall
retain all amounts collected in pursuit of such claims. Sparton shall
also have the right to settle claims by taxing authorities for additional
Taxes, and to settle its claims for refunds, upon such terms and
conditions as it shall see fit in its discretion, provided that, Sparton
shall not, without Buyer's consent, agree to any settlement with respect
to any Tax if such settlement could adversely affect the past, present,
or future Tax liability of Buyer, any of its affiliates or, upon the
Closing, any of the KPI Subsidiaries. Sparton shall be responsible for
all costs and expenses incurred in connection with the defense of or in
pursuit of such Tax claims, including legal fees and expenses, litigation
costs, and the cost of filing amended Tax Returns. Buyer agrees to cause
the KPI Subsidiaries, their officers, agents, and employees to cooperate
with and assist Sparton, as reasonably requested, in Sparton's defense of
or pursuit of such Tax claims.
(b) Section 338(h)(10) Elections.
(i) Sparton agrees, if so directed by Buyer, to join
with Buyer in making an election under Code
Section 338(h)(10) with respect to the sale and purchase of any
of the KPI Subsidiaries and to make any analogous elections
under applicable state law provisions (including such state
elections, the "Section 338(h)(10) Elections"). Sparton and
Buyer shall jointly prepare Internal Revenue Service
Form 8023-A, and such other forms and schedules as are
necessary or required to make the Section 338(h)(10) Elections,
and each covenants and agrees with the other that it shall
execute such forms and schedules and shall take all such other
acts as are necessary to make or perfect such Section 338(h)(10)
Elections. Sparton shall pay all Taxes payable by reason of such
Section 338(h)(10) Elections, subject to Buyer's obligation to
reimburse Sparton for any net increase in Taxes, other than <PAGE>
income Taxes, incurred by Sparton as a result of such Section
338(h)(10) Election.
(ii) With respect to the Acquired Assets and each KPI
Subsidiary for which a Section 338(h)(10) Election is made
pursuant to Section 9.7(a)(i) hereof, Buyer and Sparton shall
allocate the portion of the Purchase Price (including the amount
of liabilities) among the Acquired Assets and the assets of each
KPI Subsidiary as set forth on the Allocation Schedule attached
hereto, and such Allocation Schedule shall be used by the parties
and their affiliates in preparing (A) all Tax Returns, and (B)
Form 8023-A (and such other forms and schedules required to
make the Section 338(h)(10) Elections) for Sparton and the
Buyer. All allocations made pursuant to this Section 9.7(b)(ii)
shall be binding upon the parties, their affiliates, and upon each
of their successors and assigns, and the parties shall report the
transactions contemplated by this Agreement in accordance with
such allocations for all Tax purposes.
(iii) Buyer agrees to indemnify and hold Sparton
harmless from and against any and all Taxes, other than income
Taxes, paid by Sparton or any affiliated entity as a result of the
Section 338(h)(10) Elections or the sale of the Acquired Assets,
to the extent such Taxes would not have been incurred had such
Elections or sale not been made, including, without limitation,
real estate transfer taxes, vehicle transfer taxes, and recapture of
Michigan Single Business Tax capital acquisition deductions,
but excluding taxes paid by Sparton on the gains resulting from
such Elections and from the sale of the Acquired Assets, but
only to the extent of the net excess of such Taxes over the
amount of such Taxes that would have been incurred had such
Elections or sale not been made.
(c) Short Tax Year
(i) Sparton and Buyer acknowledge that Sparton will
prepare and file consolidated Tax Returns for the period July 1,
1996, through the Closing Date and include each of the KPI
Subsidiaries in such Tax Returns and shall report all items with
respect to the KPI Subsidiaries consistent with past practice.
Sparton and Buyer agree that Sparton shall be liable for payment
<PAGE> of all Taxes to which such Tax Returns relate for the
period covered by such Tax Returns, provided that, Buyer shall
be responsible for, and shall reimburse Sparton within ten (10)
business days after request therefor, for the amount by which
Sparton's liability (excluding the effect of any tax credits or tax
loss carryforwards) for Taxes attributable to the taxable income
of the KPI Subsidiaries for the period July 1, 1996, through the
Closing Date (including income Taxes attributable to the gains
resulting from the transactions contemplated by this Agreement)
exceeds the liability that Sparton would have incurred for
income Taxes attributable to the gains resulting from the
transactions contemplated by this Agreement if such
transactions had been consummated on July 1, 1996.
(ii) Sparton shall prepare all state of Michigan SBT
Tax Returns required to be filed with respect to any of the KPI
Subsidiaries for the period beginning July 1, 1996, and ending
on the Closing Date in accordance with past practice, and shall
submit such Tax Returns to Buyer at least fifteen (15) days prior
to the due date for filing such Tax Returns for Buyer's approval,
which approval shall not be unreasonably withheld. Buyer shall
cooperate as reasonably requested in assisting Sparton in the
preparation of such state of Michigan SBT Tax Returns.
Sparton shall pay all state of Michigan SBT taxes due with
respect to any of the KPI Subsidiaries for the period beginning
on July 1, 1996, and ending on the Closing Date, and Buyer
shall be responsible for, and shall reimburse Sparton within ten
(10) days after request therefor, for the amount of such SBT
taxes to the extent such SBT taxes are not attributable to any
Section 338(h)(10) Elections, provided that, Buyer shall
reimburse Sparton for such SBT taxes to the extent such state of
Michigan SBT taxes are incurred as the result of the recapture
of capital acquisition deductions attributable to any
Section 338(h)(10) Elections.
(d) Taxes of Other Persons. Sparton agrees to, and hereby does,
indemnify and hold harmless Buyer from and against any liability of each
KPI Subsidiary for Taxes of any person other than such KPI Subsidiary (i)
under Treasury Regulations Section 1.1502-6 (or any successor provision
or any similar provision of state, local, or foreign law), (ii) as a
transferee or successor, (iii) by contract, or (iv) otherwise.
<PAGE>
(e) Cooperation on Tax Matters. Buyer, Sparton, and each KPI
Subsidiary shall cooperate fully, as and to the extent reasonably
requested by the other party, in connection with the filing of Tax
Returns pursuant to this Section 9.7 and any audit, litigation, or other
proceeding with respect to Taxes. Such cooperation shall include the
retention and (upon the other party's request) the provision of records
and information which are reasonably relevant to any such audit,
litigation, or other proceeding and making employees available on a
mutually convenient basis to provide additional information and
explanation of any material provided hereunder. Buyer, Sparton, and the
KPI Subsidiaries agree (i) to retain all books and records with respect
to Tax matters and pertinent to the KPI Subsidiaries relating to any
taxable period beginning before the Closing Date until the expiration of
the statute of limitations (and, to the extent notified by Buyer or
Sparton, any extensions thereof) of the respective taxable periods, and
to abide by all record retention agreements entered into with any taxing
authority, and (ii) to give the other party reasonable written notice
prior to transferring, destroying, or discarding any such books and
records and, if the other party so requests, the KPI Subsidiaries or
Sparton, as the case may be, shall allow the other party to take
possession of such books and records. Buyer and Sparton further agree,
upon request, to use their best efforts to obtain any certificate or
other document from any governmental authority or any other person as may
be necessary to mitigate, reduce, or eliminate any Tax that could be
imposed (including, but not limited to, with respect to the transactions
contemplated hereby).
(f) Tax Sharing Agreements. All Tax sharing agreements or similar
agreements with respect to or involving any KPI Subsidiary shall be
terminated as of the Closing Date and, after the Closing Date, no KPI
Subsidiary shall be bound thereby or have any liability thereunder.
9.8 Sparton's Access to Records. After the Closing, Buyer will, and
will cause the KPI Subsidiaries and their respective successors and assigns
to, permit Sparton, its employees, agents, accounting and legal
representatives, to have reasonable access at reasonable times in a manner
so as not to interfere with the normal business operations of the KPI
Subsidiaries, to their books and records for periods prior to the Closing
Date as required by Sparton for the prosecution of the claims referred to in
Section 9.7 and for all other proper purposes.
9.9 Sparton Shares in Retirement Trusts. Certain profit sharing
retirement trusts, maintained by Lako and the KPI Subsidiaries for the benefit
of their employees, own shares of common stock of Sparton among the assets of
the plan. Following the Closing, <PAGE> Buyer agrees to use its best efforts
to cause the trustees of such trusts, should they decide to sell any of the
Sparton common stock, to offer the same for sale to Sparton at the then
current market price.
9.10 Product Warranty and Liability Claims. This Section 9.10 applies to
products, assemblies, and components of assemblies which are (a) produced by
the Gladwin Plant or by a KPI Subsidiary prior to the Closing Date, and (b)
which either have been designed by the customer or with respect to which the
customer has approved or retained the right to approve the design thereof.
Such products, assemblies, and components, collectively, are referred to in
this Section 9.10 as "Products." This Section 9.10 applies notwithstanding
any warranty, representation, covenant, agreement, understanding, or
indemnification made by Sparton in this Agreement or otherwise.
If, after the date of this Agreement, a customer claims that a KPI
Subsidiary has breached a warranty to the customer with respect to a Product
or otherwise is liable to reimburse the customer for damages, losses, or
expenses incurred or to be incurred by the customer in connection with a
recall, repair, or replacement program involving a Product, Sparton's
liability to Buyer under this Agreement shall be limited to and shall not
exceed the reasonable cost to repair or replace such Product, provided,
however, that in the event the customer makes claim for damages, losses, or
expenses in excess of the reasonable cost to repair or replace such Product,
Sparton shall either (i) agree to reimburse Buyer's payment of an amount
necessary to settle the claim of the customer, or (ii) assume defense of and
liability for such customer claims, in which event the "basket" provisions
set forth in Section 9.3(b)(ii) shall not apply to such excess and shall pay
all such claims.
If, after the date of this Agreement, a person claims (a "Product
Liability Claim") that a KPI Subsidiary or the Buyer as owner of the Acquired
Assets is liable for injuries or death caused by a Product, Sparton shall be
liable with respect to such claim only to the extent such claim is covered by
insurance maintained by Sparton and Sparton shall pay any deductible payable
under such insurance. Any such product liability in excess of Sparton's
insurance coverage+ shall be the responsibility of Buyer.
The provisions of Section 9.3(d) shall apply to Sparton's indemnification
rights and responsibilities under this Section 9.10.
As of the date of this Agreement, neither Sparton, Lako, nor any KPI
Subsidiary has received notice from a customer seeking reimbursement for
damages, losses, or expenses of the kind covered by this Section 9.10.
9.11 Change of Corporate Name. Promptly following the Closing, Buyer
will cause the charters of each of the KPI Subsidiaries to be amended to
change the corporate <PAGE> name of each to a name which does not include
"Sparton" or any other name which is confusingly similar to "Sparton."
9.12 Assignment of Kostecki Judgment and KPI v Clayton deWindt. Sparton
Engineered Products, Inc.--KPI Group has assigned, or prior to the Closing
will assign, to Sparton a judgment in its favor in the amount of $206,000
entered in the Michigan Circuit Court for the County of Ottawa, Case No.
91-15782-CB, entitled Sparton Engineered Products, Inc.--KPI Group v Stanley
V. Kostecki, et al.
Sparton shall have the right and obligation at its expense to conduct in
the name of Sparton Engineered Products, Inc.--KPI Group, as plaintiff, its
pending case against Clayton deWindt et al., defendant. Sparton shall bear
all expenses, including legal fees and expenses, shall have the right to
collect and retain any settlement or judgment in plaintiff's favor obtained
in such case, and shall be liable for any judgment or settlement amount in
favor of defendant in such case.
9.13 Environmental Matters.
(a) In addition to any and all other indemnities Sparton has
provided to Buyer, Sparton shall be responsible for, indemnify, and hold
harmless the Buyer Parties from and against, any loss, liability, damage,
obligation, or expense (including reasonable legal and consultant fees
and costs, and any damages or expenses associated with any investigation,
abatement, remediation, corrective action, personal injury, or natural
resource damage) related to (i) the underground storage tanks located at
the Gladwin Plant, and (ii) any asbestos-containing materials ("ACM") at
the White Cloud facility. Such indemnification shall not be subject to
the limitations set forth in Section 9.3(b) of this Agreement.
(b) To the extent not completed prior to the Closing, Sparton
shall, at Sparton's sole cost and expense, conduct the following actions
to remove the underground storage tanks at the Gladwin Plant through
Clayton Environmental or another nationally Qualified Underground Storage
Tank Consultant (as defined in Michigan Statute Section 324.21542)
reasonably satisfactory to Buyer:
(i) within thirty (30) days after the Closing Date,
submit all necessary notifications to governmental agencies in
order to obtain the required approvals to remove the tanks;
<PAGE>
(ii) within sixty (60) days after receiving all approvals
requested pursuant to subsection (b)(i), remove and properly
dispose of the tanks and sample for the presence of a release
where contamination is most likely to be present;
(iii) promptly conduct such remedial actions and other
actions required by the Michigan Fire Marshal and the Michigan
Department of Environmental Quality ("DEQ") or any other
governmental agency, fill and regrade the areas, and return the
areas around the tanks to their prior condition;
(iv) promptly upon the completion of all field work,
prepare and submit to DEQ a closure report documenting in
reasonable detail the actions taken to address the tanks and
remediate any releases;
(v) within sixty (60) days after the submission of the
closure report, provide Buyer with DEQ confirmation of receipt
of such report and a letter from DEQ or a Qualified
Underground Storage Tank Consultant indicating that no further
action is required in connection with the tanks.
(c) All actions of Sparton required by or relating to subsection
9.13(b) of this Agreement shall be conducted in compliance with all
applicable Environmental and Safety Requirements and in a manner that
does not unreasonably interfere with Buyer's operations at the Gladwin
Plant or the White Cloud facility. All such actions shall be subject to
Buyer's approval, provided that such approval shall not be unreasonably
withheld. Sparton shall, at its expense, promptly restore to its prior
condition any property that is altered or damaged as a result of such
actions. Sparton shall, at its expense, promptly and properly dispose
of all soil, groundwater, decontamination water, samples, waste, ACM, or
other material generated in connection with such actions. Sparton shall
keep Buyer reasonably apprised of material facts and events related to
the removal of the tank or the ACM. In particular, Sparton shall: (i)
provide Buyer with reasonable advance notice regarding any meetings
between Sparton and DEQ or any other governmental agency and allow Buyer
to attend, at Buyer's expense, such meetings; (ii) provide Buyer with
copies of letters and notices it receives from DEQ or any other
governmental agency; and (iii) provide Buyer with copies of any material
submittals to DEQ or any other governmental agency, including reports,
analytical data, letters, or other documents.
<PAGE>
9.14 Exclusivity. Sparton, on behalf of itself and its affiliated
entities, agrees that neither it nor any of its representatives, directors,
officers, agents, or affiliates will entertain or discuss a possible sale or
other disposition of the Common Stock, the Acquired Assets, or the capital
stock of Lako, or the assets of the KPI Subsidiaries (other than inventory in
the Ordinary Course of Business) or any interest therein with any other party,
or provide any information to any other party in connection therewith.
ARTICLE X
MISCELLANEOUS
10.1 Press Releases and Announcements. No press releases related to
this Agreement or the transactions contemplated herein, or other announcements
to the employees, customers, or suppliers of Sparton, Lako, or the KPI
Subsidiaries will be issued without the mutual approval of all parties hereto,
except any public disclosure which any party in good faith believes is
required by law or regulation.
10.2 Further Transfers. Sparton and Lako will execute and deliver such
further instruments of conveyance and transfer and take such additional action
as Buyer may reasonably request to effect, consummate, confirm, or evidence
the transfer to Buyer of the Common Stock and the Acquired Assets and any
other transactions contemplated hereby.
10.3 Specific Performance. Sparton acknowledges that, in the event of a
breach by Sparton of this Agreement, money damages may be inadequate and Buyer
may have no adequate remedy at law. Accordingly, Sparton agrees that Buyer
shall have the right, in addition to any other rights and remedies existing
in its favor, to enforce its rights and the obligations of Sparton and Lako,
not only by an action or actions for damages, but also by an action or actions
for specific performance, injunctive, and/or other equitable relief.
10.4 Amendment and Waiver. This Agreement may be amended and any
provision of this Agreement may be waived, provided that any such amendment or
waiver will be binding upon a party only if such amendment or waiver is set
forth in a writing executed by Buyer, Lako, and Sparton. No course of dealing
between or among any persons having any interest in this Agreement will be
deemed effective to modify, amend, or discharge any part of this Agreement or
any rights or obligations of any party under or by reason of this Agreement.
10.5 Notices. All notices, demands, and other communications given or
delivered under this Agreement will be in writing and will be deemed to have
been given when personally delivered, mailed by first class mail, return
receipt requested, or delivered by express courier service or facsimile
transmissions. Notices, demands, and communications <PAGE> to the parties
will, unless another address is specified in writing, be sent to the address
indicated below:
To Sparton or Lako: Sparton Corporation
2400 East Ganson Street
Jackson, Michigan 49202
Attention: Chairman
Fax: 517-787-1822
With copies to: Mr. R. Jan Appel
Vice President and General Counsel
Sparton Corporation
2400 East Ganson Street
Jackson, Michigan 49202
Fax: 517-787-1822
and Varnum, Riddering, Schmidt & Howlett LLP
P.O. Box 352
Grand Rapids, Michigan 49501-0352
Attention: Mr. James N. DeBoer
Fax: 616-336-7000
To Buyer: Dura Automotive Systems, Inc.
2791 Research Drive
Rochester Hills, Michigan 48309-3579
Attention: David R. Bovee
Fax: 810-299-7501
With a copy to: Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Jeffrey C. Hammes
Fax: 312-861-2200
and to: Dura Automotive Systems, Inc.
4508 IDS Center
Minneapolis, Minnesota 55402
Attention: Scott D. Rued, Vice President
Fax: 612-332-2021
<PAGE>
10.6 Binding Agreement; Assignment.
(a) This Agreement and all of the provisions hereof will be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of
the rights, interests, or obligations hereunder may be assigned by
Sparton or Lako without the prior written consent of Buyer or by Buyer
(except as provided in (b) or (c) below) without the prior written
consent of Sparton.
(b) Buyer may (at any time prior to the Closing), at its sole
discretion, assign, in whole or in part, its rights and obligations
pursuant to this Agreement to one or more of its wholly owned
subsidiaries; provided that, in the event of any such assignment, Buyer
will guaranty the obligations of any such assignee under this Agreement
(such guaranty to be in form and substance reasonably satisfactory to
Sparton).
(c) Buyer may assign its rights under this Agreement for collateral
security purposes to the lenders providing financing for the transactions
contemplated hereby and all extensions, renewals, replacements,
refinancings, and refundings thereof, in whole or in part.
10.7 Severability. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provisions or the remaining provisions of
this Agreement.
10.8 Captions. The captions used in this Agreement are for convenience
of reference only and do not constitute a part of this Agreement and will not
be deemed to limit, characterize, or in any way affect any provision of this
Agreement, and all provisions of this Agreement will be enforced and construed
as if no caption had been used in this Agreement.
10.9 Entire Agreement. This Agreement and the documents referred to
herein contain the entire agreement between the parties and supersede any
prior understandings, agreements, or representations by or between the
parties, written or oral, which may have related to the subject matter hereof
in any way.
10.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which taken
together will constitute one and the same instrument.
<PAGE>
10.11 Governing Law. All questions concerning the construction,
validity, and interpretation of this Agreement and the Exhibits and Schedules
hereto and the performance of the obligations imposed by the transactions
contemplated hereby shall be governed by and construed in accordance with the
domestic laws of the state of Michigan, except that wherever applicable the
Ohio General Corporation Law shall govern issues relating to Sparton's
corporate power and authority.
10.12 Parties in Interest. Nothing in this Agreement, express or
implied, is intended to confer on any person other than the parties and their
respective successors and assigns any rights or remedies under or by virtue
of this Agreement.
(Signatures on separate page 50 attached)
<PAGE>
(Signature page deliberately separated from Agreement
between the undersigned dated October 3, 1996.
Body of Agreement terminated on page 49 with Section 10.12)
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
SPARTON CORPORATION DURA AUTOMOTIVE SYSTEMS, INC.
By /s/ John J. Smith By /s/ David Bovee
John J. Smith David Bovee
Its Chairman Its Vice President
SPARTON ENGINEERED PRODUCTS, INC.,
LAKE ODESSA GROUP
By /s/ John J. Smith
John J. Smith
Its President
<PAGE>
<TABLE>
<CAPTION>
APPENDIX B
SPARTON CORPORATION AND SUBSIDIARIES
Proforma Consolidated Condensed Balance Sheet (Unaudited) (A)
June 30, 1996
Proforma
ASSETS Historical Adjustments Proforma
<S> <C> <C> <C>
Current assets:
Cash $718,363 $79,040,000 (D) $718,363
(33,594,225)(E)
(45,445,775)(E)
Short-term investments 45,445,775 (E) 45,445,775
Income taxes recoverable 2,300,000 2,300,000
Accounts receivable 18,805,122 18,805,122
Inventories 34,217,538 34,217,538
Prepaid expenses 2,840,189 2,840,189
Current assets of
discontinued
operations 34,351,930 (25,471,400)(D) 9,225,495
344,965 (D)
------------ ----------- ------------
Total current assets $93,233,142 $20,319,340 $113,552,482
Other assets 3,587,835 3,587,835
Property, plant and
equipment - net 9,402,283 9,402,283
Non-current assets,
principally property
plant and equipment,
of discontinued
operations - net 13,047,403 (8,523,921)(D) 4,523,482
------------ ----------- ------------
Total assets $119,270,663 $11,795,419 $131,066,082
============ =========== ============
See accompanying notes to proforma financial information.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPARTON CORPORATION AND SUBSIDIARIES
Proforma Consolidated Condensed Balance Sheet (Unaudited) (A)
June 30, 1996
LIABILITIES AND SHARE OWNERS' EQUITY
Proforma
Historical Adjustments Proforma
<S> <C> <C> <C>
Current liabilities:
Notes payable $33,594,225 (33,594,225)(E) 0
Accounts payable 11,289,716 11,289,716
Income taxes 279,676 19,365,000 (D)(F) 19,644,676
Accrued liabilities 6,127,877 6,127,877
Current liabilities of
discontinued operations 12,000,855 (10,300,705)(D) 3,600,150
1,900,000 (D)
----------- ----------- ------------
Total current
liabilities 63,292,349 (22,629,930) 40,662,419
Non current liabilities 4,217,403 4,217,403
Non current liabilities - 231,032 0 (D) 231,032
discontinued operations
Share owners' equity:
Common stock - $1.25
par value; 8,500,000
shares authorized,
7,811,370, shares out-
standing after deducting
123,342 shares
in Treasury 9,764,213 9,764,213
Capital in excess of
par value 403,067 403,067
Retained earnings 41,362,599 34,425,349(D) 75,787,948
----------- ----------- ------------
Total Share Owners'
equity 51,529,879 34,425,349 85,955,228
----------- ----------- ------------
Total liabilities and
Share Owners' equity $119,270,663 $11,795,419 $131,066,082
=========== ========== ============
See accompanying notes to proforma financial information.
</TABLE>
<TABLE>
<CAPTION>
SPARTON CORPORATION AND SUBSIDIARIES
Proforma Consolidated Condensed Statement of Operation (Unaudited) (A)
For the Fiscal Year Ended June 30,1996
Proforma
Historical Adjustments Proforma
<S> <C> <C> <C>
Net sales $102,824,946 $102,824,946
Costs and expenses 104,926,455 104,926,455
----------- ---------- -----------
(2,101,509) (2,101,509)
Other income (expense):
Interest (1,202,143) 1,202,143(B) 0
Other - net (16,142) 2,413,000(C) 2,396,858
----------- --------- ------------
Income (loss) from
continuing operations
before income taxes (3,319,794) 3,615,143 295,349
Provision (credit)
for income taxes (509,000) 1,301,000(F) 792,000
----------- ---------- ------------
Income (loss) from
continuing operations ($2,810,794) $2,314,143 ($496,651)
============ ========== ===========
Income (loss) per share
of common stock -
continuing operations $(.36) $(.06)
============ ===========
Weighted average common
shares outstanding 7,811,370 7,811,370
============ ===========
See accompanying notes to proforma financial information.
</TABLE>
<PAGE>
SPARTON CORPORATION AND SUBSIDIARIES
Notes to Proforma Financial Information
For the Fiscal Year Ended June 30, 1996
(A) The Proforma Consolidated Condensed Statement of Operations for the
fiscal year ended June 30, 1996, presents the results of operations of Sparton
Corporation (Sparton), assuming that the sale of three wholly owned
subsidiaries, Sparton Engineered Products, Inc.--KPI Group, a Michigan
corporation ("KPI-Michigan"), Sparton Engineered Products, Inc.--KPI Group,
an Indiana corporation ("KPI-Indiana"), and Sparton Engineered Products,
Inc.--Lake Odessa Group, a Michigan corporation ("Lako") (collectively
referred to herein as the "Subsidiaries"), had taken place as of the beginning
of the fiscal year. The assumed sale contemplates the sale of substantially
all of the assets of Lako and all of the stock of KPI-Michigan and KPI-
Indiana. The statement includes all material adjustments necessary to present
the historical results to reflect these assumptions. The Subsidiaries and
Sparton Engineered Products, Inc.--Flora Group ("Flora") had been classified
as part of discontinued automotive operations in Sparton's historical
statement of operations for the fiscal year ended June 30, 1996; accordingly,
the Subsidiaries' and Flora's operating results had already been excluded
from results of continuing operations.
The Proforma Consolidated Condensed Balance Sheet as of June 30, 1996,
presents Sparton's financial position assuming the sale of the Subsidiaries
(excluding Flora) had taken place at June 30, 1996.
The proforma information is not necessarily indicative of the results of
operations or the financial position which may have actually been obtained
if the sale transaction had been consummated on the dates indicated. In
addition, the proforma financial information does not purport to be indicative
of results of operations or financial position which may be obtained in the
future. The Company has prepared these proforma financial statements based
upon assumptions deemed appropriate by management. The proforma financial
information should be readin conjunction with Sparton's historical
consolidated financial statements and notes thereto contained in the 1996
Annual Report on Form 10-K.
(B) Interest expense was eliminated under the assumption that the cash
proceeds from the sale of the Subsidiaries were used to eliminate outstanding
borrowings under the existing credit facilities.
(C) Interest income was added under the assumption that the remaining
cash proceeds from the sale of the Subsidiaries, after paying off the
outstanding borrowings and paying the applicable income taxes from gain on
the sale, were invested in short-term U.S. Treasury instruments. Investment
income was calculated using an estimated one-year Treasury yield of 6.0% for
the year ended June 30, 1996.
(D) The sale of the Subsidiaries was recorded as having taken place on
June 30, 1996. Included in this adjustment was the cash selling price less
related sales commissions and expenses netting $79,040,000, the assets sold
and the liabilities assumed of the Subsidiaries by the Buyer netting
$23,695,000, the assets retained of $345,000, and the liabilities assumed of
$1,900,000 of the Subsidiaries by Sparton, estimated income taxes of
$19,365,000 from the gain on sale, and the estimated aftertax gain on sale
of $34,426,000. Subsidiaries' assets retained by Sparton include various
machinery and equipment at Lako's production facility and vacant land in Lake
Odessa, Michigan, originally purchased for a plant expansion. Subsidiaries'
liabilities assumed by Sparton include certain contingent trade payables,
estimated accruals related to employee benefits, and estimated accruals
concerning ongoing litigation. No charge was recorded for the disposition
of Flora, the remaining discontinued automotive operation currently offered
for sale and not part of the Subsidiaries' sale transaction, as for purposes
of this presentation, a loss was assumed to be not anticipated regarding this
wholly owned subsidiary of Sparton.
(E) The cash proceeds from the sale of the Subsidiaries were assumed to
be used to eliminate outstanding borrowings under Sparton's revolving credit
facilities with remaining cash proceeds invested in short-term U.S. Treasury
instruments.
(F) The income tax effects of the proforma adjustments referred to in
Notes A through E were recorded assuming an estimated combined federal and
state income tax rate of 36% as substantially all of the proforma adjustments
affected U.S. operations only. For the fiscal year ended June 30, 1996, the
adjustments resulted in proforma income before income taxes from U.S.
continuing operations of $2,026,397 and a proforma loss before income taxes
from Canadian continuing operations of $1,731,048. As the Canadian operations
are in an income tax loss carryforward position, no income tax benefits were
available with respect to the Canadian loss.
