<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 1-1000
SPARTON CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 38-1054690
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2400 East Ganson Street, Jackson, Michigan 49202
------------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
517-787-8600
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of shares of common
stock outstanding as of January 31, 1997 was 7,818,090.
<PAGE> 2
<TABLE>
<CAPTION>
SPARTON CORPORATION
INDEX
Financial Statements: Page No.
- --------------------- --------
<S> <C>
Condensed Consolidated Balance Sheet - December 31 and June 30, 1996 3
Condensed Consolidated Statement of Operations - Three-month and Six-month
Periods ended December 31, 1996 and 1995 4
Condensed Consolidated Statement of Cash Flows - Six-month Periods ended
December 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Other Information and Signatures 13
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet (Unaudited)
December 31 and June 30, 1996
December 31 June 30
---------------- -----------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $46,364,192 $718,363
Income taxes recoverable 25,779 2,300,000
Accounts receivable 19,124,576 18,805,122
Inventories and costs on contracts in progress,
less progress payments of $8,028,000 at December 31
($4,535,000 at June 30) 29,532,937 34,217,538
Prepaid expenses 3,232,813 2,840,189
Current assets of discontinued automotive operations 8,263,094 34,351,930
---------------- -----------------
Total current assets 106,543,391 93,233,142
Miscellaneous receivables and other assets 3,949,108 3,587,835
Property, plant and equipment - net 11,194,877 9,402,283
Noncurrent assets, principally property plant and
equipment of discontinued automotive operations - net 4,300,467 13,047,403
---------------- -----------------
Total assets $125,987,843 $119,270,663
================ =================
Liabilities and Shareowners' Equity
Current liabilities:
Notes payable - due within one year $ -- $33,594,225
Accounts payable 8,260,372 11,289,716
Taxes on income 18,283,604 279,676
Accrued liabilities 12,689,328 6,127,877
Current liabilities of discontinued automotive operations 1,897,265 12,000,855
---------------- -----------------
Total current liabilities 41,130,569 63,292,349
Deferred income taxes 1,961,500 1,961,500
Deferred compensation -- 2,180,903
Long-term obligations, net of current maturities -- 75,000
Other liabilities of discontinued automotive operations 188,147 231,032
Shareowners' equity:
Common stock - 7,818,370 shares outstanding at December 31
(7,811,370 at June 30) after deducting 116,342 shares at
December 31 (123,370 at June 30) in treasury 9,772,963 9,764,213
Capital in excess of par value 440,694 403,067
Retained earnings 72,493,970 41,362,599
---------------- -----------------
Total shareowners' equity 82,707,627 51,529,879
---------------- -----------------
Total liabilities and shareowners' equity $125,987,843 $119,270,663
================ =================
</TABLE>
See accompanying notes.
3
<PAGE> 4
<TABLE>
<CAPTION>
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations (Unaudited)
For the Three-month and Six-month Periods ended December 31, 1996 and 1995
Three-month Periods Six-month Periods
----------------------------------- ------------------------------------
1996 1995 1996 1995
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales $32,875,199 $23,598,769 $66,155,484 $41,460,784
Costs and expenses 32,678,780 24,415,472 65,994,763 44,508,635
---------------- ---------------- ---------------- ----------------
196,419 (816,703) 160,721 (3,047,851)
Other income (expense):
Interest (473,422) (384,667) (881,084) (586,943)
Other - net 134,979 82,259 199,097 197,855
---------------- ---------------- ---------------- ----------------
Loss from continuing operations
before income tax credits (142,024) (1,119,111) (521,266) (3,436,939)
Credit for income taxes (57,000) (402,000) (194,000) (1,237,000)
---------------- ---------------- ---------------- ----------------
Loss from continuing operations (85,024) (717,111) (327,266) (2,199,939)
Discontinued operations:
Loss from discontinued automotive
operations, net of applicable income taxes
credits -- (420,864) (128,720) (1,607,428)
Gain on sale of discontinued automotive
operations, including provision of $3,491,000
for operating losses of operations not sold as
of December 31, 1996, net of applicable
income taxes of $18,551,000 31,587,357 -- 31,587,357 --
---------------- ---------------- ---------------- ----------------
31,587,357 (420,864) 31,458,637 (1,607,428)
---------------- ---------------- ---------------- ----------------
Net income (loss) $31,502,333 $(1,137,975) $31,131,371 $(3,807,367)
================ ================ ================ ================
Information per share of common stock:
Continuing operations ($0.01) ($0.09) ($0.04) ($0.28)
Discontinued operations 4.04 (0.06) 4.02 (0.21)
---------------- ---------------- ---------------- ----------------
Net income (loss) $4.03 ($0.15) $3.98 ($0.49)
================ ================ ================ ================
Dividends $ -0- $ -0- $ -0- $ -0-
================ ================ ================ ================
</TABLE>
See accompanying notes.
4
<PAGE> 5
<TABLE>
<CAPTION>
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (Unaudited)
For the Six-month Periods ended December 31, 1996 and 1995
1996 1995
--------------- ----------------
<S> <C> <C>
Cash flows provided (used) by operating activities:
Loss from continuing operations $(327,266) $(2,199,939)
Add non-cash items affecting continuing operations:
Depreciation 774,433 563,719
Deferred compensation 107,615 100,488
--------------- ----------------
554,782 (1,535,732)
Add (deduct) changes in operating assets and liabilities:
Inventories 4,684,601 (3,249,556)
Income taxes recoverable 2,274,221 (729,937)
Other 809,754 395,189
Accounts receivable (319,454) 7,860,218
Taxes on income (547,377) (160,393)
Deferred compensation (2,288,518) ---
Accounts payable (3,029,344) (3,728,073)
--------------- ----------------
Net cash provided (used) by continuing operations 2,138,665 (1,148,284)
Cash flow provided by discontinued operations 1,140,499 283,955
--------------- ----------------
3,279,164 (864,329)
Cash flows provided (used) by investing activities:
Proceeds from sale of discontinued operations 78,829,062 ---
Purchases of property, plant and equipment-net (2,222,062) (1,962,072)
Noncurrent other assets (361,273) (15,207)
Discontinued operations, principally purchases of property,
plant and equipment-net (213,329) (796,090)
--------------- ----------------
76,032,398 (2,773,369)
Cash flows provided (used) by financing activities:
(Decrease) increase in notes payable (33,594,225) 3,958,982
Decrease in long-term obligations (75,000) (75,000)
Discontinued operations, changes in long-term obligations (42,885) (42,457)
Proceeds from exercise of stock options 46,377 ---
--------------- ----------------
(33,665,733) 3,841,525
--------------- ----------------
Increase in cash and cash equivalents 45,645,829 203,827
Cash and cash equivalents at beginning of period 718,363 873,783
--------------- ----------------
Cash and cash equivalents at end of period $46,364,192 $1,077,610
=============== ================
</TABLE>
See accompanying notes.
5
<PAGE> 6
<TABLE>
<CAPTION>
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (Unaudited) - Continued
For the Six-month Periods ended December 31, 1996 and 1995
1996 1995
--------------- ----------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the period for:
Interest $ 1,284,000 $ 1,112,000
=============== ================
Income taxes $(2,009,000) $(1,483,000)
=============== ================
Supplemental schedule of noncash investing activities:
The Company had noncash transactions relating to the sale of
discontinued automotive operations as follows:
Income tax liabilities $18,551,000
Provision for operating losses of operations not yet sold as of
December 31,1996 3,250,000
Other assets and liabilities 1,764,000
---------------
$23,565,000
===============
</TABLE>
See accompanying notes.
6
<PAGE> 7
SPARTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) The accompanying condensed consolidated balance sheet at December
31, 1996, and the related condensed consolidated statements of operations for
the three-month and six-month periods ended December 31, 1996 and 1995 and cash
flows for the six-month periods ended December 31, 1996 and 1995 are unaudited,
but include all adjustments (consisting only of normal recurring accruals) which
the Company considers necessary for a fair presentation of such financial
statements. The results of operations for the six-month period ended December
31, 1996 are not necessarily indicative of the results that may be expected for
the full fiscal year.
2) Earnings per share are computed using the weighted average number of
shares outstanding. For the three-month periods, average shares outstanding were
7,818,142 in 1996 and 7,811,370 in 1995; for the six-month periods, 7,814,756 in
1996 and 7,811,370 in 1995.
3) Cash and cash equivalents consist of demand deposits and other
highly liquid investments with an original maturity of less than three months.
The carrying amount of the investments approximated fair value due to their
short duration.
4) In August 1996, the Company formalized its plan to offer for sale
its automotive operations. Accordingly, these operating results have been
reclassified and reported as discontinued operations. In December 1996, the
Company sold substantially all of the net assets and operations of the Sparton
Engineered Products, Inc.-KPI Group (KPI) business unit. The KPI business ,
which included the former Sparton Engineered Products, Inc.-Lake Odessa Group,
comprised approximately 80% of the automotive operations of the Company. This
sale did not include the net assets and operations of the remaining automotive
unit, Sparton Engineered Products, Inc.-Flora Group (Flora). Flora is actively
being offered for sale and the Company expects the sale will be completed in
fiscal 1997.
In consideration for the assets and operations of the KPI unit,
the Company received approximately $80,500,000 in cash and retained ownership of
certain assets totaling $345,000 as well as certain liabilities totaling
$550,000. The Company used a portion of the KPI sale proceeds to eliminate
short-term bank borrowings and cancelled its formal credit facility. Remaining
proceeds from the sale of discontinued automotive operations are intended to be
used by the Company for working capital purposes and for expanding its
electronic contract manufacturing business.
Operating results of discontinued automotive operations are as
follows for the three-month period ended December 31, 1995 and the six-month
periods ended December 31, 1996 and 1995. Operating results for discontinued
operations for the six-month period ended December 31, 1996 are classified as
such through August 1996, the date the Company formalized its plan to offer for
sale its automotive operations.
<TABLE>
<CAPTION>
Three-month
Period Six-month Periods
------------------ -----------------------------------------
1995 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Revenues $ 29,014,248 $ 30,461,930 $ 55,722,181
================== ================== ==================
Loss before income taxes $ (657,864) $ (200,720) $ (2,511,428)
Income tax credits (237,000) (72,000) (904,000)
------------------ ------------------ ------------------
Net loss $ (420,864) $ (128,720) $ (1,607,428)
================== ================== ==================
</TABLE>
7
<PAGE> 8
5) Various litigation is pending against the Company, in many cases
involving ordinary and routine claims incidental to the business of the Company
and in others presenting allegations that are non-routine. The Company and its
subsidiaries are also involved in certain compliance issues with the United
States Environmental Protection Agency (EPA) and various state agencies,
including being named as a potentially responsible party at several sites.
Potentially responsible parties (PRP's) can be held jointly and severally liable
for the cleanup costs at any specific site. The Company's past experience,
however, has indicated that when it has contributed only relatively small
amounts of materials or waste to a specific site relative to other PRP's, its
ultimate share of any cleanup costs has been minor. Based upon available
information, the Company believes it has contributed only small amounts to those
sites in which it is currently viewed a potentially responsible party.
Environmental compliance issues involving either the discontinued oil and gas
operations, which were sold in fiscal 1991, or the discontinued automotive
operations, are not material.
One of Sparton's facilities located in New Mexico has been the
subject of ongoing investigations with the EPA under the Resource Conservation
and Recovery Act (RCRA). This EPA compliance issue is related to continuing
operations, but involves a now idle facility. To date, this work has involved,
among other things, on-site and off-site investigations of environmental
impacts, negotiation and execution of an Administrative Order on Consent (AOC)
with EPA and the installation of some on-site groundwater recovery wells and air
stripping equipment. A remedial investigation called for in the AOC has been
completed and approved. In May 1996, Sparton submitted to EPA a final Corrective
Measures Study, based upon the results of its investigation, as required in the
AOC. In June 1996, EPA issued its final decision selecting remedies for
corrective action at the site. EPA estimated that the present value cost of its
remedies would range from between $15,000,000 and $26,400,000 based on a 30-year
time frame. In Sparton's judgment, the remedies proposed by EPA are either
unnecessary or technically impractical. Sparton is vigorously challenging EPA's
remedy selection and has filed suit in Federal District Court in Dallas
asserting that EPA's decision on remedy selection violates the AOC. In September
1996, EPA issued an Initial Administrative Order under RCRA ordering Sparton to
implement their selected remedy for corrective action. Sparton is vigorously
contesting this action and does not believe that EPA has the authority to issue
such an order. Sparton is currently negotiating with other involved regulatory
agencies for alternative remedies that Sparton believes would protect public
health and the environment with estimated costs ranging from $500,000 to
$1,000,000. These negotiations have not yet been completed. Successful
resolution of these negotiations and Sparton's litigation with EPA may be
difficult, given the simultaneous involvement of local, state and federal
governmental agencies. To date, Sparton has incurred approximately $6,400,000
since this contamination problem was first identified in the early 1980's.
$3,000,000 of this amount has been recovered from insurance companies. A reserve
was initiated in 1991 to cover the then estimated future minimum costs. For the
six months ended December 31, 1996 and 1995, Sparton incurred costs of $506,000
and $99,000 respectively. At December 31, 1996, the remaining reserve to cover
future minimum costs totaled $444,000. If a remedy is imposed on Sparton, other
than the one it has proposed, the ultimate cleanup costs may significantly
increase. There is no assurance that additional costs greater than the amount
reserved will not be incurred or that significant changes in environmental laws
or their interpretation will not require that additional amounts be spent.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
events affecting the Company's earnings and financial condition during the
periods included in the accompanying financial statements. The Company's
continuing operations are in one line of business, the design, development
and/or manufacture and sale of electronic parts and assemblies for both
government and commercial customers worldwide. In August 1996, the Company
formalized its plan to offer for sale its automotive operations. Accordingly,
these operations, formerly classified as the Automotive and Industrial Products
segment, have been reclassified and reported as discontinued operations.
RESULTS OF OPERATIONS
- ---------------------
Six-Month Periods
- -----------------
Sales for the six-month period ended December 31, 1996 were $66,155,000, an
increase of $24,695,000 (60%) over the low revenue levels of the corresponding
period last year. Revenues increased $23,503,000 at Sparton Electronics compared
to the same period last year. Commercial and defense revenues both increased and
were consistent with the levels anticipated. Sales increased 16% at Sparton
Technology, primarily due to significant foreign and proprietary product
revenues to the worldwide telecommunications industry as well as sustained sales
of border protection devices to the U.S. Immigration and Naturalization Service
(INS). This particular portion of the INS contract was substantially completed
by the end of December. Higher revenues were reported by the Canadian unit,
which continues to make progress in developing a new commercial sales base to
offset declining government defense sales.
Operating income of $161,000 was reported for the six months ended December 31,
1996 compared to an operating loss of $3,048,000 last year. These current
operating results were consistent with expectations. Sparton Electronics had a
small operating profit compared to an operating loss of $1,956,000 last year.
These significantly improved operating results were primarily due to higher
sales volume, improved internal cost controls and greater proficiency in the
management of the Electronic Contract Manufacturing (ECM) multiple product mix.
Sparton Technology operated at a higher profit for the current six-month period
primarily due to increased sales volume and a favorable product mix. The
Canadian unit incurred an operating loss for the current six-month period
similar to the operating loss of last year. Underutilized manufacturing capacity
was the primary reason for this loss.
Interest expense increased by $294,000 to $881,000 due to higher average
borrowings and higher current period borrowing costs. Other Income was $199,000
for the current period compared to $198,000 last year. After an annualized
provision for applicable income taxes, the Company incurred a loss from
continuing operations of $327,000 ($.04 per share) for the six-month period
ended December 31, 1996 compared to a loss from continuing operations of
$2,200,000 ($.28 per share) for the corresponding period last year.
In August 1996, the Company formalized its plans to sell its automotive
operations, and accordingly reclassified and reported operating results as
discontinued operations. Operating results for discontinued operations for the
six-month period ended December 31, 1996 are classified as such through August
1996, the date the Company formalized it plan to offer for sale its automotive
operations. After provision for applicable income taxes, the Company reported a
loss from discontinued automotive operations for the six-month period ended
December 31, 1996 of $129,000 compared to a loss of $1,607,000 last year. As
detailed in Note 4 to the financial statements, in December 1996, the Company
sold substantially all of the net assets and operations of the Sparton
Engineered Products, Inc-KPI Group (KPI) business unit for $80,500,000 in cash
and retained ownership of certain assets
9
<PAGE> 10
totaling $345,000 as well as certain liabilities totaling $550,000. The KPI sale
included the former Sparton Engineered Products, Inc.-Lake Odessa Group. This
sale did not include the net assets and operations of the remaining automotive
unit, Sparton Engineered Products, Inc. Flora Group (Flora). Flora is actively
offered for sale and the Company expects that this transaction should be
completed within fiscal 1997. After provision for applicable income taxes, the
Company reported a gain on sale of discontinued automotive operations of
$31,587,000 in December. Included in this gain is a charge of $3,491,000 for the
estimated operating losses and other costs associated with the Flora operations
which were not sold as of December 31, 1996. This charge represents the
Company's best estimate of the operating losses and other costs expected to be
incurred by Flora through June 1997. The amounts that the Company will
ultimately incur could differ materially from the charge recorded. The Company
is currently negotiating the sale of the Flora operations; however, no
definitive sales agreement has been concluded at this time. After provision for
applicable income taxes, the Company reported a gain from discontinued
operations of $31,459,000 ($4.02 per share) for the six-month period ended
December 31, 1996 compared to a loss from discontinued operations of $1,607,000
($.21 per share) for the corresponding period last year.
The Company reported net income of $31,131,000 ($ 3.98 per share) for the
six-month period ended December 31, 1996 compared to a net loss of $3,807,000
($.49 per share) for the same period last year.
Three-month Periods
- -------------------
Sales for the three-month period ended December 31, 1996 were $ 32,875,000, an
increase of $9,276,000 (39%) compared to last year. Revenues at Sparton
Electronics were $9,053,000 (48%) higher this year due to increased sales in
both the commercial and defense areas. These sales levels were within
management's expectations. Revenues at Sparton Technology were down slightly
compared to last year. As previously mentioned, the current portion of the
contract for border protection devices to the INS has been substantially
completed. Product shipments have commenced on a contract for emergency warning
radios, the production of which had been delayed for more than one year. At the
Canadian unit, revenues were up for the current three-month period compared to
last year.
Operating income of $196,000 was reported for the three-month period ended
December 31, 1996 compared to an operating loss of $817,000 for the same period
last year. These current operating results were consistent with management's
expectations. Sparton Electronics operated at a small profit for the current
period compared to an operating loss of $637,000 last year. These favorable
operating results were primarily due to the previously mentioned factors of
higher sales volume, better cost controls and improved multiple contract
production management. Sparton Technology's profit for the three-month period
declined compared to last year. Sparton of Canada had an operating loss similar
to the operating loss incurred last year due to the previously mentioned
underutilized manufacturing capacity.
Interest expense increased by $89,000 to $473,000 due to higher average
borrowings and higher current period borrowing costs. Other Income increased by
$53,000 to $135,000 primarily due to higher investment income. After an
annualized provision for applicable income taxes, the Company incurred a loss
from continuing operations of $85,000 ($ .01 per share) for the three-month
period ended December 31, 1996 compared to a loss from continuing operations of
$717,000 ($.09 per share) for the same period last year.
As previously mentioned, the Company formalized it plans in August 1996 to sell
its automotive operations, and accordingly reclassified and reported operating
results as discontinued operations through August 1996. Operating results from
discontinued operations after this date were therefor included as part of the
gain on sale recorded. As detailed in Note 4 to the financial statements, the
Company sold in December 1996 its KPI automotive business unit. This sale did
not include the net assets and operations of the remaining Flora automotive unit
which is actively offered for sale. The Company expects that this disposition
should be completed in fiscal 1997. After
10
<PAGE> 11
provision for applicable income taxes, the Company reported a gain on sale of
discontinued automotive operations of $31,587,000 in December. Included in this
gain is a charge of $3,491,000 for the estimated operating losses and other
costs of the Flora operations through the expected date of sale. The charge
represents management's best estimate of the operating costs expected to be
incurred by Flora through June 1997. The amounts that the Company will
ultimately incur could differ materially from those recorded. After provision
for applicable income taxes, the Company reported a gain from discontinued
operations of $31,587,000 ($4.04 per share) for the three-month period ended
December 31, 1996 compared to a loss from discontinued operations of $421,000
($.06 per share) for the corresponding period last year.
The Company reported net income of $31,502,000 ($4.03 per share) for the
three-month period ended December 31, 1996 compared to a net loss of $1,138,000
($.15 per share) for the same period last year.
FINANCIAL POSITION
- ------------------
For the six-month period ended December 31, 1996, Cash and Cash Equivalents
increased $45,646,000 to $46,364,000. Operating activities provided $3,279,000
in net cash flows. Principal sources of cash flows from operating activities
included decreases in inventories, recoverable income taxes and discontinued
operations. The principal uses of cash flows from operating activities were
reductions in accounts payable and the pay-off of the Chief Executive Officer's
contractual deferred compensation account. Cash flows provided by investing
activities were $76,032,000, primarily from the proceeds of the previously
discussed sale of the discontinued automotive KPI business unit, partially
offset by the purchase of equipment within the Company's ECM business
operations. The Company will continue to strategically invest in additional
property, plant and equipment to accommodate growth in the ECM business.
Cash flows used by financing activities were $33,666,000, and were primarily
used for the elimination of short-term bank borrowings. The Company used a
portion of the KPI sale proceeds to pay-off these borrowings and canceled its
formal credit facility. This formal line of credit, originally maturing in
October 1996, was extended by the three banks for 90 days or until the KPI sale
closed. The Company is currently negotiating with several lenders for an
informal line of credit reflecting the more favorable financial position of the
Company. Noncash transactions arising from the sale of discontinued automotive
operations totaled $23,565,000, primarily relating to income tax accruals and
liabilities for operating losses of operations not yet sold as of December 31,
1996.
At the present time, the Company plans on using the remaining proceeds from the
KPI sale, after paying income taxes and other related costs of the sale, to
provide working capital for its expanding ECM business. No dividends were
declared in any of the periods presented. At December 31, 1996, the Company had
$82,708,000 ($10.58 per share) of recorded shareowners' equity, $65,413,000 of
working capital, and a 2.59:1.00 working capital ratio.
OTHER
- -----
Various litigation is pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company and in
others presenting allegations that are non-routine. The Company and its
subsidiaries are also involved in certain compliance issues with the United
States Environmental Protection Agency (EPA) and various state agencies,
including being named as a potentially responsible party at several sites.
Potentially responsible parties (PRP's) can be held jointly and severally liable
for the cleanup costs at any specific site. The Company's past experience,
however, has indicated that when it has contributed only relatively small
amounts of materials or waste to a specific site relative to other PRP's, its
ultimate share of any cleanup costs has been minor. Based upon available
information, the Company believes it has contributed only small amounts to those
sites in which it is currently viewed a potentially responsible party.
Environmental compliance issues
11
<PAGE> 12
involving either the discontinued oil and gas operations, which were sold in
fiscal 1991, or the discontinued automotive operations, are not material.
One of Sparton's facilities located in New Mexico has been the subject of
ongoing investigations with the EPA under the Resource Conservation and Recovery
Act (RCRA). This EPA compliance issue is related to continuing operations, but
invloves a now idle facility. To date, this work has involved, among other
things, on-site and off-site investigations of environmental impacts,
negotiation and execution of an Administrative Order on Consent (AOC) with EPA
and the installation of some on-site groundwater recovery wells and air
stripping equipment. A remedial investigation called for in the AOC has been
completed and approved. In May 1996, Sparton submitted to EPA a final Corrective
Measures Study, based upon the results of its investigation, as required in the
AOC. In June 1996, EPA issued its final decision selecting remedies for
corrective action at the site. EPA estimated that the present value cost of its
remedies would range from between $15,000,000 and $26,400,000 based on a 30-year
time frame. In Sparton's judgment, the remedies proposed by EPA are either
unnecessary or technically impractical. Sparton is vigorously challenging EPA's
remedy selection and has filed suit in Federal District Court in Dallas
asserting that EPA's decision on remedy selection violates the AOC. In September
1996, EPA issued an Initial Administrative Order under RCRA ordering Sparton to
implement their selected remedy for corrective action. Sparton is vigorously
contesting this action and does not believe that EPA has the authority to issue
such an order. Sparton is currently negotiating with other involved regulatory
agencies for alternative remedies that Sparton believes would protect public
health and the environment with estimated costs ranging from $500,000 to
$1,000,000. These negotiations have not yet been completed. Successful
resolution of these negotiations and Sparton's litigation with EPA may be
difficult, given the simultaneous involvement of local, state and federal
governmental agencies. To date, Sparton has incurred approximately $6,400,000
since this contamination problem was first identified in the early 1980's.
$3,000,000 of this amount has been recovered from insurance companies. A reserve
was initiated in 1991 to cover the then estimated future minimum costs. For the
six months ended December 31, 1996 and 1995, Sparton incurred costs of $506,000
and $99,000 respectively. At December 31, 1996, the remaining reserve to cover
future minimum costs totaled $444,000. If a remedy is imposed on Sparton, other
than the one it has proposed, the ultimate cleanup costs may significantly
increase. There is no assurance that additional costs greater than the amount
reserved will not be incurred or that significant changes in environmental laws
or their interpretation will not require that additional amounts be spent.
The Company's sales of sonobuoys, principally to the U.S. Navy, have declined
dramatically over the past several years from a high point of $151,024,000 in
fiscal 1992 to a level of $35,589,000 in fiscal 1996. The Company has been
developing commercial electronics manufacturing opportunities which will utilize
its existing technological and manufacturing capabilities, largely in the U.S.
and Canadian ECM markets. The Company's experience to date indicates that
significant commercial opportunities exist, and the Company is starting to
realize some of these. Because of the many new customers and markets involved,
however, management continues to be challenged in its attempts to forecast
near-term sales. In addition, experience to date suggests that ECM product
margins will be less than those historically earned with sonobuoy products and
will be adversely impacted in the near term by multiple program start-up costs
as the Company expands in this new market area. As with any change of this
magnitude, unanticipated problems can be reasonably expected to occur. Investors
should be aware of these uncertainties and make their own independent
evaluation.
12
<PAGE> 13
OTHER INFORMATION
PART II
- -------
Item 6 - Exhibits and Reports on Form 10-K and 10-Q
- ---------------------------------------------------
(a) Exhibits
3 & 4 Instruments defining the rights of security holders have been
previously filed as follows:
Articles of Incorporation of the Registrant were filed on form
10-K for the year ended June 30, 1981 and an amendment thereto
was filed on Form 10-Q for the three-month period ended
December 31, 1983 and are incorporated herein by reference.
By-laws of the Registrant were filed on Form 10-K for the year
ended June 30, 1981 and are incorporated herein by reference.
Code of Regulation of the Registrant was filed on Form 10-K
for the year ended June 30, 1981 and an amendment thereto was
filed on Form 10-Q for the three-month period ended December
31, 1982 and are incorporated herein by reference.
27 Submitted to the Securities and Exchange Commission for its
information.
(b) Reports on Form 8-K filed in the Second Quarter of Fiscal 1997
On December 5, 1996, the Company reported on Form 8-K that it
had sold its Sparton Engineered Products, Inc.-KPI Group
automotive business unit.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SPARTON CORPORATION
-------------------
Registrant
Date: February 14, 1997 /s/ David W. Hockenbrocht
-------------------- -----------------------------------------
David W. Hockenbrocht, President
Date: February 14, 1997 /s/ Richard Langley
-------------------- -----------------------------------------
Richard Langley, Vice President/Treasurer
and Principal Financial Officer
13
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