<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ______________ to ______________
Commission File Number 1-1000
SPARTON CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 38-1054690
--------------------------- ----------------------------------
(State of Incorporation) (IRS Employer Identification No.)
2400 East Ganson Street, Jackson, Michigan 49202
- -------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 787-8600
(Title of each class) (Name of each exchange on which registered)
- ------------------------------- -------------------------------------------
COMMON STOCK, $1.25 PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in Part III of this Form 10-K or any amendment
to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of August 29, 1997 was $73,203,000.
The number of shares of common stock outstanding as of August 29, 1997 were
7,828,090.
Documents incorporated in part by reference:
Parts II and IV - Portions of the 1997 Annual Report to Shareowners
of Sparton Corporation ("Annual Report") are filed
as Exhibit 13 herewith.
Part III - Proxy Statement for October 22, 1997 Meeting
<PAGE> 2
PART I
- ------
Item l. Business
- ------- --------
Except as otherwise indicated, the term "Company" refers to Sparton
Corporation, and the term "Sparton" refers to Sparton Corporation and its
consolidated subsidiaries.
The Company has been in continuous existence since 1900. It was last
reorganized in 1919 as an Ohio corporation. Sparton operates in one principal
line of business, electronics. In August 1996, the Company formalized its plan
to offer for sale its automotive and industrial products operations.
Accordingly, these operating results have been reclassified and reported as
discontinued operations. In December 1996, the Company sold approximately 80% of
these discontinued automotive operations. Details of this transaction are
included in the Annual Report in Note 8, Discontinued Operations, of the Notes
to the Consolidated Financial Statements on page 15 and are filed as part of
Exhibit 13. A buyer for the remaining portion is actively being pursued. A
description of the major products and various information on sales of the
Company's continuing operations, electronics, are included in the Annual Report
in Note 1, Statement of Significant Accounting Policies, and in Note 11, Sales
Concentration, of the Notes to Consolidated Financial Statements on Pages 13 and
17, respectively, and are filed as part of Exhibit 13. Additional information
about this line of business is as follows.
Electronics
- -----------
Historically, the electronics segment's principal product has been
sonobuoys, which are anti-submarine warfare (ASW) devices used by the U.S. Navy
and other free world military organizations. It competes with a limited number
of qualified manufacturers for sonobuoy procurements by the U.S. and selected
foreign governments. Contracts are obtained through competitive bid or directed
procurement. Sales of sonobuoys have declined substantially from the levels of
the early 1990's, but have stabilized in recent years at these reduced levels.
Within the electronics line of business, the Company also designs
and/or manufactures a variety of electronic and electromechanical products for
the telecommunications, electronics and other industries. Many of the physical
and technical attributes used in the production of sonobuoys are required in the
production of these commercial products. The Company is focusing its resources
on substantially expanding revenues in these commercial areas, particularly in
electronic contract manufacturing. Sales are generally obtained on a
1
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competitive basis. Competitive factors include technical ability, customer
service, product quality and price. A majority of the proprietary products,
principally transducers and condition monitoring systems, are sold to the
telecommunications industry worldwide. Commercial electronics products are
distributed through a direct sales force and through a small group of
manufacturers' representatives. The primary industries of the Company's
electronic contract manufacturing (ECM) business include telecommunications,
medical and industrial controls and scientific instrumentation. In the ECM
business, it must compete with a number of domestic and foreign manufacturers,
some of which are much larger in terms of size and in financial resources.
Within the ECM business, the Company contracts with its customers to manufacture
products based on the customer's design, specifications and shipping schedules.
Generally, ECM programs do not require the Company's direct involvement in
product marketing. Material cost and availability and product quality, delivery
and reliability are very important factors in the ECM business. In general,
margins within the ECM operations are lower than those obtained in the Company's
ASW or proprietary electronics areas, primarily due to intense competition and
the higher purchased parts component of the products shipped.
At June 30, 1997 and June 30, 1996, the aggregate backlog from
continuing operations was approximately $106 million and $107 million,
respectively. A majority of the 1997 backlog is expected to be realized in 1998.
The Company's sales of sonobuoys, principally to the U.S. Navy, have
declined dramatically from the levels of the early 1990's. It is expected that
both the domestic and international demand for production sonobuoys will
continue at these reduced and unpredictable levels for the foreseeable future.
In anticipation of this decline, the Company has chosen to develop commercial
electronics opportunities which will utilize its existing technological and
manufacturing capabilities, largely in the North American ECM markets. The
Company's experience indicates that significant commercial electronics
opportunities exist. As with any change of this magnitude, unanticipated
problems can be reasonably expected to occur. Investors should be aware of this
uncertainty and make their own independent evaluation.
Automotive and Industrial Products
- ----------------------------------
As previously discussed, the Company formalized its plan in August 1996
to sell the automotive and industrial products segment and accordingly, these
operations have been reported as discontinued operations.
2
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Other Information
- -----------------
Sparton's principal sales are currently concentrated with a limited
number of customers and the loss of any one of them could have a material
adverse financial effect. Materials for the electronics operations are obtained
from a variety of worldwide sources, except for selected components. Access to
competitively priced materials is critical to success in the ECM business. In
certain markets, the volume purchasing power of the larger competitors creates a
substantial cost advantage for them. While Sparton holds a number of patents
relating to its products and processes, none are considered of material
importance. The Company has not encountered and does not expect to encounter
significant long-term problems in obtaining sufficient raw materials although
the commercial electronics industry has experienced occasional spot shortages or
delivery delays of key components. The risk of materials obsolescence in the ECM
business is less than normal because raw materials and component parts are
generally not purchased until actually needed. While overall sales fluctuate
during the year, such fluctuations do not reflect a definitive seasonal pattern
or tendency.
Research and development expenditures amounted to approximately
$17,225,000 in 1997, $17,254,000 in 1996 and $20,060,000 in 1995 (approximately
$16,238,000, $15,845,000 and $15,985,000 of these expenditures, respectively,
were customer funded). There are approximately 350 employees involved in
research and development activities. Few, if any, devote all of their time to
such efforts. In addition, many of those involved in research and development do
not have an engineering or other technical background.
Sparton employed approximately 1,600 people at June 30, 1997. The
Company has one operating division and four wholly-owned active subsidiaries
classified as continuing operations and one wholly-owned active subsidiary
within the remaining portion of discontinued operations.
Item 2. Properties
- ------- ----------
The table that follows lists the principal properties of Sparton within
continuing operations. All are owned except as noted. There are manufacturing
and/or office facilities at each location. Sparton believes these facilities are
suitable for its operations, except as noted. Several of the facilities have
available physical space for additional production equipment as the demand
arises. In addition, at least two of the plants are currently underutilized,
operating on a one 8 hour shift. Such underutilization would decline as sales
volume increases.
3
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Jackson, Michigan
DeLeon Springs, Florida (2 plants)
Brooksville, Florida
London, Ontario
Albuquerque, New Mexico (see below)
Rio Rancho, New Mexico
Deming, New Mexico (lease/purchase, see below)
The Company leases the Deming, New Mexico facility under terms of a
capital lease and has exercised an option to purchase the facility at the end of
the lease term which expired on July 1, 1997. Future minimum payments under this
capital lease at June 30, 1997 are $75,000 in 1998. The Company's Coors Road,
Albuquerque, New Mexico facility is not being fully utilized and is offered for
sale.
In November 1996, the Company closed its Lake Odessa, Michigan
automotive production facility as part of the plan to exit the automotive
business. This property was sold in April 1997 for $475,000 under an installment
contract expiring in 2002.
As a condition of the December 1996 sale of approximately 80% of the
discontinued automotive operations, the Company purchased, for $675,600, the
Grand Haven and White Cloud, Michigan production facilities that were owned by
Mr. and Mrs. John J. Smith (Mr. Smith is the Company's CEO and a director) and
Lawson K. Smith (an officer and director of the Company). These facilities were
leased to the purchaser of the discontinued automotive operations (the
Purchaser) under a five (5) year term with an aggregate annual rental of
$135,000. The Leases grant the Purchaser the option of purchasing for $50,000
both (but not less than both) facilities at the end of the original term of the
Leases. As part of the December 1996 sale, the Board reviewed, considered and
approved the purchase of this real estate by the Company.
Item 3. Legal Proceedings
- ------- -----------------
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 can be held jointly and severally liable for the
4
<PAGE> 6
cleanup costs at any specific site. The Company's past experience, however, has
indicated that when it has contributed only de minimis amounts of material or
waste to a specific site, its ultimate share of any cleanup costs has been very
small. Based upon available information, and subject to the exception noted
below, the Company believes it has contributed only de minimis amounts to those
sites in which it is currently viewed a potentially responsible party.
One of Sparton's facilities located in New Mexico has been the subject
of ongoing investigations conducted with the EPA under the Resource Conservation
and Recovery Act (RCRA). This EPA compliance issue is related to continuing
operations, but involves a now largely 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 the EPA and the installation of some on-site groundwater
recovery wells and air stripping equipment. A remedial investigation called for
in the AOC has been completed and approved. In May 1996, Sparton submitted to
the EPA a final Corrective Measures Study, based upon the results of its
investigation, as required in the AOC. In June 1996, the EPA issued its final
decision selecting remedies for corrective action at the site. The 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 the EPA are either unnecessary or technically impractical.
Sparton is vigorously challenging the EPA's remedy selection and filed suit in
Federal District Court in Dallas asserting that the EPA's decision on remedy
selection violates the AOC. In September 1996, the EPA issued an Initial
Administrative Order under RCRA ordering Sparton to undertake additional testing
to justify implementing the remedy selected by the Agency in June 1996, and then
implement that remedy. Sparton is vigorously contesting this action both
judicially and administratively, and does not believe that the EPA has the
authority to issue such an order.
In February 1997, three lawsuits were filed against Sparton in Federal
District Court in Albuquerque, one by the United States on behalf of the EPA,
the second by the State of New Mexico, and the third by the City of Albuquerque
and the County of Bernalillo. All three actions allege that the impacts to soil
and groundwater associated with Sparton's now idled facility present an imminent
and substantial threat to human health or the environment. Through these
lawsuits the plaintiffs seek to compel Sparton to undertake additional testing
and to implement the same remedy selected by the EPA in June of 1996, referred
to above. Sparton is vigorously contesting these actions on procedural and
substantive grounds. In March 1997, the plaintiffs in these three lawsuits filed
a motion for preliminary injunction, which if granted, would require Sparton to
install additional monitoring wells and conduct acquifer testing at an estimated
cost of $550,000. Sparton is opposing this motion.
5
<PAGE> 7
In July 1997 Sparton's action in Dallas was transferred to Federal District
Court in Albuquerque and consolidated with the three lawsuits filed in February
1997.
Sparton continues to seek regulatory acceptance of alternative remedies
that it believes should adequately protect human health and the environment, but
with costs in the first three to five years of operations ranging from $815,000
to $1,120,000. Acceptance of such a remedy, either by the plaintiffs or the
courts, is uncertain. To date, Sparton has incurred approximately $6,900,000
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 operating
costs. In 1997 and 1996, Sparton incurred costs of $935,000 and $247,000,
respectively, principally related to legal and other defense costs. At June 30,
1997, the reserve to cover future minimum operating costs totaled $967,000. 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. At this time, it is not possible to estimate the
ultimate cost to resolve this matter.
6
<PAGE> 8
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matters were submitted to a vote of the security holders during the
last quarter of the period covered by this report.
Executive Officers
- ------------------
Information with respect to executive officers of the Registrant is set
forth below. The positions noted have been held for at least five years, except
where noted.
Age
---
JOHN J. SMITH, Chairman of the Board, Chief Executive Officer 85
and Director
DAVID W. HOCKENBROCHT, President, Chief Operating Officer 62
and Director
LAWSON K. SMITH, Vice President, Secretary and Director 82
RICHARD L. LANGLEY, Vice President-Treasurer and Assistant Secretary 52
R. JAN APPEL, Vice President, General Counsel and Assistant Secretary 51
RICHARD D. MICO, Vice President and General Manager of 67
Sparton Technology, Inc.
DOUGLAS E. JOHNSON, Vice President and General Manager of Sparton 49
Electronics since July 1995. Prior to that date,
Mr. Johnson was the Assistant General Manager of Sparton
Electronics.
W. DAVID WEIND, Vice President and General Manager of Sparton of 50
Canada, Ltd. since June 1996. Prior to that date,
Mr. Weind was employed as President of GSW Construction
Products.
JOSEPH S. LERCZAK, Assistant Treasurer 40
John J. Smith and Lawson K. Smith are brothers. There are no other
family relationships between the persons named above. All officers are elected
annually and serve at the discretion of the Board of Directors.
7
<PAGE> 9
PART II
- -------
Item 5. Market for the Registrant's Common Stock and Related Security Holder
- ------- --------------------------------------------------------------------
Matters
-------
Information with respect to the market for the Company's stock,
including stock prices, stock exchange and number of shareowners, and quarterly
dividends for the two year period ended June 30, 1997, is included under
"Financial Highlights" on page 1 of the Annual Report and is included in Exhibit
13 filed herewith.
Item 6. Selected Financial Data
- ------- -----------------------
The "Selected Financial Data" on page 18 of Exhibit 13 filed hereunder
is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 19-21 of Exhibit 13 filed hereunder is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
The consolidated financial statements of Sparton Corporation and
Subsidiaries and "Report of Independent Auditors" are included on pages 8-17 and
12, respectively, in Exhibit 13 filed hereunder and are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
None.
8
<PAGE> 10
PART III
- --------
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
Information with respect to directors is included in the Proxy
Statement under "Election of Directors" and is incorporated herein by reference.
Information concerning the executive officers is included in Part I on page 7.
Item 11. Executive Compensation
- -------- ----------------------
Information concerning executive compensation is included under
"Compensation of Executive Officers and Directors" in the Proxy Statement and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
Information on management and certain other beneficial ownership of the
Company's common stock is included under "Outstanding Shares and Voting" in the
Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Information as to certain relationships and related transactions is
included under "Certain Relationships and Transactions" in the Proxy Statement
and is incorporated herein by reference.
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------- ----------------------------------------------------------------
(a) The following financial statements are filed as part of this
report on Form 10-K: The following Consolidated Financial Statements of Sparton
Corporation and Subsidiaries and Report of Independent Auditors, included on
Pages 8-17 and 12, respectively, of Exhibit 13 filed hereunder are incorporated
by reference in Item 8.
9
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<TABLE>
<CAPTION>
Page Reference
Annual Report
to Shareowners
--------------
<S> <C>
Data from the 1997 Annual Report to
Shareowners of Sparton Corporation:
Consolidated balance sheets at June 30, 1997 and 1996 8 - 9
For the years ended June 30, 1997, 1996, and 1995:
Consolidated statements of operations 10
Consolidated statements of cash flows 11
Consolidated statements of shareowners' equity 12
Notes to consolidated financial statements 13 - 17
Report of Independent Auditors 12
Financial Statement Schedules
All prescribed schedules have been omitted since the
required information is not present or is not present in
amounts sufficient to require submission of the schedule,
or because the information required is included in the
consolidated financial statements or the notes thereto.
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed for the three
months ended June 30, 1997.
(c) Exhibits
See Exhibit Index on page 13
10
<PAGE> 12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SPARTON CORPORATION
------------------------------------------
Date: September 26, 1997 By /s/ Richard L. Langley
---------------------------------------------
Richard L. Langley, Vice President-Treasurer
(Principal Accounting and Financial Officer)
11
<PAGE> 13
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature and Title Date
------------------- ----
<S> <C>
By /s/ John J. Smith August 22, 1997
- ---------------------------------------------------------
John J. Smith, Chairman of the Board
of Directors and Chief Executive Officer
By /s/ David W. Hockenbrocht August 22, 1997
- ---------------------------------------------------------
David W. Hockenbrocht, President,
Chief Operating Officer and Director
By /s/ Lawson K. Smith August 22, 1997
- ---------------------------------------------------------
Lawson K. Smith, Vice President, Secretary
and Director
By /s/ James N. DeBoer August 22, 1997
- ---------------------------------------------------------
James N. DeBoer, Director
By /s/ Robert J. Kirk August 22, 1997
- ---------------------------------------------------------
Robert J. Kirk, Director
By /s/ Marshall V. Noecker August 22, 1997
- ---------------------------------------------------------
Marshall V. Noecker, Director
By /s/ Rory B. Riggs August 22, 1997
- ---------------------------------------------------------
Rory B. Riggs, Director
By /s/ David B. Schoon August 22, 1997
- ---------------------------------------------------------
David B Schoon, Director
By /s/ Blair H. Thompson August 22, 1997
- ---------------------------------------------------------
Blair H. Thompson, Director
</TABLE>
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Exhibit Index
- -------------
3 and 4 Articles of Incorporation of the Registrant were filed with
Form 10-K for the year ended June 30, 1981 and an amendment thereto
was filed with Form 10-Q for the three-month period ended September
30, 1983, and are incorporated herein by reference.
By-laws of the Registrant were filed with Form 10-K for the year
ended June 30, 1981, and are incorporated herein by reference.
Code of Regulations of the Registrant were filed with Form 10-K for
the year ended June 30, 1981 and an amendment thereto was filed with
Form 10-Q for the three-month period ended September 30, 1982, and
are incorporated herein by reference.
10 The employment agreement with John J. Smith was filed with Form 10-K
for the year ended June 30, 1981 and subsequent amendments thereto
were filed with Form 10-Q for the three- month period ended
September 30, 1988, with Form 10-Q for the three-month period ended
September 30, 1991 and with Form 10-Q for the three-month period
ended September 30, 1994 and are incorporated herein by reference.
13 Portions of the 1997 Annual Report to Shareowners (filed herewith
and attached).
22 Subsidiaries (filed herewith and attached).
23 Consent of independent auditors (filed herewith and attached).
27 Financial data schedule, submitted to the Securities and Exchange
Commission for its information.
13
<PAGE> 1
Financial Highlights
Exhibit 13
SPARTON CORPORATION & SUBSIDIARIES For Years Ended June 30
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 142,736,800 $ 102,824,946 $ 94,514,784
Income (loss):
Continuing operations $ 2,241,903 $ (2,810,794) $ (4,570,848)
Discontinued operations 31,458,637 (1,269,390) (1,889,873)
------------- ------------- -------------
$ 33,700,540 $ (4,080,184) $ (6,460,721)
============= ============= =============
Working capital $ 68,760,933 $ 29,940,793 $ 33,187,775
Working capital ratio 3.53:1 1.47:1 1.66:1
Common shares outstanding at June 30 7,818,090 7,811,370 7,811,370
Long-term obligations - continuing operations -- $ 75,000 $ 150,000
Per common share:
Income (loss):
Continuing operations $ .29 $ (.36) $ (.59)
Discontinued operations 4.02 (.16) (.24)
------------- ------------- -------------
$ 4.31 $ (.52) $ (.83)
============= ============= =============
Working capital $ 8.80 $ 3.83 $ 4.25
Shareowners' equity 10.90 6.60 7.12
Dividends -- -- --
</TABLE>
Market Data
PRICE RANGE
<TABLE>
<CAPTION>
New York Stock Exchange Years Ended June 30
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Quarter Ended: High Low High Low High Low
---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
September 30 8 3 7/8 5 3/8 4 5 3/4 4 5/8
December 31 9 7 1/2 4 7/8 3 7/8 5 5/8 4 1/4
March 31 8 3/4 7 5/8 4 3/8 3 1/4 4 1/2 3 3/8
June 30 11 7/8 8 1/4 4 3/4 3 1/2 5 1/4 3 1/2
Recent Price as of August 29, 1997 15 1/4
Shareowners of record 845
</TABLE>
<PAGE> 2
[Photo John J. Smith]
[Photo David W. Hockenbrocht]
TO OUR SHAREOWNERS:
September 26, 1997
Sparton Corporation, now just three years away from its 100th consecutive
year in business, completed a milestone fiscal year in repositioning the Company
as a significant competitor in the fast growing electronics contract
manufacturing (ECM) business. As part of this repositioning, we completed the
sale of the major portion of our automotive parts Original Equipment
Manufacturer (OEM) business, Sparton Engineered Products, Inc. - KPI Group,
located in Grand Haven, Michigan, at a sale price of $80,500,000 cash. The
completion of this transaction enabled the Company to retire all bank debt,
increase shareowners' equity at June 30 to $85,242,000 and, after the payment of
estimated taxes associated with the sale, retain a cash and investment balance
at June 30 of $29,948,000. We expect that this amount, coupled with normal cash
flow from operations, will provide a strong funding base for our future
manufacturing equipment and working capital needs for some time.
The Company reported sales from continuing operations for the fiscal year
of $142,737,000, a 39% increase from the previous year. Net income for the year
was $33,701,000 ($4.31 per share). Of this amount, $2,242,000 ($.29 per share)
was net income from continuing operations, the balance, $31,459,000 ($4.02 per
share), was from discontinued operations. This $.29 per share profit on
continuing operations replaced the loss from the previous year of $.36 per
share.
Our sales mix for the fiscal year was $77 million in ECM sales, a 40%
increase, $56 million in Government sales (principally sonobuoys), an increase
of 43%, and $10 million in proprietary Telecommunications products, an increase
of 12%.
ELECTRONICS AND TELECOMMUNICATIONS
(CONTINUING OPERATIONS)
To further enhance Sparton's competitive position, Sparton Electronics
implemented a new, fully integrated computerized business information system,
which will be later networked throughout all of Sparton. This Enterprise
Resource Planning (ERP) system will enable real time information sharing between
all of Sparton's manufacturing locations and its growing customer and key
supplier bases.
All six Sparton manufacturing facilities continue to maintain ISO 9000
certification as well as comply with a variety of customer-specific, third-party
quality certifications. Sparton remains focused on continuously improving the
quality levels of our products and service and, within 2-3 years, operating on a
Six-Sigma basis. Six Sigma represents a quality standard of 13 or less defective
parts per million.
Sparton's objective is to be a rapid-response, high value-added
supplier/partner with a select group of growing customers. These customers tend
to make outsourcing decisions strategically with an emphasis on maintaining
lowest total cost over the life of their products. We seek to provide a
personalized set of manufacturing and engineering services for each customer in
an otherwise rather impersonal business world.
Sparton Electronics began the first phase of implementing the business
system designed to support this rapid response, personalized service. In
addition to these business system improvements, our program management function
has been enhanced through the creation of a customer business manager (CBM)
system during 1997. The CBM's, who manage the process at a strategic level, are
focused on specific industries and related customers. This structure better
supports customer utilization of multiple manufacturing sites through a single
point of contact, as CBM's coordinate site-specific teams at each manufacturing
facility. This increases the geographic flexibility for a widely dispersed
customer base. Currently, 45% of Sparton Electronics' ECM business is with
companies based in the northeastern U.S., 36% with midwestern companies and 19%
with firms located in the southeastern U.S.
Sales of government products, primarily sonobuoys, rose approximately 50%
at Sparton Electronics in 1997. Sparton, the largest free world producer of
these submarine-detection devices, was awarded 55% of the U.S. Navy's
requirements this year. Sonobuoy demand from the U.S. and international
governments should rise modestly in 1998 and appears to be stable for the
foreseeable future. However, these sales levels are significantly less than
their peaks in the early 1990's.
At Sparton Technology, revenues from power monitoring and proprietary
telecommunications products increased. Exports of these products grew,
particularly into mainland China.
Electronics Contract Manufacturing revenues rose at Sparton of Canada.
Their operational highlights included the reaching of an agreement in principle
to provide electronic ballasts to a water treatment customer and the
10 1/2-month completion of a full turnkey design and manufacturing project for a
telecommunications customer.
We focused our efforts on business development and production efficiency
improvements in 1997. Sparton Electronics upgraded their real-time quality data
collection system and electronic communications with their customers via the
Internet. A team of personnel from all of Sparton's purchasing departments was
formed to optimize material acquisition processes and minimize costs.
During the new year, we look forward to obtaining a select number of new
customers as well as adding a significant amount of new business from our
existing customer base. We continue to see the fulfillment and value of what we
believe is a unique ECM business
2
<PAGE> 3
approach. As always, we appreciate your interest and your confidence in our
efforts to reposition Sparton in this growing business field.
AUTOMOTIVE AND INDUSTRIAL PRODUCTS
(DISCONTINUED OPERATIONS)
Sparton's KPI Group was sold to Dura Automotive Systems, Inc. on December
5, 1996 for $80,500,000. Sparton's remaining automotive business unit is Sparton
Engineered Products, Inc. - Flora Group. Its principal product is automotive
horns sold to the worldwide automotive OEM business. Flora experienced increased
sales and a reduced loss from the prior year. Flora Group has completed
engineering development and initial qualification testing of two new world class
automotive OEM electric horns which are now being tested by several customers.
Discussions are under way with several parties who have expressed interest in
the purchase of Flora Group. We anticipate the sale of this business unit soon.
Our Annual Meeting this year is scheduled for Wednesday, October 22, 1997
in our Jackson, Michigan offices at 9:00 a.m. We trust that many of you will
attend. We are striving to make the meeting an interesting review of the
highlights of the fiscal year just closed.
Yours very truly,
/s/ John J. Smith
John J. Smith
Chairman
/s/ David W. Hockenbrocht
David W. Hockenbrocht
President
"We continue to see the fulfillment and value of what we believe is a unique ECM
business approach."
[GRAPHIC OF THE EARTH]
3
<PAGE> 4
[GRAPHIC]
Sparton's Electronic Contract Manufacturing (ECM) revenues were $77 million in
1997. This ECM product, an electronic scale, is made at the Sparton Electronics'
facility in DeLeon Springs, Florida.
OVERVIEW
Sparton Corporation's businesses are vested in three units: Sparton Electronics
in DeLeon Springs, Florida, Sparton of Canada, Ltd. (SOC) in London, Ontario and
Sparton Technology, Inc. (STI) in Rio Rancho, New Mexico.
Sparton Electronics is comprised of Sparton Electronics Florida, Inc. and
the Sparton Electronics division of Sparton Corporation. In addition to its
headquarters location and manufacturing facility in DeLeon Springs, Sparton
Electronics operates plants in Brooksville, Florida and Jackson, Michigan.
Revenues increased by 44% at Sparton Electronics in 1997 and this business unit
returned to profitability. Electronics Contract Manufacturing (ECM) and
government sales were both significantly higher than last year.
Sparton of Canada's revenues increased 43% over 1996 and reached their
highest level in 5 years. Overall, this business unit was unprofitable, but its
losses were substantially reduced compared to the previous year. SOC has agreed
to supply electronic ballasts to an ultraviolet water purification system
customer for a multi-year period. ECM sales increased substantially.
Sparton Technology, with facilities in Rio Rancho, Albuquerque and Deming,
New Mexico, recorded a revenue increase of over 13% and remained profitable. ECM
and export sales of STI's proprietary telecommunications products continued to
grow.
ELECTRONICS CONTRACT MANUFACTURING (ECM)
Growth of the ECM business and improving profitability are
primary focuses within Sparton. Corporate ECM revenues increased from $55
million in fiscal 1996 to $77 million in 1997, a 40% increase. All six Sparton
operating facilities, located in Florida, Ontario, New Mexico and Michigan,
provide ECM services and are ISO 9000 certified. The ECM
[GRAPHIC]
The Brooksville, Florida plant of Sparton Electronics manufactures this remote
access server. ECM revenues, including those from this internationally
distributed product, increased 40% at Sparton in 1997.
4
<PAGE> 5
\
services range from printing circuit board production to complete turnkey
product design, box build capabilities and aftermarket services. Turnkey entails
the responsibilities of procuring all of the components of a product and
performing all the labor to assemble it compared to receiving the components on
consignment. Box build signifies full system, rather than just printed circuit
board, manufacturing.
Sparton added several new ECM customers in the networking and medical
electronics industries and noted significant growth in the telecommunications,
medical and avionics portions of its existing customer base. Emphasis continues
to be placed on increasing the percentage of value-added services included in
each project, such as design and aftermarket support. This one-stop shopping
approach is attractive to customers seeking an outsourcing partner, rather than
just short-term manufacturing capacity.
Technological advancements in this industry tend to reduce printed circuit
board material and labor content. Sparton is dedicated to minimizing the impact
of this tendency by adding value beyond pure assembly labor.
ECM revenues rose by 37% at Sparton Electronics. Due to cyclical ups and
downs in the computer industry, most contract manufacturers have learned to
maintain a diverse group of customers with minimal reliance on a major customer
or a single industry. Sparton Electronics' ECM customers may be grouped into the
following product categories: approximately 56% industrial products, 11% medical
electronics, 20% telecommunications-related products and 12% commercial
avionics. The industrial sector includes process control, instrumentation,
factory automation and ruggedized automotive products. Consumer computing
products represent less than 1% of ECM sales at Sparton Electronics.
Over 50% of the ECM business base at Sparton Electronics involves subsystem
or system level assembly, as opposed to assembly of printed circuit boards
alone. A majority of manufacturing customers utilize Sparton's engineering
services for either product development or cost reduction. On several programs,
Sparton ships directly to our customers' customers, providing aftersale support
services, such as spare parts, repair depots and refurbishment needs.
ECM at Sparton Electronics is also geographically diversified. In terms of
sales dollars, approximately 45% of our customers are located in the northeast,
36% in the midwest and 19% in the southeast. Efforts are underway to develop
equally strong business bases in the southwestern and western United States.
Sparton Electronics has continued to optimize its operations to support the
needs of its customer base. This past year, the traditional plant-focused
program management structure was re-engineered to a customer business management
structure. Under the new organization, customer business managers (CBM's) are
focused on specific industries and related customers, as opposed to a mix of
customers at a common manufacturing facility. The CBM manages the process at a
strategic level and directs site-specific teams focused on the tactical issues
of account management. The customer business manager becomes the customer's
advocate at Sparton Electronics. Each CBM's performance is measured on customer
satisfaction, growth of the business he or she manages and program
profitability. This business model allows for more localized support of regional
customer needs.
Sparton of Canada recorded considerable Electronics Contract Manufacturing
sales growth. ECM revenues more than doubled from the previous year. A major
factor for the growth was a large turnkey ECM project in which SOC provided full
turnkey design and manufacturing services for an international
telecommunications supplier. The project was completed from concept to final
production in 10 1/2 months with a high customer satisfaction level. SOC offers
full ECM engineering services, with disciplines including mechanical and
electronic design, software, electronic packaging and radio frequency (RF)
engineering.
Another 1997 ECM highlight at Sparton of Canada was the negotiation of an
agreement in principle to supply high-power electronic ballasts for a customer's
ultraviolet water purification systems. The multi-year agreement to provide
these power supplies has the potential for significant volumes. Patents are
being pursued for the ballasts, which are specifically used to power high
intensity discharge lamps. New applications for these ballasts in such products
as stadium and theatrical lighting, motion picture cameras and welders are being
explored.
Sparton Technology Inc. (STI) delivered emergency alert radios during 1997
for the Chemical Stockpile Emergency Preparedness Program (CSEPP) funded by the
government. The reliability and performance of these receivers, which emit a
loud warning sound and subsequent message in case of an emergency, has been
excellent.
Bus wiring harnesses manufactured in Deming, New Mexico also contributed to
STI's 43% ECM growth. The harness business grew slightly while remaining strong
and profitable. Another major factor in Sparton Technology's ECM work is the
supply of commercial downlink receivers to a video service company. Volumes were
not as high as hoped for in 1997, but are expected to rebound in 1998. An
agreement in principle was reached for STI to manufacture, test, calibrate and
drop ship automatic meter reading assemblies. Shipments of these devices, which
will be used in rural areas of the U.S., should commence in the first quarter of
fiscal 1998.
Continued growth and North American regional expansion are anticipated for
Sparton's ECM business.
[GRAPHIC]
Sparton of Canada in London, Ontario manufactures the electronic ballasts
included in this ultraviolet wastewater treatment system. The ballasts, which
have patents pending, contain a unique power supply technology.
5
<PAGE> 6
ENGINEERING SERVICES
Advanced Engineering Services (AES) is the business portion of Sparton
Electronics dedicated to selling design engineering services to the medical
industry. 1997 was the first full year of operation for AES. Customers embraced
the concept and performance of this business located in DeLeon Springs, Florida.
Sales continue to grow and engineering staff is being added in this area to
accommodate growing demand.
The AES market focus is product design of diagnostic, therapeutic, surgical
and laboratory equipment for medical companies. AES acts as an extension of a
customer's engineering department to handle its overload or to work outside of
the field of expertise of a customer's internal staff. Sparton AES strengths are
fast turnaround time, a focus on concurrent engineering and manufacturability,
broad technical knowledge and a thorough understanding of FDA, UL, FCC and other
agency approvals necessary for medical products. Sparton possesses technical
knowledge in the area of analog and digital electronics, software, mechanical
design and acoustics. The turnaround time for AES is typically one-third that of
most customers' internal resources.
[GRAPHIC]
The staff within the Advanced Engineering Service (AES) portion of Sparton
Electronics designed this tourniquet, now in production in DeLeon Springs,
Florida.
A microprocessor-controlled pneumatic tourniquet was designed by AES and is
now being manufactured by Sparton Electronics. The device has been very
successful in the marketplace and AES is bidding new projects for the customer.
Several components of a full surgical suit ventilation system were engineered by
AES for a major medical company.
Three development programs are currently underway at AES. The first is the
design and build of a complex control system for an advanced therapeutic
hospital bed. The other two programs involve the design of microscope slide
preparation devices.
The outlook for AES is very positive. They are receiving positive publicity
from prior projects and repeat business.
GOVERNMENT PRODUCTS
Government revenues within Sparton Electronics increased approximately 50%
during 1997 after four years of stagnant or declining sales. These revenues came
primarily from sales of Anti-Submarine Warfare (ASW) products, particularly the
development and production of sonobuoys and other oceanographic devices. Both
domestic and international sales of these expendable submarine-detecting devices
increased. Sparton continues to be the largest volume production sonobuoy
company in the free world. In 1997, Sparton was awarded 55% of the U.S. Navy's
sonobuoy requirements.
Sparton was in full production of the U.S. Navy's SSQ 62 active sonobuoy
for all of 1997 and production should continue through 1998. This represents our
largest non-stop output of the Q62 in the 17-year history of the product.
Sonobuoy demand from the U.S. and international governments should increase
slightly in 1998 and remain stable for the foreseeable future. The oceanographic
portion of the Government Business Unit should also grow. In 1997, Sparton
Electronics developed the next generation of airborne bathythermographic buoys.
These devices, which measure temperatures as they descend through water, are in
the qualification stage with the U.S. Navy.
There were two government programs of significance at Sparton of Canada
during the year. The first was the delivery of a research projector for a towed
sonar system to the Royal Australian Navy Defence and Technology Organsation.
The second was the receipt of an order for free-flooded ring transducers. These
sonar projectors that transmit sound underwater are part of an ongoing effort to
upgrade the U.K. Navy with new transducer systems.
Intrusion detection systems for border protection continue to be delivered
by STI to the U.S. Immigration and Naturalization Service under a five-year
contract which is subject to annual releases. Sparton delivers seismic, magnetic
(vehicle detection), long and short-range infrared sensors,
processor-transmitters, repeaters and portable monitors for the program.
Feedback has been positive on the latest generation of equipment.
Processor-transmitter, repeater and monitor technology enables the sensor to
function up to 100 miles from the command center.
TELECOMMUNICATIONS PRODUCTS
Revenues from Sparton's proprietary telecommunications products continue to
grow. Power monitoring equipment sales and exports rose, particularly in China.
Interest in STI's pressure transducers and systems is increasing as
Internet usage sparks demand for better quality, higher bandwidth and hence,
better monitoring of standard telephone wires. During the past year an
addressable flow transducer was added to the pressure monitoring line of
products. This flow transducer, which makes it easier to locate leaks in
pressurized cable, experienced significant sales into China. STI also introduced
a higher speed modem in these systems to meet the demand for the receipt of
higher speed data.
Sparton's PowerCom(TM) power management system is being standardized in
Beijing, Shanghai and Guangzhou, China and is being tested by several other
Chinese cities. The system is used by central
6
<PAGE> 7
telecommunications offices to monitor and control all their power elements
including rectifiers, converters, standby generators and batteries. This
standardization signifies that Sparton should have a strong power monitoring
presence in China for many years.
Battery monitoring continues to grow in the United States as telephone
companies continue to deploy thousands of small unattended sites requiring
battery back-up. The batteries are utilized to maintain telephone service in the
event of an electrical power failure. During this past year, STI licensed a
software package for predicting battery life and is now including it in its
battery monitoring line. This capability will allow telecommunications companies
to monitor battery life from a central facility via telephone lines.
Sparton is now approved for battery monitoring at five of the seven major
U.S. regional telecommunications companies. STI is also talking to major
telephone power equipment manufacturers regarding the supply of battery monitors
for original equipment installations.
QUALITY AND TECHNOLOGY
All six Sparton facilities passed their audits for ISO 9000 recertification
during the year. ISO 9000 is the internationally recognized stringent quality
standard. It includes engineering design, manufacturing and customer service
standards for quality. The three plants of Sparton Electronics were recertified
to ISO 9001 under a single Quality System certification. Sparton of Canada
received recertification of ISO 9001. Both STI plants successfully completed
their audits, Rio Rancho for ISO 9001 and Deming for ISO 9002.
This Sparton commitment to the highest standards of product and service
excellence was evidenced by several customer recognitions for outstanding
quality. For the third consecutive year, Sparton Technology received the Quality
New Mexico Roadrunner award. It honors recipients "...that have made significant
progress towards building sound processes through the implementation of total
quality principles."
Sparton of Canada passed the quality audit of a major telecommunications
company for the design and manufacture of products.
Sparton Electronics received third-party recognition twice for its
leadership in commercial contract electronics product development and
manufacturing. It was awarded the 1996 Service Excellence Award for Technology
in the large contractor category sponsored by Technology Forecasters, Inc. and
Circuits Assembly magazine. The group was also selected as one of four finalists
in the SDRC/Machine Design Concurrent Engineering Awards sponsored by Machine
Design magazine and the Structural Dynamics Research Corporation.
In 1997 Sparton focused its efforts on business development and production
efficiency improvements. The ECM business at Sparton Electronics has a large
percentage of customers with high product mix and low to medium volume
requirements. This drives a need for strong product scheduling and tracking
capability, a flexible manufacturing floor capable of changing product mix every
two to four hours and a strong materials management organization. To this end,
Sparton Electronics has continued its investment in equipment and systems. New
capabilities in assembly and test equipment have been added to enhance Sparton's
ECM technology offerings. An investment was made in a new business information
and tracking system. Enhancements have been made to the existing real-time
quality data collection system and electronic customer communications through
the Internet. A corporate-wide materials team has been established to optimize
material acquisition processes while minimizing costs.
A second Surface Mount Technology (SMT) line has been ordered by Sparton
Technology to keep pace with customer demand for printed circuit board
manufacturing.
A Sparton Web site was developed and put on line in 1997 to electronically
reach potential new customers, employees, vendors and shareowners. As of this
writing over 5,000 Internet users have accessed the site including people in
Great Britain, Italy, Australia, Japan and Thailand. The internet address is
www.sparton.com.
[GRAPHIC]
This medical pump was designed and is now being made for an ECM customer by
Sparton Electronics in Jackson, Michigan. The group performed UL and FDA
regulatory testing on this limb compression unit.
[GRAPHIC]
This PowerCom(TM) power management system is manufactured by Sparton Technology
in Rio Rancho, New Mexico. It is employed by central telecommunications offices
throughout the world to monitor and control their power equipment.
7
<PAGE> 8
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SPARTON CORPORATION & SUBSIDIARIES June 30
- --------------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,021,620 $ 718,363
Investment securities (Notes 1 and 2) 21,926,849 --
Income taxes recoverable -- 2,300,000
Accounts receivable:
Trade, less allowance of $144,000 ($175,000 in 1996) 14,484,331 10,033,548
U.S. and foreign governments 10,316,573 8,771,574
Inventories (Notes 1 and 3) 29,662,787 34,217,538
Prepaid expenses (Note 7) 3,391,094 2,840,189
Current assets of discontinued automotive operations (Note 8) 8,175,772 34,351,930
------------- -------------
Total current assets 95,979,026 93,233,142
Other assets (Note 6) 5,118,524 3,587,835
Property, plant and equipment, at cost (Note 1):
Land and land improvements 1,826,194 1,825,194
Buildings and building equipment 10,321,577 10,320,284
Machinery and equipment 18,804,527 17,365,275
------------- -------------
30,952,298 29,510,753
Less accumulated depreciation (21,579,772) (20,108,470)
------------- -------------
Net property, plant and equipment 9,372,526 9,402,283
Noncurrent assets, principally property, plant and equipment, of discontinued
automotive operations (Note 8) 3,707,011 13,047,403
------------- -------------
$ 114,177,087 $ 119,270,663
============= =============
</TABLE>
See accompanying notes
FINANCIAL TRENDS AT A GLANCE
<TABLE>
<CAPTION>
Net Sales - Continuing Operations
(In Millions of Dollars)
<S> <C>
'93 $147.5
'94 95.5
'95 94.5
'96 102.8
'97 142.7
</TABLE>
<TABLE>
<CAPTION>
Income (Loss) Per Common Share -
Continuing Operations
<S> <C>
'93 $ 60
'94 (.65)
'95 (.59)
'96 (.36)
'97 .29
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
SPARTON CORPORATION & SUBSIDIARIES June 30
- --------------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Notes payable (Note 4) $ -- $ 33,594,225
Accounts payable (Note 3) 12,219,845 11,289,716
Salaries and wages 2,694,336 2,574,213
Income taxes (Note 7) 2,080,513 279,676
Accrued liabilities 5,599,782 3,553,664
Current liabilities of discontinued automotive operations (Note 8) 4,623,617 12,000,855
------------ ------------
Total current liabilities 27,218,093 63,292,349
Deferred compensation -- 2,180,903
Deferred income taxes (Note 7) 1,571,500 1,961,500
Long term obligations, net of current maturities (Note 3) -- 75,000
Other liabilities of discontinued automotive operations (Note 8) 145,044 231,032
Commitments and contingencies (Note 9)
Shareowners' equity (Notes 1 and 5):
Preferred stock, serial, no par value; 200,000 shares authorized, none
outstanding -- --
Common stock, $1.25 par value; 8,500,000 shares authorized,
7,818,090 shares outstanding (7,811,370 at June 30, 1996)
after deducting 116,622 shares (123,342 at June 30, 1996)
in treasury (Note 5) 9,772,613 9,764,213
Capital in excess of par value 440,677 403,067
Retained earnings 75,029,160 41,362,599
------------ ------------
Total shareowners' equity 85,242,450 51,529,879
------------ ------------
$114,177,087 $119,270,663
============ ============
</TABLE>
<TABLE>
<CAPTION>
Equity Per Common Share
<S> <C>
'93 $ 8.57
'94 7.95
'95 7.12
'96 6.60
'97 10.90
</TABLE>
<TABLE>
<CAPTION>
Working Capital
(In Millions of Dollars)
<S> <C>
'93 $ 51.2
'94 42.2
'95 33.2
'96 29.9
'97 68.8
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
Consolidated Statements of Operations
SPARTON CORPORATION & SUBSIDIARIES For Years Ended June 30
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 142,736,800 $ 102,824,946 $ 94,514,784
Costs and expenses:
Costs of goods sold 123,798,483 89,596,288 85,761,641
Selling and administrative 15,653,430 15,330,167 15,055,889
------------- ------------- -------------
139,451,913 104,926,455 100,817,530
------------- ------------- -------------
3,284,887 (2,101,509) (6,302,746)
Other income (expense):
Interest and investment income (Note 2) 1,211,233 101,586 77,905
Interest expense (896,010) (1,202,143) (948,800)
Other-net 12,793 (117,728) 514,793
------------- ------------- -------------
328,016 (1,218,285) (356,102)
------------- ------------- -------------
Income (loss) from continuing operations before income taxes (credits) 3,612,903 (3,319,794) (6,658,848)
Provision (credits) for income taxes (Note 7) 1,371,000 (509,000) (2,088,000)
------------- ------------- -------------
Income (loss) from continuing operations 2,241,903 (2,810,794) (4,570,848)
Discontinued operations:
Loss from discontinued automotive operations, net of income tax credits of
$(72,000) in 1997, $(771,000) in 1996 and $(966,000) in 1995 (Note 8) (128,720) (1,269,390) (1,889,873)
Gain on sale of discontinued automotive operations, net of applicable
income taxes of $18,122,000 31,587,357 -- --
------------- ------------- -------------
Net income (loss) $ 33,700,540 $ (4,080,184) $ (6,460,721)
============= ============= =============
Income (loss) per share of common stock:
Continuing operations $ .29 $ (.36) $ (.59)
Discontinued operations 4.02 (.16) (.24)
------------- ------------- -------------
$ 4.31 $ (.52) $ (.83)
============= ============= =============
</TABLE>
See accompanying notes
FINANCIAL TRENDS AT A GLANCE (continued)
GOVERNMENTAL SALES - CONTINUING OPERATIONS
(In Millions of Dollars)
93 94 95 96 97
$110.9 49.7 38.3 39.1 55.9
COMMERCIAL SALES - CONTINUING OPERATIONS
(In Millions of Dollars)
93 94 95 96 97
$36.6 45.8 56.2 63.7 86.8
10
<PAGE> 11
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
SPARTON CORPORATION & SUBSIDIARIES For Years Ended June 30
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Income (loss) from continuing operations $ 2,241,903 $ (2,810,794) $ (4,570,848)
Add (deduct) non-cash items affecting continuing operations:
Depreciation 1,494,511 1,147,027 1,016,818
Deferred income taxes (467,000) 307,000 (928,000)
Other (13,337) (31,939) (362,783)
Add (deduct) changes in operating assets and liabilities:
Inventories and prepaid expenses 4,080,847 (7,410,631) 6,250,539
Income taxes recoverable 2,300,000 (120,000) 411,000
Deferred compensation (2,288,518) -- --
Accounts receivable (6,345,782) 1,939,730 (4,782,014)
Accounts payable, salaries and wages, accrued liabilities
and income taxes 4,468,207 (16,483) 5,423,254
------------ ------------ ------------
Net cash provided (used) by continuing operations 5,470,831 (6,996,090) 2,457,966
Income taxes on discontinued operations (18,122,000) -- --
Cash flow provided (used) by discontinued operations (605,725) 3,167,262 (1,084,197)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (13,256,894) (3,828,828) 1,373,769
INVESTING ACTIVITIES:
Proceeds from sale of discontinued operations - net 78,829,062 -- --
Purchases of investment securities - net (21,926,849) -- --
Purchases of property, plant and equipment (2,132,478) (3,333,421) (2,083,838)
Other, principally noncurrent other assets (424,014) 8,498 (31,133)
Discontinued operations, principally purchases of automotive property,
plant and equipment (74,388) (855,324) (4,047,447)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 54,271,333 (4,180,247) (6,162,418)
FINANCING ACTIVITIES:
(Decrease) increase in notes payable (33,594,225) 8,013,485 4,966,190
Common stock transactions, principally from exercise of stock options 44,031 -- --
Principal payments on long-term borrowings (75,000) (75,000) (75,000)
Principal payments on long-term borrowings, discontinued operations (85,988) (84,830) (84,173)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (33,711,182) 7,853,655 4,807,017
------------ ------------ ------------
INCREASE (DECREASE) IN CASH 7,303,257 (155,420) 18,368
CASH AT BEGINNING OF YEAR 718,363 873,783 855,415
------------ ------------ ------------
CASH AT END OF YEAR $ 8,021,620 $ 718,363 $ 873,783
============ ============ ============
Supplemental disclosures of cash paid (refunded) during the year for:
Interest expense $ 1,353,897 $ 2,237,131 $ 1,545,276
============ ============ ============
Income taxes $ 15,937,989 $ (1,428,098) $ (2,621,789)
============ ============ ============
</TABLE>
See accompanying notes
11
<PAGE> 12
Consolidated Statements of Shareowners' Equity
<TABLE>
<CAPTION>
SPARTON CORPORATION & SUBSIDIARIES For Years Ended June 30
- ----------------------------------------------------------------------------------------------------------------------
COMMON STOCK, CAPITAL IN
$1.25 PAR VALUE EXCESS OF RETAINED
SHARES AMOUNT PAR VALUE EARNINGS TOTAL
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance June 30, 1994 7,811,370 $ 9,764,213 $ 403,067 $ 51,903,504 $ 62,070,784
Net loss (6,460,721) (6,460,721)
--------- ------------ ------------ ------------ ------------
Balance June 30, 1995 7,811,370 9,764,213 403,067 45,442,783 55,610,063
Net loss (4,080,184) (4,080,184)
--------- ------------ ------------ ------------ ------------
Balance June 30, 1996 7,811,370 9,764,213 403,067 41,362,599 51,529,879
Net income 33,700,540 33,700,540
Exercise of stock options and other 6,720 8,400 37,610 (1,979) 44,031
Net unrealized losses in marketable
securities (Note 2) (32,000) (32,000)
--------- ------------ ------------ ------------ ------------
Balance June 30, 1997 7,818,090 $ 9,772,613 $ 440,677 $ 75,029,160 $ 85,242,450
========= ============ ============ ============ ============
</TABLE>
See accompanying notes
Report of Independent Auditors
The Board of Directors and Shareowners
Sparton Corporation
We have audited the accompanying consolidated balance sheets of Sparton
Corporation and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of operations, shareowners' equity, and cash flows for
each of the three years in the period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sparton
Corporation and subsidiaries at June 30, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
Toledo, Ohio
August 22, 1997
12
<PAGE> 13
Notes to Consolidated Financial Statements
1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Sparton Corporation and all subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
OPERATIONS - The Company's continuing operations are principally in one line of
business, the development and manufacture of electronic parts and assemblies.
The Company's products and services include microprocessor-based systems,
transducers, printed circuit boards and assemblies, sensors and
electromechanical and electronic contract manufacturing (ECM) for the
telecommunications, medical, electronics and other industries. The Company also
manufactures and develops sonobuoys, air deployed Anti-Submarine Warfare (ASW)
devices, used by the U.S. Navy and other free world countries.
USE OF ESTIMATES - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the disclosure of contingent assets and
liabilities and the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CONTRACT ACCOUNTING - Long-term contracts relate principally to government
defense contracts. Production contracts are accounted for based on completed
units and their estimated average contract cost per unit. Development contracts
are accounted for based on percentage completion. Costs and fees billed under
cost reimbursement type contracts are recorded as sales. A provision for the
entire amount of a loss on a contract is charged to operations as soon as the
loss is determinable.
CREDIT PRACTICES - The Company manufactures and sells products principally in
the commercial electronics, defense and automotive manufacturing industries.
Credit terms are granted and periodically revised based on evaluations of the
customers' financial condition with collateral generally not required.
Receivables from foreign customers are generally secured by letters of credit.
Credit losses relating to customers consistently have been within management's
expectations.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of demand deposits
and other highly liquid investments with an original maturity date of less than
three months.
INVESTMENT SECURITIES - Investments in debt securities that are not cash
equivalents and marketable equity securities have been designated as available
for sale. Those securities are reported at fair value, with material net
unrealized gains and losses included in equity, net of applicable taxes.
Unrealized losses that are other than temporary are recognized in earnings.
Realized gains and losses on investments are determined using the specific
identification method.
INVENTORIES - Inventories are valued at the lower of cost (first-in, first-out
basis) or market and include costs related to long-term contracts as disclosed
in Note 3. Inventories, other than contract costs, are principally raw materials
and supplies. The nature of the Company's business is such that only
insignificant amounts of finished goods and non-contract related work-in-process
are maintained.
STOCK OPTIONS - The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock options. Under APB 25, no
compensation expense is recognized as the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant. The Company will follow the disclosure requirements of Statement
of Financial Accounting Standards (SFAS) No.123, "Accounting for Stock-Based
Compensation."
DEPRECIATION - Depreciation is provided over estimated useful lives on
accelerated methods, except for certain buildings, machinery and equipment with
aggregate costs at June 30, 1997 of approximately $8,668,000 which are being
depreciated on the straight-line method. Estimated useful lines generally range
from 10 to 40 years for buildings and improvements, 5 to 12 years for machinery
and equipment and 3 to 5 years for test equipment.
RESEARCH AND DEVELOPMENT EXPENDITURES - Expenditures for research and
development not funded by customers amounted to approximately $987,000 in 1997,
$1,409,000 in 1996 and $4,075,000 in 1995.
EARNINGS PER SHARE - Earnings per share are computed using the weighted average
number of common shares outstanding of 7,816,417 in 1997 and 7,811,370 in both
1996 and 1995. Inclusion of outstanding stock options in the computation would
not result in any significant dilution.
2. INVESTMENT SECURITIES
The Company has had investment securities since January 1997. Details of the
investment securities portfolio as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Amortized Gross Unrealized Estimated
Cost Gains (Losses) Fair Value
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities:
Corporate-primarily U.S. $ 10,036,480 $ (35,417) $ 10,001,063
U.S. government and
federal agency 7,690,425 1,538 7,691,963
State and municipal 1,606,356 (12,541) 1,593,815
Equity securities-primarily
preferred stock 2,643,588 (3,580) 2,640,008
------------ ------------ ------------
$ 21,976,849 $ (50,000) $ 21,926,849
============ ============ ============
</TABLE>
A large majority of the investment portfolio has an original maturity date
of less than two years and a daily market exists for all of the investment
securities. The Company believes that the impact of fluctuations in interest
rates on its investment portfolio should not have a material impact on financial
position or results of operations. It is the Company's intention to use these
investment securities to provide working capital for its expanding ECM business.
For the year ended June 30, 1997, the Company had gross purchases of
investment securities totaling $27,574,000 and gross sales of investment
securities totaling $5,647,000.
3. LONG-TERM CONTRACTS
Inventories include costs related to long-term contracts of approximately
$9,030,000 and $8,096,000 at June 30, 1997 and 1996, respectively, reduced by
progress billings from the United States government of approximately $2,198,000
and $4,535,000, respectively.
Accounts payable includes billings in excess of costs of $4,227,000 and
$2,914,000 at June 30, 1997 and 1996, respectively.
13
<PAGE> 14
Notes to Consolidated Financial Statements
4. DEBT AND LEASE INFORMATION
In December 1996, the Company used a portion of the proceeds from the sale of a
portion of its discontinued automotive operations (See Note 8) to pay off all
bank borrowings and canceled its formal credit facility. This formal line of
credit, totaling $36,000,000, had been in place since December 1995, when it
replaced unsecured and informal lines of credit totaling $33,000,000. Short-term
borrowings outstanding at June 30, 1996 had a weighted average interest rate of
8.31%.
The Company leases certain machinery, data processing, vehicles and other
equipment. Such leases, some of which are noncancelable and in many cases
include renewals, expire at various dates. The Company is responsible for most
maintenance, insurance, and tax expenses relating to these leased assets. Rent
expense under agreements accounted for as operating leases was $947,000 in 1997,
$703,000 in 1996, and $531,000 in 1995. At June 30, 1997, future minimum lease
payments for noncancelable operating leases totaled $2,479,000 and are payable
as follows: 1998-$1,045,000, 1999-$868,000, 2000-$443,000, 2001-$112,000 and
2002-$11,000.
5. STOCK OPTIONS
The Company has an incentive stock option plan under which 400,000 common shares
were reserved for option grants to key employees at the fair market value of the
stock at the date of the grant. Under the plan, the options generally become
exercisable cumulatively, beginning one year after the date granted, in equal
annual installments, and generally terminate five years after the date of grant.
Individual grants may have a stock appreciation rights feature whereby optionees
can surrender up to one-half on their unexercised options to the extent then
exercisable in exchange for cash or common shares equal to the difference
between the then current market value and the option prices for shares issuable
upon surrender of such options.
Information on options is as follows:
<TABLE>
<CAPTION>
Shares
Under Option Price Range
- ------------------------------------------------------------------------
<S> <C> <C>
Outstanding at June 30, 1994 111,600 $4.38 to $6.63
Exercised as stock appreciation rights (7,500) 4.38
Cancelled or expired (55,100) 4.38 to 6.63
------- ----------------
Outstanding at June 30, 1995 49,000 6.63
Exercised -- --
Cancelled -- --
------- ----------------
Outstanding at June 30, 1996 49,000 $ 6.63
Granted 196,500 8.375
Exercised (7,000) 6.63
Cancelled -- --
------- ----------------
Outstanding at June 30, 1997 238,500 $ 6.63 to $8.375
======= ================
</TABLE>
At June 30, 1997, the per share weighted average exercise price of options
outstanding was $8.07. The weighted average remaining contractual life of those
options is approximately 4.0 years. At June 30, 1997, there were 31,333 options
exercisable at the per share weighted average exercise price of $6.63. The
weighted average fair value under SFAS 123 of the options granted in December
1996 was $2.90. Remaining shares available for grant under the plan were 341,500
at July 1, 1996 and 145,000 at June 30, 1997.
Had the compensation cost for the stock options granted in December 1996
been determined based on the fair value at the grant date consistent with the
fair value method of SFAS 123, the Company's net earnings would have been
reduced by $40,000 ($.01 per share) in 1997. The effect on 1997 net earnings may
not be representative of the effect on future years' net earnings amounts as the
compensation cost of each year's grant is recognized over the four year vesting
period.
Fair value was estimated at the date of grant using the Black-Scholes
option pricing model and the following weighted average assumptions for 1997:
risk-free interest rate of 5.92%, dividend yield of 0.00%, expected volatility
of 32.7% and an expected option life of 4 years.
6. EMPLOYEE BENEFIT PLANS
The Company has a contributory pension plan for the benefit of certain
salaried and hourly employees. Basic plan benefits are based upon the
participants' years of service. Additional benefits are available to
contributory participants based upon their years of contributory service and
compensation. The Company's policy is to fund the plan based upon legal
requirements and tax regulations.
The following major assumptions were used in the actuarial valuations:
<TABLE>
<S> <C>
Long-term rate of investment return (8.0% for 1996 and 1995) 7.5%
Long-term rate of increase in compensation levels 5.0%
Discount rate (8.0% for 1995) 7.5%
</TABLE>
Net periodic pension income of $89,000, $236,000 and $427,000 was
recognized in 1997, 1996 and 1995, respectively. The components of these credits
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned
during the year $ 432,000 $ 178,000 $ 239,000
Interest on projected
benefit obligation 720,000 662,000 623,000
Actual return on plan assets (2,669,000) (3,149,000) 85,000
Net amortization and deferral 1,428,000 2,073,000 (1,374,000)
----------- ----------- -----------
Net periodic pension
income $ (89,000) $ (236,000) $ (427,000)
=========== =========== ===========
</TABLE>
The following table summarizes the funding status of the plan at March
31:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested $ 7,785,000 $ 6,831,000
Nonvested 456,000 748,000
----------- ------------
$ 8,241,000 $ 7,579,000
=========== ============
Projected benefit obligation $ 9,533,000 $ 8,650,000
Market value of plan assets consisting
principally of common stock
(including 319,100 shares of the
Company's common stock), corporate
bonds, and U.S. Government obligations 15,126,000 13,544,000
----------- ------------
Excess of plan assets over projected
benefit obligation 5,593,000 4,894,000
Unrecognized net (gain) loss (435,000) 471,000
Unrecognized net transition asset (1,482,000) (1,778,000)
----------- ------------
Prepaid pension cost included in other assets $ 3,676,000 $ 3,587,000
=========== ============
</TABLE>
14
<PAGE> 15
7. INCOME TAXES
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities. Significant
components of the Company's deferred tax assets and liabilities at June 30, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Canadian tax carryovers $ 2,664,000 $ 2,340,000
Inventories 1,821,000 1,786,000
Liabilities of discontinued operations 1,098,000 --
Employment and compensation 424,000 1,334,000
Other 360,000 489,000
----------- -----------
Total deferred tax assets 6,367,000 5,949,000
Less valuation reserve for Canadian
tax carryovers (2,664,000) (2,340,000)
----------- -----------
3,703,000 3,609,000
Deferred tax liabilities:
Property, plant and equipment 1,127,000 1,551,000
Prepaid pension costs 1,324,000 1,292,000
----------- -----------
Total deferred tax liabilities 2,451,000 2,843,000
----------- -----------
Net deferred tax assets $ 1,252,000 $ 766,000
=========== ===========
</TABLE>
Deferred taxes are included in the balance sheet at June 30, 1997 and
1996 as follows:
<TABLE>
<S> <C> <C>
Prepaid expenses $2,823,000 $2,727,500
Deferred tax liabilities 1,571,000 1,961,500
----------- -----------
$ 1,252,000 $ 766,000
=========== ===========
</TABLE>
Income (loss) before income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Continuing operations:
United States $ 4,385,967 $ (1,348,317) $ (5,860,569)
Canada (773,064) (1,971,477) (798,279)
------------ ------------ ------------
3,612,903 (3,319,794) (6,658,848)
Discontinued operations 49,508,637 (2,040,390) (2,855,873)
------------ ------------ ------------
$ 53,121,540 $ (5,360,184) $ (9,514,721)
============ ============ ============
</TABLE>
The provision (credit) for income taxes for continuing operations
consists of:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------
Current:
<S> <C> <C> <C>
United States $ 1,095,000 $(881,000) $(1,222,000)
State and local -- 65,000 62,000
----------- ----------- -----------
1,095,000 (816,000) (1,160,000)
Deferred - United States 276,000 307,000 (928,000)
----------- ----------- -----------
$ 1,371,000 $ (509,000) $(2,088,000)
=========== =========== ===========
</TABLE>
The consolidated effective tax rate differs from the statutory U.S. federal
tax rate for the following reasons and by the following percentages:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. federal tax
(benefit) rate 35.0% (34.0%) (34.0%)
Significant increases
(reductions) resulting from:
Canadian tax loss carryovers
and other 10.0 20.2 4.1
Tax benefit of foreign
sales corporation (9.0) (2.0) (2.2)
State and local income taxes -- (0.1) (1.1)
Other 1.9 0.6 1.8
---- ----- -----
Effective tax (benefit) rate 37.9% (15.3%) (31.4%)
==== ===== =====
</TABLE>
For Canadian income tax purposes, approximately $5,578,000 of non-capital
losses and scientific research and experimental development expenditures are
available at June 30, 1997 for carryover against income in future tax years.
These carryovers begin to expire in the year 2000. In addition, unused
investment tax credits of approximately $433,000 at June 30, 1997 are available
for carryover against tax liabilities in future tax years. These carryover
credits will begin to expire in the year 2004. For financial reporting purposes,
a valuation reserve of $2,664,000 has been established for the full amount of
the Canadian carryovers.
8. DISCONTINUED OPERATIONS
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). The Company is pursuing the sale
of Flora. In December 1996, the Company recorded a reserve totaling $4,671,000
for the estimated operating losses and other costs associated with the Flora
operations as well as the estimated loss on sale of the Flora operations. At
June 30, 1997, approximately $2,930,000 of this reserve remained to cover these
losses. Management does not anticipate operating losses and a loss on the sale
of Flora beyond what was anticipated and recorded in December, 1996.
In consideration for the assets and operations of the KPI unit, the Company
received approximately $80,500,000 in cash, before costs and expenses, and
retained the 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 canceled 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 ECM business.
15
<PAGE> 16
Operating results of discontinued automotive operations are as follows and
are classified as such through August 1996, the date the Company formalized its
plan to offer for sale its automotive operations:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 30,461,930 $ 121,263,396 $ 115,015,984
============= ============= =============
Loss before income taxes $ (200,720) $ (2,040,390) $ (2,855,873)
Income tax credits (72,000) (771,000) (966,000)
------------- ------------- -------------
Net loss $ (128,720) $ (1,269,390) $ (1,889,873)
============= ============= =============
</TABLE>
Corporate office expenses, historically allocated and charged to the
automotive operations, were reversed and allocated back to continuing operations
as these expenses were not considered to be directly attributable to
discontinued operations. Expenses allocated back to continuing operations
totaled $569,535 in 1997, $2,209,129 in 1996 and $1,701,649 in 1995.
Interest on borrowings under the Company's general credit facilities was
allocated to discontinued operations based on the ratio of the net assets of
discontinued automotive operations to the total net assets of the Company plus
existing debt under the Company's general credit facilities. Interest expense
allocated to discontinued automotive operations totaled $286,821 in 1997,
$1,092,023 in 1996 and $707,047 in 1995.
Assets and liabilities of discontinued automotive operations are as follows
at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash $ 158,073 $ 21,841
Accounts receivable 4,299,596 21,528,650
Inventories 3,549,317 12,423,376
Prepaid expenses 168,786 378,063
------------ ------------
$ 8,175,772 $ 34,351,930
============ ============
Noncurrent assets:
Property, plant and equipment, at cost $ 12,990,330 $ 37,308,326
Less accumulated depreciation (9,283,319) (24,260,923)
------------ ------------
$ 3,707,011 $ 13,047,403
============ ============
Current liabilities:
Accounts payable $ 1,156,581 $ 9,836,617
Salaries and wages 246,342 751,529
Accrued liabilities 3,220,694 1,412,709
------------ ------------
$ 4,623,617 $ 12,000,855
============ ============
Long-term obligations,
net of current maturities $ 145,044 $ 231,032
============ ============
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
Various litigation is pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company and in
others presenting allegations that are non-routine. The Company and its
subsidiaries are also involved in certain compliance issues with the United
States Environmental Protection Agency (EPA) and various state agencies,
including being named as a potentially responsible party at several sites.
Potentially responsible parties 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 de minimis amounts of material or
waste to a specific site, its ultimate share of any cleanup costs has been very
small. Based upon available information, and subject to the exception noted
below, the Company believes it has contributed only de minimis amounts to those
sites in which it is currently viewed a potentially responsible party.
One of Sparton's facilities located in New Mexico has been the subject of
ongoing investigations conducted with the EPA under the Resource Conservation
and Recovery Act (RCRA). This EPA compliance issue is related to continuing
operations, but involves its now largely 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 the EPA and the installation of some on-site groundwater
recovery wells and air stripping equipment. A remedial investigation called for
in the AOC has been completed and approved. In May 1996, Sparton submitted to
the EPA a final Corrective Measures Study, based upon the results of its
investigation, as required in the AOC. In June 1996, the EPA issued its final
decision selecting remedies for corrective action at the site. The 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 the EPA are either unnecessary or technically impractical.
Sparton is vigorously challenging the EPA's remedy selection and filed suit in
Federal District Court in Dallas asserting that the EPA's decision on remedy
selection violates the AOC. In September 1996, the EPA issued an Initial
Administrative Order under RCRA ordering Sparton to undertake additional testing
to justify implementing the remedy selected by the Agency in June 1996, and then
implement that remedy. Sparton is vigorously contesting this action both
judicially and administratively, and does not believe that the EPA has the
authority to issue such an order.
In February 1997, three lawsuits were filed against Sparton in Federal
District Court in Albuquerque, one by the United States on behalf of the EPA,
the second by the State of New Mexico and the third by the City of Albuquerque
and the County of Bernalillo. All three actions allege that the impacts to soil
and groundwater associated with Sparton's now idled facility present an imminent
and substantial threat to human health or the environment. Through these
lawsuits the plaintiffs seek to compel Sparton to undertake additional testing
and to implement the same remedy selected by the EPA in June of 1996, referred
to above. Sparton is vigorously contesting these actions on procedural and
substantive grounds. In March 1997, the plaintiffs in these three lawsuits filed
a motion for preliminary injunction, which, if granted, would require Sparton to
install additional monitoring wells and conduct acquifer testing at an estimated
cost of $550,000. Sparton is opposing this motion. In July 1997 Sparton's action
in Dallas was transferred to Federal District Court in Albuquerque and
consolidated with the three lawsuits filed in February 1997.
Sparton continues to seek regulatory acceptance of alternative remedies
that it believes should adequately protect human health and the environment, but
with costs in the first three to five years of operations ranging from $815,000
to $1,120,000. Acceptance of such a remedy, either by the plaintiffs or the
courts, is uncertain. To date, Sparton has incurred approximately $6,900,000
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 operating
costs. In 1997 and 1996, Sparton incurred costs of $935,000 and $247,000,
respectively, principally related to legal and other defense costs. At June 30,
1997, the reserve to cover future minimum operating costs totaled
16
<PAGE> 17
$967,000. 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. At this time, it is not possible to
estimate the ultimate cost to resolve this matter.
In the fourth quarter of 1995, the Company resolved litigation that arose
during the ownership of its oil and gas operations which were sold in 1991. The
Company had retained responsibility for resolving this litigation. Upon
settlement, income of $846,000 was recorded on the financial statements and
included in other income.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following unaudited information shows selected items by quarter for the
years ended June 30, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales:
1997 $ 33,280,285 $ 32,875,199 $31,866,062 $44,715,254
1996 17,862,015 23,598,769 25,185,127 36,179,035
Gross profit:
1997 3,926,720 3,288,336 3,536,755 8,186,506
1996 1,855,150 2,760,515 2,982,194 5,630,799
Income (loss):
1997:
Continuing operations $ (242,242) $ (85,024) $ 465,415 $ 2,103,754
Discontinued operations (128,720) 31,587,357 -- --
------------ ------------ ---------- -----------
$ (370,962) $ 31,502,333 $ 465,415 $ 2,103,754
============ ============ ========== ===========
1996:
Continuing operations $ (1,482,828) $ (717,111) $ (485,167) $ (125,688)
Discontinued Operations (1,186,564) (420,864) (331,108) 669,146
------------ ------------ ---------- -----------
$ (2,669,392) $ (1,137,975) $ (816,275) $ 543,458
============ ============ ========== ===========
Income (loss) per common share:
1997:
Continuing operations $(.03) $ (.01) $ .06 $ .27
Discontinued operations (.02) 4.04 -- --
---- ---- ------ -----
$(.05) $ 4.03 $ .06 $ .27
===== ====== ====== =====
1996:
Continuing operations $(.19) $ (.09) $(.06) $(.02)
Discontinued operations (.15) (.06) (.04) .09
---- ---- ---- ---
$(.34) $ (.15) $(.10) $ .07
===== ====== ===== ======
</TABLE>
The Company's gross margins were decreased approximately $1,066,000 in the
fourth quarter of 1996 due to the writedown in carrying value of FM
pager-related inventories. The pager program was unique within the Company's ECM
business as the Company unexpectedly became involved in the direct marketing of
a commercial/consumer product on a worldwide basis. Normally, ECM programs do
not require the Company's direct involvement in product marketing. Pager
marketing and development expenditures were insignificant in 1997 and were not
material to operating results in 1996. The Company is no longer involved in the
pager program and no pager inventories remain within the financial statements.
11. SALES CONCENTRATION
Total direct sales on prime contracts to United States government agencies were
$28,123,000 in 1997, $27,809,000 in 1996 and $25,692,000 in 1995. Total sales to
the Foxboro Company were $4,863,000 in 1997, $7,375,000 in 1996 and $11,199,000
in 1995; and total sales to Waters Corporation were $11,224,000 in 1997,
$10,573,000 in 1996 and $10,909,000 in 1995. No other customer accounted for 10%
or more of consolidated sales from continuing operations in 1997, 1996 or 1995.
Foreign export sales by U.S. continuing operations to unaffiliated
customers were $36,738,000 in 1997, $17,043,000 in 1996 and $16,225,000 in 1995.
Sales of ASW devices and related engineering contract services for the years
1997-1995 contributed approximately 38%, 34% and 37%, respectively, to total
sales. Intracompany sales were not significant in any of these years.
17
<PAGE> 18
Selected Financial Data
<TABLE>
<CAPTION>
SPARTON CORPORATION & SUBSIDIARIES Years Ended June 30
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $ 142,736,800 $ 102,824,946 $ 94,514,784 $ 95,453,340 $ 147,457,053
Costs and expenses 139,451,913 104,926,455 100,817,530 102,833,311 139,601,555
------------- ------------- ------------- ------------- -------------
3,284,887 (2,101,509) (6,302,746) (7,379,971) 7,855,498
Other income (expense):
Interest and investment income 1,211,233 101,586 77,905 80,055 82,313
Interest expense (896,010) (1,202,143) (948,800) (421,447) (384,060)
Other-net 12,793 (117,728) 514,793 396,471 113,857
------------- ------------- ------------- ------------- -------------
328,016 (1,218,285) (356,102) 55,079 (187,890)
------------- ------------- ------------- ------------- -------------
Income (loss) from continuing operations
before income taxes 3,612,903 (3,319,794) (6,658,848) (7,324,892) 7,667,608
Provision (credits) for income taxes 1,371,000 (509,000) (2,088,000) (2,220,000) 3,022,000
------------- ------------- ------------- ------------- -------------
Income (loss) from continuing operations 2,241,903 (2,810,794) (4,570,848) (5,104,892) 4,645,608
Income (loss) from discontinued automotive
operations, net of income taxes 31,458,637 (1,269,390) (1,889,873) 205,478 1,992,334
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 33,700,540 $ (4,080,184) $ (6,460,721) $ (4,899,414) $ 6,637,942
============= ============= ============= ============= =============
Weighted average common shares outstanding 7,816,417 7,811,370 7,811,370 7,810,721 7,800,543
PER SHARE OF COMMON STOCK
Income (loss):
Continuing operations $ .29 $(.36) $(.59) $(.65) $ .60
Discontinued operations 4.02 (.16) (.24) .02 .25
------ ----- ----- ----- -----
$ 4.31 $(.52) $(.83) $(.63) $ .85
====== ===== ===== ===== =====
Shareowners' equity $10.90 $6.60 $7.12 $ 7.95 $8.57
Dividends -- -- -- -- --
OTHER FINANCIAL DATA
Total assets $ 114,177,087 $ 119,270,663 $ 110,654,772 $ 108,721,940 $ 104,388,719
Working capital 68,760,933 29,940,793 33,187,775 42,204,541 51,212,170
Working capital ratio 3.53:1 1.47:1 1.66:1 2.00:1 2.56:1
Long-term obligations -- $ 75,000 $ 150,000 $ 225,000 $ 300,000
Shareowners' equity 85,242,450 51,529,879 55,610,063 62,070,784 66,965,823
</TABLE>
18
<PAGE> 19
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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, namely the design,
development and/or manufacture 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.
The Private Securities Litigation Reform Act of 1995 reflects Congress'
determination that the disclosures of forward-looking information is desirable
for investors and encourages such disclosure by providing a safe harbor for
forward-looking statements by corporate management. The following discussion
about the Company's results of operations and financial condition contains
forward-looking statements that involve risk and uncertainty. The Company notes
that a variety of factors could cause the actual results and experience to
differ materially from anticipated results or other expectations expressed in
the Company's forward-looking statements. The risks and uncertainties that may
affect the operations, performance, growth forecasts and results of the
Company's business include, but are not limited to, fluctuations in U.S. and
world economies, competition in the overall electronic contract manufacturing
(ECM) business, the availability of materials, production labor and management
services under terms acceptable to the Company, Congressional budget outlays for
sonobuoy development and production, Congressional legislation, changes in the
interpretation of environmental laws and the uncertainties of environmental
litigation.
FISCAL 1997 COMPARED TO FISCAL 1996
Sales for the year ended June 30, 1997 were $142,737,000, an increase of
$39,912,000 (39%) over 1996. Revenues were below expectations, primarily in the
ECM area. Revenues increased $36,118,000 (44%) to $118,416,000 at Sparton
Electronics. While both commercial and defense sales increased substantially
from last year, delays in planned shipments on several ECM contracts caused
total revenues to be lower than expected. Sales increased $2,262,000 (13%) to
$19,240,000 at Sparton Technology, principally due to significant proprietary
product revenues to the worldwide telecommunications industry as well as
increased sales of wiring harnesses to an ECM customer. This sales level at
Sparton Technology was below expectations as several ECM contract launches were
delayed. Canadian revenues totaled $5,081,000, an increase of 43% from last
year's low levels. This sales level was anticipated as the Canadian unit
continues to make progress in developing a new commercial sales base.
Operating income of $3,285,000 was reported for 1997 compared to an
operating loss of $2,102,000 last year. These results were consistent with
internal expectations. Sparton Electronics had an operating profit of $4,108,000
compared to $203,000 for the prior year. These significantly improved operating
results were primarily due to higher sales volume, improved cost controls and
better management of the ECM multiple product customer mix. Included within
these operating results were adverse capacity variances totaling $2,351,000
caused by underutilized capacity at two production facilities. Also included
within these results were charges against operations of $351,000 in 1997 and
$1,066,000 in 1996 related to the writedown in the carrying value of FM
pager-related inventories. Pager marketing and development expenditures were
insignificant in 1997 and were not material to operating results in 1996. As of
June 30, 1997, these were no pager inventories remaining on the financial
statements. Sparton Technology had an operating profit of $206,000 compared to
$1,401,000 last year. Included within the 1997 results were costs of $935,000
and an increase of $522,000 in the reserve for future minimum operating costs
charged against operations related to a long-standing government environmental
claim. After consideration of the effects of environmental costs, operating
results were consistent with expectations and due primarily to increased sales
volume and a favorable product mix. The Canadian unit incurred an operating loss
of $629,000 in 1997 compared to an operating loss of $1,491,000 last year. Low
sales volume was the primary reason for the current year loss. Underutilized
manufacturing capacity resulted in an undercapacity variance totaling $691,000
and was charged to operations. These operating results at the Canadian unit were
as anticipated.
Interest and investment income increased $1,110,000 to $1,211,000 in 1997
due to the investment of the sales proceeds from the December 1996 sale of the
automotive operations. These investment securities are more fully described in
Note 2 to the financial statements. Interest expense decreased $306,000 to
$896,000 due to significantly lower average borrowings. In December 1996, the
Company used a portion of the proceeds from the sale of its automotive
operations to eliminate short-term bank borrowings. Since December 1996, the
Company has incurred substantially no interest expense. After provision for
applicable income taxes (credits), as discussed in Note 7 to the financial
statements, the Company reported income from continuing operations of $2,242,000
($.29 per share) in 1997 compared to a loss from continuing operations of
$2,811,000 ($.36 per share) in 1996.
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 from discontinued operations for 1997
are classified as such through August 1996, the date the Company formalized its
plan to offer for sale its automotive operations. After provision for applicable
income taxes, the Company reported a loss from discontinued automotive
operations of $128,000 in 1997 compared to a loss of $1,269,000 last year. As
described in Note 8 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 cash and retained
ownership of certain assets and liabilities. 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). The Company is pursuing the sale
of Flora. Management does not anticipate a loss on the sale of Flora beyond what
was anticipated and recorded in December 1996. After provision for applicable
income taxes, the Company reported a gain on sale of discontinued automotive
operations of $31,587,000 in December 1996. Reflected 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. This charge represents the Company's
best estimate
19
<PAGE> 20
Management's Discussion and Analysis of
Financial Condition and Results of Operations
of the operating losses and other costs to be incurred by Flora to date of
disposal. The amounts that the Company ultimately incurs could differ materially
from the charge recorded. After provision for applicable income taxes, the
Company reported a gain from discontinued operations of $31,459,000 ($4.02 per
share) in 1997 compared to a loss of $1,269,000 ($.16 per share) in 1996.
The Company reported net income of $33,701,000 ($4.31 per share) in 1997
compared to a net loss of $4,080,000 ($.52 per share) in 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Sales for the year ended June 30, 1996 totaled $102,825,000, an increase of
$8,310,000 (9%) from 1995. Revenues were below expectations, primarily in the
ECM areas. Sales at Sparton Electronics were $5,433,000 (7%) higher than last
year, with all of the increase attributable to ECM revenues. Sales, however,
fell below anticipated levels due to the slow start up on a new production
sonobuoy contract and the failure of certain expected ECM revenues to
materialize as planned. Sales increased 26% at Sparton Technology, primarily due
to strong foreign and proprietary product revenues to the worldwide
telecommunications industry. Revenues at the Canadian business unit were below
last year's levels.
The Company reported a loss from operations of $2,102,000 in 1996 compared
to a loss of $6,303,000 in the prior year. These results were below
expectations. Sparton Electronics generated an operating profit of $203,000 for
the year compared to a loss of $5,955,000 last year. Although this was a
significant improvement over the prior year, Sparton Electronics operations were
unfavorably impacted by multiple ECM program startups, delays in production
startup on a defense contract and continuing unfavorable capacity variances.
Included within these operating results were charges totaling $1,432,000 in 1996
and $5,500,000 in 1995 due to the writedown in carrying value of FM
pager-related inventories. The FM pager program was unique within the Company's
ECM business as the Company unexpectedly became involved in the direct marketing
of a commercial/consumer product. No other ECM contract has had this direct
marketing requirement. In May 1996, the Company entered into negotiations for
the sale of up to 9,000 completed pager units. Based on these negotiations, the
Company's gross margins in the fourth quarter of 1996 were decreased $1,066,000
due to the writedown in carrying value of the pager-related inventories. After
these charges, remaining pager inventories were valued at $351,000. Pager
marketing and development expenditures were not material to operating results in
either 1996 or 1995. Sparton Technology reported a strong operating profit for
1996 compared to operating income last year, primarily due to sustained sales
growth and a favorable product mix. The Canadian unit incurred a significant
operating loss, greater than the operating loss from last year, due to low sales
volume.
As previously discussed, in August 1996, the Company formalized its plan to
offer for sale its automotive operations. Accordingly, operating results were
reclassified and reported as discontinued operations. Interest expense increased
$253,000 to $1,202,000 due to higher average borrowings and higher borrowing
costs. Other Expense-net was $118,000 compared to Other Income-net of $515,000
last year as 1995 included income from the resolution of litigation which arose
during the ownership of the oil and gas operations that were sold in 1991. After
provision for applicable income taxes, as discussed in Note 7 to the financial
statements, the Company incurred a loss from continuing operations of $2,811,000
($.36 per share) in 1996 compared to a loss of $4,571,000 ($.59 per share) in
1995. A loss of $1,269,000 ($.16 per share) from discontinued automotive
operations was incurred in 1996 compared to a loss of $1,890,000 ($.24 per
share) in 1995. The Company's net loss was $4,080,000 ($.52 per share) for 1996
and $6,461,000 ($.83 per share) in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of cash and equivalents has historically been from
operations. Short-term credit facilities have been used in the past to provide
added liquidity. The Company continues to experience a change in its liquidity
sources as the volume of U.S. defense-related contract work declines as a
percentage of total Company revenues. Certain contracts within the defense
operations of Sparton Electronics provide for interim progress billings based on
costs incurred. These progress billings reduce the amount of cash that would
otherwise be required during the performance of these contracts. As the volume
of U.S. defense-related contract work declines as a percentage of total Company
revenues, so has the relative importance of progress billings as a component of
the Company's aggregate liquidity resources. 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 and to
strategically invest in additional property, plant and equipment to accommodate
growth in the ECM business. While the Company has had no short-term debt
outstanding or credit agreements since December 1996, management believes that
it could secure credit facilities under terms acceptable to the Company should
the need arise.
Cash flows used by operating activities were $13,257,000 in 1997 and
$3,829,000 in 1996. Cash flows provided by operating activities were $1,374,000
in 1995. Primary sources of 1997 cash flows provided by operating activities
included continuing operations, reductions of inventories and the receipt of
recoverable income taxes, offset by increases in accounts receivable and the
payoff of the deferred compensation account. Federal income tax estimated
payments totaling $17,900,000, principally related to the previously discussed
gain on sale of the discontinued automotive operations, were made in March and
June 1997.
Cash flows provided by investing activities were $54,271,000 in 1997
compared to cash flows used by investing activities of $4,180,000 in 1996 and
$6,162,000 in 1995. The primary source of 1997 net cash flows provided by
investing activities was the proceeds from the sale of the automotive KPI
business unit, partially offset by the purchase of investment securities and the
purchase of property and equipment.
Cash flows used by financing activities were $33,711,000 in 1997 compared
to cash flows from financing activities of $7,854,000 in 1996 and $4,807,000 in
1995. The elimination of short-term bank borrowings was the primary use of cash
flows by financing activities in 1997. The Company used a portion of the KPI
sale proceeds to pay off all bank borrowings and canceled its formal credit
facility.
20
<PAGE> 21
As previously stated, the Company plans on using the proceeds from the sale
of its automotive operations, after paying income taxes and other costs, to
provide working capital for its expanding ECM business. To the extent not
immediately used, these proceeds will continue to be invested in high quality
marketable securities. The resulting interest and investment income, combined
with a lack of interest expense, should favorably impact the Company's
operations. There can be no assurance, however, regarding either the amount or
duration of this favorable non-operating income trend. It is dependent upon how
quickly the Company's ECM business grows as well and the emergence of alternate
uses for these proceeds. At June 30, 1997, the Company had $68,761,000 in
working capital.
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 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 de minimis amounts of material or
waste to a specific site, its ultimate share of any cleanup costs has been very
small. Based upon available information, and subject to the exception noted
below, the Company believes it has contributed only de minimis amounts to those
sites in which it is currently viewed a potentially responsible party.
One of Sparton's facilities located in New Mexico has been the subject of
ongoing investigations conducted with the EPA under the Resource Conservation
and Recovery Act (RCRA). This EPA compliance issue is related to continuing
operations, but involves its now largely 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 the EPA and the installation of some on-site groundwater
recovery wells and air stripping equipment. A remedial investigation called for
in the AOC has been completed and approved. In May 1996, Sparton submitted to
the EPA a final Corrective Measures Study, based upon the results of its
investigation, as required in the AOC. In June 1996, the EPA issued its final
decision selecting remedies for corrective action at the site. The 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 the EPA are either unnecessary or technically impractical.
Sparton is vigorously challenging the EPA's remedy selection and filed suit in
Federal District Court in Dallas, asserting that the EPA's decision on remedy
selection violates the AOC. In September 1996, the EPA issued an Initial
Administrative Order under RCRA ordering Sparton to undertake additional testing
to justify implementing the remedy selected by the Agency in June 1996, and then
implement that remedy. Sparton is vigorously contesting this action both
judicially and administratively, and does not believe that the EPA has the
authority to issue such an order.
In February 1997, three lawsuits were filed against Sparton in Federal
District Court in Albuquerque, one by the United States on behalf of the EPA,
the second by the State of New Mexico, and the third by the City of Albuquerque
and the County of Bernalillo. All three actions allege that the impacts to soil
and groundwater associated with Sparton's now idled facility present an imminent
and substantial threat to human health or the environment. Through these
lawsuits the plaintiffs seek to compel Sparton to undertake additional testing
and to implement the same remedy selected by the EPA in June of 1996, referred
to above. Sparton is vigorously contesting these actions on procedural and
substantive grounds. In March 1997, the plaintiffs in these three lawsuits filed
a motion for preliminary injunction, which, if granted, would require Sparton to
install additional monitoring wells and conduct acquifer testing at an estimated
cost of $550,000. Sparton is opposing this motion. In July 1997 Sparton's action
in Dallas was transferred to Federal District Court in Albuquerque and
consolidated with the three lawsuits filed in February 1997.
Sparton continues to seek regulatory acceptance of alternative remedies
that it believes should adequately protect human health and the environment, but
with costs in the first three to five years of operations ranging from $815,000
to $1,120,000. Acceptance of such a remedy, either by the plaintiffs or the
courts, is uncertain. To date, Sparton has incurred approximately $6,900,000
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 operating
costs. In 1997 and 1996, Sparton incurred costs of $935,000 and $247,000,
respectively, principally related to legal and other defense costs. At June 30,
1997, the reserve to cover future minimum operating costs totaled $967,000. 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. At this time, it is not possible to estimate the
ultimate cost to resolve this matter.
The Company's sales of sonobuoys, principally to the U.S. Navy, have
declined dramatically from the levels of the early 1990's. In anticipation of
this decline, the Company has chosen to develop commercial electronics
opportunities which will utilize its existing technological and manufacturing
capabilities, largely in the U.S. and Canadian ECM markets. The Company's
experience to date indicates that significant commercial electronics
opportunities exist. As with any change of this magnitude, unanticipated
problems can be reasonably expected to occur. Because of the many new customers
and markets involved, management continues to be challenged in its attempts to
forecast near-term sales and margins with accuracy. Investors should be aware of
this uncertainty and make their own independent evaluation.
21
<PAGE> 22
DIRECTORS, OFFICERS & GENERAL MANAGERS
<TABLE>
<CAPTION>
DIRECTORS OFFICERS AND GENERAL MANAGERS
<S> <C>
JAMES N. DEBOER, Partner SPARTON CORPORATION
Law Firm of Varnum, Riddering,
Schmidt and Howlett, LLP JOHN J. SMITH
Grand Rapids, Michigan Chairman and Chief Executive Officer
DAVID W. HOCKENBROCHT, President DAVID W. HOCKENBROCHT
Sparton Corporation President and Chief Operating Officer
*ROBERT J. KIRK, Financial Consultant RICHARD L. LANGLEY
Toledo, Ohio Vice President-Treasurer
*MARSHALL V. NOECKER, Chairman LAWSON K. SMITH
and substantial owner of the Vice President-Secretary
Marshall Noecker Group Companies
Garden City, Michigan R. JAN APPEL
Vice President, General Counsel and
RORY B. RIGGS, President Assistant Secretary
Biomatrix, Inc.
Richfield, New Jersey JOSEPH S. LERCZAK
Assistant Treasurer
DAVID B. SCHOON, President
Stock Portfolio Management, Inc. ELECTRONICS
Grand Rapids, Michigan
DOUGLAS E. JOHNSON
JOHN J. SMITH, Chairman Vice President-General Manager
Sparton Corporation Sparton Electronics
LAWSON K. SMITH, Vice President-Secretary RICHARD D. MICO
Sparton Corporation Vice President-General Manager
Sparton Technology, Inc.
BLAIR H. THOMPSON, Retired
Vice President-Treasurer W. DAVID WEIND
Sparton Corporation Vice President-General Manager
Sparton of Canada, Ltd.
<FN>
*Audit Committee
</TABLE>
[PHOTO]
The Sparton Board of Directors are, front row left to right, David W.
Hockenbrocht and John J. Smith and, back row left to right, David B. Schoon,
Robert J. Kirk, Rory B. Riggs, Blair H. Thompson, Lawson K. Smith and James N.
DeBoer. Marshall V. Noecker is not pictured.
22
<PAGE> 23
Business Units
ELECTRONICS CORPORATE OFFICE
SPARTON ELECTRONICS SPARTON CORPORATION
Administrative Office 2400 E. Ganson St.
Johnson Lake Rd. Jackson, MI 49202
DeLeon Springs, FL 32130
Phones (517) 787-8600 - (800) 248-9579
MANUFACTURING FACILITIES: Fax (517) 787-1822
Jackson, MI Web site - www.sparton.com
DeLeon Springs, FL
Brooksville, FL
SPARTON OF CANADA, LTD.
99 Ash St.
London, Ontario N5Z 4V3
SPARTON TECHNOLOGY, INC.
Administrative Office
4901 Rockaway Blvd., S.E.
Rio Rancho, NM 87124
MANUFACTURING FACILITIES:
Deming, NM
Rio Rancho, NM
Albuquerque, NM
23
<PAGE> 24
COMMON STOCK LISTING
New York Stock Exchange
TRANSFER AGENT/REGISTRAR
PRINCIPAL TRANSFER AGENT
ILLINOIS STOCK TRANSFER COMPANY
223 West Jackson Blvd, Suite 1210
Chicago, IL 60606
(312) 427-2953
REGISTRAR:
HARRIS TRUST AND SAVINGS
311 W. Monroe Street
11th Floor
Chicago, IL 60690
FORM 10-K AVAILABLE:
A copy of Sparton Corporation's annual
report on Form 10-K for the year ended
June 30, 1997, filed with the Securities
and Exchange Commission, will be
furnished without charge to any
shareowner upon written request to
Richard L. Langley, Vice
President-Treasurer, Sparton
Corporation, 2400 E. Ganson St.,
Jackson, MI 49202
NOTICE OF ANNUAL MEETING:
The Annual Meeting of Sparton
Corporation will be held at 9:00 a.m. on
Wednesday, October 22, 1997, in the
Company offices, 2400 E. Ganson St.,
Jackson, Michigan.
It is Sparton Corporation's policy to
afford equal employment opportunity to
all employees and qualified applicants
for employment without regard to race,
religion, creed, color, sex, national
origin, age, handicap or veteran
status.
24
<PAGE> 1
EXHIBIT 22
SPARTON CORPORATION
The Registrant, Sparton Corporation, an Ohio Corporation, had the following
subsidiaries at June 30, 1997:
Incorporated
Name In
- ------------------------------------------ ------------
Domestic:
Continuing Operations
Sparton Electronics Florida, Inc. Florida
Sparton Technology, Inc. New Mexico
Discontinued Operations
Sparton Engineered Products, Inc.-Flora Group Illinois
Foreign (both continuing operations):
Sparton of Canada, Limited Ontario, Canada
Sparton Electronics International Sales, Ltd. Barbados
14
<PAGE> 1
EXHIBIT 23
SPARTON CORPORATION
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Sparton Corporation of our report dated August 22, 1997, included in the 1997
Annual Report to Shareowners of Sparton Corporation and subsidiaries.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-43703) pertaining to the Sparton Corporation 1989 Stock Option
Plan of our report dated August 22, 1997, with respect to the consolidated
financial statements of Sparton Corporation and subsidiaries incorporated by
reference in this Annual Report (Form 10-K) for the year ended June 30, 1997.
/s/ ERNST & YOUNG LLP
Toledo, Ohio
September 26, 1997
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 8,021,620
<SECURITIES> 21,926,849
<RECEIVABLES> 24,944,904
<ALLOWANCES> 144,000
<INVENTORY> 29,662,787
<CURRENT-ASSETS> 95,979,026
<PP&E> 30,952,298
<DEPRECIATION> 21,579,772
<TOTAL-ASSETS> 114,177,087
<CURRENT-LIABILITIES> 27,218,093
<BONDS> 0
<COMMON> 9,772,613
0
0
<OTHER-SE> 75,469,837
<TOTAL-LIABILITY-AND-EQUITY> 114,177,087
<SALES> 142,736,800
<TOTAL-REVENUES> 142,736,800
<CGS> 123,798,483
<TOTAL-COSTS> 139,451,913
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 896,010
<INCOME-PRETAX> 3,612,903
<INCOME-TAX> 1,371,000
<INCOME-CONTINUING> 2,241,903
<DISCONTINUED> 31,458,637
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,700,540
<EPS-PRIMARY> 4.31
<EPS-DILUTED> 4.31
</TABLE>
