<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, 1998
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 31, 1998 was $28,995,000.
The number of shares of common stock outstanding as of August 31, 1998 were
7,828,090.
Documents incorporated in part by reference:
Parts II and IV - Portions of the 1998 Annual Report to
Shareowners of Sparton Corporation
("Annual Report") are filed as Exhibit 13
herewith.
Part III - Proxy Statement for October 28, 1998 Meeting
<PAGE> 2
PART I
- ------
Item 1. 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 16 and are filed as part of
Exhibit 13. At its' meeting on August 28, 1998 the Board of Directors approved
the closing of the final automotive operation and an orderly liquidation of its'
assets. Accordingly, the liquidation process has now commenced. 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 principal product of the electronics segment 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.
The Company is focusing its resources on substantially expanding
revenues in commercial areas, particularly in Electronic Contract Manufacturing
(ECM). This is the area the Company expects future revenue growth to occur. Many
of the physical and technical attributes used in the production of sonobuoys
are required
1
<PAGE> 3
in the production of these commercial products. The Company's ECM business
includes designs and/or manufacture of a variety of electronic and
electromechanical products for the telecommunications, electronics and other
industries. Sales are generally obtained on a competitive basis. Competitive
factors include technical ability, customer service, product quality and price.
A majority of the proprietary products, principally transducers and condition
monitoring systems, are sold to the telecommunications industry worldwide.
Commercial electronics products are distributed through a direct sales force and
through a small group of manufacturers' representatives. The primary industries
of the Company's ECM business include telecommunications, medical and industrial
controls and scientific instrumentation. In the ECM business Sparton 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, 1998 and June 30, 1997, the aggregate backlog from
continuing operations was approximately $102 million and $106 million,
respectively. A majority of the 1998 backlog is expected to be realized in 1999.
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 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
<PAGE> 4
Other Information
- -----------------
Sparton's principal sales are currently concentrated with a relatively
limited number of customers and the loss of any one of them could have an
adverse material financial effect. The Company continues to grow its' ECM sales
with the intent to expand the customer base, thus reducing this concentration.
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
$10,512,000 in 1998, $17,225,000 in 1997 and $17,254,000 in 1996 (approximately
$9,462,000, $16,238,000, and $15,845,000 of these expenditures, respectively,
were customer funded). There are approximately 75 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 1,400 people at June 30, 1998. 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 only one eight hour shift. Such underutilization would decline as
sales volume increases.
3
<PAGE> 5
Jackson, Michigan
DeLeon Springs, Florida (2 plants)
Brooksville, Florida
London, Ontario
Albuquerque, New Mexico (see below)
Rio Rancho, New Mexico
Deming, New Mexico
The Company leased the, Deming, New Mexico facility under terms of a
capital lease and exercised its option to purchase thc facility at the end of
the lease term, which expired on July 1, 1997. The Company's Coors Road,
Albuquerque, New Mexico facility is not being fully utilized and is available
for sale. Currently, a portion of the facility is leased to another
organization.
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
- ------- -----------------
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 largely idled facility. The investigation began in
the early 1980's
4
<PAGE> 6
and involved a review of on-site and off-site environmental impacts. In 1988, an
administrative order on consent ("AOC") was executed with EPA related to further
investigation and proposing a means of dealing with quantified impacts.
The remedial investigation called for in the AOC has been completed and
approved. In May 1996, Sparton submitted to the EPA a final corrective measure
study, based on the results of its investigations, as required in the AOC. In
June 1996, the EPA issued its final decision selecting a 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 thirty (30) year time
frame. In Sparton's judgment, the remedies proposed by the EPA are either
unnecessary or technically impracticable. Sparton vigorously challenged the
EPA's remedy selection and filed suit in federal district court in Dallas
asserting that the EPA's decision on remedy selection violated 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 implementing that remedy.
Sparton vigorously contested that order administratively, but on February 10,
1998, EPA issued a final administrative order that in all material respects
followed the initial administrative order issued in September 1996. Sparton has
refused to implement those portions of that order that it believes are
unjustified.
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 Coors Road 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 now
incorporated in the Final Administrative Order, and referred to above. In March
1997, the plaintiffs in these three lawsuits filed a motion for preliminary
injunction and in July of 1997, the action in Dallas was transferred to federal
district court in Albuquerque and consolidated with the three lawsuits filed in
February 1997.
A pretrial schedule has been established for the consolidated actions, but no
trial date set. Limited discovery, involving interrogatories and requests for
production, has been undertaken by the plaintiffs. The plaintiffs have sought to
amend their lawsuit to compel Sparton to implement the Final Administrative
Order, and seeking civil
5
<PAGE> 7
penalties for alleged noncompliance. Sparton has opposed this request and no
decision has been made by the court on the plaintiffs' request to amend.
In March 1998, a hearing was held on the plaintiffs' request for a preliminary
injunction. After two days of testimony, the federal district judge indicated
he had tentatively concluded he might issue a preliminary injunction. The
parties subsequently entered into settlement discussions that culminated in an
agreed workplan for the installation of certain off-site monitoring,
observation, and containment wells, in exchange for plaintiffs withdrawing their
request for a preliminary injunction. An order withdrawing that request and
approving this off-site workplan was signed on July 7, 1998. This is one of
several workplans being negotiated.
At the current time, all litigation has been stayed to allow the parties to
continue settlement discussions. The most recent stay will expire on October 23,
1998.
Uncertainties associated with environmental remediation contingencies are
pervasive and often result in wide ranges of reasonably possible estimates.
Estimates developed in the early stages of remediation can vary significantly.
Normally, a finite estimate of cost does not become fixed and determinable at a
specific point in time. Rather, the costs associated with environmental
remediation become estimable over a continuum of events and activities that
help to frame and define a liability. To date, Sparton has incurred costs of
approximately $7,914,000 since environmental impacts were first identified in
the early 1980's. $3,000,000 of this amount has been recovered from insurance
companies. For the fiscal years ended June 30, 1998, 1997 and 1996, Sparton
incurred costs of $1,014,000, $935,000, and $247,000 with legal and defense
costs included of $548,000, $379,000, and $53,000, respectively. In addition,
total amounts expensed for 1998, 1997 and 1996 were $1,821,000, $1,457,000,
and $307,000 respectively.
At June 30, 1998, Sparton has accrued $1,828,000 as its' estimate of the future
undiscounted minimum obligation with respect to this matter. This reflects the
minimum range of the amount Sparton expects to incur over the next five years.
This amount includes equipment and operating and maintenance costs. In many
cases, new technologies become available over time, which result in modified
costs for environmental remediation. The Company's estimate of cost is based on
the existing methodology and excludes legal and related consulting costs. The
estimate includes the minimum range of activity expected to occur in the next
five years including onsite and offsite pump and treat containment systems, a
soil vapor extraction program and continued onsite/offsite monitoring. Beyond
five years, while additional expenditures are probable, Sparton does not believe
such expenditures are reasonably estimable based on available information.
Factors causing the
6
<PAGE> 8
uncertainty include, but are not limited to, effectiveness of the currently
proposed programs to achieve targeted results and decisions made by regulating
agencies regarding future proposals and reports of Sparton. Sparton routinely
refines and revises the estimate of its' environmental efforts as additional
information becomes available.
It is reasonably possible that Sparton's recorded estimate of this liability may
change. If a remedy is imposed on Sparton other than the one it has proposed,
the ultimate cleanup costs could increase significantly. There is no assurance
that additional costs greater than the amount accrued will not be incurred or
that 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.
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.
OFFICERS OF THE REGISTRANT
- --------------------------
Information with respect to executive officers of the Registrant is set
forth below. The positions noted have been held for at least five years, except
where noted.
<TABLE>
<CAPTION>
Age
---
<S> <C>
John J. Smith, Chairman of the Board, Chief Executive Officer and Director 86
- -------------
David W. Hockenbrocht, President, Chief Operating Officer and Director 63
- ---------------------
Lawson K. Smith, Vice President and Secretary 83
- ---------------
Richard L. Langley, Vice President-Treasurer and Assistant Secretary 53
- ------------------
R. Jan Appel, Vice President, General Counsel and Assistant Secretary 52
- ------------
</TABLE>
7
<PAGE> 9
<TABLE>
<S> <C>
Richard D. Mico, Vice President and General Manager of Sparton Technology, Inc. 68
- ---------------
Douglas E. Johnson, Vice President and General Manager of Sparton 50
- ------------------
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 51
- --------------
Canada, Ltd. since June 1996. Prior to that date, Mr. Weind
was employed as President of GSW Construction Products.
</TABLE>
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.
PART II
- -------
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- ------- -----------------------------------------------------------------
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, 1998, 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 19-22 of Exhibit 13 filed hereunder is
incorporated herein by reference.
8
<PAGE> 10
Item 7(a). Qualitative and Quantitative Disclosures About Market Risk
- ---------- ---------------------------------------------------------------
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Market Risk Exposure" on page 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.
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 4.
Item 11. Executive Compensation
- -------- ----------------------
Information concerning executive compensation is included under
"Compensation of Executive Officers" in the Proxy Statement and is incorporated
herein by reference.
9
<PAGE> 11
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 Stock and Voting Rights"
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.
<TABLE>
<CAPTION>
Page Reference
Annual Report
to Shareowners
--------------
<S> <C>
Data from the 1998 Annual Report to
Shareowners of Sparton Corporation:
Consolidated balance sheets at June 30, 1998 and 1997 8 - 9
For the years ended June 30, 1998, 1997, and 1996:
Consolidated statements of operations 10
</TABLE>
10
<PAGE> 12
<TABLE>
<S> <C>
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.
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed for the three
months ended June 30, 1998.
(c) Exhibits
See Exhibit Index on page 15
</TABLE>
11
<PAGE> 13
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.
<TABLE>
<S> <C>
SPARTON CORPORATION
--------------------------------------------
Date: September 28, 1998 By /s/ Richard L. Langley
--------------------------------------------
Richard L. Langley, Vice President-Treasurer
(Principal Accounting and Financial Officer)
</TABLE>
12
<PAGE> 14
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature and Title Date
By /s/ John J. Smith August 28, 1998
- ----------------------------------------------------
John J. Smith, Chairman of the Board
of Directors and Chief Executive Officer
By /s/ David W. Hockenbrocht August 28, 1998
- ----------------------------------------------------
David W. Hockenbrocht, President,
Chief Operating Officer and Director
By /s/ James N. DeBoer August 28, 1998
- ----------------------------------------------------
James N. DeBoer, Director
By /s/ Robert J. Kirk August 28, 1998
- ----------------------------------------------------
Robert J. Kirk, Director
By /s/ (Signature not obtained) August 28, 1998
- ----------------------------------------------------
William Noecker, Director
By /s/ Rory B. Riggs August 28, 1998
- ----------------------------------------------------
Rory B. Riggs, Director
13
<PAGE> 15
By /s/ David B. Schoon August 28, 1998
- ----------------------------------------------------
David B. Schoon, Director
By /s/ W. Peter Slusser August 28, 1998
- ----------------------------------------------------
W. Peter Slusser, Director
By /s/ (Signature not obtain) August 28, 1998
- ----------------------------------------------------
Bradley Smith, Director
14
<PAGE> 16
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 Amendment and extension of the employment agreement between the
Registrant and John J. Smith is filed herewith and attached. The
employment agreement with John J. Smith was filed with Form 10-Q
for the quarter ended September 30, 1994 and is incorporated
herein by reference.
13 Portions of the 1998 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.
15
<PAGE> 1
EXHIBIT 10
EMPLOYMENT AGREEMENT
This Employment Agreement entered into this 19th day of September, 1998,
between Sparton Corporation, an Ohio corporation (hereinafter called "Sparton"),
and John J. Smith of Jackson, Michigan (hereinafter called "Smith").
The Agreement dated September 1, 1994, attached hereto and incorporated by
reference, is hereby extended for three (3) years effective July 1, 1997, and
ending June 30,2000. Paragraph 3 of the September 1, 1994 Agreement is amended
in its entirety to read as follows:
"Smith shall receive as base compensation for his
services an annual salary of $302,969.00 for each year,
payable in equal semimonthly installments. The Board of
Directors of Sparton will consider a discretionary bonus at
the end of each fiscal year during the term of this
Agreement.
By written notice to the Company, Smith shall have
the right, voluntarily and in his discretion, at any time and
from time to time to reduce his base compensation or his
incentive compensation, if any, or both, in such amount and
for such reason (or no reason) as he sees fit. Smith shall
likewise have the right at any time and from time to time to
restore all or any part of any prior voluntary reduction in
his compensation (including the reduction referred to above).
All such reduction and increases shall be prospective and not
retroactive."
SPARTON CORPORATION
By /s/ John J. Smith By /s/ David W. Hockenbrocht
--------------------------- -----------------------------
John J. Smith David W. Hockenbrocht
President
16
<PAGE> 1
SPARTON
CORPORATION
[LOGO]
VISION
INNOVATION
SPEED
VALUE
1998
ANNUAL
REPORT
<PAGE> 2
VISION
THROUGH CONTINUOUS INVESTMENTS
IN ASSOCIATE TRAINING ALONG WITH
INFORMATION AND MANUFACTURING
TECHNOLOGY UPGRADES, SPARTON
DEMONSTRATES ITS COMMITMENT TO
BE AT THE FOREFRONT OF AVAILABLE
TECHNOLOGY IN THE 21ST CENTURY.
INNOVATION
SPARTON'S DESIGN AND ENGINEERING
CAPABILITIES ARE EXEMPLARY.
SPARTON REGULARLY TAKES
ON CUSTOMER DESIGN
CHALLENGES FOR SPEED
AND INNOVATION. FOR
EXAMPLE, ONE NEW
DESIGN WAS EXECUTED
IN ONE-THIRD THE
CUSTOMER'S ORIGINAL
TIME ESTIMATE.
VISION
&
INNOVATION
<TABLE>
<CAPTION>
INDEX
<S> <C>
Financial Highlights ............................................... 1
Shareowners' Letter ................................................ 2
Operations ......................................................... 4
Financial Trends at a Glance ....................................... 8
Consolidated Balance Sheets ........................................ 8
Consolidated Statements of Operations .............................. 10
Consolidated Statements of Cash Flows .............................. 11
Consolidated Statements of Shareowners' Equity ..................... 12
Report of Independent Auditors ..................................... 12
Notes to Consolidated Financial Statements ......................... 13
Selected Financial Data ............................................ 18
Management's Discussion & Analysis ................................. 19
Directors, Officers and General Managers ........................... 23
Business Units ..................................................... 24
Notice of Annual Meeting ........................................... 24
</TABLE>
<PAGE> 3
SPARTON.COM
FINANCIAL HIGHLIGHTS
SPARTON CORPORATION & SUBSIDIARIES For Years Ended June 30
================================================================================
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $145,935,583 $142,736,800 $102,824,946
Income (loss):
Continuing operations $4,333,117 $2,241,903 $(2,810,794)
Discontinued operations (1,320,000) 31,458,637 (1,269,390)
------------------------------------------------
$3,013,117 $33,700,540 $(4,080,184)
====================================================
Working capital $71,118,395 $68,760,933 $29,940,793
Working capital ratio 3.92:1 3.53:1 1.47:1
Common shares outstanding at June 30 7,828,090 7,818,090 7,811,370
Long-term obligations - continuing operations -- -- $75,000
Basic and diluted earnings per share:
Income (loss):
Continuing operations $.55 $.29 $(.36)
Discontinued operations (.17) 4.02 (.16)
------------------------------------------------
$.38 $4.31 $(.52)
====================================================
Working capital $9.09 $8.80 $3.83
Shareowners' equity 11.29 10.90 6.60
Dividends -- -- --
</TABLE>
<TABLE>
<CAPTION>
MARKET DATA
PRICE RANGE
New York Stock Exchange Years Ended June 30
==============================================================================================================================
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
Quarter Ended: High Low High Low High Low
----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
September 30 $15 1/4 $10 7/8 $8 $3 7/8 $5 3/8 $4
December 31 16 1/2 10 1/4 9 7 1/2 4 7/8 3 7/8
March 31 10 1/4 8 7/8 8 3/4 7 5/8 4 3/8 3 1/4
June 30 9 7/8 8 3/8 11 7/8 8 1/4 4 3/4 3 1/2
</TABLE>
Recent Price as of August 31, 1998 $6 7/8
Shareowners of record 800
1
<PAGE> 4
VISION
SHAREOWNERS' LETTER
September 28, 1998
TO OUR SHAREOWNERS:
Sparton Corporation celebrating 98 years in business has reported record
earnings in its Electronics Contract Manufacturing (ECM) business for this past
fiscal year. The successful year can be attributed to Sparton's aggressive
repositioning strategies and enhanced focus on customer service. By enabling
itself to become faster, more customer-specific and more responsive, Sparton is
emerging as a leader in the Electronics Contract Manufacturing industry.
For the fiscal year ended June 30, 1998, Sparton reported total corporate sales
of $145.9 million with pre-tax earnings of $6.5 million on continuing operations
after deducting $1.8 million in cost allocations for EPA cleanup in Albuquerque,
New Mexico. Net income for the year was $3.0 million ($0.38 per share). Income
from continuing operations was $4.3 million ($0.55 per share). Of the total
sales, Corporate ECM sales were $75.4 million. Government sales were $60.8
million, while telecommunications and other sales were $9.7 million.
Shareowners' equity on June 30, 1998 was $88.4 million. Sparton does not have
any outstanding long or short-term debt. Cash and cash equivalents along with
investment securities totaled $27.7 million.
The successful incorporation of Sparton's strategic plan and ECM Business Model
was highlighted on August 25, 1998. Sparton received the 1998 SERVICE EXCELLENCE
AWARD FOR ELECTRONICS CONTRACT MANUFACTURERS in the category of Highest Overall
Customer Rating for Large Contract Manufacturers. Presented by Technology
Forecasters, Inc. and Circuits Assembly Magazine, the award was based on
customers' evaluations of technology, manufacturing quality, dependability/
delivery, responsiveness and value for the price. Sparton had the highest
overall average.
This award is a testament to our unique customer oriented ECM business approach
and strategic initiatives, which are the catalysts toward creating a sound
future in the ECM business.
[PHOTO]
Sparton's rapid design and prototyping service helped bring the innovative OGI
Variable Speed Pump Controller to production in a matter of two months
Sparton provided final stage engineering design and prototyping
for a Cardiac Event Recorder
[PHOTO]
To sustain a solid financial position, Sparton is in the final stage of
organizing all management functions and manufacturing locations around its
information technology advantage. The program consists of implementing a new
business system with real-time access capabilities. Sparton's initiative is to
set our service apart from our competitors. One area of focus is an updated
corporate website. Sparton's site, "sparton.com" will evolve from
information-only content to an interactive site for customers and suppliers. The
new features contained within the site will allow access to Sparton's business
system and other value-added services available to our customers. This
competitive advantage offers online retrieval of customer and supplier
information.
Through advantageous international partnerships, Sparton has continued to
reposition itself as a strong competitor in the Electronics Contract
Manufacturing industry. In December 1997, an alliance was established with
Simclar Electronics of Scotland. This working arrangement provides Sparton with
a manufacturing venue to the European market. The partnership is expected to
produce many mutually beneficial opportunities for both Simclar and Sparton.
To further enhance Sparton's strategic positioning efforts, essential management
and manufacturing personnel have begun working toward the goal of being
designated as a Six-Sigma (3.4 defects per one million parts) ECM supplier. Six
Sigma training is in process at this time. Sparton expects to achieve Six Sigma
within three years or less. Sparton also addressed the value-added needs of its
customers through the Sparton Corporate Acquisition Team (SCAT). SCAT positions
Sparton as a high value-added partner offering highly competitive pricing, rapid
response, and strategic outsourcing solutions.
In all locations, Sparton has seen an unprecedented amount of new business
quoting activity. For fiscal 1998, Sparton has gained a high number of new ECM
customers.
Flexible Manufacturing On Demand (FlexMOD(R)) - a new customized customer
focused manufacturing process - was introduced in 1998. This process was
designed to provide
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flexibility and specialized customer attention at competitive costs for OEM's
with low to medium volume assembly requirements. The success of this program was
made possible through the use of Sparton's new interactive business process
system.
Our Advanced Engineering Solutions operations (AES) has continued to grow as it
develops products for the medical electronics design business. AES, a part of
Sparton Electronics, located in DeLeon Springs, Florida successfully completed
an FDA audit to the new, more stringent regulations in June. This operations'
sales were double Company expectations for fiscal 1998. Continued double-digit
growth is expected both in medical product development and the manufacturing of
those developed products.
Government sales for fiscal 1998 continued to rebound despite the reduction in
defense spending. Sparton is still one of the major suppliers of sonobuoys for
the United States Navy and is still the only supplier that makes every type of
sonobuoy purchased by the Navy. This past year, Sparton has seen an increase in
international customers. Sonobuoy demand for fiscal 1999 is not expected to
increase; however, it remains a significant and important market for Sparton.
Our power electronics and telecommunication businesses continue to flourish. In
Canada, Sparton established a high power electronic ballast business catering to
customers' power needs. New sales for the ballasts were significant and we
expect fiscal year 1999 sales to continue to improve.
Telecommunication sales for fiscal 1998 increased 28% from the previous year.
This increase was led by the worldwide demand for Sparton's Power Monitoring
Systems manufactured by Sparton Technology, Inc. International sales of this
product line to China remains strong. Based on numerous inquiries, Sparton
Technology, Inc. has designed an Uninterruptable Power Supply (UPS). Final
testing of the power supply is now underway.
[PHOTO]
Sparton's 5300 series of telecommunications cable air pressure monitor systems
has been one of the industry's leaders for over 20 years.
[PHOTO]
Photo courtesy of DePuy
Sparton supplies the ventilation unit and power controller for this surgical
medical gown
In August of 1996, Sparton announced that it would exit the OEM and aftermarket
auto parts supply business so as to concentrate its efforts in the development
of its electronics based businesses. In that regard both the KPI and the Flora
Groups of Sparton Engineered Products were offered for sale. The KPI Group was
sold in December of 1996 and the Flora Group has remained for sale since that
time. On August 28, 1998 Sparton's Board of Directors decided to close and
liquidate the Flora operations since it had failed in its efforts after nearly
24 months to obtain an acceptable offer to purchase the business. We believe
that we have made adequate reserve provisions in our financial statements to
cover losses on liquidating the Flora business, including any losses from
operations through that date.
For fiscal 1999 Sparton looks forward to obtaining new and exciting design and
production opportunities within avionics, telecommunications, medical and other
industrial electronics market segments. We believe our unique business approach
and customer commitment contributes to the long-term value creation at Sparton
Corporation.
We wish to express our sincere appreciation to you for your confidence and
support of our efforts toward becoming a leader in the Electronics Contract
Manufacturing industry.
Our Annual Meeting is scheduled for Wednesday, October 28, 1998 in our Jackson,
Michigan offices at 10:00 a.m. We trust that many of you will attend to review
the highlights of the fiscal year just closed.
/s/ John J. Smith
JOHN J. SMITH
Chairman
/s/ David W. Hockenbrocht
DAVID W. HOCKENBROCHT
President
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<PAGE> 6
INNOVATION
Sparton Corporation (Sparton) is emerging as a leader in the Electronics
Contract Manufacturing (ECM) industry. Sparton provides high mix, low to medium
volume contract manufacturing services. Sparton utilizes six manufacturing
service centers encompassing over 700,000-square feet within North America. In
addition to Sparton's strong core manufacturing capabilities, we provide a
complete range of pre-manufacturing and post-manufacturing services.
Pre-manufacturing services include product development, concurrent engineering,
design for test (DFT), design for manufacturing (DFM), design for assembly
(DFA), printed circuit board design and quick-turn prototype. Post-manufacturing
services range from repair depot, direct ship, distribution management to field
support.
Any Electronics Contract Manufacturer can claim they have the same benefits, but
customer service sets Sparton apart. Sparton customer relationships are open and
honest with two-way information sharing. It is truly a partnership. Everything
is shared from the product and market plans to an understanding of each other's
costs of doing business. This facilitates an open relationship. On a regular
basis, Sparton and its customer analyze every element of their business
relationship.
Sparton's continuous investments in technology, personnel and equipment have
been rewarded. Through vision, innovation, value and speed, Sparton forges ahead
into the next millennium.
VISION
Through continuous investments in associate training along with information and
manufacturing technology upgrades, Sparton demonstrates its commitment to be at
the forefront of available technology in the 21st century.
Sparton is working with its customers toward the realization of the future.
Sparton is primarily focused on enabling time-to-market customer service
emphasizing speed, responsiveness, reliability and predictability. This service
is delivered through an adaptive business process that facilitates a
customized business solution for each customer. To achieve this, Sparton
developed a "new product introduction process", assuring that each customer
receives the quality electronics they need and when they need it.
[PHOTO]
Sparton's 5317 Addressable Mini-Satellite is the smallest and the newest remote
system providing telecommunications companies economical monitoring of
pressurized cables.
[PHOTO]
Re-engineering an existing product, Sparton has designed the Pulse Dose EX2000
Demand Oxygen Controller with added functionality, improved performance and
reliability
In 1998, Sparton introduced its new Flexible Manufacturing on Demand
(FlexMOD(R)) business model. FlexMOD(R) addresses all aspects of a business
process ensuring customers receive high speed, specialized attention and
personalized service. A key part of the success of FlexMOD(R) is the
implementation of a new integrated manufacturing information system introduced
during this past year.
Improving response time while reducing overhead cost is the goal of the Sparton
Corporate Aquisition Team (SCAT). SCAT is responsible for the strategy
formulation and development of the materials supply and logistics operations
within Sparton. Focal points to be addressed include supplier value-added
programs, obsolescence intervention, Electronic Data Interchange (EDI) and
web-based communications.
The success of an Electronics Contract Manufacturer can be summarized in one
word: Flexibility. Recognizing that we are only as successful as our customer
is, Sparton implemented rapid prototyping capabilities. Sparton can process
short-run circuit card assemblies in a matter of hours. This is possible through
highly flexible, programmable equipment and refined processes. The key
ingredient is submitted data obtained from the customer database to Sparton's
equipment.
INNOVATION
Sparton's design and engineering capabilities are exemplary. Sparton regularly
takes on customer design challenges for speed and innovation. For example, one
new design was executed in one-third the customer's original time estimate.
Where does a customer turn when it has a concept, but does not have the
resources or the technical expertise to bring that idea to the market? Sparton.
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For those companies with limited engineering resources, Sparton can provide the
technical depth and expertise they require. Sparton has successfully integrated
design and engineering with production capabilities providing solutions for
customers in numerous industry applications.
Recognizing a market niche, Sparton implemented Advanced Engineering Solutions
(AES). AES is dedicated to new medical product design and manufacturing. AES
designs and manufactures therapeutic, diagnostic, surgical, and medical
laboratory equipment. These products are typically small, electro-mechanical
devices with either embedded or PC-based software control. Working as an
extension of the customer's engineering department, AES sells product design
services on a time and materials basis. Services include product specification
and prototype development, manufacturing and assembly (DFMA) design, agency
approval support, product and software documentation and final product
manufacturing.
Each of Sparton's business units has special design capabilities. Our
engineering capabilities have led to unique products. High-Power Electronic
Ballasts, Uninterruptable Power Supply (UPS) Monitors and Battery Monitoring
Systems showcase Sparton's design expertise. Many of Sparton's products have
evolved from efforts that exceeded customers' expectations.
VALUE
Value has been Sparton's cornerstone offering for 98 years. Competitive costs,
personalized design and manufacturing services coupled with ISO 9000 certified
plants provide Sparton's customers with a competitive edge in the world's
marketplaces.
Sparton provides added value through competitive costs and exceptional quality.
Sparton's goal for the 21st Century is to have a consistent quality level of
Six Sigma (3.4 defects per million parts). Along with quality, Sparton is also
introducing a component obsolescence program. This program will pinpoint
obsolete components and re-design products before the parts are no longer
available.
[PHOTO]
The 5354 Battery Monitoring System is used by telecommunications companies
around the world to remotely audit the status of a back-up battery system
[PHOTO]
Sparton is involved in the development of a custom power supply and control
electronics for these Electrodeionization (EDI) Stacks
An example of Sparton's value to many contract manufacturing customers is the
breadth of services offered, including design-to-distribution and quality
adeptness. Sparton's Canadian engineering department received recognition from a
major telecommunication company by "going the extra mile" with its technical
knowledge and customer service.
A Remote Battery Monitoring customer of Sparton Technology, Inc. stated, "Remote
accessibility, estimated reserve time and individually monitored cell voltages
make the Sparton's 5354 Battery Monitor worth five times its price." This
statement underscores Sparton's commitment to achieving the greatest value for
its customers.
SPEED
Time lost in today's marketplace is lost money. The speed of Sparton's business
process execution is a defining competitive advantage and a daily focus by all
of Sparton associates.
The marketplace is driven by speed. Sparton continually seeks new ways of
enhancing and improving processes. Besides a new business process, Sparton has
made various improvements throughout its North American facilities. At selected
facilities, areas of improvement include printed circuit assembly upgrades,
additional surface mount lines, newly automatic insertion lines and new
peripheral equipment. For fiscal year ended June 30, 1999 (fiscal 1999), Sparton
intends to make investments to upgrade and improve equipment and facilities.
At Sparton, speed reaches beyond the manufacturing process. Recently, a customer
needed a prototype designed within five months. After being informed by their
internal operations that the prototype would be available in nine months, the
client turned to Sparton. Sparton designed the prototype within five months and
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<PAGE> 8
VALUE
at one-third the original cost estimate. Within another five months from the
initial field test, the customer was delivered 400 units. Sparton's design and
production capabilities surpassed the customer's expectation throughout each
project phase.
In fiscal 1999, Sparton will enhance customer relationships through expanded use
of the Internet and an interactive website. With "push technology" and other
applications, the Internet will bring the customer/Sparton relationship into a
"real-time" mode. Both customers and suppliers will be able to access Sparton's
database to find the information they need.
VISION. INNOVATION.
VALUE. SPEED.
Celebrating its 98th year, Sparton Corporation has made tremendous strides
toward our goal of becoming a leader of the Electronics Contract Manufacturing
industry. Sparton now has a presence in numerous markets: avionics, medical,
industrial, telecommunications, data communications, transportation,
instrumentation, aerospace, acoustics and government.
Relationships and contracts with existing customers continue to grow. Each
business unit has seen new and exciting technological opportunities in products
and design throughout the past year.
ELECTRONICS CONTRACT MANUFACTURING
In ECM, Sparton's marketing strategy and implementation has proven to be
successful. Fiscal 1999 sales are expected to grow in the telecommunications,
medical, industrial and aerospace markets.
Sparton Electronics' ECM business has completed another successful year.
Bookings for the year were the highest ever. A total of 27 new and exciting
customer opportunities were realized. The balance and diversity of these new
customers will help Sparton achieve its desired objective of steady growth
without the high risk to any single market or customer.
[PHOTO]
Sparton provides the assembly, distribution and repair depot support for this
medical patient-warming device.
[PHOTO]
Sparton provided the end stage design and production ramp up for the Computer
Controlled Syringe
Sparton of Canada's success was fueled by growth in all of their business
units: power, ECM, acoustic and oceanographic. This location divested its
oceanographic business during the year, adding to the overall positive results.
In fiscal 1998, Sparton's Canadian operations realized a dramatic turnaround by
optimizing its focus on its core strengths in power electronics and ECM.
ADVANCED ENGINEERING SOLUTIONS
AES sales for the past year were double its earlier expectations to
approximately $1.6 million. Two large laboratory equipment development projects
were the major contributors to this increase. The continued development of the
touch screen control system also contributed to this increase. This product is
part of a hospital bed that treats patients with spinal injuries.
Additional projects include the concept development of a new ostomy patient care
product and the design of an electronically controlled saline surgical pump. The
saline pump system is now being manufactured. A power controller for a surgical
suit ventilation system has been developed and is currently in production. AES
also received contracts for the functional models of two different automated
slide preparation devices. One of the devices creates slides from urine samples
for automatic microscopy. The other device prepares bar coded, single layer,
cell samples on slides from aqueous solutions such as pap smears.
AES successfully completed an FDA audit in June. The audit assessed AES's
compliance with the new, more stringent FDA/GMP regulations. AES's strength is
its ability to handle complex software and hardware development tasks while
maintaining strict compliance with FDA requirements. These FDA requirements
include verification and validation of software and designs. AES continues to
enhance its market position by continually increasing its regulatory expertise
and procedural depth.
The outlook for AES in fiscal 1999 is positive growth both in the development of
medical products and the manufacturing of some of those products.
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GOVERNMENT
Government sales continue to recover from the drastic reductions seen several
years ago. These reductions were caused by the decline of the U.S. Navy and
international sonobuoy budgets in the early 1990's. Many countries have obtained
sophisticated diesel electric submarines. Anti-submarine warfare or under sea
warfare remains a viable product area. The global submarine threat has actually
increased in the past few years. Fiscal 1998 bookings were not as high as
expected due to competitive pressures.
Sparton does not expect to return to previous funding levels due to the reduced
number of operational anti-submarine warfare aircraft. For the first time in
several years, Sparton was not awarded the majority of U.S. Navy sonobuoy
contracts as a result of competitive pressures. Development of the
bathythermographic buoy was successfully completed in fiscal 1998 and production
was initiated.
Sonobuoy sales from international customers, which tend to be more cyclic than
the U.S. market, increased in fiscal 1998. Currently, Sparton sells to 21
international customers.
During the past year, the Naval Office of Oceanography and Atmospherics (NOOA)
qualified Sparton to produce a buoy to obtain environmental data. This
free-floating system has a 90-day life. The buoy measures sea surface, seawater
temperature and barometric pressure. The system transmits the data to an ARGOS
satellite to be further transmitted to environmental data banks. These buoys
were used during the past year to track the El Nino phenomenon. Interest in this
type of information is expected to increase in the U.S. and internationally.
Currently, Sparton is investigating the next iteration of this buoy and plans to
bid this program in fiscal 1999.
Dramatic growth in the global sonobuoy business is not anticipated, however, it
remains a core market for Sparton. Sparton is still the only manufacturer to
build every type of sonobuoy used by the United States Navy.
[PHOTO]
Sparton's engineering capabilities updated The Blood Pressure Monitor
documentation and enhanced the design for CE Mark compliance
[PHOTO]
Sparton adds greater reliability and more flexibility to this automatic meter
reader which computes the power used at homesites
POWER ELECTRONICS &
TELECOMMUNICATIONS
Three major ECM telecommunication contracts from diverse customers were awarded
in late fiscal 1998. These contracts should contribute to improved sales in
fiscal 1999.
Sales to China remain strong and are growing. Sparton added another major
telephone company as a customer for its battery monitoring system and a second
potential telecommunications customer is now conducting trials with this system.
Sparton Technology's sales declined by 3% from fiscal 1997. This decline was
caused by reduced orders from existing ECM customers, the Tone Alert Radio and
bus wiring harnesses. In addition, this ECM program was delayed for a year due
to operational problems experienced in the field. The customer has made changes
and production is scheduled to re-start in the first quarter of fiscal 1999.
In response to numerous requests, Sparton has designed an Uninterruptable Power
Supply (UPS) monitor. Trials will be underway during the first quarter of fiscal
1999.
VISION. INNOVATION. VALUE. SPEED. These are the key ingredients for Sparton
Corporation to continue to pursue for the foreseeable future.
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SPEED
CONSOLIDATED BALANCE SHEETS
SPARTON CORPORATION & SUBSIDIARIES June 30
<TABLE>
<CAPTION>
=============================================================================================================================
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,083,273 $8,021,620
Investment securities (Notes 1 and 2) 23,653,129 21,926,849
Accounts receivable:
Trade, less allowance of $290,000 ($144,000 in 1997) 12,888,558 14,484,331
U.S. and foreign governments 11,728,744 10,316,573
Inventories (Notes 1 and 3) 31,743,407 29,662,787
Prepaid expenses (Note 7) 4,340,455 3,391,094
Current assets of discontinued automotive operations (Note 8) 7,036,482 8,175,772
-------------------------------
Total current assets 95,474,048 95,979,026
Other assets (Note 6) 5,464,007 5,118,524
Property, plant and equipment, at cost (Note 1):
Land and land improvements 1,811,801 1,826,194
Buildings and building equipment 10,674,989 10,321,577
Machinery and equipment 21,679,537 18,804,527
-------------------------------
34,166,327 30,952,298
Less accumulated depreciation (22,598,471) (21,579,772)
-------------------------------
Net property, plant and equipment 11,567,856 9,372,526
Noncurrent assets, principally property, plant and equipment, of
discontinued automotive operations (Note 8) 2,808,360 3,707,011
-------------------------------
$115,314,271 $114,177,087
===============================
</TABLE>
See accompanying notes
FINANCIAL TRENDS AT A GLANCE
NET SALES
(In Millions of Dollars)
$95.5 94.5 102.8 142.7 145.9
1994 1995 1996 1997 1998
INCOME (LOSS) PER COMMON SHARE -
CONTINUING OPERATIONS
$(.65) (.59) (.36) .29 .55
1994 1995 1996 1997 1998
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SPARTON.COM
SPARTON CORPORATION & SUBSIDIARIES June 30
<TABLE>
<CAPTION>
===========================================================================================================================
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Accounts payable (Note 3) $11,390,801 $12,219,845
Salaries and wages 3,256,182 2,694,336
Income taxes (Note 7) 504,451 2,080,513
Accrued liabilities 5,069,584 5,599,782
Current liabilities of discontinued automotive operations (Note 8) 4,134,635 4,623,617
------------------------------
Total current liabilities 24,355,653 27,218,093
Deferred income taxes (Note 7) 2,531,500 1,571,500
Other liabilities of discontinued automotive operations (Note 8) 58,301 145,044
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,
7,828,090 shares outstanding (7,818,090 at June 30, 1997) after
deducting 106,622 shares (116,622 at June 30, 1997) in treasury (Note 5) 9,785,113 9,772,613
Capital in excess of par value 494,427 440,677
Retained earnings 78,089,277 75,029,160
------------------------------
Total shareowners' equity 88,368,817 85,242,450
------------------------------
$115,314,271 $114,177,087
==============================
</TABLE>
FINANCIAL TRENDS AT A GLANCE (Continued)
EQUITY PER COMMON SHARE
$7.95 7.12 6.60 10.90 11.29
1994 1995 1996 1997 1998
WORKING CAPITAL
(In Millions of Dollars)
$42.2 33.2 29.9 68.8 71.1
1994 1995 1996 1997 1998
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VISION
CONSOLIDATED STATEMENTS OF OPERATIONS
SPARTON CORPORATION & SUBSIDIARIES For Years Ended June 30
<TABLE>
<CAPTION>
============================================================================================================================
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $145,935,583 $142,736,800 $102,824,946
Costs and expenses:
Costs of goods sold 123,401,850 123,798,483 89,596,288
Selling and administrative 18,351,300 15,653,430 15,330,167
-----------------------------------------------
141,753,150 139,451,913 104,926,455
-----------------------------------------------
4,182,433 3,284,887 (2,101,509)
Other income (expense):
Interest and investment income (Note 2) 1,756,039 1,211,233 101,586
Interest expense (26,845) (896,010) (1,202,143)
Other-net 602,490 12,793 (117,728)
-----------------------------------------------
2,331,684 328,016 (1,218,285)
-----------------------------------------------
Income (loss) from continuing operations before income taxes (credits) 6,514,117 3,612,903 (3,319,794)
Provision (credits) for income taxes (Note 7) 2,181,000 1,371,000 (509,000)
-----------------------------------------------
Income (loss) from continuing operations 4,333,117 2,241,903 (2,810,794)
Discontinued operations: (Note 8)
Loss from discontinued automotive operations, net of income tax credits of
$72,000 in 1997 and $771,000 in 1996 -- (128,720) (1,269,390)
Gain (loss) on disposal of discontinued automotive operations,
net of applicable income tax credit of $680,000 in 1998 and
provision of $18,122,000 in 1997 (1,320,000) 31,587,357 --
-----------------------------------------------
Net income (loss) $3,013,117 $33,700,540 $(4,080,184)
===============================================
Basic and diluted earnings per share:
Continuing operations $.55 $.29 $(.36)
Discontinued operations (.17) 4.02 (.16)
-----------------------------------------------
$ .38 $4.31 $(.52)
===============================================
</TABLE>
See accompanying notes
FINANCIAL TRENDS AT A GLANCE (Continued)
Governmental Sales
(In Millions of Dollars)
$49.7 38.3 39.1 55.9 60.8
1994 1995 1996 1997 1998
Commercial Sales
(In Millions of Dollars)
$45.8 56.2 63.7 86.8 85.1
1994 1995 1996 1997 1998
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CONSOLIDATED STATEMENTS OF CASH FLOW
SPARTON CORPORATION & SUBSIDIARIES For Years Ended June 30
<TABLE>
<CAPTION>
============================================================================================================================
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Income (loss) from continuing operations $4,333,117 $2,241,903 $(2,810,794)
Add (deduct) non-cash items affecting continuing operations:
Depreciation 1,868,208 1,494,511 1,147,027
Deferred income taxes 1,102,000 (467,000) 307,000
Pension (489,257) (88,952) (236,835)
Gain on sale of property, plant and equipment (560,126) -- (66,144)
Other 47,000 75,615 271,040
Add (deduct) changes in operating assets and liabilities:
Accounts receivable 183,602 (6,345,782) 1,939,730
Inventories and prepaid expenses (3,171,981) 4,080,847 (7,410,631)
Income taxes recoverable -- 2,300,000 (120,000)
Deferred compensation -- (2,288,518) --
Accounts payable, salaries and wages,
accrued liabilities and income taxes (2,298,458) 4,468,207 (16,483)
----------------------------------------------
Net cash provided (used) by continuing operations 1,014,105 5,470,831 (6,996,090)
Income taxes on discontinued operations 680,000 (18,122,000) --
Cash flow provided (used) by discontinued operations (2,497,758) (605,725) 3,167,262
----------------------------------------------
NET CASH USED BY OPERATING ACTIVITIES (803,653) (13,256,894) (3,828,828)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (4,078,602) (2,132,478) (3,333,421)
Proceeds from sale of assets of discontinued operations 2,283,164 78,829,062 --
Purchases of investment securities-net (1,726,280) (21,926,849) --
Other, principally noncurrent other assets 143,774 (424,014) (66,146)
Proceeds from sale of property, plant and equipment 575,190 -- 74,644
Discontinued operations, principally purchases of
property, plant and equipment (236,447) (74,388) (855,324)
----------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (3,039,201) 54,271,333 (4,180,247)
FINANCING ACTIVITIES:
Principal payments on long-term borrowings (75,000) (75,000) (75,000)
Common stock transactions, principally from exercise of stock options 66,250 44,031 --
(Decrease) increase in notes payable -- (33,594,225) 8,013,485
Principal payments on long-term borrowings, discontinued operations (86,743) (85,988) (84,830)
----------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (95,493) (33,711,182) 7,853,655
----------------------------------------------
INCREASE (DECREASE) IN CASH (3,938,347) 7,303,257 (155,420)
Cash at beginning of year 8,021,620 718,363 873,783
----------------------------------------------
CASH AT END OF YEAR $4,083,273 $8,021,620 $718,363
==============================================
Supplemental disclosures of cash paid (refunded) during the year for:
Interest expense $6,000 $1,354,000 $2,237,000
==============================================
Income taxes $2,364,000 $15,938,000 $(1,428,000)
==============================================
</TABLE>
See accompanying notes
11
<PAGE> 14
INNOVATION
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
SPARTON CORPORATION & SUBSIDIARIES For Years Ended June 30
<TABLE>
<CAPTION>
===============================================================================================================================
COMMON STOCK,
$1.25 PAR VALUE CAPITAL IN
-------------------- EXCESS OF RETAINED
SHARES AMOUNT PAR VALUE EARNINGS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Net income 3,013,117 3,013,117
Exercise of stock options 10,000 12,500 53,750 -- 66,250
Net unrealized gains in marketable
securities (Note 2) 47,000 47,000
--------------------------------------------------------------------------
Balance June 30, 1998 7,828,090 $9,785,113 $494,427 $78,089,277 $88,368,817
==========================================================================
</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, 1998 and 1997, and the related
consolidated statements of operations, shareowners' equity, and cash flows for
each of the three years in the period ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sparton
Corporation and subsidiaries at June 30, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Toledo, Ohio
August 28, 1998
12
<PAGE> 15
SPARTON.COM
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 of 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.
MARKET RISK EXPOSURE - The Company manufactures its products in the United
States and Canada. Sales of the Company's products are to the U.S. and Canada,
as well as other foreign markets. The Company is potentially subject to foreign
currency exchange rate risk relating to receipts from customers and payments to
suppliers in foreign currencies. As a result, the Company's financial results
could be affected by factors such as changes in foreign currency exchange rates
or weak economic conditions in the foreign markets in which the Company
operates. However, minimal receivables and payables are designated in foreign
currency. The Company does not consider the market risk exposure relating to
currency exchange to be material.
The Company has financial instruments that are subject to interest rate risk,
principally short-term investments. Historically, the Company has not
experienced material gains or losses due to such interest rate changes. Based on
the current holdings of short-term investments, the interest rate risk is not
considered to be material.
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 normally 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 follows 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, 1998 of approximately $8,756,000 which are being
depreciated on the straight-line method. Estimated useful lives generally range
from 10 to 40 years for buildings and improvements, 5 to 12 years for machinery
and equipment and 3 to 5 years for test equipment.
RESEARCH AND DEVELOPMENT EXPENDITURES - Expenditures for research and
development not funded by customers amounted to approximately $1,049,000 in
1998, $987,000 in 1997 and $1,409,000 in 1996.
EARNINGS PER SHARE - The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share." SFAS 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. The diluted earnings per share calculation is very
similar to the previous fully diluted earnings per share calculation method.
SFAS 128 became effective December 31, 1997.
The Company has a simple capital structure and there were no changes under the
SFAS 128 methodology to the previously reported earnings per share amounts for
any of the fiscal years. Income from continuing operations for purposes of the
SFAS 128 computations were also the same as those reported for all fiscal years.
Basic earnings per share under SFAS 128 were computed using the weighted average
number of shares outstanding of 7,826,840 in 1998, 7,816,417 in 1997 and
7,811,370 in 1996. Differences in the weighted average number of shares
outstanding for purposes of computing diluted earnings per share were due to the
inclusion of the dilutive effect of employee incentive stock options previously
granted of 164,072 in 1998 and 38,237 in 1997. These differences in the weighted
average number of shares outstanding for the calculation of basic and diluted
earnings per share were not material in any of the reporting periods within
fiscal years 1998 and 1997, and resulted in no differences between basic and
diluted earnings per share. Options to purchase 49,000 shares of common stock at
$6.625 per share were outstanding during 1996 and options to purchase 196,500
shares of common stock at $8.375 per share were outstanding during 1997 but were
not included in the computation of diluted earnings per share because the
options exercise price was greater than the average market price of the common
shares and therefore, the effect would be anti-dilutive.
13
<PAGE> 16
VALUE
2. INVESTMENT SECURITIES
The Company has had investment securities since January 1997. Details of the
investment securities portfolio as of June 30, 1998 and June 30, 1997 are as
follows:
<TABLE>
<CAPTION>
GROSS
AMORTIZED UNREALIZED ESTIMATED
JUNE 30, 1998 COST GAINS (LOSSES) FAIR VALUE
================================================================
<S> <C> <C> <C>
Debt securities:
Corporate-primarily U.S. $8,598,524 $(27,045) $8,571,479
U.S. government and
federal agency 8,762,115 12,187 8,774,302
State and municipal 3,806,674 (5,352) 3,801,322
Equity securities-primarily
preferred stock 2,461,816 44,210 2,506,026
-------------------------------------
$23,629,129 $24,000 $23,653,129
======================================
</TABLE>
<TABLE>
<CAPTION>
GROSS
AMORTIZED UNREALIZED ESTIMATED
JUNE 30, 1997 COST GAINS (LOSSES) FAIR VALUE
==================================================================
Debt securities:
<S> <C> <C> <C>
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 years ended June 30, 1998 and 1997, the Company had gross purchases of
investment securities totaling $12,585,000 and $27,574,000 respectively, and
gross sales of investment securities totaling $10,859,000 and $5,647,000,
respectively.
3. LONG-TERM CONTRACTS
Inventories include costs related to long-term contracts of approximately
$8,930,000 and $9,030,000 at June 30, 1998 and 1997, respectively, reduced by
progress billings from the United States government of approximately $2,646,000
and $2,198,000, respectively.
Accounts payable includes billings in excess of costs of $716,000 and $4,227,000
at June 30, 1998 and 1997, respectively.
4. LEASE INFORMATION
The Company leases certain machinery, data processing, vehicles and other
equipment. Such leases, some of which are non-cancelable and in many cases
include renewal options, expire at various dates. The Company is responsible for
most maintenance, insurance, and taxes relating to these leased assets. Rent
expense under agreements accounted for as operating leases was $1,036,000 in
1998, $947,000 in 1997, and $703,000 in 1996. At June 30, 1998, future minimum
lease payments for non-cancelable operating leases totaled $1,533,000 and are
payable as follows: 1999-$897,000, 2000-$447,000, 2001-$172,000, 2002-$16,000,
and 2003-$1,000.
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, 1995 49,000 $6.625
Exercised -- --
Cancelled -- --
-----------------------------
Outstanding at June 30, 1996 49,000 6.625
Granted 196,500 8.375
Exercised (7,000) 6.625
Cancelled -- --
-----------------------------
Outstanding at June 30, 1997 238,500 6.625 to 8.375
Granted --
Exercised (10,000) 6.625
Cancelled (15,000) 8.375
-----------------------------
Outstanding at June 30, 1998 213,500 $6.625 to $8.375
=============================
</TABLE>
At June 30, 1998, the per share weighted average exercise price of options
outstanding was $8.11. The weighted average remaining contractual life of those
options is approximately 3.08 years. At June 30, 1998, there were 71,935 options
exercisable at the per share weighted average exercise price of $7.729. 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 160,000
at July 1, 1998 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
$69,000 ($.01 per share) and $40,000 ($.01 per share) in 1998 and 1997,
respectively. The impact on 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 the options
granted in December 1996: risk-free interest rate of 5.92%, dividend yield of
0.0%, expected volatility of 32.7% and an expected option life of 4 years.
14
<PAGE> 17
SPARTON.COM
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:
Long-term rate of investment return (7.5% for 1997)..................... 8.0%
Long-term rate of increase in compensation levels....................... 5.0%
Discount rate (7.5% for 1997 and 1996).................................. 7.0%
Net periodic pension income of $489,000, $89,000, and $236,000 was recognized in
1998, 1997 and 1996, respectively. The components of these credits are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
=========================================================================
<S> <C> <C> <C>
Service cost-benefits earned
during the year $314,000 $432,000 $178,000
Interest on projected
benefit obligation 629,000 720,000 662,000
Actual return on plan assets (3,551,000) (2,669,000) (3,149,000)
Net amortization and deferral 2,119,000 1,428,000 2,073,000
-------------------------------------------
Net periodic pension
income $(489,000) $(89,000) $ (236,000)
============================================
</TABLE>
The following table summarizes the funding status of the plan at March 31:
<TABLE>
<CAPTION>
1998 1997
===============================================================================
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
<S> <C> <C>
Vested $7,734,000 $7,785,000
Nonvested 419,000 456,000
-------------------------
$8,153,000 $8,241,000
=========================
Projected benefit obligation $9,335,000 $9,533,000
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 17,559,000 15,126,000
--------------------------
Excess of plan assets over projected
benefit obligation 8,224,000 5,593,000
Unrecognized net (gain) loss (2,872,000) (435,000)
Unrecognized net transition asset (1,186,000) (1,482,000)
---------------------------
Prepaid pension cost included in other assets $4,166,000 $3,676,000
=========================
</TABLE>
7. INCOME TAXES
Deferred tax assets and liabilities are determined based on differences between
financial reporting and the tax bases of assets and liabilities. Significant
components of the Company's deferred tax assets and liabilities at June 30, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Canadian tax carryovers $ 2,003,000 $ 2,664,000
Inventories 1,795,000 1,821,000
Liabilities of discontinued operations 1,023,000 1,098,000
Accrual for environmental contingencies 658,000 348,000
Employment and compensation 467,000 424,000
Other 115,000 12,000
----------- -----------
Total deferred tax assets 6,061,000 6,367,000
Less valuation reserve for Canadian
tax carryovers (2,003,000) (2,664,000)
----------- -----------
4,058,000 3,703,000
Deferred tax liabilities:
Property, plant and equipment 1,160,000 1,127,000
Prepaid pension costs 1,500,000 1,324,000
----------- -----------
Total deferred tax liabilities 2,660,000 2,451,000
----------- -----------
Net deferred tax assets $ 1,398,000 $ 1,252,000
=========== ===========
</TABLE>
Deferred taxes are included in the balance sheet at June 30, 1998 and 1997 as
follows:
<TABLE>
<S> <C> <C>
Prepaid expenses $3,930,000 $2,823,000
Deferred tax liabilities 2,532,000 1,571,000
----------- ----------
$1,398,000 $1,252,000
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
Income (loss) before income taxes consists of the following:
1998 1997 1996
- ------------------------------------------------------------------------------------
Continuing operations:
<S> <C> <C> <C>
United States $ 6,141,769 $ 4,385,967 $ (1,348,317)
Canada 372,348 (773,064) (1,971,477)
------------ ------------ ------------
6,514,117 3,612,903 (3,319,794)
Discontinued operations (2,000,000) 49,508,637 (2,040,390)
------------ ------------ ------------
$ 4,514,117 $ 53,121,540 $ (5,360,184)
============ ============ ============
</TABLE>
The provision (credit) for income taxes for continuing operations consists of:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
United States $ 969,000 $ 1,095,000 $ (881,000)
State and local 110,000 -- 65,000
------------ ------------ ------------
1,079,000 1,095,000 (816,000)
Deferred - United States 1,102,000 276,000 307,000
------------ ------------ ------------
$ 2,181,000 $ 1,371,000 $ (509,000)
============ ============ ============
</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>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. federal tax
(benefit) rate 34.0% 35.0% (34.0%)
Significant increases (reductions)
resulting from:
Canadian tax loss carryovers
and other (0.2) 10.0 20.2
Tax benefit of foreign
sales corporation (4.2) (9.0) (2.0)
State and local income taxes 2.0 -- (0.1)
Other 1.9 1.9 0.6
---------------------------------
Effective tax (benefit) rate 33.5% 37.9% (15.3%)
=================================
</TABLE>
For Canadian income tax purposes, approximately $4,432,000 of non-capital losses
and scientific research and experimental development expenditures are available
at June 30, 1998 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 $407,000 at June 30, 1998 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 $2,003,000 has been established for the full amount of the Canadian
carryovers.
15
<PAGE> 18
SPEED
8. DISCONTINUED OPERATIONS
In August 1996, the Company formalized its decision to offer for sale its
automotive operations. Accordingly, these operating results have been 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. 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. In 1998,
$1,610,000 of additional proceeds were received upon resolution of certain tax
issues related to the sale. This amount, $1,063,000 after-tax, was recorded as a
gain on disposal of discontinued operations. 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.
This sale did not include the net assets and operations of the remaining
automotive unit, Sparton Engineered Products, Inc.-Flora Group (Flora). In
establishing the amount of gain on sale reported in December 1996 the Company
included a reserve totaling $4,671,000 for the estimated operating losses and
other costs associated with expected disposal of the Flora operations. The
Company has pursued disposal of the Flora operations since the August 1996
decision to sell its automotive operations. During this protracted period, a
number of events occurred that negatively impacted the potential value of the
Flora Group including continued unplanned operating losses, loss of personnel,
tornado damage to the plant on April 15, 1998 and loss of a major customer. In
April 1998, the Company abandoned attempts to finalize a sale/purchase agreement
with a party with whom negotiations had been ongoing for some 16 months. These
events were not anticipated when the initial reserve was recorded, nor did the
Company expect its plan of disposal to extend over this period of time.
Accordingly, the Company has adjusted its previously recorded reserve for
discontinued operations by a charge to discontinued operations of $3,610,000
pre-tax ($2,383,000 after-tax) for additional losses now anticipated in the
disposal of this business. At June 30, 1998, approximately $2,144,000 of this
reserve remains to cover these losses. At its meeting on August 28, 1998 the
Board of Directors approved the closing of this Flora operation and an orderly
liquidations of its assets. Accordingly, the liquidation process has now
commenced.
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:
1997 1996
================================================================
Revenues $30,461,930 $121,263,396
===========================
Loss before income taxes $ (200,720) $(2,040,390)
Income tax credits (72,000) (771,000)
---------------------------
Net loss $ (128,720) $(1,269,390)
===========================
Assets and liabilities of discontinued automotive operations are as follows at
June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
==============================================================
<S> <C> <C>
Current assets:
Cash $77,749 $158,073
Accounts receivable 2,651,043 4,299,596
Inventories 4,049,207 3,549,317
Prepaid expenses 258,483 168,786
---------------------------
$7,036,482 $8,175,772
===========================
Noncurrent assets:
Property, plant and
equipment, at cost $12,196,492 $12,990,330
Less accumulated depreciation (9,388,132) (9,283,319)
-----------------------------
$2,808,360 $3,707,011
=============================
Current liabilities:
Accounts payable $825,955 $1,156,581
Salaries and wages 195,905 246,342
Accrued liabilities 3,112,775 3,220,694
----------------------------
$4,134,635 $4,623,617
============================
Long-term obligations,
net of current maturities $58,301 $145,044
============================
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
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 largely idled facility. The investigation began in
the early 1980's and involved a review of on-site and off-site environmental
impacts. In 1988, an administrative order on consent ("AOC") was executed with
EPA related to further investigation and proposing a means of dealing with
quantified impacts.
The remedial investigation called for in the AOC has been completed and
approved. In May 1996, Sparton submitted to the EPA a final corrective measure
study, based on the results of its investigations, as required in the AOC. In
June 1996, the EPA issued its final decision selecting a 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 thirty (30) year time
frame. In Sparton's judgment, the remedies proposed by the EPA are either
unnecessary or technically impracticable. Sparton vigorously challenged the
EPA's remedy selection and filed suit in federal district court in Dallas
asserting that the EPA's decision on remedy selection violated 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 implementing that remedy.
Sparton vigorously contested that order administratively, but on February 10,
1998, EPA issued a final administrative order that in all material respects
followed the initial administrative order issued in September 1996. Sparton has
refused to implement those portions of that order that it believes are
unjustified.
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 Coors Road 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 now
incorporated in the Final Administrative Order, and referred to above. In March
1997, the plaintiffs in these three lawsuits filed a motion for preliminary
injunction and in July of 1997, the action in Dallas was transferred to federal
district court in Albuquerque and consolidated with the three lawsuits filed in
February 1997.
A pretrial schedule has been established for the consolidated actions, but no
trial date set. Limited discovery, involving interrogatories and requests for
production, has been undertaken by the plaintiffs. The plaintiffs have sought to
amend their lawsuit to compel Sparton to implement the Final Administrative
Order, and seeking civil penalties for alleged noncompliance. Sparton has
opposed this request and no decision has been made by the court on the
plaintiffs' request to amend.
In March 1998, a hearing was held on the plaintiffs' request for a preliminary
injunction. After two days of testimony, the federal district judge indicated he
had tentatively concluded he might issue a preliminary injunction. The parties
subsequently entered into settlement discussions that culminated in an agreed
workplan for the installation of certain off-site monitoring, observation, and
containment wells, in exchange for plaintiffs withdrawing their request for a
preliminary injunction. An order withdrawing that request and approving this
off-site workplan was signed on July 7, 1998. This is one of several workplans
being negotiated.
At the current time, all litigation has been stayed to allow the parties to
continue settlement discussions. The most recent stay will expire on October 23,
1998.
Uncertainties associated with environmental remediation contingencies are
pervasive and often result in wide ranges of reasonably possible estimates.
Estimates developed in the early stages of remediation can vary significantly.
16
<PAGE> 19
SPARTON.COM
Normally, a finite estimate of cost does not become fixed and determinable at a
specific point in time. Rather, the costs associated with environmental
remediation become estimable over a continuum of events and activities that help
to frame and define a liability. To date, Sparton has incurred costs of
approximately $7,914,000 since environmental impacts were first identified in
the early 1980's. $3,000,000 of this amount has been recovered from insurance
companies. For the fiscal years ended June 30, 1998, 1997 and 1996, Sparton
incurred costs of $1,014,000, $935,000, and $247,000 with legal and defense
costs included of $548,000, $379,000, and $53,000, respectively. In addition,
total amounts expensed for 1998, 1997 and 1996 were $1,821,000, $1,457,000, and
$307,000 respectively.
At June 30, 1998, Sparton has accrued $1,828,000 as its estimate of the future
undiscounted minimum obligation with respect to this matter. This reflects the
minimum range of the amount Sparton expects to incur over the next five years.
This amount includes equipment and operating and maintenance costs. In many
cases, new technologies become available over time, which result in modified
costs for environmental remediation. The Company's estimate of cost is based on
the existing methodology and excludes legal and related consulting costs. The
estimate includes the minimum range of activity expected to occur in the next
five years including onsite and offsite pump and treat containment systems, a
soil vapor extraction program and continued onsite/offsite monitoring. Beyond
five years, while additional expenditures are probable, Sparton does not believe
such expenditures are reasonably estimable based on available information.
Factors causing the uncertainty include, but are not limited to, effectiveness
of the currently proposed programs to achieve targeted results and decisions
made by regulating agencies regarding future proposals and reports of Sparton.
Sparton routinely refines and revises the estimate of its environmental efforts
as additional information becomes available.
It is reasonably possible that Sparton's recorded estimate of this liability may
change. If a remedy is imposed on Sparton, other than the one it has proposed,
the ultimate cleanup costs could increase significantly. There is no assurance
that additional costs greater than the amount accrued will not be incurred or
that 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.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following unaudited information shows selected items by quarter for the
years ended June 30, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
===============================================================================================================================
<S> <C> <C> <C> <C>
Net sales:
1998 $32,366,103 $34,865,638 $41,901,535 $36,802,307
1997 33,280,285 32,875,199 31,866,062 44,715,254
Gross profit:
1998 3,260,379 5,154,872 5,842,726 8,275,756
1997 3,926,720 3,288,336 3,536,755 8,186,506
Income (loss):
1998:
Continuing operations $322,654 $872,188 $1,203,465 $1,934,810
Discontinued operations -- -- -- (1,320,000)
----------------------------------------------------------------
$322,654 $872,188 $1,203,465 $614,810
================================================================
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
================================================================
Income (loss) basic and diluted earnings per share:
1998:
Continuing operations $.04 $.11 $.15 $.25
Discontinued operations -- -- -- (.17)
----------------------------------------------------------------
$.04 $.11 $.15 $.08
================================================================
1997:
Continuing operations $(.03) $(.01) $.06 $.27
Discontinued operations (.02) 4.04 -- --
----------------------------------------------------------------
$(.05) $4.03 $.06 $.27
================================================================
</TABLE>
The Company's gross margins were increased $450,000 in the fourth quarter of
1998 due to revisions in estimated completion cost on a government defense
contract and decreased $1,071,000 due to the Company's adjusting its accrual for
EPA related costs as described in Note 8. The Company also recorded a net loss
on disposal of discontinued operations of $2,000,000 ($1,320,000 after tax) in
the fourth quarter of 1998 as more fully described in Note 8.
11. SALES CONCENTRATION
Total direct sales on prime contracts to United States government agencies were
$25,326,000 in 1998, $28,123,000 in 1997, and $27,809,000 in 1996. No other
customer accounted for 10% or more of consolidated sales from continuing
operations in 1998, 1997 or 1996. Foreign export sales by U.S. continuing
operations to unaffiliated customers were $45,684,000 in 1998, $36,738,000 in
1997, and $17,043,000 in 1996.
Sales of ASW devices and related engineering contract services for the years
1998-1996 contributed approximately 36%, 38%, and 34% respectively, to total
sales. Intracompany sales were not significant in any of these years.
17
<PAGE> 20
VISION
SELECTED FINANCIAL DATA
SPARTON CORPORATION & SUBSIDIARIES Years Ended June 30
<TABLE>
<CAPTION>
===========================================================================================================================
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $145,935,583 $142,736,800 $102,824,946 $94,514,784 $95,453,340
Costs and expenses 141,753,150 139,451,913 104,926,455 100,817,530 102,833,311
----------------------------------------------------------------------------------
4,182,433 3,284,887 (2,101,509) (6,302,746) (7,379,971)
Other income (expense):
Interest and investment income 1,756,039 1,211,233 101,586 77,905 80,055
Interest expense (26,845) (896,010) (1,202,143) (948,800) (421,447)
Other-net 602,490 12,793 (117,728) 514,793 396,471
----------------------------------------------------------------------------------
2,331,684 328,016 (1,218,285) (356,102) 55,079
----------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes 6,514,117 3,612,903 (3,319,794) (6,658,848) (7,324,892)
Provision (credits) for income taxes 2,181,000 1,371,000 (509,000) (2,088,000) (2,220,000)
----------------------------------------------------------------------------------
Income (loss) from continuing
operations 4,333,117 2,241,903 (2,810,794) (4,570,848) (5,104,892)
Income (loss) from discontinued
automotive operations, net of
income taxes (1,320,000) 31,458,637 (1,269,390) (1,889,873) 205,478
-----------------------------------------------------------------------------------
Net income (loss) $3,013,117 $33,700,540 $(4,080,184) $(6,460,721) $(4,899,414)
==================================================================================
Weighted average common shares
outstanding 7,826,840 7,816,417 7,811,370 7,811,370 7,810,721
PER SHARE OF COMMON STOCK
Income (loss):
Continuing operations $.55 $.29 $(.36) $(.59) $(.65)
Discontinued operations (.17) 4.02 (.16) (.24) .02
----------------------------------------------------------------------------------
$.38 $4.31 $(.52) $(.83) $(.63)
===================================================================================
Shareowners' equity $11.29 $10.90 $6.60 $7.12 $7.95
Dividends -- -- -- --
- --
OTHER FINANCIAL DATA
Total assets $115,314,271 $114,177,087 $119,270,663 $110,654,772 $108,721,940
Working capital 71,118,395 68,760,933 29,940,793 33,187,775 42,204,541
Working capital ratio 3.92:1 3.53:1 1.47:1 1.66:1 2.00:1
Long-term obligations -- -- $75,000 $150,000 $225,000
Shareowners' equity 88,368,817 85,242,450 51,529,879 55,610,063 62,070,784
</TABLE>
18
<PAGE> 21
SPARTON.COM
MANAGEMENT'S DISCUSSION & 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 decision to offer for sale its automotive operations.
Accordingly, these operations, are 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 1998 COMPARED TO FISCAL 1997
Sales for the year ended June 30, 1998 were $145,936,000, an increase of
$3,199,000 (2%) over 1997. Revenues were below expectations, primarily in the
ECM area. Revenues increased $5,489,000 (5%) to $124,019,000 at Sparton
Electronics. Both commercial and government sales increased. Government sales
were slightly above plan while ECM sales were approximately 10% below
expectations. Sales declined $497,000 (3%) to $18,819,000 at Sparton Technology.
Sales were substantially below expectations due principally to unplanned delays
in two new program startups. Canadian revenues totaled $4,485,000, a decrease of
13% from last year. Sparton of Canada continues to develop a commercial sales
base.
Operating income of $4,182,000 was reported for 1998 compared to an operating
income of $3,285,000 last year. These results were consistent with internal
expectations. Sparton Electronics had an operating income of $6,285,000 compared
to $4,108,000 for the prior year. These significantly improved operating results
exceeded expectations and were due to an improved product mix and better control
over new program start-ups. Included within these operating results were adverse
capacity variances of $1,844,000 and $2,351,000 for 1998 and 1997, respectively,
caused by underutilized capacity at two production facilities. Also included
within these results were charges against operations of $351,000 in 1997 related
to the write-down in the carrying value of FM pager-related inventories. Sparton
Technology had an operating loss of $350,000 compared to an operating income of
$206,000 last year. As discussed below, these results reflect EPA related costs
and expense of $1,821,000 and $1,457,000 in 1998 and 1997, respectively. The
Canadian unit reported an operating loss of $122,000 in 1998 compared to an
operating loss of $629,000 last year. Low sales volume was the primary reason
for these results.
Selling and administrative expense increased by $2,698,000 to $18,351,000 in
1998. Several factors contributed to this increase, the largest being $1,350,000
in expenditures relating to the implementation of the new computer system this
past year. Consulting services made up the majority of this expense along with
computer equipment, supplies, and leases. An additional $450,000 was expended in
increased salaries and hiring costs. Finally, EPA costs increased by $400,000
at Sparton Technology.
Interest and investment income increased $545,000 to $1,756,000 in 1998 due to
the full year of 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 declined substantially
to $1,000. 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
$4,333,000 ($.55 per share) in 1998 compared to income from continuing
operations of $2,242,000 ($.29 per share) in 1997.
In recording the gain on sale of the discontinued automotive operations in
December 1996, the Company included estimates of the potential sales value and
operating losses that would be incurred by Sparton Engineered Products,
Inc.-Flora Group through the date of expected disposal. At the time these
estimates were tentative because the Company had focused its efforts on the sale
of the larger automotive business, KPI Group, and had not received competitive
responses from potential buyers for the Flora Group. In December 1996, the
Company received an initial letter of intent for the purchase of the Flora
Group. Extended and protracted negotiations for over a year failed to result in
an acceptable agreement with this buyer. At the same time, the Company continued
to pursue other competitive offers.
During this extended period, a number of events occurred that negatively
impacted the potential value of the Flora Group including continued unplanned
operating losses, loss of personnel, tornado damage to the plant on April 15 and
loss of a major customer. These events were not anticipated when the initial
gain was recorded in December 1996 nor did the Company expect that its plan for
disposal of the Flora Group would extend over this period of time. These events
and the termination of negotiations with an identified potential buyer in April
1998 caused the Company to reevaluate the amount of the gain on sale previously
recorded. As a result of that review, the Company recorded a charge of
$3,610,000, ($2,383,000 after-tax) to discontinued operations in the fourth
quarter of fiscal 1998 to reflect the reduction in value now expected to be
received and to recognize probable additional operating losses until disposal.
19
<PAGE> 22
INNOVATION
In its meeting on August 28, 1998, the Board of Directors approved and the
Company has commenced to close the Flora Operations and liquidate its assets.
The Company reported net income of $3,013,000 ($.38 per share) in 1998 compared
to a net income of $33,701,000 ($4.31 per share) in 1997.
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,
there 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 decision 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). Reflected in this gain is a
charge of $3,491,000 for the estimated operating losses and other costs
associated with the disposal of the Flora operations which were not sold. After
provision for applicable income taxes, the Company reported a gain on sale of
discontinued automotive operations of $31,587,000 in December 1996. 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.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of liquidity and capital resources 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 disposal of its discontinued
automotive operations, 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
20
<PAGE> 23
SPARTON.COM
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 provided by continuing operating activities were $1,014,000 in 1998
and $5,471,000 in 1997. Cash flows used by continuing operating activities were
$6,996,000 in 1996. Primary sources of 1998 cash flows provided by operating
activities included cash earnings offset by an increase in inventory, a
reduction in various accounts payable and accrued expenses and discontinued
operations. Federal income tax estimated payments totaling $17,900,000,
principally related to the gain on sale of the discontinued automotive
operations, were made in March and June 1997 and were significant elements of
cash flow used by operating activities in fiscal 1997.
Cash flows used by investing activities were $3,039,000 in 1998 and $4,180,000
in 1996. Cash flows provided by investing activities were $54,271,000 in 1997.
The primary use of cash by investing activities is the purchase of equipment to
update and expand the Company's production capabilities in its continuing
electronics business. 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.
Cash flows used by financing activities were $95,000 in 1998 and $33,711,000 in
1997 compared to cash flows from financing activities of $7,854,000 in 1996. 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.
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 and equipment 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, 1998, the Company had $71,118,395 in
working capital.
MARKET RISK EXPOSURE - The Company manufactures its products in the United
States and Canada. Sales of the Company's products are to the U.S. and Canada,
as well as other foreign markets. The Company is potentially subject to foreign
currency exchange rate risk relating to receipts from customers and payments to
suppliers in foreign currencies. As a result, the Company's financial results
could be affected by factors such as changes in foreign currency exchange rates
or weak economic conditions in the foreign markets in which the Company
operates. However, minimal receivables and payables are designated in foreign
currency. The Company does not consider the market risk exposure relating to
currency exchange to be material.
The Company has financial instruments that are subject to interest rate risk,
principally short-term investments. Historically, the Company has not
experienced material gains or losses due to such interest rate changes. Based on
the current holdings of short-term investments, the interest rate risk is not
considered to be material.
OTHER
LITIGATION - 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 largely idled facility. The investigation
began in the early 1980's and involved a review of on-site and off-site
environmental impacts. In 1988, an administrative order on consent ("AOC") was
executed with EPA related to further investigation and proposing a means of
dealing with quantified impacts.
The remedial investigation called for in the AOC has been completed and
approved. In May 1996, Sparton submitted to the EPA a final corrective measure
study, based on the results of its investigations, as required in the AOC. In
June 1996, the EPA issued its final decision selecting a 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 thirty (30) year time
frame. In Sparton's judgment, the remedies proposed by the EPA are either
unnecessary or technically impracticable. Sparton vigorously challenged the
EPA's remedy selection and filed suit in federal district court in Dallas
asserting that the EPA's decision on remedy selection violated 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 implementing that remedy.
Sparton vigorously contested that order administratively, but on February 10,
1998, EPA issued a final administrative order that in all material respects
followed the initial administrative order issued in September 1996. Sparton has
refused to implement those portions of that order that it believes are
unjustified.
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 Coors Road 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 now
incorporated in the Final Administrative Order, and referred to above. In March
1997, the plaintiffs in these three lawsuits filed a motion for preliminary
injunction and in July of 1997, the action in Dallas was transferred to federal
district court in Albuquerque and consolidated with the three lawsuits filed in
February 1997.
21
<PAGE> 24
VALUE
A pretrial schedule has been established for the consolidated actions, but no
trial date set. Limited discovery, involving interrogatories and requests for
production, has been undertaken by the plaintiffs. The plaintiffs have sought to
amend their lawsuit to compel Sparton to implement the Final Administrative
Order, and seeking civil penalties for alleged noncompliance. Sparton has
opposed this request and no decision has been made by the court on the
plaintiffs' request to amend.
In March 1998, a hearing was held on the plaintiffs' request for a preliminary
injunction. After two days of testimony, the federal district judge indicated he
had tentatively concluded he might issue a preliminary injunction. The parties
subsequently entered into settlement discussions that culminated in an agreed
workplan for the installation of certain off-site monitoring, observation, and
containment wells, in exchange for plaintiffs withdrawing their request for a
preliminary injunction. An order withdrawing that request and approving this
off-site workplan was signed on July 7, 1998. This is one of several workplans
being negotiated.
At the current time, all litigation has been stayed to allow the parties to
continue settlement discussions. The most recent stay will expire on October 23,
1998.
Uncertainties associated with environmental remediation contingencies are
pervasive and often result in wide ranges of reasonably possible estimates.
Estimates developed in the early stages of remediation can vary significantly.
Normally, a finite estimate of cost does not become fixed and determinable at a
specific point in time. Rather, the costs associated with environmental
remediation become estimable over a continuum of events and activities that help
to frame and define a liability. To date, Sparton has incurred costs of
approximately $7,914,000 since environmental impacts were first identified in
the early 1980's. $3,000,000 of this amount has been recovered from insurance
companies. For the fiscal years ended June 30, 1998, 1997 and 1996, Sparton
incurred costs of $1,014,000, $935,000, and $247,000 with legal and defense
costs included of $548,000, $379,000, and $53,000, respectively. In addition,
total amounts expensed for 1998, 1997 and 1996 were $1,821,000, $1,457,000, and
$307,000 respectively.
At June 30, 1998, Sparton has accrued $1,828,000 as its estimate of the future
undiscounted minimum obligation with respect to this matter. This reflects the
minimum range of the amount Sparton expects to incur over the next five years.
This amount includes equipment and operating and maintenance costs. In many
cases, new technologies become available over time, which result in modified
costs for environmental remediation. The Company's estimate of cost is based on
the existing methodology and excludes legal and related consulting costs. The
estimate includes the minimum range of activity expected to occur in the next
five years including onsite and offsite pump and treat containment systems, a
soil vapor extraction program and continued onsite/offsite monitoring. Beyond
five years, while additional expenditures are probable, Sparton does not believe
such expenditures are reasonably estimable based on available information.
Factors causing the uncertainty include, but are not limited to, effectiveness
of the currently proposed programs to achieve targeted results and decisions
made by regulating agencies regarding future proposals and reports of Sparton.
Sparton routinely refines and revises the estimate of its environmental efforts
as additional information becomes available.
It is reasonably possible that Sparton's recorded estimate of this liability may
change. If a remedy is imposed on Sparton, other than the one it has proposed,
the ultimate cleanup costs could increase significantly. There is no assurance
that additional costs greater than the amount accrued will not be incurred or
that 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.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of many older computer programs being written
using only two digits rather than four to define a specific year. A computer
program that has time-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
Sparton Electronics implemented a new business information system in the summer
of 1997, to further enhance the Company's competitive position. This system,
called Manufacturing Total Management System (MTMS), will enable information to
be shared between all of Sparton's manufacturing locations. The information
system is presently being implemented throughout the remainder of the Company's
facilities with full implementation scheduled for completion by February 1,
1999. The decision to purchase and implement MTMS was independent of the Year
2000 issue. The Company believes that implementation of MTMS will render its
internal information systems Year 2000 compliant and with no disruptions in
operations. With respect to suppliers and customers software being year 2000
compliant, the Company does not believe that there is sufficient integration or
dependency of such software to cause a material impact on the Company's own
business operating systems or processes. The Company is surveying customers and
major suppliers to determine their status with respect to year 2000 compliance.
The Company has completed an assessment of both current and past proprietary
products. Corrective measures for current products have been completed where
applicable. Corrective measures for past products have been identified, where
applicable, and affected customers notified. The Company does not anticipate
that internal Year 2000 conversion issues will materially impact operations or
operating results.
22
<PAGE> 25
SPARTON.COM
DIRECTORS, OFFICERS & GENERAL MANAGERS
DIRECTORS
JAMES N. DEBOER, PARTNER
Law Firm of Varnum, Riddering, Schmidt
and Howlett, LLP
Grand Rapids, Michigan
DAVID W. HOCKENBROCHT, President
Sparton Corporation
* ROBERT J. KIRK, Financial Consultant
Toledo, Ohio
WILLIAM I. NOECKER, Director of Program Management
Fisher Dynamics Corporation
St. Clair Shores, Michigan
Chairman
Brasco International, Inc.
Detroit, Michigan
RORY B. RIGGS, President
Biomatrix, Inc.
Richfield, New Jersey
DAVID B. SCHOON, President
Stock Portfolio Management, Inc.
Grand Rapids, Michigan
W. PETER SLUSSER, President
Slusser & Associates Inc.
New York, New York
BRADLEY O. SMITH, Former President
Tracy Products, Inc.
Ionia, Michigan
JOHN J. SMITH, Chairman
Sparton Corporation
* Audit Committee
OFFICERS & GENERAL MANAGERS
SPARTON CORPORATION
JOHN J. SMITH
Chairman and Chief Executive Officer
DAVID W. HOCKENBROCHT
President and Chief Operating Officer
RICHARD L. LANGLEY
Vice President-Treasurer
LAWSON K. SMITH
Vice President-Secretary
R. JAN APPEL
Vice President, General Counsel and
Assistant Secretary
SUSAN E. WIDENER
Assistant Treasurer
ELECTRONICS
DOUGLAS E. JOHNSON
Vice President-General Manager
Sparton Electronics
RICHARD D. MICO
Vice President-General Manager
Sparton Technology, Inc.
W. DAVID WEIND
Vice President-General Manager
Sparton of Canada, Ltd
[PHOTO]
Mr. Marshall V. Noecker and Mr. Lawson K. Smith, longtime Directors of the
Corporation resigned in August, 1998.
BACK ROW FROM LEFT TO RIGHT:
David B. Schoon, Lawson K. Smith, Rory Riggs, William I. Noecker, Marshall V.
Noecker, Peter Slusser, Bradley O. Smith
FRONT ROW FROM LEFT TO RIGHT:
Robert J. Kirk, David W. Hockenbrocht, John J. Smith, James N. DeBoer
23
<PAGE> 26
SPEED
BUSINESS UNITS
SPARTON ELECTRONICS
Administrative Office
Johnson Lake Rd.
DeLeon Springs, FL 32130
MANUFACTURING FACILITIES:
Jackson, MI
DeLeon Springs, FL
Brooksville, FL
SPARTON OF CANADA, LTD.
99 Ash Street
London, Ontario N5Z 4V3
SPARTON TECHNOLOGY, INC.
Administrative Office
4901 Rockaway Blvd., S.E.
Rio Rancho, NM 87124
MANUFACTURING FACILITIES:
Deming, NM
Rio Rancho, NM
CORPORATE OFFICE
SPARTON CORPORATION
2400 E. Ganson Street
Jackson, MI 49202
Phones (517) 787-8600 o (800) 248-9579
Fax (517) 787-1822
Website: sparton.com
COMMON STOCK LISTING:
New York Stock Exchange
TRANSFER AGENT/REGISTRAR:
PRINCIPAL TRANSFER AGENT:
Illinois Stock Transfer Company
209 West Jackson Blvd, Suite 903
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, 1998, 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
BLAIR HARRIS THOMPSON
April 2, 1925 - July 27, 1998
[PHOTO]
Sparton's Directors, Management and Associates were saddened this year at the
passing of our long time friend and significant contributor to the success of
our Company, Mr. Blair H. Thompson. Blair gave the major portion of his adult
working life to Sparton serving from 1958 until his retirement in 1990. He
served as a Director of the Company until his death. We shall miss him greatly.
NOTICE OF ANNUAL MEETING:
The Annual Meeting of Sparton Corporation will be held at 10:00 a.m. on
Wednesday, October 28, 1998, 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> 27
VALUE
VALUE HAS BEEN SPARTON'S CORNERSTONE OFFERING FOR 98 YEARS. COMPETITIVE COSTS,
PERSONALIZED DESIGN AND MANUFACTURING SERVICES COUPLED WITH ISO 9000 CERTIFIED
PLANTS PROVIDE SPARTON'S CUSTOMERS WITH A COMPETITIVE EDGE IN THE WORLD'S
MARKETPLACES.
SPEED
TIME LOST IN TODAY'S MARKETPLACE IS LOST MONEY. THE SPEED OF SPARTON'S BUSINESS
PROCESS EXECUTION IS A DEFINING COMPETITIVE ADVANTAGE AND A DAILY FOCUS BY ALL
OF SPARTON ASSOCIATES.
VALUE
&
SPEED
<PAGE> 28
[LOGO- SPARTON CORPORATION]
CORPORATE OFFICE
SPARTON CORPORATION
2400 E. Ganson Street
Jackson, MI 49202
Phones (517) 787-8600 - (800) 248-9579
Fax (517) 787-1822
Website: sparton.com
<PAGE> 1
EXHIBIT 22
SPARTON CORPORATION
The Registrant, Sparton Corporation, an Ohio Corporation, had the following
subsidiaries at June 30, 1998:
<TABLE>
<CAPTION>
Incorporated
Name In
- ------------------------------------------------ ------------
<S> <C>
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
</TABLE>
17
<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 28, 1998, included in the 1998
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 28, 1998, 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, 1998.
/s/ ERNST & YOUNG LLP
Toledo, Ohio
September 28, 1998
18
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 4,083,273
<SECURITIES> 23,653,129
<RECEIVABLES> 24,907,302
<ALLOWANCES> 290,000
<INVENTORY> 31,743,407
<CURRENT-ASSETS> 95,474,048
<PP&E> 34,166,327
<DEPRECIATION> 22,598,471
<TOTAL-ASSETS> 115,314,271
<CURRENT-LIABILITIES> 24,355,653
<BONDS> 0
0
0
<COMMON> 9,785,113
<OTHER-SE> 78,583,704
<TOTAL-LIABILITY-AND-EQUITY> 115,314,271
<SALES> 145,935,583
<TOTAL-REVENUES> 145,935,583
<CGS> 123,401,850
<TOTAL-COSTS> 141,753,150
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 26,845
<INCOME-PRETAX> 6,514,117
<INCOME-TAX> 2,181,000
<INCOME-CONTINUING> 4,333,117
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<EPS-DILUTED> .38
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