<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, 1999
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, 1999 was $29,396,000.
The number of shares of common stock outstanding as of August 31, 1999 were
7,828,090.
Documents incorporated in part by reference:
Parts II and IV - Portions of the 1999 Annual Report to Shareowners' of
Sparton Corporation ("Annual Report") are filed as Exhibit
13 herewith.
Part III - Proxy Statement for October 27, 1999 Meeting
1
<PAGE> 2
PART I
Item l. Business
- ------- --------
Except as otherwise indicated, the term "Company" refers to Sparton Corporation,
and the term "Sparton" refers to Sparton Corporation and its consolidated
subsidiaries.
The Company has been in continuous existence since 1900. It was last reorganized
in 1919 as an Ohio corporation. Sparton operates in one line of business,
electronics manufacturing services (EMS). 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 12, Business Segment and
Concentration of Sales, of the Notes to Consolidated Financial Statements on
Pages 23 and 31, respectively, and are filed as part of Exhibit 13.
In August 1996, the Company formalized its plan to offer for sale its automotive
and industrial products operations. Accordingly, these operating results have
been reported as discontinued operations. Further discussion of these
transactions are included in the Annual Report in Note 9, Discontinued
Operations, of the Notes to the Consolidated Financial Statements on page 27 and
are filed as part of Exhibit 13.
Electronic Manufacturing Services
- ---------------------------------
Historically, the Company's principal electronics product has been sonobuoys,
which are anti-submarine warfare (ASW) devices used by the U.S. Navy and other
free world military organizations. It competes with a very 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 1980's and early 1990's, but have stabilized in recent years at these
levels.
The Company has focused its resources in recent years on substantially expanding
revenues in the commercial EMS area. This is the area where the Company expects
substantially all future revenue growth to occur. Many of the physical and
technical attributes used in the production of sonobuoys are also required in
the production of commercial electronics products. The Company's commercial EMS
business includes design and/or manufacture of a variety of electronic and
electromechanical products and assemblies. Sales are generally obtained on a
competitive basis. Competitive factors include technical ability, customer
service, product quality, timely delivery 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 sold through a direct sales force and through a small group of
manufacturers' representatives. The primary industries of the Company's
commercial EMS market include telecommunication, avionics, medical and
industrial controls and scientific instrumentation. In the commercial EMS
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. The Company generally contracts with its customers to manufacture
products based on the customer's design, specifications and shipping schedules.
Normally, EMS programs do not require the Company's direct involvement in
product marketing.
2
<PAGE> 3
Material cost and availability and product quality, delivery and reliability are
very important factors in the commercial EMS business. In general, margins
within the EMS markets are lower than those obtained in the Company's
governmental EMS markets of ASW or proprietary electronics. The lower margins
are primarily due to intense competition and the higher number of purchased
parts contained in the products shipped.
At June 30, 1999 and June 30, 1998, the government backlog was approximately $70
million and $66 million, respectively. A majority of the 1999 backlog is
expected to be realized in 2000. Commercial EMS sales are not included in the
backlog. The Company does not believe the amount of backlog of commercial sales
covered by firm purchase orders is a meaningful measure of future sales, as such
orders may be rescheduled or cancelled without significant penalty.
Automotive and Industrial Products
- ----------------------------------
As previously discussed, the Company formalized its plan in August 1996 to
dispose of the automotive and industrial products segment and accordingly, these
operations have been reported as discontinued operations.
Other Information
- -----------------
Sparton's largest customer is the U.S. Navy. While the loss of government sales
would have a material adverse financial effect, the loss of any one of several
other customers could also have a significant but less dramatic financial
impact. The Company continues to grow its commercial EMS 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 EMS business. In certain markets, the volume purchasing power of
the larger competitors creates a substantial cost advantage for them. 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 material obsolescence in the EMS business
is less than it is in many other markets because raw materials and component
parts are generally only purchased upon receipt of a customer's order. While
Sparton holds a number of patents relating to its products and processes, none
are considered of material importance. 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 $8,779,000 in
1999, $10,512,000 in 1998 and $17,225,000 in 1997 (approximately $6,700,000,
$9,462,000 and $16,238,000 of these expenditures, respectively, were customer
funded). There are approximately 82 employees involved in research and
development activities. Few, if any, devote all of their time to such efforts.
Sparton employed approximately 1,200 people at June 30, 1999. The Company has
one operating division and four wholly owned active subsidiaries classified as
continuing operations and one wholly owned inactive subsidiary within the
remaining portion of discontinued operations.
3
<PAGE> 4
Item 2. Properties
- ------- ----------
The table that follows lists the principal properties of Sparton within
continuing operations. All are owned. There are manufacturing and/or office
facilities at each location. Sparton believes these facilities are suitable for
its operations. 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 at or below one eight hour
shift level. Such underutilization would decline as sales volume increases.
Jackson, Michigan
DeLeon Springs, Florida (2 plants)
Brooksville, Florida
London, Ontario
Rio Rancho, New Mexico
Deming, New Mexico
The Company's Coors Road, Albuquerque, New Mexico facility is idle and is
available for sale or lease. 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
his brother, Lawson K. Smith (former 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. These leases grant the Purchaser the option of purchasing
both (but not less than both) facilities for $50,000 at the end of the original
term of the Leases. These leases also offer options to acquire the facilities
during the lease term. As part of the December 1996 sale, the Board approved the
purchase of this real estate from the Smiths.
Item 3. Legal Proceedings
- ------- -----------------
Various litigation is pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company and in
others presenting allegations that are nonroutine. The Company and its
subsidiaries are also involved in certain compliance issues with the United
States Environmental Protection Agency (EPA) and various state agencies,
including being named as a potentially responsible party at several sites.
Potentially responsible parties (PRPs) can be held jointly and severally liable
for the cleanup costs at any specific site. The Company's past experience,
4
<PAGE> 5
however, has indicated that when it has contributed only relatively small
amounts of materials or waste to a specific site relative to other PRPs, its
ultimate share of any cleanup costs has been minor. Based upon available
information, the Company believes it has contributed only small amounts to those
sites in which it is currently viewed a potentially responsible party.
Environmental compliance issues involving the discontinued automotive operations
are not material.
One of Sparton's facilities, located in New Mexico, has been the subject of
ongoing investigations conducted with the Environmental Protection Agency (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 the 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, different from what Sparton had proposed. 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 EPAs remedy selection and filed
suit in Federal District Court in Dallas asserting that the EPAs 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 the implementation
of the remedy selected by the agency in June 1996, and then to implement that
remedy. Sparton vigorously contested that order administratively, but on
February 10, 1998, the 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 in the preceding
paragraph. 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 noncompli-
5
<PAGE> 6
ance. 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.
At the current time, all litigation has been stayed to allow the parties to
continue settlement discussions. The most recent stay expired on August 9, 1999,
but the parties have agreed to extend it to at least September 9, 1999. It is
anticipated that implementation of the three workplans discussed below will
relieve the Company of its obligations under the February 10, 1998 Final
Administrative Order. As a result of these developments, the Company has updated
its cost estimates. It is believed the initial cost of the corrective measures
called for in these plans will not be materially different from the cost
estimates the Company has previously accrued. There is no assurance that
additional corrective measures, involving increased expenditures, may not be
required.
The proposed workplans provide for the installation of an off-site containment
well (already completed and operating), an on-site containment well and an
enhancement to an on-site soil vapor extraction system. The purpose of the
containment wells is to restrict further migration of impacted groundwater. The
soil vapor extraction system removes solvents in the on-site soil above the
groundwater. The installation and operation of the two containment wells and the
enhanced soil vapor extraction system are dependent upon various permits,
licenses and approvals from regulatory agencies and third parties. It is
anticipated that these remediation activities will operate for a period of time
during which the Company and the regulatory agencies will analyze their
effectiveness. The Company believes that it will take at least three to five
years before the effectiveness of the groundwater extraction wells can be
established. Until then, in the Company's judgment, no definitive conclusion can
be reached on whether additional remediation activities may be required.
At June 30, 1999, Sparton has accrued $1,426,000 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 four years.
The period of accrual was reduced from five to four years to reflect what is now
believed will be the initial period for testing the effectiveness of the
remediation plan as discussed and described above. Details of the activity
beyond this period will be dependent upon the effectiveness of the workplans
being currently negotiated and not yet implemented. 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 four years including
on-site and off-site pump and treat containment systems, a soil vapor extraction
program and continued on-site/off-site monitoring. Beyond four 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
6
<PAGE> 7
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.
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. Amounts charged to operations, principally
legal and consulting, for fiscal years 1999 and 1998 were $1,756,000 and
$1,821,000, respectively. It is reasonably possible that Sparton's recorded
estimate of this liability may change. If a remedy is imposed on Sparton, other
than as described in the proposed workplans, 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.
On June 17, 1998, Sparton Corporation and Sparton Technology, Inc. filed a
complaint in the Circuit Court of Cook County, Illinois, against Lumbermens
Mutual Casualty Company and American Manufacturers Mutual Insurance Company
demanding reimbursement of expenses incurred in connection with its remediation
efforts at the Coors Road facility based on various primary and excess
comprehensive general liability policies in effect between 1959 and 1975.
On February 11, 1998, Sparton Technology, Inc. commenced litigation in the
United States Court of Federal Claims alleging that the Department of Energy
(DOE), acting through its contractors, Sandia Corporation and Allied Signal,
Inc., is liable for reimbursement of Sparton's costs incurred in defending
against and complying with federal and state regulatory requirements. The DOE
prescribed certain mandatory performance requirements that were then imposed
upon Sparton through its agreements with Sandia Corporation and Allied Signal,
Inc. On February 9, 1999, the Court of Federal Claims dismissed Sparton's
complaint based on its determination that an agency relationship did not exist
between Sandia Corporation and Allied Signal, Inc. and the United States for
purposes of reimbursing costs incurred during litigation. Sparton believes that
the court erred in its decision and filed its notice of appeal on April 9,
1999. Briefing has begun but is not yet complete.
Sparton Technology, Inc. filed a complaint on September 21, 1998, against Allied
Signal, Inc. in U.S. District Court in Kansas City seeking to recover costs
incurred to investigate and remediate impacts to the environment at its Coors
Road facility. In July 1999, the court allowed the Company to amend its
complaint to add Sandia Corporation and the DOE as defendants. Limited discovery
has been completed. This case is currently scheduled for trial in the Spring of
2000.
At this time, the Company is unable to predict the amount of recovery, if any,
that may result from the pursuit of these before-mentioned three claims.
7
<PAGE> 8
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matters were submitted to a vote of the security holders during the last
quarter of the period covered by this report.
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 87
DAVID W. HOCKENBROCHT, President, Chief Operating Officer and Director 64
RICHARD L. LANGLEY, Vice President-Treasurer 54
R. JAN APPEL, Vice President, Secretary and General Counsel 53
RICHARD D. MICO, Vice President and General Manager of Sparton Technology, Inc. 69
DOUGLAS E. JOHNSON, Vice President and General Manager of Sparton 51
Electronics since July 1995. Prior to that date, Mr. Johnson was
the Assistant General Manager of Sparton Electronics.
MICHAEL G. WOODS, Vice President since August 1999 and General Manager of 40
Sparton of Canada, Ltd. since November 1998. Prior to that date,
Mr. Woods held varying positions including Controller and Director of
Electronics Manufacturing Services for Sparton of Canada.
</TABLE>
There are no family relationships between the persons named above. All officers
are elected annually and serve at the discretion of the Board of Directors.
8
<PAGE> 9
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, 1999, 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 32 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 33 of Exhibit 13 filed hereunder is incorporated herein by
reference.
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 35 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 18 - 31 and 22 ,
respectfully, 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.
9
<PAGE> 10
PART III
- --------
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
Information with respect to directors is included in the Proxy Statement under
"Election of Directors" and is incorporated herein by reference. Information
concerning the executive officers is included in Part I on page 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.
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 18 - 31 and
22, respectfully, of Exhibit 13 filed hereunder are incorporated by reference in
Item 8.
10
<PAGE> 11
<TABLE>
<CAPTION>
Page Reference
Annual Report
to Shareowners
--------------
<S> <C>
Data from the 1999 Annual Report to Shareowners of Sparton Corporation:
Consolidated balance sheets at June 30, 1999 and 1998 18
For the years ended June 30, 1999, 1998 and 1997:
Consolidated statements of operations 20
Consolidated statements of cash flows 21
Consolidated statements of shareowners' equity 22
Notes to consolidated financial statements 23 - 31
Report of Independent Auditors 22
</TABLE>
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, 1999.
(c) Exhibits
See Exhibit Index on page 14.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SPARTON CORPORATION
Date: September 24, 1999 By: /s/ Richard L. Langley
- ---------------------------- --------------------------------------------
Richard L. Langley, Vice President-Treasurer
(Principal Accounting and Financial Officer)
12
<PAGE> 13
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature and Title Date
------------------- ----
<S> <C>
By /s/ John J. Smith August 27, 1999
- ---------------------------------------------------
John J. Smith, Chairman of the Board
of Directors and Chief Executive Officer
By /s/ David W. Hockenbrocht August 27, 1999
- ---------------------------------------------------
David W. Hockenbrocht, President,
Chief Operating Officer and Director
By /s/ James N. DeBoer August 27, 1999
- ---------------------------------------------------
James N. DeBoer, Director
By /s/ Robert J. Kirk August 27, 1999
- ---------------------------------------------------
Robert J. Kirk, Director
By /s/ William I. Noecker August 27, 1999
- ---------------------------------------------------
William I. Noecker, Director
By /s/ Rory B. Riggs August 27, 1999
- ---------------------------------------------------
Rory B. Riggs, Director
By /s/ David B. Schoon August 27, 1999
- ---------------------------------------------------
David B. Schoon, Director
By /s/ W. Peter Slusser August 27, 1999
- ---------------------------------------------------
W. Peter Slusser, Director
By /s/ Bradley O. Smith August 27, 1999
- ---------------------------------------------------
Bradley O. Smith, Director
</TABLE>
13
<PAGE> 14
Exhibit Index
- -------------
3 and 4 Articles of Incorporation of the Registrant were filed with Form
10-K for the year ended June 30, 1981 and an amendment thereto
was filed with Form 10-Q for the three-month period ended
September 30, 1983, and are incorporated herein by reference.
By-laws of the Registrant were filed with Form 10-K for the year
ended June 30, 1981, and are incorporated herein by reference.
Code of Regulations of the Registrant were filed with Form 10-K
for the year ended June 30, 1981 and an amendment thereto was
filed with Form 10-Q for the three-month period ended September
30, 1982, and are incorporated herein by reference.
10 The employment agreement with John J. Smith was filed with Form
10-Q for the quarter ended September 30, 1994 and an amendment
and extension of the employment agreement thereto was filed with
Form 10-K for the year ended June 30, 1998, and are incorporated
herein by reference.
13 Portions of the 1999 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.
14
<PAGE> 1
EXHIBIT 13
1999
ANNUAL
REPORT
NYSE:SPA
Reaching Beyond Excellence
SPARTON
CORPORATION
<PAGE> 2
THE SPARTON WAY
Dedicated to the conduct of our business at the highest ethical level.
Dedicated to the manufacture of superior quality products in the most efficient
manner possible and at the lowest possible cost.
Dedicated to loyally serving our customers to the utmost of our ability by
making continuing contributions that support their progress.
Dedicated to constantly improving our Company's technological base to better
serve our customers.
Dedicated to the creation of new ideas and new processes in order to remain the
low cost producer in our chosen marketplaces.
Dedicated to making our Company grow faster than the economy.
Dedicated to the maximization of shareowner value.
Dedicated to providing a work environment that is safe, modern and clean and one
where our employees can achieve their highest potential during their
working years.
<TABLE>
<CAPTION>
INDEX
<S> <C>
Financial Highlights ...................................1
Shareowners' Letter ....................................2
Sparton Operations .....................................4
Financial Performance .................................17
Directors, Officers and General Managers ..............39
Sparton Locations .....................................40
Annual Meeting Notification ...........................40
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SPARTON CORPORATION & SUBSIDIARIES FOR YEARS ENDED JUNE 30
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Net sales $ 131,900,489 $ 145,935,583 $142,736,800
Net income (loss):
Continuing operations $ 1,759,081 $ 4,333,117 $ 2,241,903
Discontinued operations (2,520,000) (1,320,000) 31,458,637
------------- ------------- ------------
$ (760,919) $ 3,013,117 $ 33,700,540
============= ============= ============
Working capital $ 68,578,975 $ 71,118,395 $ 68,760,933
Working capital ratio 4.88:1 4.52:1 3.53:1
Common shares outstanding at June 30 7,828,090 7,828,090 7,818,090
Basic and diluted earnings per share:
Income (loss):
Continuing operations $ 0.22 $ 0.55 $ 0.29
Discontinued operations (0.32) (0.17) 4.02
------------- ------------- ------------
$ (0.10) $ 0.38 $ 4.31
============= ============= ============
Additional per share information:
Working capital $ 8.76 $ 9.09 $ 8.80
Shareowners' equity 11.18 11.29 10.90
Dividends -- -- --
</TABLE>
MARKET DATA
Price range
New York Stock Exchange
<TABLE>
<CAPTION>
Years Ended June 30
---------------------------------------------------------
1999 1998 1997
--------------- ----------------- ------------------
Quarter ended: High Low High Low High Low
--------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
September 30 $8 7/8 $5 3/4 $15 1/4 $10 7/8 $ 8 $ 3 7/8
December 31 6 3/8 5 5/8 16 1/2 10 1/4 9 7 1/2
March 31 7 1/2 6 10 1/4 8 7/8 8 3/4 7 5/8
June 30 6 3/8 5 7/8 9 7/8 8 3/8 11 7/8 8 1/4
</TABLE>
Recent Price as of August 31, 1999 .....$6 1/16
Shareowners of record.......................764
1
<PAGE> 4
[PHOTOGRAPH]
JOHN J. SMITH
CHAIRMAN
[PHOTOGRAPH]
DAVID W. HOCKENBROCHT
PRESIDENT
TO OUR SHAREOWNERS
- ------------------
As Sparton progresses toward 100 consecutive years in business, we look
back on the evolution of Sparton and the changing business world in which we now
compete. Founded as a manufacturer of agricultural implements, Sparton now
enters the 21st Century as a major provider of Electronic Manufacturing
Services (EMS), both governmental and commercial. Sparton specializes in high
product mix, moderate-volume commercial electronics outsourcing. This market
enables Sparton to develop and sustain a wide range of competitive advantages
which will provide us with a valid business model for years to come.
While a significant number of new customers joined the Sparton family
of customer/partners during this fiscal year, many did not enter production
start-up until the last quarter. Several other key customers had annual sales
volumes below their original expectations. While this was a disappointment, it
was only temporary as that business was deferred to fiscal year 2000.
For the year ended June 30, 1999, sales from continuing operations were
$131.9 million, a 10% decrease from last year. Net income from continuing
operations was $1.8 million compared to $4.3 million one year ago. Our backlog
of government EMS sales at June 30, 1999 was $70.0 million. Due to rapidly
changing technologies, commercial EMS backlog dollars are no longer a fair
predictor of continuing sales and will no longer be reported. Almost all of our
customers are moving toward a "build-to-order" business cycle. At the time of
this Annual Report, all six of Sparton's manufacturing locations are
experiencing double-digit growth as we seek to introduce new products into
production from both existing and new customers.
Sparton's principal focus remains in Electronic Manufacturing Services,
one of the world's fastest growing business sectors. Current annual sales volume
for commercial EMS is estimated to be $44.9 billion rising to an expected high
of $130 billion in the year 2003. Industry growth has been fueled largely by the
demand for laptop and desktop computers, which Sparton has chosen not to
manufacture. These products are produced in large quantities and at low margins.
Although this high-volume EMS market is attractive, our unique business model
drives us toward a smaller, higher value-added niche market with better profit
margin potential. Sparton elected to concentrate on the high-mix, low- and
medium- volume business, which continues to grow in excess of 20% each year. In
this business, the principal driving force is outsourcing. Major Original
Equipment Manufacturers (OEMs) around the world continue to outsource
electronics design and manufacturing because neither is a core competency for
them.
In the last three years, Sparton has remained on a course of making
continuing investments in training, remodeling of facilities, acquiring new
equipment and, most recently, establishing alliances with other private EMS
providers. We began the alliance program to provide our existing and prospective
customers with front-end engineering and low-volume manufacturing capabilities
in key regional electronics markets of the world. Currently, Sparton has
alliance partners in Boston, Massachusetts, Eden Prairie, Minnesota,
Dunfermline, Scotland and Ottawa, Ontario, Canada. We expect to add other
alliance companies during the new fiscal year.
In June, Sparton made a $3 million investment in Cybernet Systems
Corporation of Ann Arbor, Michigan. Cybernet, an ongoing customer of Sparton, is
a privately owned developer of hardware, software, next-generation network
computing and robotics products. Several new products in these areas are at
various stages in the development cycle with Sparton potentially being the
manufacturer of one of them.
We continuously set challenging but achievable goals for ourselves to
create a wide range of sustainable competitive advantages. Our principal
advantages today involve speed of business process, a large customer-focused
database, Internet connectivity and a range of
2
SPARTON
<PAGE> 5
strategic supplier partnerships founded on business principles unique to
Sparton. We diligently select only those customers/partners who will provide
long-term, consistent value to Sparton.
During the year just closed, we completed the implementation and
integration of our Cimcase/MTMS business information system. All of Sparton's
manufacturing locations possess the same information system as well as the same
business process. Another technological issue Sparton is actively addressing is
Year 2000 (Y2K) compliance. All of Sparton's critical systems are currently
compliant, with the remainder expected to be Y2K compliant by September 30,
1999.
In the middle of the year, we began to explore the sale of our
acoustics product line in Canada. The sale of that product line was completed in
the first quarter of fiscal 2000. The resulting gain will be included in our
fiscal 2000 results.
Costs associated with our ongoing Environmental Protection Agency (EPA)
related cleanup activities at our Coors Road facility in Albuquerque, New Mexico
totaled $1.8 million for the year. Ongoing negotiations with regulators continue
and we expect to be able to report a successful conclusion to those
deliberations shortly. We are encouraged by the progress that has been made in
the settlement discussions with governmental entities concerning the impacts to
groundwater associated with our Coors Road facility. Two of the three corrective
measures proposed have been implemented. In our judgment, it will take several
years to evaluate the effectiveness of these efforts.
As a result of these developments, the Company believes that the EPA's
1996 estimate for the total cost of 30 years of remediation at the site of $15.0
million to $26.4 million is now outdated. We believe that the initial minimum
cost to be incurred for the corrective measures called for in these workplans
should approximate $1.5 million over the next three to five years. There is no
assurance that additional corrective measures, involving increased expenditures,
may not be required in the future.
The last manufacturing facility of our discontinued automotive segment
closed in December 1998. All remaining inventory and equipment at our Flora,
Illinois facility were sold at auction. The building is currently held for sale.
With the recording of the after-tax charge of $2.5 million ($0.32 per share) in
the third quarter of fiscal 1999, we believe that all costs related to the final
disposition of this property have been reflected in our financial statements.
Current electronic information and news on Sparton is available through
our web site at www.sparton.com. We invite you to visit our web site
periodically as it does contain timely information about our Company.
In January 2000, Sparton will begin its 100th consecutive year in
business as an independent company. Few companies ever have such an opportunity
for celebration and reflection. We are appreciative of those who have gone
before us and to our present associates who have created and sustained Sparton
as a viable business entity. To you, our shareowners, we express our
appreciation for your continued interest and support of our endeavors.
We anticipate that our 100th year will be one of continued growth and
success.
Cordially yours,
/s/ John J. Smith /s/ David W. Hockenbrocht
John J. Smith David W. Hockenbrocht
Chairman President
3
SPARTON
<PAGE> 6
SPARTON'S EXPERTISE INCLUDES THREE-
DIMENSIONAL PRODUCT RENDERINGS
[PHOTO]
SPARTON PROVIDES FINAL
ASSEMBLY SERVICES SUCH AS THIS
BOX BUILD FOR A DUAL CHANNEL
SATELLITE RECEIVER
[PHOTO]
SPARTON'S DEMING, NEW
MEXICO FACILITY IS
CAPABLE OF PRODUCING
LARGE WIRE
HARNESS DESIGNS
[PHOTO]
THE SPARTON CUSTOMER BUSINESS
MANAGEMENT PROGRAM OFFERS
CUSTOMERS A TOTAL BUSINESS
SOLUTION
[PHOTO]
WWW.SPARTON.COM 4
<PAGE> 7
HOW SPARTON DEFINES SUCCESS
---------------------------
In the mid-1990s, the greatest challenge Sparton faced was creating a
dynamic culture that would envelop emerging electronic outsourcing and enable a
unique business model.
This business model is now Sparton's strength, driving it toward
industry leadership in the high product mix, low- to medium- volume market of
electronics outsourcing.
SERVICES. Sparton has the knowledge for prototype modeling, testing,
assembly, manufacturing, re-engineering, component obsolescence management,
final packaging and warranty repair.
ELECTRONIC COMMERCE. We believe no other EMS provider has a business
process that equals the information system put into place by Sparton. All six
facilities operate within one environment, disseminating information as a
virtually seamless corporation.
LOGISTICS. Within two years, Sparton developed a material logistics
program around a centralized corporate strategy for component and material
costing. Material logistics also entails open information exchange from supplier
to customer as well as one of the industry's leading component obsolescence
management programs.
ENVIRONMENT. Sparton has focused significant resources on addressing
environmental issues. We believe this is not a project to be completed, rather,
a continuous journey.
CUSTOMER SERVICE. Twenty-four hours a day, seven days a week. Secured,
instant access to critical information through the Internet.
ALLIANCES. Sparton has expanded its regional presence by creating
strategic alliances with local EMS providers. The result is increased
opportunities without additional capital expenditures.
PERSONNEL. One of the key ingredients to Sparton's success in the EMS
industry is its continuous and extensive effort in attracting and keeping the
best and brightest talent available.
5
SPARTON
<PAGE> 8
ANTICIPATING MARKET TRENDS
- --------------------------
As the new millennium approaches, a company's success will depend on
its ability to change, adapt and evolve as an outsourcing partner. Sparton
identified the growing need for technological expertise in the medical industry
and formed Sparton Medical Solutions. Sparton Medical Solutions serves medical
OEMs that are in need of engineering expertise.
Sparton Medical Solutions is dedicated to the design and manufacture of
diagnostic, therapeutic, surgical and laboratory equipment for the medical
industry.
Product documentation, design history file maintenance, verification
and validation for Class I, II and III devices are a routine part of the product
design and manufacturing service provided to customers. Sparton Medical
Solutions provides customers with practical, cost-effective product designs that
benefit from Concurrent Engineering, Design for Assembly (DFA) and Design for
Manufacturing (DFM) services that are an integral part of all Sparton programs.
The medical group also provides fast R&D and functional model development for
those customers that are in the early stages of design and agency approval.
Clients of Sparton Medical Solutions benefit from the latest advances
in software technology. Three-dimensional files and animation are used to
simulate assembly and production operation or a full-featured model can be
generated through a CNC or stereo lithographic machine. Sparton Medical
Solutions recent projects include:
- DESIGN AND MANUFACTURE OF A FULLY AUTOMATED SLIDE PREPARATION
SYSTEM FOR PAP SMEARS AND OTHER AQUEOUS SPECIMENS.
- DESIGN AND MANUFACTURE OF A DUAL-CUFF PNEUMATIC TOURNIQUET
SYSTEM FOR USE IN CONTROLLING BLOOD FLOW TO THE LIMBS DURING
SURGERY OR THE ADMINISTRATION OF LOCAL ANAESTHETICS.
- DESIGN AND MANUFACTURE OF A SURGICAL IRRIGATION SYSTEM FOR USE
IN CONJUNCTION WITH AN ENDOSCOPIC CAMERA .
- DESIGN OF A TOUCH SCREEN CONTROL SYSTEM, SOFTWARE AND HARDWARE
FOR A THERAPEUTIC BED THAT IS USED WITH SPINAL INJURY
PATIENTS.
- DESIGN AND MANUFACTURE OF AN ERGONOMIC SURGICAL SUIT
VENTILATION SYSTEM.
- DESIGN OF A COMPACT, PORTABLE DEFIBRILLATOR.
Due to the recent changes in regulatory requirements, the
documentation, verification and validation of medical product designs have
become more complex, especially ones involving software. Sparton Medical
Solutions has resident expertise in all these areas, providing a critical
service to medical OEMs without the resources necessary to comply with the
required regulatory documentation.
WWW.SPARTON.COM 6
<PAGE> 9
INCREASING DEMAND FOR MEDICAL
TECHNOLOGY LED TO THE FORMATION OF
SPARTON MEDICAL SOLUTIONS
[PHOTO]
SERVICE IS THE FOUNDATION OF
THE SPARTON BUSINESS
SOLUTION MODEL
[PHOTO]
SPARTON MEDICAL
SOLUTIONS HAS CREATED
IMAGE PROCESSING SOFTWARE
WHICH COLORIZES AND
ENHANCES X-RAY IMAGES
[PHOTO]
SPARTON ELECTRONICS IN JACKSON,
MICHIGAN EXEMPLIFIES EQUIPMENT AND
FACILITY IMPROVEMENTS IMPLEMENTED
THROUGHOUT VARIOUS LOCATIONS
[PHOTO]
7
SPARTON
<PAGE> 10
DRIVEN BY INFORMATION TECHNOLOGY
- --------------------------------
Sparton Corporation's 100 successful years were achieved through
experience and timing. In 1993, Sparton recognized that the electronics industry
was drastically changing. To meet the evolving needs of original equipment
manufacturers, Sparton began a dramatic reinvention of itself.
New equipment, upgraded facilities, new knowledge bases and
organizational structures were acquired or implemented in anticipation of the
new electronics industry. Without the implementation of new information
technology, these improvements would not have been successful.
The pinnacle of the Sparton technological commitment lies within its
Enterprise Resource Planning (ERP) business process which is now in all Sparton
facilities.
For decades Sparton had worked under various manufacturing and
accounting software packages. The software versions began showing signs of
individualization throughout various facilities until the extensive
modifications created unique legacy programs. Sparton extinguished the old ERP
system and replaced it with a new, flexible business process package.
Fiscal 1999 marks the first time Sparton operated under a common,
centralized information system and business process system. Substantial benefits
were gained from the new Enterprise Resource Planning system. Sparton has
experienced significant reductions in transaction times and eliminated
extraneous tasks which did not create added value. The reports may be as simple
or complex as the user requires.
Further affirmation of the strengths of the new management information
system includes a 100% increase in the number of transactions with a decrease in
accounting staff overtime from 50% to 10%. Personnel may now spend time on
value-added services rather than transaction processing.
Managers can access over 750 screens of client and accounting
information regardless of their physical location.
Through the use of the Internet, customers may also access information
on-line and in real time. Information such as invoices, shipping information,
accounts payable and scheduling is readily available at the customer's
convenience.
All these benefits have successfully streamlined the entire supply
chain by reducing transaction time, one of the key enablers of the Sparton
business system.
WWW.SPARTON.COM 8
<PAGE> 11
SPARTON IS COMMITTED TO PROVIDING A
CLEAN, SAFE AND PRODUCTIVE WORK
ENVIRONMENT FOR ALL ASSOCIATES
[PHOTO]
EXAMPLES OF PRODUCT ASSEMBLY AND
TESTING BY SPARTON TECHNOLOGY,
INC. LOCATED IN RIO RANCHO,
NEW MEXICO
[PHOTO]
SPARTON HAS THE ABILITY
TO PROVIDE SERVICES
RANGING FROM CONCEPT
DESIGN TO REPAIR SERVICES
[PHOTO]
THE ENTERPRISE RESOURCE PLANNING
SOFTWARE OFFERS ADVANTAGES TO
SPARTON CUSTOMERS, PARTNERS,
ASSOCIATES AND MANAGERS
[PHOTO]
9
<PAGE> 12
STREAMLINING MATERIAL LOGISTICS
- -------------------------------
Sparton Corporation looked within its organizational structure to
discover how the corporation could improve profit margins and reduce materials
management costs while improving service to Sparton customers.
Working with the knowledge that materials management is the largest
determinant of success for EMS providers, Sparton dissolved prior methods of
materials acquisition and developed a company-wide strategic program. Prior to
this program all facilities purchased materials based on local strategies and
relationships.
The process began with the Sparton Corporate Acquisition Team (SCAT).
What began as an exploratory committee has evolved into a team focused on the
selection, management and retention of suppliers to aid in the reduction of
total acquisition costs. This group is now known as Material Logistics.
The Material Logistics group focuses on strategic management as opposed
to the daily operations of each facility. Material Logistics is committed to
improving component purchasing, quoting, supplier selection, electronic
information exchange and obsolescence.
Because components are more than half of all materials purchased,
Material Logistics developed a centralized commodity strategy for components.
Suppliers now considered Sparton a singular, national entity. The team
negotiated contracts, payment terms and project material repricing on behalf of
Sparton Corporation. After one year, nearly 77% of all materials, including
components and other items are purchased under this strategy with substantial
projected savings.
The success of the Material Logistics program was based on the
selection of national suppliers that met specific qualifications. Component
vendors were screened and ranked to determine their ability to meet Sparton's
aggressive growth goals. Thirty-seven suppliers were analyzed on 27 different
criteria during a four-month assessment.
Qualifications necessary to become a Sparton Strategic Supplier
extended beyond pricing and delivery. Does the supplier offer the latest
advances in inventory replenishment? Is the supplier approved for various
industry quality standards? Does the supplier offer any engineering services?
Are the supplier's technological capabilities proactive or reactive? Does the
supplier offer electronic data interchange (EDI), Internet capabilities and
electronic bar coding?
WWW.SPARTON.COM 10
<PAGE> 13
Seven electronic distributors were selected as Sparton Strategic
Suppliers. The result is that all Sparton facilities and Sparton Alliance
companies have access to volume pricing along with the latest value-added
services.
Sparton went beyond merely selecting a core group of suppliers and
negotiating prices. The cornerstone of Sparton's material cost-reduction efforts
is called FlexLink. FlexLink allows Sparton, its customers and suppliers to
share information and data. Through electronic data interchange and other
electronic commerce tools, this business system accelerates the timeliness of
information, enhancing the decision-making process from customer to supplier.
FlexLink will reduce transaction costs, inventory levels, material overhead
costs and material lead times while increasing customer flexibility.
FLEXLINK IS A BUSINESS MODEL OF SUPPLY CHAIN MANAGEMENT THAT LINKS THE CUSTOMER,
SPARTON AND ITS STRATEGIC SUPPLIERS TO A SOPHISTICATED NETWORK OF SHARED
BUSINESS INFORMATION AND DATA.
Evolving technologies have drastically reduced the life cycles of
products and the internal components needed to build these products. Sparton
customers have access to over 50 years of experience in component obsolescence
management.
Because of the dynamics of the electronics market, many original
equipment manufacturers are faced with designs that specify outdated or
nonexistent components. Sparton proactively monitors customer programs and
recommends changes which minimize costs and may eliminate scheduling problems in
the future.
Forecasting, trend analysis, bill of material assessment and industry
updates are some of the methods Material Logistics utilizes to support customer
programs from inception to completion.
For Sparton customers, Material Logistics provides ongoing cost savings
through strategic supplier management, pricing, inventory control, the latest
technology and component obsolescence planning.
11
SPARTON
<PAGE> 14
RESPECTING OUR ENVIRONMENT AND ITS RESOURCES
- --------------------------------------------
As responsible members of the communities within which we operate,
Sparton is committed to proactively protecting our local environment. Prior to
any purchase, all equipment and processes are evaluated for noise, sound and
chemical pollution properties.
Sparton is progressing toward the complete elimination of solvents used
in the cleaning of printed circuit board assemblies. All facilities are using
cleaners that are either 100% inorganic saponifiers (i.e., soap-producing
solutions) or strictly water. Materials used to assemble the circuit boards may
be soluble in water or in the saponifier/water solutions.
In the Brooksville, Florida facility, for example, we are utilizing a
reverse osmosis system as well as a customized water treatment system.
BY RECYCLING THE WATER SUPPLY, SPARTON'S NEED FOR GROUNDWATER HAS DECREASED
BY 83%.
The remainder of the wastewater from the reverse osmosis system is
pumped into a fully lined evaporation pond. This method eliminates any
wastewater from seeping into the groundwater.
In another area, new technology has allowed Sparton to reduce energy
consumption from lighting fixtures by 50%. This system uses an electronic
ballast with a special energy-efficient bulb.
WWW.SPARTON.COM 12
<PAGE> 15
THE SPARTON STRATEGIC MATERIAL
LOGISTICS PROGRAM OFFERS NUMEROUS
ADVANTAGES FOR SPARTON CUSTOMERS AND
ALLIANCE PARTNERS
[PHOTO]
NEARLY ALL AREAS OF THE
SPARTON BUSINESS MODEL HAVE
BEEN ENHANCED BY INFORMATION
TECHNOLOGY
[PHOTO]
EQUIPMENT MUST PASS
VARIOUS SAFETY
STANDARDS PRIOR
TO PURCHASE
[PHOTO]
ROUTING WIRES FOR TRANSPORTATION
WIRE HARNESSES AT
SPARTON TECHNOLOGY, INC.
IN DEMING, NEW MEXICO
[PHOTO]
13
SPARTON
<PAGE> 16
UNPARALLELED CUSTOMER SERVICE
- -----------------------------
All new and existing customers are individually represented by a
Sparton Customer Business Manager. The Customer Business Manager is accessible
24 hours a day, seven days a week. Besides continuous service, Customer Business
Managers work closely with their clients to create and enhance other Sparton
services such as access to account information through the Internet, EDI
transactions, component obsolescence, materials purchasing and engineering.
Sparton's Business Development team has successfully created a customer
care program committed to exceeding all expectations through strong client
relationships.
"THE RELATIONSHIP BETWEEN ALLIED SIGNAL BGA AND SPARTON EXEMPLIFIES THE LEVEL OF
INTEGRATION AND COLLABORATION THAT ALL SUPPLIER/CUSTOMER RELATIONSHIPS STRIVE
FOR. THE AS AND SPARTON ACCOUNT ASSOCIATES MANAGE THE DAY TO DAY ISSUES AS ONE
INTEGRATED TEAM. THIS RELATIONSHIP HAS ALLOWED IMPLEMENTATION OF ADVANCED SUPPLY
MANAGEMENT STRATEGIES THAT HAVE PRODUCED OUTSTANDING RESULTS. THIS HAS MOVED THE
RELATION(SHIP) TO A TRUE STRATEGIC PARTNERSHIP THAT CONTINUES TO DRIVE BENEFIT
FOR BOTH COMPANIES AND ALLOWED EXPANSION OF THE SERVICES SPARTON PROVIDES."
GARY FITZPATRICK
DIRECTOR OF MATERIALS
ALLIED SIGNAL BGA
"WE HAVE ENJOYED A LONG-TERM RELATIONSHIP WITH SPARTON ELECTRONICS THAT
HAS BEEN DRIVEN BY A FOCUS ON QUALITY AND TOTAL CUSTOMER SATISFACTION"
TOM MARINO
VICE PRESIDENT & DIRECTOR OF PURCHASING
WATERS CORPORATION
"SPARTON'S PROACTIVE APPROACH TO PROBLEM PREVENTION AND RESOLUTION
HELPS KEEP PRODUCT QUALITY UP TO A LEVEL THAT HOBART EXPECTS FOR IT'S
PRODUCTS."
HARRY COLLINS
PRODUCT DEVELOPMENT MANAGER
HOBART CORPORATION
WWW.SPARTON.COM 14
<PAGE> 17
"ALL OF THE INDIVIDUALS WE HAVE COME INTO CONTACT WITH AT SPARTON ELECTRONICS
HAVE BEEN VERY KNOWLEDGEABLE, EAGER TO PARTICIPATE, OPEN WITH THEIR IDEAS,
THOROUGH IN THEIR WORK, AND EXTREMELY COURTEOUS."
"IN SUMMARY, DEPUY HAS THOROUGHLY ENJOYED WORKING WITH SPARTON ON DEVELOPMENT
PROJECTS AND WE FEEL THAT THEIR EXPERIENCE AND EXPERTISE MAKES THEM A VALUABLE
ASSET TO ANY DESIGN TEAM."
DEPUY, INC.
"SPARTON'S INTEGRATED ENGINEERING, LOGISTICS, AND PRODUCTION SERVICES HAVE
ALLOWED CRS TO FOCUS ON MARKETING, PRODUCT DEVELOPMENT AND FINAL ASSEMBLY,
KNOWING THAT WE ARE RECEIVING GOOD VALUE, QUALITY, AND DELIVERY THROUGHOUT ALL
PHASES OF OUR PRODUCT LIFE CYCLES."
ROD RAFAULI
VICE PRESIDENT, OPERATIONS
CRS ROBOTICS CORPORATION
SPARTON CONTINUALLY MONITORS AND EVALUATES ALL CUSTOMER RETENTION
PROGRAMS. REGARDLESS OF RECENT ACCOLADES AND SUCCESSES, THE CUSTOMER
SERVICE TEAM LOOKS FOR NEW AND INNOVATIVE WAYS TO ANTICIPATE CUSTOMERS
NEEDS AND EXCEED THEM.
"SPARTON'S TEAM TAKES A LOT OF PRIDE IN WHAT THEY DO. THEY HAVE AS
MUCH COMMITMENT TO OUR PRODUCT AS WE DO."
RAY BITTIKOFER
QUALITY MANAGER
HOBART CORPORATION
15
<PAGE> 18
GROWTH BY ASSOCIATION
- ---------------------
Through an aggressive alliance program, Sparton has increased its
regional presence in both North America and Europe without the complexities and
expense of acquisitions or new plant start-ups.
A growing trend in the outsourcing industry is the teaming of an OEM
with a local EMS provider. The close proximity provides an increased level of
customer service while maintaining community support.
Sparton provides partners with services such as product and process
engineering, management and manufacturing expertise. The alliance partner
benefits from this union by tapping into the resources of Sparton Corporation,
its business management process system and strategic materials acquisition
program.
Alliance companies are generally smaller in size, technically sound,
customer service-oriented and beyond the start-up phase.
By teaming with regional EMS providers, Sparton has maintained business
levels with current customers and experienced a dramatic increase in sales
opportunities through utilization of the local network.
Simclar International of Dunfermline, Scotland, Contract Assembly, Inc.
of Lawrence, Massachusetts, Micro Dynamics Corporation of Eden Prairie,
Minnesota and OCM Technology Inc. of Ottawa, Ontario, Canada are current Sparton
alliance partners.
Sparton is actively seeking other EMS providers in order to complete a
global network of EMS services offered by Sparton and its partners.
ALLIANCE PARTNERING IS ONE REASON SPARTON IS POISED FOR SUCCESS BEYOND THE YEAR
2000. CHANGES IN THE MATERIAL LOGISTICS PROGRAM, SPARTON'S BUSINESS MODEL,
ADVANCE DESIGN SERVICES AND CUSTOMER RETENTION PROGRAM HAVE BEEN ACHIEVED
THROUGH THE USE OF INFORMATION TECHNOLOGY.
SPARTON ENTERS THE NEXT MILLENNIUM WITH THE RESOLVE TO BECOME A LEADER IN THE
ELECTRONICS OUTSOURCING INDUSTRY AND BELIEVES THAT THE SKILLS, RESOURCES AND
BUSINESS MODEL ARE IN PLACE TO ACHIEVE THIS OBJECTIVE.
WWW.SPARTON.COM 16
<PAGE> 19
FINANCIAL PERFORMANCE
- ----------------------
Financial Trends at a Glance .......................................... 18
Consolidated Balance Sheets ........................................... 18
Consolidated Statements of Operations ................................. 20
Consolidated Statements of Cash Flows ................................. 21
Consolidated Statements of Shareowners' Equity ........................ 22
Report of Independent Auditors ........................................ 22
Notes to Consolidated Financial Statements ............................ 23
Selected Financial Data ............................................... 32
Management's Discussion and Analysis
of Financial Condition and Results of Operations ................... 33
Directors, Officers and General Managers .............................. 39
Business Units ........................................................ 40
Notice of Annual Meeting .............................................. 40
[SPARTON LOGO]
17
<PAGE> 20
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
- ----------------------------------
SPARTON CORPORATION & SUBSIDIARIES JUNE 30
1999 1998
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,996,205 $ 4,083,273
Investment securities (Notes 1 and 3) 20,122,902 23,653,129
Income taxes recoverable 622,083 --
Accounts receivable:
Trade, less allowance of $175,000 ($290,000 in 1998) 11,795,601 12,888,558
U.S. and foreign governments 5,545,775 11,728,744
Inventories (Notes 1 and 4) 40,201,131 31,743,407
Prepaid expenses (Note 8) 3,959,862 4,340,455
Net current assets of discontinued automotive operations (Note 9) -- 2,901,847
------------- -------------
Total current assets 86,243,559 91,339,413
Other assets (Note 7) 9,001,240 5,464,007
Property, plant and equipment, at cost (Note 1)
Land and land improvements 1,764,657 1,811,801
Buildings and building equipment 10,779,063 10,674,989
Machinery and equipment 21,123,207 21,679,537
------------- -------------
33,666,927 34,166,327
Less accumulated depreciation (21,343,220) (22,598,471)
------------- -------------
Net property, plant and equipment 12,323,707 11,567,856
Net noncurrent assets of discontinued automotive operations (Note 9) 598,976 2,750,059
------------- -------------
$ 108,167,482 $ 111,121,335
============= =============
<CAPTION>
FINANCIAL TRENDS AT A GLANCE
- -----------------------------
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
NET SALES (IN MILLIONS OF DOLLARS) $94.5 102.8 142.7 145.9 131.9
<CAPTION>
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
INCOME (LOSS) PER COMMON SHARE -
CONTINUING OPERATIONS $(.59) (.36) .29 .55 .22
</TABLE>
WWW.SPARTON.COM
18
<PAGE> 21
<TABLE>
<CAPTION>
SPARTON CORPORATION & SUBSIDIARIES JUNE 30
1999 1998
------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Accounts payable (Note 4) $ 8,884,332 $ 11,390,801
Salaries and wages 3,708,857 3,256,182
Income taxes (Note 8) -- 504,451
Accrued liabilities 4,282,097 5,069,584
Net current liabilities of discontinued automotive operations (Note 9) 789,298 --
------------- -------------
Total current liabilities 17,664,584 20,221,018
Deferred Income taxes (Note 8) 2,981,000 2,531,500
Commitments and contingencies (Note 10) -- --
Shareowners' equity (Notes 1 and 6)
Preferred stock, 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 after deducting 106,622 shares in treasury 9,785,113 9,785,113
Capital in excess of par value 494,427 494,427
Accumulated other comprehensive income (loss) (71,000) 15,000
Retained earnings 77,313,358 78,074,277
------------- -------------
Total shareowners' equity 87,521,898 88,368,817
------------- -------------
$ 108,167,482 $ 111,121,335
============= =============
See accompanying notes.
<CAPTION>
FINANCIAL TRENDS AT A GLANCE (CONTINUED)
EQUITY PER COMMON SHARE
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C>
$7.12 6.60 10.90 11.29 11.18
<CAPTION>
WORKING CAPITAL (IN MILLIONS OF DOLLARS)
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C>
$33.2 29.9 68.8 71.1 68.6
</TABLE>
[SPARTON LOGO]
19
<PAGE> 22
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------
SPARTON CORPORATION & SUBSIDIARIES FOR YEARS ENDED JUNE 30
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $ 131,900,489 $ 145,935,583 $ 142,736,800
Cost and expenses:
Costs of goods sold 112,092,367 123,401,850 123,798,483
Selling and administrative 17,758,382 18,351,300 15,653,430
------------- ------------- -------------
129,850,749 141,753,150 139,451,913
------------- ------------- -------------
2,049,740 4,182,433 3,284,887
Other income (expense):
Interest and investment income (Note 3) 1,503,982 1,756,039 1,211,233
Interest expense (416) (26,845) (896,010)
Other - net 23,775 602,490 12,793
------------- ------------- -------------
1,527,341 2,331,684 328,016
------------- ------------- -------------
Income from continuing operations before income taxes 3,577,081 6,514,117 3,612,903
Provision for income taxes (Note 8) 1,818,000 2,181,000 1,371,000
------------- ------------- -------------
Income from continuing operations 1,759,081 4,333,117 2,241,903
Discontinued operations (Note 9):
Loss from discontinued automotive operations, net of
income tax credit of ($72,000) in 1997 -- -- (128,720)
Gain (loss) on disposal of discontinued automotive opera-
tions, net of applicable income tax credits of $1,480,000
and $680,000 in 1999 and 1998, respectively, and a tax
provision of $18,122,000 in 1997 (2,520,000) (1,320,000) 31,587,357
------------- ------------- -------------
Net income (loss) $ (760,919) $ 3,013,117 $ 33,700,540
============= ============= =============
Basic and diluted earnings per share:
Continuing operations $ 0.22 $ 0.55 $ 0.29
Discontinued operations (0.32) (0.17) 4.02
------------- ------------- -------------
Net income (loss) $ (0.10) $ 0.38 $ 4.31
============= ============= =============
See accompanying notes
<CAPTION>
FINANCIAL TRENDS AT A GLANCE (CONTINUED)
GOVERNMENTAL SALES (IN MILLIONS OF DOLLARS)
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
$38.3 39.1 55.9 60.8 47.1
<CAPTION>
COMMERCIAL SALES (IN MILLIONS OF DOLLARS)
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C>
$56.2 63.7 86.8 85.1 84.8
www.sparton.com
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
SPARTON CORPORATION & SUBSIDIARIES FOR YEARS ENDED JUNE 30
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Income from continuing operations $ 1,759,081 $ 4,333,117 $ 2,241,903
Add (deduct) non-cash items affecting continuing operations:
Depreciation 2,101,262 1,868,208 1,494,511
Deferred income taxes 513,000 1,102,000 (467,000)
Pension (665,564) (489,257) (88,952)
(Gain) loss on sale of property, plant and equipment 51,739 (560,126) --
Other (85,998) 47,000 75,615
Add (deduct) changes in operating assets and liabilities:
Accounts receivable 7,275,926 183,602 (6,345,782)
Inventories and prepaid expenses (8,140,631) (3,171,981) 4,080,847
Income taxes recoverable (622,083) -- 2,300,000
Deferred compensation -- -- (2,288,518)
Accounts payable, salaries and wages, accrued liabilities
and income taxes (3,345,734) (2,298,458) 4,468,207
------------ ------------ ------------
Net cash provided (used) by continuing operations (1,159,002) 1,014,105 5,470,831
Income taxes on discontinued operations 1,480,000 680,000 (18,122,000)
Cash flow provided (used) by discontinued operations 788,110 (2,497,758) (605,725)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,109,108 (803,653) (13,256,894)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,908,852) (4,078,602) (2,132,478)
Proceeds from sale of assets of discontinued operations 1,216,890 2,283,164 78,829,062
Proceeds from (purchases of) investment securities - net 3,530,227 (1,726,280) (21,926,849)
Other, principally noncurrent other assets (2,871,669) 143,774 (424,014)
Proceeds from sale of property, plant and equipment -- 575,190 --
Discontinued operations, principally purchases of property,
plant and equipment (39,772) (236,447) (74,388)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (1,073,176) (3,039,201) 54,271,333
FINANCING ACTIVITIES:
Common stock transactions, principally from exercise of stock options -- 66,250 44,031
Decrease in notes payable -- -- (33,594,225)
Principal payments on long-term borrowings, discontinued operations (123,000) (161,743) (160,988)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (123,000) (95,493) (33,711,182)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH (87,068) (3,938,347) 7,303,257
Cash at beginning of year 4,083,273 8,021,620 718,363
------------ ------------ ------------
CASH AT END OF YEAR $ 3,996,205 $ 4,083,273 $ 8,021,620
============ ============ ============
Supplemental disclosures of cash paid during the year:
Interest expense $ 1,000 $ 6,000 $ 1,354,000
============ ============ ============
Income taxes $ 350,000 $ 2,364,000 $ 15,938,000
============ ============ ============
See accompanying notes.
</TABLE>
[SPARTON LOGO]
21
<PAGE> 24
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
- ----------------------------------------------
SPARTON CORPORATION & SUBSIDIARIES FOR YEARS ENDED JUNE 30
Common stock, Accumulated
$1.25 par value Capital in other
---------------------------- excess of comprehensive Retained
Shares Amount par value income (loss) earnings Total
------------ ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance June 30, 1996 7,811,370 $ 9,764,213 $ 403,067 $ -- $ 41,362,599 $ 51,529,879
Exercise of stock options 6,720 8,400 37,610 (1,979) 44,031
Net income 33,700,540 33,700,540
Other comprehensive income:
Net unrealized losses in marketable
securities (Note 3) (32,000) (32,000)
------------
Comprehensive net income 33,668,540
------------ ------------ ----------- ----------- ------------ ------------
Balance June 30, 1997 7,818,090 9,772,613 440,677 (32,000) 75,061,160 85,242,450
Exercise of stock options 10,000 12,500 53,750 -- 66,250
Net income 3,013,117 3,013,117
Other comprehensive income:
Net unrealized gains in marketable
securities (Note 3) 47,000 47,000
------------
Comprehensive net income 3,060,117
------------ ------------ ----------- ----------- ------------ ------------
Balance June 30, 1998 7,828,090 9,785,113 494,427 15,000 78,074,277 88,368,817
Net loss (760,919) (760,919)
Other comprehensive income:
Net unrealized losses in marketable
securities (Note 3) (86,000) (86,000)
------------
Comprehensive net loss (846,919)
------------ ------------ ----------- ----------- ------------ ------------
BALANCE JUNE 30, 1999 7,828,090 $ 9,785,113 $ 494,427 $ (71,000) $ 77,313,358 $ 87,521,898
============ ============ =========== =========== ============ ============
See accompanying notes.
</TABLE>
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, 1999 and 1998, and the related
consolidated statements of operations, shareowners' equity, and cash flows for
each of the three years in the period ended June 30, 1999. 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, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Toledo, Ohio
August 27, 1999
WWW.SPARTON.COM
22
<PAGE> 25
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 in one line of business,
electronic manufacturing services (EMS). The Company's products and services
include microprocessor-based systems, transducers, printed circuit boards and
assemblies, sensors and electromechanical devices for the telecommunications,
medical, electronics and other industries. The Company also develops and
manufactures 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. These 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 and governmental electronics 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 or
cash advances.
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 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.
The Company also has purchased an investment in Cybernet Systems, a privately
held company. This investment is carried at cost, as there is no established
market price for shares held, and is included in other assets.
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 denominated 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 4. 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, 1999 of approximately $9,447,000 which are being
depreciated on the straight-line method. Estimated useful lives generally range
from 5 to 50 years for buildings and improvements, 3 to 16 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 $2,079,000 in
1999, $1,049,000 in 1998 and $987,000 in 1997.
[SPARTON LOGO]
23
<PAGE> 26
EARNINGS PER SHARE - Basic earnings per share were computed using the
weighted-average number of shares outstanding of 7,828,090 in 1999, 7,826,840 in
1998 and 7,816,417 in 1997. 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 139,000 shares of common
stock at $8.375 per share and 32,000 shares at $6.625 per share in 1999 and
196,500 shares at $8.375 per share in 1997, were outstanding 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 antidilutive.
2. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income". SFAS No. 130 requires disclosure of total
non-stockholder changes in equity in interim periods and additional disclosures
of the components of nonstockholder changes in equity on an annual basis. Total
nonstockholder changes in equity includes all changes in equity during a period
except those resulting from investments by and distributions to stockholders.
Total comprehensive income for the years ended June 30 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) $ (761,000) $ 3,013,000 $ 33,701,000
Other Comprehensive Income:
Unrealized gains (losses) on
investment securities (86,000) 47,000 (32,000)
------------ ------------ ------------
Comprehensive income (loss) $ (847,000) $ 3,060,000 $ 33,669,000
============ ============ ============
</TABLE>
3. INVESTMENT SECURITIES
Details of the investment securities portfolio as of June 30, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
GROSS
UNREALIZED
AMORTIZED GAINS ESTIMATED
JUNE 30,1999: COST (LOSSES) FAIR VALUE
- ------------ ------------ ------------ ------------
<S> <C> <C> <C>
Debt securities:
Corporate - primarily U.S. $ 11,698,438 $ (83,290) $ 11,615,148
U.S. government and
federal agency 2,895,342 (15,416) 2,879,926
State and municipal 3,166,354 ( 2,017) 3,164,337
Equity securities - primarily
preferred stock 2,475,580 (12,089) 2,463,491
------------ ------------ ------------
$ 20,235,714 $ (112,812) $ 20,122,902
============ ============ ============
<CAPTION>
Gross
Unrealized
Amortized Gains Estimated
June 30,1998: Cost (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>
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, fund the expansion of its
business and for other general purposes.
For the years ended June 30, 1999 and 1998, the Company had gross purchases of
investment securities totaling $26,347,000 and $12,585,000, respectively, and
gross sales of investment securities totaling $29,877,000 and $10,859,000,
respectively.
In June 1999, the Company purchased an investment in Cybernet Systems for
$3,000,000. The investment is carried at cost and included in other assets on
the balance sheet.
4. LONG-TERM CONTRACTS
Inventories include costs related to long-term contracts of approximately
$19,239,000 and $8,930,000 at June 30, 1999 and 1998, respectively, reduced by
progress billings to the United States government of approximately $1,026,000
and $2,646,000, respectively.
Accounts payable includes billings in excess of costs of $149,000 and $716,000
at June 30, 1999 and 1998, respectively.
5. LEASE INFORMATION
The Company leases certain machinery, data processing equipment, vehicles and
other equipment. Such leases, some of which are noncancelable 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 $1,920,000 in
1999, $1,036,000 in 1998 and $947,000 in 1997. At June 30, 1999, future minimum
lease payments for all noncancelable operating leases totaled $5,956,000 and was
payable as follows: 2000-$1,838,000, 2001-$1,438,000, 2002-$1,206,000,
2003-$1,138,000, 2004-$336,000.
WWW.SPARTON.COM
24
<PAGE> 27
6. 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 of their unexercised options to the extent then
exercisable in exchange for cash or common shares equal to the difference
between the then-current market value and the option prices for shares issuable
upon surrender of such options.
Information on options is as follows:
<TABLE>
<CAPTION>
Shares
Under Option Price Range
------------ ---------------
<S> <C> <C>
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
Granted -- --
Exercised -- --
Cancelled (42,500) 8.375
------- ----------------
OUTSTANDING AT JUNE 30, 1999 171,000 $6.625 to $8.375
======= ================
</TABLE>
At June 30, 1999, the per share weighted-average exercise price of options
outstanding was $8.05. The weighted-average remaining contractual life of those
options is approximately 2.0 years. At June 30, 1999, there were 101,500 options
exercisable at the per share weighted-average exercise price of $7.82. 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 202,500
at June 30, 1999 and 160,000 at July 1, 1998.
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) in both 1999 and 1998, and $40,000 ($.01 per share) in
1997. 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 four years.
7. EMPLOYEE BENEFIT PLANS
As of June 30, 1999, the Company has adopted Statement of Financial Accounting
Standard No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (SFAS No. 132), which is effective for financial
statements for fiscal years beginning after December 15, 1997. SFAS No. 132
establishes revised standards for disclosures about pensions and other
postretirement benefits.
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 weighted-average assumptions were used as of June 30:
1999 1998
---- ----
Discount rate 7.0% 7.0%
Expected return on plan assets 7.5 8.0
Rate of compensation increase 5.0 5.0
Net periodic pension income of $666,000, $489,000 and $89,000 was recognized in
1999, 1998 and 1997, respectively.
The components of net periodic pension income for each of the years were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Service cost $ 355,000 $ 314,000 $ 432,000
Interest cost 626,000 629,000 720,000
Expected return on plan
assets (1,282,000) (1,099,000) (958,000)
Amortization of prior service
cost (6,000) (6,000) (6,000)
Amortization of transition
assets (296,000) (296,000) (296,000)
Recognized net actuarial
(gain) losses (63,000) (31,000) 19,000
----------- ----------- -----------
Net periodic pension income $ (666,000) $ (489,000) $ (89,000)
=========== =========== ===========
</TABLE>
The following tables summarize the changes in benefit obligations, plan assets
and funding status of the plan at March 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligation at beginning of period $ 9,335,000 $ 9,533,000
Service cost 878,000 848,000
Interest cost 626,000 629,000
Actuarial losses (gains) 361,000 (80,000)
Benefits paid (711,000) (1,595,000)
------------ ------------
Benefit obligation at end of period $ 10,489,000 $ 9,335,000
============ ============
</TABLE>
[SPARTON LOGO]
25
<PAGE> 28
<TABLE>
<CAPTION>
1999 1998
------------ ------------
CHANGE IN PLAN ASSETS:
<S> <C> <C>
Fair value of plan assets at
beginning of period $ 17,559,000 $ 15,126,000
Actual return on plan assets 2,145,000 3,551,000
Plan participants' contributions 482,000 477,000
Benefits paid (711,000) (1,595,000)
Fair value of plan assets at end of
period, consisting principally of
common stock (including 319,100
shares of the Company's common
stock), corporate bonds and U.S.
government obligations ------------ ------------
$ 19,475,000 $ 17,559,000
============ ============
Plan assets in excess of projected
benefit obligations $ 8,986,000 $ 8,224,000
Unrecognized net actuarial gains (3,224,000) (2,825,000)
Unrecognized transition asset (889,000) (1,186,000)
Unamortized prior service cost (41,000) (47,000)
------------ ------------
Prepaid benefit cost included in other
assets $ 4,832,000 $ 4,166,000
============ ============
</TABLE>
8. 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, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
Deferred tax assets:
<S> <C> <C>
Canadian tax loss carryovers $ 2,613,000 $ 2,003,000
Inventories 1,285,000 1,795,000
Accrual for environmental
contingencies 513,000 658,000
Employment and compensation 468,000 467,000
Accrued liabilities on long-term
loss contracts 439,000 18,000
Liabilities of discontinued operations 336,000 1,023,000
Other 149,000 97,000
----------- -----------
Total deferred tax assets 5,803,000 6,061,000
Less valuation reserve for
Canadian tax carryovers (2,613,000) (2,003,000)
----------- -----------
3,190,000 4,058,000
Deferred tax liabilities:
Prepaid pension costs 1,739,000 1,500,000
Property, plant and equipment 1,242,000 1,160,000
----------- -----------
Total deferred tax liabilities 2,981,000 2,660,000
----------- -----------
Net deferred tax assets $ 209,000 $ 1,398,000
=========== ===========
</TABLE>
Deferred taxes are included in the balance sheet at June 30, 1999 and 1998 as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Prepaid expenses $ 3,190,000 $ 3,930,000
Deferred tax liabilities 2,981,000 2,532,000
----------- -----------
$ 209,000 $ 1,398,000
=========== ===========
</TABLE>
Income (loss) before income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Continuing operations:
United States $ 5,489,104 $ 6,141,769 $ 4,385,967
Canada (1,912,023) 372,348 (773,064)
------------ ------------ ------------
3,577,081 6,514,117 3,612,903
Discontinued operations (4,000,000) (2,000,000) 49,508,637
------------ ------------ ------------
$ (422,919) $ 4,514,117 $ 53,121,540
============ ============ ============
</TABLE>
The provision for income taxes for continuing operations consists of:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
Current:
<S> <C> <C> <C>
United States $1,246,000 $ 969,000 $1,095,000
States and local 59,000 110,000 --
---------- ---------- ----------
1,305,000 1,079,000 1,095,000
Deferred - United States 513,000 1,102,000 276,000
---------- ---------- ----------
$1,818,000 $2,181,000 $1,371,000
========== ========== ==========
</TABLE>
The consolidated effective tax rate for continuing operations differs from the
statutory U.S. federal tax rate for the following reasons and by the following
percentages:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Statutory U.S. federal
tax rate 34.0% 34.0% 35.0%
Significant increases (reductions) resulting from:
Canadian tax loss
carryovers and other 18.2 (0.2) 10.0
Tax benefits of foreign
sales corporation (6.2) (4.2) (9.0)
State and local income
taxes 1.1 2.0 --
Other 3.7 1.9 1.9
------ ------ ------
Effective tax rate 50.8% 33.5% 37.9%
====== ====== ======
</TABLE>
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<PAGE> 29
For Canadian income tax purposes, approximately $6,176,000 of noncapital losses
and scientific research and experimental development expenditures is available
at June 30, 1999 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 $323,000 at June 30, 1999 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 $2,613,000 has been established for the full amount of the Canadian
carryovers.
9. DISCONTINUED OPERATIONS
In August 1996, the Company formalized its decision to offer for sale its
automotive operations. Accordingly, related 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) which comprised approximately 80% of the automotive operations of
the Company. This sale did not include the net assets and operations of the
remaining automotive unit, Sparton Engineered Products, Inc.-Flora Group
(Flora). The Company pursued the sale of the Flora operations since the August
1996 decision was made. 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 agreement with a party
with whom negotiations had been ongoing for some 16 months. At June 30, 1998,
based upon then-available information, the Company adjusted its recorded reserve
for discontinued operations by an additional charge for losses anticipated in
the disposal of these businesses.
At its meeting on August 28, 1998, the Board of Directors approved the closing
of the Flora operation and an orderly liquidation of its assets. In December
1998, all production ceased. An auction of inventory and equipment was held in
January 1999. It had been expected that both inventory and equipment would be
sold in groupings by product lines and that 75% or more of the book value of
inventory and equipment would be recovered. However, anticipated sales of
various product lines did not materialize. At auction individual items were sold
essentially for scrap value. As a result, a pre-tax charge to discontinued
operations of $4,000,000 ($2,520,000 after tax) was recorded in the third
quarter of fiscal 1999. An auction in February 1999 did not generate sufficient
interest and the real estate is held for sale. At June 30, 1999, approximately
$959,000 is accrued for the costs associated with the sale of the remaining
assets and other open issues associated with the discontinued automotive
operations as shown below.
For purposes of balance sheet presentation, the current and noncurrent assets
and liabilities of discontinued operations have been netted. The presentation at
June 30, 1998 has been reclassified to conform to that of June 30, 1999 amounts.
Operating results of discontinued automotive operations are as follows and are
classified as such through August 1996, the date the Company formalized its plan
to offer for sale its automotive operations.
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Revenues $ 30,461,930
============
Loss before income taxes $ (200,720)
Income tax credits 72,000
------------
Net loss $ (128,720)
============
</TABLE>
Assets and liabilities of discontinued automotive operations are as follows at
June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current assets $ 169,553 $ 7,036,482
Current liabilities (958,851) (4,134,635)
----------- -----------
Net $ (789,298) $ 2,901,847
=========== ===========
Noncurrent assets $ 598,976 $ 2,808,360
Noncurrent liabilities -- (58,301)
----------- -----------
Net $ 598,976 $ 2,750,059
=========== ===========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
Various litigation is pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company and in
others presenting allegations that are nonroutine. The Company and its
subsidiaries are also involved in certain compliance issues with the United
States Environmental Protection Agency (EPA) and various state agencies,
including being named as a potentially responsible party at several sites.
Potentially responsible parties (PRPs) can be held jointly and severally liable
for the cleanup costs at any specific site. The Company's past experience,
however, has indicated that when it has contributed only relatively small
amounts of materials or waste to a specific site relative to other PRPs, its
ultimate share of any cleanup costs has been minor. Based upon available
information, the Company believes it has contributed only small amounts to
those sites in which it is currently viewed as a potentially responsible party.
Environmental compliance issues involving the discontinued automotive
operations are not material.
One of Sparton's facilities, located in New Mexico, has been the subject of
ongoing investigations conducted with the Environmental Protection Agency (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 1980s and involved a review of
on-site and off-site environmental impacts. In 1988, an administrative order on
consent (AOC) was executed with the 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 re-
[SPARTON LOGO]
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<PAGE> 30
sults of its investigations, as required in the AOC. In June 1996, the EPA
issued its final decision selecting a corrective action at the site, different
from what Sparton had proposed. 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 the implementation
of the remedy selected by the agency in June 1996, and then to implement that
remedy. Sparton vigorously contested that order administratively, but on
February 10, 1998, the 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 1996, now
incorporated in the Final Administrative Order, and referred to in the preceding
paragraph. In March 1997, the plaintiffs in these three lawsuits filed a motion
for preliminary injunction and in July 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.
At the current time, all litigation has been stayed to allow the parties to
continue settlement discussions. The most recent stay expired on August 9, 1999,
but the parties have agreed to extend it to at least September 9, 1999. It is
anticipated that implementation of the three workplans discussed below will
relieve the Company of its obligations under the February 10, 1998 Final
Administrative Order. As a result of these developments, the Company has updated
its cost estimates. It is believed the initial cost of the corrective measures
called for in these plans will not be materially different from the cost
estimates the Company has previously accrued. There is no assurance that
additional corrective measures, involving increased expenditures, may not be
required.
The proposed workplans provide for the installation of an off-site containment
well (already completed and operating), an on-site containment well and an
enhancement to an on-site soil vapor extraction system. The purpose of the
containment wells is to restrict further migration of impacted groundwater. The
soil vapor extraction system removes solvents in the on-site soil above the
groundwater. The installation and operation of the two containment wells and the
enhanced soil vapor extraction system are dependent upon various permits,
licenses and approvals from regulatory agencies and third parties. It is
anticipated that these remediation activities will operate for a period of time
during which the Company and the regulatory agencies will analyze their
effectiveness. The Company believes that it will take at least three to five
years before the effectiveness of the groundwater extraction wells can be
established. Until then, in the Company's judgment, no definitive conclusion can
be reached on whether additional remediation activities may be required.
At June 30, 1999, Sparton has accrued $1,426,000 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 four years.
The period of accrual was reduced from five to four years to reflect what is now
believed will be the initial period for testing the effectiveness of the
remediation plan as discussed and described above. Details of the activity
beyond this period will be dependent upon the effectiveness of the workplans
being currently negotiated and not yet implemented. 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 four years including
on-site and off-site pump and treat containment systems, a soil vapor extraction
program and continued on-site/off-site monitoring. Beyond four 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.
Uncertainties associated with environmental remediation contingencies are
pervasive and often result in wide ranges of reasonably possible estimates.
Estimates developed in the
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<PAGE> 31
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. Amounts charged to operations, principally legal and consulting, for
fiscal years 1999 and 1998 were $1,756,000 and $1,821,000, respectively. It is
reasonably possible that Sparton's recorded estimate of this liability may
change. If a remedy is imposed on Sparton, other than as described in the
proposed workplans, 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.
On June 17, 1998, Sparton Corporation and Sparton Technology, Inc. filed a
complaint in the Circuit Court of Cook County, Illinois, against Lumbermens
Mutual Casualty Company and American Manufacturers Mutual Insurance Company
demanding reimbursement of expenses incurred in connection with its remediation
efforts at the Coors Road facility based on various primary and excess
comprehensive general liability policies in effect between 1959 and 1975.
On February 11, 1998, Sparton Technology, Inc. commenced litigation in the
United States Court of Federal Claims alleging that the Department of Energy
(DOE), acting through its contractors, Sandia Corporation and Allied Signal,
Inc., is liable for reimbursement of Sparton's costs incurred in defending
against and complying with Federal and state regulatory requirements. The DOE
prescribed certain mandatory performance requirements that were then imposed
upon Sparton through its agreements with Sandia Corporation and Allied Signal,
Inc. On February 9, 1999 the Court of Federal Claims dismissed Sparton's
complaint based on its determination that an agency relationship did not exist
between Sandia Corporation and Allied Signal, Inc. and the United States for
purposes of reimbursing costs incurred during litigation. Sparton believes that
the court erred in its decision and filed its notice of appeal on April 9,
1999. Briefing has begun but is not yet complete.
Sparton Technology, Inc. filed a complaint on September 21, 1998, against Allied
Signal, Inc. in U.S. District Court in Kansas City seeking to recover costs
incurred to investigate and remediate impacts to the environment at its Coors
Road facility. In July 1999, the court allowed the Company to amend its
complaint to add Sandia Corporation and the DOE as defendants. Limited discovery
has been completed. This case is currently scheduled for trial in the spring of
2000.
At this time, the Company is unable to predict the amount of recovery, if any,
that may result from the pursuit of these before-mentioned three claims.
[SPARTON LOGO]
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<PAGE> 32
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following unaudited information shows selected items by quarter for the
years ended June 30, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Net sales:
<S> <C> <C> <C> <C>
1999 $ 32,449,428 $ 38,974,458 $ 26,981,204 $ 33,495,399
1998 32,366,103 34,865,638 41,901,535 36,802,307
Gross profit:
1999 3,867,913 5,625,243 2,601,489 7,713,477
1998 3,260,379 5,154,872 5,842,726 8,275,756
Income (loss):
1999:
Continuing operations $ 109,489 $ 1,210,912 $ (632,359) $ 1,071,039
Discontinued operations -- -- (2,520,000) --
------------ ------------ ------------ ------------
$ 109,489 $ 1,210,912 $ (3,152,359) $ 1,071,039
============ ============ ============ ============
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
============ ============ ============ ============
Income (loss) basic and diluted earnings per share:
1999:
Continuing operations $ 0.01 $ 0.15 $ (0.08) $ 0.14
Discontinued operations -- -- (0.32) --
------------ ------------ ------------ ------------
$ 0.01 $ 0.15 $ (0.40) $ 0.14
============ ============ ============ ============
1998:
Continuing operations $ 0.04 $ 0.11 $ 0.15 $ 0.25
Discontinued operations -- -- -- (0.17)
------------ ------------ ------------ ------------
$ 0.04 $ 0.11 $ 0.15 $ 0.08
============ ============ ============ ============
</TABLE>
In the fourth quarter of 1999, gross margins were increased by $730,000 due to
the net impact of reversals of certain inventory reserves established throughout
the preceding three fiscal quarters and revisions in estimated completion costs
on government defense contracts. In the fourth quarter of 1998, gross margins
were increased by $450,000 due to revisions in estimated completion costs on a
government defense contract.
The results for the fourth quarter of 1999 were further reduced by $151,000,
after adjusting the Company's full-year effective tax rate to 50.8%. The
increased effective tax rate is due to the higher-than-expected losses reported
at Sparton of Canada. No tax benefits were recognized due to the current
uncertainty that the Canadian operations will generate sufficient taxable income
to utilize the existing tax loss carryovers.
The Company also recorded a net loss on disposal of discontinued operations of
$4,000,000 ($2,520,000 after tax) in the third quarter of 1999 and $2,000,000
($1,320,000 after tax) in the fourth quarter of 1998 as more fully described in
Note 9.
Finally, gross margin decreased $570,000 in the third quarter of 1999 and
$807,000 in the fourth quarter of 1998 due to the Company's adjusting its
accrual for EPA-related costs as described in Note 10.
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<PAGE> 33
12. BUSINESS SEGMENT
AND CONCENTRATION OF SALES
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued. SFAS No. 131 establishes standards for the way
that a public enterprise reports information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. The Company operates in one business segment, commercial and
government electronic manufacturing services.
Total direct sales on prime contracts to United States government agencies were
$25,754,000 in 1999, $25,326,000 in 1998 and $28,123,000 in 1997. In 1999, one
commercial customer accounted for 11% of consolidated sales from continuing
operations. There were no other customers in 1998 or 1997 that accounted for 10%
or more of consolidated sales. Foreign export sales by U.S. continuing
operations to unaffiliated customers were $27,891,000 in 1999, $45,684,000 in
1998 and $36,738,000 in 1997. No single country accounted for 10% or more of
export sales in 1999, 1998 or 1997.
Sales of ASW devices and related engineering contract services for the years
1999-1997 contributed approximately 30%, 36% and 38%, respectively, to total
sales. Intercompany sales were not significant in any of these years.
[SPARTON LOGO]
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<PAGE> 34
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
- -----------------------
SPARTON CORPORATION & SUBSIDIARIES FOR YEARS ENDED JUNE 30
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $ 131,900,489 $ 145,935,583 $ 142,736,800 $ 102,824,946 $ 94,514,784
Costs and expense 129,850,749 141,753,150 139,451,913 104,926,455 100,817,530
------------- ------------- ------------- ------------- -------------
2,049,740 4,182,433 3,284,887 (2,101,509) (6,302,746)
Other income (expense):
Interest and investment income 1,503,982 1,756,039 1,211,233 101,586 77,905
Interest expense (416) (26,845) (896,010) (1,202,143) (948,800)
Other - net 23,775 602,490 12,793 (117,728) 514,793
------------- ------------- ------------- ------------- -------------
1,527,341 2,331,684 328,016 (1,218,285) (356,102)
------------- ------------- ------------- ------------- -------------
Income (loss) from continuing operations
before income taxes 3,577,081 6,514,117 3,612,903 (3,319,794) (6,658,848)
Provision (credits) for income taxes 1,818,000 2,181,000 1,371,000 (509,000) (2,088,000)
------------- ------------- ------------- ------------- -------------
Income (loss) from continuing operations 1,759,081 4,333,117 2,241,903 (2,810,794) (4,570,848)
Income (loss) from discontinued automotive
operations, net of income taxes (2,520,000) (1,320,000) 31,458,637 (1,269,390) (1,889,873)
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (760,919) $ 3,013,117 $ 33,700,540 $ (4,080,184) $ (6,460,721)
============= ============= ============= ============= =============
Weighted-average common shares outstanding 7,828,090 7,826,840 7,816,417 7,811,370 7,811,370
PER SHARE OF COMMON STOCK
Income (loss):
Continuing operations $ 0.22 $ 0.55 $ 0.29 $ (0.36) $ (0.59)
Discontinued operations (0.32) (0.17) 4.02 (0.16) (0.24)
------------- ------------- ------------- ------------- -------------
$ (0.10) $ 0.38 $ 4.31 $ (0.52) $ (0.83)
============= ============= ============= ============= =============
Shareowners' equity $ 11.18 $ 11.29 $ 10.90 $ 6.60 $ 7.12
Dividends -- -- -- -- --
OTHER FINANCIAL DATA
Total assets $ 108,167,482 $ 111,121,335 $ 114,177,087 $ 119,270,663 $ 110,654,772
Working capital 68,578,975 71,118,395 68,760,933 29,940,793 33,187,775
Working capital ratio 4.88:1 4.52:1 3.53:1 1.47:1 1.66:1
Long-term obligations -- -- -- $ 75,000 $ 150,000
Shareowners' equity 87,521,898 88,368,817 85,242,450 51,529,879 55,610,063
</TABLE>
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<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
events affecting the Company's earnings and financial condition during the
periods included in the accompanying financial statements. The Company's
continuing operations are in one line of business, electronic manufacturing
services (EMS). This includes 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, formerly classified as
the Automotive and Industrial Products segment, were reclassified and reported
as discontinued operations.
The Private Securities Litigation Reform Act of 1995 reflects Congress'
determination that the disclosures of forward-looking information is desirable
for investors and encourages such disclosure by providing a safe harbor for
forward-looking statements by corporate management. The following discussion
about the Company's results of operations and financial condition contains
forward-looking statements that involve risk and uncertainty. The Company notes
that a variety of factors could cause the actual results and experience to
differ materially from anticipated results or other expectations expressed in
the Company's forward-looking statements. The risks and uncertainties that may
affect the operations, performance, growth forecasts and results of the
Company's business include, but are not limited to, fluctuations in U.S. and/or
world economies, the ability of Sparton and its customers and vendors to address
effectively Year 2000 issues, competition in the overall electronic
manufacturing services (EMS) 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. Management cautions readers
not to place undue reliance on forward-looking statements, which are subject to
influence by the enumerated risk factors as well as unanticipated future events.
FISCAL 1999 COMPARED TO FISCAL 1998
Sales for the year ended June 30, 1999 were $131,900,000, a decrease of
$14,035,000 (10%) from 1998. Governmental EMS sales declined $13,792,000. These
sales were below expectations. Commercial EMS sales of $84,797,000 were
essentially unchanged. Sales decreased $15,653,000 (13%) to $108,366,000 at
Sparton Electronics due to lower sonobuoy sales. Sales increased $2,724,000
(13%) to $21,543,000 at Sparton Technology mainly as a result of increased
wiring harness sales. Canadian revenues totaled $2,494,000, a decrease of (44%)
from last year. Sparton of Canada continues to be challenged in replacing
government defense sales.
Operating income of $2,050,000 was reported for 1999 compared to income of
$4,182,000 last year. These results were lower than expected. Included within
these operating results were adverse capacity variances of $3,646,000 and
$1,844,000 for 1999 and 1998, respectively, caused by underutilized capacity at
several production facilities. These results also reflect Coors Road-related EPA
costs and expenses of $1,756,000 and $1,821,000 in 1999 and 1998, respectively.
Selling and administrative expense decreased by $593,000 to $17,758,000 in 1999.
Several factors contributed to this decrease, the largest being the decrease in
expenditures relating to the implementation of the new computer system this past
year as the implementation work was completed in fiscal 1998.
Interest and investment income decreased $252,000 to $1,504,000 in 1999 due to
lower average investments and a decline in interest rates. These investment
securities are more fully described in Note 3 to the financial statements.
After provision for applicable income taxes as discussed in Note 8 to the
financial statements, the Company reported income from continuing operations of
$1,759,000 ($.22 per share) in 1999 compared to income from continuing
operations of $4,333,000 ($.55 per share) in 1998.
In August 1996, the Company formalized its plans to sell its automotive
operations and accordingly reclassified and reported related operating results
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) which comprised approximately 80% of its automotive operations. This
sale did not include the net assets and operations of the remaining automotive
unit, Sparton Engineered Products, Inc.-Flora Group (Flora).
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.
[SPARTON LOGO]
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<PAGE> 36
After extensive efforts to sell the Flora operations proved unsuccessful, the
Board of Directors approved the closing of the facility in August 1998. In
December 1998, Flora production ceased. An auction of inventory and equipment
was held in January 1999. Both inventory and equipment were expected to be sold
in groupings by product line thereby maximizing the value received for both
inventory and equipment. 75% or more of the book value of inventory and
equipment was expected to be recovered through sales by product line. However,
the sales of various product lines did not materialize. At auction, individual
items were sold essentially for scrap value. As a result, a pretax charge of
$4,000,000 ($2,520,000 after-tax) was recognized for the year ended June 30,
1999. An auction in February 1999 did not generate sufficient interest in the
Flora real property, and the property will be placed for sale with a real estate
broker. At June 30, 1999, approximately $959,000 is accrued for the costs
associated with the disposal of the remaining assets and other issues related to
the discontinued automotive operations.
The Company reported a net (loss) of ($761,000) ($.10 per share) in 1999
compared to a net income of $3,013,000 ($.38 per share) in 1998.
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. Governmental EMS sales increased $5,032,000, while,
commercial EMS sales decreased $1,833,000. Revenues were below expectations,
primarily in the commercial EMS area. Revenues increased $5,489,000 (5%) to
$124,019,000 at Sparton Electronics. Both commercial and defense sales
increased. Government sales were slightly above plan, while EMS 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 start-ups. 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. Improved operating results were due to an improved product mix and
better control over new program start-ups. These operating results include
adverse capacity variances of $1,844,000 and $2,351,000 for 1998 and 1997,
respectively, caused by underutilized capacity at two production facilities.
These results also reflect EPA-related costs and expense of $1,821,000 and
$1,457,000 in 1998 and 1997, respectively.
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.
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, Coors Road EPA-related costs increased by
$364,000.
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 3 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 8 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.
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 expected to be received and to recognize probable additional
operating losses associated with the disposal of the Flora Group. 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. In its meeting on August 28,
1998, the Board of Directors approved and the Company has commenced to close the
Flora operations and to 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.
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 government contracts provide for
interim progress billings based on costs incurred. These progress billings
reduce the amount of cash that would otherwise be required during the
performance of these contracts. As the volume of U.S. defense-related contract
work declines, so has the relative importance of progress billings as a
liquidity resources. At the present time, the Company plans on using its
investment securities to provide working capital and to strategically invest in
additional property, plant and equipment to accommodate growth in the EMS
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.
www.sparton.com
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<PAGE> 37
Cash flows used by continuing operating activities were $1,159,000 in 1999; cash
flows provided were $1,014,000 in 1998 and $5,471,000 in 1997. Primary uses of
1999 cash flows were an increase in inventory and a reduction in various
accounts payable and accrued expenses. Primary sources included cash earnings
from continuing operations and a decrease in accounts receivable.
Cash flows used by investing activities were $1,073,000 in 1999 and $3,039,000
in 1998. 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. Additionally, the Company made an investment in Cybernet
Systems for $3,000,000 in fiscal 1999. Cybernet is a privately owned developer
of hardware, software and next-generation network computing and robotics
products. Sparton may potentially manufacture one of several new products in
development. This investment is an additional way for Sparton to develop its
strength in emerging fields of technology. The primary source of 1997 net cash
flows provided by investing activities was the proceeds from the sale of the KPI
automotive business unit, partially offset by the purchase of investment
securities.
Cash flows used by financing activities were $123,000 in 1999, $95,000 in 1998
and $33,711,000 in 1997. 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.
At June 30, 1999, the Company had $68,579,000 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 denominated 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
- ----------
Various litigation is pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company and in
others presenting allegations that are nonroutine. The Company and its
subsidiaries are also involved in certain compliance issues with the United
States Environmental Protection Agency (EPA) and various state agencies,
including being named as a potentially responsible party at several sites.
Potentially responsible parties (PRPs) can be held jointly and severally liable
for the cleanup costs at any specific site. The Company's past experience,
however, has indicated that when it has contributed only relatively small
amounts of materials or waste to a specific site relative to other PRPs, its
ultimate share of any cleanup costs has been minor. Based upon available
information, the Company believes it has contributed only small amounts to those
sites in which it is currently viewed a potentially responsible party.
Environmental compliance issues involving the discontinued automotive operations
are not material.
One of Sparton's facilities, located in New Mexico, has been the subject of
ongoing investigations conducted with the Environmental Protection Agency (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 1980s and involved a review of
on-site and off-site environmental impacts. In 1988, an administrative order on
consent (AOC) was executed with the 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, different from what Sparton had proposed. 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 the implementation
of the remedy selected by the agency in June 1996, and then to implement that
remedy. Sparton vigorously contested that order administratively, but on
February 10, 1998, the 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.
[SPARTON LOGO]
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<PAGE> 38
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 1996, now
incorporated in the Final Administrative Order, and referred to in the preceding
paragraph. In March 1997, the plaintiffs in these three lawsuits filed a motion
for preliminary injunction and in July 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.
At the current time, all litigation has been stayed to allow the parties to
continue settlement discussions. The most recent stay expired on August 9, 1999,
but the parties have agreed to extend it to at least September 9, 1999. It is
anticipated that implementation of the three workplans discussed below will
relieve the Company of its obligations under the February 10, 1998 Final
Administrative Order. As a result of these developments, the Company has updated
its cost estimates. It is believed the initial cost of the corrective measures
called for in these plans will not be materially different from the cost
estimates the Company has previously accrued. There is no assurance that
additional corrective measures, involving increased expenditures, may not be
required.
The proposed workplans provide for the installation of an off-site containment
well (already completed and operating), an on-site containment well and an
enhancement to an on-site soil vapor extraction system. The purpose of the
containment wells is to restrict further migration of impacted groundwater. The
soil vapor extraction system removes solvents in the on-site soil above the
groundwater. The installation and operation of the two containment wells and the
enhanced soil vapor extraction system are dependent upon various permits,
licenses and approvals from regulatory agencies and third parties. It is
anticipated that these remediation activities will operate for a period of time
during which the Company and the regulatory agencies will analyze their
effectiveness. The Company believes that it will take at least three to five
years before the effectiveness of the groundwater extraction wells can be
established. Until then, in the Company's judgment, no definitive conclusion can
be reached on whether additional remediation activities may be required.
At June 30, 1999, Sparton has accrued $1,426,000 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 four years.
The period of accrual was reduced from five to four years to reflect what is now
believed will be the initial period for testing the effectiveness of the
remediation plan as discussed and described above. Details of the activity
beyond this period will be dependent upon the effectiveness of the workplans
being currently negotiated and not yet implemented. 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 four years including
on-site and off-site pump and treat containment systems, a soil vapor extraction
program and continued on-site/off-site monitoring. Beyond four 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.
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. Amounts charged to operations, principally
legal and consulting, for fiscal years 1999 and 1998 were $1,756,000 and
$1,821,000, respectively. It is reasonably possible that Sparton's recorded
estimate of this liability may change. If a remedy is imposed on Sparton, other
than as described in the proposed workplans, 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.
On June 17, 1998, Sparton Corporation and Sparton Technology, Inc. filed a
complaint in the Circuit Court of Cook County, Illinois, against Lumbermens
Mutual Casualty Company and American Manufacturers Mutual Insurance Company
demanding reimbursement of expenses incurred in connection with its remediation
efforts at the Coors Road facility based on various primary and excess
comprehensive general liability policies in effect between 1959 and 1975.
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<PAGE> 39
On February 11, 1998, Sparton Technology, Inc. commenced litigation in the
United States Court of Federal Claims alleging that the Department of Energy
(DOE), acting through its contractors, Sandia Corporation and Allied Signal,
Inc., is liable for reimbursement of Sparton's costs incurred in defending
against and complying with Federal and state regulatory requirements. The DOE
prescribed certain mandatory performance requirements that were then imposed
upon Sparton through its agreements with Sandia Corporation and Allied Signal,
Inc. On February 9, 1999 the Court of Federal Claims dismissed Sparton's
complaint based on its determination that an agency relationship did not exist
between Sandia Corporation and Allied Signal, Inc. and the United States for
purposes of reimbursing costs incurred during litigation. Sparton believes that
the court erred in its decision and filed its notice of appeal on April 9,
1999. Briefing has begun but is not yet complete.
Sparton Technology, Inc. filed a complaint on September 21, 1998, against Allied
Signal, Inc. in U.S. District Court in Kansas City seeking to recover costs
incurred to investigate and remediate impacts to the environment at its Coors
Road facility. In July 1999, the court allowed the Company to amend its
complaint to add Sandia Corporation and the DOE as defendants. Limited discovery
has been completed. This case is currently scheduled for trial in the spring of
2000.
At this time, the Company is unable to predict the amount of recovery, if any,
that may result from the pursuit of these before-mentioned three claims.
Impact of Year 2000
- -------------------
The Year 2000 problem results from the fact that many older computer programs
were written using two digits rather than four to define the applicable 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 normal business activities.
Sparton Electronics implemented a new business information system in the summer
of calendar 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. This
information system has been implemented throughout the Company, with the final
location, Sparton Technology, completed in April 1999. The timing of the
decision to purchase and implement MTMS was independent of the Year 2000 issue.
Based upon representation from the manufacturer and our independent testing, the
Company believes that implementation of MTMS will render all of its significant
internal information systems Year 2000 compliant, with no disruptions in
operations. As the majority of software and hardware was upgraded to accommodate
the implementation of MTMS, expenditures have been minimal to date for Year 2000
compliance. Additional expenditures to complete our Year 2000 program are not
expected to exceed $100,000.
Sparton's readiness plan encompasses both information technology systems and
computer-chip-embedded functions. These include such things as elevators,
security systems, factory floor machines and heating and cooling systems. Other
than MTMS which was discussed earlier, all locations have completed their
inventory and assessment of information technology (IT) systems, and have begun
the modification and upgrading process of these systems. In August 1999, a
company-wide test using a simulated Year 2000 environment was conducted to
further test significant systems. All critical systems have been completed;
remaining areas are scheduled for completion by September 1999. In addition,
inventory and assessment of production facilities, test and production equipment
and other non-IT areas have been completed, with remediation or replacement
scheduled as necessary. Completion in this area is also anticipated by the end
of September 1999. Teams are in place at each company to oversee and ensure
completion of Sparton's Year 2000 program. Additionally, the Company is
discussing and monitoring Year 2000 compliance issues with its major suppliers,
customers and other third parties. With respect to suppliers' and customers'
software being Year 2000 compliant, the Company does not believe that there is
sufficient integration and/or dependency upon such software to potentially have
any material impact on the Company's business operating systems or processes.
Certain of the Company's EMS revenues involve products built to contract
specifications dictated by the customer using a customer-owned design. As these
products are nonproprietary in nature, the Company believes that potential Year
2000 problems, if any, associated with these products are the customer's
responsibility. Regarding proprietary products, the Company has completed an
assessment of both current and past 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 affect operations or operating results. However, if all Year 2000
issues are not properly identified, assessed and corrected as required in a
timely manner, there can be no assurance that the Year 2000 issue will not
materially adversely impact the Company's results of operation or adversely
affect the Company's relationships with customers, suppliers and others. Sparton
believes the actions it is taking should reduce the risks posed by Year 2000
challenges to its own systems. Management recognizes, however, that unforeseen
circumstances could arise both within its own systems and within the systems of
external entities and can give no assurances that if such circumstances arose
they would not adversely affect the Company's Year 2000 compliance efforts.
Further, management cannot determine the impact that any such adverse
circumstance might have on the Company's operations, financial position or cash
flows.
The Company is developing a contingency plan to address situations that may
result if the Company, or any of the third parties upon which the Company is
dependent, is unable to achieve Year 2000 readiness. Plans include such items as
manual work arounds, adjusting staffing levels and listings of alternative
suppliers and service providers. The Company's
[SPARTON LOGO]
37
<PAGE> 40
Year 2000 compliance program is ongoing and will continue to be evaluated.
Year 2000 Forward-Looking Statements
- ------------------------------------
The foregoing Year 2000 discussion contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including without limitation, expected financial impact and the
dates by which the Company expects to complete certain actions, are based on
management's best estimates at this time, which were derived utilizing numerous
assumptions about future events, including the continued availability of certain
resources, representations received from third parties and other factors.
However, there can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
ability to identify and remediate all relevant IT and non-IT systems, results of
Year 2000 testing, adequate resolution of Year 2000 issues by businesses and
other third parties who are service providers, suppliers or customers of the
Company, unanticipated system costs, the adequacy of and ability to develop and
implement contingency plans and similar uncertainties. The "forward-looking
statements" made in the foregoing Year 2000 discussion are only as of the date
on which such statements are made, and the Company undertakes no obligation to
update on less than a quarterly basis.
WWW.SPARTON.COM
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<PAGE> 41
DIRECTORS, OFFICERS AND GENERAL MANAGERS
- ----------------------------------------
DIRECTORS:
JAMES N. DEBOER (2,3)
Partner
Law Firm of Varnum, Riddering, Schmidt and Howlett, LLP
Grand Rapids, Michigan
DAVID W. HOCKENBROCHT (2,3)
President
Sparton Corporation
ROBERT J. KIRK (1)
Financial Consultant
Toledo, Ohio
WILLIAM I. NOECKER (1)
Director of Program Management
Fisher Dynamics Corporation
St. Clair Shores, Michigan
Chairman
Brasco International Inc.
Detroit, Michigan
RORY B. RIGGS (2,3)
President
Biomatrix, Inc.
Richfield, New Jersey
DAVID B. SCHOON
Financial Consultant
Grand Rapids, Michigan
W. PETER SLUSSER (2)
President
Slusser & Associates Inc.
New York, New York
BRADLEY O. SMITH (1,3)
Private Investor
Grand Rapids, Michigan
JOHN J. SMITH (2,3)
Chairman
Sparton Corporation
COMMITTEE ASSIGNMENTS:
(1) Audit committee
(2) Compensation committee
(3) Executive committee
OFFICERS AND GENERAL MANAGERS:
SPARTON CORPORATION
JOHN J. SMITH
Chairman and Chief Executive Officer
DAVID W. HOCKENBROCHT
President and Chief Operating Officer
RICHARD L. LANGLEY
Vice President-Treasurer
R. JAN APPEL
Vice President, General Counsel and 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.
MICHAEL G. WOODS
Vice President-General Manager
Sparton of Canada, LTD.
[SPARTON LOGO]
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<PAGE> 42
LOCATIONS
- ---------
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.
Adminstrative Office
4901 Rockaway Blvd., S.E.
Rio Rancho, NM 87124
Manufacturing Facilities:
Deming, NM
Rio Rancho, NM
CORPORATE OFFICES
SPARTON CORPORATION
2400 E. Ganson Street
Jackson, MI 49202
Phone: (517) 787-8600
Watts: (800) 248-9579
Fax: (517) 787-1822
WEB SITE:
http://www.sparton.com
COMMON STOCK LISTING:
New York Stock Exchange under the symbol SPA.
TRANSFER AGENT/REGISTRAR:
PRINCIPAL TRANSFER AGENT:
Illinois Stock Transfer Company
209 West Jackson Blvd., Suite 903
Chicago, IL 60606-6905
(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, 1999, filed with the Securities and Exchange Commission, will be
furnished without charge to any shareowner upon written request to Richard L.
Langley, Vice President-Treasurer, Sparton Corporation, 2400 E.
Ganson St., Jackson, MI 49202.
NOTICE OF ANNUAL MEETING:
The Annual Meeting of Sparton Corporation will be held at 10:00 a.m. on October
27, 1999, 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.
40
<PAGE> 1
EXHIBIT 22
SPARTON CORPORATION
The Registrant, Sparton Corporation, an Ohio Corporation, had the following
subsidiaries at June 30, 1999:
<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>
<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 27, 1999, included in the
1999 Annual Report to Shareowners of Sparton Corporation and subsidiaires.
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 27, 1999, 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, 1999.
/s/ ERNST & YOUNG LLP
Toledo, Ohio
September 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 3,996,205
<SECURITIES> 20,122,902
<RECEIVABLES> 17,516,376
<ALLOWANCES> 175,000
<INVENTORY> 40,201,131
<CURRENT-ASSETS> 86,243,559
<PP&E> 33,666,927
<DEPRECIATION> 21,343,220
<TOTAL-ASSETS> 108,167,482
<CURRENT-LIABILITIES> 17,664,584
<BONDS> 0
0
0
<COMMON> 9,785,113
<OTHER-SE> 77,736,785
<TOTAL-LIABILITY-AND-EQUITY> 108,167,482
<SALES> 131,900,489
<TOTAL-REVENUES> 131,900,489
<CGS> 112,092,367
<TOTAL-COSTS> 129,850,749
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 416
<INCOME-PRETAX> 3,577,081
<INCOME-TAX> 1,818,000
<INCOME-CONTINUING> 1,759,081
<DISCONTINUED> (2,520,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (760,919)
<EPS-BASIC> (.10)
<EPS-DILUTED> (.10)
</TABLE>
