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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ______________ to ______________
Commission File Number 1-1000
SPARTON CORPORATION
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(Exact name of registrant as specified in its charter)
OHIO 38-1054690
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(State of Incorporation) (IRS Employer Identification No.)
2400 East Ganson Street, Jackson, Michigan 49202
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(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)
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in Part III of this Form 10-K or any amendment
to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of August 29, 1997 was $73,203,000.
The number of shares of common stock outstanding as of August 29, 1997 were
7,828,090.
Documents incorporated in part by reference:
Parts II and IV - Portions of the 1997 Annual Report to Shareowners
of Sparton Corporation ("Annual Report") are filed
as Exhibit 13 herewith.
Part III - Proxy Statement for October 22, 1997 Meeting
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PART I
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Item l. Business
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Except as otherwise indicated, the term "Company" refers to Sparton
Corporation, and the term "Sparton" refers to Sparton Corporation and its
consolidated subsidiaries.
The Company has been in continuous existence since 1900. It was last
reorganized in 1919 as an Ohio corporation. Sparton operates in one principal
line of business, electronics. In August 1996, the Company formalized its plan
to offer for sale its automotive and industrial products operations.
Accordingly, these operating results have been reclassified and reported as
discontinued operations. In December 1996, the Company sold approximately 80% of
these discontinued automotive operations. Details of this transaction are
included in the Annual Report in Note 8, Discontinued Operations, of the Notes
to the Consolidated Financial Statements on page 15 and are filed as part of
Exhibit 13. A buyer for the remaining portion is actively being pursued. A
description of the major products and various information on sales of the
Company's continuing operations, electronics, are included in the Annual Report
in Note 1, Statement of Significant Accounting Policies, and in Note 11, Sales
Concentration, of the Notes to Consolidated Financial Statements on Pages 13 and
17, respectively, and are filed as part of Exhibit 13. Additional information
about this line of business is as follows.
Electronics
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Historically, the electronics segment's principal product has been
sonobuoys, which are anti-submarine warfare (ASW) devices used by the U.S. Navy
and other free world military organizations. It competes with a limited number
of qualified manufacturers for sonobuoy procurements by the U.S. and selected
foreign governments. Contracts are obtained through competitive bid or directed
procurement. Sales of sonobuoys have declined substantially from the levels of
the early 1990's, but have stabilized in recent years at these reduced levels.
Within the electronics line of business, the Company also designs
and/or manufactures a variety of electronic and electromechanical products for
the telecommunications, electronics and other industries. Many of the physical
and technical attributes used in the production of sonobuoys are required in the
production of these commercial products. The Company is focusing its resources
on substantially expanding revenues in these commercial areas, particularly in
electronic contract manufacturing. Sales are generally obtained on a
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competitive basis. Competitive factors include technical ability, customer
service, product quality and price. A majority of the proprietary products,
principally transducers and condition monitoring systems, are sold to the
telecommunications industry worldwide. Commercial electronics products are
distributed through a direct sales force and through a small group of
manufacturers' representatives. The primary industries of the Company's
electronic contract manufacturing (ECM) business include telecommunications,
medical and industrial controls and scientific instrumentation. In the ECM
business, it must compete with a number of domestic and foreign manufacturers,
some of which are much larger in terms of size and in financial resources.
Within the ECM business, the Company contracts with its customers to manufacture
products based on the customer's design, specifications and shipping schedules.
Generally, ECM programs do not require the Company's direct involvement in
product marketing. Material cost and availability and product quality, delivery
and reliability are very important factors in the ECM business. In general,
margins within the ECM operations are lower than those obtained in the Company's
ASW or proprietary electronics areas, primarily due to intense competition and
the higher purchased parts component of the products shipped.
At June 30, 1997 and June 30, 1996, the aggregate backlog from
continuing operations was approximately $106 million and $107 million,
respectively. A majority of the 1997 backlog is expected to be realized in 1998.
The Company's sales of sonobuoys, principally to the U.S. Navy, have
declined dramatically from the levels of the early 1990's. It is expected that
both the domestic and international demand for production sonobuoys will
continue at these reduced and unpredictable levels for the foreseeable future.
In anticipation of this decline, the Company has chosen to develop commercial
electronics opportunities which will utilize its existing technological and
manufacturing capabilities, largely in the North American ECM markets. The
Company's experience indicates that significant commercial electronics
opportunities exist. As with any change of this magnitude, unanticipated
problems can be reasonably expected to occur. Investors should be aware of this
uncertainty and make their own independent evaluation.
Automotive and Industrial Products
- ----------------------------------
As previously discussed, the Company formalized its plan in August 1996
to sell the automotive and industrial products segment and accordingly, these
operations have been reported as discontinued operations.
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Other Information
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Sparton's principal sales are currently concentrated with a limited
number of customers and the loss of any one of them could have a material
adverse financial effect. Materials for the electronics operations are obtained
from a variety of worldwide sources, except for selected components. Access to
competitively priced materials is critical to success in the ECM business. In
certain markets, the volume purchasing power of the larger competitors creates a
substantial cost advantage for them. While Sparton holds a number of patents
relating to its products and processes, none are considered of material
importance. The Company has not encountered and does not expect to encounter
significant long-term problems in obtaining sufficient raw materials although
the commercial electronics industry has experienced occasional spot shortages or
delivery delays of key components. The risk of materials obsolescence in the ECM
business is less than normal because raw materials and component parts are
generally not purchased until actually needed. While overall sales fluctuate
during the year, such fluctuations do not reflect a definitive seasonal pattern
or tendency.
Research and development expenditures amounted to approximately
$17,225,000 in 1997, $17,254,000 in 1996 and $20,060,000 in 1995 (approximately
$16,238,000, $15,845,000 and $15,985,000 of these expenditures, respectively,
were customer funded). There are approximately 350 employees involved in
research and development activities. Few, if any, devote all of their time to
such efforts. In addition, many of those involved in research and development do
not have an engineering or other technical background.
Sparton employed approximately 1,600 people at June 30, 1997. The
Company has one operating division and four wholly-owned active subsidiaries
classified as continuing operations and one wholly-owned active subsidiary
within the remaining portion of discontinued operations.
Item 2. Properties
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The table that follows lists the principal properties of Sparton within
continuing operations. All are owned except as noted. There are manufacturing
and/or office facilities at each location. Sparton believes these facilities are
suitable for its operations, except as noted. Several of the facilities have
available physical space for additional production equipment as the demand
arises. In addition, at least two of the plants are currently underutilized,
operating on a one 8 hour shift. Such underutilization would decline as sales
volume increases.
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Jackson, Michigan
DeLeon Springs, Florida (2 plants)
Brooksville, Florida
London, Ontario
Albuquerque, New Mexico (see below)
Rio Rancho, New Mexico
Deming, New Mexico (lease/purchase, see below)
The Company leases the Deming, New Mexico facility under terms of a
capital lease and has exercised an option to purchase the facility at the end of
the lease term which expired on July 1, 1997. Future minimum payments under this
capital lease at June 30, 1997 are $75,000 in 1998. The Company's Coors Road,
Albuquerque, New Mexico facility is not being fully utilized and is offered for
sale.
In November 1996, the Company closed its Lake Odessa, Michigan
automotive production facility as part of the plan to exit the automotive
business. This property was sold in April 1997 for $475,000 under an installment
contract expiring in 2002.
As a condition of the December 1996 sale of approximately 80% of the
discontinued automotive operations, the Company purchased, for $675,600, the
Grand Haven and White Cloud, Michigan production facilities that were owned by
Mr. and Mrs. John J. Smith (Mr. Smith is the Company's CEO and a director) and
Lawson K. Smith (an officer and director of the Company). These facilities were
leased to the purchaser of the discontinued automotive operations (the
Purchaser) under a five (5) year term with an aggregate annual rental of
$135,000. The Leases grant the Purchaser the option of purchasing for $50,000
both (but not less than both) facilities at the end of the original term of the
Leases. As part of the December 1996 sale, the Board reviewed, considered and
approved the purchase of this real estate by the Company.
Item 3. Legal Proceedings
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Various litigation is pending against the Company, in many cases
involving ordinary and routine claims incidental to the business of the Company
and in others presenting allegations that are non-routine. The Company and its
subsidiaries are also involved in certain compliance issues with the United
States Environmental Protection Agency (EPA) and various state agencies,
including being named as a potentially responsible party at several sites.
Potentially responsible parties can be held jointly and severally liable for the
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cleanup costs at any specific site. The Company's past experience, however, has
indicated that when it has contributed only de minimis amounts of material or
waste to a specific site, its ultimate share of any cleanup costs has been very
small. Based upon available information, and subject to the exception noted
below, the Company believes it has contributed only de minimis amounts to those
sites in which it is currently viewed a potentially responsible party.
One of Sparton's facilities located in New Mexico has been the subject
of ongoing investigations conducted with the EPA under the Resource Conservation
and Recovery Act (RCRA). This EPA compliance issue is related to continuing
operations, but involves a now largely idle facility. To date, this work has
involved, among other things, on-site and off-site investigations of
environmental impacts, negotiation and execution of an Administrative Order on
Consent (AOC) with the EPA and the installation of some on-site groundwater
recovery wells and air stripping equipment. A remedial investigation called for
in the AOC has been completed and approved. In May 1996, Sparton submitted to
the EPA a final Corrective Measures Study, based upon the results of its
investigation, as required in the AOC. In June 1996, the EPA issued its final
decision selecting remedies for corrective action at the site. The EPA estimated
that the present value cost of its remedies would range from between $15,000,000
and $26,400,000 based on a 30-year time frame. In Sparton's judgment, the
remedies proposed by the EPA are either unnecessary or technically impractical.
Sparton is vigorously challenging the EPA's remedy selection and filed suit in
Federal District Court in Dallas asserting that the EPA's decision on remedy
selection violates the AOC. In September 1996, the EPA issued an Initial
Administrative Order under RCRA ordering Sparton to undertake additional testing
to justify implementing the remedy selected by the Agency in June 1996, and then
implement that remedy. Sparton is vigorously contesting this action both
judicially and administratively, and does not believe that the EPA has the
authority to issue such an order.
In February 1997, three lawsuits were filed against Sparton in Federal
District Court in Albuquerque, one by the United States on behalf of the EPA,
the second by the State of New Mexico, and the third by the City of Albuquerque
and the County of Bernalillo. All three actions allege that the impacts to soil
and groundwater associated with Sparton's now idled facility present an imminent
and substantial threat to human health or the environment. Through these
lawsuits the plaintiffs seek to compel Sparton to undertake additional testing
and to implement the same remedy selected by the EPA in June of 1996, referred
to above. Sparton is vigorously contesting these actions on procedural and
substantive grounds. In March 1997, the plaintiffs in these three lawsuits filed
a motion for preliminary injunction, which if granted, would require Sparton to
install additional monitoring wells and conduct acquifer testing at an estimated
cost of $550,000. Sparton is opposing this motion.
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In July 1997 Sparton's action in Dallas was transferred to Federal District
Court in Albuquerque and consolidated with the three lawsuits filed in February
1997.
Sparton continues to seek regulatory acceptance of alternative remedies
that it believes should adequately protect human health and the environment, but
with costs in the first three to five years of operations ranging from $815,000
to $1,120,000. Acceptance of such a remedy, either by the plaintiffs or the
courts, is uncertain. To date, Sparton has incurred approximately $6,900,000
since this contamination problem was first identified in the early 1980's.
$3,000,000 of this amount has been recovered from insurance companies. A reserve
was initiated in 1991 to cover the then estimated future minimum operating
costs. In 1997 and 1996, Sparton incurred costs of $935,000 and $247,000,
respectively, principally related to legal and other defense costs. At June 30,
1997, the reserve to cover future minimum operating costs totaled $967,000. If a
remedy is imposed on Sparton, other than the one it has proposed, the ultimate
cleanup costs may significantly increase. There is no assurance that additional
costs greater than the amount reserved will not be incurred or that significant
changes in environmental laws or their interpretation will not require that
additional amounts be spent. At this time, it is not possible to estimate the
ultimate cost to resolve this matter.
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Item 4. Submission of Matters to a Vote of Security Holders
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No matters were submitted to a vote of the security holders during the
last quarter of the period covered by this report.
Executive Officers
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Information with respect to executive officers of the Registrant is set
forth below. The positions noted have been held for at least five years, except
where noted.
Age
---
JOHN J. SMITH, Chairman of the Board, Chief Executive Officer 85
and Director
DAVID W. HOCKENBROCHT, President, Chief Operating Officer 62
and Director
LAWSON K. SMITH, Vice President, Secretary and Director 82
RICHARD L. LANGLEY, Vice President-Treasurer and Assistant Secretary 52
R. JAN APPEL, Vice President, General Counsel and Assistant Secretary 51
RICHARD D. MICO, Vice President and General Manager of 67
Sparton Technology, Inc.
DOUGLAS E. JOHNSON, Vice President and General Manager of Sparton 49
Electronics since July 1995. Prior to that date,
Mr. Johnson was the Assistant General Manager of Sparton
Electronics.
W. DAVID WEIND, Vice President and General Manager of Sparton of 50
Canada, Ltd. since June 1996. Prior to that date,
Mr. Weind was employed as President of GSW Construction
Products.
JOSEPH S. LERCZAK, Assistant Treasurer 40
John J. Smith and Lawson K. Smith are brothers. There are no other
family relationships between the persons named above. All officers are elected
annually and serve at the discretion of the Board of Directors.
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PART II
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Item 5. Market for the Registrant's Common Stock and Related Security Holder
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Matters
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Information with respect to the market for the Company's stock,
including stock prices, stock exchange and number of shareowners, and quarterly
dividends for the two year period ended June 30, 1997, is included under
"Financial Highlights" on page 1 of the Annual Report and is included in Exhibit
13 filed herewith.
Item 6. Selected Financial Data
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The "Selected Financial Data" on page 18 of Exhibit 13 filed hereunder
is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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"Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 19-21 of Exhibit 13 filed hereunder is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
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The consolidated financial statements of Sparton Corporation and
Subsidiaries and "Report of Independent Auditors" are included on pages 8-17 and
12, respectively, in Exhibit 13 filed hereunder and are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
None.
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PART III
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Item 10. Directors and Executive Officers of the Registrant
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Information with respect to directors is included in the Proxy
Statement under "Election of Directors" and is incorporated herein by reference.
Information concerning the executive officers is included in Part I on page 7.
Item 11. Executive Compensation
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Information concerning executive compensation is included under
"Compensation of Executive Officers and Directors" in the Proxy Statement and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
Information on management and certain other beneficial ownership of the
Company's common stock is included under "Outstanding Shares and Voting" in the
Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
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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
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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(a) The following financial statements are filed as part of this
report on Form 10-K: The following Consolidated Financial Statements of Sparton
Corporation and Subsidiaries and Report of Independent Auditors, included on
Pages 8-17 and 12, respectively, of Exhibit 13 filed hereunder are incorporated
by reference in Item 8.
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Page Reference
Annual Report
to Shareowners
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Data from the 1997 Annual Report to
Shareowners of Sparton Corporation:
Consolidated balance sheets at June 30, 1997 and 1996 8 - 9
For the years ended June 30, 1997, 1996, and 1995:
Consolidated statements of operations 10
Consolidated statements of cash flows 11
Consolidated statements of shareowners' equity 12
Notes to consolidated financial statements 13 - 17
Report of Independent Auditors 12
Financial Statement Schedules
All prescribed schedules have been omitted since the
required information is not present or is not present in
amounts sufficient to require submission of the schedule,
or because the information required is included in the
consolidated financial statements or the notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed for the three
months ended June 30, 1997.
(c) Exhibits
See Exhibit Index on page 13
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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
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Date: September 26, 1997 By /s/ Richard L. Langley
---------------------------------------------
Richard L. Langley, Vice President-Treasurer
(Principal Accounting and Financial Officer)
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature and Title Date
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By /s/ John J. Smith August 22, 1997
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John J. Smith, Chairman of the Board
of Directors and Chief Executive Officer
By /s/ David W. Hockenbrocht August 22, 1997
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David W. Hockenbrocht, President,
Chief Operating Officer and Director
By /s/ Lawson K. Smith August 22, 1997
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Lawson K. Smith, Vice President, Secretary
and Director
By /s/ James N. DeBoer August 22, 1997
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James N. DeBoer, Director
By /s/ Robert J. Kirk August 22, 1997
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Robert J. Kirk, Director
By /s/ Marshall V. Noecker August 22, 1997
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Marshall V. Noecker, Director
By /s/ Rory B. Riggs August 22, 1997
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Rory B. Riggs, Director
By /s/ David B. Schoon August 22, 1997
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David B Schoon, Director
By /s/ Blair H. Thompson August 22, 1997
- ---------------------------------------------------------
Blair H. Thompson, Director
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Exhibit Index
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3 and 4 Articles of Incorporation of the Registrant were filed with
Form 10-K for the year ended June 30, 1981 and an amendment thereto
was filed with Form 10-Q for the three-month period ended September
30, 1983, and are incorporated herein by reference.
By-laws of the Registrant were filed with Form 10-K for the year
ended June 30, 1981, and are incorporated herein by reference.
Code of Regulations of the Registrant were filed with Form 10-K for
the year ended June 30, 1981 and an amendment thereto was filed with
Form 10-Q for the three-month period ended September 30, 1982, and
are incorporated herein by reference.
10 The employment agreement with John J. Smith was filed with Form 10-K
for the year ended June 30, 1981 and subsequent amendments thereto
were filed with Form 10-Q for the three- month period ended
September 30, 1988, with Form 10-Q for the three-month period ended
September 30, 1991 and with Form 10-Q for the three-month period
ended September 30, 1994 and are incorporated herein by reference.
13 Portions of the 1997 Annual Report to Shareowners (filed herewith
and attached).
22 Subsidiaries (filed herewith and attached).
23 Consent of independent auditors (filed herewith and attached).
27 Financial data schedule, submitted to the Securities and Exchange
Commission for its information.
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