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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from _______________ to _______________
Commission File Number 1-1000
SPARTON CORPORATION
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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 31, 1998 was $28,995,000.
The number of shares of common stock outstanding as of August 31, 1998 were
7,828,090.
Documents incorporated in part by reference:
Parts II and IV - Portions of the 1998 Annual Report to
Shareowners of Sparton Corporation
("Annual Report") are filed as Exhibit 13
herewith.
Part III - Proxy Statement for October 28, 1998 Meeting
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PART I
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Item 1. 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 16 and are filed as part of
Exhibit 13. At its' meeting on August 28, 1998 the Board of Directors approved
the closing of the final automotive operation and an orderly liquidation of its'
assets. Accordingly, the liquidation process has now commenced. A description of
the major products and various information on sales of the Company's continuing
operations, electronics, are included in the Annual Report in Note 1, Statement
of Significant Accounting Policies, and in Note 11, Sales Concentration, of the
Notes to Consolidated Financial Statements on Pages 13 and 17, respectively. and
are filed as part of Exhibit 13. Additional information about this line of
business is as follows.
Electronics
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Historically, the principal product of the electronics segment has been
sonobuoys, which are anti-submarine warfare (ASW) devices used by the U.S. Navy
and other free world military organizations. It competes with a limited number
of qualified manufacturers for sonobuoy procurements by the U.S. and selected
foreign governments. Contracts are obtained through competitive bid or directed
procurement. Sales of sonobuoys have declined substantially from the levels of
the early 1990's, but have stabilized in recent years at these reduced levels.
The Company is focusing its resources on substantially expanding
revenues in commercial areas, particularly in Electronic Contract Manufacturing
(ECM). This is the area the Company expects future revenue growth to occur. Many
of the physical and technical attributes used in the production of sonobuoys
are required
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in the production of these commercial products. The Company's ECM business
includes designs and/or manufacture of a variety of electronic and
electromechanical products for the telecommunications, electronics and other
industries. Sales are generally obtained on a competitive basis. Competitive
factors include technical ability, customer service, product quality and price.
A majority of the proprietary products, principally transducers and condition
monitoring systems, are sold to the telecommunications industry worldwide.
Commercial electronics products are distributed through a direct sales force and
through a small group of manufacturers' representatives. The primary industries
of the Company's ECM business include telecommunications, medical and industrial
controls and scientific instrumentation. In the ECM business Sparton must
compete with a number of domestic and foreign manufacturers, some of which are
much larger in terms of size and in financial resources. Within the ECM
business, the Company contracts with its customers to manufacture products based
on the customer's design, specifications and shipping schedules. Generally, ECM
programs do not require the Company's direct involvement in product marketing.
Material cost and availability and product quality, delivery and reliability are
very important factors in the ECM business. In general, margins within the ECM
operations are lower than those obtained in the Company's ASW or proprietary
electronics areas, primarily due to intense competition and the higher purchased
parts component of the products shipped.
At June 30, 1998 and June 30, 1997, the aggregate backlog from
continuing operations was approximately $102 million and $106 million,
respectively. A majority of the 1998 backlog is expected to be realized in 1999.
The Company's sales of sonobuoys, principally to the U.S. Navy, have
declined dramatically from the levels of the early 1990's. It is expected that
both the domestic and international demand for production sonobuoys will
continue at these reduced levels for the foreseeable future. In anticipation of
this decline, the Company has chosen to develop commercial electronics
opportunities which will utilize its existing technological and manufacturing
capabilities, largely in the North American ECM markets. The Company's
experience indicates that significant commercial electronics opportunities
exist. As with any change of this magnitude, unanticipated problems can be
reasonably expected to occur. Investors should be aware of this uncertainty and
make their own independent evaluation.
Automotive and Industrial Products
- ----------------------------------
As previously discussed, the Company formalized its plan in August 1996
to sell the automotive and industrial products segment and accordingly, these
operations have been reported as discontinued operations.
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Other Information
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Sparton's principal sales are currently concentrated with a relatively
limited number of customers and the loss of any one of them could have an
adverse material financial effect. The Company continues to grow its' ECM sales
with the intent to expand the customer base, thus reducing this concentration.
Materials for the electronics operations are obtained from a variety of
worldwide sources, except for selected components. Access to competitively
priced materials is critical to success in the ECM business. In certain markets,
the volume purchasing power of the larger competitors creates a substantial
cost advantage for them. While Sparton holds a number of patents relating to
its' products and processes, none are considered of material importance. The
Company has not encountered and does not expect to encounter significant
long-term problems in obtaining sufficient raw materials although the commercial
electronics industry has experienced occasional spot shortages or delivery
delays of key components. The risk of materials obsolescence in the ECM business
is less than normal because raw materials and component parts are generally not
purchased until actually needed. While overall sales fluctuate during the year,
such fluctuations do not reflect a definitive seasonal pattern or tendency.
Research and development expenditures amounted to approximately
$10,512,000 in 1998, $17,225,000 in 1997 and $17,254,000 in 1996 (approximately
$9,462,000, $16,238,000, and $15,845,000 of these expenditures, respectively,
were customer funded). There are approximately 75 employees involved in research
and development activities. Few, if any, devote all of their time to such
efforts. In addition, many of those involved in research and development do not
have an engineering or other technical background.
Sparton employed approximately 1,400 people at June 30, 1998. The
Company has one operating division and four wholly-owned active subsidiaries
classified as continuing operations and one wholly-owned active subsidiary
within the remaining portion of discontinued operations.
Item 2. Properties
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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 only one eight 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
The Company leased the, Deming, New Mexico facility under terms of a
capital lease and exercised its option to purchase thc facility at the end of
the lease term, which expired on July 1, 1997. The Company's Coors Road,
Albuquerque, New Mexico facility is not being fully utilized and is available
for sale. Currently, a portion of the facility is leased to another
organization.
In November 1996, the Company closed its' Lake Odessa, Michigan
automotive production facility as part of the plan to exit the automotive
business. This property was sold in April 1997 for $475,000 under an installment
contract expiring in 2002.
As a condition of the December 1996 sale of approximately 80% of the
discontinued automotive operations, the Company purchased, for $675,600, the
Grand Haven and White Cloud, Michigan production facilities that were owned by
Mr. and Mrs. John J. Smith (Mr. Smith is the Company's CEO and a director) and
Lawson K. Smith (an officer and director of the Company). These facilities were
leased to the purchaser of the discontinued automotive operations (the
Purchaser) under a five (5) year term with an aggregate annual rental of
$135,000. The Leases grant the Purchaser the option of purchasing for $50,000
both (but not less than both) facilities at the end of the original term of the
Leases. As part of the December 1996 sale, the Board reviewed, considered and
approved the purchase of this real estate by the Company.
Item 3. Legal Proceedings
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One of Sparton's facilities, located in New Mexico, has been the subject of
ongoing investigations conducted with the EPA under the Resource Conservation
and Recovery Act ("RCRA"). This EPA compliance issue is related to continuing
operations, but involves a largely idled facility. The investigation began in
the early 1980's
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and involved a review of on-site and off-site environmental impacts. In 1988, an
administrative order on consent ("AOC") was executed with EPA related to further
investigation and proposing a means of dealing with quantified impacts.
The remedial investigation called for in the AOC has been completed and
approved. In May 1996, Sparton submitted to the EPA a final corrective measure
study, based on the results of its investigations, as required in the AOC. In
June 1996, the EPA issued its final decision selecting a corrective action at
the site. The EPA estimated that the present value cost of its remedies would
range from between $15,000,000 and $26,400,000 based on a thirty (30) year time
frame. In Sparton's judgment, the remedies proposed by the EPA are either
unnecessary or technically impracticable. Sparton vigorously challenged the
EPA's remedy selection and filed suit in federal district court in Dallas
asserting that the EPA's decision on remedy selection violated the AOC.
In September 1996, the EPA issued an initial administrative order under RCRA
ordering Sparton to undertake additional testing to justify implementing the
remedy selected by the agency in June 1996, and then implementing that remedy.
Sparton vigorously contested that order administratively, but on February 10,
1998, EPA issued a final administrative order that in all material respects
followed the initial administrative order issued in September 1996. Sparton has
refused to implement those portions of that order that it believes are
unjustified.
In February 1997, three lawsuits were filed against Sparton in federal district
court in Albuquerque, one by the United States on behalf of the EPA, the second
by the State of New Mexico and the third by the City of Albuquerque and the
County of Bernalillo. All three actions allege that the impacts to soil and
groundwater associated with Sparton's Coors Road facility present an imminent
and substantial threat to human health or the environment. Through these
lawsuits, the plaintiffs seek to compel Sparton to undertake additional testing
and to implement the same remedy selected by the EPA in June of 1996 now
incorporated in the Final Administrative Order, and referred to above. In March
1997, the plaintiffs in these three lawsuits filed a motion for preliminary
injunction and in July of 1997, the action in Dallas was transferred to federal
district court in Albuquerque and consolidated with the three lawsuits filed in
February 1997.
A pretrial schedule has been established for the consolidated actions, but no
trial date set. Limited discovery, involving interrogatories and requests for
production, has been undertaken by the plaintiffs. The plaintiffs have sought to
amend their lawsuit to compel Sparton to implement the Final Administrative
Order, and seeking civil
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penalties for alleged noncompliance. Sparton has opposed this request and no
decision has been made by the court on the plaintiffs' request to amend.
In March 1998, a hearing was held on the plaintiffs' request for a preliminary
injunction. After two days of testimony, the federal district judge indicated
he had tentatively concluded he might issue a preliminary injunction. The
parties subsequently entered into settlement discussions that culminated in an
agreed workplan for the installation of certain off-site monitoring,
observation, and containment wells, in exchange for plaintiffs withdrawing their
request for a preliminary injunction. An order withdrawing that request and
approving this off-site workplan was signed on July 7, 1998. This is one of
several workplans being negotiated.
At the current time, all litigation has been stayed to allow the parties to
continue settlement discussions. The most recent stay will expire on October 23,
1998.
Uncertainties associated with environmental remediation contingencies are
pervasive and often result in wide ranges of reasonably possible estimates.
Estimates developed in the early stages of remediation can vary significantly.
Normally, a finite estimate of cost does not become fixed and determinable at a
specific point in time. Rather, the costs associated with environmental
remediation become estimable over a continuum of events and activities that
help to frame and define a liability. To date, Sparton has incurred costs of
approximately $7,914,000 since environmental impacts were first identified in
the early 1980's. $3,000,000 of this amount has been recovered from insurance
companies. For the fiscal years ended June 30, 1998, 1997 and 1996, Sparton
incurred costs of $1,014,000, $935,000, and $247,000 with legal and defense
costs included of $548,000, $379,000, and $53,000, respectively. In addition,
total amounts expensed for 1998, 1997 and 1996 were $1,821,000, $1,457,000,
and $307,000 respectively.
At June 30, 1998, Sparton has accrued $1,828,000 as its' estimate of the future
undiscounted minimum obligation with respect to this matter. This reflects the
minimum range of the amount Sparton expects to incur over the next five years.
This amount includes equipment and operating and maintenance costs. In many
cases, new technologies become available over time, which result in modified
costs for environmental remediation. The Company's estimate of cost is based on
the existing methodology and excludes legal and related consulting costs. The
estimate includes the minimum range of activity expected to occur in the next
five years including onsite and offsite pump and treat containment systems, a
soil vapor extraction program and continued onsite/offsite monitoring. Beyond
five years, while additional expenditures are probable, Sparton does not believe
such expenditures are reasonably estimable based on available information.
Factors causing the
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uncertainty include, but are not limited to, effectiveness of the currently
proposed programs to achieve targeted results and decisions made by regulating
agencies regarding future proposals and reports of Sparton. Sparton routinely
refines and revises the estimate of its' environmental efforts as additional
information becomes available.
It is reasonably possible that Sparton's recorded estimate of this liability may
change. If a remedy is imposed on Sparton other than the one it has proposed,
the ultimate cleanup costs could increase significantly. There is no assurance
that additional costs greater than the amount accrued will not be incurred or
that changes in environmental laws or their interpretation will not require that
additional amounts be spent. At this time, it is not possible to estimate the
ultimate cost to resolve this matter.
Item 4. Submission of Matters to a Vote of Security Holders
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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.
OFFICERS OF THE REGISTRANT
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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
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John J. Smith, Chairman of the Board, Chief Executive Officer and Director 86
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David W. Hockenbrocht, President, Chief Operating Officer and Director 63
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Lawson K. Smith, Vice President and Secretary 83
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Richard L. Langley, Vice President-Treasurer and Assistant Secretary 53
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R. Jan Appel, Vice President, General Counsel and Assistant Secretary 52
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Richard D. Mico, Vice President and General Manager of Sparton Technology, Inc. 68
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Douglas E. Johnson, Vice President and General Manager of Sparton 50
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Electronics since July 1995. Prior to that date, Mr. Johnson was the
Assistant General Manager of Sparton Electronics.
W. David Weind, Vice President and General Manager of Sparton of 51
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Canada, Ltd. since June 1996. Prior to that date, Mr. Weind
was employed as President of GSW Construction Products.
John J. Smith and Lawson K. Smith are brothers. There are no other
family relationships between the persons named above. All officers are elected
annually and serve at the discretion of the Board of Directors.
PART II
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Item 5. Market for the Registrant's Common Equity and Related Stockholder
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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, 1998, is included under
"Financial Highlights" on page 1 of the Annual Report and is included in Exhibit
13 filed herewith.
Item 6. Selected Financial Data
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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
---------------------
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 19-22 of Exhibit 13 filed hereunder is
incorporated herein by reference.
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Item 7(a). Qualitative and Quantitative Disclosures About Market Risk
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"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Market Risk Exposure" on page 21 of Exhibit 13 filed
hereunder is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
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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
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None.
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 4.
Item 11. Executive Compensation
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Information concerning executive compensation is included under
"Compensation of Executive Officers" in the Proxy Statement and is incorporated
herein by reference.
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Item 12. Security Ownership of Certain Beneficial Owners and Management
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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
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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.
Page Reference
Annual Report
to Shareowners
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Data from the 1998 Annual Report to
Shareowners of Sparton Corporation:
Consolidated balance sheets at June 30, 1998 and 1997 8 - 9
For the years ended June 30, 1998, 1997, and 1996:
Consolidated statements of operations 10
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12
Consolidated statements of cash flows 11
Consolidated statements of shareowners equity 12
Notes to consolidated financial statements 13 - 17
Report of Independent Auditors 12
Financial Statement Schedules
All prescribed schedules have been omitted since the required
information is not present or is not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial
statements or the notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed for the three
months ended June 30, 1998.
(c) Exhibits
See Exhibit Index on page 15
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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 28, 1998 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
By /s/ John J. Smith August 28, 1998
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John J. Smith, Chairman of the Board
of Directors and Chief Executive Officer
By /s/ David W. Hockenbrocht August 28, 1998
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David W. Hockenbrocht, President,
Chief Operating Officer and Director
By /s/ James N. DeBoer August 28, 1998
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James N. DeBoer, Director
By /s/ Robert J. Kirk August 28, 1998
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Robert J. Kirk, Director
By /s/ (Signature not obtained) August 28, 1998
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William Noecker, Director
By /s/ Rory B. Riggs August 28, 1998
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Rory B. Riggs, Director
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By /s/ David B. Schoon August 28, 1998
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David B. Schoon, Director
By /s/ W. Peter Slusser August 28, 1998
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W. Peter Slusser, Director
By /s/ (Signature not obtain) August 28, 1998
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Bradley Smith, 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 Amendment and extension of the employment agreement between the
Registrant and John J. Smith is filed herewith and attached. The
employment agreement with John J. Smith was filed with Form 10-Q
for the quarter ended September 30, 1994 and is incorporated
herein by reference.
13 Portions of the 1998 Annual Report to Shareowners (filed herewith
and attached).
22 Subsidiaries (filed herewith and attached).
23 Consent of independent auditors (filed herewith and attached).
27 Financial data schedule, submitted to the Securities and Exchange
Commission for its information.
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