<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 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
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2400 East Ganson Street
Jackson, Michigan 49202
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(517)787-8600
----------------------------------------------------
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $1.25 Par Value - 7,828,090 shares as of October 31, 1999.
<PAGE> 2
INDEX
SPARTON CORPORATION AND SUBSIDIARIES
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet - September 30 and June 30, 1999 3
Condensed Consolidated Statement of Operations - Three-Month Periods ended
September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows - Three-Month Periods ended
September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
</TABLE>
<PAGE> 3
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet (Unaudited)
September 30 and June 30, 1999
<TABLE>
<CAPTION>
September 30 June 30
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ASSETS (NOTE 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,323,645 $ 4,165,758
Investment securities 12,982,517 20,122,902
Income taxes recoverable 594,616 622,083
Accounts receivable 20,626,238 17,341,376
Inventories and costs on contracts in progress, less progress payments of
$1,604,000 at September 30 ($1,026,000 at June 30) 45,860,041 40,201,131
Prepaid expenses 3,512,108 3,959,862
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Total current assets 87,899,165 86,413,112
Other assets 9,188,409 9,600,216
Property, plant and equipment - net 12,197,465 12,323,707
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Total assets $ 109,285,039 $ 108,337,035
============= =============
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Accounts payable $ 7,997,323 $ 8,884,332
Salaries and wages 3,352,522 3,708,857
Accrued liabilities 7,377,628 5,240,948
------------- -------------
Total current liabilities 18,727,473 17,834,137
Deferred Income taxes 2,981,500 2,981,000
Shareowners' equity:
Common stock - 7,828,090 shares outstanding at September 30 and June 30 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) (93,000) (71,000)
Retained earnings 77,389,526 77,313,358
------------- -------------
Total shareowners' equity 87,576,066 87,521,898
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Total liabilities and shareowners' equity $ 109,285,039 $ 108,337,035
============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE> 4
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations (Unaudited)
For the Three-Month Periods ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Three-Month Periods
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 34,473,957 $ 32,449,428
Costs and expenses 35,022,265 32,707,810
------------ ------------
(548,308) (258,382)
Other income (expenses):
Interest and investment income 253,065 434,759
Other - net 416,411 (2,888)
------------ ------------
Income before income taxes 121,168 173,489
Provision for income taxes 45,000 64,000
------------ ------------
Net income $ 76,168 $ 109,489
============ ============
Basic and diluted earnings per share $ .01 $ .01
============ ============
Dividends $ -0- $ -0-
============ ============
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE> 5
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Three-Month Periods ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows (used) provided by operating activities:
Income from continuing operations $ 76,168 $ 109,489
Add noncash items affecting continuing operations:
Depreciation 536,940 534,621
----------- -----------
613,108 644,110
Add (deduct) changes in operating assets and liabilities:
Inventories (5,658,910) (1,847,877)
Accounts receivable (3,284,862) 5,143,094
Other 2,206,099 1,397,740
Accounts payable (887,009) (6,257,604)
Income taxes recoverable 27,467 --
Deferred taxes 500 --
Taxes on income -- (208,567)
----------- -----------
Net cash used by continuing operations (6,983,607) (1,129,104)
Cash flow provided by discontinued operations -- 909,033
----------- -----------
(6,983,607) (220,071)
----------- -----------
Cash flows (used) provided by investing activities:
Sales of investment securities-net 7,140,385 890,038
Noncurrent other assets 411,807 9,523
Purchases of property, plant and equipment-net (410,698) (950,403)
Discontinued operations, principally purchases of property, plant and equipment-net -- (109,560)
----------- -----------
7,141,494 (160,402)
----------- -----------
Increase (decrease) in cash and cash equivalents 157,887 (380,473)
Cash and cash equivalents at beginning of period 4,165,758 4,083,273
----------- -----------
Cash and cash equivalents at end of period $ 4,323,645 $ 3,702,800
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 23,000 $ 230,000
=========== ===========
Interest expense
$ -0- $ -0-
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE> 6
SPARTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying condensed consolidated balance sheet at September 30, 1999,
and the related condensed consolidated statements of operations for the
three-month periods ended September 30, 1999 and 1998 and cash flows for the
three-month periods ended September 30, 1999 and 1998 are unaudited, but include
all adjustments (consisting only of normal recurring accruals) which the Company
considers necessary for a fair presentation of such financial statements. The
results of operations for the period ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the full fiscal
year.
The June 30, 1999 balance sheet has been reclassified to conform to the
September 30, 1999 presentation. Amounts previously reported as discontinued
operations have been reclassified as continuing operations as they are no longer
deemed material.
2. 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.
3. Basic earnings per share were computed using the weighted average number of
shares outstanding. For the three-month periods, average shares outstanding were
7,828,090 in both 1999 and 1998. 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 29,165 in 1998. These differences in the weighted average
number of shares outstanding for the calculation of basic and diluted earnings
per share were not material and resulted in no differences between basic and
diluted earnings per share. Outstanding options to purchase 131,500 and 164,000
shares of common stock at $8.375 per share for the three months ended September
30, 1999 and 1998, respectively, and 32,000 shares at $6.625 for the three
months ended September 30, 1999, were not included in the computation of
diluted earnings per share because the options exercise price was greater than
the average market price of the common shares and therefore the effect would be
anti-dilutive.
4. 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 non-stockholder changes in equity on an annual
basis. Total non-stockholder 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 three-month periods September
30, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Three Months Ended
1999 1998
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<S> <C> <C>
Net income $ 76,200 $109,500
Other Comprehensive Income:
Unrealized gains (losses) on investment securities (22,000) 42,000
-------- --------
Comprehensive income $ 54,200 $151,500
======== ========
</TABLE>
Retained earnings includes accumulated other comprehensive income (loss) of
($93,000) and ($71,000) at September 30, 1999 and June 30, 1999, respectively,
which relates to unrealized gains (losses) on investments.
5. Cash and cash equivalents consist of demand deposits and other highly liquid
investments with an original maturity date of less than three months. A large
majority of the investment portfolio has an original maturity date of less than
two years and a daily market exists for all 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 and to otherwise fund the expansion of its
business.
6
<PAGE> 7
At September 30, 1999, the Company had net unrealized losses of $147,600. At
that date, the net after-tax effect of these losses was $93,000 and included in
equity. For the three months ended September 30, 1999 and 1998, the Company had
sales of investment securities totaling $7,149,000 and $890,000, respectively.
There were no purchases of investment securities in either period.
6. 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.
At September 30, 1999, Sparton has accrued $1,362,000 as its estimate of the
future undiscounted minimum financial liability with respect to this matter.
This reflects the Company's estimate of the minimum amount it will incur over
the next four years under its proposed workplans. The Company's cost estimate is
based upon existing technology and excludes legal and related consulting costs.
Remediation activities beyond the four year period will be dependent, in part,
upon the effectiveness of the workplans currently being negotiated but not fully
implemented. The Company's estimate includes equipment and operating costs for
on-site and off-site pump and treat containment systems, a soil vapor extraction
program and continued on-site and off-site monitoring and is based on existing
methodology. Legal costs and related consulting costs are expensed as incurred.
Uncertainties associated with environmental remediation contingencies are
pervasive and often result in wide ranges of reasonably possible outcomes.
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.
Factors which cause uncertainties for the Company include, but are not limited
to, the effectiveness of the current workplans in achieving targeted results and
proposals of regulatory agencies for desired methods and outcomes. If a remedy
is imposed on Sparton, other than the current workplans, the ultimate costs
could increase significantly. Sparton and the other litigants are continuing in
their attempt to reach a mutually acceptable agreement. It is possible that cash
flows and results of operations could be affected by the impact of the ultimate
resolution of this contingency.
Amounts charged to operations, principally legal and consulting, for the three
months ended September 30, 1999 and 1998 were $102,000 and $143,000,
respectively.
7. 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.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND 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.
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 and cost 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.
RESULTS OF OPERATIONS
- ---------------------
Sales for the three-month period ended September 30, 1999 were as expected and
totaled $34,474,000, an increase of $2,025,000 (6%) from last year. Government
sales increased 8% while EMS and other revenues increased 5%. Sales increased
$1,014,000 at Sparton Technology and $906,000 at Sparton of Canada for the
three-month period. Revenues at Sparton Electronics were essentially comparable
to the corresponding period last year.
An operating loss of $548,000 was reported for the three months ended September
30, 1999 compared to an operating loss of $258,000 last year. These results
include adverse capacity related variances of $868,000 ($799,000 in 1998). Also,
included were charges against income of $102,000 in 1999 and $143,000 in 1998
related to the New Mexico environmental remediation effort. Additionally, gross
margin for the three months ended September 30, 1999 was decreased by $606,000
due to revisions in estimated completion costs on certain governmental
contracts. Finally, gross margin was adversely impacted by start-up costs on
several new programs.
Interest and Investment Income declined $182,000 to $253,000 in 1999 due to
lower average investments and a decline in interest rates. Other Income-Net was
$416,000 in 1999 compared to Other Expense-Net of $3,000 for the corresponding
three-month period last year. Included within 1999 Other Income-Net was a gain
of $443,000 from the sale of equipment and other assets at the Canadian
operating unit.
The Company reported net income of $76,000 ($.01 per share) for the three months
ended September 30, 1999 compared to a net income of $109,000 ($.01 per share)
for the corresponding period last year.
FINANCIAL POSITION
- ------------------
For the three-month period ended September 30, 1999, Cash and Cash Equivalents
increased $158,000 to $4,324,000. Operating activities used $6,984,000 in net
cash flows. The principal source of cash flow from operating activities was an
increase in accrued liabilities. Principal uses of cash flows from operating
activities included reductions in accounts payable and increases in inventories
and accounts receivable. Inventory growth was in anticipation of increasing
sales in the next several quarters. Cash flows provided by investing activities
totaled $7,141,000, principally from the sale of investments. The Company will
continue to strategically invest in additional property, plant and equipment to
accommodate growth in the EMS business. No cash was used or provided by
financing activities.
8
<PAGE> 9
The continued receipt of interest and investment income, combined with a lack of
interest expense, should favorably impact the Company's operations. It is
uncertain, however, how long and to what extent this favorable nonoperating
income trend will continue. This trend is dependent upon how quickly the
Company's EMS business develops as well as the emergence of alternate uses for
these proceeds. The Company's market risk exposure to foreign currency exchange
and interest rates are not considered to be material due to principally short
term investments and minimal receivables and payables designated in foreign
currency.
At September 30, 1999 and June 30, 1999, the aggregate government EMS backlog
was approximately $64 million and $70 million, respectively. A majority of the
1999 backlog is expected to be realized in the next 12-15 months. Commercial EMS
sales are not included in the backlog. The Company does not believe the amount
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.
No dividends were declared in either period presented. At September 30, 1999,
the Company had $87,576,000 in recorded shareowners' equity ($11.19 per share),
$69,172,000 in working capital, and a 4.69:1.00 working capital ratio.
OTHER
- -----
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.
At September 30, 1999, Sparton has accrued $1,362,000 as its estimate of the
future undiscounted minimum financial liability with respect to this matter.
This reflects the Company's estimate of the minimum amount it will incur over
the next four years under its proposed workplans. The Company's cost estimate is
based upon existing technology and excludes legal and related consulting costs.
Remediation activities beyond the four year period will be dependent, in part,
upon the effectiveness of the workplans currently being negotiated but not fully
implemented. The Company's estimate includes equipment and operating costs for
on-site and off-site pump and treat containment systems, a soil vapor extraction
program and continued on-site and off-site monitoring and is based on existing
methodology. Legal costs and related consulting costs are expensed as incurred.
Uncertainties associated with environmental remediation contingencies are
pervasive and often result in wide ranges of reasonably possible outcomes.
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.
Factors which cause uncertainties for the Company include, but are not limited
to, the effectiveness of the current workplans in achieving targeted results and
proposals of regulatory agencies for desired methods and outcomes. If a remedy
is imposed on Sparton, other than the current workplans, the ultimate costs
could increase significantly. Sparton and the other litigants are continuing in
their attempt to reach a mutually acceptable agreement. It is possible that cash
flows and results of operations could be affected by the impact of the ultimate
resolution of this contingency.
Amounts charged to operations, principally legal and consulting, for the three
months ended September 30, 1999 and 1998 were $102,000 and $143,000,
respectively.
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.
9
<PAGE> 10
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
substantially completed 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 November 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 November 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 finalizing 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 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
10
<PAGE> 11
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.
11
<PAGE> 12
OTHER INFORMATION
PART II. OTHER INFORMATION
Item 1. 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,
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-year (30) 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 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-
12
<PAGE> 13
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 November 30, 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 September 30, 1999, Sparton has accrued $1,362,000 as its estimate of the
future undiscounted minimum financial liability with respect to this matter.
This reflects the Company's estimate of the minimum amount it will incur over
the next four years under its proposed workplans. The Company's cost estimate is
based upon existing technology and excludes legal and related consulting costs.
Remediation activities beyond the four year period will be dependent, in part,
upon the effectiveness of the workplans currently being negotiated but not fully
implemented. The Company's estimate includes equipment and operating costs for
on-site and off-site pump and treat containment systems, a soil vapor extraction
program and continued on-site and off-site monitoring and is based on existing
methodology. Legal costs and related consulting costs are expensed as incurred.
Uncertainties associated with environmental remediation contingencies are
pervasive and often result in wide ranges of reasonably possible outcomes.
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.
Factors which cause uncertainties for the Company include, but are not limited
to, the effectiveness of the current workplans in achieving targeted results and
proposals of regulatory agencies for desired methods and outcomes. If a remedy
is imposed on Sparton, other than the current workplans, the ultimate costs
could increase significantly. Sparton and the other litigants are continuing in
their attempt to reach a mutually acceptable agreement. It is possible that cash
flows and results of operations could be affected by the impact of the ultimate
resolution of this contingency.
Amounts charged to operations, principally legal and consulting, for the three
months ended September 30, 1999 and 1998 were $102,000 and $143,000,
respectively.
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.
13
<PAGE> 14
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.
14
<PAGE> 15
OTHER INFORMATION
PART II.
Item 6. Exhibits and Reports on Form 10-K and 10-Q
(a) Exhibits
3 & 4 Instruments defining the rights of security holders have been
previously filed as follows:
Articles of Incorporation of the Registrant were filed on form
10-K for the year ended June 30, 1981 and an amendment thereto was
filed on Form 10-Q for the three-month period ended December 31,
1983 and are incorporated herein by reference.
By-laws of the Registrant were filed on Form 10-K for the year
ended June 30, 1981 and are incorporated herein by reference.
Code of Regulation of the Registrant was filed on Form 10-K for
the year ended June 30, 1981 and an amendment thereto was filed on
Form 10-Q for the three-month period ended September 30, 1982 and
are incorporated herein by reference.
27 Submitted to the Securities and Exchange Commission for its
information.
(b) Reports on Form 8-K filed in the First Quarter of Fiscal 2000: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
<S> <C>
SPARTON CORPORATION
-------------------
Registrant
Date: November 12, 1999 /s/ John J. Smith
-------------------- -----------------
John J. Smith, Chairman of the Board of
Directors and Chief Executive Officer
Date: November 12, 1999 /s/ Richard Langley
-------------------- -----------------
Richard Langley, Vice President/Treasurer and
Principal Financial Officer
</TABLE>
15
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<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
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<SECURITIES> 12,982,517
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