<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 March 31, 2000.
---------------
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
------------------------------------------------------
(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 practical date.
Common Stock, $1.25 Par Value - 7,828,090 shares as of April 28, 2000.
<PAGE> 2
INDEX
SPARTON CORPORATION AND SUBSIDIARIES
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 2000 and June
30, 1999 3
Condensed Consolidated Statements of Operations - Three-Month
and Nine-Month Periods ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows - Nine-Month
Periods ended March 31, 2000 and 1999 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 11
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
<PAGE> 3
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 2000 and June 30,1999
<TABLE>
<CAPTION>
March 31 June 30
------------ ------------
(Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,028,555 $ 4,165,758
Investment securities 6,199,654 20,122,902
Income taxes recoverable 2,227,616 622,083
Accounts receivable 19,686,663 17,341,376
Inventories and costs on contracts in progress, less progress payments
of $7,839,782 at March 31 ($1,026,000 at June 30) 49,384,758 40,201,131
Prepaid expenses 3,529,444 3,959,862
------------ ------------
Total current assets 86,056,690 86,413,112
Deferred income taxes 450,364 -
Other assets 9,159,261 9,600,216
Property, plant and equipment - net 12,474,734 12,323,707
------------ ------------
Total assets $108,141,049 $108,337,035
============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Accounts payable $ 10,179,811 $ 8,884,332
Salaries and wages 3,975,154 3,708,857
Accrued liabilities 6,771,063 5,240,948
------------ ------------
Total current liabilities 20,926,028 17,834,137
Deferred income taxes - 2,981,000
Other liabilities 9,275,308 -
Shareowners' equity:
Common stock - 7,828,090 shares outstanding at March 31 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 losses (109,000) (71,000)
Retained earnings 67,769,173 77,313,358
------------ ------------
Total shareowners' equity 77,939,713 87,521,898
------------ ------------
Total liabilities and shareowners' equity $108,141,049 $108,337,035
============ ============
</TABLE>
SEE ACCOMPANYING NOTES
3
<PAGE> 4
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
For the Three-Month and Nine-Month Periods ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
Three-Month Periods Nine-Month Periods
-------------------------------- -----------------------------
2000 1999 2000 1999
------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 41,756,764 $ 26,981,204 $ 112,968,296 $ 98,405,090
Costs and expenses 45,208,848 28,397,490 129,091,981 98,474,041
------------- ------------- ------------- -------------
(3,452,084) (1,416,286) (16,123,685) (68,951)
Other income (expenses):
Interest and investments income 116,096 414,009 535,452 1,169,214
Interest expense - - - (416)
Other - net 10,273 (1,082) 438,048 (7,805)
------------- ------------- ------------- -------------
Income (loss) from continuing operations
before income taxes (3,325,715) (1,003,359) (15,150,185) 1,092,042
Provision (credit) for income taxes (1,231,000) (371,000) (5,606,000) 404,000
------------- ------------- ------------- -------------
Income (loss) from continuing operations (2,094,715) (632,359) (9,544,185) 688,042
Discontinued operations:
Loss from discontinued automotive
operations, net of applicable income tax
credit of $1,480,000 - (2,520,000) - (2,520,000)
------------- ------------- ------------- -------------
Net loss $ (2,094,715) $ (3,152,359) $ (9,544,185) $ (1,831,958)
============= ============= ============= =============
Basic and diluted earnings (loss) per share:
Continuing operations $(0.27) $(0.08) $(1.22) $ 0.09
Discontinued operations 0.00 (0.32) 0.00 (0.32)
------ ------ ------ ------
Net loss $(0.27) $(0.40) $(1.22) $(0.23)
====== ====== ====== ======
Dividends $ 0.00 $ 0.00 $ 0.00 $ 0.00
====== ====== ====== ======
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE> 5
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine-Month Periods ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash flows (used) provided by operating activities:
(Loss) income from continuing operations $ (9,544,185) $ 688,042
Add noncash items affecting continuing operations:
Environmental charge 10,000,000 -
Depreciation 1,640,514 1,586,126
Deferred income taxes (3,431,364) -
------------ ------------
(1,335,035) 2,274,168
Add (deduct) changes in operating assets and liabilities:
Accounts payable 1,295,479 (6,378,570)
Income taxes (1,605,533) (1,317,356)
Accounts receivable (2,345,287) 6,899,181
Inventories (9,183,627) (4,261,706)
Other changes 1,464,138 1,459,068
------------ ------------
Net cash used by continuing operations (11,709,865) (1,325,215)
Cash flow provided by discontinued operations - 1,391,574
------------ ------------
(11,709,865) 66,359
Cash flows (used) provided by investing activities:
Sales of investment securities-net 13,923,248 1,206,282
Noncurrent other assets 440,955 60,388
Purchases of property, plant and equipment-net (1,791,541) (1,519,665)
Discontinued operations - 1,862,661
------------ ------------
12,572,662 1,609,666
------------ ------------
Increase in cash and cash equivalents 862,797 1,676,025
Cash and cash equivalents at beginning of period 4,165,758 4,083,273
------------ ------------
Cash and cash equivalents at end of period $ 5,028,555 $ 5,759,298
============ ============
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the period
Income taxes paid (refunded) $(573,000) $239,000
========= ========
Interest expense $ - $ 400
========= ========
</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 March 31, 2000, and
the related condensed consolidated statements of operations for the three-month
and nine-month periods ended March 31, 2000 and 1999 and cash flows for the
nine-month periods ended March 31, 2000 and 1999 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 periods ended March 31, 2000, are not necessarily
indicative of the results that may be expected for the full fiscal year. The
Company operates in one segment, commercial and governmental electronics
manufacturing services.
The June 30, 1999, balance sheet has been reclassified to conform to the March
31, 2000, presentation. Amounts previously reported as discontinued operations
have been reclassified 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. Average shares outstanding for both the three-month and
nine-month periods were 7,828,090. 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, 31,870 shares in 1999, of employee
incentive stock options previously granted. 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 149,000 shares of common stock at $8.375 per share for the three months and
nine months ended March 31, 2000 and 1999, respectively; and 32,000 shares at
$6.625 for the three months ended March 31, 2000, 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. Comprehensive income includes net income, as well as unrealized gains and
losses, which are excluded from net income and reflected as a direct charge or
credit to stockholders' equity. A summary of comprehensive income for the
three-month and nine-month periods ending March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- --------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(2,094,715) $(3,152,359) $(9,544,185) $(1,831,958)
Other Comprehensive Income:
Unrealized gains (losses) on investment securities 4,200 (58,000) (38,000) (35,000)
----------- ----------- ----------- -----------
Comprehensive loss $(2,090,515) $(3,210,359) $(9,582,185) $(1,866,958)
=========== =========== =========== ===========
</TABLE>
Shareowners' equity includes accumulated other comprehensive losses of $109,000
and $71,000 at March 31, 2000, and June 30, 1999, respectively, which relate to
unrealized 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 March 31, 2000, the Company had net unrealized losses of $175,000. At that
date, the net after-tax effect of these losses was $109,000 and included in
equity. For the nine months ended March 31, 2000 and 1999, the Company had sales
of investment securities totaling $13,923,000 and $8,740,000, respectively.
There were no purchases of investment securities for the nine months ended March
31, 2000. Gross purchases of investment securities totaled $7,534,000 for the
same period last year.
6. One of Sparton's facilities, located in Albuquerque, New Mexico, has been the
subject of ongoing investigations conducted with the United States 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.
On January 18, 2000, a Consent Decree was lodged with the Federal District Court
in Albuquerque that resolved all disputes related to the Final Administrative
Order dated February 10, 1998. As a result of the execution of the Consent
Decree, the Company revised its estimate of the future minimum costs expected to
be incurred, as well as the time period involved. The change in estimate
resulted in a $10,000,000 pre-tax charge to operations in December 1999.
At March 31, 2000, Sparton has an accrual of $9,417,000 as its estimate of the
future undiscounted minimum financial liability for remediation. This balance is
after payment of $1,675,000, in March, 2000, to resolve claims for damages to
natural resources, civil penalties and costs, which were paid to various
governmental agencies as part of the final terms of the Consent Decree. Cash
expenditures for remediation activities are expected to be incurred over the
next thirty years. The accrual reflects the Company's estimate of the minimum
amount it will incur under the agreed upon work plans. The Company's cost
estimate is based upon existing technology and excludes legal and related
consulting costs. 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 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 work plans in achieving targeted results
and proposals of regulatory agencies for desired methods and outcomes. It is
possible that cash flows and results of operations could be affected by the
impact of the ultimate resolution of this contingency.
In addition to the $10,000,000 pre-tax charge described above, amounts charged
to operations, principally legal and consulting, for the nine months ended March
31, 2000 and 1999 were $560,000 and $1,199,000, respectively.
7. Deferred tax assets and liabilities are determined based on differences
between financial reporting and the tax bases of assets and liabilities. Accrued
environmental contingencies is a significant component of the Company's deferred
tax assets.
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 disclosure 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, timing and fluctuations in
U.S. and/or world economies and in customer demand for products, competition in
the overall 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 remediation. 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
NINE-MONTH PERIODS
Sales for the nine months ended March 31, 2000, were above the prior year at all
locations and totaled $112,968,000. While sales were up 15%, this volume was
lower than expected mainly due to slower than anticipated start ups on several
commercial programs at Sparton Technology and Sparton of Canada. Commercial and
governmental EMS sales increased 18% and 8%, respectively.
An operating loss of $16,124,000 was reported for the nine months ended March
31, 2000, compared to a loss of $69,000 for the same period last year. Included
were charges against income of $10,560,000 in 2000 and $1,199,000 in 1999
related to the New Mexico environmental remediation effort. The accrual for
future minimum costs reflects the remediation activities contained in the
Consent Decree executed and lodged with the Court in January 2000. At March 31,
2000, the accrual for such costs approximates $9,417,000, and covers minimum
anticipated remediation costs for the next thirty years. The operating results
for the nine months ended March 31, 2000, also, reflect a charge of $3,268,000
for revisions in estimated completion costs on several governmental sonobuoy
contracts. Finally, gross margins have continued to be adversely impacted by
start-up costs on a number of new programs.
Interest and Investment Income declined $634,000 to $535,000 in 2000 due to
lower average investments. Other Income-Net was $438,000 in 2000 compared to
Other Expense-Net of $8,000 for the corresponding nine-month period last year.
Included within fiscal 2000 Other Income-Net was a gain of $443,000 from the
sale of equipment and other assets at the Canadian operating unit.
In fiscal 1999, a pre-tax charge of $4,000,000 ($2,520,000 after-tax) was
recognized in the third quarter for discontinued operations. The net affect of
this charge on earnings per share was a loss of $(.32) per share for the
three-months and nine-months ended March 31, 1999.
The Company reported a net loss of $9,544,000 ($(1.22) per share) for the nine
months ended March 31, 2000, compared to $1,832,000 ($(0.23) per share) for the
corresponding period last year.
8
<PAGE> 9
THREE-MONTH PERIODS
Sales for the three months ended March 31, 2000, totaled $41,757,000, an
increase of $14,776,000 (55%) from last year. Government and commercial EMS
sales increased $6,583,000 and $8,193,000 respectively. Revenues at Sparton
Electronics increased $14,273,000, due in part to higher shipments of sonobuoys.
Revenues at Sparton Technology and Sparton of Canada were also above last year.
.
An operating loss of $3,452,000 was reported for the three months ended March
31, 2000, compared to a loss of $1,416,000 for the same period last year.
Current operating results include charges against income of $73,000 related to
the New Mexico environmental remediation effort, discussed previously, and
adverse capacity related variances of $1,200,000. In addition, the gross margin
for the three months ended March 31, 2000, declined $2,110,000 due to cost
increases in actual and anticipated costs to complete a major government
sonobuoy production program, and start-up costs on new commercial programs. The
cost increases on the government contract reflect difficulties encountered in
production and material cost issues. Production on this contract is now
scheduled for completion in June, 2000.
In the later part of the third quarter, the Company began to encounter material
availability and extended lead time issues on electronic components. Shortages
on some key electronic components has resulted in higher prices. This shortage
on some critical electronic components could impact the electronics industry,
and Sparton specifically, for the next one to two years. Availability of
material components could adversely affect the Company's ability to meet
customers' production schedules. In addition, the ability to recover increasing
material costs from customers will be a major factor in future operating
results.
Interest and Investment Income declined $298,000 to $116,000 in 2000 due to
lower average investments. Other Income-Net was $10,000 in 2000 compared to
Other Expense-Net of $1,000 for the corresponding three-month period last year.
The Company reported a net loss of $2,095,000 ($(.27) per share for the three
months ended March 31, 2000, compared to $3,152,000 ($(0.40) per share) for the
corresponding period last year.
FINANCIAL POSITION
For the nine-month period ended March 31, 2000, Cash and Cash Equivalents
increased $863,000 to $5,029,000. Operating activities used $11,710,000 in net
cash flows. Principal uses included increases in inventories and accounts
receivable. The growth in inventory was in anticipation of continued expanding
sales in the next several quarters. Cash flows provided by investing activities
totaled $12,573,000, 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.
The continued receipt of interest and investment income, combined with a lack of
interest expense, continues to 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. Investments have declined 46% in the nine-month period ending
March 31, 2000. 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 March 31, 2000, and June 30, 1999, the aggregate governmental EMS backlog
approximated $70 million and $67 million, respectively. A majority of the March
31, 2000, 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 purchase orders received 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 March 31, 2000, the
Company had $77,940,000 in recorded shareowners' equity ($9.96 per share),
$65,131,000 in working capital, and a 4.11:1.00 working capital ratio.
9
<PAGE> 10
OTHER
One of Sparton's facilities, located in Albuquerque, New Mexico, has been the
subject of ongoing investigations conducted with the United States 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.
On January 18, 2000, a Consent Decree was lodged with the Federal District Court
in Albuquerque that resolved all disputes related to the Final Administrative
Order dated February 10, 1998. As a result of the execution of the Consent
Decree, the Company revised its estimate of the future minimum costs expected to
be incurred, as well as the time period involved. The change in estimate
resulted in a $10,000,000 pre-tax charge to operations in December 1999.
At March 31, 2000, Sparton has an accrual of $9,417,000 as its estimate of the
future undiscounted minimum financial liability for remediation. This balance is
after payment of $1,675,000, in March, 2000, to resolve claims for damages to
natural resources, civil penalties and costs, which were paid to various
governmental agencies as part of the final terms of the Consent Decree. Cash
expenditures for remediation activities are expected to be incurred over the
next thirty years. The accrual reflects the Company's estimate of the minimum
amount it will incur under the agreed upon work plans. The Company's cost
estimate is based upon existing technology and excludes legal and related
consulting costs. 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 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 work plans in achieving targeted results
and proposals of regulatory agencies for desired methods and outcomes. It is
possible that cash flows and results of operations could be affected by the
impact of the ultimate resolution of this contingency.
In addition to the $10,000,000 pre-tax charge described above, amounts charged
to operations, principally legal and consulting, for the nine months ended March
31, 2000 and 1999 were $560,000 and $1,199,000, respectively.
IMPACT OF YEAR 2000
- -------------------
The Company did not anticipate, and has not incurred, any Year 2000 conversion
issues that materially affected operations or operating results. Sparton
believes the actions it took reduced the risks posed by Year 2000 challenges to
its own systems. Management recognizes, however, that unforeseen circumstances
could still 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 efforts. Further, management cannot determine
the impact that any such adverse circumstance might have on the Company's
operations, financial position or cash flows.
Sparton Electronics implemented a new business information system (MTMS) in the
summer of calendar 1997 to further enhance the Company's competitive position.
The timing of the decision to purchase and implement MTMS was independent of the
Year 2000 issue. As the majority of software and hardware was upgraded to
accommodate the implementation of MTMS, Year 2000 compliance expenditures were
minimal .
10
<PAGE> 11
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 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 (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.
In February 1997, three lawsuits were filed against Sparton's wholly owned
subsidiary, Sparton Technology, Inc., 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 alleged that the impacts to soil and groundwater associated
with Sparton Technology's Coors Road facility presented an imminent and
substantial threat to human health or the environment.
On March 3, 2000, a Consent Decree was entered, settling the lawsuits as well as
a related administrative enforcement action. The Consent Decree represents a
judicially enforceable settlement agreement under which Sparton Technology has
paid $1,000,000 to resolve claims for damages to natural resources, $475,000 to
resolve claims for civil penalties for alleged violations of state law and an
order entered in the related administrative enforcement action, and $200,000 for
reimbursement of the litigation costs of certain plaintiffs. The Consent Decree
also contains work plans describing remedial activity Sparton Technology agreed
to undertake. In exchange for the monetary payment and an agreement to implement
the work plans, Sparton Technology is receiving covenants not to sue that,
except in fairly extraordinary circumstances, prevent any further administrative
or judicial action by state and federal entities in connection with the impacts
to the environment associated with past activities at the Coors Road facility
that was the subject of the existing legal proceedings.
The work plans provide for the installation of an off-site containment well
(already completed and operating), enhancement to an on-site soil vapor
extraction system (in operation) and an on-site containment well. It is
anticipated that these remediation activities will operate for a period of time
during which Sparton Technology 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.
Upon entering into the Consent Decree, the Company reviewed its estimates of the
future costs expected to be incurred in connection with its remediation of the
environmental issues associated with its Coors Road Plant over the next 30
years. The Company increased its accrual for the cost of addressing
environmental impacts associated with its Coors Road Plant by $10,000,000,
pre-tax, in December 1999. At March 31, 2000, the estimated future undiscounted
minimum accrual for EPA remediation approximates $9,417,000. This balance is
after payment of the $1,675,000 in costs and damages, described above, payable
to the various plaintiff parties, which amount was paid in March, 2000. The
Company's estimate is based upon existing technology and current costs which
have not been discounted. The estimate includes equipment and operating and
maintenance costs for the on-site and off-site pump and treat containment
systems, a soil vapor extraction program and continued on-site and off-site
monitoring. It also includes the required periodic reporting requirements. This
estimate does not include legal and related consulting costs which are expensed
as incurred. The estimate does not reflect any offset or reduction for monies
recovered from various parties which the Company is currently pursuing as
described below.
In 1995 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. In 1999 the
Complaint was amended to add various other excess insurers, including certain
London market insurers and Fireman's Fund Insurance Company. The case is
currently in the discovery stage.
11
<PAGE> 12
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 Technology through its agreements with Sandia Corporation and
Allied Signal, Inc. On February 9, 1999, the Court of Federal Claims dismissed
Sparton Technology's complaint on the basis of a lack of jurisdiction concluding
that an agency relationship did not exist between Sandia Corporation and Allied
Signal, Inc. and the United States for purposes of reimbursing costs incurred
during litigation. Sparton Technology believed that the court erred in its
decision and filed its notice of appeal on April 9, 1999. On April 18, 2000, the
Federal Circuit reversed the lower court's decision and reinstated Sparton
Technology's claim for purposes of examining whether the Court of Federal Claims
does indeed have jurisdiction. Sparton Technology is now proceeding with
discovery on the jurisdiction related issues.
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 Sparton Technology to amend its
complaint to add Sandia Corporation and the DOE as defendants. Limited discovery
has been completed. In March 1999, the case was transferred to the United States
District Court in Albuquerque, NM. A scheduling order has not yet been entered.
At this time, the Company is unable to predict the amount or timing of recovery,
if any, that may result from the pursuit of these before-mentioned three claims.
12
<PAGE> 13
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 Third 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.
SPARTON CORPORATION
Registrant
Date: MAY 12, 2000 /s/ John J. Smith
-------------------------------------------
John J. Smith, Chairman of the Board of
Directors and Chief Executive Officer
Date: MAY 12, 2000 /s/ Richard Langley
-------------------------------------------
Richard Langley , Vice President/Treasurer
and Principal Financial Officer
13
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<PERIOD-START> JUL-31-1999
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