<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 December 31, 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
------------------------------------------------------
(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 January 31, 2000.
<PAGE> 2
INDEX
SPARTON CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet - December 31 and June 30, 1999 3
Condensed Consolidated Statement of Operations - Three-Month and Six-Month
Periods ended December 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows - Six-Month Periods ended
December 31, 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 11
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
</TABLE>
<PAGE> 3
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet (Unaudited)
December 31 and June 30, 1999
<TABLE>
<CAPTION>
December 31 June 30
------------- -------------
(NOTE 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,659,166 $ 4,165,758
Investment securities 8,878,918 20,122,902
Income taxes recoverable 961,840 622,083
Accounts receivable 23,085,723 17,341,376
Inventories and costs on contracts in progress, less progress payments of
$6,436,038 at December 31 ($1,026,000 at June 30) 46,638,064 40,201,131
Prepaid expenses 3,274,221 3,959,862
------------- -------------
Total current assets 86,497,932 86,413,112
Deferred income taxes 450,000 --
Other assets 9,155,736 9,600,216
Property, plant and equipment - net 12,477,284 12,323,707
------------- -------------
Total assets $ 108,580,952 $ 108,337,035
============= =============
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Accounts payable $ 8,745,397 $ 8,884,332
Salaries and wages 2,383,404 3,708,857
Accrued liabilities 8,146,615 5,240,948
------------- -------------
Total current liabilities 19,275,416 17,834,137
Deferred income taxes -- 2,981,000
Other liabilities 9,275,308 --
Shareowners' equity:
Common stock - 7,828,090 shares outstanding at December 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 income (loss) (113,200) (71,000)
Retained earnings 69,863,888 77,313,358
------------- -------------
Total shareowners' equity 80,030,228 87,521,898
------------- -------------
Total liabilities and shareowners' equity $ 108,580,952 $ 108,337,035
============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE> 4
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations (Unaudited)
For the Three-Month and Six-Month Periods ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Three-Month Periods Six-Month Periods
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 36,737,575 $ 38,974,458 $ 71,211,532 $ 71,423,886
Costs and expenses 48,860,868 37,368,741 83,883,133 70,076,551
------------ ------------ ------------ ------------
(12,123,293) 1,605,717 (12,671,601) 1,347,335
Other income (expenses):
Interest and investment income 166,291 320,446 419,356 755,205
Interest expense -- (416) -- (416)
Other - net 11,364 (3,835) 427,775 (6,723)
------------ ------------ ------------ ------------
Income (loss) before income taxes (11,945,638) 1,921,912 (11,824,470) 2,095,401
Provision (credit) for income taxes (4,420,000) 711,000 (4,375,000) 775,000
------------ ------------ ------------ ------------
Net income (loss) $ (7,525,638) $ 1,210,912 $ (7,449,470) $ 1,320,401
============ ============ ============ ============
Basic and diluted earnings (loss) per share $ (.96) $ .16 $ (.95) $ .17
============ ============ ============ ============
Dividends $ 0 $ 0 $ 0 $ 0
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE> 5
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six-Month Periods ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash flows (used) provided by operating activities:
(Loss) income from continuing operations $ (7,449,470) $ 1,320,401
Add noncash items affecting continuing operations:
Environmental charge 10,000,000 --
Depreciation 1,076,530 1,059,905
Deferred income taxes (3,431,000) --
------------ ------------
196,060 2,380,306
Add (deduct) changes in operating assets and liabilities:
Other accrued liabilites 1,498,963 1,303,573
Accounts payable (138,935) (7,543,884)
Income taxes (339,757) 453,933
Accounts receivable (5,744,347) (917,180)
Inventories (6,436,933) 2,898,881
------------ ------------
Net cash used by continuing operations (10,964,949) (1,424,371)
Cash flow provided by discontinued operations -- 823,175
------------ ------------
(10,964,949) (601,196)
Cash flows (used) provided by investing activities:
Sales of investment securities-net 11,243,984 1,149,240
Noncurrent other assets 444,480 39,964
Purchases of property, plant and equipment-net (1,230,107) (1,172,119)
Discontinued operations -- 293,796
------------ ------------
10,458,357 310,881
------------ ------------
Increase (decrease) in cash and cash equivalents (506,592) (290,315)
Cash and cash equivalents at beginning of period 4,165,758 4,083,273
------------ ------------
Cash and cash equivalents at end of period $ 3,659,166 $ 3,792,958
============ ============
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the period
Income taxes paid $ 65,000 $ 296,000
============ ============
Income taxes (refunded) $ (673,000) $ --
============ ============
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 December 31, 1999,
and the related condensed consolidated statements of operations for the
three-month and six-month periods ended December 31, 1999 and 1998 and cash
flows for the six-month periods ended December 31, 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 periods ended December 31, 1999,
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
December 31, 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 and six-month periods, average shares
outstanding were 7,828,090 for all periods presented. 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, 31,510
shares in 1998, 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 139,000 and 159,000 shares of common stock at
$8.375 per share for the three months and six months ended December 31, 1999 and
1998, respectively; and 32,000 shares at $6.625 for the three months ended
December 31, 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. 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 six-month periods ending December 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $(7,526,000) $ 1,211,000 $(7,449,000) $ 1,320,000
Other Comprehensive Income:
Unrealized gains (losses) on investment securities (20,000) (19,000) (42,000) 23,000
----------- ----------- ----------- -----------
Comprehensive income (loss) $(7,546,000) $ 1,192,000 $(7,491,000) $ 1,343,000
=========== =========== =========== ===========
</TABLE>
Retained earnings includes accumulated other comprehensive losses of $113,000
and $71,000 at December 31, 1999, and June 30, 1999, respectively, which relates
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 December 31, 1999, the Company had net unrealized losses of $180,000. At that
date, the net after-tax effect of these losses was $113,000 and are included in
equity. For the six months ended December 31, 1999 and 1998, the Company had
sales of investment securities totaling $11,244,000 and $6,081,000,
respectively. There were no purchases of investment securities for the six
months ended December 31, 1999. Gross purchases of investment securities totaled
$4,932,000 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 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 proposed Consent Decree was lodged with the Federal
District Court in Albuquerque that would resolve all disputes related to the
Final Administrative Order dated February 10, 1998. As a result of the execution
and filing of the Consent Decree, the Company has revised its estimate of the
future minimum costs expected to be incurred, as well as the time period
involved. This change in estimate resulted in a $10,000,000 pre-tax charge to
operations in December 1999. Actual cash expenditures for remediation activities
are expected to be incurred over the next thirty years.
At December 31, 1999, Sparton has accrued $11,300,000 as its estimate of the
future undiscounted minimum financial liability with respect to this matter.
This balance includes $1,675,000 to resolve claims for damages to natural re-
sources, civil penalties and costs, payable to various governmental agencies as
part of the final terms of a Consent Decree. This also reflects the Company's
estimate of the minimum amount it will incur over the next thirty years 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 six months ended
December 31, 1999 and 1998 were $487,000 and $300,000, 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 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, timing and fluctuations in
U.S. and/or world economies and in customer demand for products, competition in
the overall and 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
- ---------------------
Six-Month Periods
- -----------------
Sales for the six-month period totaled $71,212,000 and were lower than
expected. This was mainly due to slower than expected start ups on several
commercial programs and technical and production delays on several sonobuoy
programs. Overall, sales were consistent with prior year, with commercial EMS
sales increasing 14% and governmental sales decreasing a similar amount.
An operating loss of $12,672,000 was reported for the six months ended December
31, 1999, compared to operating income of $1,347,000 for the same period last
year. Included were charges against income of $10,487,000 in 1999 and $300,000
in 1998 related to the New Mexico environmental remediation effort. Our prior
estimates of future minimum costs were revised as of December 31, 1999, to
reflect the remediation activities contained in the Consent Decree executed and
lodged with the Court in January 2000. The adjusted accrual for such expected
costs approximated $11,300,000. This includes $1,675,000 for fines, penalties,
and litigation reimbursement costs to various governmental entities. The
remainder of the $11,300,000 is to cover minimum anticipated remediation costs
for the next thirty years. The operations' results also include adverse capacity
related variances of $1,291,000 ($1,974,000 in 1998). Additionally, gross
margin for the six months ended December 31, 1999, reflects a charge of
$1,158,000 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 $336,000 to $419,000 in 1999 due to
lower average investments. Other Income-Net was $428,000 in 1999 compared to
Other Expense-Net of $7,000 for the corresponding six-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 a net loss of $7,449,000 ($(.95) per share) for the six
months ended December 31, 1999, compared to net income of $1,320,000 ($.17 per
share) for the corresponding period last year.
Three-Month Periods
- -------------------
Sales for the three-month period ended December 31, 1999, were lower than
expected and totaled $36,738,000, a decline of $2,236,000 (6%) from last year.
Government sales decreased $4,796,000 while commercial EMS sales increased
$2,560,000.
8
<PAGE> 9
Sales decreased $2,067,000 at Sparton Electronics, mainly due to production and
design issues on several sonobuoy programs. Revenues at Sparton Technology and
Sparton of Canada were essentially comparable to the corresponding period last
year.
An operating loss of $12,123,000 was reported for the three months ended
December 31, 1999, compared to operating income of $1,606,000 for the same
period last year. Included were charges against income of $10,385,000 in 1999
and $157,000 in 1998 related to the New Mexico environmental remediation effort,
discussed previously. Also included were adverse capacity related variances of
$423,000 ($313,000 in 1998). Additionally, gross margin for the three months
ended December 31, 1999, was decreased by $552,000 due to revisions in estimated
completion costs on certain governmental contracts, and start-up costs on new
programs.
Interest and Investment Income declined $154,000 to $166,000 in 1999 due to
lower average investments. Other Income-Net was $11,000 in 1999 compared to
Other Expense-Net of $4,000 for the corresponding three-month period last year.
The Company reported a net loss of $7,526,000 ($(.96) per share) for the three
months ended December 31, 1999, compared to net income of $1,211,000 ($.16 per
share) for the corresponding period last year.
FINANCIAL POSITION
- ------------------
For the six-month period ended December 31, 1999, Cash and Cash Equivalents
declined $507,000 to $3,659,000. Operating activities used $10,965,000 in net
cash flows. The principal source of cash flow from operating activities was $10
million due to the change in estimate for remediation activities as a result of
the settlement reached between the Company and the EPA. Principal uses of cash
flows from operating activities included 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
$10,458,000, 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, 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 December 31, 1999, and June 30, 1999, the aggregate government EMS backlog
was approximately $63 million and $50 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 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 December 31, 1999, the
Company had $80,030,000 in recorded shareowners' equity ($10.22 per share),
$67,223,000 in working capital, and a 4.49:1.00 working capital ratio.
OTHER
- -----
One of Sparton's facilities, located in Albuquerque, 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.
On January 18, 2000, a proposed Consent Decree was lodged with the Federal
District Court in Albuquerque that would resolve all disputes related to the
Final Administrative Order dated February 10, 1998. As a result of the execution
and filing of the Consent Decree, the Company has revised its estimate of the
future minimum costs expected to be incurred, as well as the time period
involved. This change in estimate resulted in a $10,000,000 pre-tax charge to
operations in
9
<PAGE> 10
December 1999. Actual cash expenditures for remediation activities are expected
to be incurred over the next thirty years.
At December 31, 1999, Sparton has accrued $11,300,000 as its estimate of the
future undiscounted minimum financial liability with respect to this matter.
This balance includes $1,675,000 to resolve claims for damages to natural re-
sources, civil penalties and costs, payable to various governmental agencies as
part of the final terms of a Consent Decree. This also reflects the Company's
estimate of the minimum amount it will incur over the next thirty years 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 six months ended
December 31, 1999 and 1998 were $487,000 and $300,000, respectively.
IMPACT OF YEAR 2000
- -------------------
The Year 2000 problem resulted from the fact that many older computer programs
were written using two digits rather than four to define the applicable year. A
computer program with time-sensitive software may have recognized a date using
"00" as the year 1900 rather than the year 2000. This could have resulted in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in normal business activities.
Sparton Electronics implemented a new business information system in the summer
of calendar 1997, to further enhance the Company's competitive position. This
system, called Manufacturing Total Management System (MTMS), enables 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. As the
majority of software and hardware was upgraded to accommodate the implementation
of MTMS, expenditures were minimal for Year 2000 compliance.
The Company does not anticipate, and has not incurred, any Year 2000 conversion
issues materially affecting operations or operating results. Sparton believes
the actions it has taken 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 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.
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 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 environmental 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. In Sparton's judgment, the
remedies proposed by the EPA were either unnecessary or technically
impracticable. Sparton vigorously challenged the EPA's remedy selection and
filed suit in Federal District Court in Dallas asserting that the EPA's decision
on remedy selection violated the AOC.
In September 1996, the EPA issued an initial administrative order under RCRA
ordering Sparton to undertake additional testing to justify the implementation
of the remedy selected by the agency in June 1996, and then to implement that
remedy. Sparton vigorously contested that order administratively, but on
February 10, 1998, the EPA issued a Final Administrative Order that in all
material respects followed the initial administrative order issued in September
1996. Sparton refused to implement those portions of that order that it believed
were 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 alleged that the impacts to soil and
groundwater associated with Sparton's Coors Road facility presented an imminent
and substantial threat to human health or the environment. Through these
lawsuits, the plaintiffs sought 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.
On January 18, 2000, a proposed Consent Decree was lodged with the Federal
District Court in Albuquerque that would resolve all disputes related to the
Final Administrative Order dated February 10, 1998, and the litigation in
Albuquerque. This Consent Decree is subject to a 30-day public comment period
after which the Company anticipates that it will become final.
The Consent Decree represents a judicially enforceable settlement agreement that
requires Sparton Technology, Inc. to pay $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 the Final Administrative Order, and $200,000
for reimbursement of the litigation costs of certain plaintiffs. The Consent
Decree also contains work plans describing remedial activity Sparton Technol-
ogy, Inc. agreed to undertake. In exchange for the monetary payment and an
agreement to implement the work plans, Sparton Technology, Inc. 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 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), an on-site
11
<PAGE> 12
containment well and an enhancement to an on-site soil vapor extraction system
(in operation). 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, beyond those already contained in the work plans, may be
required.
As a result of having reached an understanding between the various parties and
upon entering into the Consent Decree, the Company has reviewed its estimates of
the future minimum costs expected to be incurred in its remediation effort over
the next 20-30 years. Given the nature and extent of the various work plans and
the probable continued operation of the containment wells for a number of years
as well as extensive monitoring and reporting responsibilities, the Company
increased its accrual for its EPA remediation by $10,000,000, pre-tax, in
December 1999. At December 31, 1999, the estimated future undiscounted minimum
accrual for EPA remediation approximates $11,300,000 of which $2,000,000 is
expected to be incurred in the next 12 months with the remainder payable over
the next 20-30 years. The current portion of the liability includes the
$1,675,000 in costs and damages, described above, payable to the various
plaintiff parties. The Company's estimate of the minimum amount is based upon
existing technology, current costs and is not 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. The estimate does not reflect any offset or reduction
for monies recovered from various parties which the Company is currently
pursuing as described below.
Uncertainties associated with environmental remediation contingencies are
pervasive and often result in wide ranges of 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 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 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.
On February 11, 1998, Sparton Technology, Inc. commenced litigation in the
United States Court of Federal Claims alleging that the Department of Energy
(DOE), acting through its contractors, Sandia Corporation and Allied Signal,
Inc., is liable for reimbursement of Sparton's costs incurred in defending
against and complying with federal and state regulatory requirements. The DOE
prescribed certain mandatory performance requirements that were then imposed
upon Sparton through its agreements with Sandia Corporation and Allied Signal,
Inc. On February 9, 1999, the Court of Federal Claims dismissed Sparton's
complaint based on its determination that an agency relationship did not exist
between Sandia Corporation and Allied Signal, Inc. and the United States for
purposes of reimbursing costs incurred during litigation. Sparton believes that
the court erred in its decision and filed its notice of appeal on April 9, 1999.
Briefing to the U.S. Court of Appeals for the Federal Circuit has been
completed, and oral argument was held February 7, 2000.
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
2001.
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 Second Quarter of Fiscal 2000:
On January 19, 2000, the Company reported on Form 8-K that a proposed
Consent Decree that would resolve all disputes related to the Final
Administrative Order dated February 10, 1998, and the litigation in
Albuquerque, was lodged with the Court on January 18, 2000. This
Consent Decree is subject to a thirty day public comment period after
which the Company anticipates that it will become final.
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: February 11, 2000 /s/ David W. Hockenbrocht
----------------- -----------------------------------------
David W. Hockenbrocht, President
Date: February 11, 2000 /s/ Richard Langley
----------------- -----------------------------------------
Richard Langley, Vice President/ Treasurer and
Principal Financial Officer
13
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