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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1998
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 practicable date. The number of shares of common
stock outstanding as of October 31, 1998 was 7,828,090.
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SPARTON CORPORATION
INDEX
Financial Statements: Page No.
--------
Condensed Consolidated Balance Sheet - September 30 and June 30, 1998 3
Condensed Consolidated Statement of Operations - Three-Month Periods ended
September 30, 1998 and 1997 4
Condensed Consolidated Statement of Cash Flows - Three-Month Periods ended
September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Other Information and Signatures 16
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3
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet (Unaudited)
September 30 and June 30, 1998
September 30 June 30
------------ ------------
ASSETS (Note 4)
Current assets:
Cash and cash equivalents $ 3,702,800 $ 4,083,273
Investment securities 22,763,091 23,653,129
Accounts receivable 19,474,208 24,617,302
Inventories and costs on contracts in progress, less progress payments
of $2,316,000 at September 30,1998 ($2,646,000 at June 30, 1998) 33,591,284 31,743,407
Prepaid expenses 4,436,259 4,340,455
Net current assets of discontinued automotive operations (Note 4) 2,148,912 2,901,847
------------ ------------
Total current assets 86,116,554 91,339,413
Other assets 5,454,484 5,464,007
Property, plant and equipment - net 11,983,638 11,567,856
Noncurrent assets, principally property, plant and
equipment, of discontinued automotive operations - net (Note 4) 2,703,521 2,750,059
------------ ------------
Total assets $106,258,197 $111,121,335
============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Accounts payable $ 5,133,197 $ 11,390,801
Taxes on income 295,884 504,451
Accrued liabilities 9,777,310 8,325,766
------------ ------------
Total current liabilities 15,206,391 20,221,018
Deferred income taxes 2,531,500 2,531,500
Shareowners' equity:
Common stock - 7,828,090 shares outstanding at September 30, 1998
and June 30,1998 after deducting 106,622 shares in treasury 9,785,113 9,785,113
Capital in excess of par value 494,427 494,427
Retained earnings 78,240,766 78,089,277
------------ ------------
Total shareowners' equity 88,520,306 88,368,817
------------ ------------
Total liabilities and shareowners' equity $106,258,197 $111,121,335
============ ============
See accompanying notes
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SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations (Unaudited)
For the Three-Month Periods ended September 30, 1998 and 1997
Three-Month Periods
--------------------------------------
1998 1997
----------- -----------
Net sales $32,449,428 $32,366,103
Costs and expenses 32,707,810 32,958,518
----------- -----------
(258,382) (592,415)
Other income (expense):
Interest and investment income 434,759 530,444
Interest expense - (720)
Other - net (2,888) 574,345
----------- -----------
Income before income taxes 173,489 511,654
Provision for income taxes 64,000 189,000
----------- -----------
Net income $ 109,489 $ 322,654
=========== ===========
Basic and diluted earnings per share $.01 $.04
==== ====
Dividends $-0- $-0-
==== ====
See accompanying notes
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SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (Unaudited)
For the Three-Month Periods ended September 30, 1998 and 1997
1998 1997
----------- -----------
Cash flows (used) provided by operating activities:
Income from continuing operations $ 109,489 $ 322,654
Add non-cash items affecting continuing operations:
Depreciation 534,621 441,309
----------- -----------
644,110 763,963
Add (deduct) changes in operating assets and liabilities:
Accounts receivable 5,143,094 965,223
Other 1,397,740 (525,866)
Taxes on income (208,567) (2,080,513)
Income taxes recoverable - (1,724,727)
Inventories (1,847,877) 7,608,711
Accounts payable (6,257,604) (5,336,316)
----------- -----------
Net cash used by continuing operations (1,129,104) (329,525)
Cash flow provided by discontinued operations 909,033 818,383
----------- -----------
(220,071) 488,858
Cash flows used by investing activities:
Sales (purchases) of investment securities-net 890,038 (135,171)
Noncurrent other assets 9,523 37,462
Purchases of property, plant and equipment-net (950,403) (711,216)
Discontinued operations, principally purchases of property,
plant and equipment-net (109,560) (163,518)
----------- -----------
(160,402) (972,443)
Cash flows provided (used) by financing activities:
Common stock transactions from exercise of stock options - 66,249
Discontinued operations, decrease in long-term obligations - (21,618)
----------- -----------
- 44,631
----------- -----------
Decrease in cash and cash equivalents (380,473) (438,954)
Cash and cash equivalents at beginning of period 4,083,273 8,021,620
----------- -----------
Cash and cash equivalents at end of period $ 3,702,800 $ 7,582,666
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid out during the period for:
Interest $ -0- $ 1,000
=========== ===========
Income taxes $ 230,000 $ 4,915,000
=========== ===========
See accompanying notes
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SPARTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying condensed consolidated balance sheet at September
30, 1998, and the related condensed consolidated statements of operations and
cash flows for the three-month periods ended September 30, 1998 and 1997 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 three-month period ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the full fiscal year.
2. The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. The diluted earnings per share calculation is very
similar to the previous fully diluted earnings per share calculation method.
SFAS 128 is effective December 31, 1997. The Company has a simple capital
structure and there were no changes under the SFAS 128 methodology to the
previously reported earnings per share amounts for the quarter ended September
30, 1997.
Basic earnings per share under SFAS 128 were computed using the weighted average
number of shares outstanding. For the three-month periods, average shares
outstanding were 7,828,090 in 1998 and 7,823,090 in 1997. 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 and 139,867 in
1997. These differences in the weighted average number of shares outstanding for
the calculation of basic and diluted earnings per share were not material in
either 1998 and 1997, and resulted in no differences between basic and diluted
earnings per share. Options to purchase 189,000 shares of common stock at $8.375
per share were outstanding during 1998 but were not included in computation of
diluted earnings per share because their exercise price was greater than the
average market price of the common shares and therefore the effect would be
anti-dilutive.
3. Cash and cash equivalents consist of demand deposits and other
highly liquid investments with an original maturity date of less than three
months.
The Company has had investment securities since January 1997. 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 for its expanding ECM business.
At September 30, 1998, the Company had net unrealized gains, net of applicable
taxes, of $57,000. The increase in net unrealized gains net of applicable taxes
of $42,000 in 1998, was included with equity. For the three months ended
September 30, 1998, the Company had gross purchases and sales of investment
securities totaling $0 and $890,000 respectively.
4. In August 1996, the Company formalized its decision to offer for
sale its automotive operations. Accordingly, these operating results have been
reported as discontinued operations. In December 1996, the Company sold
substantially all of the net assets and operations of the Sparton Engineered
Products, Inc.-KPI Group (KPI) business unit, which comprised approximately 80%
of the automotive operations of the Company. This sale did not include the net
assets and operations of the remaining automotive unit, Sparton Engineered
Products, Inc.-Flora Group (Flora). The Company has pursued disposal of the
Flora operations since the August
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1996 decision to sell its automotive operations. During this protracted period,
a number of events occurred that negatively impacted the potential value of the
Flora Group including continued unplanned operating losses, loss of personnel,
tornado damage to the plant on April 15, 1998 and loss of a major customer. In
April 1998, the Company abandoned attempts to finalize a sale/purchase agreement
with a party with whom negotiations had been ongoing for some 16 months.
At its' meeting on August 28, 1998, the Board of Directors approved the closing
of this Flora operation and an orderly liquidation of its' assets. Formal
announcement of the plant closing has been made and completion of liquidation
and closure is tentatively scheduled for December 1998. Land and buildings have
been offered for sale and bids are being received for the sale of the various
product lines including inventories, equipment, and tooling. At September 30,
1998, approximately $1,819,000 in accruals and reserves are available to cover
the costs associated with this closing and the sale of its' assets.
For purposes of balance sheet presentation, the assets and liabilities of
discontinued operations have been netted. The presentation at June 30, 1998 has
been reclassified to conform to the September 30, 1998 amounts. The detail of
the discontinued operations balances are as follows:
September 30 June 30
------------ -------
Current assets $6,208,000 $7,036,000
Current liabilities 4,059,000 4,135,000
---------- ----------
Net $2,149,000 $2,901,000
========== ==========
Noncurrent assets $2,704,000 $2,808,000
Noncurrent liabilities - 58,000
---------- ----------
Net $2,704,000 $2,750,000
========== ==========
5. One of Sparton's facilities, located in New Mexico, has been the
subject of ongoing investigations conducted with the EPA under the Resource
Conservation and Recovery Act ("RCRA"). This EPA compliance issue is related to
continuing operations, but involves a largely idled facility. The investigation
began in the early 1980's and involved a review of on-site and off-site
environmental impacts. In 1988, an administrative order on consent ("AOC") was
executed with EPA related to further investigation and proposing a means of
dealing with quantified impacts.
The remedial investigation called for in the AOC has been completed and
approved. In May 1996, Sparton submitted to the EPA a final corrective measure
study, based on the results of its investigations, as required in the AOC. In
June 1996, the EPA issued its final decision selecting a corrective action at
the site, 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 (30) year time frame. In Sparton's judgment, the
remedies proposed by the EPA are either unnecessary or technically
impracticable. Sparton vigorously challenged the EPA's remedy selection and
filed suit in federal district court in Dallas asserting that the EPA's decision
on remedy selection violated the AOC.
In September 1996, the EPA issued an initial administrative order under RCRA
ordering Sparton to undertake additional testing to justify implementing the
remedy selected by the agency in June 1996, and then implementing that remedy.
Sparton vigorously contested that order administratively, but on February 10,
1998, EPA issued a final administrative order that in all material respects
followed the initial administrative order issued in September 1996. Sparton has
refused to implement those portions of that order that it believes are
unjustified.
In February 1997, three lawsuits were filed against Sparton in federal district
court in Albuquerque, one by the United States on behalf of the EPA, the second
by the State of New Mexico and the third by the City of
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Albuquerque and the County of Bernalillo. All three actions allege that the
impacts to soil and groundwater associated with Sparton's Coors Road facility
present an imminent and substantial threat to human health or the environment.
Through these lawsuits, the plaintiffs seek to compel Sparton to undertake
additional testing and to implement the same remedy selected by the EPA in June
of 1996 now incorporated in the Final Administrative Order, and referred to
above. In March 1997, the plaintiffs in these three lawsuits filed a motion for
preliminary injunction and in July of 1997, the action in Dallas was transferred
to federal district court in Albuquerque and consolidated with the three
lawsuits filed in February 1997.
A pretrial schedule has been established for the consolidated actions, but no
trial date set. Limited discovery, involving interrogatories and requests for
production, has been undertaken by the plaintiffs. The plaintiffs have sought to
amend their lawsuit to compel Sparton to implement the Final Administrative
Order, and seeking civil penalties for alleged noncompliance. Sparton has
opposed this request and no decision has been made by the court on the
plaintiffs' request to amend.
In March 1998, a hearing was held on the plaintiffs' request for a preliminary
injunction. After two days of testimony, the federal district judge indicated he
had tentatively concluded he might issue a preliminary injunction. The parties
subsequently entered into settlement discussions that culminated in an agreed
workplan for the installation of certain off-site monitoring, observation, and
containment wells, in exchange for plaintiffs withdrawing their request for a
preliminary injunction. An order withdrawing that request and approving this
off-site workplan was signed on July 7, 1998.
At the current time, all litigation has been stayed to allow the parties to
continue settlement discussions. The most recent stay will expire in December
1998. During this stay, several workplans related to the implementation of
corrective measures are being negotiated.
Uncertainties associated with environmental remediation contingencies are
pervasive and often result in wide ranges of reasonably possible estimates.
Estimates developed in the early stages of remediation can vary significantly.
Normally, a finite estimate of cost does not become fixed and determinable at a
specific point in time. Rather, the costs associated with environmental
remediation become estimable over a continuum of events and activities that help
to frame and define a liability. To date, Sparton has incurred costs of
approximately $8,116,000 since environmental impacts were first identified in
the early 1980's. $3,000,000 of this amount has been recovered from insurance
companies. For the three-months ended September 30, 1998 and 1997, Sparton
incurred costs of $202,000 and $124,000 including legal and defense costs of
$83,000 and $91,000, respectively. Amounts charged to operations for the
three-months ended September 30, 1998 and 1997 were $143,000 and $250,000,
respectively.
At September 30, 1998, Sparton has accrued $1,769,000 as its' estimate of the
future undiscounted minimum obligation with respect to this matter. This
reflects the minimum range of the amount Sparton expects to incur over the next
five years. This amount includes equipment and operating and maintenance costs.
In many cases, new technologies become available over time, which result in
modified costs for environmental remediation. The Company's estimate of cost is
based on the existing methodology and excludes legal and related consulting
costs. The estimate includes the minimum range of activity expected to occur in
the next five years including onsite and offsite pump and treat containment
systems, a soil vapor extraction program and continued onsite/offsite
monitoring. Beyond five years, while additional expenditures are probable,
Sparton does not believe such expenditures are reasonably estimable based on
available information. Factors causing the uncertainty include, but are not
limited to, effectiveness of the currently proposed programs to achieve targeted
results and decisions made by regulating agencies regarding future proposals and
reports of Sparton. Sparton routinely refines and revises the estimate of its'
environmental efforts as additional information becomes available.
It is reasonably possible that Sparton's recorded estimate of this liability may
change. If a remedy is imposed on Sparton, other than the one it has proposed,
the ultimate cleanup costs could increase significantly. There is no
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assurance that additional costs greater than the amount accrued will not be
incurred or that changes in environmental laws or their interpretation will not
require that additional amounts be spent. At this time, it is not possible to
estimate the ultimate cost to resolve this matter.
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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, namely the design,
development and/or manufacture of electronic parts and assemblies for both
government and commercial customers worldwide. In August 1996, the Company
formalized its plan to offer for sale its automotive operations. Accordingly,
these operations, formerly classified as the Automotive and Industrial Products
segment, were reclassified and reported as discontinued operations.
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 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 include, but are not
limited to, fluctuations in U. S. and world economies, competition in the
overall electronic contract manufacturing (ECM) business, Congressional budget
outlays for sonobuoy development and production, Congressional legislation,
changes in the interpretation of environmental laws, the uncertainties of
environmental litigation and the availability of materials, production labor and
management services under terms acceptable to the Company.
RESULTS OF OPERATIONS
- ---------------------
Sales for the three-month period ended September 30, 1998 were $32,449,000,
essentially comparable to the corresponding period last year. While overall
sales were expected to be below the fourth quarter of fiscal 1998, actual
revenues were below expectations as unanticipated delays were encountered on
several programs, as well as necessary rescheduling of a U.S. Navy sonobuoy drop
test due to hurricane George. Revenues decreased $345,000 (1%) to $27,814,000 at
Sparton Electronics. While defense sales decreased 11% from last year, ECM and
other revenues increased 7%. Sales increased $500,000 at Sparton Technology. In
September, a major ECM customer finalized their plan for the redesign and rework
of an existing product for Sparton Technology and production has once again
commenced on that product. Revenues at Sparton of Canada totaled $248,000 for
the three-month period. Increased ECM work is now scheduled for the second
quarter which should have a positive impact.
An operating loss of $258,000 was reported for the three months ended September
30, 1998 compared to an operating loss of $592,000 last year. These results were
below expectations but consistent with the level of sales achieved. Sparton
Electronics had an operating profit of $610,000 in 1998 which was comparable to
the same period last year. These results reflect a more favorable product mix
and include adverse capacity related variances of $799,000 caused by
underutilized capacity at two production facilities. Sparton Technology reported
an operating loss of $15,000 for the three-month period compared to an operating
loss of $249,000 for the same period last year. These results were slightly
below expectations and primarily due to lower sales volume. Included were
charges against income of $143,000 in 1998 and $250,000 in 1997 related to the
New Mexico environmental claim. The Canadian unit incurred an operating loss of
$329,000 in 1998 compared to an operating loss of $268,000 last year. These
results were below expectations and due to the unexpected continued delays in a
major program. Low sales volume continues to impact operations as underutilized
manufacturing capacity resulted in a charge of $150,000 to the Canadian
operations.
Interest and Investment Income declined $96,000 to $435,000 in 1998 due to lower
average investments and a decline in interest rates. In December 1996, the
Company used a portion of the proceeds from the sale of its
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automotive operations to eliminate short-term borrowings. Since then, the
Company has incurred substantially no interest expense. Other Expense-Net was
$3,000 in 1998 compared to Other Income-Net of $574,000 for the corresponding
three-month period last year. Included within 1997 Other Income-Net was a gain
of $511,000 from the sale of equipment and other assets at the Canadian
operating unit.
In the first quarter of fiscal 1999, the Company entered into an affiliation
agreement with Contract Assembly Incorporated (CAI) of Lawrence, Massachusetts.
This agreement provides Sparton with access to front-end engineering and low
volume capabilities for its' customers in the Northeast. The Company has
previously signed a similar agreement with Simclar Electronics of Scotland.
These affiliation agreements involve no monetary or equity investment and are
non-exclusive/non-binding arrangements. The purpose of such agreement is to gain
access to additional opportunities not otherwise available, and to satisfy
certain geographical customer demands.
In August 1996, the Company formalized its plans to sell its automotive
operations and accordingly reclassified and reported operating results as
discontinued operations. As more fully described in Note 4 to these financial
statements, in December 1996, the Company sold substantially all of the net
assets and operations of the Sparton Engineered Products, Inc.-KPI Group (KPI)
business unit which comprised approximately 80% of its' automotive operations.
This sale did not include the net assets and operations of the remaining
automotive unit, Sparton Engineered Products, Inc.-Flora Group (Flora). In its
meeting on August 28, 1998, the Board of Directors approved and the Company has
commenced to close the Flora operations and liquidate its assets. At September
30, 1998, a reserve of approximately $1,819,000 is available to cover the costs
associated with this closing and the sale of its' assets. The amounts that the
Company ultimately realizes, however, could differ materially from that
anticipated based upon its' ability to sell or otherwise liquidate the Flora
assets.
The Company reported net income of $109,000 ($.01 per share) for the three
months ended September 30, 1998 compared to a net income of $323,000 ($.04 per
share) for the corresponding period last year.
FINANCIAL POSITION
- ------------------
For the three-month period ended September 30, 1998, Cash and Cash Equivalents
decreased $380,000 to $3,703,000. Operating activities used $220,000 in net cash
flows. Principal sources of cash flows from operating activities included
continuing operations and decreases in accounts receivable. Principal uses of
cash flows from operating activities included reductions in accounts payable and
increases in inventories. Cash flows used by investing activities were $160,000,
principally for the purchase of equipment. The Company will continue to
strategically invest in additional property, plant and equipment to accommodate
growth in the ECM business. No cash was used or provided by financing
activities.
As previously stated, the Company plans on using the proceeds from the sale of
its automotive operations, after paying income taxes and other costs, to provide
working capital for its expanding ECM business. In addition, two additional
production lines were acquired through a five-year operating lease of
approximately $5 million.
To the extent not immediately used, sale proceeds will continue to be invested
in high quality marketable securities. The resulting 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 non-operating income trend will continue. This trend is dependent upon
how quickly the Company's ECM 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, 1998 and June 30, 1998, the aggregate backlog from continuing
operations was approximately $100 million and $103 million, respectively.
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No dividends were declared in either period presented. At September 30, 1998,
the Company had $88,520,000 in recorded shareowners' equity ($11.31 per share),
$70,910,000 in working capital, and a 5.66:1.00 working capital ratio.
OTHER
- -----
One of Sparton's facilities, located in New Mexico, has been the subject of
ongoing investigations conducted with the 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
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 (30) year time frame. In Sparton's judgment, the
remedies proposed by the EPA are either unnecessary or technically
impracticable. Sparton vigorously challenged the EPA's remedy selection and
filed suit in federal district court in Dallas asserting that the EPA's decision
on remedy selection violated the AOC.
In September 1996, the EPA issued an initial administrative order under RCRA
ordering Sparton to undertake additional testing to justify implementing the
remedy selected by the agency in June 1996, and then implementing that remedy.
Sparton vigorously contested that order administratively, but on February 10,
1998, EPA issued a final administrative order that in all material respects
followed the initial administrative order issued in September 1996. Sparton has
refused to implement those portions of that order that it believes are
unjustified.
In February 1997, three lawsuits were filed against Sparton in federal district
court in Albuquerque, one by the United States on behalf of the EPA, the second
by the State of New Mexico and the third by the City of Albuquerque and the
County of Bernalillo. All three actions allege that the impacts to soil and
groundwater associated with Sparton's Coors Road facility present an imminent
and substantial threat to human health or the environment. Through these
lawsuits, the plaintiffs seek to compel Sparton to undertake additional testing
and to implement the same remedy selected by the EPA in June of 1996 now
incorporated in the Final Administrative Order, and referred to above. In March
1997, the plaintiffs in these three lawsuits filed a motion for preliminary
injunction and in July of 1997, the action in Dallas was transferred to federal
district court in Albuquerque and consolidated with the three lawsuits filed in
February 1997.
A pretrial schedule has been established for the consolidated actions, but no
trial date set. Limited discovery, involving interrogatories and requests for
production, has been undertaken by the plaintiffs. The plaintiffs have sought to
amend their lawsuit to compel Sparton to implement the Final Administrative
Order, and seeking civil penalties for alleged noncompliance. Sparton has
opposed this request and no decision has been made by the court on the
plaintiffs' request to amend.
In March 1998, a hearing was held on the plaintiffs' request for a preliminary
injunction. After two days of testimony, the federal district judge indicated he
had tentatively concluded he might issue a preliminary injunction. The parties
subsequently entered into settlement discussions that culminated in an agreed
workplan for the installation of certain off-site monitoring, observation, and
containment wells, in exchange for plaintiffs withdrawing their request for a
preliminary injunction. An order withdrawing that request and approving this
off-site workplan was signed on July 7, 1998.
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13
At the current time, all litigation has been stayed to allow the parties to
continue settlement discussions. The most recent stay will expire in December
1998. During this stay several workplans related to the implementation of
corrective measures are being negotiated.
Uncertainties associated with environmental remediation contingencies are
pervasive and often result in wide ranges of reasonably possible estimates.
Estimates developed in the early stages of remediation can vary significantly.
Normally, a finite estimate of cost does not become fixed and determinable at a
specific point in time. Rather, the costs associated with environmental
remediation become estimable over a continuum of events and activities that help
to frame and define a liability. To date, Sparton has incurred costs of
approximately $8,116,000 since environmental impacts were first identified in
the early 1980's. $3,000,000 of this amount has been recovered from insurance
companies. For the three-months ended September 30, 1998 and 1997, Sparton
incurred costs of $202,000 and $124,000 including legal and defense costs of
$83,000 and $91,000, respectively. Amounts charged to operations for the
three-months ended September 30, 1998 and 1997 were $143,000 and $250,000,
respectively.
At September 30, 1998, Sparton has accrued $1,769,000 as its' estimate of the
future undiscounted minimum obligation with respect to this matter. This
reflects the minimum range of the amount Sparton expects to incur over the next
five years. This amount includes equipment and operating and maintenance costs.
In many cases, new technologies become available over time, which result in
modified costs for environmental remediation. The Company's estimate of cost is
based on the existing methodology and excludes legal and related consulting
costs. The estimate includes the minimum range of activity expected to occur in
the next five years including onsite and offsite pump and treat containment
systems, a soil vapor extraction program and continued onsite/offsite
monitoring. Beyond five years, while additional expenditures are probable,
Sparton does not believe such expenditures are reasonably estimable based on
available information. Factors causing the uncertainty include, but are not
limited to, effectiveness of the currently proposed programs to achieve targeted
results and decisions made by regulating agencies regarding future proposals and
reports of Sparton. Sparton routinely refines and revises the estimate of its'
environmental efforts as additional information becomes available.
It is reasonably possible that Sparton's recorded estimate of this liability may
change. If a remedy is imposed on Sparton, other than the one it has proposed,
the ultimate cleanup costs could increase significantly. There is no assurance
that additional costs greater than the amount accrued will not be incurred or
that changes in environmental laws or their interpretation will not require that
additional amounts be spent. At this time, it is not possible to estimate the
ultimate cost to resolve this matter.
New Accounting Standards
- ------------------------
As more fully described in Note 2 to these financial statements, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
per Share". SFAS 128, replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. The Company has a
simple capital structure and there were no changes under SFAS 128 to the
previously reported earnings per share amounts for the period ended September
30, 1997.
Impact of Year 2000
- -------------------
The Year 2000 Issue is the result of many older computer programs being 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 similar normal business activities.
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Sparton Electronics implemented a new business information system in the summer
of 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. The information
system is presently being implemented throughout the remainder of the Company's
management units with full implementation scheduled for completion in fiscal
1999. The decision to purchase and implement MTMS was independent of the Year
2000 issue. The Company believes that implementation of MTMS will render its
internal information systems Year 2000 compliant and with no disruptions in
operations. With respect to suppliers and customers software being year 2000
compliant, the Company does not believe that there is sufficient integration or
dependency of such software to cause a material impact on the Company's business
operating systems or processes. The Company is currently surveying customers and
major suppliers to determine their status with respect to year 2000 compliance.
A large majority of the Company's revenues are generated in the ECM and
government defense areas, where products are built to contract specifications,
dictated by the customer using a customer-owned design. As these products are
non-proprietary 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.
Litigation
- ----------
One of Sparton's facilities, located in New Mexico, has been the subject of
ongoing investigations conducted with the EPA under the Resource Conservation
and Recovery Act ("RCRA"). This EPA compliance issue is related to continuing
operations, but involves a largely idled facility. The investigation began in
the early 1980's and involved a review of on-site and off-site environmental
impacts. In 1988, an administrative order on consent ("AOC") was executed with
EPA related to further investigation and proposing a means of dealing with
quantified impacts.
The remedial investigation called for in the AOC has been completed and
approved. In May 1996, Sparton submitted to the EPA a final corrective measure
study, based on the results of its investigations, as required in the AOC. In
June 1996, the EPA issued its final decision selecting a corrective action at
the site, 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 (30) year time frame. In Sparton's judgment, the
remedies proposed by the EPA are either unnecessary or technically
impracticable. Sparton vigorously challenged the EPA's remedy selection and
filed suit in federal district court in Dallas asserting that the EPA's decision
on remedy selection violated the AOC.
In September 1996, the EPA issued an initial administrative order under RCRA
ordering Sparton to undertake additional testing to justify implementing the
remedy selected by the agency in June 1996, and then implementing that remedy.
Sparton vigorously contested that order administratively, but on February 10,
1998, EPA issued a final administrative order that in all material respects
followed the initial administrative order issued in September 1996. Sparton has
refused to implement those portions of that order that it believes are
unjustified.
In February 1997, three lawsuits were filed against Sparton in federal district
court in Albuquerque, one by the United States on behalf of the EPA, the second
by the State of New Mexico and the third by the City of Albuquerque and the
County of Bernalillo. All three actions allege that the impacts to soil and
groundwater associated with Sparton's Coors Road facility present an imminent
and substantial threat to human health or the environment. Through these
lawsuits, the plaintiffs seek to compel Sparton to undertake additional testing
and to implement the same remedy selected by the EPA in June of 1996 now
incorporated in the Final Administrative Order, and referred to above. In March
1997, the plaintiffs in these three lawsuits filed a motion for preliminary
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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-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 will expire in December
1998. During this stay, several workplans related to the implementation of
corrective measures are being negotiated.
Uncertainties associated with environmental remediation contingencies are
pervasive and often result in wide ranges of reasonably possible estimates.
Estimates developed in the early stages of remediation can vary significantly.
Normally, a finite estimate of cost does not become fixed and determinable at a
specific point in time. Rather, the costs associated with environmental
remediation become estimable over a continuum of events and activities that help
to frame and define a liability. To date, Sparton has incurred costs of
approximately $8,116,000 since environmental impacts were first identified in
the early 1980's. $3,000,000 of this amount has been recovered from insurance
companies. For the three-months ended September 30, 1998 and 1997, Sparton
incurred costs of $202,000 and $124,000 including legal and defense costs of
$83,000 and $91,000, respectively. Amounts charged to operations for the
three-months ended September 30, 1998 and 1997 were $143,000 and $250,000,
respectively.
At September 30, 1998, Sparton has accrued $1,769,000 as its' estimate of the
future undiscounted minimum obligation with respect to this matter. This
reflects the minimum range of the amount Sparton expects to incur over the next
five years. This amount includes equipment and operating and maintenance costs.
In many cases, new technologies become available over time, which result in
modified costs for environmental remediation. The Company's estimate of cost is
based on the existing methodology and excludes legal and related consulting
costs. The estimate includes the minimum range of activity expected to occur in
the next five years including onsite and offsite pump and treat containment
systems, a soil vapor extraction program and continued onsite/offsite
monitoring. Beyond five years, while additional expenditures are probable,
Sparton does not believe such expenditures are reasonably estimable based on
available information. Factors causing the uncertainty include, but are not
limited to, effectiveness of the currently proposed programs to achieve targeted
results and decisions made by regulating agencies regarding future proposals and
reports of Sparton. Sparton routinely refines and revises the estimate of its'
environmental efforts as additional information becomes available.
It is reasonably possible that Sparton's recorded estimate of this liability may
change. If a remedy is imposed on Sparton, other than the one it has proposed,
the ultimate cleanup costs could increase significantly. There is no assurance
that additional costs greater than the amount accrued will not be incurred or
that changes in environmental laws or their interpretation will not require that
additional amounts be spent. At this time, it is not possible to estimate the
ultimate cost to resolve this matter.
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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 1999: 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: November 9, 1998 /s/ John J. Smith
------------------ ---------------------------------------------
John J. Smith, Chairman of the Board of
Directors and Chief Executive Officer
Date: November 9, 1998 /s/ Richard Langley
------------------ ---------------------------------------------
Richard Langley, Vice President/Treasurer and
Principal Financial Officer
16