Item 2. Properties - ------- ----------
The table that follows lists the principal properties of Sparton within continuing operations. All are owned. There are manufacturing and/or office facilities at each location. Sparton believes these facilities are suitable for its operations. Several of the facilities have available physical space for additional production equipment as the demand arises. In addition, at least two of the plants are currently underutilized, operating at or below one eight hour shift level. Such underutilization would decline as sales volume increases.
Jackson, Michigan DeLeon Springs, Florida (2 plants) Brooksville, Florida London, Ontario Rio Rancho, New Mexico Deming, New Mexico
The Company's Coors Road, Albuquerque, New Mexico facility is idle and is available for sale or lease. Currently, a portion of the facility is leased to another organization.
In November 1996, the Company closed its Lake Odessa, Michigan automotive production facility as part of the plan to exit the automotive business. This property was sold in April 1997 for $475,000 under an installment contract expiring in 2002.
As a condition of the December 1996 sale of approximately 80% of the discontinued automotive operations, the Company purchased, for $675,600, the Grand Haven and White Cloud, Michigan production facilities that were owned by Mr. and Mrs. John J. Smith (Mr. Smith is the Company's CEO and a director) and his brother, Lawson K. Smith (former officer and director of the Company). These facilities were leased to the purchaser of the discontinued automotive operations (the Purchaser) under a five- (5) year term with an aggregate annual rental of $135,000. These leases grant the Purchaser the option of purchasing both (but not less than both) facilities for $50,000 at the end of the original term of the Leases. These leases also offer options to acquire the facilities during the lease term. As part of the December 1996 sale, the Board approved the purchase of this real estate from the Smiths.
Item 3.
Item 3. Legal Proceedings - ------- -----------------
Various litigation is pending against the Company, in many cases involving ordinary and routine claims incidental to the business of the Company and in others presenting allegations that are nonroutine. The Company and its subsidiaries are also involved in certain compliance issues with the United States Environmental Protection Agency (EPA) and various state agencies, including being named as a potentially responsible party at several sites. Potentially responsible parties (PRPs) can be held jointly and severally liable for the cleanup costs at any specific site. The Company's past experience,
however, has indicated that when it has contributed only relatively small amounts of materials or waste to a specific site relative to other PRPs, its ultimate share of any cleanup costs has been minor. Based upon available information, the Company believes it has contributed only small amounts to those sites in which it is currently viewed a potentially responsible party. Environmental compliance issues involving the discontinued automotive operations are not material.
One of Sparton's facilities, located in New Mexico, has been the subject of ongoing investigations conducted with the Environmental Protection Agency (EPA) under the Resource Conservation and Recovery Act (RCRA). This EPA compliance issue is related to continuing operations, but involves a largely idled facility. The investigation began in the early 1980's and involved a review of on-site and off-site environmental impacts. In 1988, an administrative order on consent (AOC) was executed with the EPA related to further investigation and proposing a means of dealing with quantified impacts.
The remedial investigation called for in the AOC has been completed and approved. In May 1996, Sparton submitted to the EPA a final corrective measure study, based on the results of its investigations, as required in the AOC. In June 1996, the EPA issued its final decision selecting a corrective action at the site, different from what Sparton had proposed. The EPA estimated that the present value cost of its remedies would range from between $15,000,000 and $26,400,000 based on a thirty- (30) year time frame. In Sparton's judgment, the remedies proposed by the EPA are either unnecessary or technically impracticable. Sparton vigorously challenged the EPAs remedy selection and filed suit in Federal District Court in Dallas asserting that the EPAs decision on remedy selection violated the AOC.
In September 1996, the EPA issued an initial administrative order under RCRA ordering Sparton to undertake additional testing to justify the implementation of the remedy selected by the agency in June 1996, and then to implement that remedy. Sparton vigorously contested that order administratively, but on February 10, 1998, the EPA issued a Final Administrative Order that in all material respects followed the initial administrative order issued in September 1996. Sparton has refused to implement those portions of that order that it believes are unjustified.
In February 1997, three lawsuits were filed against Sparton in Federal District Court in Albuquerque, one by the United States on behalf of the EPA, the second by the State of New Mexico and the third by the City of Albuquerque and the County of Bernalillo. All three actions allege that the impacts to soil and groundwater associated with Sparton's Coors Road facility present an imminent and substantial threat to human health or the environment. Through these lawsuits, the plaintiffs seek to compel Sparton to undertake additional testing and to implement the same remedy selected by the EPA in June of 1996, now incorporated in the Final Administrative Order, and referred to in the preceding paragraph. In March 1997, the plaintiffs in these three lawsuits filed a motion for preliminary injunction and in July of 1997, the action in Dallas was transferred to Federal District Court in Albuquerque and consolidated with the three lawsuits filed in February 1997.
A pretrial schedule has been established for the consolidated actions, but no trial date set. Limited discovery, involving interrogatories and requests for production, has been undertaken by the plaintiffs. The plaintiffs have sought to amend their lawsuit to compel Sparton to implement the Final Administrative Order, and seeking civil penalties for alleged noncompli-
ance. 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 expired on August 9, 1999, but the parties have agreed to extend it to at least September 9, 1999. It is anticipated that implementation of the three workplans discussed below will relieve the Company of its obligations under the February 10, 1998 Final Administrative Order. As a result of these developments, the Company has updated its cost estimates. It is believed the initial cost of the corrective measures called for in these plans will not be materially different from the cost estimates the Company has previously accrued. There is no assurance that additional corrective measures, involving increased expenditures, may not be required.
The proposed workplans provide for the installation of an off-site containment well (already completed and operating), an on-site containment well and an enhancement to an on-site soil vapor extraction system. The purpose of the containment wells is to restrict further migration of impacted groundwater. The soil vapor extraction system removes solvents in the on-site soil above the groundwater. The installation and operation of the two containment wells and the enhanced soil vapor extraction system are dependent upon various permits, licenses and approvals from regulatory agencies and third parties. It is anticipated that these remediation activities will operate for a period of time during which the Company and the regulatory agencies will analyze their effectiveness. The Company believes that it will take at least three to five years before the effectiveness of the groundwater extraction wells can be established. Until then, in the Company's judgment, no definitive conclusion can be reached on whether additional remediation activities may be required.
At June 30, 1999, Sparton has accrued $1,426,000 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 four years. The period of accrual was reduced from five to four years to reflect what is now believed will be the initial period for testing the effectiveness of the remediation plan as discussed and described above. Details of the activity beyond this period will be dependent upon the effectiveness of the workplans being currently negotiated and not yet implemented. 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 four years including on-site and off-site pump and treat containment systems, a soil vapor extraction program and continued on-site/off-site monitoring. Beyond four 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.
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. Amounts charged to operations, principally legal and consulting, for fiscal years 1999 and 1998 were $1,756,000 and $1,821,000, respectively. It is reasonably possible that Sparton's recorded estimate of this liability may change. If a remedy is imposed on Sparton, other than as described in the proposed workplans, 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.
On June 17, 1998, Sparton Corporation and Sparton Technology, Inc. filed a complaint in the Circuit Court of Cook County, Illinois, against Lumbermens Mutual Casualty Company and American Manufacturers Mutual Insurance Company demanding reimbursement of expenses incurred in connection with its remediation efforts at the Coors Road facility based on various primary and excess comprehensive general liability policies in effect between 1959 and 1975.
On February 11, 1998, Sparton Technology, Inc. commenced litigation in the United States Court of Federal Claims alleging that the Department of Energy (DOE), acting through its contractors, Sandia Corporation and Allied Signal, Inc., is liable for reimbursement of Sparton's costs incurred in defending against and complying with federal and state regulatory requirements. The DOE prescribed certain mandatory performance requirements that were then imposed upon Sparton through its agreements with Sandia Corporation and Allied Signal, Inc. On February 9, 1999, the Court of Federal Claims dismissed Sparton's complaint based on its determination that an agency relationship did not exist between Sandia Corporation and Allied Signal, Inc. and the United States for purposes of reimbursing costs incurred during litigation. Sparton believes that the court erred in its decision and filed its notice of appeal on April 9, 1999. Briefing has begun but is not yet complete.
Sparton Technology, Inc. filed a complaint on September 21, 1998, against Allied Signal, Inc. in U.S. District Court in Kansas City seeking to recover costs incurred to investigate and remediate impacts to the environment at its Coors Road facility. In July 1999, the court allowed the Company to amend its complaint to add Sandia Corporation and the DOE as defendants. Limited discovery has been completed. This case is currently scheduled for trial in the Spring of 2000.
At this time, the Company is unable to predict the amount of recovery, if any, that may result from the pursuit of these before-mentioned three claims.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ------- ---------------------------------------------------
No matters were submitted to a vote of the security holders during the last quarter of the period covered by this report.
OFFICERS OF THE REGISTRANT - --------------------------
Information with respect to executive officers of the Registrant is set forth below. The positions noted have been held for at least five years, except where noted.
There are no family relationships between the persons named above. All officers are elected annually and serve at the discretion of the Board of Directors.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder - ------- ----------------------------------------------------------------- Matters -------
Information with respect to the market for the Company's stock, including stock prices, stock exchange and number of shareowners, and quarterly dividends for the two-year period ended June 30, 1999, is included under "Financial Highlights" on page 1 of the Annual Report and is included in Exhibit 13 filed herewith.
Item 6.
Item 6. Selected Financial Data - ------- -----------------------
The "Selected Financial Data" on page 32 of Exhibit 13 filed hereunder is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations ---------------------
"Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 33 of Exhibit 13 filed hereunder is incorporated herein by reference.
Item 7.(a) Qualitative and Quantitative Disclosures About Market Risk - ---------- ----------------------------------------------------------
"Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk Exposure" on page 35 of Exhibit 13 filed hereunder is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data - ------- -------------------------------------------
The consolidated financial statements of Sparton Corporation and Subsidiaries and "Report of Independent Auditors" are included on pages 18 - 31 and 22 , respectfully, in Exhibit 13 filed hereunder and are incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ------- --------------------------------------------------------------- Financial Disclosure --------------------
None.
PART III - --------
Item 10.
Item 10. Directors and Executive Officers of the Registrant - -------- --------------------------------------------------
Information with respect to directors is included in the Proxy Statement under "Election of Directors" and is incorporated herein by reference. Information concerning the executive officers is included in Part I on page 4.
Item 11.
Item 11. Executive Compensation - -------- ----------------------
Information concerning executive compensation is included under "Compensation of Executive Officers" in the Proxy Statement and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - -------- --------------------------------------------------------------
Information on management and certain other beneficial ownership of the Company's common stock is included under "Outstanding Stock and Voting Rights" in the Proxy Statement and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions - -------- ----------------------------------------------
Information as to certain relationships and related transactions is included under "Certain Relationships and Transactions" in the Proxy Statement and is incorporated herein by reference.
PART IV - -------
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - -------- ---------------------------------------------------------------
(a) The following financial statements are filed as part of this report on Form 10-K:
The following Consolidated Financial Statements of Sparton Corporation and Subsidiaries and Report of Independent Auditors, included on Pages 18 - 31 and 22, respectfully, of Exhibit 13 filed hereunder are incorporated by reference in Item 8.
Financial Statement Schedules All prescribed schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.
(b) Reports on Form 8-K No reports on Form 8-K were required to be filed for the three months ended June 30, 1999.
(c) Exhibits
See Exhibit Index on page 14.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SPARTON CORPORATION
Date: September 24, 1999 By: /s/ Richard L. Langley - ---------------------------- -------------------------------------------- Richard L. Langley, Vice President-Treasurer (Principal Accounting and Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Exhibit Index - -------------
3 and 4 Articles of Incorporation of the Registrant were filed with Form 10-K for the year ended June 30, 1981 and an amendment thereto was filed with Form 10-Q for the three-month period ended September 30, 1983, and are incorporated herein by reference.
By-laws of the Registrant were filed with Form 10-K for the year ended June 30, 1981, and are incorporated herein by reference.
Code of Regulations of the Registrant were filed with Form 10-K for the year ended June 30, 1981 and an amendment thereto was filed with Form 10-Q for the three-month period ended September 30, 1982, and are incorporated herein by reference.
10 The employment agreement with John J. Smith was filed with Form 10-Q for the quarter ended September 30, 1994 and an amendment and extension of the employment agreement thereto was filed with Form 10-K for the year ended June 30, 1998, and are incorporated herein by reference.
13 Portions of the 1999 Annual Report to Shareowners (filed herewith and attached).
22 Subsidiaries (filed herewith and attached).
23 Consent of independent auditors (filed herewith and attached).
27 Financial data schedule, submitted to the Securities and Exchange Commission for its information.