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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED - March 31, 2003
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
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SPARTON CORPORATION
(Exact Name of Registrant as Specified in its Charter)
OHIO 38-1054690
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer 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 check mark 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 by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes No X
---- ----
Common Stock, $1.25 Par Value - 7,943,671 shares outstanding as of April 30,
2003.
1
SPARTON CORPORATION AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets March 31, 2003 and June 30, 2002......................... 3
Condensed Consolidated Statements of Operations for the Three-Month and
Nine-Month Periods ended March 31, 2003 and 2002............................................. 4
Condensed Consolidated Statements of Cash Flows for the Nine-Month
Periods ended March 31, 2003 and 2002........................................................ 5
Notes to Condensed Consolidated Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 15
Item 4. Controls and Procedures................................................................. 15
Part II. Other Information
Item 1. Legal Proceedings....................................................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................................ 17
Signatures............................................................................................. 17
Certifications......................................................................................... 18
2
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 2003 and June 30, 2002
ASSETS
March 31 June 30
------------- -------------
Current assets:
Cash and cash equivalents $ 16,003,805 $ 8,687,873
Investment securities 18,360,172 11,530,374
Accounts receivable:
Trade 18,609,020 18,703,397
EPA settlement (Note 6) 1,000,000 --
Income taxes recoverable -- 1,055,965
Inventories and costs on contracts in progress, less progress payments of
$8,350,000 at March 31 and $6,275,000 at June 30 (Note 2) 38,634,516 41,929,559
Prepaid expenses 2,421,126 2,214,845
------------- -------------
Total current assets 95,028,639 84,122,013
Pension asset 6,208,093 6,304,117
Other assets 2,794,004 2,940,918
Property, plant and equipment, net 8,632,884 9,034,200
------------- -------------
Total assets $ 112,663,620 $ 102,401,248
============= =============
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Accounts payable $ 8,414,885 $ 7,762,357
Salaries and wages 3,684,313 3,545,045
Accrued liabilities (Note 6) 4,502,904 2,104,170
Income taxes payable 543,443 --
------------- -------------
Total current liabilities 17,145,545 13,411,572
Environmental remediation (Note 6) 7,092,887 7,375,259
Shareowners' equity:
Preferred stock, no par value;
200,000 shares authorized, none outstanding
Common stock, $1.25 par value;
7,943,671 and 7,559,790 shares outstanding at March 31
and June 30 (after deducting 374,922 shares in treasury at June 30) (Note 3) 9,929,589 9,449,738
Capital in excess of par value (Note 3) 3,015,989 477,493
Accumulated other comprehensive income (loss) (Notes 4 and 5) 181,941 (172,000)
Retained earnings 75,297,669 71,859,186
------------- -------------
Total shareowners' equity 88,425,188 81,614,417
------------- -------------
Total liabilities and shareowners' equity $ 112,663,620 $ 102,401,248
============= =============
See accompanying notes.
3
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
For the Three-Month and Nine-Month Periods ended March 31, 2003 and 2002
Three-Month Periods Nine-Month Periods
----------------------------------- ----------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 40,841,367 $ 34,970,080 $ 120,888,569 $ 116,845,979
Costs of goods sold 36,701,515 31,241,349 107,219,388 104,572,461
------------- ------------- ------------- -------------
4,139,852 3,728,731 13,669,181 12,273,518
Selling and administrative (income) expense:
Selling and administrative 3,332,782 2,855,790 10,066,411 9,221,208
EPA related - net (Note 6) 6,242 130,787 (5,223,320) 431,260
------------- ------------- ------------- -------------
3,339,024 2,986,577 4,843,091 9,652,468
------------- ------------- ------------- -------------
Operating income 800,828 742,154 8,826,090 2,621,050
Other income (expense):
Interest and investment income 188,192 82,967 489,849 325,935
Equity income (loss) in investment 29,000 (71,250) (28,000) (213,750)
Other - net (60,490) 136,363 (107,141) 362,623
------------- ------------- ------------- -------------
156,702 148,080 354,708 474,808
------------- ------------- ------------- -------------
Income before income taxes 957,530 890,234 9,180,798 3,095,858
Provision for income taxes 287,000 356,000 2,754,000 1,225,000
------------- ------------- ------------- -------------
Net income $ 670,530 $ 534,234 $ 6,426,798 $ 1,870,858
============= ============= ============= =============
Basic and diluted earnings per share (Note 3) $ 0.08 $ 0.07 $ 0.80 $ 0.23
======= ======= ======= =======
Cash dividends (Note 3) $-0- $-0- $-0- $-0-
======= ======= ======= =======
See accompanying notes.
4
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine-Month Periods ended March 31, 2003 and 2002
March 31
---------------------------------
2003 2002
---- ----
Cash flows provided (used) by Operating Activities:
Net income $ 6,426,798 $ 1,870,858
Add noncash items affecting operations:
Depreciation 1,086,883 1,228,756
EPA settlement due in fiscal 2004 (Note 6) (1,000,000) --
Equity loss in investment 28,000 213,750
Pension asset 96,024 --
Add (deduct) changes in operating assets and liabilities:
Accounts receivable 94,377 (383,797)
Income taxes recoverable 1,055,965 --
Inventories and prepaid assets 3,088,762 7,332,497
Accounts payable and accrued liabilities 3,805,542 (5,672,912)
----------- -----------
14,682,351 4,589,152
Cash flows provided (used) by Investing Activities:
Purchases of investment securities-net (6,829,798) (3,477,177)
Purchases of property, plant and equipment-net (685,567) (263,236)
Noncurrent other assets 118,914 (250,733)
----------- -----------
(7,396,451) (3,991,146)
Cash flows provided (used) by Financing Activities:
Proceeds from the exercise of stock options 31,112 --
Purchase of common stock for treasury -- (72,236)
Stock dividend - cash in lieu of fractional shares (1,080) --
----------- -----------
30,032 (72,236)
----------- -----------
Increase in cash and cash equivalents 7,315,932 525,770
Cash and cash equivalents at beginning of period 8,687,873 13,034,790
----------- -----------
Cash and cash equivalents at end of period $16,003,805 $13,560,560
=========== ===========
Supplemental disclosures of cash paid (received) during the period:
Income taxes paid $ 2,389,000 $ 883,000
=========== ===========
Income taxes refunded $(1,135,000) $ (488,000)
=========== ===========
See accompanying notes.
5
SPARTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The following is a summary of the Company's accounting policies not
discussed elsewhere within this report.
Basis of presentation - The accompanying unaudited condensed consolidated
financial statements of Sparton Corporation and all active subsidiaries have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. All significant
intercompany transactions and accounts have been eliminated. The condensed
consolidated balance sheet at March 31, 2003, and the related condensed
consolidated statements of operations for the three-month and nine-month periods
ended March 31, 2003 and 2002, and cash flows for the nine-month periods ended
March 31, 2003 and 2002, are unaudited, but include all adjustments (consisting
of normal recurring accruals) which the Company considers necessary for a fair
presentation of such financial statements. Operating results for the nine-month
period ended March 31, 2003, are not necessarily indicative of the results that
may be expected for the year ended June 30, 2003.
The balance sheet at June 30, 2002, has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended June 30, 2002.
At June 30, 2002, the Company changed its method of accounting for its
investment in Cybernet Systems Corporation (Cybernet). The investment is now
accounted for under the equity method and included in other assets on the
balance sheets at March 31, 2003 and June 30, 2002. The condensed consolidated
statements of operations and cash flows for the period ended March 31, 2002,
have been changed to reflect the Company's share of Cybernet's losses and
accumulated other comprehensive income (loss), as required by Accounting
Principles Board Opinion No. 18, "The Equity Method of Accounting for
Investments In Common Stock".
Operations - The Company's operations are in one line of business,
electronic contract manufacturing services (EMS). Products and services include
complete "Box Build" products for Original Equipment Manufacturers, micropro-
cessor-based systems, transducers, printed circuit boards and assemblies,
sensors and electromechanical devices for the telecommunications,
medical/scientific instrumentation, electronics, aerospace, and other
industries. The Company also develops and manufactures sonobuoys,
anti-submarine warfare (ASW) devices, used by the U.S. Navy and other free-world
countries.
Use of estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the disclosure of
assets and liabilities and the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue recognition - The Company's net sales are comprised primarily of
product sales, with supplementary revenues earned from engineering and design
services. Standard contract terms are FOB shipping point. Revenue from product
sales is generally recognized upon shipment of the goods; service revenue is
recognized as the service is performed or under the percentage of completion
method, depending on the nature of the arrangement. Long-term contracts relate
principally to government defense contracts. These contracts are accounted for
based on completed units accepted 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. Shipping and handling costs are
included in costs of goods sold.
6
Accounts receivable and allowance for possible losses - Products are sold
principally in electronics manufacturing markets. Accounts receivable are
customer obligations generally due under normal trade terms for the industry.
The Company performs ongoing credit evaluations of its customers and although
the Company does not generally require collateral, letters of credit may be
required from customers in certain circumstances. Receivables from foreign
customers are generally secured by letters of credit or cash advances.
The Company maintains an allowance for possible losses on receivables for
estimated losses resulting from the inability of its customers to make required
payments. The allowance is estimated based on historical experience of
write-offs, the level of past due amounts, information known about specific
customers with respect to their ability to make payments, and future
expectations of conditions that might impact the collectibility of accounts.
When management determines that it is probable that an account will not be
collected, it is charged against the allowance for possible losses.
New accounting standards - Effective July 1, 2002, the Company was required
to adopt Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting
for the Impairment of Long-Lived Assets" (SFAS No. 144), which supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and provides a single accounting model for impaired
long-lived assets and for long-lived assets which are to be disposed of. The
adoption of SFAS No. 144 did not have a material effect on the Company's
consolidated results of operations or financial position.
In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (SFAS No. 148), which amends SFAS No. 123, "Accounting for
Stock-Based Compensation". The amendment permits two additional transition
methods for a voluntary change to the fair value based method of accounting for
stock-based compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require more prominent and frequent disclosures
about the effects of stock-based compensation. SFAS No. 148 is effective for
Sparton's fiscal year end June 30, 2003. The Company is still evaluating whether
it will adopt SFAS No. 148 and, if it does, which transition method it will
follow. However, should the Company decide to change to the fair value method of
accounting for its stock-based compensation, it is not expected to have a
material effect on the Company's consolidated results of operations or financial
position.
Depreciation - Depreciation is provided over estimated useful lives on
accelerated methods, except for certain buildings, machinery and equipment,
which are being depreciated on the straight-line method. Estimated useful lives
generally range from 5 to 50 years for buildings and improvements, 3 to 16 years
for machinery and equipment, and 3 to 5 years for test equipment.
Treasury stock - The Company records treasury stock purchases at cost. In
recording the Company's treasury stock purchases, the excess of cost over par
value is allocated to capital in excess of par value based on the per share
amount of capital in excess of par value for all shares, with the difference
charged to retained earnings. There is no treasury stock held at March 31, 2003.
Stock options - The Company follows Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock options. Under APB 25, no
compensation expense is recognized as the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant. The Company follows the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation".
At March 31, 2003, the per share weighted-average exercise price of options
outstanding was $6.22. The weighted-average remaining contractual life of those
options was approximately 4 years. At March 31, 2003, there were 165,851 options
exercisable at the weighted-average per share price of $5.36. Remaining shares
available for grant under the plan were 247,262 at March 31, 2003.
7
The following table illustrates the effect on net income and earnings per
share, using the Black-Scholes method of valuation, as if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
compensation.
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported $ 671,000 $ 534,000 $6,427,000 $1,871,000
Deduct: Total stock-based compensation expense
determined under the fair value based method
for all awards, net of tax effects 44,000 23,000 132,000 69,000
---------- ---------- ---------- ----------
Pro forma net income $ 627,000 $ 511,000 $6,295,000 $1,802,000
========== ========== ========== ==========
Earnings per share:
Basic and diluted - as reported $ 0.08 $ 0.07 $ 0.80 $ 0.23
========== ========== ========== ==========
Basic and diluted - pro forma $ 0.08 $ 0.06 $ 0.78 $ 0.23
========== ========== ========== ==========
2. INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out basis) or
market and include costs related to long-term contracts. The following are the
major classifications of inventory, which are presented net of progress
payments.
March 31, 2003 June 30, 2002
-------------- -------------
Raw materials $26,630,000 $23,353,000
Work in process and finished goods 12,005,000 18,577,000
----------- -----------
Total $38,635,000 $41,930,000
=========== ===========
Work in progress and finished goods inventories include $3.5 million and
$7.5 million of sonobuoys at March 31, 2003, and June 30, 2002, respectively.
3. EARNINGS PER SHARE
On January 10, 2003, Sparton's Board of Directors approved a 5% common stock
dividend. Eligible shareowners of record as of January 21, 2003, received the
stock dividend on February 18, 2003. The majority of shares were issued from
treasury stock. An amount equal to the fair market value of the common stock
issued was transferred from retained earnings to common stock and capital in
excess of par to record the stock dividend. Shares outstanding and earnings per
share for the three months and the nine months ended March 31, 2003 and 2002,
respectively, have been adjusted accordingly and are as follows.
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
2003 2002 2003 2002
---- ---- ---- ----
Basic - weighted average shares outstanding 7,901,456 7,559,817 7,674,388 7,565,530
Weighted average shares outstanding with respect to the
5% common stock dividend declared January 10, 2003 42,021 377,991 267,754 378,277
---------- ---------- ---------- ----------
7,943,477 7,937,808 7,942,142 7,943,807
Effect of dilutive stock options 75,163 72,361 83,921 51,199
---------- ---------- ---------- ----------
Weighted average diluted shares outstanding 8,018,640 8,010,169 8,026,063 7,995,006
========== ========== ========== ==========
Basic & diluted earnings per share - after stock dividend $ 0.08 $ 0.07 $ 0.80 $ 0.23
========== ========== ========== ==========
To compute diluted earnings per share, for the three-month and nine-month
periods ended March 31, 2003, options to purchase 98,700 and 3,150 shares,
respectively, of common stock were not included in the computation of diluted
earnings per share. Such options' exercise prices were greater than the average
market price of the Company's common stock and, therefore, would be
antidilutive.
In the nine-month period ended March 31, 2002, the Company purchased 10,300
shares of common stock for treasury, at price ranging from $6.60 to $7.00. These
repurchases resulted in a net charge to Retained Earnings of $59,000.
8
4. COMPREHENSIVE INCOME
The reporting of comprehensive income requires disclosure of total
non-shareowner changes in equity in interim periods and additional disclosures
of the components of non-shareowner changes in equity on an annual basis. Total
non-shareowner changes in equity include all changes in equity during a period
except those resulting from investments by and distributions to shareowners.
Comprehensive income includes net income, as well as unrealized gains and losses
on investments, which are excluded from net income. Such gains and losses are
reflected as a direct charge or credit to shareowners' equity.
Comprehensive income for the three months and nine months ended March 31 was
as follows:
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 671,000 $ 534,000 $ 6,427,000 $ 1,871,000
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses)
Investment securities owned 43,000 (3,000) 252,000 (3,000)
Investment securities held by investee
accounted for by the equity method 7,000 (131,000) 102,000 (394,000)
----------- ----------- ----------- -----------
Comprehensive income $ 721,000 $ 400,000 $ 6,781,000 $ 1,474,000
=========== =========== =========== ===========
At March 31, 2003, shareowners' equity includes accumulated other
comprehensive income (loss) of $330,000 and ($148,000), which relates to
unrealized gains, net of tax, on investments securities owned and unrealized
losses, net of tax, on investment securities held by an investee accounted for
by the equity method, respectively. At June 30, 2002, these amounts were $78,000
and ($250,000), respectively.
5. INVESTMENT SECURITIES
Cash and cash equivalents consist of demand deposits and other highly liquid
investments. The investment portfolio has various maturity dates up to 25
years. A daily market exists for all 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 fund the expansion of its business and for other
business purposes.
At March 31, 2003, the Company had net unrealized gains of $524,000. At that
date, the net after-tax effect of these gains was $330,000, which amount is
included in accumulated comprehensive income within shareowners' equity. For the
nine months ended March 31, 2003 and 2002, purchases of investments totaled
$7,746,000 and $3,502,000, and sales of investment securities totaled $916,000
and $25,000, respectively.
Sparton owns a 14% interest in Cybernet, which was purchased for $3,000,000
in June 1999. This investment is accounted for under the equity method and is
included in other assets on the condensed consolidated balance sheet. Sparton's
share of unrealized gains (losses) on available-for-sale securities held by
Cybernet is carried in accumulated other comprehensive income (loss) within the
Shareowners' Equity section of Sparton's balance sheet.
6. COMMITMENTS AND CONTINGENCIES
One of Sparton's former manufacturing facilities, located in Albuquerque,
New Mexico (Coors Road), has been the subject of ongoing investigations
conducted with the Environmental Protection Agency (EPA) under the Resource
Conservation and Recovery Act (RCRA). The investigation began in the early 1980s
and involved a review of onsite and offsite environmental impacts.
9
At March 31, 2003, Sparton has a remaining accrual of $7,703,000 as its
estimate of the minimum future undiscounted financial liability with respect
to this matter, of which $610,000 is classified as a current liability and
included on the balance sheet in accrued liabilities. The Company's minimum cost
estimate is based upon existing technology and excludes legal and related
consulting costs, which are expensed as incurred. The Company's estimate
includes equipment and operating costs for onsite and offsite pump and treat
containment systems, a soil vapor extraction program and continued onsite and
offsite monitoring.
During the first quarter of fiscal 2003, Sparton reached an agreement with
the United States Department of Energy (DOE) and others to recover certain
remediation costs. Under the settlement terms, Sparton received $4,850,000 from
the DOE and others in fiscal 2003, plus an additional $1,000,000 is scheduled to
be received in fiscal 2004. In addition, the DOE has agreed to reimburse Sparton
for 37.5% of certain future environmental expenses in excess of $8,400,000
incurred at the site. The settlement concludes a very lengthy negotiation
process and two court actions, one in the Federal Court of Claims and one in the
Federal District Court in Albuquerque, New Mexico.
With the settlement, Sparton received cash and gained some degree of risk
protection, with the DOE agreeing to reimburse future costs incurred above the
established level. The financial impact of the settlement was recorded in the
first quarter of fiscal 2003. Most of the settlement proceeds (approximately
$5,500,000) were recorded as income.
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 significantly
affected by the impact of changes associated with the ultimate resolution of
this contingency.
Amounts charged to operations, principally legal and consulting, for the
nine months ended March 31, 2003 and 2002 were $277,000 and $431,000,
respectively. These costs were generally incurred in pursuit of various claims
for reimbursement.
10
SPARTON CORPORATION AND SUBSIDIARIES
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
operations are in one line of business, electronic contract manufacturing
services (EMS). This includes the design, development and/or manufacture of
electronic parts and assemblies for 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, customer demand for products, competition in the
overall EMS business, availability of production labor and management services
under terms acceptable to the Company, Congressional budget outlays for sonobuoy
development and production, Congressional legislation, changes in the
interpretation of environmental laws and the uncertainties of environmental
remediation. An additional risk factor is the availability and cost of
materials. The Company has encountered availability and extended lead time
issues on some electronic components in the past, which have resulted in price
and delivery issues. Finally, the timing of sonobuoy sales is dependent upon
access to and successful passage of performance tests performed by the U.S.
Navy. Reduced governmental budgets have made access to the test range less
predictable and less frequent than in the past. 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
Three-Month Periods
Sales for the three-month period ended March 31, 2003, totaled $40,841,000,
an increase of $5,871,000 (17%) over last year. The increase reflects higher
sales in the homeland security, avionics, and medical product markets. Govern-
ment sales declined. The majority of the sales increase was due to new customers
and products. Our involvement with airport security products favorably impacted
the current quarter's sales. Additional sales are expected for the remaining
period of this year. Government sales declined 29% ($4,031,000) to $9,838,000
compared to last year. The decline in government sales reflects the timing of
foreign sales, as well as test schedules for sonobuoys. In addition, several
failed lots, which were tested earlier, remain in rework but are expected to
ship by June 30, 2003.
Gross margin for the quarter was consistent with prior year. In general, a
more favorable product mix improved margins. Also, cost reduction measures put
in place in prior quarters continue to improve performance. Off-setting were two
one-time charges to operations during the third quarter. Margins were reduced by
$280,000 for rework for a commercial customer. Additionally, inventory
valuations for a second commercial customer resulted in a net charge of
$308,000. Selling and administrative expenses, as a percentage of sales, are
consistent with last year. Actions to control costs continue.
Operating income of $801,000 was reported for the three months ended March
31, 2003, compared to $742,000 for the same period last year. Included in
operating income are charges against income related to the Coors Road site
remediation, principally litigation, of $7,000 and $131,000 in 2003 and 2002,
respectively.
11
Interest and Investment Income increased $105,000 to $188,000 in 2003, due
to higher average investments. Equity income (loss) in investment relates to
Sparton's investment in Cybernet Systems, Inc., in which the Company has a 14%
equity investment. Other Expense-net was $61,000 in 2003, compared to Other
Income-net of $136,000 for the corresponding quarter last year. Included in
Other Income-net in 2002 is $92,000, a one time recovery from a former insurer
as part of that company's conversion to a stock company (formerly a mutual
company). An estimate for this recovery of $200,000 was booked in the previous
quarter.
The Company reported net income of $671,000 ($0.08 per share) for the three
months ended March 31, 2003, versus $534,000 ($0.07 per share) for the
corresponding period last year.
Nine-Month Periods
Sales for the nine-month period ended March 31, 2003, totaled $120,889,000,
an increase of $4,043,000 (3%) from last year. Government sales declined
$8,768,000 (21%) to $32,715,000 compared to last year, while sales in other
markets increased $12,811,000 (17%) to $88,174,000. The uncertainty of
customers' schedules in selected markets has resulted in the need for continuing
adjustments to reduce costs and expenses. Sales of homeland security products
have been strong, reflecting the current focus to install detection equipment in
U.S. airports. The decline in government sales resulted from timing of foreign
sales and less frequent access to the sonobuoy testing range, as well as product
rework remaining on several sonobuoy lots. Government sales are expected to
rebound somewhat in the fourth quarter of this fiscal year.
Margins on many jobs have been running favorable due to the impact of cost
reduction measures put in place in prior quarters. In addition, Sparton has new
product introduction programs at all facilities. These programs have resulted in
more efficient new job start ups, and fewer jobs with negatively impacted
margins. Also, a government job was completed. The rework estimates associated
with this job were no longer required, resulting in a pickup of $489,000 during
the first two quarters of fiscal 2003. Finally, disengagement issues with one
customer resulted in decreased margins in fiscal 2002. Overall improved margins
were offset by year to date charges totaling $825,000. These charges were
related to inventory and rework issues for two customers. Selling and
administrative expenses, as a percentage of sales, are consistent with last
year. Actions continue to be taken to control costs. Costs include bid and
proposal expenses related to new job opportunities. Sparton's bid activity
remains at record levels.
Operating income of $8,826,000 was reported for the nine months ended March
31, 2003, compared to $2,621,000 for the same period last year. Included in 2003
operating income was the $5,500,000 recovery of certain remediation costs
negotiated this year. It reflects Sparton's settlement with the DOE and others
regarding reimbursement of costs incurred at the Company's Sparton Technology,
Inc. Coors Road site. Also included are charges against income related to the
Coors Road site remediation effort, principally litigation, of $277,000 and
$431,000 in 2003 and 2002, respectively.
Interest and Investment Income increased $164,000 to $490,000 in 2003, due
to increased funds available for investment. Equity loss in investment relates
to Sparton's equity investment in Cybernet. Other Expense-net was $107,000 in
2003, compared to Other Income-net of $363,000 for the corresponding nine-month
period last year. Other Income-net in 2002 included a one time recovery of
$292,000 from a former insurer as part of that company's conversion to a stock
company (formerly a mutual company). Other Expense-net in 2003 includes $120,000
of costs related to potential insurance adjustments for Sparton's previously
owned automotive segment.
Previously, the Company reduced its estimate of its annual effective tax
rate based on anticipated usage of the existing Canadian loss and contribution
carry-forwards. The change in estimated annual effective tax rate resulted in a
$398,000 reduction of second quarter tax expense and a quarterly tax rate of
14%. The effective tax rate for the third quarter remained at 30%.
The Company reported net income of $6,427,000 ($0.80 per share) for the nine
months ended March 31, 2003, versus $1,871,000 ($0.23 per share) for the
corresponding period last year.
12
LIQUIDITY AND CAPITAL RESOURCE
For the nine-month period ended March 31, 2003, Cash and Cash Equivalents
increased $7,316,000 to $16,004,000. Overall, Cash and Investments increased by
$14,146,000 from June 30, 2002. Operating activities provided $14,682,000 in net
cash flows. Cash provided by operating activities was mainly attributable to the
DOE settlement and a decline in inventory. $4.85 million of the settlement
negotiated with the DOE has been received. The remaining $1 million of the
settlement is scheduled to be received next year. Improved inventory management
and tracking has allowed lower inventory levels to be maintained, further
contributing to cash flow from operations. Additionally, accounts payable and
other accrued liabilities includes increased balances related to various
insurances and employee benefits. Cash flows used by investing activities
totaled $7,396,000, principally for the purchase of investment securities. Cash
flow provided by financing activities was from stock options exercised. The
Company continues to operate with no bank debt.
The Company's market risk exposure to foreign currency exchange and interest
rates are not considered to be material, principally due to short term
investments and minimal receivables and payables designated in foreign cur-
rency.
The aggregate government EMS backlog was approximately $60 million at both
March 31, 2003 and June 30, 2002. A majority of the March 31, 2003, backlog is
expected to be realized in the next 12-18 months. The major U.S. government
awards of sonobuoy contracts have been announced and Sparton's share of those
awards is reflected in the backlog. The Company does not believe commercial
backlog amounts representing firm purchase orders is a meaningful measure of
future sales. Such orders may be rescheduled or cancelled by the customer and
such releases and/or purchase orders span various time frames.
No cash dividends were declared in either period presented. At March 31,
2003, the Company had $88,425,000 in recorded shareowners' equity ($11.13 per
share), $77,883,000 in working capital, and a 5.54:1.00 working capital ratio.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. The Company believes that of its significant accounting policies, the
following may involve a higher degree of judgement and complexity.
Environmental Contingencies - One of Sparton's former manufacturing
facilities, located in Albuquerque, New Mexico (Coors Road), has been the
subject of ongoing investigations and remediation efforts conducted with the
Environmental Protection Agency (EPA) under the Resource Conservation and
Recovery Act (RCRA). The investigation began in the early 1980s and involved a
review of onsite and offsite environmental impacts.
In December 1999, the Company increased its accrual for the estimated cost
of addressing the environmental impacts associated with its Coors Road plant by
$10,000,000 (pre-tax). This increase was reflective of revised cost estimates in
conjunction with the negotiated Consent Decree that settled related lawsuits
then outstanding, as well as a related administrative enforcement action, and
covered activities expected to be incurred over the next thirty years.
As discussed in Note 6 to the condensed consolidated financial statements,
Sparton has accrued its estimate of the minimum future undiscounted financial
liability. The estimate was developed using existing technology and excludes
legal and related consulting costs, which are expensed as incurred. The minimum
cost estimate includes equipment and operating and monitoring costs for both
onsite and offsite remediation. Sparton reviews its EPA accrual activity
quarterly.
13
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. It is possible that cash flows and results of
operations could be materially affected by the impact of changes in these
estimates.
Government Contract Cost Estimates - Government production contracts are
accounted for based on completed units accepted with respect to revenue
recognition, and their estimated average cost per unit regarding costs. The
Company formally reviews, on a quarterly basis, costs incurred to date and
estimated costs to complete on all significant contracts. These revised
estimated contract costs are reflected in the financial statements. Losses for
the entire amount of the contract are recognized in the period when such losses
are determinable.
Significant judgment is exercised in determining estimated total contract
costs, including but not limited to, cost experience to date, estimated length
of time to contract completion, costs for materials, production labor and
support services to be expended, and known issues on remaining units to be
completed. Estimated costs developed in the early stages of contracts can change
significantly as the contracts progress, and events and activities take place.
Significant changes in estimates can also occur when new designs are initially
placed into production. Depending upon the circumstances, it is possible that
the Company's financial position, results of operations and cash flows could be
materially affected by changes in estimated costs to complete on one or more
significant contracts.
Commercial Inventory Valuation Allowances - Contracts with commercial
customers are based upon estimated quantities of product manufactured for
shipment over estimated time periods. Raw material inventories are purchased to
fulfill these customer requirements. Within these arrangements, customer demand
for products frequently change, sometimes creating excess and obsolete
inventories.
The Company regularly reviews raw material inventories by customer for both
excess and obsolete quantities, with adjustments made accordingly. Wherever
possible, the Company attempts to recover its full cost of excess and obsolete
inventories from customers, or in some cases, through other markets. When it is
determined that the Company's carrying cost of such excess and obsolete
inventories cannot be recovered in full, a charge is taken against income and a
valuation allowance is established for the difference between the carrying cost
and the estimated realizable amount. Conversely, should the disposition of
adjusted excess and obsolete inventories result in recoveries in excess of these
reduced carrying values, the remaining portion of the valuation allowances are
reversed and taken into income when such determinations are made.
The establishment of inventory valuation allowances for commercial customer
inventories requires a significant degree of judgment and is influenced by the
Company's experience to date with both customers and other markets, prevailing
market conditions for raw materials, contractual terms and customers' ability to
satisfy these obligations, environmental or technological materials
obsolescence, changes in demand for customer products, and other factors
resulting in acquiring materials in excess of customer product demand. It is
possible that the Company's financial position, results of operations and cash
flows could be materially affected by changes to inventory valuation allowances
for commercial customer excess and obsolete inventories.
OTHER
Litigation - 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). The investigation began in the early 1980s and involved a
review of onsite and offsite environmental impacts.
At March 31, 2003, Sparton has an accrual of $7,703,000 as its estimate of
the future undiscounted minimum financial liability with respect to this matter.
The Company's cost estimate is based upon existing technology and excludes legal
and related consulting costs, which are expensed as incurred. The Company's
estimate includes equipment and operating costs for onsite and offsite
operations and is based on existing methodology.
14
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. It is possible that cash flows and results of
operations could be affected by the ultimate resolution of this contingency.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
The Company manufactures its products in the United States and Canada. Sales
of the Company's products are made in the U.S. and Canada, as well as other
foreign markets. The Company is potentially subject to foreign currency exchange
rate risk relating to receipts from customers and payments to suppliers in
foreign currencies. As a result, the Company's financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which the Company operates.
However, few receivables and payables are denominated in foreign currency. The
Company does not consider the market risk exposure relating to currency ex-
change to be material.
The Company has financial instruments that are subject to interest rate
risk, principally short-term investments. Historically, the Company has not
experienced material gains or losses due to such interest rate changes. Based on
the current holdings of short-term investments, the interest rate risk is not
believed to be material.
Item 4. Controls and Procedures
The Company maintains a system of internal accounting policies, procedures,
and controls intended to provide reasonable assurance, at appropriate cost, that
all material transactions are executed in accordance with Company authorization
and are properly recorded and reported in the financial statements, and that
assets are adequately safeguarded. The Company also maintains a system of
disclosure controls and procedures to ensure that information required to be
disclosed in Company reports, filed or submitted under the Securities Exchange
Act of 1934, is properly reported in the Company's periodic and other reports.
As of March 31, 2003, an evaluation was updated by the Company's management,
including the CEO and CFO, on the effectiveness of the design and operation of
the Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures continue to be effective as of March 31,
2003. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to March 31, 2003.
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
Various litigation is pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company and in
others presenting allegations that are non-routine. The Company and its
subsidiaries are also involved in certain compliance issues with the United
States Environmental Protection Agency (EPA) and various state agencies,
including being named as a potentially responsible party at several sites.
Potentially responsible parties (PRPs) can be held jointly and severally
liable for the clean-up 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 clean-up 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 as a potentially responsible party.
15
In February 1997, several lawsuits were filed against Sparton's wholly owned
subsidiary, Sparton Technology, Inc. (STI), alleging that Sparton Technology's
Coors Road facility presented an imminent and substantial threat to human health
or the environment. On March 3, 2000, a Consent Decree was entered, settling the
lawsuits. The Consent Decree represents a judicially enforceable settlement and
contains work plans describing remedial activity Sparton Technology agreed to
undertake. The remediation activities called for by the work plans have been
installed and are either completed or are currently in operation. It is
anticipated that ongoing remediation activities will operate for a period of
time during which Sparton Technology and the regulatory agencies will analyze
their effectiveness. The Company believes that it will take at least three to
five years from the date of the Consent Decree, dated March 3, 2000, before the
effectiveness of the groundwater containment wells can be established. If
ineffective, additional remedies may be imposed at a significantly increased
cost. There is no assurance that additional costs greater than the amount
accrued will not be incurred or that no adverse changes in environmental laws or
their interpretation will occur.
Upon entering into the Consent Decree, the Company reviewed its estimates of
the future costs expected to be incurred in connection with its remediation of
the environmental issues associated with its Coors Road Plant over the next 30
years. The Company increased its accrual for the cost of addressing
environmental impacts associated with its Coors Road Plant by $10,000,000
(pre-tax) in December 1999. At March 31, 2003, the remaining undiscounted mini-
mum accrual for EPA remediation approximates $7,703,000. The Company's estimate
is based upon existing technology and current costs which have not been
discounted. The estimate includes equipment and operating and maintenance
costs for the onsite and offsite pump and treat containment systems, a soil
vapor extraction program and continued onsite and offsite monitoring. It also
includes the required periodic reporting requirements. This estimate does not
include legal and related consulting costs which are expensed as incurred. The
estimate does not reflect any offset or reduction for monies recovered from
various parties currently being pursued as described below.
In 1998, Sparton Technology, Inc. commenced litigation in two courts against
the United States Department of Energy (DOE) and others seeking reimbursement of
Sparton's costs incurred in complying with, and defending against, Federal and
state environmental requirements with respect to its former Coors Road plant.
Sparton also sought to recover future costs being incurred by the Company on an
ongoing basis as a result of continuing remediation at the Coors Road facility.
During the first quarter of fiscal 2003, Sparton reached an agreement with
the DOE and others to recover certain remediation costs. Under the agreement,
Sparton was reimbursed a portion of the costs the Company has incurred in its
investigation and site remediation efforts at the Coors Road site. Under the
settlement terms, Sparton received $4,850,000 from the DOE and others in fiscal
2003, plus an additional $1,000,000 is to be received in fiscal 2004. In
addition, the DOE has agreed to reimburse Sparton for 37.5% of certain future
environmental expenses in excess of $8,400,000 incurred at the site.
With the settlement, Sparton received cash and gained some degree of risk
protection, with the DOE sharing in costs incurred above the established level.
The financial impact of the settlement was recorded in the first quarter of
fiscal 2003, ending September 30, 2002. Most of the settlement proceeds
(approximately $5,500,000) were recorded as income.
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 remains in
pretrial activity.
In September 2002, Sparton Technology, Inc. filed an action in the U.S.
District Court for the Eastern District of Michigan to recover certain
unreimbursed costs incurred as a result of a manufacturing relationship with two
entities, Util-Link, LLC ("Util-Link") of Delaware and National Rural
Telecommunications Cooperative ("NRTC") of the District of Columbia. On or about
October 21, 2002, the defendants filed a counterclaim seeking money damages,
alleging that STI breached its duties in the manufacture of products for the
defendants. The defendant Util-Link has asked for damages in the amount of
$25,000,000 for lost profits. The defendant NRTC has asked for damages in the
amount
16
$20,000,000 for the loss of its investment in and loans to Util-Link. Sparton
has not had an opportunity to fully assess the respective claims, but believes
that the damages sought by NRTC are included in Util-Link's claim for damages
and as such, are duplicative. Sparton believes the counterclaim to be without
merit and intends to vigorously defend against it. This case is in the initial
stages of discovery.
At this time, the Company is unable to predict the amount of recovery, if
any, that may result from the pursuit of these two before-mentioned claims.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended Articles of Incorporation of the Registrant, were filed
on Form 10-Q for the three-month period ended September 30,
2002, and are incorporated herein by reference.
3.2 By-laws of the Registrant, as amended, were filed on Form 10-Q
for the three-month period ended December 31, 2000, and are
incorporated herein by reference.
99.1 Chief Executive Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K filed in the third quarter of fiscal 2003:
- On January 10, 2003, the Company filed on Form 8-K, Item 5.
Other Events, the Company issued a press release announcing that
the Board of Directors of the Company had approved a 5% stock
dividend on the Company's common stock, par value $1.25 per
share.
- On February 11, 2003, the Company filed on Form 8-K, item 5.
Other Events, the Company issued a press release announcing the
financial results of the second quarter and six months ended
December 31, 2002.
- On February 14, 2003, the Company filed on Form 8-K, Item 9.
Regulation FD Disclosure, Officer's Certification, under Section
906 of the Sarbanes-Oxley Act of 2002, relating to the
Registrant's Quarterly Report on Form 10-Q for the six-month
period ended December 31, 2002.
==========================
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPARTON CORPORATION
---------------------------------------------
Registrant
Date: May 14, 2003 /s/ DAVID W. HOCKENBROCHT
---------------------------------------------
David W. Hockenbrocht, CEO and President
Date: May 14, 2003 /s/ RICHARD L. LANGLEY
---------------------------------------------
Richard L. Langley, Chief Financial Officer
17
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, DAVID W. HOCKENBROCHT, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sparton
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statement made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weakness.
Date: May 14, 2003 /s/ DAVID W. HOCKENBROCHT
---------------------------------
David W. Hockenbrocht, CEO
18
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, RICHARD L. LANGLEY, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sparton
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statement made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weakness.
Date: May 14, 2003 /s/ RICHARD L. LANGLEY
-----------------------------
Richard L. Langley, CFO
19