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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q/A
------------------
Amendment No. 1 to Form 10-Q
For Quarter Ended September 30, 1996
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
COMMISSION FILE NO. 1-4474
--------------------------
OAK INDUSTRIES INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-1569000
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
1000 WINTER STREET
WALTHAM, MASSACHUSETTS 02154
(Address of principal executive offices)
(617) 890-0400
(Registrant's telephone number)
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 number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
As of October 31, 1996, the Company had outstanding 18,310,438 shares of
Common Stock, $0.01 par value per share.
The undersigned registrant hereby amends the following items, financial
statements, and other portions of its quarterly report on Form 10-Q for
quarter ended September 30, 1996 as set forth on the pages attached hereto.
===========================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
(Unaudited)
------------------ -----------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................. $ 10,623 $ 16,842
Receivables, less reserve................. 44,619 38,314
Inventories:
Raw materials.......................... $ 12,932 $ 12,308
Work in process........................ 28,145 29,679
Finished goods......................... 10,155 51,232 6,527 48,514
---------- ----------
Deferred income taxes..................... 12,829 19,900
Other current assets...................... 3,479 3,088
--------- ---------
Total current assets................ 122,782 126,658
Plant and Equipment, at cost................. 140,657 123,083
Less - accumulated depreciation.............. (76,497) 64,160 (70,009) 53,074
---------- ---------
Deferred income taxes........................ 8,392 17,242
Goodwill and other intangible assets, less
accumulated amortization of
$10,170 and $9,518........................ 76,663 79,094
Investments in affiliates.................... 8,356 20,940
Net assets of discontinued operations........ 8,727 8,438
Other assets................................. 7,331 7,098
--------- ---------
Total assets........................ $ 296,411 $ 312,544
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Current portion of long-term debt......... $ 5,098 $ 14,691
Accounts payable.......................... 16,170 15,103
Accrued liabilities....................... 27,347 23,696
--------- ----------
Total current liabilities .......... 48,615 53,490
Other liabilities............................ 7,546 11,628
Long-term debt............................... 38,416 91,570
Minority interest............................ 43,254 36,643
Stockholders' Equity:
Common stock.............................. 182 177
Additional paid-in capital................ 289,589 282,179
Accumulated deficit....................... (129,396) (161,528)
Other..................................... (1,795) 158,580 (1,615) 119,213
----------- --------- --------- ----------
Total liabilities and stockholders'
equity......................... $ 296,411 $ 312,544
========= ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales....................................... $ 74,086 $ 59,886 $ 233,413 $ 186,338
Cost of sales................................... (45,416) (36,435) (142,479) (111,790)
--------- --------- --------- ---------
Gross profit.................................... 28,670 23,451 90,934 74,548
Selling, general and administrative expenses.... (14,504) (12,018) (48,129) (34,881)
Purchased in-process research and development... - (80,872) - (80,872)
--------- --------- --------- ---------
Operating income (loss)......................... 14,166 (69,439) 42,805 (41,205)
Interest expense................................ (990) (1,469) (4,100) (4,068)
Interest income................................. 108 451 374 1,426
Gain on sale of equity investments.............. 952 - 21,502 -
Equity in net income (loss) of
affiliated companies......................... (159) 236 (1,065) 1,171
--------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes and minority interest........... 14,077 (70,221) 59,516 (42,676)
Income taxes.................................... (4,884) (4,152) (22,215) (6,617)
Minority interest in net income of subsidiaries. (1,786) (2,400) (6,611) (7,738)
--------- --------- --------- ---------
Income (loss) from continuing operations........ 7,407 (76,773) 30,690 (57,031)
Income from discontinued operations, net of
income taxes................................. 358 538 1,442 2,334
--------- --------- --------- ---------
Net income (loss) before extraordinary charge... 7,765 (76,235) 32,132 (54,697)
Extraordinary charge for early extinguishment
of debt, net of income tax benefit of $1,506
and minority interest benefit of $746........ # (1,610) # (1,610)
--------- --------- --------- ---------
Net income (loss)............................... $ 7,765 $ (77,845) $ 32,132 $ (56,307)
========= ========= ========= =========
Income (loss) per common share:
Continuing operations........................ $ .39 $ (4.11) $ 1.65 $ (3.06)
Discontinued operations...................... .02 .03 .08 .12
Extraordinary charge......................... # (.09) # (.09)
--------- --------- --------- ---------
Net income (loss)............................ $ .41 $ (4.17) $ 1.73 $ (3.03)
========= ========= ========= =========
Weighted average shares......................... 18,827 18,679 18,612 18,613
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------
1996 1995
-------- --------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM:
Operating Activities:
Net income........................................... $ 30,690 $ (57,031)
Adjustments to reconcile income (loss)
from continuing operations to net cash provided
by operations:
Purchased in-process research and
development charge........................... - 80,872
Depreciation and amortization.................. 9,498 8,400
Change in minority interest.................... 6,611 7,738
Gain on sale of equity investment.............. (21,502) -
Change in assets and liabilities............... 10,556 (9,272)
Other.......................................... (123) (1,928)
-------- ---------
Net cash provided by continuing operations.............. 35,730 28,779
-------- ---------
Investing Activities:
Capital expenditures................................. (18,798) (10,900)
Acquisition of business, net of cash acquired........ - (100,019)
Proceeds from the sale of equity investment.......... 30,871 -
Other................................................ 337 277
-------- --------
Net cash provided by (used in) investing activities..... 12,410 (110,642)
-------- --------
Financing Activities:
Long-term borrowings.................................. - 114,000
Repayment of borrowings............................... (62,747) (22,315)
Early retirement of debt.............................. - (28,610)
Exercise of options................................... 7,352 441
Other................................................. 285 (1,627)
-------- --------
Net cash provided by (used in) financing activities...... (55,110) 61,889
-------- --------
Effect of exchange rates................................. (402) 1,180
-------- --------
Net cash provided by discontinued operations............. 1,153 681
-------- --------
Cash and Cash Equivalents:
Net change during the period.......................... (6,219) (18,113)
Balance, beginning of period.......................... 16,842 37,548
-------- --------
Balance, end of period................................ $ 10,623 $ 19,435
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
OAK INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(As Restated)
1. The condensed consolidated financial statements have been prepared by
Oak Industries Inc. (the "Company") without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes that the disclosures made in this report
are adequate to make the information presented not misleading. It is
suggested that these condensed financial statements be read in conjunction
with the financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K. In the opinion of the
Company, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of Oak Industries Inc.
and subsidiaries as of September 30, 1996 and December 31, 1995, and the
results of their operations for the three and nine month periods ending
September 30, 1996 and 1995 and cash flows for the nine month periods
ending September 30, 1996 and 1995 have been included. The results of
operations for such interim periods are not necessarily indicative of the
results for the full year.
2. In early 1997, the Company discovered that the controller of one of
its divisions, in collusion with two of his assistants, capitalized certain
amounts which should have been expensed in the periods incurred. The
amounts involved, which totaled $3,518,000 ($2,181,000 after taxes), or
$.12 per share, relate to portions of fiscal years 1995 and 1996. Because
the irregularities which relate to 1995 were not material, the 1995
financial statements were not restated; the first, second, and third
quarters of 1996 have been restated, and the cumulative effect of the 1995
misstatements is reflected in the restated financial statements for the
three months ended March 31, 1996. All amounts in this Form 10-Q/A have
been adjusted, as appropriate, to reflect the foregoing. In response to
this employee misconduct, the Company conducted an investigation of this
matter involving outside legal counsel and the Company's independent
accountants, terminated the employment of the individuals involved, and
executed a review of the internal control system at the applicable
division. The impact of these adjustments on the Company's financial
results for the three and nine months ended September 30 as originally
reported is summarized below (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
For The Three Months For The Nine Months
Ended September 30, 1996 Ended September 30, 1996
------------------------- ------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
------------------------- ----------------------------
<S> <C> <C> <C> <C>
Sales............................... $ 74,086 $ 74,086 $ 233,413 $ 233,413
Operating income.................... 14,980 14,166 46,323 42,805
Income from continuing
operations before income
taxes and minority interest..... 14,891 14,077 63,034 59,516
Income from continuing operations... 7,912 7,407 32,871 30,690
Net income.......................... 8,270 7,765 34,313 32,132
Net income per common share......... $ .44 $ .41 $ 1.84 $ 1.73
</TABLE>
3. Interest paid on debt for the three months ending September 30, 1996
and 1995 was $841,000 and $532,000, respectively, and for the nine months
ending September 30, 1996 and 1995 was $4,096,000 and $2,806,000,
respectively. Income taxes, consisting primarily of foreign and state,
paid during the three months ended September 30, 1996 and 1995 were
$831,000 and $960,000, respectively, and during the nine months ended
September 30, 1996 and 1995 were $5,407,000 and $2,707,000, respectively.
4. During the third quarter of 1996, the Company completed the sale of
its 45% interest in O/E/N India Ltd. for $1,471,000 in cash. As a result
of this sale the Company reported a pre-tax gain of $952,000 on the "Gain
on sale of equity investments" line of the Consolidated Statement of
Operations in the third quarter of 1996.
5. During the first quarter of 1996, the Company sold its 49% interest in
Video 44 (WENS-TV Channel 44), a Hispanic television station located in
Chicago, and received net proceeds of $29,400,000. The Company recorded a
pre-tax gain of $20,550,000 from the sale. Proceeds of $29,000,000 were
used to reduce debt.
6. During the first quarter of 1996, the Company recorded a pre-tax
charge of $1,900,000 associated with the write down of certain assets and a
reserve for potential legal and environmental costs.
7. Certain items in the 1995 Consolidated Statement of Operations have
been reclassified to conform with 1996 presentation.
8. In October 1996, the Company sold its Nordco Inc. ("Nordco")
subsidiary to an affiliate of Banc One Venture Corporation and members of
Nordco management for net cash proceeds of approximately $19,381,000. The
Company will report a gain of approximately $9,367,000 from the sale in the
fourth quarter of 1996. Because the tax basis of Nordco is greater than
the sales price, the Company will not pay income taxes nor record an income
tax provision related to this transaction.
As a result of the sale of Nordco, the Company has restated its prior
year consolidated financial statements to reflect Nordco as a discontinued
operation. The results of the discontinued operations reflected in the
consolidated statements of operations are as follows ($000s):
<TABLE>
<CAPTION>
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
----------------------- --------------------
<S> <C> <C> <c< <C>
Net sales................................ $ 4,694 $ 5,156 $ 16,715 $ 17,236
======= ======= ======== ========
Gross profit............................. $ 1,628 $ 2,086 $ 5,780 $ 6,475
======= ======= ======== ========
Earnings before income taxes............. $ 577 $ 882 $ 2,325 $ 2,852
Income taxes............................. (219) (344) (883) (518)
------- ------- -------- --------
Net earnings from discontinued
operations........................... $ 358 $ 538 $ 1,442 $ 2,334
======= ======= ======== ========
</TABLE>
The components of net assets of discontinued operations included in the
Consolidated Balance Sheet at September 30, 1996 and December 31, 1995
were as follows ($000s):
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
<S> <C> <C>
Inventories............................ $ 3,719 $ 3,814
Receivables, less reserve.............. 3,623 2,317
Other current assets................... 697 827
PPandE, net............................ 517 494
Intangibles, net....................... 612 699
Other.................................. 907 1,742
Current liabilities.................... (1,348) (1,455)
--------- ---------
Net assets of discontinued operations.. $ 8,727 $ 8,438
========= =========
</TABLE>
b) On November 1, 1996, the Company purchased the 20% interest in
Connector Holding Co. ("Connector") owned by certain affiliates of Bain
Capital, Inc. ("Bain") for approximately $95,000,000 in cash, including
transaction expenses. Because Connector owns 85% of Gilbert Engineering
Co., Inc. ("Gilbert"), as a result of this transaction the Company
acquired a 17% indirect interest in Gilbert. The acquisition will be
accounted for as a purchase and accordingly the minority interest related
to Bain subsequent to the date of acquisition will be excluded from the
Company's future consolidated financial statements. Goodwill of
approximately $72,000,000 resulting from this acquisition will be amortized
over 36 years. The purchase price was financed with the proceeds from a
new $300,000,000 revolving credit facility.
c) On November 1, 1996, the Company entered into a new credit agreement
with various lenders which provides for a $300,000,000 revolving credit
facility (the "Facility"). On November 1, 1996, proceeds of $95,000,000
from the Facility were used to purchase the minority interest of Connector
owned by Bain and $21,000,000 was used to refinance existing indebtedness
of the Company. The Company's previously existing $200,000,000 credit
agreements were terminated on November 1, 1996. The Company will incur a
non-cash, after tax charge of approximately $949,000 in the fourth quarter
of 1996 related to the early extinguishment of the former credit
facilities.
Borrowings under the Facility bear interest, at the option of the
Company, either (i) at the prime rate (or, if higher, at 1/2% above the
federal funds rate) or (ii) at a spread of (1/2% to 1%) over the reserve-
adjusted 1, 2, 3 or 6 month LIBOR rate. The spread is initially 3/4% and
is subject to adjustment based on certain financial tests. Certain of the
Company's subsidiaries have guaranteed the obligations under the Facility.
The Company is required to meet certain financial covenants and is
prohibited from paying dividends.
The Facility will be reduced by $50,000,000 on each of November 1,
1999 and November 1, 2000 and matures on December 31, 2001.
d) On November 15, 1996, the Company announced that it had agreed to
purchase the 15% interest in Gilbert that is currently owned by certain
members of the management of Gilbert. The Company expects to purchase 7.5%
of Gilbert from Gilbert management in the fourth quarter of 1996 at a
purchase price of approximately $30,600,000. This acquisition will be
accounted for as a purchase and accordingly, the minority interest related
to the portion purchased from Gilbert management subsequent to the date of
acquisition will be excluded from the Company's future consolidated
financial statements. Substantially all of the goodwill of approximately
$20,000,000 resulting from this acquisition will be amortized over 36
years. Upon the consummation of this transaction in the fourth quarter of
1996, the Company will own 92.5% of Gilbert. The Company will purchase the
remaining 7.5% over the next two years at a price that will be a multiple
of earnings. These transactions will be financed with working capital and
the borrowings from the new $300,000,000 revolving credit facility.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company has restated its interim financial statements for the first,
second, and third quarters of 1996 as described in Note 2 of Notes to
Condensed Consolidated Financial Statements. This restatement relates to
the reversal of certain capitalized amounts that should have been expensed
in the periods incurred.
In October 1996, the Company sold its Nordco Inc. ("Nordco") subsidiary
which was the only business included in the Other Segment. As a result of
the sale, the Company has restated prior year consolidated financial
statements to reflect Nordco as a discontinued operation. The Company now
operates entirely in one segment, the Components Segment. The Company will
report a gain of approximately $9.4 million from the sale in the fourth
quarter of 1996.
On November 1, 1996, the Company purchased the 20% interest in Connector
Holding Co. ("Connector") owned by certain affiliates of Bain Capital, Inc.
("Bain") for approximately $95 million in cash, including transaction
expenses. Because Connector owns 85% of Gilbert Engineering Co., Inc.
("Gilbert"), as a result of this transaction the Company acquired a 17%
indirect interest in Gilbert. The acquisition will be accounted for as a
purchase and accordingly the minority interest related to Bain subsequent
to the date of acquisition will be excluded from the Company's future
consolidated financial statements. Goodwill of approximately $72 million
resulting from this acquisition will be amortized over 36 years. The
purchase price was financed with the proceeds from a new $300 million
revolving credit facility.
In November 1996, the Company announced that it had agreed to purchase
the 15% interest in Gilbert that is currently owned by certain members of
the management of Gilbert. The Company expects to purchase 7.5% of Gilbert
from Gilbert management in the fourth quarter of 1996 at a purchase price
of approximately $30.6 million. This acquisition will be accounted for as
a purchase and accordingly, the minority interest related to the portion
purchased from Gilbert management subsequent to the date of acquisition
will be excluded from the Company's future consolidated financial
statements. Goodwill of approximately $20 million resulting from this
acquisition will be amortized over 36 years. Upon the consummation of this
transaction in the fourth quarter of 1996, the Company will own 92.5% of
Gilbert. The Company will purchase the remaining 7.5% over the next two
years at a price that will be a multiple of earnings. These transactions
will be financed with working capital and the borrowings from the new $300
million revolving credit facility.
The Company's previously existing $200 million credit agreements were
terminated on November 1, 1996. The Company will incur a non-cash, after
tax charge of approximately $0.9 million in the fourth quarter of 1996
related to the early extinguishment of the former credit facilities.
Third Quarter Results
Sales for the third quarter of 1996 reached $74.1 million, an increase
of 23.7% over the $59.9 million in the same period of 1995 primarily due to
incremental sales of Lasertron Inc. ("Lasertron"), purchased in September
1995 and increased sales of Controls Components.
The Company reported net income of $7.8 million in 1996 compared to a
net loss of $77.8 million in 1995. The Company's results of operations for
the three months ended September 30, 1996 and 1995 can be summarized as
follows (in millions):
<TABLE>
<CAPTION>
For The Three Months
Ended September 30,
1996 1995
---------------------
<S> <C> <C>
Pre-tax income excluding unusual items............... $ 13.1 $ 11.2
Income taxes......................................... (4.5) (4.3)
Minority interest.................................... (1.8) (2.4)
------ ------
Net income excluding unusual items................... 6.8 4.5
Unusual items:
Gain on the sale of equity investment (1)......... .9 #
Purchased in-process research and
development (2)................................ # (80.9)
Reversal of inventory write-up required by
purchase accounting (3)........................ # (.5)
Tax effect of unusual items (1), (3).............. (.3) .2
Income from discontinued operations............... .4 .5
Extraordinary charge for early extinguishment of
debt (4)....................................... # (1.6)
------ ------
Net income as reported............................... $ 7.8 $ (77.8)
====== ======
<FN>
(1) In the third quarter of 1996, the Company completed the sale of its
45% interest in O/E/N India Ltd. for $1.5 million in cash and recorded a
pre-tax gain of $0.9 million. The Company also recorded an income tax
expense of $0.3 million related to this gain.
(2) In the third quarter of 1995, the Company recorded a charge of $80.9
million related to purchased in-process research and development in
connection with the Lasertron acquisition.
(3) In the third quarter of 1995, the Company recorded a charge of $0.5
million, included in cost of goods sold, related to the partial reversal of
the write-up of Lasertron inventory required by purchase accounting. The
Company also recorded an income tax benefit of $0.2 million related to this
charge.
(4) In the third quarter of 1995, the Company recorded an extraordinary
charge of $1.6 million, net of taxes and minority interest, related to the
early extinguishment of debt at Gilbert and Connector.
</TABLE>
Income from continuing operations, excluding unusual items, increased
51.1% to $6.8 million in the third quarter of 1996 from $4.5 million
recorded in the third quarter of 1995. Operating income before unusual
items increased $2.2 million from third quarter 1995 results due primarily
to incremental profits from higher sales volume.
Communications Components
Communications Components revenues increased 21.9% in the third quarter
of 1996 over the same period in 1995 due primarily to incremental revenues
from Lasertron, which was purchased in September 1995 and therefore
included for only one month in the third quarter 1995 results. Subsequent
to the end of the third quarter of 1996, Gilbert's single largest customer,
a domestic CATV service provider, notified the Company that it was
temporarily suspending all shipments from its vendors as part of an
inventory reduction program. The impact on the Company's fourth quarter
results cannot be reasonably estimated at this time.
Controls Components
The sales of Controls Components increased 28.3% in the third quarter of
1996 over the same period in 1995, principally as the result of increased
demand for sensing devices combined with sales growth of gas appliance
control products.
Gross Profit
The gross profit margin excluding unusual items, decreased to 38.7% for
the third quarter of 1996 from 40.0% in the third quarter of 1995 due
primarily to a higher mix of lower margin control components and expenses
associated with the start up of the new Lasertron facilities in the third
quarter of 1996. Adjustments to reflect inventories at fair value,
required by purchase accounting for the acquisition of the 24.5% interest
in Gilbert previously owned by Bain and certain members of Gilbert
management, will flow through cost of sales as the inventories are assumed
to be sold during the fourth quarter of 1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, excluding unusual items,
increased from $12.0 million in the third quarter of 1995 to $14.5 million
in the third quarter of 1996 due to the inclusion of Lasertron for a full
quarter in 1996 and for only one month in 1995. Despite this increase,
selling, general and administrative expenses decreased as a percentage of
sales to 19.6% in the third quarter of 1996 from 20.1% in the third quarter
of 1995. Beginning with the fourth quarter of 1996, annual amortization
expense of approximately $2.5 million relating to the goodwill from the
purchase of the 24.5% interest in Gilbert previously owned by Bain and by
certain members of Gilbert management, will be reflected in selling,
general and administrative expenses.
Interest
Interest expense decreased to $1.0 million in the third quarter of 1996
from $1.5 million in 1995 due to lower average debt balances. Higher
interest expense resulting from increased borrowings for the purchase of
the 24.5% interest in Gilbert previously owned by Bain and by certain
members of Gilbert management, will be reflected beginning with the fourth
quarter of 1996.
Interest income decreased to $0.1 million in 1996 from $0.5 million in
the third quarter of 1995 as average cash balances decreased. The Company
used approximately $20.0 million of cash in conjunction with its
acquisition of Lasertron in September of 1995.
Equity Income
Equity income decreased from $0.2 million in the third quarter of 1995
to a loss of $0.2 million in the third quarter of 1996. The Company sold
its 49% interest in Video 44 (WSNS-TV Channel 44), a Hispanic television
station located in Chicago, in the first quarter of 1996 and as a result,
the Company's proportionate share of Video 44's earnings was not included
in the third quarter of 1996. As a result of its acquisition of Lasertron
in September 1995, the Company has included in equity income its
proportionate share of the earnings or losses of its 50% owned Wuhan
Telecommunications Devices Company ("WTD"), located in the People's
Republic of China.
Income Taxes
The effective income tax rate excluding unusual items was 34.4% for the
third quarter of 1996 as compared to 39.0% in the third quarter of 1995.
This reduction in the tax rate was the result of the favorable resolution
of several state tax matters during the third quarter of 1996.
Minority Interest
Minority interest expense decreased from $2.4 million in the third
quarter of 1995 to $1.8 million in the third quarter of 1996. This
decrease is due to the fact that, as a result of a tax sharing agreement
between the Company and Gilbert, the minority interest of Gilbert benefited
from a lower cash tax rate for financial reporting purposes in the third
quarter of 1995. Beginning with the fourth quarter of 1996, minority
interest related to the purchase of the 24.5% interest in Gilbert
previously owned by Bain and by certain members of Gilbert management will
be excluded from the Company's future consolidated financial statements.
Nine Month Results
Sales for the first nine months of 1996 were $233.4 million, and
increased 25.3% from $186.3 million in the first nine months of 1995
primarily due to incremental sales of Lasertron, purchased in September
1995, and also due to growth in the Communication Components and Controls
Components businesses.
The Company reported net income of $32.1 million for the first nine
months of 1996 compared to a loss of $56.3 million in 1995. However, both
periods include unusual items as detailed below. Net income for the first
nine months of 1996 includes a net gain of $13.3 million ($21.5 million
less $8.2 million income tax expense) from the sale of the Company's 49%
interest in Video 44, a joint venture owning WSNS-TV Channel 44 and the
sale of the Company's 45% interest in O/E/N India Ltd. and the write down
of certain assets and a reserve to cover certain legal and environmental
contingencies of $1.2 million. The first nine months of 1996 also include
certain amounts which should have been expensed in the periods incurred.
Since the irregularities which occurred in 1995 were not material ($1.1
million) to the 1995 results, the 1995 financials were not restated. The
irregularities which occurred in 1995 are reflected as an unusual item in
the first nine months of 1996.
The Company's results of operations for the first nine months of 1996
and 1995 can be summarized as follows (in millions):
<TABLE>
<CAPTION>
For The Nine Months For The Nine Months
Ended September 30, Ended September 30,
1996 1995
------------------- --------------------
<S> <C> <C>
Pre-tax income excluding unusual items........ $ 41.1 $ 38.7
Income taxes.................................. (15.3) (6.8)
Minority interest............................. (6.6) (7.7)
------- -------
Net income excluding unusual items............ 19.2 24.2
Unusual items:
Gain on the sale of equity investment...... 21.5 -
Asset write down and other reserves........ (1.9) -
Improperly capitalized expenses............ (1.1) -
Tax impact of unusual items................ (7.0) -
Purchased in-process research and
development (1)......................... - (80.9)
Reversal of inventory write-up required
by purchase accounting (2).............. - (.5)
Tax effect of reversal of inventory
write-up (2)........................... - .2
Income from discontinued operations........ 1.4 2.3
Extraordinary charge for early
extinguishment of debt (3)............. - (1.6)
-------- ------
Net income (loss) as reported................. $ 32.1 $(56.3)
======== =======
<FN>
(1) In the third quarter of 1995, the Company recorded a charge of $80.9
million for purchased, in-process research and development in connection
with the Lasertron acquisition.
(2) In the third quarter of 1995, the Company recorded a charge of $0.5
million, included in cost of goods sold, related to the partial reversal of
the write-up of Lasertron inventory required by purchase accounting. The
Company also recorded an income tax benefit of $0.2 million related to this
charge.
(3) In the third quarter of 1995, the Company recorded an extraordinary
charge of $1.6 million, net of taxes and minority interest, related to the
early extinguishment of debt at Gilbert and Connector.
</TABLE>
The first nine months of 1996 income tax provision, excluding the impact
of unusual items, increased $8.5 million over the same period in 1995
principally due to an increase in the effective tax rate for financial
reporting purposes. The annual effective income tax rate for financial
reporting purposes increased to 37% in the first nine months of 1996 from
18% in the corresponding period of the prior year reflecting the provision
of a full U.S. statutory rate beginning in the third quarter of 1995.
Minority interest decreased $1.1 million in the first nine months of
1996 as compared to the same period in 1995, due to the fact that as a
result of a tax sharing agreement between the Company and Gilbert, the
minority interest of Gilbert benefited from a lower tax rate for financial
reporting purposes in the first nine months of 1995.
Pre-tax income before minority interest and unusual items increased by
$2.4 million to $41.1 million in the first nine months of 1996 from $38.7
million recorded in 1995. Operating income, before unusual items,
increased $4.8 million from 1995 results due primarily to incremental
profits from higher sales volume and it was partially offset by decreased
interest income ($1.1 million) and decreased equity income ($1.3 million).
Communications Components
Communications Components revenues increased 31.8% in the first nine
months of 1996 over the same period in 1995. Excluding the impact of
Lasertron, which was purchased in September 1995 and therefore not included
in all of 1995 results, Communication Components revenues increased 11.1%
over the first nine months of 1995. Excluding Lasertron, Communications
Components sales increased over prior year's results due primarily to
increased construction of cable television networks in international
markets, upgrading of domestic cable systems, and expanding applications
for products in cellular, paging and personal communications systems.
Controls Components
Sales of Controls Components increased 12.2% in the first nine months of
1996 over the same period in 1995 principally as the result of increased
demand for sensing devices combined with modest sales growth of gas
appliance control products.
Gross Profit
Gross profit margin, excluding unusual items, was 39.4% for the first
nine months of 1996 and 40.3% for the same period in 1995.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, excluding unusual items,
increased as a percentage of sales to 20.2% in the first nine months of
1996 from 18.7% in the same period of 1995 due to an increase in research
and development expenditures related to the acceleration of product
prototyping activity for wireless communications and wired telephony
applications. Most of the increase was attributable to Lasertron which was
acquired in September 1995.
Interest Expense
Interest expense was $4.1 million for both the first nine months of 1996
and 1995.
Interest income decreased to $0.4 million in 1996 from $1.4 million in
the first nine months of 1995 as average cash balances decreased. The
Company used approximately $20.0 million of cash in conjunction with its
acquisition of Lasertron in September 1995.
Equity Income
During the first nine months of 1996, the Company sold its 49% interest
in Video 44 (WSNS-TV Channel 44), a Hispanic television station located in
Chicago, and received net proceeds of $29.4 million. The Company recorded
a pre-tax gain of $20.5 million from the sale. Due to this transaction,
the Company's proportionate share of Video 44's earnings was included in
1995 results but not in the nine months of 1996 results subsequent to the
sale. In addition, as a result of its acquisition of Lasertron, the
Company has included in equity income its proportionate share of the
earnings or losses of its 50% owned Wuhan Telecommunications Devices
Company ("WTD"), located in the People's Republic of China in 1996 results.
Liquidity and Capital Resources
Cash flow from operations increased to $35.7 million in the first nine
months of 1996 from $28.8 million generated in the same period in 1995,
reflecting an increase in income from operations combined with a reduction
in the level of working capital. The Company accelerated its rate of
capital spending to $18.8 million in the first nine months of 1996 from
$10.9 million in the same period for 1995 due, in part, to new capacity
brought on line to support higher production volumes and new products and
in part, to additional expenditures for automation of production processes
to reduce both cost and manufacturing cycle time, expanded use of CAD
capabilities and new prototyping equipment to reduce development cycle
times.
Debt net of cash decreased to $32.9 million at September 30, 1996 from
$89.4 million at December 31, 1995. Cash proceeds of $29.0 million from
the sale of the Company's 49% interest in Video 44 (WSNS-TV Channel 44), a
Hispanic television station located in Chicago, were used to reduce debt.
In addition, the Company repaid $33.7 of debt in the first nine months of
1996.
On November 1, 1996, the Company entered into a new credit agreement
with various lenders which provides for a $300 million revolving credit
facility (the "Facility"). On November 1, 1996, proceeds of $95 million
from the Facility were used to purchase the minority interest of Connector
held by Bain and $21 million was used to refinance existing indebtedness of
the Company. The Company's previously existing $200 million credit
agreements were terminated on November 1, 1996.
Borrowings under the Facility bear interest, at the option of the
Company, either (i) at the prime rate (or, if higher, at 1/2% above the
federal funds rate) or (ii) at a spread of (1/2% to 1%) over the reserve-
adjusted 1, 2, 2 or 6 month LIBOR rate. The spread is initially 3/4% and
is subject to adjustment based on certain financial tests. Certain of the
Company's subsidiaries have guaranteed the obligations under the Facility.
The Company is required to meet certain financial covenants and is
prohibited from paying dividends.
The Facility will be reduced by $50.0 million on each of November 1,
1999 and November 1, 2000 and matures on December 31, 2001.
In November 1996, the Company announced that it had agreed to purchase
the 15% interest in Gilbert that is currently owned by certain members of
the management of Gilbert. The Company expects to purchase from Gilbert
management 7.5% of Gilbert in the fourth quarter of 1996 at a purchase
price of approximately $30.6 million. Upon the consummation of this
transaction in the fourth quarter of 1996, the Company will own 92.5% of
Gilbert. The Company will purchase the remaining 7.5% over the next two
years at a price that will be a multiple of earnings. These transactions
will be financed with working capital and the borrowings from the new $300
million revolving credit facility.
In October 1996, the Company sold its Nordco Inc. subsidiary for $19.4
million in cash. These proceeds were used to further pay down debt in the
fourth quarter of 1996.
The Company believes that funds generated by operations, existing cash
balances and its available credit facility will be sufficient to fund the
Company's ongoing operations over the next year.
Risks and Uncertainties
Revenues from telecommunications components will account for a majority
of the Company's future revenues. Although demand for these products has
grown in recent years with the build out of telecommunications networks in
domestic and international markets, a decrease in the rate of
infrastructure construction or upgrade programs could have an adverse
impact on the Company's results of operations.
The telecommunications industry is very competitive and is characterized
by rapid technological change, new product development, product
obsolescence and evolving product specifications. Additionally, price
competition in this market is intense with significant price erosion over
the life cycle of a product. The ability of the Company to compete
successfully depends on the continued introduction of new products and
ongoing manufacturing cost reduction.
Sales of the Company's Controls Components are in large part dependent
on the production level of a few North American appliance manufacturers,
which in turn is sensitive to the strength of the economy, including
housing starts, consumer disposable income and interest rates. Adverse
changes in the economy could have a negative impact on the Company's
financial results.
The Company currently buys a number of raw materials from single
sources. In most cases there are readily available and qualified
alternative sources of supply. Although the Company does not at this time
have a qualified second source for one critical component used in the
production of fiber optic modules, management believes there are other
suppliers that could provide a like quality product on comparable terms. A
change in suppliers for this product could cause a delay in manufacturing
and adversely impact operating results.
The Company must comply with governmental regulations relating to the
environment. The cost of compliance with environmental regulations in 1995
was immaterial and is not expected to have a material effect on capital
expenditures or operating results in 1996.
Various pending or threatened legal proceedings by or against the
Company or one or more of its subsidiaries involve alleged breaches of
contract, torts and miscellaneous other causes of action arising in the
course of business. The Company's management, based upon advice of legal
counsel representing the Company with respect to each of these proceedings,
does not believe any of these proceedings will have a significant impact on
the Company's consolidated financial position.
The Company's international operations and its results could be affected
by changes in policies of foreign governments and in social and economic
conditions outside the U.S. including civil unrest, changing inflation and
foreign exchange rates, and trade restrictions or prohibitions.
Any of the foregoing could have an adverse effect on future results.
OAK INDUSTRIES INC.
SIGNATURES
Pursuant to the requirement 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.
OAK INDUSTRIES INC.
Date: February 10, 1997 /s/ Francis J. Lunger
Francis J. Lunger
Senior Vice President and
Chief Financial Officer
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<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Sep-30-1996
<CASH> 10,623
<SECURITIES> 0
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