<PAGE>
===========================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
------------------
For Quarter Ended March 31, 1999
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 02451
(Address of principal executive offices)
(781) 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 May 12, 1999, the Company had outstanding 18,213,396 shares of Common
Stock, $0.01 par value per share.
===========================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
--------------------- ---------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 13,754 $ 16,331
Receivables, less reserves................. 59,968 65,975
Inventories:
Raw materials........................... 28,225 26,633
Work in process......................... 33,699 32,496
Finished goods.......................... 15,397 77,321 11,622 70,751
--------- ---------
Deferred income taxes...................... 11,491 11,733
Other current assets....................... 2,902 3,059
--------- ---------
Total current assets................. 165,436 167,849
Plant and equipment, at cost.................. 199,027 199,471
Less - accumulated depreciation............... (100,057) 98,970 (104,531) 94,940
--------- ---------
Goodwill and other intangible assets, less
accumulated amortization of
$23,566 and $24,830........................ 196,531 193,301
Investment in affiliates...................... 11,014 10,641
Other assets.................................. 10,486 12,730
--------- ---------
Total Assets......................... $ 482,437 $ 479,461
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt.......... $ 2,051 $ 1,800
Accounts payable........................... 20,800 19,627
Accrued liabilities........................ 30,453 22,105
--------- ---------
Total current liabilities............ 53,304 43,532
Other Liabilities............................. 8,603 11,188
Long-Term Debt, Net of Current Portion........ 119,555 119,498
4 7/8% Convertible Subordinated Notes......... 100,000 100,000
Stockholders' Equity:
Common stock............................... 192 194
Additional paid-in capital................. 312,860 317,630
Accumulated deficit........................ (70,617) (64,593)
Accumulated other comprehensive income..... (4,662) (10,234)
Unearned compensation - restricted stock... (995) (2,023)
Treasury stock............................. (35,541) (35,469)
Other...................................... (262) 200,975 (262) 205,243
--------- --------- --------- ---------
Total Liabilities and
Stockholders' Equity.............. $ 482,437 $ 479,461
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------
1998 1999
-------- --------
<S> <C> <C>
Net sales................................................. $ 79,214 $ 104,833
Cost of sales............................................. (49,540) (70,656)
--------- ----------
Gross profit.............................................. 29,674 34,177
Selling, general and administrative expenses.............. (17,170) (20,976)
--------- ----------
Operating income.......................................... 12,504 13,201
Interest expense.......................................... (2,565) (3,527)
Interest income........................................... 177 99
Equity in net income of affiliated companies.............. 584 (359)
--------- ----------
Income before income taxes and minority interest.......... 10,700 9,414
Income tax provision...................................... (4,066) (3,390)
Minority interest in net income of subsidiaries........... (142) --
--------- ----------
Net income................................................ $ 6,492 $ 6,024
========= ==========
Income per share - basic
Net income.......................................... $ .37 $ .34
========= ==========
Weighted average number of shares outstanding - basic..... 17,744 17,542
========= ==========
Income per share - diluted
Net income.......................................... $ .35 $ .33
========= ==========
Weighted average number of shares outstanding - diluted... 19,464 20,851
========= ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
------------------------
1998 1999
-------- --------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM:
Operating Activities:
Net income............................................. $ 6,492 $ 6,024
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation..................................... 3,427 4,826
Amortization..................................... 1,825 2,137
Minority interest................................ 142 --
Gain on the sale of equity investments........... (477) --
Undistributed earnings of affiliated companies... (107) 359
Changes in assets and liabilities:
Receivables................................... (3,501) (6,629)
Inventories................................... (5,264) 5,637
Accounts payable and accrued liabilities...... 3,696 (8,535)
Other......................................... 57 (357)
--------- --------
Net cash provided by operations........................... 6,290 3,462
--------- --------
Investing Activities:
Capital expenditures................................... (3,106) (3,674)
Other.................................................. 24 135
--------- --------
Net cash used in investing activities..................... (3,082) (3,539)
--------- --------
Financing Activities:
Long-term borrowings................................... 104,000 13,000
Repayment of borrowings................................ (110,191) (12,655)
Exercise of stock options.............................. 1,160 2,923
Dividends paid to minority stockholders................ (458) --
Deferred debt issuance costs........................... (3,213) --
--------- --------
Net cash provided by (used in) financing activities....... (8,702) 3,268
--------- --------
Effect of exchange rate changes on cash
and cash equivalents................................... (30) (614)
--------- --------
Cash and Cash Equivalents:
Net change during the period........................... (5,524) 2,577
Balance, beginning of period........................... 8,642 13,754
--------- --------
Balance, end of period................................. $ 3,118 $ 16,331
========= ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
OAK INDUSTRIES INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The consolidated condensed financial statements have been prepared by
Oak Industries Inc. (together with its consolidated subsidiaries, 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 the Company as of December 31, 1998 and March 31, 1999, and the
results of its operations and cash flows for the three month periods ending
March 31, 1998 and 1999 have been included. The results of operations for
such interim periods are not necessarily indicative of the results for the
full year.
2. The Company paid interest on debt for the three months ended March 31,
1998 and 1999 in the amounts of $2.3 million and $4.3 million,
respectively. Income taxes paid during the three months ended March 31,
1998 and 1999 were $1.1 million and $4.1 million, respectively.
3. The following represents a reconciliation of the net income and
weighted average number of shares used in the basic and diluted earnings
per share computations (in thousands, except per share data):
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------
1998 1999
-------- --------
<S> <C> <C>
Basic
Net income.................................... $ 6,492 $ 6,024
Weighted average shares outstanding........... 17,744 17,542
Net income per share.......................... $ .37 $ .34
========= =========
Diluted
Net income.................................... $ 6,492 $ 6,024
Interest expense and amortization of deferred
costs, net of tax, related to 4 7/8%
convertible subordinated notes............. 320 833
--------- ---------
Net income as adjusted........................ $ 6,812 $ 6,857
Weighted average shares:
Outstanding................................ 17,744 17,542
Incremental shares related to 4 7/8%
convertible subordinated notes.......... 1,035 2,587
Incremental shares related to other common
stock equivalents.......................... 685 722
--------- ---------
Total shares outstanding, as adjusted......... 19,464 20,851
Net income per share.......................... $ .35 $ .33
========= =========
</TABLE>
4. Certain items in the 1998 financial statements have been reclassified
to conform with 1999 presentation.
5. The Company's total comprehensive income was $6.4 million and $0.5
million for the three months ended March 31, 1998 and 1999, respectively.
The difference between comprehensive income and net income is due to the
inclusion of foreign currency translation adjustments and unrealized gains
on available-for-sale securities in comprehensive income. For the three
months ended March 31, 1998 and 1999, foreign currency translation
adjustments were losses of $0.2 million and $5.6 million, respectively, and
unrealized gains on available-for-sale securities amounted to $0.1 million
for the three months ended March 31, 1998. There were no unrealized gains
on available-for-sale securities for the three months ended March 31, 1999.
6. The Company's reportable segments are business units that offer
different products. The Company has four reportable segments: the "Cable
Broadband Products Segment," which manufactures coaxial connector products
used primarily in broadband networks; the "Frequency Control Products
Segment," which manufactures quartz-based crystals and oscillators for
wireless base stations and telecommunications applications; the "Fiber-
Optic Products Segment," which manufactures fiber-optic components
primarily used in wired telephony networks; and the "Controls Products
Segment," which manufactures components for gas ranges, and switches and
encoders used in a variety of applications.
Reported segment income is operating income and equity in net income
(loss) of affiliated companies directly attributable to the segment,
adjusted for minority interest in income before income taxes of
subsidiaries. Operating income is before corporate expenses, interest, and
unusual transactions. Equity in net income (loss) of affiliated companies
is before unusual transactions.
Summarized financial information concerning the Company's reportable
segments is shown in the following table (dollars in thousands):
<TABLE>
<CAPTION>
CABLE FREQUENCY
BROADBAND CONTROL FIBER-OPTIC CONTROLS
PRODUCTS PRODUCTS PRODUCTS PRODUCTS TOTAL
--------- --------- ----------- -------- -----
<S> <C> <C> <C> <C> <C>
QUARTER ENDED MARCH 31, 1999
Sales............................ $ 34,676 $ 25,994 $ 17,503 $ 26,660 $ 104,833
Operating income................. 10,010 (1,385) 3,621 2,648 14,894
Equity in net income of
affiliated companies........... -- -- (359) -- (359)
Minority interest in income
before income taxes of
subsidiaries................... -- -- -- -- --
Segment income................... 10,010 (1,385) 3,262 2,648 14,535
QUARTER ENDED MARCH 31, 1998
Sales............................ 25,567 17,118 13,108 23,421 79,214
Operating income................. 6,121 2,649 2,295 2,529 13,594
Equity in net income of
affiliated companies (1)....... -- 370 223 -- 593
Minority interest in income
Before income taxes of
Subsidiaries................... (252) -- -- -- (252)
Segment income................... 5,869 3,019 2,518 2,529 13,935
</TABLE>
The following is a reconciliation of combined segment income to
consolidated income before income taxes and minority interest:
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------
1998 1999
-------- --------
<S> <C> <C>
Total income for reportable segments.................... $ 13,935 $ 14,535
Corporate............................................... (1,090) (1,693)
Interest expense........................................ (2,565) (3,527)
Interest income......................................... 177 99
Equity in net income (loss) of affiliated companies..... (9) --
Minority interest in income before income taxes
of subsidiaries.................................. 252 --
--------- ---------
Income before income taxes and minority interest........ $ 10,700 $ 9,414
========= =========
</TABLE>
(1) Includes gain on sale of an equity investment in the Frequency
Control Products Segment.
7. Subsequent event:
On April 21, 1999, the Company announced that it had initiated
discussions with investment bankers and other advisors about the possible
initial public offering of a minority interest in its wholly-owned
subsidiary, Lasertron, Inc. ("Lasertron"). The Company stated that such an
initial public offering could be followed by a tax-free spin-off of the
remaining shares of Lasertron, subject to, among other things, a favorable
ruling from the Internal Revenue Service and approval by the Company's
Board of Directors.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST QUARTER RESULTS OF OPERATIONS
- -----------------------------------
SUMMARY
Net sales increased 32% to $104.8 million in the first quarter of 1999
from $79.2 million in the first quarter of 1998. Each of the Company's
business segments significantly increased sales in the first quarter of
1999 compared to sales during the first quarter of 1998. Net income
decreased to $6.0 million in the first quarter of 1999 from $6.5 million in
the first quarter of 1998 primarily due to reduced profitability in the
Frequency Control Products Segment.
SALES
Sales by the Frequency Control Products Segment for the first quarter of
1999 increased 52% over sales in the first quarter of 1998 primarily as the
result of the addition of sales by Tele Quarz GmbH ("Tele Quarz"), which
was acquired during the fourth quarter of 1998. The Cable Broadband
Products Segment increased its sales for the first quarter of 1999 by 36%
over sales for the first quarter of 1998 mainly as a result of strong
demand from domestic CATV customers. The successful introduction of
several new products and increased international sales also contributed to
the growth in sales by the Cable Broadband Products Segment. Sales by the
Fiber-Optic Products Segment during the first quarter of 1999 grew by 34%
compared to the comparable period in the prior year primarily as the result
of increased sales of 980 nm pump products, including the sales of
significantly increased volumes of 980 nm pump products with optical power
greater than 150 mW. The Controls Products Segment's sales during the
first quarter of 1999 increased by 14% compared to the sales levels
achieved during the first quarter of 1998. Within the Controls Products
Segment, sales of both gas range components and switch and encoder products
increased as the result of market share gains and the introduction of new
products.
GROSS PROFIT
The gross profit margin for the first quarter of 1999 was 32.6% compared
to 37.5% during the first quarter of 1998. The decrease in gross profit
margin was mainly the result of reduced gross profit margin in the
Frequency Control Products Segment. The reduced margin in the Frequency
Control Products Segment was caused by increased costs associated with the
reorganization of the segment's North American operations and by the
inclusion of the results of Tele Quarz, which sells products with gross
margins lower than the gross profit margin for the products sold by the
Frequency Control Products Segment during the first quarter of 1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses increased to $21.0 million
during the first quarter of 1999 compared to $17.2 million of such expenses
during the first quarter of 1998. This increase was primarily the result
of the addition of selling, general, and administrative expenses of Tele
Quarz.
INTEREST EXPENSE
Interest expense increased to $3.5 million during the first quarter of
1999 from $2.6 million during the first quarter of 1998. The increase
resulted mainly from higher outstanding borrowings related to the
acquisition of Tele Quarz.
INCOME TAXES
The effective income tax rate for financial reporting purposes for the
first quarter of 1999 was 36.0%. The tax rate for the comparable prior
year period was 38.0%. The lower effective tax rate during the first
quarter of 1999 resulted primarily from tax savings related to the
financing structure of the Tele Quarz acquisition.
MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES
There was no Minority Interest in Net Income of Subsidiaries during the
first quarter of 1999 as the Company purchased, on October 30, 1998, the
remaining 3.75% of Gilbert Engineering Co., Inc. held by certain minority
shareholders. During the first quarter of 1998, Minority Interest in Net
Income of Subsidiaries was $0.1 million.
EQUITY IN NET INCOME OF AFFILIATED COMPANIES
Equity in net income of affiliated companies reflected a loss of $0.4
million for the first quarter of 1999 compared to income of $0.6 million in
the comparable prior year period. Equity in net income of affiliated
companies during the first quarter of 1998 included a $0.5 million gain
from the Company's sale to its partner of its 50% interest in a joint
venture that manufactured quartz crystal blanks in Venezuela. During the
first quarter of 1999, the Company reported a loss of $0.4 million from its
interest in Wuhan Telecommunications Devices Co. ("WTD"), its Chinese joint
venture, compared to income of $0.2 million during the first quarter of
1998. This loss resulted from reduced sales volume at WTD.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operations for the first quarter of 1999 was $3.5
million compared to $6.3 million for the first quarter of 1998. This
decrease was primarily the result of an increase in net working capital
requirements.
Capital expenditures for the first quarter of 1999 were $3.7 million
compared to $3.1 million for the first quarter of 1998. Capital
expenditures during the first quarter of 1999 were mainly for equipment to
increase capacity.
The Company believes that its existing cash balances, the funds
generated by its operations, and its revolving credit facility will be
sufficient to fund the Company's ongoing operations for the foreseeable
future.
IMPACT OF THE EURO CURRENCY
- ---------------------------
On January 1, 1999, the members of the European Union established fixed
conversion rates between their existing currencies ("legacy currencies")
and one common currency, the "Euro". As a result, the Euro now trades on
currency exchanges and may be used for business transactions utilizing
electronic fund transfer. Conversion to the Euro has the effect of
eliminating exchange rate risk between member countries, as exchange rates
are now permanent. Beginning in January 2002, new Euro-denominated
currency will be issued, and legacy currency will be removed from
circulation during the first six months of that year. The Company's
subsidiaries that are affected by the Euro conversion have modified
business processes to accommodate Euro denominated transactions. Certain
of the Company's operations expect to implement additional changes to
improve the processing of Euro denominated transactions. The anticipated
future increase in Euro denominated transactions is not expected to have a
material impact on the Company's business or results of operations, and the
Company believes that its currency risk in participating countries may be
reduced as the legacy currencies are converted to the Euro.
YEAR 2000 COMPLIANCE
- --------------------
BACKGROUND
"Year 2000" issues may arise because many existing computer programs use
only the last two of the four digits that identify a year. Therefore,
certain computer programs may not properly recognize a year that begins
with "20" and these programs may not function correctly once dates
beginning with "20" start being used.
The Company is aware of the Year 2000 issue and its potential associated
business and financial risks. The Company completed an initial internal
assessment of the Year 2000 impact on each of its operating facilities
during 1997. As a result of this internal assessment, the Company
initiated corrective actions at several of its operating facilities.
During the second quarter of 1998, qualified external consultants performed
a more detailed assessment of the impact of the Year 2000 on the Company's
major operating facilities. This assessment included a review of existing
corrective action plans and recommendations for additional corrective
actions. The cost of this external assessment was approximately $0.1
million.
Based on the foregoing assessments, the Company believes that Year 2000
issues at its operating facilities should not have a material impact on its
financial or operating performance. However, pending completion of all
necessary corrective actions, it is not possible for the Company to
determine the extent of any difficulty it might experience at its operating
facilities as a result of Year 2000 issues. Such problems, or similar
problems at the Company's customers or suppliers, could temporarily affect
the Company's performance adversely.
CORRECTIVE ACTION STATUS
PERSONAL COMPUTERS AND LOCAL AREA NETWORKS:
Each of the Company's domestic and foreign operating facilities uses
personal computers and networking hardware and software. The external
assessment completed during the second quarter of 1998 identified required
upgrades and provided information on the steps necessary to upgrade
hardware and software. Each operating facility is upgrading its hardware
and software, where necessary, to ensure personal computers and local area
networks are Year 2000 compliant. Many of the required upgrades would have
been made to keep pace with technological improvements even were they not
required for Year 2000 compliance, and had been provided for in each
operating facility's annual budget for capital expenditures and selling,
general and administrative expenses. All required upgrades are expected to
be completed by the third quarter of 1999. It is estimated that the total
cost for these upgrades will approximate $0.5 million to $1.0 million.
This figure includes amounts for capital equipment and amounts to be
charged to selling, general and administrative expenses.
BUSINESS SYSTEMS:
The term "Business Systems" includes the systems used in materials
requirements planning, manufacturing and materials control, general ledger
and other financial systems, order entry and customer activity tracking.
There is a wide variety of hardware and software used in the Company's
Business Systems; some of the Company's operating facilities have Business
Systems that have been developed, in part, "in-house." The systems have
been evaluated at each of the operating facilities and categorized as
follows:
1) Already Year 2000 compliant; no action required;
2) Software and/or hardware upgrade required; make necessary
changes to existing systems; or
3) Software and/or hardware upgrade required; replace existing
system with upgraded Year 2000 compliant system.
For existing systems that are to be revised to be brought into
compliance, Year 2000 program plans are in place and the majority of the
work has been completed. All remaining work is expected to be completed by
the third quarter of 1999. There is no significant incremental cost to
these efforts because the majority of the work is being performed by
internal management information systems personnel. These expenses are
reported as selling, general and administrative expenses as incurred.
At operating facilities where an existing system is being replaced with
a new system, program plans have been or will be established to ensure the
new systems are operational by the third quarter of 1999. These upgrades
are necessary investments for the operating facilities to keep pace with
technology and to enhance operational performance, in addition to being
required to ensure Year 2000 compliance.
The Company has focused the required resources on this area and
anticipates that all systems will be compliant by the third quarter of
1999. Approximately $3.3 million in capital investment has been made to
date for these systems improvements. The Company has planned an additional
$1.2 million to $2.2 million in capital expenditures for upgrades still to
be completed.
CORPORATE-WIDE SYSTEMS:
The Company's corporate-wide electronic mail system and the corporate
financial reporting system will be upgraded by the end of the second
quarter of 1999. These systems are being upgraded to improve operational
performance. The upgraded systems will be Year 2000 compliant. The total
cost for these upgrades is approximately $1.2 million, including
capitalized amounts and selling, general and administrative expenses.
OTHER:
The Company has also identified certain corrective actions necessary to
ensure other computer-dependent equipment is Year 2000 compliant. This
equipment includes telephone systems and computer-controlled manufacturing
equipment. The Company believes that only minor efforts are required in
these areas to ensure Year 2000 compliance.
FUNDING FOR REQUIRED CORRECTIVE ACTIONS
The Company believes it has budgeted sufficient funds to ensure all
required corrective actions are completed in time to avoid Year 2000
problems. The Company does not believe that costs required to address its
Year 2000 issues at its operating facilities will have a material financial
impact.
YEAR 2000 COMPLIANCE OF SUPPLIERS AND CUSTOMERS
The Company is presently surveying selected suppliers, customers and
service providers that are material to the Company's business to ensure
they are Year 2000 compliant, and will complete this process by mid-1999.
Where practicable, the Company will attempt to mitigate its risks with
respect to the failure of suppliers to be Year 2000 compliant. In the
event that certain suppliers indicate that they will not be Year 2000
compliant, and this non-compliance is expected to result in failure to meet
the Company's requirements, the Company will seek alternative suppliers.
However, such failures could temporarily affect the Company's operations.
PRODUCTS
The products produced by the Company do not include date references that
could be affected by the Year 2000 issue, and therefore the Company does
not believe there is a material risk of warranty claims related to the Year
2000 issue.
RISKS
If certain of the Company's systems fail to be brought into Year 2000
compliance, the most likely worst-case scenario would be a temporary
disruption of operations during the implementation of alternative manual
systems. The Company believes the impact of such a temporary disruption
would not be material.
CONTINGENCY PLANS
Because of the rapidly changing Year 2000 situations at the Company and
its suppliers, customers and service providers, the Company has not
developed formal contingency plans to address the possibility that its
planned corrective actions may not achieve Year 2000 compliance. The
Company will consider the need for such contingency plans as it continues
to assess the Year 2000 risk and monitors the progress of its corrective
action plans.
RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
- ------------------------------------------
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments
and for Hedging Activities." SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from the changes in the values of those
derivatives would be accounted for depending on the use of the derivatives
and whether they qualify for hedge accounting. The requirements of this
statement are to be adopted by the Company as of the first quarter of 2000.
The Company is assessing the impact of SFAS No. 133 on its financial
position and results of operations.
RISKS AND UNCERTAINTIES
- -----------------------
Statements contained in the Management's Discussion and Analysis of
Financial Condition and Results of Operations that are not statements of
historical fact may include forward looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, including, without
limitation, statements as to expectations, beliefs and strategies regarding
the future. It is important to note that actual results could differ
materially from such forward looking statements due to a number of factors,
including, among other things, the factors set forth below. The forward
looking statements should be considered in light of these factors.
A significant portion of the Company's revenues is attributable to sales
of components for building, maintaining and expanding the communications
infrastructure. These components are used primarily in cable, wireless and
wired telephony systems in the United States and internationally. The
amount of capital spending in these industries is affected by a variety of
factors, including general economic conditions, availability of financing,
government regulation, demand for the products and services offered by the
Company's customers and technological developments. A decrease in capital
spending for communications infrastructure could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The communications 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. The Company believes that it will continue to see varying
degrees of price pressure across all product lines. These price pressures,
if not offset by cost reductions, could result in lower average gross
margins.
Certain of the Company's business units sell products to a concentrated
group of customers. The loss of, or reduced demand for products from, any
of the Company's major customers could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's international operations are subject to a variety of
risks, including changes in policy by foreign governments, social
conditions such as civil unrest, and economic conditions including high
levels of inflation, fluctuation in the value of foreign currencies and
currency exchange rates and trade restrictions or prohibitions. Such
factors could adversely affect the Company's international operations and
have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, although the Company's
direct sales to customers in Asia have historically been a small percentage
of total sales, the Company sells to customers that do business worldwide
and cannot predict how the businesses of these customers may be affected by
economic conditions in Asia or elsewhere.
The Company has completed an assessment of the impact of the Year 2000
on computers and software at its operating units. This assessment included
a review of the Company's year 2000 readiness by qualified independent
consultants. The Company has identified a number of potential problems and
corrective actions required. Some of these actions have already been, and
others remain to be, completed. The Company believes that Year 2000 issues
at its facilities should not have a material impact on its financial or
operating performance. However, pending completion of all necessary
corrective actions, it is not possible for the Company to determine the
extent of any difficulty it might experience at its facilities as a result
of Year 2000 issues. Such problems, or similar problems at the Company's
customers or suppliers, could temporarily affect the Company's performance
adversely. See "Year 2000 Compliance" above.
The Company's subsidiaries currently buy a number of raw materials from
single sources. The failure of the subsidiaries to obtain sufficient raw
materials or components as required, or to develop alternative sources if
and as required in the future, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's operations are subject to a variety of laws, regulations
and licensing requirements, including governmental regulations relating to
the environment. In addition, various pending or threatened legal
proceedings by or against Oak Industries Inc. or one or more of its
subsidiaries involve alleged breaches of contract, torts and miscellaneous
other causes of action. The Company does not currently believe that its
compliance with applicable regulations or any litigation against the
Company will have a material adverse effect on the Company. However, there
can be no assurance that future compliance efforts or litigation will not
have a material adverse effect on the Company's business, financial
condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates on its borrowings. In the
normal course of its business, the Company manages its exposure to these
risks as described below. The Company does not engage in trading market
risk sensitive instruments for speculative purposes.
FOREIGN EXCHANGE
- ----------------
During the first quarter of 1999, less than 20% of the Company's
business was transacted in currencies other than the U.S. dollar. From
time to time, the Company enters into forward exchange contracts as a hedge
against the foreign currency exchange risk on transactions denominated in
foreign currencies. The Company has not entered into forward exchange
contracts for speculative or trading purposes. The Company has performed a
sensitivity analysis assuming a hypothetical 10% adverse movement in
foreign exchange rates. As of March 31, 1999, the analysis demonstrated
that such market movements would not have had a material adverse effect on
the Company's consolidated financial position, results of operations or
cash flows. Actual gains and losses in the future may differ materially
from this analysis, however, based on changes in the timing and amount of
foreign currency rate movements and the Company's actual exposures. The
Company believes that its exposure to foreign currency exchange rate risk
at March 31, 1999 was not material. See "Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Risks and
Uncertainties."
INTEREST RATES
- --------------
As of March 31, 1999, the Company had outstanding borrowings that were
subject to a floating interest rate. The Company entered into interest
rate swap agreements to manage its exposure to interest rate fluctuations
on a portion of these borrowings. These swap agreements provide for the
exchange of floating rate for fixed interest payments periodically over the
life of the agreements without any change to the underlying notional
amounts.
The Company has performed a sensitivity analysis assuming a hypothetical
10% adverse movement in the floating interest rate on the borrowings
described above. As of March 31, 1999, the analysis demonstrated that such
movement would not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
Actual gains and losses in the future may differ materially from that
analysis, however, based on changes in the timing and amount of interest
rate movements and the Company's actual exposures. The Company believes
that it has minimal exposure to interest rate risk. See "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risks and Uncertainties."
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
ITEM 2. CHANGES IN SECURITIES
On January 1, 1999, the Company issued 3,000 shares of its common stock
to non-employee members of its Board of Directors. These shares were
issued to such directors in consideration for past services to the Company.
On March 5, 1999, the Company issued 307 shares of its common stock to a
departing employee from its Supplemental Retirement Income Plan (the
"SRIP"). These shares represented vested matching contributions made by
the Company to the former employee's SRIP account. All of the above
transactions were effected pursuant to exemptions from registration under
Section 4(2) of the Securities Act of 1933, as amended and the rules and
regulations thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
(27) Financial Data Schedule (Submitted only to the Securities
and Exchange Commission in electronic format for its
information only).
(b) Reports on Form 8-K:
None.
<PAGE>
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: May 14, 1999 /s/ Coleman S. Hicks
Coleman S. Hicks
Senior Vice President and
Chief Financial Officer
<PAGE>
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