-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CSKSTHM8/5tyZF0ydrOpJZPJfKv42kValQy+1qkUzdvbV2AtIhrrvIIsFvtkR97H rV7n9y0XzugiVSX2KGomJg== 0000073568-99-000003.txt : 19990322 0000073568-99-000003.hdr.sgml : 19990322 ACCESSION NUMBER: 0000073568-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OAK INDUSTRIES INC CENTRAL INDEX KEY: 0000073568 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC CONNECTORS [3678] IRS NUMBER: 361569000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04474 FILM NUMBER: 99569033 BUSINESS ADDRESS: STREET 1: 1000 WINTER STREET STREET 2: BAY COLONY CORP CENTER CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6178900400 MAIL ADDRESS: STREET 1: BAY COLONY CORPORATE CENTER STREET 2: 1000 WINTER STREET CITY: WALTHAM STATE: MA ZIP: 02154 FORMER COMPANY: FORMER CONFORMED NAME: OAK ELECTRONETICS CORP DATE OF NAME CHANGE: 19720827 10-K 1 10K MAIN DOCUMENT =========================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-K ------------------ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 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) (Zip Code)
(781) 890-0400 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED Common Stock, $0.01 par value, together with New York Stock Exchange Junior Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: NONE (Title of class) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. The aggregate market value of Registrant's Common Stock held by persons who are not affiliates of Registrant was $558,138,514 on March 17, 1999. The Registrant had 17,753,909 shares of Common Stock, $0.01 par value, issued and outstanding on March 17, 1999. Documents Incorporated by Reference Proxy Statement to be filed no later than March 31, 1999 Part III, Items 10-13 =========================================================================== PART I ITEM 1. BUSINESS (A) GENERAL DEVELOPMENT OF BUSINESS Oak Industries Inc. ("Oak" or the "Registrant") was incorporated under the laws of the State of Delaware in 1960. The predecessor of Oak was incorporated in 1932 under the laws of the State of Illinois. Oak adopted its present corporate name in 1972. Oak's executive offices are located at 1000 Winter Street, Waltham, Massachusetts 02451, and its telephone number is (781) 890-0400. References herein to the "Company" refer to Oak and its consolidated subsidiaries. The Company has four operating segments: the manufacture of coaxial connector products used primarily in the CATV industry (the "Cable Broadband Products Segment"); the manufacture of quartz-based crystals and oscillators for wireless base stations and telecommunications applications (the "Frequency Control Products Segment"); the manufacture of fiber-optic components used primarily in wired telephony networks (the "Fiber-Optic Products Segment"); and the manufacture of components for gas ranges and switches and encoders used in a variety of applications (the "Controls Products Segment"). On October 30, 1998 the Company purchased 100% of the outstanding capital stock of Tele Quarz GmbH ("Tele Quarz"). Tele Quarz, located in Neckarbischofsheim, Germany, is a manufacturer of frequency control products. The total purchase price for the capital stock and certain real estate, including debt assumed and transaction costs, was approximately $63.5 million. (See Note 3 "Acquisitions" of the Notes to Consolidated Financial Statements). On October 30, 1998, the Company purchased the remaining 3.75% of Gilbert Engineering Co., Inc. ("Gilbert") owned by current and former members of Gilbert management for a purchase price of approximately $11.4 million. The Company has owned 100% of Gilbert since October 30, 1998. (B) FINANCIAL INFORMATION ABOUT REPORTABLE SEGMENTS For information regarding sales, income, assets and capital expenditures of the Company's reportable segments, see Note 10 of the Notes to Consolidated Financial Statements, which is incorporated herein by reference. (C) NARRATIVE DESCRIPTION OF BUSINESS Overview The Company is a leading manufacturer of highly-engineered components that it designs and sells to manufacturers and service providers in communications and other selected industries. The Company's communications products consist primarily of connectors for the CATV industry ("Cable Broadband Products"), frequency control devices used in wireless base stations and telecommunications applications ("Frequency Control Products"), and dense wavelength division multiplexing ("DWDM") fiber-optic components for the wired telephony infrastructure ("Fiber-Optic Products"). The Company's controls products include components for gas ranges, and switches and encoders, which are used in a wide range of applications (collectively, "Controls Products"). Business Strategy The Company's objective is to establish and maintain a leading position in markets with strong underlying growth characteristics. The Company attempts to achieve this position by providing a broad line of products that meets the quality and price/performance targets of its customers. The key elements of the Company's strategy include the following: Maintain Technology Leadership. The Company believes that its strong competitive position is attributable in large part to its engineering capabilities. The Company believes that its investment in engineering resources enables it to maintain technological leadership and will enable it to increase its customer base by developing products that meet its customers' specific technical requirements. Develop New Products and Increase Market Share. The Company plans to continue to increase sales by developing additional products that can be sold to existing customers and by expanding its customer base. For example, the Fiber-Optic Products Segment has introduced higher-power versions of its pump lasers designed for new DWDM applications. In addition, the Frequency Control Products Segment has introduced a voltage controlled oscillator product line, expanding its customer base to include manufacturers of switching and transmission equipment in addition to its traditional customer base of manufacturers of wireless base stations and military and satellite equipment. The Cable Broadband Products Segment recently began supplying new premium drop connectors used on smaller- diameter coaxial cables at a subscriber's house. The Controls Products Segment recently introduced a new sealed system for gas ranges and a modulating thermostat to broaden its product offerings. Expand International Presence. The Company intends to continue to increase its international presence. In October of 1998, the Company purchased Tele Quarz, a leading manufacturer of frequency control devices located in Germany. The Company currently has foreign manufacturing facilities in Canada, China, Denmark, France, Germany and Mexico, and also participates in a manufacturing joint venture in China. Sales made by the Company to customers located outside the United States accounted for approximately 31% of the Company's sales for the year ended December 31, 1998. Reduce Manufacturing Costs. The Company aggressively pursues a strategy of improving its manufacturing efficiencies to reduce the cost and increase the quality of its products. The Company engineers its products for volume manufacturing and continues to evaluate and redesign its products in order to reduce manufacturing costs. The Company has also invested significantly in the automation of its manufacturing facilities. The Company intends to continue to invest in enhancing its manufacturing capabilities with the objective of meeting the quality and price/performance targets of customers while maintaining strong operating margins. For example, in 1998 the Company opened a facility in Tennessee closer to a number of its key Controls Products Segment customers. As a result, it has been able to provide completed subassemblies to meet these customers' daily production schedules in an efficient and cost-effective manner. Grow Through Strategic Acquisitions. The Company's sales have increased in part through acquisitions, including Gilbert in 1992, Cabel-Con A/S in 1994, Lasertron, Inc. in 1995, Piezo Crystal Company ("Piezo") in 1997 and Tele Quarz in 1998. The Company also has divested non-strategic businesses in order to make more effective use of available capital. The Company plans to continue pursuing strategic acquisitions that complement its existing businesses. The Company believes that the benefits of such acquisitions include expanding the product lines of the Company and increasing its customer base. Cable Broadband Products Segment The Cable Broadband Products Segment is a leading worldwide manufacturer of coaxial connectors for the CATV industry. The Company manufactures connectors for the trunk and feeder portion of the broadband distribution network. These connectors are used whenever a coaxial cable is cut or spliced, such as at connection points for amplifiers, power supplies, and other active and passive devices. The Company also manufactures drop connectors that connect the subscriber's television to the cable network. Many of the Company's customers have different specifications for their connectors. The Company offers over 1,700 different types of connectors. Connectors are complex components; for example, trunk and feeder connectors may have as many as 20 parts, many of which are individually machined prior to assembly of the connector. A cable system consists of three principal segments. The first is the headend, where the cable system operator receives television signals via satellite, terrestrial, microwave and other sources. The headend organizes, processes and retransmits those signals through the second segment, the distribution network, to the subscriber. The distribution network typically consists of coaxial and fiber-optic cables and associated equipment that takes the signals from the headend and then transmits them throughout the cable system. The third segment is the subscriber drop, which extends from the distribution network to the subscriber's home, and connects either directly to the subscriber's television set or to a converter box. Connectors are used throughout the system where coaxial cable connects to electronic equipment such as amplifiers and at various distribution and termination points. Cable operators continue to upgrade the technological capabilities of their systems in order to provide subscribers with improved signal quality and increased channel capacity that allows a broader range of digital services, Internet access through cable modems, and telephony. Cable networks are also being upgraded in response to competitive multichannel services such as direct broadcast satellite and wireless cable. Industry data indicate that a large portion of domestic cable systems have not yet been upgraded to the quality required by CATV operators for the delivery of digital services and to provide for a return path for two-way services such as Internet access and telephony. The Company also anticipates continued growth in the cable industry internationally, where cable penetration rates typically are still low, although international sales were affected during the last year by financial constraints in certain markets. The Company believes that opportunities for increased revenues for its Cable Broadband Products will arise in connection with the anticipated upgrading of domestic cable systems and expansion of the cable industry internationally, and from recently developed new products. The Cable Broadband Products Segment regularly introduces new products to expand its presence in existing markets. It has expanded its line of drop connectors and has redesigned its two-piece trunk and feeder connector product line. In addition to CATV connectors, the Company manufactures a line of microwave connectors that are used primarily in high reliability applications in satellites and telecommunications systems, and also produces a line of connectors used to connect tower-based antennas to wireless base stations. The Cable Broadband Products Segment sells directly to major multiple system operators and leading distributors of CATV components. The Cable Broadband Products Segment manufactures products in Glendale and Phoenix, Arizona; Vordingborg, Denmark; and Amboise, France. The market for Cable Broadband Products is highly competitive with respect to price, quality and delivery; however, the Company believes it competes favorably with respect to each of these factors. Cable Broadband Products are engineered to meet stringent customer reliability requirements. Certain parties are attempting to develop technologies that could compete with those currently employed by the customers for Cable Broadband Products. If successful, these developments could have a negative impact on the business of the Cable Broadband Products Segment. The primary raw materials used in the manufacture of Cable Broadband Products are aluminum and brass. The Company currently receives its aluminum requirements from two different manufacturing facilities of a single supplier. Although the Company believes several alternative sources of supply of aluminum are available, a sudden disruption of its supply from this vendor could have a temporary adverse effect on the manufacture and sale of Cable Broadband Products. The Company is not dependent on any single supplier for its other significant raw material requirements for Cable Broadband Products. The Company believes it will be able to obtain the raw materials necessary to manufacture its Cable Broadband Products. The Cable Broadband Products Segment has several major customers. The loss of, or reduced demand for products from, any major customer of this segment could have a material adverse effect on the segment. The Company owns a number of patents with respect to its Cable Broadband Products but the Company does not consider any one patent or group of patents material to the conduct of the Cable Broadband Products Segment's business. Frequency Control Products Segment The Frequency Control Products Segment is a leading supplier of quartz- based crystals and oscillators for use in wireless, wired telephony, military, satellite, and other communications applications as well as for automotive applications. Crystals and oscillators are highly-engineered components that provide critical timing or frequency references for wireless communications networks, wired telephony systems, satellite communications and other electronic applications requiring a high degree of signal precision. The Frequency Control Products Segment also manufactures glass-to-metal hermetically sealed packages used primarily in the frequency control industry. The Frequency Control Products Segment includes divisions that manufacture oscillators, quartz crystals that are the key components in oscillators, and bases for crystals and oscillators. There are four primary classes of crystal oscillators: (i) uncompensated crystal oscillators or "XOs", (ii) temperature compensated crystal oscillators or "TCXOs", (iii) voltage controlled crystal oscillators ("VCXOs"), and (iv) oven controlled crystal oscillators ("OCXOs"). The type used depends on the performance characteristics required and the environment to which the oscillator will be exposed. The Company has designed products that can be used with all major analog and digital technologies used by cellular telephone and Personal Communications Systems, or "PCS" service providers, including Code Division Multiple Access, or "CDMA," Time Division Multiple Access, or "TDMA," and Global Systems for Mobile Communications, or "GSM." The Company's development efforts are focused on addressing market demands for Frequency Control Products with higher stability, smaller size and lower power consumption. It has also invested in highly automated production and test systems to increase capacity. Growth in the Frequency Controls Products Segment's sales has been driven primarily by the growth of wireless infrastructure spending. The Company expects continued growth in wireless infrastructure spending in the United States and internationally to support the substantial increase in the number of wireless subscribers. In emerging markets abroad, wireless is viewed as a viable substitute for wired telephony. The Company sells its Frequency Control Products using a direct sales force and manufacturers' representatives. The Company supplies oscillators and crystals to leading manufacturers of wireless base stations and telecommunications equipment, as well as manufacturers of test, instrumentation and other equipment and automotive systems. The Company also sells to a large number of smaller communications companies. The market for frequency control devices is highly competitive in terms of price, quality and delivery. The Company believes it competes favorably with respect to each of these factors. The Frequency Control Products Segment's manufacturing facilities are located in Mt. Holly Springs, Carlisle, and Mercersburg, Pennsylvania; Kansas City, Kansas; Whitby, Ontario, Canada; Shanghai, China; and Neckarbischofsheim, Germany. There are many domestic and foreign suppliers of frequency control devices. In order to compete effectively in this market, the Company places a strong emphasis on high quality. A large percentage of the Company's Frequency Control Products are manufactured to exacting customer specifications, and the Company relies to a great extent on its engineering staff to design and provide post-production support to meet customer needs. The Company believes the raw materials required for the production of its Frequency Control Products are readily available. There are multiple suppliers of such raw materials, and the Company utilizes many suppliers. The Frequency Control Products Segment has several major customers. The loss of, or reduced demand for products from, any major customer of this segment could have a material adverse effect on the segment. The Company owns a number of patents with respect to its Frequency Control Products but the Company does not consider any one patent or group of patents material to the conduct of the Frequency Control Products Segment's business. Fiber-Optic Products Segment The Fiber-Optic Products Segment designs, manufactures and sells active DWDM fiber-optic components used in long distance and metropolitan wired telephony networks and semiconductor lasers for telecommunications applications. The Company's Fiber-Optic Products include pump lasers that are critical components of optical amplifiers and increase the power of light signals. Optical amplifiers are placed at intervals in the network or at the source of the light signal. The Company's pump lasers are deployed in the major domestic long distance networks and in rings connecting headends in the CATV market. The Company also designs and manufactures transmission components that are used to generate or detect optical signals carried on fiber-optic links. The Fiber-Optic Products Segment has developed a line of advanced transmission products, known as distributed feedback lasers ("DFBs"), for applications in long distance and other networks. These advanced transmission products generate fiber-optic signals at the rate of 2.5 gigabits per second. The Fiber-Optic Products Segment also manufactures standard transmission products for the local loop, such as laser sources and detectors, which operate at lower speeds. Telecommunication service providers are experiencing a significant increase in data traffic. Data transmissions now account for a substantial portion of traffic on many networks and the volume of data being transmitted is growing very rapidly. The increase in data traffic results primarily from the growing number of Internet users, home offices, and additional telephone lines, and the increased use of electronic mail and wireless calls that terminate on the wired network. The Company believes that service providers will continue to upgrade existing networks to increase capacity. The Company owns a 50% interest in Wuhan Telecommunication Devices Co. ("WTD") located in Wuhan, China. WTD is a manufacturer of fiber-optic, semiconductor laser components for the communications industry. A research division of the Chinese Ministry of Information Industry, Wuhan Optical Communication Technology Company, owns the other 50% interest of WTD. The Company's Fiber-Optic Products are sold both directly and through distributors to domestic and export customers, which are primarily manufacturers of fiber-optic communications and CATV communications equipment. The Fiber-Optic Products Segment's manufacturing facilities are located in Bedford, MA and Wuhan, China. Although the market for the Company's Fiber-Optic Products is highly competitive with respect to quality, price and delivery, the Company believes that the Fiber-Optic Products Segment competes favorably with respect to each of these factors. The Company believes that the Fiber- Optic Products Segment is very competitive in the area of high-power pump lasers, for which there is currently high demand. While several of the Company's customers have captive operations that make products for their own use and for sale to others that compete with those of the Company, these customers have historically relied on the Company to supply a portion of their product needs. The Company's Fiber-Optic Products incorporate semiconductor diode laser and detector "chips" that are coupled to an optical fiber and supplied as compact fiber-optic modules. One high volume chip is purchased from a sole supplier, although the Fiber-Optic Product Segment now also produces this chip internally. Internal production of this chip currently requires purchasing wafer raw material from a limited number of external suppliers, although the Fiber-Optic Product Segment is developing the capability to produce this raw material internally in addition to sourcing it externally. An inability to obtain these chips or wafers externally in sufficient quantities to meet projected needs could have a material adverse effect on the Fiber-Optic Products Segment's business. The Fiber-Optic Products Segment sells products to a concentrated group of customers. The loss of, or reduced demand for products from, any major customer of this segment could have a material adverse effect on the segment. The Fiber-Optic Products Segment licenses a number of patents from third parties and the Company considers several licenses to be material to the conduct of its business. Controls Products Segment The Controls Products Segment is a leading supplier of components to the original equipment manufacturers of gas range appliances and also supplies components for outdoor gas grills. The Controls Products Segment also includes the manufacture of optical, rotary and appliance switches and encoders for applications in the test and measurement, communications, medical, military and other markets. The Controls Products Segment offers a broad line of components and replacement parts for gas ranges for sale to original equipment manufacturers. These components control the flow of gas to, and the ignition and temperature of, burners and ovens. The Controls Products Segment supplies components to the major domestic gas range manufacturers, as well as gas range manufacturers in Canada, Mexico, and Latin America. The Controls Products Segment also supplies service parts for gas ranges and sells gas grills for outdoor cooking. The Controls Product Segment also manufactures optical, rotary and appliance switches and encoders for applications in the appliance, test and measurement, communications, medical, military and other markets. These products include low-power open frame switches, enclosed and encoded rotary switches, as well as solenoids, lighted push-button switches and appliance switches. To keep pace with the transition of its customer base from traditional analog switch technology to digital controls, the Controls Product Segment has also developed sensors and controls that eliminate many of the mechanical aspects of rotary switches. These products translate an input, such as motion, into electronic output. The Company has made significant investments in engineering resources and computer-aided design capabilities to shorten its new product development cycle. New products include ignition systems, a sealed supply system, and subassemblies that range manufacturers incorporate directly into their ranges in their production lines. The Company plans to continue to develop new products for its existing customers. The Company recently opened a satellite manufacturing facility in Tennessee. This facility is located near several major customers of Controls Products and allows the Company to provide just-in-time delivery of components and subassemblies to these customers. The Company sells its Controls Products primarily through a direct sales force and through manufacturers' representatives. The Controls Products Segment has highly automated manufacturing facilities for gas range components in Princeton, Illinois, Ooltewah, Tennessee, and Juarez, Mexico. The Controls Products Segment's principal manufacturing operations for switch and encoder components take place in Juarez, Mexico. The Controls Products market is highly competitive in terms of price, quality and delivery. The Company believes it competes favorably with respect to each of these factors. The Controls Products Segment is a leading supplier to the domestic market for gas range components. Its domestic gas range components must conform to Underwriters' Laboratories and American Gas Association specifications. All such approvals for existing products have been obtained and the Controls Products Segment's quality assurance team maintains compliance with these specifications. The Controls Products Segment is not dependent upon any single supplier for raw materials. The Controls Products Segment has several major customers. The loss of, or reduced demand for products from, any major customer of this segment could have a material adverse effect on the segment. The Company owns a number of patents relating to its Controls Products but the Company does not consider any one patent or group of patents material to the conduct of the Controls Products Segment's business. Employees At December 31, 1998, the Company had 3,875 employees, 2,046 of whom worked at locations in the United States and 1,829 at locations outside the United States. Of these employees, 187 are subject to collective bargaining agreements. The Company believes that its relationships with its employees are good. (D) FOREIGN AND DOMESTIC SALES AND LONG-LIVED ASSETS For information regarding foreign and domestic sales and long-lived assets, see Note 10 of the Notes to Consolidated Financial Statements, which is incorporated herein by reference. EXECUTIVE OFFICERS OF THE REGISTRANT The following table lists the name, age, position and offices of all executive officers of the Registrant. The term of office of all executive officers will expire upon the holding of the first meeting of the Board of Directors following the Registrant's 1999 Annual Meeting of Stockholders.
Name Age Position - --------- ------ ----------- William S. Antle III...... 54 Chairman of the Board since May 1996. President and Chief Executive Officer since December 1989. From 1980 to 1989, Mr. Antle was at Bain and Company, Inc., an international strategy consulting firm, most recently as Executive Vice President. From 1973 to 1980, Mr. Antle was an executive at Cummins Engine Company, a manufacturer of diesel engines, where from 1976 to 1980, he served as General Manager of several manufacturing facilities in the United Kingdom. Coleman S. Hicks....... 55 Senior Vice President and Chief Financial Officer since June 1997 and Senior Vice President, General Counsel and Secretary from September 1995 until June 1997. Mr. Hicks also served as President, Oak Frequency Control Group from September 1995 until October 1997. Prior to joining the Company, Mr. Hicks was a partner at Covington and Burling, a Washington, D.C. law firm that he joined in 1972. From February 1979 until 1981, Mr. Hicks served as General Counsel of the Department of the Navy. Pamela F. Lenehan...... 46 Senior Vice President, Corporate Development and Treasurer since February 1995. From 1981 until December 1994, Ms. Lenehan was at CS First Boston, an investment banking firm, most recently as Managing Director-Investment Banking. From 1974 to 1981, Ms. Lenehan was a lending officer at the Chase Manhattan Bank where she was a Vice President in the Corporate Banking Department.
ITEM 2. PROPERTIES The Company believes that its facilities are suitable and adequate for its business. They are well maintained, in sound operating condition, and in regular use. The table below sets forth the location and general character of important properties of the Company. Properties without reference to leases are owned by the Company.
Floor Space (Approximate Location Square Feet) ---------- ------------- CABLE BROADBAND PRODUCTS SEGMENT Amboise, France {B,C}......................................... 35,000 (2 buildings) Glendale, Arizona (leases expire 12/31/01, 12/31/02, and 8/31/10) {B,C}.......................................... 205,700 (6 buildings) Phoenix, Arizona (lease expires 8/31/06) {B,C}................ 40,400 Vordingborg, Denmark {B,C}.................................... 44,650 FREQUENCY CONTROL PRODUCTS SEGMENT Carlisle, Pennsylvania {B,C}.................................. 32,000 Kansas City, Kansas {B,C} (lease expires 9/30/02)............. 19,000 Mercersburg, Pennsylvania {B,C}............................... 24,000 Mt. Holly Springs, Pennsylvania {B,C}......................... 79,000 (2 buildings) Neckarbischofsheim, Germany {B,C}............................. 92,000 (2 buildings) Shanghai, China (lease expires 6/30/07) {B,C}................. 13,600 Whitby, Ontario, Canada {B,C}................................. 25,000 FIBER-OPTIC PRODUCTS SEGMENT Bedford, Massachusetts (lease expires 4/30/06) {B,C}.......... 80,000 (2 buildings) CONTROLS PRODUCTS SEGMENT Aurora, Illinois (lease expires 11/30/01) {B}................. 18,000 Juarez, Mexico (lease expires 5/16/02) {B,C}.................. 51,000 Ooltewah, Tennessee (lease expires 6/30/03) {C}............... 20,000 Princeton, Illinois {B,C}..................................... 235,000 (2 buildings) Sugar Grove, Illinois (lease expires 12/14/01) {B}............ 45,000 Zaragosa, Mexico (lease expires 6/30/02) {C}.................. 97,000 CORPORATE Waltham, Massachusetts (lease expires 7/31/00) {A,B}.......... 15,000 {A} Corporate Headquarters. {B} Office Space. {C} Manufacturing Facilities.
ITEM 3. LEGAL PROCEEDINGS Various pending or threatened legal proceedings by or against the Registrant or one or more of its subsidiaries involve alleged breaches of contract, torts and miscellaneous other causes of action. The Company does not consider any of such proceedings to be material to the Company's financial position, results of operations, or liquidity. (See Note 13 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements.) ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1998, no matters were submitted to a vote of security holders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of the Registrant is traded on the New York Stock Exchange ("NYSE") under the trading symbol "OAK". As of March 17, 1999, there were 4,401 stockholders of record of common stock of the Registrant. Information regarding the trading price of the Registrant's common stock as reported on the NYSE for each quarterly period during the last two fiscal years is set forth below. No dividends on the Registrant's common stock were paid during 1997 or 1998. (See description of dividend restrictions in the Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 5 "Indebtedness" of the Notes to Consolidated Financial Statements.)
Price of Common Stock ------------------------------------ 1997 1998 ------------- ------------- High Low High Low ---- --- ---- --- First Quarter............ $22 7/8 $16 1/4 $35 $27 Second Quarter........... 29 18 1/8 37 7/16 29 11/16 Third Quarter............ 32 1/4 25 3/4 41 1/4 26 Fourth Quarter........... 29 3/4 24 1/4 35 21 13/16
On each of January 1, 1998 and 1999, the Registrant issued 3,500 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 Registrant. On December 7, 1998, the Registrant issued 344 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 Registrant to the former employee's SRIP account. All of the above referenced transactions were effected pursuant to exceptions from registration under Section 4(2) of the Securities Act of 1933, as amended and the rules and regulations thereunder. ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) -------------------------------------------------------------------- 1994 1995 1996 1997 1998 ----------- ----------- ----------- ----------- ---------- FINANCIAL RESULTS Net sales.......................... $ 230,894 $ 255,364 $ 303,536 $ 314,388 $ 347,866 Purchased in-process research and development expense............. -- 80,872 -- -- -- Operating income (loss)............ 44,113 (27,897) 46,987 47,232 51,133 Interest expense................... 5,906 6,273 5,767 10,973 10,146 Income (loss) from continuing operations before income taxes, minority interest and extraordinary charge............ 41,840 (30,926) 62,012 36,685 44,730 Income (loss) from continuing operations...................... 41,041 (52,983) 31,976 21,736 27,339 Net income (loss).................. 42,446 (52,124) 41,836 21,736 27,339 Earnings per share - basic Income (loss) from continuing operations................... 2.37 (3.02) 1.77 1.22 1.54 Net income (loss)............... 2.46 (2.98) 2.32 1.22 1.54 Earnings per share - diluted Income (loss) from continuing operations................... 2.23 (3.02) 1.71 1.20 1.46 Net income (loss)............... 2.31 (2.98) 2.24 1.20 1.46 Cash dividends per share........... -- -- -- -- -- FINANCIAL POSITION Working capital.................... $ 67,544 $ 73,168 $ 79,019 $ 84,818 $ 112,132 Plant and equipment, net........... 36,253 53,074 65,026 69,425 98,970 Total assets....................... 279,800 312,544 374,285 387,790 482,437 4 7/8% Convertible Subordinated Notes........................... -- -- -- -- 100,000 Long-term debt, net of current portion......................... 34,403 91,570 138,161 151,465 119,555 Total stockholders' equity......... 167,150 119,213 171,723 182,154 200,975 GENERAL STATISTICS Capital expenditures............... $ 6,723 $ 16,942 $ 23,205 $ 14,697 $ 16,834 Depreciation....................... $ 6,569 $ 7,694 $ 10,028 $ 12,287 $ 14,358 Amortization of intangible assets.. $ 2,372 $ 2,760 $ 3,609 $ 5,835 $ 6,357 Weighted average shares outstanding (000s): Basic......................... 17,282 17,520 18,043 17,837 17,771 Diluted....................... 18,371 17,520 18,684 18,108 20,597 Number of holders of record (at year-end)................... 8,346 7,144 6,312 5,717 4,511 Number of employees (at year-end).. 2,776 2,931 2,944 3,373 3,875 Salaries and wages................. $ 60,054 $ 65,543 $ 79,433 $ 85,681 $ 101,294
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Certain unusual transactions affected the Company's results during 1996, 1997, and 1998. These unusual transactions are listed in the following table (dollars in millions):
1996 1997 1998 ------ ------ ------ Income before interest, income taxes, minority interest and unusual transactions........................... $ 55.7 $ 47.9 $ 57.9 Net interest.............................. (5.2) (10.6) (9.2) Income taxes.............................. (18.4) (14.1) (18.2) Minority interest......................... (7.3) (1.1) (0.7) ------- ------- ------- Net income excluding unusual transactions. 24.8 22.1 29.8 ------- ------- ------- Gain on sale of equity investments........ 21.5 -- -- Reorganization and severance charges...... (3.8) -- (0.7) Asset write-downs and other reserves...... (4.2) -- (2.3) Purchase accounting adjustments........... (0.9) (0.6) (1.0) Improperly capitalized expenses........... (1.1) -- -- Tax impact of unusual transactions above.. (4.4) 0.2 1.5 Net income from discontinued operations... 1.4 -- -- Extraordinary charge, early extinguishment of debt, net of tax............................. (0.9) -- -- Gain on sale of discontinued operation, net of tax............................. 9.4 -- -- ------- ------- ------- Subtotal of unusual transactions.......... 17.0 (0.4) (2.5) ------- ------- ------- Net income (loss) as reported............. $ 41.8 $ 21.7 $ 27.3 ======= ======= =======
Description of certain unusual transactions 1998 Results include unusual charges of $2.5 million related to the reorganization of certain operations within the Frequency Control Products Segment and $0.5 million related to the planned discontinuation of certain product lines within the Controls Products Segment. These unusual charges included severance of $0.5 million and other reorganization charges of $0.2 million reported as selling, general and administrative expenses, and amounts charged to cost of goods sold for inventory write-downs of $1.4 million, and plant and equipment write-downs of $0.9 million. Results also include a $1.0 million charge to cost of goods sold related to the purchase accounting for inventory at Tele Quarz. 1997 Results include a $0.6 million charge to cost of goods sold related to the purchase accounting for inventory at Piezo. 1996 Unusual transactions include a gain of $21.5 million from the sale of equity investments, reorganization and severance charges of $3.8 million, a $4.2 million charge associated with the write-down of certain assets and a reserve for potential legal and environmental matters, a $0.9 million charge to cost of goods sold related to purchase accounting for inventory, an extraordinary charge of $0.9 million net of tax related to the early extinguishment of debt, and a gain of $9.4 million net of tax on the sale of a subsidiary. In early 1997, the Company discovered that the controller of one of its divisions capitalized certain costs that should have been expensed during 1995 and 1996 in the periods incurred. Because the 1995 errors were not material to the 1995 results ($1.1 million before tax, $0.7 million after tax), the 1995 financial statements were not restated and the correction of improperly capitalized expenses of $1.1 million was reported as an unusual item in 1996. Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997 Net Sales. The Company's net sales for 1998 were $347.9 million, an increase of 11% over 1997. The increase in net sales resulted mainly from growth in sales in the Cable Broadband Products Segment and Frequency Control Products Segment. Sales by the Frequency Control Products Segment for 1998 increased 33% over 1997 levels as the result of strong demand from customers in the wireless communications infrastructure industry and as the result of the addition of sales by Tele Quarz and Piezo. The Cable Broadband Products Segment's sales for 1998 increased by 16% over 1997 sales levels as a result of strong demand from domestic CATV customers and as a result of the successful introduction of several new products. These increased sales by the Cable Broadband Products Segment to domestic customers offset a decline in sales to international customers during 1998. Sales by the Fiber-Optic Products Segment for 1998 declined slightly from sales in 1997. The Fiber-Optic Products Segment's sales results for 1997 included significant sales to one European customer for a program that was not active in 1998. There was a significant increase in sales to customers other than this one European customer during 1998. The Controls Products Segment's sales increased slightly from 1997 to 1998. Within this segment, sales of gas range components increased as the result of market share gains and the introduction of several new products and switch and encoder sales declined as the result of a reduction in sales of a product used in a United States government postal sorting system. Gross Profit. The Company's gross profit margin, excluding unusual transactions, decreased to 37.0% in 1998 compared to 37.2% in 1997. Gross profit margin increased slightly in 1998 compared to 1997 in the Cable Broadband Products and Controls Products Segments, while gross profit margins decreased somewhat in 1998 compared to 1997 in the Frequency Control Products and Fiber-Optic Products Segments. In general, prices of the Company's products declined during the year, while material costs remained relatively stable, wages increased moderately, and productivity improved. Selling, General and Administrative Expenses. Selling, general and administrative expenses, before unusual transactions, increased $4.4 million, or 6%, in 1998 over those expenses in the prior year. The increase was primarily the result of increased expenses in the Frequency Control Products Segment due to the full-year impact of the Piezo acquisition and the acquisition of Tele Quarz during the fourth quarter of 1998. Research and development and selling expenses increased in 1998 compared to the level of those expenses in 1997. Amortization expense relating to intangible assets increased to $6.4 million in 1998, versus $5.8 million in 1997. This increase was mainly the result of increased goodwill amortization related to the Piezo and Tele Quarz acquisitions. Royalty income (reported as an offset against selling, general and administrative expenses) was $0.6 million during 1998. The Company reported royalty income of $1.0 million during 1997. Interest Expense. Interest expense decreased from $11.0 million in 1997 to $10.1 million in 1998. The decrease resulted primarily because the interest rate on the 4 7/8% Convertible Subordinated Notes (the "Notes") that were issued by Oak in February 1998 is significantly lower than the interest rate on the Company's revolving credit facility balances. Interest Income. Interest income increased from $0.4 million in 1997 to $1.0 million in 1998 primarily as a result of a $0.4 million gain on the sale of securities. Equity in Net Income of Affiliated Companies. The Company reported equity in net income of affiliated companies of $0.03 million in 1997 and $2.0 million during 1998. The increase is primarily the result of increased income at WTD due to increased sales. The Company also reported a gain of $0.3 million as the result of resolving outstanding issues with its WTD joint-venture partner that had been reserved for during 1996. During 1998, the Company also recorded a gain of $0.8 million from the sale to its partner of the Company's 50% interest in a joint venture that manufactured quartz crystal blanks in Venezuela. Income Taxes. The effective income tax rate excluding unusual transactions decreased from 37.8% in 1997 to 37.4% in 1998. The effective tax rate for 1998 included a benefit of $0.3 million resulting from the favorable resolution of a state income tax matter. Minority Interest in Net Income of Subsidiaries. Minority interest expense decreased to $0.7 million in 1998 from $1.1 million in 1997. The decrease resulted from purchases of additional equity interests in Gilbert in October 1997 and October 1998. Net Income. Net income excluding unusual transactions was $29.8 million in 1998 compared to $22.1 million in 1997. The increase was the net result of the factors described above. Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996 Net Sales. The Company's net sales for 1997 were $314.4 million, an increase of 4% over sales in 1996. During 1997, sales by the Fiber-Optic and Frequency Control Products Segments grew 37% and 28%, respectively, and more than offset a decline in sales by the Cable Broadband Products Segment. Demand for Fiber-Optic Products and Frequency Control Products was driven by increased infrastructure investments for long distance fiber- optic networks and for cellular and personal communications systems. Sales by the Frequency Control Products Segment in 1997 include sales by Piezo, which was acquired at the end of the third quarter of 1997. In October 1996, the Company's then-largest customer of Cable Broadband Products announced a moratorium on purchases. This CATV customer purchased significantly less from the Company in 1997 than it did in 1996. Sales volume by the Cable Broadband Products Segment declined from 1996 to 1997 as a result of lower sales to this customer, as well as lower sales to customers in certain international markets. Sales by the Cable Broadband Products Segment to other CATV customers and sales to microwave products customers increased significantly from 1996 to 1997. The Controls Products Segment's sales increased 5% in 1997, principally as the result of growth of sales of gas range components. Gross Profit. The Company's gross profit margin excluding unusual transactions decreased to 37.2% in 1997 from 39.1% in 1996 primarily as a result of the adverse impact of lower production volumes in the Cable Broadband Products Segment and increased sales of lower margin Controls Products. These gross margin reductions were partially offset by significant margin improvements in the Fiber-Optic Products and Frequency Control Products Segments. In general, prices of the Company's products declined during the year, while material costs remained relatively stable, wages increased moderately, and productivity improved. Selling, General and Administrative Expenses. Selling, general and administrative expenses excluding unusual transactions increased $6.2 million, or 9.8%, in 1997 over those expenses in the prior year, including an increase in research and development and sales and marketing expenses over 1996 levels. Amortization expense relating to intangible assets increased in 1997 to $5.8 million, versus $3.6 million in 1996. This increase was the result primarily of increased amortization expense related to the November 1996 and October 1997 purchases of additional equity interests in Gilbert. Royalty income (reported as an offset against selling, general and administrative expenses) was $1.0 million during 1997, and included $0.6 million for royalties related to 1996 that had previously been disputed by the licensee of certain technology. The Company reported no royalty income for 1996. Interest Expense. Interest expense increased from $5.8 million in 1996 to $11.0 million in 1997. The increase reflected the Company's additional borrowings to finance the purchase of additional equity interests in Gilbert, the repurchase of shares of the Company's common stock under the Company's stock repurchase program, and the acquisition of Piezo. Interest Income. Interest income decreased from $0.5 million in 1996 to $0.4 million in 1997 as a result of lower average cash balances. Equity in Net Income (Loss) of Affiliated Companies. The Company reported equity in net income (loss) of affiliated companies excluding unusual transactions of a loss of $0.01 million in 1996 and income of $0.03 million during 1997. Income Taxes. The effective income tax rate excluding unusual transactions increased from 36.4% in 1996 to 37.8% in 1997 primarily because non-tax deductible amortization expense increased as a result of the acquisition of additional equity interests in Gilbert in November 1996 and October 1997. Minority Interest in Net Income of Subsidiaries. Minority interest expense decreased to $1.1 million in 1997 from $7.3 million in 1996. The decrease resulted primarily from purchases of additional equity interests in Gilbert in November 1996 and October 1997. Net Income. Net income excluding unusual transactions was $22.1 million in 1997 compared to $24.8 million in 1996. The decrease was the net result of the factors described above. LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations was $39.2 million for 1998, representing a decrease of $8.4 million from cash flow generated during 1997. During 1998, inventory and accounts receivable balances increased by $26.0 million and $12.9 million, respectively, compared to balances in 1997 in order to support increased sales volume and as a result of the acquisition of Tele Quarz. Capital expenditures during 1998 increased to $16.8 million versus $14.7 million during 1997. Capital expenditures during 1998 included investments to increase capacity, introduce new products and improve information systems. The Company has in place a $300 million unsecured revolving credit facility (the "Facility"). Borrowings under the Facility bear interest, at the option of the Company, either (i) at the prime rate (or, if higher, at 0.5% above the federal funds rate) or (ii) at a spread ranging from 0.5% to 1.25% over the reserve-adjusted 1, 2, 3 or 6 month LIBOR. Certain of the Company's subsidiaries have guaranteed the obligations under the Facility. The Facility requires the Company to meet certain periodic financial tests and prohibits the Company from paying dividends to its stockholders. Borrowing capacity under the Facility will be reduced by $50.0 million on each of November 1, 1999 and November 1, 2000. The Facility expires on December 31, 2001. As of December 31, 1998, the Company had outstanding loans of $109 million under the Facility. On February 25, 1998, the Company issued the Notes. The Notes are convertible into common stock of the Company at a conversion price of $38.66 per share. Interest on the Notes is payable semi-annually in arrears on each March 1 and September 1, and the first interest payment was made on September 1, 1998. The net proceeds from the sale of the Notes were used to reduce borrowings under the Facility. In December 1996, the Company was authorized to expend up to $50.0 million to repurchase shares of its stock on the open market. In October 1998, this program was amended to allow stock repurchases not to exceed $75.0 million in the aggregate. As of December 31, 1998, the Company had spent $35.1 million to repurchase 1,602,200 shares of its common stock. The Company intends to finance future repurchases of its stock, if any, with cash generated by operations and borrowings under the Facility. In April 1998, the Company paid $1.0 million to the former shareholders of Piezo under the earnout provisions of the 1997 acquisition agreement for Piezo. On October 30, 1998 the Company purchased 100% of the outstanding capital stock of Tele Quarz. Tele Quarz, located in Neckarbischofsheim, Germany, is a manufacturer of frequency control products. The total purchase price for the capital stock and certain real estate, including debt assumed and transaction costs, was approximately $63.5 million. (See Note 3 of the Notes to Consolidated Financial Statements). On October 30, 1998, the Company purchased the remaining 3.75% of Gilbert owned by current and former members of Gilbert management for a purchase price of approximately $11.4 million. The Company has owned 100% of Gilbert since October 30, 1998. The Company believes that funds generated by operations and from its existing cash balances and the 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. Oak'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 $3.0 million in capital investment has been made to date for these systems improvements. The Company has planned an additional $1.5 million to $2.5 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 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 7A. 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 1998, 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 December 31, 1998, 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 December 31, 1998 was not material. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risks and Uncertainties." INTEREST RATES As of December 31, 1998, 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. Information about the Company's investments and interest rate swap agreements is set forth in Note 2 and Note 5 of the Notes to Consolidated Financial Statements, which are incorporated by reference herein. 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 December 31, 1998, 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 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risks and Uncertainties." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OAK INDUSTRIES INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ------ REPORT OF INDEPENDENT ACCOUNTANTS............................ xx Financial Statements -- Consolidated Balance Sheet at December 31, 1997 and 1998.. xx Consolidated Statement of Operations for the years ended December 31, 1996, 1997 and 1998........................ xx Consolidated Statement of Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998............ xx Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1997 and 1998.................. xx Notes to Consolidated Financial Statements................ xx Schedule -- II -- Valuation and Qualifying Accounts............... xx
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Oak Industries Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Oak Industries Inc. and its subsidiaries at December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts February 9, 1999 OAK INDUSTRIES INC. CONSOLIDATED BALANCE SHEET AT DECEMBER 31 (DOLLARS IN THOUSANDS) ASSETS
1997 1998 --------- -------- CURRENT ASSETS: Cash and cash equivalents.......................... $ 8,642 $ 13,754 Receivables, less reserves of $2,582 and $2,873.... 47,036 59,968 Inventories........................................ 51,297 77,321 Deferred income taxes.............................. 16,143 11,491 Other current assets............................... 2,488 2,902 --------- ---------- Total current assets......................... 125,606 165,436 --------- ---------- PLANT AND EQUIPMENT: Land............................................... 960 1,768 Buildings and leasehold improvements............... 26,004 31,337 Machinery and equipment............................ 124,076 157,125 Furniture and fixtures............................. 8,311 8,797 --------- ---------- 159,351 199,027 Less -- Accumulated depreciation................... (89,926) (100,057) --------- ---------- Total plant and equipment.................... 69,425 98,970 --------- ---------- OTHER ASSETS: Goodwill and other intangible assets, less accumulated amortization of $17,239 and $23,566................................... 178,577 196,531 Investment in affiliates........................... 8,358 11,014 Other assets....................................... 5,824 10,486 --------- ---------- Total other assets........................... 192,759 218,031 --------- ---------- Total Assets................................. $ 387,790 $ 482,437 ========= ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. OAK INDUSTRIES INC. CONSOLIDATED BALANCE SHEET AT DECEMBER 31 (DOLLARS IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1998 -------- -------- CURRENT LIABILITIES: Current portion of long-term debt.............. $ 443 $ 2,051 Accounts payable............................... 11,128 20,800 Accrued liabilities............................ 29,217 30,453 --------- ---------- Total current liabilities................... 40,788 53,304 --------- ---------- OTHER LIABILITIES: Deferred compensation and pensions............. 5,737 6,554 Other.......................................... 2,692 2,049 --------- ---------- Total other liabilities..................... 8,429 8,603 --------- ---------- 4 7/8% Convertible Subordinated Notes............. -- 100,000 --------- ---------- Long-Term Debt, Net of Current Portion............ 151,465 119,555 --------- ---------- Minority Interest................................. 4,954 -- --------- ---------- Commitments and Contingent Liabilities (Note 13) STOCKHOLDERS' EQUITY: Preferred stock, no par value; authorized 5,000,000 shares; none issued...... -- -- Junior preferred stock, no par value; authorized 500,000 shares; none issued........ -- -- Common stock, par value of $0.01; authorized 50,000,000 shares; issued 18,953,980 and 19,204,095 shares....... 190 192 Additional paid-in capital..................... 305,740 312,860 Accumulated deficit............................ (97,956) (70,617) Accumulated other comprehensive income......... (1,712) (4,662) Treasury stock, 1,127,014 and 1,610,041 shares. (22,092) (35,541) Unearned compensation - restricted stock....... (1,754) (995) Stock purchase loan............................ (262) (262) --------- ---------- Total stockholders' equity.................. 182,154 200,975 --------- ---------- Total Liabilities and Stockholders' Equity.................... $ 387,790 $ 482,437 ========= ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. OAK INDUSTRIES INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1997 1998 -------- -------- -------- Net Sales......................................... $ 303,536 $ 314,388 $ 347,866 Cost of sales..................................... (189,410) (197,974) (222,357) --------- --------- --------- Gross profit................................... 114,126 116,414 125,509 Selling, general and administrative expenses...... (67,139) (69,182) (74,376) --------- --------- --------- Operating income............................... 46,987 47,232 51,133 Interest expense.................................. (5,767) (10,973) (10,146) Interest income................................... 541 393 986 Gain on sale of equity investments................ 21,502 -- 772 Equity in net income (loss) of affiliated companies....................................... (1,251) 33 1,985 -------- --------- --------- Income from continuing operations before income taxes, minority interest and extraordinary charge......................... 62,012 36,685 44,730 Income tax provision.............................. (22,764) (13,861) (16,697) Minority interest in net income of subsidiaries... (7,272) (1,088) (694) -------- --------- --------- Income from continuing operations.............. 31,976 21,736 27,339 Income from discontinued operations, net of tax... 1,442 -- -- Gain on sale of discontinued operations, net of tax...................................... 9,367 -- -- Net income before extraordinary charge......... 42,785 21,736 27,339 Extraordinary charge for early extinguishment of debt, net of tax benefit of $582 in 1996..... (949) -- -- -------- --------- --------- Net income........................................ $ 41,836 $ 21,736 $ 27,339 ======== ========= ========= Income per share - basic Continuing operations.......................... $ 1.77 $ 1.22 $ 1.54 Discontinued operations........................ .08 -- -- Gain on sale of discontinued operation......... .52 -- -- -------- --------- --------- Net income before extraordinary charge......... 2.37 1.22 1.54 Extraordinary charge........................... (.05) -- -- -------- --------- --------- Net income..................................... $ 2.32 $ 1.22 $ 1.54 ======== ========= ========= Weighted average shares outstanding - basic....... 18,043 17,837 17,771 ======== ========= ========= Income per share - diluted Continuing operations.......................... $ 1.71 $ 1.20 $ 1.46 Discontinued operations........................ .08 -- -- Gain on sale of discontinued operation......... .50 -- -- -------- --------- --------- Net income before extraordinary charge......... 2.29 1.20 1.46 Extraordinary charge........................... (.05) -- -- -------- --------- --------- Net income..................................... $ 2.24 $ 1.20 $ 1.46 ======== ========= ========= Weighted average shares outstanding - diluted..... 18,684 18,108 20,597 ======== ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. OAK INDUSTRIES INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS)
ACCUMULATED ADDI- OTHER UN- TIONAL ACCU- COMPRE- EARNED STOCK COMMON PAID-IN MULATED HENSIVE COMPEN- TRESURY PURCHASE STOCK CAPITAL DEFICIT INCOME SATION STOCK LOANS TOTAL -------- --------- --------- ---------- -------- --------- ---------- ------- Balance, December 31, 1995... $177 $282,179 $(161,528) $ 248 $ -- $ (1,316) $(547) $119,213 -------- Net income........... -- -- 41,836 -- -- -- -- 41,836 Currency translation adjustments......... -- -- -- (626) -- -- -- (626) -------- Comprehensive income. -- -- -- -- -- -- -- 41,210 Exercise of options.. 6 8,762 -- -- -- (133) -- 8,635 Tax benefit from stock options....... -- 2,300 -- -- -- -- -- 2,300 Issuance of restricted stock.... 1 2,944 -- -- (2,945) -- -- -- Other................ -- -- -- -- -- 80 285 365 ---- -------- --------- ------- ------- -------- ----- -------- Balance, December 31, 1996... 184 296,185 (119,692) (378) (2,945) (1,369) (262) 171,723 -------- Net income........... -- -- 21,736 -- -- -- -- 21,736 Currency translation Adjustments......... -- -- -- (1,520) -- -- -- (1,520) Unrealized gains on Securities.......... -- -- -- 186 -- -- -- 186 -------- Comprehensive income. -- -- -- -- -- -- -- 20,402 Exercise of options.. 6 7,779 -- -- -- -- -- 7,785 Tax benefit from stock options....... -- 2,162 -- -- -- -- -- 2,162 Issuance of restricted stock.... -- 208 -- -- (208) -- -- -- Amortization of ] restricted stock.... -- -- -- -- 805 -- -- 805 Cancellation of restricted stock.... -- (594) -- -- 594 -- -- -- Stock repurchases.... -- -- -- -- -- (20,544) -- (20,544) Other................ -- -- -- -- -- (179) -- (179) ---- -------- --------- ------- ------- -------- ----- -------- Balance, December 31, 1997... 190 305,740 (97,956) (1,712) (1,754) (22,092) (262) 182,154 -------- Net income........... -- -- 27,339 -- -- -- -- 27,339 Currency translation adjustments......... -- -- -- (1,067) -- -- -- (1,067) Minimum pension liability adjustment -- -- -- (1,697) -- -- -- (1,697) Reclassification adjustment on unrealized gains on securities....... -- -- -- (186) -- -- -- (186) -------- Comprehensive income. -- -- -- -- -- -- -- 24,389 Exercise of options.. 2 5,474 -- -- -- 1,219 -- 6,695 Tax benefit from stock options....... -- 1,671 -- -- -- -- -- 1,671 Issuance of restricted stock.... -- 40 -- -- (108) 68 -- -- Amortization of restricted stock.... -- -- -- -- 867 -- -- 867 Stock repurchases.... -- -- -- -- -- (14,581) -- (14,581) Other................ -- (65) -- -- -- (155) -- (220) ---- -------- --------- ------- ------- -------- ----- -------- Balance, December 31, 1998... $192 $312,860 $ (70,617) $(4,662) $ (995) $(35,541) $(262) $200,975 ==== ======== ========= ======= ======= ======== ===== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. OAK INDUSTRIES INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM:
1996 1997 1998 -------- --------- -------- OPERATING ACTIVITIES: Income from continuing operations..................... $ 31,976 $ 21,736 $ 27,339 Adjustments to reconcile income from continuing operations to net cash provided by operations: Depreciation.................................... 10,028 12,287 14,358 Amortization.................................... 3,970 6,792 7,697 Minority interest............................... 7,273 1,088 694 Gain on sale of securities...................... -- -- (356) Gain on the sale of properties.................. -- (253) -- Gain on the sale of equity investments.......... (21,502) -- (772) Undistributed earnings of affiliated companies.. 1,263 135 (1,943) Change in assets and liabilities, net of effects from acquisition of businesses: Receivables.................................. (582) (4,087) (5,765) Inventories.................................. (4,036) 6,797 (12,293) Accounts payable and accrued liabilities..... 5,204 (6,563) 5,072 Deferred compensation and pensions........... (172) 1,020 (1,188) Deferred income taxes........................ 14,690 10,639 5,976 Other........................................ (920) (1,915) 427 ---------- --------- -------- Net cash provided by operations.......................... 47,192 47,676 39,246 ---------- --------- -------- INVESTING ACTIVITIES: Capital expenditures.................................. (23,205) (14,697) (16,834) Acquisition of businesses, net of cash acquired....... (125,600) (29,941) (41,516) Proceeds from the sale of properties.................. -- 1,924 -- Proceeds from the sale of equity investments.......... 30,871 -- 898 Repayments from employees............................. 285 -- -- Other................................................. (12) (47) 375 --------- --------- -------- Net cash used in investing activities.................... (117,661) (42,761) (57,077) --------- --------- -------- FINANCING ACTIVITIES: Long-term borrowings.................................. 146,000 58,052 189,246 Repayment of borrowings............................... (92,810) (44,595) (152,392) Early retirement of debt.............................. (21,000) -- -- Stock repurchases..................................... -- (20,544) (14,581) Exercise of options................................... 8,635 7,785 6,302 Dividends paid to minority stockholders............... -- (2,196) (1,090) Deferred debt issuance costs.......................... (720) -- (3,404) Other................................................. -- (179) (396) --------- --------- -------- Net cash provided by (used in) financing activities...... 40,105 (1,677) 23,685 --------- --------- -------- Effect of exchange rate changes on cash and cash equivalents............................................ (333) (712) (742) --------- --------- -------- Net cash and cash equivalents provided by discontinued operations............................................. 19,971 -- -- --------- --------- -------- Net change during year.................................. (10,726) 2,526 5,112 Balance, beginning of year.............................. 16,842 6,116 8,642 --------- --------- -------- Balance, end of year.................................... $ 6,116 $ 8,642 $ 13,754 ========= ========= ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. (1) NATURE OF BUSINESS: Oak Industries Inc., together with its consolidated subsidiaries (the "Company"), is a leading manufacturer of highly-engineered components that it designs and sells to manufacturers and service providers in the communications and other selected industries. (2) STATEMENT OF ACCOUNTING POLICIES: Following are the significant financial and accounting policies of the Company: Principles of Consolidation The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All significant transactions between the Company and its subsidiaries are eliminated. Pervasiveness of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Minority Interest Minority interest represents the minority stockholders' proportionate share of the equity and the net income of Connector Holding Company ("Connector") and Gilbert Engineering Co., Inc. ("Gilbert") (see Note 3). Investments in Affiliates The Company's investments in affiliates consist of: (1) a 50% interest in Wuhan Telecommunication Devices Co., a manufacturer of fiber-optic components in Wuhan, China; (2) a 49% interest in Teletec Corporation, a Japanese distributor of frequency control products; and (3) a 5% interest in TQ Electronics Co., Ltd., a Taiwanese distributor of frequency control products. Translation of Foreign Currencies The financial statements of foreign subsidiaries are translated into United States dollars in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." Translation adjustments, if any, are made directly to a separate component of stockholders' equity. Foreign currency transaction gains and losses are included in net income when realized and are insignificant. Revenue Recognition Revenues from product sales are recognized at the time products are shipped. Inventories Inventories are valued at the lower of cost ("first-in, first-out" basis) or market. Inventory costs, which include material, labor and factory manufacturing overhead expenses, are as follows (dollars in thousands):
DECEMBER 31 ----------------- 1997 1998 ------- ------ Raw materials....................... $ 14,153 $ 28,225 Work in process..................... 28,852 33,699 Finished goods...................... 8,292 15,397 -------- -------- $ 51,297 $ 77,321 ======== ========
Plant and Equipment Plant and equipment are stated at cost. Replacements and improvements are capitalized, while repairs and maintenance costs are charged to expense as incurred. The Company expenses depreciation using the straight-line method over the following useful lives:
Buildings and leasehold improvements........ 5 to 40 years Machinery and equipment..................... 3 to 15 years Furniture and fixtures...................... 5 to 15 years
The cost and accumulated depreciation of items sold or retired are removed from the plant and equipment accounts and any resulting profit or loss is recognized currently. Intangible Assets Goodwill and other intangibles, and the related amortization, are as follows (dollars in thousands):
OTHER GOODWILL INTANGIBLES TOTAL --------- ----------- --------- Balance, December 31, 1996......... $ 164,321 $ 2,177 $ 166,498 Additions.......................... 17,752 162 17,914 Amortization....................... (5,442) (393) (5,835) --------- ------- --------- Balance, December 31, 1997......... 176,631 1,946 178,577 Additions.......................... 24,243 68 24,311 Amortization....................... (5,979) (378) (6,357) --------- ------- --------- Balance, December 31, 1998......... $ 194,895 $ 1,636 $ 196,531 ========= ======= =========
Goodwill represents the excess of the cost of acquired businesses over the fair market value of their net tangible and identified intangible assets. Goodwill is being amortized using the straight-line method over periods of 10 to 40 years. Other intangibles are stated at cost and amortized using the straight-line method over periods of 3 to 15 years. Goodwill and other intangibles are assessed regularly to determine whether any potential impairment exists. The Company assesses the potential impairment of goodwill and other identified intangible assets based on anticipated undiscounted cash flows from operations. Capitalized Debt Costs The Company capitalizes all costs related to the issuance of debt. The resulting capitalized debt costs ($746,000 and $3,744,000 at December 31, 1997 and 1998, respectively) are classified as "Other assets" on the consolidated balance sheet, and are amortized to expense using the straight-line method over the life of the related debt issue. During 1996, 1997 and 1998, the Company amortized $361,000, $152,000 and $473,000 respectively, of capitalized debt costs. As a result of terminating its previous debt facility, the Company wrote off capitalized debt costs of $1,531,000 in 1996 which are included in the extraordinary charge for early extinguishment of debt. Income Taxes The provision for income taxes includes federal, foreign and state income taxes currently payable and those deferred because of temporary differences between the financial statement expenses and tax deductible expenses. Deferred tax assets are recognized, utilizing current tax rates, for deductible temporary differences and operating loss and credit carryforwards that are more likely than not to be realized. Deferred tax benefit or expense represents the change in the deferred tax asset or liability balances. Research and Development Research and development costs, which are expensed as incurred, were $10,873,000, $12,647,000 and $13,520,000 in 1996, 1997 and 1998, respectively. These costs are included in selling, general and administrative expenses in the consolidated statement of operations. Earnings Per Share 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):
FOR THE YEARS ENDED DECEMBER 31 ----------------------------------------- 1996 1997 1998 ------ ------ ------ BASIC Net income.............................. $ 41,836 $ 21,736 $ 27,339 Weighted average shares outstanding..... 18,043 17,837 17,771 Net income per share.................... $ 2.32 $ 1.22 $ 1.54 ======== ======== ======== DILUTED Net income.............................. $ 41,836 $ 21,736 $ 27,339 Interest expense and amortization of deferred costs, net of tax, related to 4 7/8% convertible subordinated notes..................... -- -- 2,741 -------- -------- -------- Net income as adjusted.................. $ 41,836 $ 21,736 $ 30,080 Weighted average shares: Outstanding............................ 18,043 17,837 17,771 Incremental shares related to 4 7/8% convertible subordinated notes........ -- -- 2,199 Incremental shares related to other common stock equivalents.............. 641 271 627 -------- -------- -------- Total shares outstanding, as adjusted .. 18,684 18,108 20,597 Net income per share.................... $ 2.24 $ 1.20 $ 1.46 ======== ======== ========
Options to purchase 50,000, 1,743,900 and 1,153,300 shares of common stock in 1996, 1997 and 1998, respectively, were outstanding at year end but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common stock for the respective period. Cash Equivalents The Company's cash equivalents represent funds invested in a variety of liquid short-term instruments with maturities of less than three months at time of purchase. The carrying amount of these instruments approximates fair value. Investments The Company has classified certain debt securities, which are included in cash and cash equivalents, as held-to-maturity and certain debt and equity securities, which are included in other assets, as available-for- sale. Held-to-maturity securities are stated at cost, which approximates fair value, and associated interest is included in interest income. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. Realized gains and losses and interest and dividends on available-for-sale securities are included in interest income. Interest Rate Swap Agreements The Company enters into interest rate swap agreements in order to manage its exposure to interest rate fluctuations. The 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 interest rate swap agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. In the unlikely event that a counterparty fails to meet the terms of an interest rate swap agreement, the Company would be left with its original floating interest rate rather than the fixed rate it had anticipated. The Company does not anticipate non-performance by any of the counterparties. Net interest differentials to be paid or received related to interest rate swap agreements are accrued and ultimately recognized as an adjustment to interest expense over the life of the agreements. The fair values of interest rate swap agreements are the estimated amounts that the Company would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates and the current credit worthiness of the counterparty. Consolidated Statement of Cash Flows Supplementary information for the consolidated statement of cash flows follows (dollars in thousands):
1996 1997 1998 -------- -------- ------- Interest............................. $ 4,696 $ 11,569 $ 7,659 Income taxes......................... 6,171 3,470 9,891
Details of businesses acquired are as follows:
1996 1997 1998 -------- -------- -------- Assets acquired...................... $ 92,607 $ 27,935 $ 79,467 Minority interest elimination........ 32,993 4,861 4,558 Liabilities assumed.................. -- (2,855) (42,256) --------- --------- --------- Cash paid............................ 125,600 29,941 41,769 Cash acquired........................ -- -- (514) Effect of exchange rate changes on cash..................... -- -- 261 --------- --------- --------- Net cash paid........................ $ 125,600 $ 29,941 $ 41,516 ========= ========= =========
Reclassifications Certain items in the 1996 and 1997 financial statements have been reclassified to conform with the 1998 presentation. (3) ACQUISITIONS: TELE QUARZ GMBH On October 30, 1998 the Company purchased 100% of the outstanding capital stock of Tele Quarz GmbH ("Tele Quarz"). Tele Quarz, located in Neckarbischofsheim, Germany, is a manufacturer of frequency control products. The total purchase price for the capital stock and certain real estate, including debt assumed and transaction costs, was approximately $63.5 million. Oak accounted for the acquisition as a purchase and, accordingly, included operating results of this business subsequent to the date of acquisition in the Company's consolidated financial statements. The Company recorded $17,646,000 of goodwill and other intangibles associated with this acquisition. The Company is amortizing the goodwill and other intangibles over 12 to 30 years. During the fourth quarter of 1998, the Company charged $975,000 to cost of goods sold related to the purchase accounting for Tele Quarz's inventory. The following unaudited pro forma summary combines the consolidated results of operations of the Company and Tele Quarz as if the acquisition had occurred at the beginning of 1997, after giving effect to certain adjustments, including amortization of intangible assets, increased interest expense on the acquisition debt, purchase accounting for inventory, and related income tax effects. The pro forma summary does not necessarily reflect the results of operations as they would have been if the Company and Tele Quarz had constituted a single entity during such periods (dollars in thousands, except per share amounts):
FOR THE YEARS ENDED DECEMBER 31 (UNAUDITED) ------------------------------- 1997 1998 -------- -------- Sales............................ $ 379,051 $ 395,971 Net income....................... $ 21,664 $ 26,336 Net income per share - basic..... $ 1.21 $ 1.48 Net income per share - diluted... $ 1.20 $ 1.41
PIEZO CRYSTAL COMPANY On September 30, 1997, the Company acquired all of the outstanding capital stock of Piezo Crystal Company ("Piezo"), a Carlisle, Pennsylvania manufacturer of frequency control products for the satellite and wireless communications industries. The Company initially paid approximately $20,200,000 in cash, including transaction expenses. The purchase price was financed with borrowings from the Company's credit facility. The acquisition was accounted for as a purchase. During the fourth quarter of 1997, the Company charged $615,000 to cost of goods sold related to the purchase accounting for Piezo's inventory. In April 1998, Piezo's selling shareholders received additional consideration of $1,000,000 based on Piezo's fourth quarter 1997 performance. The additional $1,000,000 earned by Piezo's selling shareholders was recorded by the Company as of December 31, 1997 and is included in goodwill and accrued liabilities. The Company recorded approximately $13,700,000 of goodwill that is being amortized over 40 years. Pro forma results of operations have not been presented because the effects of the acquisition were not significant. CONNECTOR AND GILBERT MINORITY INTEREST On November 1, 1996, the Company purchased the 20% interest in Connector owned by certain affiliates of Bain Capital, Inc. ("Bain") for approximately $95,000,000 in cash, including transaction expenses. Connector owned 85% of Gilbert, and as a result of the acquisition the Company acquired Bain's 17% indirect interest in Gilbert. Oak accounted for the acquisition as a purchase and accordingly there is no minority interest expense related to Bain in the Company's consolidated financial statements subsequent to the date of acquisition. Goodwill of approximately $72,000,000 resulting from this acquisition is being amortized over 36 years, which is consistent with the remaining period relating to goodwill resulting from the purchase of an 80% equity interest in Connector during 1992. The purchase was financed with borrowings from the Company's credit facility. The following unaudited pro forma summary combines the consolidated results of operations of the Company as if the acquisition of the Bain interest had occurred at the beginning of 1996, after giving effect to certain adjustments, including amortization of intangible assets, increased interest expense and related income tax effects. The pro forma summary does not necessarily reflect the results of operations as they would have been if the Company had acquired the Bain interest during such period (dollars in thousands, except per share amounts):
YEAR ENDED DECEMBER 31, 1996 (UNAUDITED) -------------------------- Net sales........................... $ 303,536 Income from operations before extraordinary charge........ $ 41,676 Net income.......................... $ 40,727 Income from operations before extraordinary charge per share - basic................. $ 2.31 Net income per share - basic........ $ 2.26 Income from operations before extraordinary charge per share - diluted............... $ 2.23 Net income per share - diluted...... $ 2.18
On November 15, 1996, the Company agreed to purchase the 15% equity interest in Gilbert owned by certain members of the management of Gilbert (the "Selling Stockholders"). The Company purchased 7.5% of Gilbert from the Selling Stockholders in the fourth quarter of 1996 at a purchase price of approximately $30,600,000. The Company financed the acquisition with borrowings from its credit facility and accounted for the acquisition as a purchase and, accordingly, there is no minority interest expense related to the portion purchased from the Selling Stockholders in the Company's consolidated financial statements subsequent to the date of acquisition. Goodwill of approximately $20,000,000 resulting from this acquisition is being amortized over 36 years. Pro forma results of operations have not been presented for the acquisition of 7.5% of Gilbert because the effects of the acquisition were not significant. On October 31, 1997, the Company purchased 3.75% of Gilbert held by the Selling Stockholders for approximately $8,800,000 in cash. The purchase price was financed with borrowings from the Company's credit facility and with cash generated from operations. Oak accounted for this acquisition as a purchase and, accordingly, there is no minority interest expense related to the portion purchased from the Selling Stockholders in the Company's consolidated financial statements subsequent to the date of the acquisition. Goodwill of approximately $4,000,000 resulting from this acquisition is being amortized over 35 years. The Company owned 96.25% of Gilbert at December 31, 1997. Pro forma results of the 3.75% acquisition are not presented because the effects of the acquisition were not significant. On October 30, 1998, the Company purchased the remaining 3.75% of Gilbert held by the Selling Stockholders, resulting in the Company's 100% ownership of Gilbert. The Company paid approximately $11,400,000 in cash. The Company financed the purchase price with borrowings from its credit facility and with cash generated from operations. The Company accounted for this acquisition as a purchase and, accordingly, there is no minority interest expense related to the portion purchased from the Selling Stockholders in the Company's consolidated financial statements subsequent to the date of the acquisition. Goodwill of approximately $6,857,000 resulting from this acquisition is being amortized over 34 years. Pro forma results of this final acquisition are not presented because the effects of the acquisition were not significant. (4) DIVESTITURES: During 1998, the Company sold its 50% interest in McCoy (Cayman) Ltd. and McCoy International and received net proceeds of $898,000. The Company recorded a pre-tax gain of $772,000 from the sale. During 1996, the Company sold its 49% interest in Video 44 (WSNS-TV Channel 44), and received net proceeds of $29,400,000. The Company recorded a pre-tax gain of $20,550,000 from the sale. During 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. During 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 reported a gain of $9,367,000 from the sale in 1996. Because the tax basis of Nordco was greater than the sales price, the Company did not pay income taxes or 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 (dollars in thousands):
YEAR ENDED DECEMBER 31, 1996 ------------------- Net sales.................................. $ 16,715 ======== Gross profit............................... $ 5,780 ======== Earnings before income taxes............... $ 2,325 Income taxes............................... (883) -------- Net earnings from discontinued operations.. $ 1,442 ========
(5) INDEBTEDNESS: Long-term debt and subordinated notes at December 31 are summarized as follows (dollars in thousands):
1997 1998 ------ ------ Revolving credit facility................. $ 149,000 $ 109,000 4 7/8% Convertible Subordinated Notes..... -- 100,000 Other..................................... 2,908 12,606 --------- --------- 151,908 221,606 Less current portion...................... (443) (2,051) --------- --------- $ 151,465 $ 219,555 ========= =========
On February 25, 1998, the Company issued $100,000,000 of 4 7/8% Convertible Subordinated Notes due 2008 (the "Notes"). The Notes are convertible into common stock of the Company at a conversion price of $38.66 per share. Interest on the Notes is payable semi-annually in arrears on each March 1 and September 1, and the first interest payment was made on September 1, 1998. The net proceeds from the sale of the Notes were used to reduce borrowings under the Company's $300,000,000 revolving credit facility. On November 1, 1996, the Company entered into a credit agreement with various lenders that provides for a $300,000,000 revolving credit facility (the "Facility"). During 1996, proceeds of $125,000,000 from the Facility were used to purchase the minority interest of Gilbert and $21,000,000 was used to refinance existing indebtedness of the Company. During 1997, the Facility was used for the repurchase of Company stock, the Piezo acquisition, and the purchase of additional interests in Gilbert. During 1998, proceeds from the Facility were used for the repurchase of Company stock, the Tele Quarz acquisition and the final purchase of minority interests in Gilbert. The Company's previously existing $200,000,000 credit agreement was terminated on November 1, 1996. As a result, the Company recorded non- cash, after tax, and other minority interest charges of $949,000 in 1996 related to the early extinguishment of the former credit facility. Borrowings under the Facility bear interest, at the option of the Company, either (i) at the prime rate (or, if higher, at 0.5% above the federal funds rate) or (ii) at a spread ranging from 0.5% to 1.25% over the reserve-adjusted 1, 2, 3, or 6 month LIBOR. The spread is subject to adjustment based on certain financial tests. As of December 31, 1998, interest rates on outstanding borrowings under the Facility ranged from 6.06% to 7.75%. Commitment fees ranging from 0.175% to 0.35% are payable on unused borrowings under these agreements. Certain of the Company's subsidiaries have guaranteed the obligations under the Facility. Pursuant to the Facility's terms, Oak Industries Inc. 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. Other long-term debt consists of mortgages and leases with maturities through 2008 and fixed rates ranging from 6.0% to 8.2%. These obligations are secured by the related land, building, machinery and equipment. Scheduled payments of long-term debt at December 31, 1998 are as follows (dollars in thousands):
1999................ $ 2,051 2000................ 2,173 2001................ 111,427 2002................ 1,010 2003................ 381 Thereafter.......... 104,564
As of December 31, 1998, the Company had exchanged its floating rate obligation on (i) a $25,000,000 notional principal amount for a fixed rate payment obligation of 6.02% (plus a spread of 0.5% to 1.25%) per annum through December 24, 1999; and (ii) a $25,000,000 notional principal amount for a fixed rate payment obligation of 6.02% (plus a spread of 0.5% to 1.25%) per annum through December 27, 2000. The Company charged $26,000 and $125,000 to interest expense related to these interest rate swap agreements for 1997 and 1998, respectively. The Company estimates that as of December 31, 1998, the cost to terminate the agreements would have been $721,000. (6) CAPITAL STOCK: SHAREHOLDERS' RIGHTS PLAN On December 7, 1995 the Company's Board of Directors adopted a shareholders' rights plan. The Board declared a distribution of one right for each share of common stock outstanding on December 18, 1995. Stock issued after that date is issued with an attached right. Each right entitles the holder, upon the occurrence of certain events, to purchase 1/100th of a share of junior preferred stock at an initial exercise price of $125. The Board may, at any time, redeem the rights until their expiration on December 7, 2005, and may amend the rights under certain circumstances until they become exercisable. STOCK PURCHASE LOANS In connection with a secondary offering of its stock in December 1993, the Company lent $1,305,000 to corporate officers and certain key divisional managers to finance their purchase of 90,000 shares of the Company's stock from selling shareholders. The principal amount of the remaining loan is repayable in full on January 1, 2000. Interest on this loan is calculated quarterly, based on the interest rate applicable to the Company's outstanding debt, and is payable annually until maturity. The loan, which is included in stockholders' equity, is secured by the common stock that was purchased and certain other amounts owed to such individual by the Company. In 1996, principal of $285,000 was paid to the Company by the borrowers. In 1996, 1997 and 1998, respectively, interest of $55,000, $20,000 and $17,000 was paid to the Company by the borrowers. The principal balance of the remaining loan at December 31, 1997 and 1998 was $262,000. STOCK REPURCHASE In December 1996, the Company was authorized to expend up to $50.0 million to repurchase shares of its common stock on the open market. In October 1998, this program was amended to allow stock repurchases not to exceed $75.0 million in the aggregate. As of December 31, 1998, the Company had spent $35.1 million to repurchase 1,602,200 shares of its common stock. (7) STOCK OPTIONS AND AWARDS: The Company has award plans for directors, officers, employees, consultants and advisors, which provide for, among other things, the issuance of stock options and restricted stock. With respect to stock options, the Compensation Committee of the Company's Board of Directors determines the option price (not to be less than fair market value) at the date of the grant. Options granted pursuant to the Company's award plans generally vest over three years from the date of the grant and expire after ten years or ten years and one day. Certain options granted under the 1995 Stock Option and Restricted Stock plan were originally exercisable prior to the tenth anniversary of their grant date only if the Company's common stock closed at or above 150% of the grant date price for ten consecutive trading days within the three year period following the grant date. On December 4, 1996, the Board of Directors approved an amendment to the exercisability terms of these options. As a result, options for the purchase of 550,000 of the Company's shares were amended in order to provide for their exercisability over a period of 3 years from their original grant date. During 1996 and 1997, the Company granted 124,000 and 5,000 shares, respectively, of restricted stock from the 1995 Stock Option and Restricted Stock Plan (the "1995 Plan") to certain of its officers and employees. These shares vest on the third anniversary of the date of grant provided that the recipient is still employed by the Company. During 1997, 25,000 shares of the restricted stock were forfeited. The market value of the restricted stock awarded to certain officers and employees totaled $2,945,000 and $133,000 in 1996 and 1997, respectively, and these amounts have been recorded as a separate component of stockholders' equity. The Company granted no restricted stock under the 1995 Plan in 1998. The Company amortizes unearned compensation to expense over the three-year vesting period. The Company has elected to follow 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, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation." The following table summarizes information about the Company's stock option activity for the years ended December 31, 1996, 1997, and 1998.
WEIGHTED-AVERAGE SHARES EXERCISE PRICE EXERCISE PRICE --------- ----------------- ------------------- Outstanding at December 31, 1995........... 3,192,966 $ 4.02 to $ 29.38 $ 17.13 Granted................................. 894,000 $19.25 to $ 33.50 $ 25.16 Expired or cancelled.................... (935,199) $ 4.02 to $ 33.50 $ 12.02 Exercised............................... (690,281) $ 4.02 to $ 26.63 $ 8.14 --------- Outstanding at December 31, 1996........... 2,461,486 $ 4.02 to $ 33.50 $ 20.20 Granted................................. 999,000 $18.50 to $ 28.50 $ 25.57 Expired or cancelled.................... (189,035) $18.38 to $ 27.00 $ 24.37 Exercised............................... (491,911) $ 4.02 to $ 26.63 $ 14.30 --------- Outstanding at December 31, 1997........... 2,779,540 $ 4.02 to $ 33.50 $ 22.89 Granted................................. 1,215,300 $26.00 to $ 39.63 $ 34.21 Expired or cancelled.................... (161,400) $14.07 to $ 35.00 $ 24.12 Exercised............................... (315,963) $ 4.02 to $ 33.25 $ 19.95 --------- Outstanding at December 31, 1998........... 3,517,477 $ 4.02 to $ 39.63 $ 27.01 ========= Exercisable at December 31, 1998........... 1,587,972 $ 22.31 ========= Available for grant at December 31, 1998... 1,665,341 =========
The following table summarizes information about stock options outstanding at December 31, 1998.
WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE EXERCISE PRICES AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE ----------------- ------------ ----------- --------- ------------ ----------- $ 4.02 - 7.50 178,293 3 $ 4.64 178,293 $ 4.64 8.04 - 14.07 70,990 5 11.03 52,822 9.98 16.50 - 21.88 57,900 6 17.22 50,640 16.78 23.00 - 33.50 1,095,694 7 25.35 1,001,577 25.36 25.38 - 37.44 931,800 9 25.89 304,640 25.63 26.00 - 39.63 1,182,800 10 34.22 -- -- -------------- --------- --------- $ 4.02 - 39.63 3,517,477 1,587,972
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rates in the range of 5.4% to 7.9%, 4.8% to 6.9% and 4.2% to 5.7% in 1996, 1997 and 1998, respectively; volatility factors of the expected market price of the Company's common stock of .72, .56 and .45 in 1996, 1997 and 1998, respectively; and an expected life of the option of 6 years. The weighted- average fair values of options granted were $18.40, $15.23 and $17.10 per share in 1996, 1997 and 1998, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information follows (in thousands except for earnings per share information):
1996 1997 1998 -------- --------- -------- Pro forma net income ...................... $ 35,590 $ 12,957 $ 18,411 Pro forma earnings per share - basic....... $ 1.97 $ 0.73 $ 1.04 Pro forma earnings per share - diluted..... $ 1.96 $ 0.73 $ 1.04
(8) POSTRETIREMENT BENEFITS: The Company has three noncontributory pension plans covering certain of its employees. Benefits under the plans are generally based on years of service and employees' compensation during the last years of employment or a specified dollar benefit. It is the Company's policy to fund at least the minimum amount required by the Employee Retirement Income Security Act of 1974, as amended, for each plan. Net periodic pension income for all defined benefit plans is as follows (dollars in thousands):
1996 1997 1998 ------ ------ ------ Service cost................................... $ 143 $ 181 $ 137 Interest cost.................................. 2,739 2,842 2,790 Expected return on assets...................... (2,862) (3,144) (3,659) Amortization of net obligation (asset) at transition................................ 9 9 8 Amortization of prior service cost............. 31 36 34 Recognized actuarial (gain) loss............... (14) 26 -- Recognized gain due to curtailment............. (139) -- -- ------ ------- ------- Net periodic pension income.................... $ (93) $ (50) $ (690) ====== ======= =======
The following table summarizes information about the benefit obligation, plan assets and funded status of all defined benefit plans at December 31, 1997 and 1998 (dollars in thousands):
1997 1998 ------------------------------ ------------------------------ ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED ACCUMULATED BENEFITS ACCUMULATED BENEFITS BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS ------------------------------ ------------------------------ CHANGE IN BENEFIT OBLIGATION: Projected benefit obligation at beginning of year................... $ 32,867 $ 3,737 $ -- $ 39,904 Service cost........................... 81 100 -- 137 Interest cost.......................... 2,531 311 -- 2,790 Actuarial loss......................... 2,730 687 -- 3,933 Benefits paid.......................... (2,426) (370) -- (2,463) Effect of exchange rate changes........ (154) (190) -- (423) -------- ------- ------ -------- Projected benefit obligation at end of year........................... 35,629 4,275 -- 43,878 Accumulated benefit obligation......... 35,158 4,275 -- 43,675 Change in plan assets: Fair value of plan assets at beginning of year..................... 33,705 3,269 -- 39,616 Actual return on plan assets........... 5,000 392 -- 3,986 Employer contributions................. -- 361 -- 415 Benefits paid.......................... (2,426) (370) -- (2,463) Effect of exchange rate changes........ (157) (158) -- (425) -------- ------- ------ -------- Fair value of plan assets at end of year........................... 36,122 3,494 -- 41,129 Funded (underfunded) status of plans... 493 (781) -- (2,749) Unrecognized net (asset) obligation at transition......................... (129) 306 -- 157 Unrecognized prior service cost........ -- 628 -- 628 Unrecognized actuarial (gain) loss..... (2,007) 169 -- 1,738 -------- ------- ------ -------- Net amount recognized.................. (1,643) 322 -- (226) Amounts recognized in the consolidated balance sheet consist of: Accrued benefit liability........ (1,643) (612) -- (2,819) Intangible asset................. -- 934 -- 896 Accumulated other comprehensive income.......................... -- -- -- 1,697 -------- ------- ------ -------- Net amount recognized............ $ (1,643) $ 322 $ -- $ (226) ======== ======= ====== ========
In 1996, the Company curtailed one of its plans as a result of reduced employment levels and plan amendments. This curtailment resulted in a gain of $139,000 in 1996. The projected benefit obligation was determined using an assumed discount rate of 7.25% for 1997 and 6.75% for 1998. The expected long-term rate of return on plan assets was 10% for 1997 and 1998. The assets of the defined benefit plans at December 31, 1997 and 1998 consist principally of common stocks, bonds and cash equivalents. The Company has defined contribution plans covering all full-time employees who meet certain eligibility requirements. Contributions by the Company and the employees are determined according to salary-based formulas. The Company recognized expense related to these plans of $2,422,000, $2,453,000 and $2,527,000 in 1996, 1997 and 1998, respectively. In 1993, the Company established a non-qualified supplemental retirement plan for certain employees. Under the plan, participants may elect to contribute up to 15% of their annual salary and bonus and the Company makes matching contributions in the form of shares of the Company's common stock having a value equal to 50% of participants' contributions. The Company's matching contributions vest on the third anniversary of a participant's enrollment in this plan provided the participant remains employed by the Company through that date. Upon termination of employment, participants receive the fair value of their account for the employee-contribution portion in cash and shares of the Company's common stock for the vested portion of the Company's matching contribution. Contributions by the employees currently earn interest at the yield for three year U.S. Treasury Notes, adjusted annually. The Company recorded expense of $431,000, $400,000 and $419,000 in 1996, 1997 and 1998, respectively, related to this plan. (9) INCOME TAXES: The sources of income from continuing operations before income taxes, minority interest and extraordinary charge for the years ended December 31 are as follows (dollars in thousands):
1996 1997 1998 ------ ------ ------ Domestic...................................... $ 58,295 $ 31,555 $ 38,429 Foreign....................................... 3,717 5,130 6,301 --------- --------- --------- $ 62,012 $ 36,685 $ 44,730 ========= ========= =========
The components of the income tax provisions for the years ended December 31 are as follows (dollars in thousands):
1996 1997 1998 ------- ------ ------ Current -- Federal.................................. $ (1,800) $ (902) $ (7,245) Foreign.................................. (1,526) (1,304) (2,066) State and local.......................... (2,429) (1,016) (1,410) --------- --------- --------- $ (5,755) $ (3,222) $ (10,721) Deferred -- Provision for federal and state taxes payable in future ............... (17,009) (10,639) (5,976) --------- --------- --------- Total tax provision..................... $ (22,764) $ (13,861) $ (16,697) ========= ========= =========
Deferred income tax assets (liabilities) at December 31 are as follows (dollars in thousands):
1997 1998 ------ ------ Net operating loss carryforwards.......................... $ 4,550 $ 4,837 Other..................................................... 16,950 7,405 -------- --------- Gross deferred tax assets................................. 21,500 12,242 Gross deferred tax liabilities............................ (5,870) (1,023) -------- --------- Net deferred tax assets................................... $ 15,630 $ 11,219 ======== =========
In connection with the acquisition of Tele Quarz in October 1998, the Company recorded deferred tax assets in the amount of approximately $1,582,000. The decrease in the gross deferred tax assets from 1997 to 1998 results primarily from the utilization of the Company's tax credit carryforwards. The following table displays the differences between income tax provision and the amount of income tax that would result by applying the applicable U.S. statutory federal income tax rate to income from continuing operations before income taxes, minority interest and extraordinary charge (dollars in thousands):
1996 1997 1998 ------------------- -------------------- ------------------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT --------- ------- --------- -------- ------- -------- Computed statutory tax provision....... $ (21,704) (35.0) $ (12,840) (35.0) $(15,656) (35.0) (Increase) decrease in tax provision resulting from -- State income taxes (net of federal benefit)................... (1,580) (2.5) (660) (1.8) (917) (2.1) Alternative minimum tax............. (1,150) (1.9) -- -- -- -- Goodwill amortization............... (1,034) (1.7) (1,798) (4.9) (1,871) (4.2) Foreign sales corporation........... 1,200 1.9 1,030 2.8 1,000 2.2 Resolution of tax issues............ 800 1.3 324 0.9 300 0.7 Other............................... 704 1.2 83 0.2 447 1.0 --------- ----- --------- ----- -------- ----- Income tax provision.................. $ (22,764) (36.7) $ (13,861) (37.8) $(16,697) (37.4) ========= ===== ========= ===== ======== =====
At December 31, 1998, the Company had no net operating loss carryforwards for federal tax reporting purposes. The Company had foreign tax credit carryforwards of approximately $630,000 at December 31, 1998 that, if unused, will expire from 2000 to 2001. Realization of the credit carryforwards is dependent on generating sufficient taxable income prior to the expiration of the credits. Although realization is not assured, the Company believes it is more likely than not that all of the deferred tax assets will be realized. Undistributed earnings of certain foreign subsidiaries and of certain foreign equity method investees of the Company are considered to be indefinitely reinvested. Accordingly, no provision for U.S. federal and state income taxes has been provided for these unremitted earnings. (10) SEGMENT INFORMATION: 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 the CATV industry; 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. Segment assets are all assets directly attributable to the segment, excluding goodwill and other intangible assets, deferred income taxes and investment in affiliates. The accounting policies for the segments are the same as those described in the statement of accounting policies. Summarized financial information concerning the Company's reportable segments is shown in the following table:
CABLE FREQUENCY BROADBAND CONTROL FIBER-OPTIC CONTROLS PRODUCTS PRODUCTS PRODUCTS PRODUCTS TOTAL --------- --------- ----------- -------- ----- YEAR ENDED DECEMBER 31, 1998 Sales.......................... $ 123,760 $ 74,794 $ 52,791 $ 96,521 $ 347,866 Depreciation................... 3,517 3,194 3,337 4,046 14,094 Amortization................... 4,639 638 866 214 6,357 Operating income............... 34,617 8,460 8,452 10,603 62,132 Equity in net income of affiliated companies.(1). -- 665 1,800 -- 2,465 Minority interest in income before income taxes of subsidiaries................ (1,199) -- -- -- (1,199) Segment income................. 33,418 9,125 10,252 10,603 63,398 Segment assets................. 66,236 98,769 35,038 51,801 251,844 Capital expenditures........... 6,827 4,408 1,808 3,269 16,312 YEAR ENDED DECEMBER 31, 1997 Sales.......................... 107,136 56,411 54,513 96,328 314,388 Depreciation................... 3,284 1,937 2,801 3,864 11,886 Amortization................... 4,504 231 867 233 5,835 Operating income............... 26,858 9,001 10,407 9,677 55,943 Equity in net income (loss) of affiliated companies..... -- (48) 46 -- (2) Minority interest in income before income taxes of subsidiaries................ (2,049) -- -- -- (2,049) Segment income................. 24,809 8,953 10,453 9,677 53,892 Segment assets................. 56,351 43,531 31,217 43,972 175,071 Capital expenditures........... 3,653 2,380 3,296 4,224 13,553 YEAR ENDED DECEMBER 31, 1996 Sales.......................... 127,754 43,954 39,825 92,003 303,536 Depreciation................... 2,925 1,640 1,815 3,441 9,821 Amortization................... 2,350 195 844 220 3,609 Operating income............... 42,774 6,108 5,159 9,386 63,427 Equity in net loss of affiliated companies..... -- (306) (180) -- (486) Minority interest in income before income taxes of subsidiaries................ (13,056) -- -- -- (13,056) Segment income................. 29,718 5,802 4,979 9,386 49,885 Segment assets................. 64,585 27,972 31,884 44,150 168,591 Capital expenditures........... 8,215 2,467 7,205 4,869 22,756
The following are reconciliations to corresponding totals in the accompanying consolidated financial statements:
1996 1997 1998 ---------- ---------- ---------- INCOME Total for reportable segments............. $ 49,885 $ 53,892 $ 63,398 Corporate................................. (7,641) (8,096) (7,002) Interest expense.......................... (5,767) (10,973) (10,146) Interest income........................... 541 393 986 Equity in net income of affiliated companies................................ 476 35 292 Minority interest in income before income taxes of subsidiaries........... 13,056 2,049 1,199 Unusual transactions (2).................. 11,462 (615) (3,997) --------- --------- --------- Income from continuing operations before income taxes, minority interest and extraordinary charge.... 62,012 36,685 44,730 ASSETS Total for reportable segments............. 168,591 175,071 251,844 Goodwill and other intangible assets, net. 166,498 178,577 196,531 Deferred income taxes..................... 26,558 16,918 12,242 Investment in affiliates.................. 8,315 8,358 11,014 Corporate (3)............................. 4,323 8,866 10,806 --------- --------- --------- Total assets........................... 374,285 387,790 482,437 CAPITAL EXPENDITURES Total for reportable segments............. 22,756 13,553 16,312 Corporate................................. 449 1,144 522 --------- --------- --------- Total capital expenditures............. 23,205 14,697 16,834 DEPRECIATION EXPENSE Total for reportable segments............. 9,821 11,886 14,094 Corporate................................. 207 401 264 --------- --------- --------- Total depreciation expense............. 10,028 12,287 14,358 AMORTIZATION EXPENSE Total for reportable segments............. 3,609 5,835 6,357 Corporate (4)............................. 361 957 1,340 --------- --------- --------- Total amortization expense............. 3,970 6,792 7,697 (1) Includes gain on sale of equity investment in Frequency Control Products. (2) Unusual transactions for 1998 include the following: an inventory write-down of $1.4 million; a $1.0 million charge related to the purchase accounting for inventory at Tele Quarz; a $0.9 million plant and equipment write-down; and $0.7 million of reorganization and severance charges. Unusual transactions for 1997 include a $0.6 million charge related to the purchase accounting for inventory at Piezo. Unusual transactions for 1996 include the following: a gain of $21.5 million from the sale of equity investments; reorganization and severance charges of $3.8 million; a $4.2 million charge associated with the write-down of certain assets and a reserve for potential legal and environmental matters, of which $1.2 million related to investment in affiliates; a $1.1 million correction of improperly capitalized expenses; and a $0.9 million charge related to the purchase accounting for inventory at Gilbert. (3) Principally cash and cash equivalents, fixed assets and other non- current assets. (4) Capitalized debt costs and restricted stock.
The geographic areas of the Company's sales for the years ended December 31 and long-lived assets at December 31 are as follows (dollars in thousands):
SALES (1) --------------------------------------- 1996 1997 1998 ------------ ---------- --------- United States......................... $ 199,726 $ 200,005 $ 241,363 Foreign countries..................... 103,810 114,383 106,503 --------- ---------- ---------- Consolidated sales................. $ 303,536 $ 314,388 $ 347,866 ========= ========== ========== (1) Sales are attributed to countries based on the location of customers.
LONG-LIVED ASSETS --------------------------------------- 1996 1997 1998 ------------ ---------- --------- United States......................... $ 214,792 $ 234,676 $ 236,102 Germany............................... -- -- 46,590 Other foreign countries............... 27,733 23,224 26,714 --------- ---------- ---------- Long-lived assets.................. $ 242,525 $ 257,900 $ 309,406 ========= ========== ==========
(11) CURRENT ACCRUED LIABILITIES: The following table summarizes the Company's current accrued liabilities at December 31 (dollars in thousands):
1997 1998 -------- -------- Wages, bonuses, commissions, vacation, and other compensation............... $ 10,481 $ 10,383 Income taxes............................. 5,049 3,034 Insurance................................ 2,718 1,916 Other.................................... 10,969 15,120 ---------- ---------- $ 29,217 $ 30,453 ========== ==========
(12) ACCUMULATED OTHER COMPREHENSIVE INCOME: In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income." This statement requires disclosure of comprehensive income and its components in interim and annual reports. Comprehensive income includes all changes in stockholders' equity during a period except those resulting from investments by stockholders and distributions to stockholders. Accordingly, the components of comprehensive income include net income, cumulative translation adjustments, minimum pension liability adjustments and unrealized gains and losses on available-for-sale securities. The components of other comprehensive income are as follows (dollars in thousands):
FOREIGN MINIMUM ACCUMULATED CURRENCY PENSION UNREALIZED OTHER TRANSLATION LIABILITY GAINS ON COMPREHENSIVE ADJUSTMENT ADJUSTMENT SECURITIES INCOME ------------- ------------ ------------ --------------- Balance at December 31, 1995............. $ 248 $ -- $ -- $ 248 Currency translation adjustment.......... (626) -- -- (626) ------- ------- ------- -------- Balance at December 31, 1996............. (378) -- -- (378) Currency translation adjustment.......... (1,520) -- -- (1,520) Unrealized gains on securities........... -- -- 303 303 Deferred taxes relating to unrealized gains on securities................... -- -- (117) (117) ------- ------- ------- -------- Balance at December 31, 1997............. (1,898) -- 186 (1,712) Currency translation adjustment.......... (1,067) -- -- (1,067) Minimum pension liability adjustment..... -- (1,697) -- (1,697) Reclassification adjustment relating to unrealized gains on securities..... -- -- (303) (303) Deferred taxes relating to reclassification adjustment........... -- -- 117 117 ------- ------- ------- -------- Balance at December 31, 1998............. $(2,965) $(1,697) $ -- $ (4,662) ======= ======= ======= ========
(13) COMMITMENTS AND CONTINGENCIES: The Company incurred rent expense for facilities and office equipment of $4,601,000, $3,970,000 and $4,296,000 in 1996, 1997 and 1998, respectively. At December 31, 1998, the Company was committed under non-cancellable operating leases for minimum annual rentals for the next five years as follows: 1999 - $4,260,000; 2000 - $3,814,000; 2001 - $3,260,000; 2002 - $2,494,000; 2003 - $1,547,000; thereafter - $7,835,000. 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. The Company does not consider any of such proceedings to be material to the Company's financial position, results of operations, or liquidity. In January 1997 the Company discovered that the controller at one of its divisions had improperly capitalized expenses that should have been expensed during the periods in which they were incurred. The Company filed amended Form 10-Qs for the first three quarters of 1996 during February 1997 to correct these errors. The Company is voluntarily cooperating with the Securities and Exchange Commission (the "SEC") on an informal basis with respect to inquiries by the SEC concerning these matters. (14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): The following is a summary of the unaudited quarterly results of operations for 1997 and 1998 (dollars in thousands, except per share date):
QUARTER ENDED ----------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 FULL YEAR ------------ ----------- ------------ ----------- --------- 1997 Net sales.......................... $ 73,042 $ 80,306 $ 76,975 $ 84,065 $314,388 Gross profit....................... $ 25,086 $ 30,783 $ 28,602 $ 31,943 $116,414 Net income......................... $ 4,027 $ 5,361 $ 5,824 $ 6,524 $ 21,736 Earnings per share - basic Net income...................... $ .22 $ .30 $ .33 $ .37 $ 1.22 Earnings per share - diluted Net income...................... $ .22 $ .30 $ .32 $ .36 $ 1.20 1998 Net sales.......................... $ 79,214 $ 88,662 $ 81,627 $ 98,363 $347,866 Gross profit....................... $ 29,674 $ 34,033 $ 30,172 $ 31,630 $125,509 Net income......................... $ 6,492 $ 7,916 $ 7,404 $ 5,527 $ 27,339 Earnings per share - basic Net income...................... $ .37 $ .44 $ .41 $ .32 $ 1.54 Earnings per share - diluted Net income...................... $ .35 $ .41 $ .39 $ .31 $ 1.46
Fourth Quarter - 1998 The Company recorded a $1.9 million charge, net of tax, in the Frequency Control Products segment related to the reorganization of certain Frequency Control Products operations. The Company recorded a $0.6 million charge, net of tax, related to the purchase accounting for inventory at Tele Quarz. Fourth Quarter - 1997 The Company recorded a charge of $0.4 million, net of tax, related to the purchase accounting for inventory at Piezo. The Company received $1.0 million of royalty income that included approximately $0.6 million relating to 1996. Royalty income is reported as an offset to selling, general, and administrative expenses. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information with respect to the executive officers of the registrant, see "Executive Officers of the Registrant" in Part I of this report. For information with respect to the directors of the registrant, see "Election of Directors" in the Proxy Statement, incorporated herein by reference, to be filed no later than March 31, 1999 for the Annual Meeting of Stockholders to be held on April 23, 1999. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Compensation of Executive Officers" and "Compensation of Directors" in the Proxy Statement to be filed no later than March 31, 1999 for the Annual Meeting of Stockholders to be held on April 23, 1999 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Directors and Executive Officers" in the Proxy Statement to be filed no later than March 31, 1999 for the Annual Meeting of Stockholders to be held on April 23, 1999 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Certain Relationships and Related Transactions" in the Proxy Statement to be filed no later than March 31, 1999 for the Annual Meeting of Stockholders to be held on April 23, 1999 is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K (a) List of documents filed as part of the report: 1. Financial Statements Consolidated balance sheet at December 31, 1997 and 1998 Consolidated statement of operations for the years ended December 31, 1996, 1997 and 1998 Consolidated statement of stockholders' equity for the years ended December 31, 1996, 1997 and 1998 Consolidated statement of cash flows for the years ended December 31, 1996, 1997 and 1998 Notes to consolidated financial statements 2. Schedule II - Valuation and qualifying accounts All other schedules have been omitted since the information is either not applicable, not required or is included in the financial statements or notes thereto. 3. Exhibit Index (3)(a) Restated Certificate of Incorporation of Oak Industries Inc. dated October 28, 1980; Certificate of Amendment of Restated Certificate of Incorporation dated May 1, 1981; Certificate of Amendment of Restated Certificate of Incorporation, as Amended dated August 14, 1985; Certificate of Amendment of Restated Certificate of Incorporation, as Amended dated September 30, 1986; Certificate of Amendment of Certificate of Incorporation, as Amended dated July 15, 1987; Certificate of Amendment of Certificate of Incorporation, as Amended dated June 3, 1992; and Certificate of Amendment of Restated Certificate of Incorporation, as Amended dated May 7, 1993 all filed as Exhibit 3.1 to the Company's Amendment No. 1 to Form S-3 dated November 24, 1993 are incorporated herein by this reference. (3)(b) Certificate of Designation dated December 21, 1995, filed as Exhibit 2 to the Company's Form 8-K dated December 27, 1995 is incorporated herein by this reference. (3)(c) Bylaws of Oak Industries Inc. as amended through December 7, 1995, filed as Exhibit (3)(c) to Form 10-K dated February 11, 1998 is incorporated herein by this reference. (4)(a) Rights Agreement dated as of December 7, 1995, between Oak Industries Inc. and Bank of Boston as Rights Agent, filed as Exhibit 1 to the Company's Form 8-K dated December 27, 1995 is incorporated herein by this reference. (4)(b) Indenture between Oak Industries Inc. and the State Street Bank and Trust Company, as Trustee, dated as of February 25, 1998, filed as Exhibit 4.2 to the Company's Form S-3, Registration Number 333-50093, dated April 14, 1998 is incorporated herein by this reference. (4)(c) Registration Rights Agreement dated as of February 20, 1998 by and among Oak Industries Inc., Donaldson, Lufkin and Jenrette Securities Corporation, Lehman Brothers and Cowen and Company, filed as Exhibit 4.3 to the Company's Form S-3, Registration Number 333-50093, dated April 14, 1998 is incorporated herein by this reference. (10)(a) 1986 Stock Option and Restricted Stock Plan for Executive and Key Employees of Oak Industries Inc. filed as Annex III to the Proxy Statement dated February 14, 1986 for a Special Meeting of Stockholders is incorporated herein by this reference. (10)(b) 1988 Stock Option Plan for Non-Employee Directors of Oak Industries Inc. filed as Exhibit A to the Company's Proxy Statement in connection with 1988 Annual Meeting of Stockholders filed with the Commission on April 6, 1988 is incorporated herein by this reference. (10)(c) 1992 Stock Option and Restricted Stock Plan, as amended effective as of December 17, 1997, filed as Exhibit (10)(d) to Form 10-K dated February 11, 1998 is incorporated herein by this reference. (10)(d) Oak Industries Inc. Non-Qualified Stock Option Plan, as amended effective as of October 22, 1998, filed herewith. (10)(e) 1995 Stock Option and Restricted Stock Plan, as amended effective as of April 24, 1998, filed as Exhibit 10.1 to the Form 10-Q dated May 12, 1998 is incorporated herein by this reference. (10)(f) Lasertron, Inc. 1982 Incentive Stock Option Plan and 1992 Stock Option Plan filed as Exhibit 10.1 and 10.2 to Form S-8 dated September 21, 1995 are incorporated herein by this reference. (10)(g) Credit Agreement (the "Credit Agreement") dated as of November 1, 1996 among Oak Industries Inc., the lenders from time to time party thereto and the Chase Manhattan Bank, as administrative agent and issuing bank, filed as Exhibit 10 to Form 10-Q dated November 14, 1996 is incorporated herein by this reference. (10)(h) Amendment No. 1 dated as of December 13, 1996 to the Credit Agreement, filed as Exhibit 10 to Form 10-Q dated May 14, 1997 is incorporated herein by this reference. (10)(i) Second Amendment dated as of October 6, 1997 to the Credit Agreement, filed as Exhibit 10 to the Form 10-Q dated November 12, 1997 is incorporated herein by this reference. (10)(j) Third Amendment to the Credit Agreement dated as of February 13, 1998, filed as Exhibit 10.2 to Form 10-Q dated May 12, 1998 is incorporated herein by this reference. (10)(k) Fourth Amendment to the Credit Agreement dated as of October 2, 1998 filed as Exhibit 10.1 to Form 10-Q dated November 12, 1998 is incorporated herein by this reference. (10)(l) Fifth Amendment to the Credit Agreement dated as of October 28, 1998, filed as Exhibit 10.2 to Form 10-Q dated November 12, 1998 is incorporated herein by this reference. (10)(m) Form of Severance Agreement dated as of May 1, 1998 by and between the Company and each of William S. Antle III, Coleman S. Hicks and Pamela F. Lenehan, filed as Exhibit 10.1 to Form 10-Q dated August 12, 1998 is incorporated herein by this reference. (10)(n) Oak Industries Inc. Severance Plan filed as Exhibit 10.2 to Form 10-Q dated August 12, 1998 is incorporated herein by this reference. (13) 1998 Annual Report to be provided no later than March 31, 1999 for the information of the Commission and not deemed "filed" as a part of the filing. (21) Subsidiaries of the Company, filed herewith. (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: On October 30, 1998, the Company filed a report on Form 8-K regarding its acquisition, through a wholly-owned subsidiary, of Tele Quarz GmbH. CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File Nos. 33-14708, 33-62817, 33-59073, 33-32104, 2- 83639, 33-53012, 33-58878, 333-50093, 333-65641 and 333-65643) of Oak Industries Inc. of our report dated February 9, 1999 appearing in this Form 10-K. PricewaterhouseCoopers LLP Boston, Massachusetts March 19, 1999 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OAK INDUSTRIES INC. Date: March 19, 1999 By: WILLIAM S. ANTLE III (William S. Antle III) Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- WILLIAM S. ANTLE III President and March 19, 1999 (William S. Antle III) Chief Executive Officer (Principal Executive Officer) COLEMAN S. HICKS Senior Vice President March 19, 1999 (Coleman S. Hicks) and Chief Financial Officer (Principal Financial Officer) RODERICK M. HILLS Vice Chairman of March 19, 1999 (Roderick M. Hills) the Board BETH L. BRONNER Director March 19, 1999 (Beth L. Bronner) DANIEL W. DERBES Director March 19, 1999 (Daniel W. Derbes) GILBERT E. MATTHEWS Director March 19, 1999 (Gilbert E. Matthews) CHRISTOPHER H. B. MILLS Director March 19, 1999 (Christopher H. B. Mills) ELLIOT L. RICHARDSON Director March 19, 1999 (Elliot L. Richardson) OAK INDUSTRIES INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1996, 1997 and 1998 (dollars in thousands)
ALLOWANCE FOR LOSSES IN COLLECTION 1996 1997 1998 ------ ------ ------ Balance, beginning of year......................... $ 1,573 $ 2,330 $ 2,582 Provision charged to selling, general, and administrative expenses....................... 812 335 647 Recoveries of accounts previously written off...... 3 11 -- Less write-off of uncollectible accounts........... (58) (194) (668) Acquisition of businesses.......................... -- 100 312 ------- ------- -------- Balance, end of year............................... $ 2,330 $ 2,582 $ 2,873 ======= ======= ========
EX-10 2 NON-QUALIFIED STOCK OPTION PLAN - 10D Exhibit 10(d) OAK INDUSTRIES INC. NON-QUALIFIED STOCK OPTION PLAN As amended through October 22, 1998 OAK INDUSTRIES INC. (the "Company"), a corporation organized under the laws of the State of Delaware, hereby adopts this Non-Qualified Stock Option Plan. The purpose of this Plan is to advance the interests of the Company by enhancing the ability of the Company to attract and retain employees, consultants or advisors who are in a position to make significant contributions to the success of the Company; to reward such individuals for their contributions; and to encourage such individuals to take into account the long-term interests of the Company through interests in shares of the Company's common stock. ARTICLE I DEFINITIONS Whenever the following terms are used in this Plan, they shall have the meaning specified below unless the context clearly indicates to the contrary. The masculine pronoun shall include the feminine and neuter and the singular shall include the plural, where the context so indicates. Section 1.1 - Board "Board" shall mean the Board of Directors of the Company. Section 1.2 - Code "Code" shall mean the Internal Revenue Code of 1986, as amended Section 1.3 - Committee "Committee" shall mean the Compensation Committee of the Board, which shall consist of at least two Directors; provided, however that the Chief Executive Officer of the Company, so long as such individual is also a Director, shall have the authority to make awards under this Plan for not more than 10,000 shares each of the Company's Stock to Employees who are not executive officers for the purpose of Section 16 of the Securities Exchange Act of 1934, as amended. Section 1.4 - Company "Company" shall mean Oak Industries Inc. In addition, "Company" shall mean any corporation assuming, or issuing new employee stock options in substitution for, Options outstanding under the Plan, in a transaction to which Section 424(a) of the Code applies. Section 1.5 - Employee "Employee" shall mean any employee (as defined in accordance with the Regulations and Revenue Rulings then applicable under Section 3401(c) of the Code) of the Company, or of any corporation which is then a Parent Corporation or a Subsidiary, whether such employee is so employed at the time this Plan is adopted or becomes so employed subsequent to the adoption of this Plan. Section 1.6 - Fair Market Value "Fair Market Value" of a share of Stock for purposes of the Plan, of a given date, shall be: (i) the closing price of a share of the Stock on the principal exchange on which shares of the Stock are then trading, if any, on such date, or, if shares were not traded on such date, then on the next preceding trading day during which a sale occurred; or (ii) if such Stock is not traded on an exchange but is quoted on NASDAQ or a successor quotation system, (1) the last sales price (if the Stock is then listed as a National Market Issue under the NASD National Market System), or (2) the mean between the closing representative bid and asked prices (in all other cases) for the Stock on such date as reported by NASDAQ or such successor quotation system; or (iii) if such Stock is not publicly traded on an exchange and not quoted on NASDAQ or a successor quotation system, the mean between the closing bid and asked prices for the Stock on such date as determined in good faith by the Committee; or (iv) if the Stock is not publicly traded, the fair market value established by the Committee acting in good faith. Section 1.7 - Non-Qualified Option "Non-Qualified Option" shall mean an Option that is not an "incentive stock option" as defined in the Code. Section 1.8 - Officer "Officer" shall mean an officer of the Company, any Parent Corporation or any Subsidiary. Section 1.9 - Option "Option" shall mean an option to purchase Stock, granted under the Plan. All Options granted under this Plan shall be Non-Qualified Options. Section 1.10 - Parent Corporation "Parent Corporation" shall mean any corporation in an unbroken chain of corporations ending with the Company if each of the corporations other than the Company then owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Section 1.11 - Participant "Participant" shall mean any Employee, consultant or adviser designated to participate in the Plan. Section 1.12 - Plan "Plan" shall mean this Non-Qualified Stock Option Plan of Oak Industries Inc. Section 1.13 - Secretary "Secretary" shall mean the Secretary of the Company. Section 1.14 - Securities Act "Securities Act" shall mean the Securities Act of 1933, as amended. Section 1.15 - Stock "Stock" shall mean shares of the Company's common stock, $.01 par value per share. Section 1.16 - Subsidiary "Subsidiary" shall mean any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Section 1.17 - Termination of Service "Termination of Service" shall mean terminaton of the employee-employer or business relationship between the Participant and the Company, a parent Corporation or a Subsidiary for any reason, including, but not by way of limitation, a termination by resignation, discharge, death or retirement, but excluding terminations where there is a simultaneous reemployment by, or establishment of a business relationship with, the Company, a Parent Corporation or a Subsidiary. In the case of a Participant who is not an Employee, the effective date of a Termination of Service shall be the date specified by the Committee. The Committee, in its absolute discretion, shall determine the effect of all other matters and questions relating to Termination of Service and all questions of whether particular leaves of absence constitute Terminations of Service. ARTICLE II SHARES SUBJECT TO PLAN Section 2.1 - Shares Subject to Plan Shares delivered under the Plan shall be authorized but unissued Stock or, if the Committee so decides in its sole discretion, previously issued Stock acquired by the Company and held in its treasury. The aggregate number of such shares which may be delivered upon exercise of Options shall not exceed 1,000,000. Section 2.2 - Unexercised Options If any Option expires or is canceled without having been fully exercised, the number of shares of Stock subject to such Option but as to which such Option was not exercised prior to its expiration or cancellation may again be awarded hereunder, subject to the limitation of Section 2.1. Section 2.3 - Changes in Company's Shares In the event that the outstanding shares of Stock are hereafter changed into or exchanged for a different number or kind of shares or other securities of the Company, or of another corporation, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, stock dividend or combination of shares, appropriate adjustments shall be made by the Committee in the number and kind of shares subject to Options then outstanding or subsequently granted under the Plan, including but not limited to adjustments of the limitation in Section 2.1 on the maximum number and kind of shares which may be issued under the Plan on exercise of Options. ARTICLE III GRANTING OF OPTIONS Section 3.1 - Eligibility Persons eligible to receive awards under the Plan shall be those Participants who, in the opinion of the Committee, are in a position to make a significant contribution to the success of the Company. No awards under this Plan may be made to Officers or directors who hold such position with the Company at the time of such award. Section 3.2 - Granting of Options to Participants The Committee shall from time to time, in its absolute discretion: (a) Determine to whom Options should be granted; and (b) Determine the number of shares of Stock to be subject to such Options granted to such selected Participants; and (c) Determine the terms and conditions of such Options, consistent with the Plan. ARTICLE IV TERMS OF OPTIONS Section 4.1 - Option Agreement Each Option shall be evidenced by a written stock option agreement, which shall be executed by the Participant and an authorized Officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with the Plan. Section 4.2 - Option Price The price of the shares subject to each Option shall be set by the Committee. Section 4.3 - Commencement of Exercisability Options shall become exercisable at such times and in such installments (which may be cumulative) as the Committee shall provide in the terms of each individual Option; provided, however, that by resolution adopted after an Option is granted the Committee may, on such terms and conditions as it may determine to be appropriate, accelerate the time at which such Option or any portion thereof may be exercised. Section 4.4 - Expiration of Options The Committee shall provide, either at the time of grant or any time thereafter, in the terms of each individual Option, when such Option expires and becomes unexercisable; and (without limiting the generality of the foregoing) the Committee may provide in the terms of individual Options that said Options expire immediately upon a Termination of Service for any reason. Section 4.5 - Employment/Business Relationship Nothing in this Plan or in any stock option agreement hereunder shall confer upon any Participant any right to continue in the employ of, or maintain a business relationship with, the Company, any Parent Corporation or any Subsidiary or shall interfere with or restrict in any way the rights of the Company, its Parent Corporations and its Subsidiaries, which are hereby expressly reserved (subject to applicable agreements specifically to the contrary), to discharge any Participant, or terminate at such relationship, at any time for any reason whatsoever, with or without cause. Section 4.6 - Merger, Consolidation, Acquisition, Liquidation or Dissolution In the event of the merger or consolidation of the Company with or into another corporation as a result of which the Stock is no longer outstanding, the acquisition by another corporation or person of all or substantially all of the Company's assets or 50% or more of the Company's then outstanding voting stock, or the liquidation or dissolution of the Company, all outstanding Options shall become immediately exercisable on the 45th day prior to the proposed effective date of any such merger, consolidation, acquisition, liquidation or dissolution. Immediately prior to the consummation of such merger, consolidation or sale of assets all outstanding Options shall terminate unless the Committee shall have arranged that the surviving or acquiring corporation or an affiliate of that corporation assume the Options or grant to Participants replacement Options. ARTICLE V EXERCISE OF OPTIONS Section 5.1 - Person Eligible to Exercise During the lifetime of the Participant, only the Participant or the Participant's permitted transferees may exercise an Option granted to such Participant, or any portion thereof. After the death of the Participant, any exercisable portion of any Option may, prior to the time when such portion becomes unexercisable, be exercised by the Participant's personal representative or by any person empowered to do so under the deceased Participant's will or under the then applicable laws of descent and distribution. Section 5.2 - Partial Exercise At any time and from time to time prior to the time when any exercisable Option or exercisable portion thereof becomes unexercisable, such Option or portion thereof may be exercised in whole or in part; provided, however, that the Company shall not be required to issue fractional shares and the Committee may, by the terms of the Option, require any partial exercise to be with respect to a specified minimum number of shares. Section 5.3 - Manner of Exercise An exercisable Option, or any exercisable portion thereof, may be exercised solely by delivery to the Secretary or the Secretary's office of all of the following prior to the time when such Option or such portion becomes unexercisable: (a) Notice in writing signed by the Participant or other person then entitled to exercise such Option or portion, stating that such Option or portion is exercised, such notice complying with all applicable rules established by the Committee; and (b) Full payment for the shares of Stock with respect to which such Option or portion is thereby exercised by: (i) cash or by check; or (ii) shares of Stock owned by the Participant (which in the case of Stock acquired from the Company, shall have been held for at least six months) duly endorsed for transfer to the Company with a Fair Market Value on the date immediately prior to the date of delivery equal to the aggregate Option price; or (iii) with the consent of the Committee, a full recourse promissory note bearing interest (at a rate at least sufficient to preclude the imputation of interest under the Code or any successor provision) and payable upon such terms as may be prescribed by the Committee. The Committee may also prescribe the form of such note and the security to be given for such note. No Option may, however, be exercised by delivery of a promissory note or by a loan from the Company when or where such loan or other extension of credit is prohibited by law; or (iv) delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price; or (v) any combination of the consideration provided in the foregoing subsections (i), (ii), (iii), and (iv); and (c) Such representations and documents as the Committee, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act and any other federal or state securities laws or regulations. The Committee may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer orders to transfer agents and registrars; and (d) In the event that the Option or portion thereof shall be exercised by any person or persons other than the Participant, appropriate proof of the right of such person or persons to exercise the Option or portion thereof. Section 5.4 - Conditions to Issuance of Stock Certificates The Company shall not be required to issue or deliver any certificate or certificates for shares of Stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which the Stock is then listed; and (b) The completion of any registration or other qualification of such shares under any state or federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; and (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (d) The payment to the Company of all amounts which it, any Parent Corporation or any Subsidiary is required to withhold under federal, state or local law in connection with the exercise of the Option. If permitted by the Committee, either at the time of the grant of the option or at the time of exercise, the Participant may elect at such time and in such manner as the Committee may prescribe, to satisfy such withholding obligation by (i) delivering to the Company Stock owned by such individual having a Fair Market Value on the day immediately prior to the date of delivery equal to such withholding obligation, or (ii) requesting that the Company withhold from the shares of Stock to be delivered upon exercise of such option a number of shares of Stock having a Fair Market Value on the date immediately prior to the date of delivery equal to such withholding obligation; and (e) The lapse of such reasonable period of time following the exercise of the Option as the Committee may establish from time to time for reasons of administrative convenience. Section 5.5 - Rights as Shareholders The holders of Options shall not be, nor have any of the rights or privileges of, shareholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until certificates representing such shares have been issued by the Company to such holders. Section 5.6 - Transfer Restrictions Except as the Committee may otherwise provide, an Option granted under the Plan is personal to the Participant and is not transferable by the Participant in any manner other than by will or the laws of descent and distribution. The Committee, in its absolute discretion, may impose such other restrictions on the transferability of the shares purchasable upon the exercise of an Option as it deems appropriate. Any such restriction, as well as any requirement to notify the Committee of the disposition of such shares, shall be set forth in the respective stock option agreement and may be referred to on the certificates evidencing such shares. ARTICLE VI ADMINISTRATION Section 6.1 - Duties and Powers of Committee It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its provisions. The Committee shall have the power to interpret the Plan, the Options and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. Section 6.2 - Majority Rule The Committee shall act by a majority of its members in office. The Committee may act either by vote at a meeting or by a memorandum or other written instrument signed by a majority of the Committee. Section 6.3 - Good Faith Actions All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon all Participants, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Options and all members of the Committee shall be fully protected by the Company in respect to any such action, determination or interpretation. ARTICLE VII OTHER PROVISIONS Section 7.1 - Amendment, Suspension or Termination of the Plan The Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board or the Committee. Neither the amendment, suspension nor termination of the Plan shall, without the consent of the holder of the Option, alter or impair any rights or obligations under any Option theretofore granted. No Option may be granted during any period of suspension nor after termination of the Plan, and in no event may any Option be granted under this Plan after the expiration of ten years from the date the Plan is adopted. Section 7.2 - Effect of Plan Upon Other Option and Compensation Plans The adoption of this Plan shall not affect any other compensation or incentive plans in effect for the Company, any Parent Corporation or any Subsidiary. Nothing in this Plan shall be construed to limit the right of the Company, any Parent Corporation or any Subsidiary (a) to establish any other forms of incentives or compensation for employees of the Company, any Parent Corporation or any Subsidiary, or (b) to grant or assume options or to issue restricted stock otherwise than under this Plan in connection with any proper corporate purpose, including, but not by way of limitation, the grant or assumption of options or the issuance of restricted stock in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, firm or association. Section 7.3 - Titles Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. EX-21 3 SUBSIDIARIES LISTING OAK INDUSTRIES INC. EXHIBIT 21 SUBSIDIARIES
Jurisdiction in which Incorporated Ownership or Organized Percentage ------------ ------------ Cabel-Con A/S........................................... Denmark 100 (1) Cabel-Con, Inc. (USA)................................... Arizona 100 (1) Connector Holding Company............................... Delaware 100 Croven Crystals Ltd..................................... Ontario, Canada 100 (2) (3) Electronic Technologies Inc............................. Delaware 100 Gilbert Engineering Co., Inc............................ Delaware 100 (4) Gilbert Engineering France, S.A......................... France 100 (1) Harper-Wyman Company.................................... Delaware 100 (14) Harper-Wyman International Inc.......................... Delaware 100 (5) Harper-Mex S.A. de C.V.................................. Mexico 100 (6) H.E.S. International, Inc............................... Kansas 100 (7) Kruger Vermogensverwaltungs GmbH........................ Germany 100 (20) Laboratoire Piezo Electricite S.A....................... France 100 (22) Lasertron, Inc.......................................... Massachusetts 100 Lasertron International (UK) Limited.................... United Kingdom 100 (19) Lasertron Worldwide Inc................................. Delaware 100 (17) McCoy International Holding Company..................... Delaware 100 (8) National Subscription Television of Chicago Inc......... Illinois 100 (9) Oak China Inc........................................... Delaware 100 (18) Oak Com Inc............................................. Delaware 100 Oak Communications Components (Shanghai) Co., Ltd....... China 100 (18) Oak Communications Inc.................................. Delaware 100 Oak Crystal (Cayman) Ltd................................ Cayman Islands 100 (10) Oak Crystal Inc......................................... Delaware 100 (11) Oak Enclosures Inc...................................... Delaware 100 Oak Industries German Holding GmbH...................... Germany 100 Oak Industries Verwaltungs GmbH......................... Germany 100 (20) Oak Investment Corporation.............................. Delaware 100 (14) Oak Omega Inc........................................... Delaware 100 (12) Oak Systems Inc......................................... Delaware 100 (13) Oak TQ Inc.............................................. Delaware 100 OakGrigsby Inc.......................................... Delaware 100 Piezo Crystal Company................................... Pennsylvania 100 SGI de Mexico, S.A. de C.V.............................. Mexico 100 (14) Societe d'Appareillages Electroniques, S.A.............. France 100 (15) Tele Quarz GmbH......................................... Germany 100 (21) Tele Quarz Slovakia S.R.O............................... Slovakia 100 (22) Tele Quarz Slovensko S.R.O.............................. Slovakia 100 (23) Tele Quarz USA Inc...................................... North Carolina 100 (22) TQ Vermogensverwaltungs GmbH and Co. KG................. Germany 100 (24) Wuhan Telecommunication Devices Co...................... China 50 (16) (1) Owned by Gilbert Engineering Co., Inc. (2) Owned by Electronic Technologies Inc. (3) Doing business as Oak Frequency Control Group. (4) Owned by Connector Holding Company. (5) Owned by Harper-Wyman Company. (6) Owned by Harper-Wyman International Inc. (7) Owned by Oak Enclosures Inc. (8) 50% owned by Electronic Technologies Inc.(and 50% owned by Oak Crystal Inc. (9) Owned by Oak Systems Inc. (10) Owned by Oak Omega Inc. (11) Doing business as Oak Frequency Control Group, McCoy, and OFC. (12) Owned by Oak Crystal Inc. (13) Owned by Oak Investment Corporation. (14) Owned by OakGrigsby Inc. (15) Owned by Gilbert Engineering France, S.A. (16) 50% owned by Lasertron, Inc. (17) Owned by Lasertron, Inc. (18) Owned by Oak Communications Inc. (19) Owned by Lasertron Worldwide Inc. (20) Owned by Oak Industries German Holding GmbH. (21) Owned by Kruger Vermogensverwaltungs GmbH. (22) Owned by Tele Quarz GmbH. (23) Owned by Tele Quarz Slovakia S.R.O. (24) Partners are Oak TQ Inc. and Oak Industries Verwaltungs GmbH.
EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS Dec-31-1998 Dec-31-1998 13,754 0 62,841 2,873 77,321 165,436 199,027 100,057 482,437 53,304 219,555 192 0 0 200,783 482,437 347,866 347,866 222,357 222,357 0 0 10,146 44,730 16,697 27,339 0 0 0 27,339 1.54 1.46
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