-----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, DHbvGfmWeqyiCsTfXybcFtjyuH3LD+v0ClaKga0J76xPAmlBzR9g0t2i5GrgMKYx 2HSt5SbiLdEoY7yY+Oq5WQ== 0000950152-96-006858.txt : 19961224 0000950152-96-006858.hdr.sgml : 19961224 ACCESSION NUMBER: 0000950152-96-006858 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961223 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEITHLEY INSTRUMENTS INC CENTRAL INDEX KEY: 0000054991 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 340794417 STATE OF INCORPORATION: OH FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09965 FILM NUMBER: 96685291 BUSINESS ADDRESS: STREET 1: 28775 AURORA RD CITY: SOLON STATE: OH ZIP: 44139 BUSINESS PHONE: 2162480400 10-K 1 KEITHLEY INSTRUMENTS 10-K 1 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 [FEE REQUIRED]. For fiscal year ended, SEPTEMBER 30, 1996 Commission file number 1-9965 ------------------ ------- KEITHLEY INSTRUMENTS, INC. (Exact name of registrant as specified in its charter) OHIO 34-0794417 - ---------------------------------------- ----------------------------------- (State of incorpoation or organization) (I.R.S. Employer Identification No.) 28775 AURORA ROAD, SOLON, OHIO 44139 - ---------------------------------------- ----------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (216) 248-0400 ---------------------- Securities registered pursuant to Section 12(b) of the Act: COMMON SHARES, WITHOUT PAR VALUE NEW YORK STOCK EXCHANGE - -------------------------------- ------------------------------------- (Title of each class) (Name of exchange on which registered) 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, 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 the 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. [ ] As of December 17, 1996 there were outstanding 4,656,850 Common Shares, without par value, and 2,794,278 Class B Common Shares, without par value. At that date, the aggregate market value of the Common Shares of the Registrant held by non-affiliates was $42,227,722 and the aggregate market value of the Class B Common Shares of the Registrant held by non-affiliates was $1,100,549 for a total aggregate market value of all classes of Common Shares held by non-affiliates of $43,328,271. While the Class B Common Shares are not listed for public trading on any exchange or market system, shares of that class are convertible into Common Shares at any time on a share-for-share basis. The market values indicated were calculated based upon the last sale price of the Common Shares as reported by the New York Stock Exchange on December 17, 1996, which was $9.875. For purposes of this information, the 380,625 Common Shares and 2,682,830 Class B Common Shares which were held by the officers and Directors of the Company were deemed to be voting stock held by affiliates. DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT Part of 10-K - -------- ------------ 1. Annual report to shareholders for the fiscal year ended September 30, 1996 Parts I and II (only the portions listed in this report). 2. Proxy statement for the annual meeting of shareholders to be held on February 15, 1997 Part III (only the portions listed in this report).
2 KEITHLEY INSTRUMENTS, INC. 10-K ANNUAL REPORT TABLE OF CONTENTS
PART I: PAGE ---- Item 1. Business 1 Item 2. Properties 9 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 PART II: Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 13 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 8. Financial Statements and Supplementary Data 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13 PART III. Item 10. Directors and Executive Officers of the Registrant 14 Item 11. Executive Compensation 14 Item 12. Security Ownership of Certain Beneficial Owners and Management 14 Item 13. Certain Relationships and Related Transactions 14 PART IV: Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 15
3 PART I. ITEM 1 - BUSINESS. General Keithley Instruments, Inc. is a corporation which was founded in 1946 and organized under the laws of the State of Ohio on October 1, 1955. Its principal executive offices are located at 28775 Aurora Road, Solon, Ohio 44139; telephone (216) 248-0400. References herein to the "Company" or "Keithley" are to Keithley Instruments, Inc. and its subsidiaries unless the context indicates otherwise. Products Keithley Instruments, Inc. provides instrumentation to semiconductor manufacturers, medical equipment manufacturers, and growth segments of the electronics industry. Scientists and engineers around the world use Keithley's advanced hardware and software for measurement, test, data acquisition, and control. Although the Company's products vary in capability, sophistication, use, size and price, they basically test, measure, and analyze electrical and physical properties. As such, the Company considers its business to be in a single industry segment. For each of the last three fiscal years, more than 90% of the Company's revenue was derived from the sale of electronic test and measurement instrumentation and data acquisition and analysis hardware and software, which represents one class of similar products. The operating units and product groups of the Company are described below: INSTRUMENTS DIVISION. The Instruments Division designs, develops, manufactures and markets sensitive electronic instrumentation used in production test and research for measuring a wide range of electrical properties such as voltage, resistance, current, capacitance and charge. Prices for the Instruments Division's products generally range from $1,000 to $10,000 and included the following product groups: Digital Multimeters. This product line includes a range of instruments that are designed to cover measurements of voltage, resistance, and current for production test, design and development, and research applications. Each digital multimeter has a computer interface for integration into automated test and measurement systems. Typical applications include testing electrical components such as resistor networks and thermistors, and end products which include cellular telephones, computer disk drives, and pace makers. Sensitive Instruments. This product group includes electrometers, picoammeters, sensitive digital voltmeters, micro-ohmmeters, and certain other instruments which are distinguished by their extreme sensitivity, resolution and accuracy as compared to the capabilities of conventional meters. Sensitive instruments are used by scientists, engineers, and researchers for the study of materials, semiconductors, and superconductors. Typical customers are industrial and government research laboratories, educational institutions, and electronics manufacturers. 1 4 Switches and Sources. Switching instruments are used to route electrical signals in test systems to measurement and source instrumentation. This allows many devices or test points to be measured with a minimum number of instruments. Switch products together with Sensitive, Digital Multimeter, Source, I-V and C-V instruments can be integrated into computer-based systems to provide flexible, automated testing and measurement. The switching product line allows Keithley to provide a complete measurement solution to customers in production test, semi-conductor characterization, and materials research applications. Sources generate the precise voltage and currents needed to test electronic devices and investigate properties of materials. Source products are sold to scientists and engineers in research, semiconductor and electronic manufacturing markets, especially where stable signals of low level current and voltage are needed. These sources can be interfaced with computers as part of an automated test system, or used manually on the laboratory bench. Source Measure Units. These are programmable instruments capable of sourcing and measuring voltage and current, thus replacing the functionality of four instruments with one reliable, compact unit. These versatile instruments cover a wide dynamic range of voltage and current and their combination of high speed and resolution have made these units ideal for high volume production testing of electronic components for computers, automotive, and wireless telecommunications products. The source measure units also provide the measurement sensitivity needed for materials research and semiconductor characterization applications. C-V (Capacitance versus Voltage). C-V products include high-frequency and quasistatic C-V meters, measurement and analysis software, and computer-based test systems. C-V products are used by scientists and engineers in semiconductor manufacturing facilities, industrial and governmental research laboratories, and educational institutions to research, develop, and characterize semiconductor devices, materials and manufacturing processes. SEMICONDUCTOR DIVISION. The Semiconductor Division designs, develops, manufactures and markets automatic parametric test systems and process monitoring solutions used by semiconductor manufacturers to measure various electrical characteristics of semiconductor materials. Its products can be found in semiconductor fabrication facilities throughout the world, and consist of two main groups: APT Products. The Company is one of the leading suppliers of these automatic parametric test systems for semiconductor production applications. In production, the systems allow manufacturers to monitor quality control parameters during fabrication of integrated circuits to improve manufacturing yields. In research, the systems are used to analyze the characteristics of semiconductor materials in the development of integrated circuit devices. The systems can also be used to develop integrated circuit manufacturing processes. A typical system incorporates Keithley instrumentation and software and computer hardware manufactured by others. The 2 5 system's major components are integrated, and in most cases, customized to customer specification. Installation and servicing of the equipment and software, and customer training are also provided. Selling prices for these products generally range from $100,000 to $250,000. In February 1996, Keithley purchased the principal assets of Turner Engineering Technology (Turner). Turner developed wafer test structures used for determining the quality of semiconductor wafers at various stages of manufacturing. These test structures will allow the company's APT systems to determine the quality of both the wafer and the manufacturing process much earlier than with previous test methods. Oxide Monitoring System. Quantox(R) is the first product based on the direct wafer measurement or non-contact technology licensed from International Business Machines in May 1994. The measurement data Quantox provides are used to detect and identify the types of charges present on semiconductor wafers. Charge is a critical indicator that tells the semiconductor production engineer whether or not the manufacturing process is "in spec." This measurement is made within minutes using Quantox, replacing a procedure that used to take up to five days. During fiscal 1996 the company incurred costs to develop and market Quantox, with the first revenues from Quantox recognized in the third quarter of fiscal 1996. The selling price for a Quantox unit is approximately $500,000 depending upon the options purchased. RADIATION MEASUREMENTS DIVISION. The Radiation Measurements Division designs, develops, manufactures and markets products and systems that accurately measure the radiation emission levels of x-ray machines and nuclear radiation sources and are used to calibrate radiation therapy and x-ray equipment in hospitals and manufacturing processes. Customers include hospitals, diagnostic x-ray equipment manufacturers, radiation researchers and physicists and field service organizations. Selling prices for standard products range from $500 to $10,500 per instrument, and products designed and manufactured for specific customer applications sell for up to $100,000. In December 1995, Keithley purchased the principal assets of International Sensor Technology, Inc. (IST). IST pioneered the development of laser heating technology in thermoluminescence dosimetry systems for personal radiation protection. The Radiation Measurements Division is fulfilling current and expected future contracts with the U.S. Navy and will commercialize the technology over the next few years. PC MEASUREMENTS DIVISION. This newly formed Division combines Keithley MetraByte with the company's Network Measurements business. Keithley MetraByte designs, develops, manufactures and markets a wide range of data acquisition and analysis hardware and software products designed for use with personal computers and workstations. These products are used in thousands of applications worldwide wherever a number of variables must be monitored and analyzed quickly. Selling prices for these products generally range from $100 to $3,000. These products are marketed under the brand names Keithley MetraByte and Acculex and are composed of the following product groups: Plug-in data acquisition boards provide data acquisition capabilities in the form of a board that is installed into a slot of the computer. The Company offers a wide range 3 6 of plug-in data acquisition boards in terms of the number of channels, input ranges and sampling rates. They are marketed worldwide to researchers and scientists engaged in laboratory automation and experimentation, as well as to engineers involved with process control and data collection applications. These products are marketed primarily through direct marketing and catalog mailings. Software products are specialized personal computer-based scientific data acquisition, analysis and graphics software products. Scientists and engineers often combine Keithley software together with data acquisition hardware or test and measurement instrumentation of other manufacturers. The software products are used with personal computers. Acculex products include digital panel meters and panel printers. These products display machine parameters, capture results for permanent storage and enunciate alarms. These products are marketed primarily through direct marketing and catalog mailings. Distributed I/O products include Keithley's WORKHORSE and MetraBus product offerings. These products are primarily used in industrial monitoring and control applications. Communication products include IEEE-488 bus interfaces and software for interfacing computers with programmable measurement instrumentation. These products are marketed through direct marketing and catalog mailings. Data Acquisition Instruments include personal computer-based workstations that collect data from, and provide control over, a variety of test and measurement modules. A typical workstation consists of a standard software package and hardware external to the personal computer that utilizes various plug-in module cards that allow a user to customize the workstation for a specific application, including research, product test and pilot plant process monitoring. Personal Computer Instrument Products (PCIP) are instruments contained entirely on boards that fit into an expansion slot of almost any personal computer. Included in the PCIP offering are a digital multimeter, scanner oscilloscope, function generator and a counter. Applications include bench top engineering and automatic production testing. These products are marketed primarily through direct marketing and catalog mailings. The company's Network Measurements business recently introduced SmartLink(TM), a new line of intelligent measurement modules that allow laboratory-grade measurements virtually anywhere due to their small size. The compact modules connect directly to a sensor or signal source creating no need for extra hardware. Each module has on-board signal processing capabilities to provide linearization, date/time stamping alarming. That allows them to deliver useful information directly to a monitoring, control of data acquisition system. Selling prices for these products generally range from $1,000 to $2,250. 4 7 AGENCY PRODUCTS. The Company markets and distributes certain products manufactured by approximately nine test and measurement companies. These products are marketed and distributed primarily by the Company's European operations and are complementary to, but not competitive with, products manufactured by the Company. New Products During Fiscal Year 1996 Several new products were introduced during fiscal 1996 including the following: The Instruments Division introduced several new products including the Model 2010 7-1/2-digit digital multimeter which rounds out the company's 2000 Series family. The Model 2400 digital source meter designed specifically for the electronic component industry, is very suitable for a wide range of electronics manufacturing applications. The Semiconductor Division introduced several new products including the Model S600 parametric test system which is expected to be available for shipping the second half of fiscal 1997. The Division also acquired Turner Engineering Technology, a company which specializes in accelerated test method for determining the quality of semiconductor wafers at various stages of manufacturing. Turner's line of Wafer- Level Reliability test structures and software allow manufacturers to fully characterize the lifetime reliability of their semiconductor wafers and have opened the door to incremental sales of the company's parametric test systems. The Radiation Measurements Division acquired International Sensor Technology, Inc. (IST) during the year. The commercialization of IST's patented technology, which provides increased speed and accuracy for personal radiation protection, is another growth opportunity for the company in the years ahead. The PC Measurements Division introduced the new SmartLink(TM) modules discussed previously, as well as several new Keithley MetraByte products including the DAS-1700 line of PC plug-in data acquisition boards. All DAS-1700 boards are supported by Windows 3.1X, 95 and NT drivers, so users can migrate their existing data acquisition applications to new Windows environments. The DAS-1700 series offers users a midrange data acquistion board with many of the features and functions of higher-end systems at a much lower cost. These boards are applied in industrial, product development, educational and scientific/research organizations. Geographic Markets and Distribution During fiscal 1996, substantially all of the Company's products were manufactured in Ohio and Massachusetts and were sold throughout the world in many developed countries. The Company's principal markets are the United States, Europe and the Pacific Basin. At the end of fiscal 1996, the company announced that it would relocate its Keithley MetraByte operation to Solon, Ohio during fiscal 1997. In the United States, the Company's products are sold by the Company's sales personnel, independent sales representatives and through direct marketing and catalog mailings. 5 8 United States sales offices are located in Solon, Ohio and Santa Clara, California. The Company markets its products directly in European countries in which it has a wholly owned sales subsidiary and through distributors in other countries. European subsidiaries have sales and service offices located in or near London, Munich, Paris, Amsterdam, Zurich and Milan. The Company also has sales offices in Belgium, China and India. Sales in markets outside the above names locations are made through independent sales representatives and distributors. The Company's Japanese subsidiary supports independent sales representatives and distributors in the Pacific Basin. Sources and Availability of Raw Materials The Company's products require a wide variety of electronic and mechanical components, most of which are purchased. The Company has multiple sources for the vast majority of the components and materials it uses; however, there are some instances where the components are obtained from a sole-source supplier. If a sole-source supplier ceased to deliver, the Company could experience a temporary adverse impact on its operations; however, management believes alternative sources could be developed quickly. Although shortages of purchased materials and components have been experienced from time to time, these items have generally been available to the Company as needed. Patents Electronic instruments of the nature the Company designs, develops and manufactures can not generally be patented in their entirety. Although the Company holds patents with respect to certain of its products, it does not believe that its business is dependent to any material extent upon any single patent or group of patents, because of the rapid rate of technological change in the industry. Seasonal Trends and Working Capital Requirements Although the Company is not subject to significant seasonal trends, its business is cyclical and is somewhat dependent upon the semiconductor industry in particular. The Company does not have any unusual working capital requirements. Customers The Company's customers generally are involved in engineering research and development, product testing, electronic service or repair, and educational and governmental research. During the fiscal year ended September 30, 1996 no one customer accounted for more than 10% of the Company's sales. Management believes that the loss of any one of its customers would not materially affect the sales or net income of the Company. 6 9 Backlog The Company's backlog of unfilled orders amounted to approximately $9,087,000 as of September 30, 1996 and approximately $11,284,000 as of September 30, 1995. It is expected that the majority of the orders included in the 1996 backlog will be delivered during fiscal 1997; however, the Company's past experience indicates that a small portion of orders included in the backlog may be canceled. Competitive Conditions The Company competes on the basis of quality, performance, service, warranty and price, with quality and performance frequently being dominant. There are many firms in the world engaged in the manufacture of electronic measurement instruments, some of which are larger and have greater financial resources than the Company. The Company's competitors vary between product lines and certain manufacturers compete with the Company in multiple product lines. The Company's principal competitors are Hewlett-Packard Company, National Instruments, Inc., Fluke Corporation, Data Translation, Inc. and Advantest Corporation. Research and Development The Company's engineering development activities are directed toward the development of new products that will complement, replace or add to the products currently included in the Company's product line. The Company does not perform basic research, but on an ongoing basis utilizes new component and software technologies in the development of its products. The highly technical nature of the Company's products and the rapid rate of technological change in the industry require a large and continuing commitment to engineering development efforts. Product development expenses were $18,337,000 in 1996, $15,385,000 in 1995 and $11,551,000 in 1994, or approximately 15%, 14% and 13% of net sales, respectively, for each of the last three fiscal years. Research contracts are not obtained from customers. As discussed earlier, during 1996 the Company acquired the principal assets of IST. IST's activities included a government research and development contract for the Navy which was concluded during 1996. The amount spent by the company on this contract was not material. During fiscal 1994, the Company expensed $3,300,000 to acquire the right to develop and commercialize direct wafer measurement technology from International Business Machines. Government Regulations The Company believes that its current operations and its current uses of property, plant and equipment conform in all material respects to applicable laws and regulations. The Company has not experienced, nor does it anticipate, any material claim or material capital expenditure in connection with environmental laws and other regulations. 7 10 Employees As of September 30, 1996, the Company employed 716 persons, 107 of whom were located outside the United States. None of the Company's employees are covered under the terms of a collective bargaining agreement and the Company believes that relations with its employees are good. Foreign Operations and Export Sales Information related to foreign and domestic operations and export sales is incorporated by reference to Note J of the Notes to the Consolidated Financial Statements on page 31 of the Company's 1996 Annual Report to Shareholders, a copy of which is filed as Exhibit 13 to this report. The Company has significant revenues from outside the United States which increase the complexity and risk to the Company. These risks include increased exposure to the risk of foreign currency fluctuations and the potential economic and political impacts from conducting business in foreign countries. With the exception of changes in the value of foreign currencies which is not possible to predict, the Company believes that its foreign subsidiaries and other larger international markets are in countries where the economic and political climate is generally stable. 8 11 ITEM 2 - PROPERTIES. The Company believes that the facilities owned and leased by it are well maintained, adequately insured and suitable for their present and intended uses. Pertinent information concerning the principal properties of the Company and its subsidiaries is as follows:
Type of Acreage (Land) Owned Properties Facility Square Footage (Building) - ---------------- -------- ------------------------- Location -------- Solon, Ohio Executive offices, Engineering, Manufacturing, 26.1 Acres Marketing and Sales 125,000 square feet Solon, Ohio Engineering, Manufacturing, Marketing, Sales, Service and 7.0 Acres Administration 76,000 square feet Solon, Ohio Marketing and Administration, 5.5 Acres Space is available for expansion with 50,000 square feet the majority leased to other parties. (4,000 square feet utilized by the Co.) Lease Type of Square Expiration Leased Properties Facility Footage Date - ----------------- -------- ------- ----------- Location -------- Taunton, Manufacturing, Marketing, Massachusetts Service and Administration 41,000 June 30, 1998 Taunton, Engineering, Sales Massachusetts and Administration 31,000 June 30, 1998 Solon, Ohio Engineering, Manufacturing, 40,000 October 13, 2006 Marketing, Sales, Service and Administration Solon, Ohio Manufacturing, and 21,600 March 31, 2002 Administration Santa Clara, Sales and Service 4,355 October 15, 1998 California
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Lease Type of Square Expiration Location Facility Footage Date - -------- -------- ------- ----------- Munich, Sales, Service and 27,750 March 31, 2001; Germany Administration renewable London, England Sales and Service 5,600 July 24, 2009 Paris, France Sales and Service 3,456 June 30, 1998 Zurich, Sales and Service 3,229 September 30, 1997 Switzerland renewable Amsterdam, Sales and Service 2,906 March 31, 2002 Netherlands Milan, Sales and Service 2,691 August 31, 2001 Italy
ITEM 3 - LEGAL PROCEEDINGS. The Company is not a party to any material litigation. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 10 13 EXECUTIVE OFFICERS OF THE REGISTRANT: The description of executive officers is included pursuant to Instruction 3 to Section (b) of Item 401 of Regulation S-K under the Securities and Exchange Act of 1934. The following table sets forth the names of all executive officers of the Company and certain other information relating to their position held with the Company and other business experience.
Executive Officer Age Recent Business Experience - ----------------- --- -------------------------- Joseph P. Keithley 48 Chairman of the Board of Directors since 1991, Chief Executive officer since November 1993 and President since May 1994. Vice Chairman of the Board of Directors from 1988 to 1991. Executive Vice President from 1989 to 1991. Joseph F. Keithley 81 Founder of the Company in 1946; President to 1973, Chairman of the Board of Directors from 1955 to 1991. Philip R. Etsler 46 Vice President Human Resources of the Company since 1990. Director of Personnel from 1986 to 1990. James B. Griswold 50 Secretary and a Director of the Company since 1988; partner in the law firm of Baker & Hostetler from 1982 to present. Hermann Hamm 57 Vice President of European Operations of the Company since 1986. Frederick R. Hume 53 Senior Vice President Strategic Planning and Technology since November 1996. Previously Senior Vice President Test Instrumentation Group from February 1993 to October 1996. Vice President Test Instrumentation Group from August 1992 to February 1993. Vice President Instrument Division of the Company from May 1988 to August 1992. Mark J. Plush 47 Controller since 1982 and Officer of the Company since 1989.
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Executive Officer Age Recent Business Experience - ----------------- --- -------------------------- Ronald M. Rebner 52 Vice President and Chief Financial Officer of the Company since 1981. Gabriel A. Rosica 56 Senior Vice President since February 1996. Previously Chief Operating Officer of Bailey Controls Company from August 1994 to January 1996 and Senior Vice President of Systems Operations of Bailey Controls Company from January 1992 to July 1994. Terrence E. Sheridan 56 Vice President Radiation Measurements Division since 1978.
12 15 PART II. ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by this Item is incorporated herein by reference under the caption Stock Market Price and Cash Dividends appearing on page 33 of the Keithley Instruments, Inc. 1996 Annual Report to Shareholders, a copy of which is filed as Exhibit 13 to this Report. The approximate number of shareholders of record of Common Shares and Class B Common Shares, including those shareholders participating in the Dividend Reinvestment Plan, as of December 17, 1996 was 1,950. ITEM 6 - SELECTED FINANCIAL DATA. The information required by this Item is incorporated herein by reference to the eleven year summary, appearing on pages 34 and 35 of the Keithley Instruments, Inc. 1996 Annual Report to Shareholders, a copy of which is filed as Exhibit 13 to this Report. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this Item is incorporated herein by reference to pages 23 through 25 of the Keithley Instruments, Inc. 1996 Annual Report to Shareholders, a copy of which is filed as Exhibit 13 to this Report. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Consolidated Financial Statements, appearing on pages 20 through 22 and pages 25 through 31, the Unaudited Quarterly Results of Operations appearing on page 33 of the Keithley Instruments, Inc. 1996 Annual Report to Shareholders, together with the report thereon of Price Waterhouse LLP dated November 14, 1996, appearing on page 32 of the Keithley Instruments, Inc. Annual Report to Shareholders is filed as Exhibit 13 to this Report. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 13 16 PART III. ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item relating to the Directors is incorporated herein by reference to the information set forth under the caption Election of Directors in the Company's Proxy Statement to be used in conjunction with the February 15, 1997 Annual Meeting of Shareholders and filed with the Securities and Exchange Commission pursuant to Section 14(a) of the Securities Exchange Act of 1934. The information required for an identification of executive officers is included on pages 11 and 12 of this Form 10-K Annual Report. ITEM 11 - EXECUTIVE COMPENSATION. The information required by this item relating to executive compensation is incorporated herein by reference to the information set forth under the caption Executive Compensation and Benefits in the Company's Proxy Statement to be used in conjunction with the February 15, 1997 Annual Meeting of Shareholders and filed with the Securities and Exchange Commission pursuant to Section 14(a) of the Securities Exchange Act of 1934. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the information set forth under the caption Principal Shareholders in the Company's Proxy Statement to be used in conjunction with the February 15, 1997 Annual Meeting of Shareholders and filed with the Securities and Exchange Commission pursuant to Section 14(a) of the Securities Exchange Act of 1934. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. James B. Griswold, a Director and nominee for Director, is a partner in the law firm of Baker & Hostetler. Baker & Hostetler served as general legal counsel to the Company during the fiscal year ended September 30, 1996 and is expected to render services in such capacity to the Company in the future. 14 17 PART IV. ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS OF THE COMPANY The following documents are filed as part of this report: 1. Consolidated Balance Sheet as of September 30, 1996 and 1995. 2. Consolidated Statement of Income for each of the three years ended September 30, 1996. 3. Consolidated Statement of Cash Flows for each of the three years ended September 30, 1996. 4. Consolidated Statement of Earnings Reinvested in the Business for each of the three years ended September 30, 1996. 5. Notes to Consolidated Financial Statements. 6. Report of Independent Accountants dated November 14, 1996. (a)(2) FINANCIAL STATEMENT SCHEDULES The following additional information should be read in conjunction with the Consolidated Financial Statements of the Company described in Item 14(a)(1): Schedule II Valuation and Qualifying Accounts Schedules other than those listed above are omitted because they are not required or not applicable, or because the information is furnished elsewhere in the consolidated financial statements or the notes thereto. 15 18 (A)(3) INDEX TO EXHIBITS
Page Number Sequential Exhibit Numbering Number Exhibit System - ------ ------- ------ 3(a) Amended Articles of Incorporation, as amended on February 11, 1985. (Reference is made to Exhibit 3(a) of the Company's Form 10 Registration Statement (File No. 0-13648) as declared effective on July 31, 1985, which Exhibit is incorporated herein by reference.) -- 3(b) Code of Regulations, as amended on February 11, 1985. (Reference is made to Exhibit 3(b) of the Company's Form 10 Registration Statement (File No. 0- 13648) as declared effective on July 31, 1985, which Exhibit is incorporated herein by reference.) -- 3(c) Amended Articles of Incorporation, as amended on February 10, 1996. (Reference is made to Exhibit 3(c) of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996 (File No. 1-9965), which Exhibit is incorporated herein by reference.) -- 4(a) Specimen Share Certificate for the Common Shares, without par value. (Reference is made to Exhibit 4(a) of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1988 (File No. 1-9965), which Exhibit is incorporated herein by reference.) -- 4(b) Specimen Share Certificate for the Class B Common Shares, without par value. (Reference is made to Exhibit 4(b) of the Company's Form 10 Registration Statement (File No. 0-13648) as declared effective on July 31, 1985, which Exhibit is incorporated herein by reference.) -- *10(a) 1984 Stock Option Plan, adopted in February 1984. -- *10(c) 1984 Deferred Compensation Plan, adopted in February 1984. -- *Reference is made to the appropriate Exhibits of the Company's Form 10 Registration Statement (File No. 0-13648) as declared effected on July 31, 1985, which Exhibits are incorporated herein by reference.
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Page Number Sequential Exhibit Numbering Number Exhibit System - ------ ------- ------ 10(k) Employment Agreement with Joseph F. Keithley dated September 26, 1988. (Reference is made to Exhibit 10(k) of the Company's Annual Report on Form 10-K for the year ended September 30, 1988 (File No. 1-9965), which Exhibit is incorporated herein by reference.) -- 10(l) Employment Agreement with Joseph P. Keithley dated September 26, 1988. (Reference is made to Exhibit 10(l) of the Company's Annual Report on Form 10-K for the year ended September 30, 1988 (File No. 1-9965), which Exhibit is incorporated herein by reference.) -- 10(o) Form of Supplemental Executive Retirement Plan, adopted in January 1988. (Reference is made to Exhibit 10(o) of the Company's Annual Report on Form 10-K for the year ended September 30, 1988 (File No. 1-9965), which Exhibit is incorporated herein by reference.) -- 10(q) 1992 Stock Incentive Plan, adopted in December 1991. (Reference is made to Exhibit 10(q) of the Company's Annual Report on form 10-K for the year ended September 30, 1991 (File No. 1-9965) which Exhibit is incorporated herein by reference.) -- 10(r) 1992 Directors' Stock Option Plan, adopted in December 1991. (Reference is made to Exhibit 10(r) of the Company's Annual Report on form 10-K for the year ended September 30, 1991 (File No. 1-9965) which Exhibit is incorporated herein by reference.) -- 10(u) Credit Agreement dated as of May 31, 1994 by and among Keithley Instruments, Inc. and certain borrowing subsidiaries and the Banks named herein, and NBD Bank, N.A., as Agent. (Reference is made to Exhibit 10(u) of the Company's Quarterly Report on form 10-Q for the quarter ended June 30, 1994 (File No. 1-9965) which Exhibit is incorporated herein by reference.) --
17 20
Page Number Sequential Exhibit Numbering Number Exhibit System - ------ ------- ------ 10(v) Contactless Testing Technology Licensing Agreement between International Business Machines Corporation and Keithley Instruments, Inc., effective as of May 26, 1994. (Reference is made to Exhibit 10(v) of the Company's Annual Report on form 10-K for the year ended September 30, 1994 (File No. 1-9965) which Exhibit is incorporated herein by reference.) -- 10(x) 1996 Outside Directors Deferred Stock Plan. (Reference is made to Exhibit 10(x) of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996 (File No. 1-9965), which Exhibit is incorporated herein by reference.) -- 11 Statement Re Computation of Per Share Earnings. 24 13 Annual Report to Shareholders for the Fiscal Year Ended September 30, 1996. 25-59 21 Subsidiaries of the Company. 60 23 Consent of Experts. 61 27 Financial Data Schedule (EDGAR version only). --
ITEM 14(B) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the last quarter of the Company's fiscal year ended September 30, 1996. ITEM 14(C) EXHIBITS: See "Index to Exhibits" at Item 14(a)(3) above. ITEM 14(D) FINANCIAL STATEMENT SCHEDULES: Schedules required to be filed in response to this portion of Item 14 are listed above in Item 14(a)(2). 18 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Keithley Instruments, Inc. (Registrant) By: /s/ Joseph P. Keithley --------------------------------- Joseph P. Keithley, (Chairman, President and Chief Executive Officer) Date: December 7, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the date indicated.
Signature Title Date - --------- ----- ---- /s/ Joseph P. Keithley Chairman of the Board of Directors, President and 12/7/96 - ----------------------- Chief Executive Officer Joseph P. Keithley (Principal Executive Officer) /s/ Joseph F. Keithley Founder and Director 12/7/96 - ------------------------------ Joseph F. Keithley /s/ Ronald M. Rebner Vice President and Chief Financial Officer 12/7/96 - -------------------- (Principal Financial and Accounting Officer) and a Ronald M. Rebner Director /s/ Dr. Theodore M. Alfred Director 12/7/96 - -------------------------- Dr. Theodore M. Alfred /s/ Brian R. Bachman Director 12/7/96 - -------------------- Brian R. Bachman /s/ James T. Bartlett Director 12/7/96 - --------------------- James T. Bartlett /s/ Arden L. Bement, Jr. Director 12/7/96 - ------------------------ Dr. Arden L. Bement, Jr. /s/ James B. Griswold Director 12/7/96 - --------------------- James B. Griswold /s/ Leon J. Hendrix, Jr. Director 12/7/96 - ------------------------ Leon J. Hendrix, Jr. /s/ R. Elton White Director 12/7/96 - ------------------ R. Elton White
19 22 Report of Independent Accountants on Financial Statement Schedule To the Board of Directors of Keithley Instruments, Inc. Our audits of the consolidated financial statements referred to in our report dated November 14, 1996 appearing on page 32 of the 1996 Annual Report to Shareholders of Keithley Instruments, Inc., (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP Cleveland, Ohio November 14, 1996 20 23 SCHEDULE II KEITHLEY INSTRUMENTS, INC. VALUATION AND QUALIFYING ACCOUNTS (In Thousands of Dollars)
Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Balance at Charged to Costs Balance at End Description Beginning of Period and Expenses Deductions (1) of Period - ----------- ------------------- ---------------- -------------- --------- For the Year Ended September 30, 1996: Valuation allowance for deferred tax assets $2,606 $467 $79 $2,994 For the Year Ended September 30, 1995: Valuation allowance for deferred tax assets $3,330 $ 80 $ 804 $2,606 For the Year Ended September 30, 1994: Valuation allowance for deferred tax assets $3,314 $ 548 $ 532 $3,330
(1) Represents utilization of foreign tax credits. 21 EX-11 2 EXHIBIT 11 1 11. Statement re computation of per share earnings
Year ended Year ended Year ended September 30, 1996 September 30, 1995 September 30, 1994(1) ------------------ ------------------ ------------------ Primary EPS calculation: Shares outstanding at beginning of period 7,227,972 7,104,876 7,067,890 Net issuance of shares under stock award plans, weighted average 76,823 22,768 19,764 Net issuance of shares under stock purchase plan, weighted average 55,617 30,038 -- ---------- ---------- ---------- Weighted average shares outstanding 7,360,412 7,157,682 7,087,654 ---------- ---------- ---------- Assumed exercise of stock options, weighted average of incremental shares 421,122 281,602 -- Assumed purchase of stock under stock purchase plan, weighted average 40,812 36,854 -- ---------- ---------- ---------- Average shares and common share equivalents - primary EPS calculation 7,822,346 7,476,138 7,087,654 ========== ========== ========== Net income (loss) per share $ (.70) $ .66 $ .13 ========== ========== ========== Net income (loss) in thousands $(5,440) $4,914 $907 ========== ========== ========== Fully diluted EPS calculation: Weighted average shares outstanding 7,360,412 7,157,682 7,087,654 Assumed exercise of stock options, weighted average of incremental shares 421,122 508,496 -- Assumed purchase of stock under stock purchase plan, weighted average 40,812 53,598 -- ---------- ---------- ---------- Average shares and common share equivalents - primary EPS calculation 7,822,346 7,719,776 7,087,654 ========== ========== ========== Net income (loss) per share $ (.70) $ .64 $ .13 ========== ========== ========== Net income (loss) in thousands $(5,440) $4,914 $907 ========== ========== ==========
(1) The impact of common stock equivalents in 1994 was negligible. EX-13 3 EXHIBIT 13 1 13. Annual report to security-holders Consolidated Statement of Income For the years ended September 30, 1996, 1995 and 1994 (In Thousands of Dollars Except for Per-Share Data)
1996 1995 1994 -------- -------- -------- Net sales $118,946 $109,574 $89,248 -------- -------- ------- Cost of goods sold 46,140 42,372 35,259 Selling, general and administrative expenses 47,695 43,945 37,765 Product development expenses 18,337 15,385 11,551 Purchased technology -- -- 3,300 Special charges 11,645 -- (42) Amortization of intangible assets 634 464 470 Net financing expenses 819 986 821 -------- -------- ------- Income (loss) before income taxes (6,324) 6,422 124 Income taxes (benefit) (884) 1,508 (783) -------- -------- ------- Net income (loss) $ (5,440) $ 4,914 $ 907 ======== ========= ========= Net income (loss) per share $ (.70) $ .66 $ .13 ======== ========= ========= Fully diluted net income (loss) per share $ (.70) $ .64 $ .13 ======== ========= =========
The accompanying notes are an integral part of the financial statements. Consolidated Statement of Earnings Reinvested in the Business For the years ended September 30, 1996, 1995 and 1994 (In Thousands of Dollars Except for Per-Share Data)
1996 1995 1994 -------- -------- -------- Earnings reinvested in the business at beginning of year $32,157 $27,943 $27,685 Net income (loss) (5,440) 4,914 907 Cash dividends-Common Shares ($.125 per share in 1996, $.106 per share in 1995 and $.10 per share in 1994) (568) (450) (410) Cash dividends-Class B Common Shares ($.10 per share in 1996, $.085 per share in 1995 and $.08 per share in 1994) (284) (250) (239) ------- ------- ------- Earnings reinvested in the business at end of year $25,865 $32,157 $27,943 ======= ======= =======
The accompanying notes are an integral part of the financial statements. 2 Consolidated Balance Sheet September 30, 1996 and 1995 (In Thousands of Dollars Except for Per-Share Data)
1996 1995 ------- -------- Assets Current assets: Cash and cash equivalents $ 3,995 $ 3,890 Accounts receivable and other, net of allowances of $630 in 1996 and $357 in 1995 18,538 20,856 Inventories: Raw materials 8,255 4,917 Work in process 4,880 3,981 Finished products 4,291 3,762 ------- ------- Total inventories 17,426 12,660 Deferred income taxes 3,082 1,627 Prepaid expenses 699 663 ------- ------- Total current assets 43,740 39,696 ------- ------- Property, plant and equipment, at cost: Land 1,325 426 Buildings and leasehold improvements 13,310 9,346 Manufacturing, laboratory and office equipment 23,238 22,755 ------- ------- 37,873 32,527 Less-Accumulated depreciation and amortization 22,531 21,984 ------- ------- Total property, plant and equipment, net 15,342 10,543 ------- ------- Intangible assets, net of accumulated amortization of $29,708 in 1996 and $23,337 in 1995 2,064 6,201 Other assets 12,688 9,669 ------- ------- Total assets $73,834 $66,109 ======= ======= Liabilities and Shareholders' Equity Current liabilities: Current installments on long-term debt $ 61 $ 71 Accounts payable 8,162 6,759 Accrued payroll and related expenses 4,525 6,142 Other accrued expenses 9,358 4,575 Income taxes payable 2,955 2,580 ------- ------- Total current liabilities 25,061 20,127 ------- ------- Long-term debt 13,308 6,042 Other long-term liabilities 3,655 2,992 Deferred income taxes 54 46 Shareholders' equity: Common Shares, stated value $.025: Authorized - 30,000,000; issued and outstanding - 4,656,600 in 1996 and 4,308,976 in 1995 116 108 Class B Common Shares, stated value $.025: Authorized - 9,000,000; issued and outstanding - 2,794,278 in 1996 and 2,918,996 in 1995 70 73 Capital in excess of stated value 5,293 3,981 Earnings reinvested in the business 25,865 32,157 Cumulative translation adjustment and other 548 583 Common shares held in treasury, at cost (136) -- ------- ------- Total shareholders' equity 31,756 36,902 ------- ------- Total liabilities and shareholders' equity $73,834 $66,109 ======= =======
The accompanying notes are an integral part of the financial statements. 3 Consolidated Statement of Cash Flows For the years ended September 30, 1996, 1995 and 1994 (In Thousands of Dollars)
1996 1995 1994 -------- -------- -------- Cash flows from operating activities: Net income (loss) $ (5,440) $ 4,914 $ 907 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 3,419 3,106 2,902 Amortization of intangible assets 634 464 470 Deferred income taxes (3,772) (1,217) (2,216) Deferred compensation 211 220 232 Special charges 11,452 -- (42) Change in current assets and liabilities: Accounts receivable and other 2,317 (6,108) 241 Inventories (5,275) (2,864) (620) Prepaid expenses (57) 289 219 Other current liabilities (143) 4,660 3,297 Other operating activities (746) (1,007) 1,251 -------- -------- -------- Net cash provided by operating activities 2,600 2,457 6,641 -------- -------- -------- Cash flows from investing activities: Payments for property, plant and equipment (8,539) (2,695) (3,591) Other investing activities 71 69 81 Acquisitions of businesses (1,408) -- -- -------- -------- -------- Net cash used in investing activities (9,876) (2,626) (3,510) -------- -------- -------- Cash flows from financing activities: Net decrease in short-term debt (10) (35) (496) Borrowing (repayment) of long-term debt 7,385 1,367 (1,124) Proceeds from sale of Common Shares 974 520 85 Cash dividends (852) (700) (649) -------- -------- -------- Net cash provided by (used in) financing activities 7,497 1,152 (2,184) -------- -------- -------- Effect of changes in foreign currency exchange rates on cash (116) 195 113 -------- -------- -------- Increase in cash and cash equivalents 105 1,178 1,060 Cash and cash equivalents at beginning of period 3,890 2,712 1,652 -------- -------- -------- Cash and cash equivalents at end of period $ 3,995 $ 3,890 $ 2,712 ======== ======== ======== Supplemental disclosures of cash flow information Cash paid during the year for: Income taxes $ 2,201 $ 1,419 $ 665 Interest 711 814 813 Supplemental schedule of noncash investing activities The company's acquisitions included the following noncash transactions: Fair value of assets acquired $ 2,525 $ -- $ -- Cash paid (1,408) -- -- Common Shares issued (201) -- -- -------- -------- -------- Liabilities assumed $ 916 $ -- $ -- ======== ======== ========
Disclosure of accounting policy For purposes of this statement, the company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash flows resulting from hedging transactions are classified in the same category as the cash flows from the item being hedged. The accompanying notes are an integral part of the financial statements. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Percent of net sales for the years ended September 30, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Net sales 100.0 100.0 100.0 Cost of goods sold 38.8 38.7 39.5 Selling, general and administrative expenses 40.1 40.1 42.3 Product development expenses 15.4 14.0 13.0 Purchased technology -- -- 3.7 Special charges 9.8 -- -- Amortization of intangible assets 0.5 0.4 0.5 Net financing expenses 0.7 0.9 0.9 ----- ------ ----- Income (loss) before income taxes (5.3) 5.9 0.1 Income taxes (benefit) (0.7) 1.4 (0.9) ----- ------ ----- Net income (loss) (4.6) 4.5 1.0 ===== ====== =====
RESULTS OF OPERATIONS (IN THOUSANDS OF DOLLARS EXCEPT FOR PER-SHARE DATA) The net loss of $5,440, or $.70 per share, resulted from special charges totaling $11,645 pretax, or $1.23 per share, due primarily to the company's decision to relocate the Keithley MetraByte operation to Cleveland. Excluding special charges, net income was $4,185, or $.53 per share in 1996 versus $4,914, or $.64 per share on a fully diluted basis in 1995, and $907, or $.13 per share in 1994. The above figures also include expenses to develop Quantox(R), the company's first product based on the technology licensed from IBM in 1994, as well as to explore other new business opportunities. These start-up losses totaled approximately $10,800 and $6,900 pretax in 1996 and 1995, respectively. Net income in 1994 included pretax costs of $3,300 to license the technology, approximately $1,400 to begin developing the technology and $925 in other non-recurring charges. Earnings before taxes and special charges excluding the company's new business losses were approximately $16,100, $13,300 and $4,800 in 1996, 1995 and 1994, respectively. For the second consecutive year, the company reported record net sales. Net sales of $118,946 for 1996 were up 9% from $109,574 in 1995. Increased demand for the company's instruments used in production test and research and for those products serving the semiconductor industry accounted for the increase. Net sales were $89,248 in 1994, with the increase from 1994 to 1995 due mainly to increased sales demand for the company's products serving the semiconductor industry. Geographically, domestic and 5 export sales, particularly those to the Pacific Basin region, have increased for the last two years. Net sales in Europe were flat from 1995 to 1996 and increased from 1994 to 1995. Cost of goods sold as a percentage of net sales was 38.8 percent in 1996, 38.7 percent in 1995 and 39.5 percent in 1994. Foreign exchange hedging had no effect on cost of goods sold as a percentage of net sales in 1996 versus an increase of 0.2 percentage points in 1995. The slight increase from 1995 to 1996 resulted from increased sales of lower gross margin products offset by increased manufacturing efficiencies due to higher sales volume. Gross margins are expected to decrease to the extent sales include a greater mix of Quantox. Gross margins increased from 1994 to 1995 due mainly to an 11 percent weakening of the U.S. dollar. The U.S. dollar strengthened less than 1 percent from 1995 to 1996 and had a minimal effect on changes in costs. Selling, general and administrative expenses increased $3,750 or 9 percent to $47,695 in 1996 from $43,945 in 1995, and increased $6,180 or 16 percent in 1995 from $37,765 in 1994. As a percentage of net sales, they were 40.1 percent in 1996 and 1995 versus 42.3 percent in 1994. The increases in expenses were due mostly to higher marketing costs associated with new business initiatives and the introduction of new products from existing businesses, higher commissions due to increased sales, and from 1994 to 1995, an 11 percent weakening of the U.S. dollar. Product development expenses increased $2,952 or 19 percent to 15.4 percent of net sales in 1996 from 14.0 percent in 1995, and increased $3,834 or 33 percent in 1995 from 13.0 percent of net sales in 1994. The increase from 1995 to 1996 was due to increased personnel and development costs associated with the company's next generation parametric test system, the Model S600, introduced in the second quarter of fiscal 1996, the development of new bench-top instrument products and the exploration of other new business opportunities. Almost two-thirds of the increase from 1994 to 1995 was due to additional spending to develop the Quantox product. The remainder of the increase from 1994 to 1995 was incurred primarily to develop other products for the company's semiconductor customers. Purchased technology of $3,300 in 1994 represents technology rights acquired from International Business Machines (IBM). Per the provisions of the license agreement with IBM, the company will also pay future royalties based on specified sales levels. There is no minimum royalty payment required; however, $3,000 must be paid by May 26, 2000 to 6 retain exclusive rights to the technology. In fiscal 1996, $79 was expensed for royalties to IBM. Special charges of $11,645 pretax, or $1.23 per share, recorded in 1996 primarily represent the expected costs of closing the Keithley MetraByte operation located in Taunton. Since the acquisition of Keithley MetraByte in 1989, sales have declined for the operation and earnings have been poor. In September 1996, it became apparent to management that due to the lack of growth, the business could not support stand-alone operations. Therefore management made the decision to move the Taunton, Massachusetts operation to Cleveland, Ohio. The Keithley MetraByte operation will be combined with the company's Network Measurements organization to form a new business. The special charges comprise the following: a noncash charge of $5,737 to write off the remaining goodwill; $3,433 for severance, outplacement and other personnel costs related to approximately 130 employees to be terminated; $998 for lease and related costs, and $835 in noncash charges related to impaired inventory and equipment. Also included in special charges is $642 representing an accrual for costs to be incurred over the next five years under two operating subleases at the company's European facilities. Of the special charges, noncash charges total $6,572; $194 of severance related costs were paid in fiscal 1996, leaving $4,538 accrued in the Consolidated Balance Sheet under the category "Other accrued expenses" and $341 accrued under the category "Other long-term liabilities." The closing of the Taunton facility and relocation to Cleveland is expected to be complete by July 1, 1997. It is anticipated that once the relocation is complete, employment for the operation will be reduced by a net of over 50 people. During 1997, management believes that approximately $2,000 to $2,500 will be saved by the relocation in product development and selling, general and administrative expenses; however, certain costs to move the operation and hire replacements (not included in the special charges incurred in 1996) will approximate $1,000 to $1,500. Additionally, amortization expense will be reduced by $464 per year due to the write off of goodwill. Any resultant increase in earnings during fiscal 1997 will be dependent upon sales volume. Amortization expense of $634 in 1996 increased $170 from $464 in 1995. This is due to the amortization of goodwill associated with the acquisitions of International Sensor Technology in the first quarter of fiscal 1996 and Turner Engineering Technology in the second quarter of fiscal 1996. Neither acquisition had a material effect on net sales or earnings for the year. 7 Net financing expenses decreased $167 to $819 in 1996 from $986 in 1995, and 1995 increased $165 from $821 in 1994. Despite higher average debt levels in 1996, the decrease from 1995 was due to lower interest rates on the variable rate debt and the absence of certain fees related to the pay-off of a higher interest rate loan in the second quarter of 1995. The increase from 1994 to 1995 was due mainly to higher average debt levels in the later year. The company recorded an income tax benefit of $884 in 1996, which resulted from the company's pretax loss. The effective rate (benefit) of (14.0) percent is less than the statutory rate principally due to the nondeductibility of the Keithley MetraByte goodwill written off, offset by the utilization of foreign tax credits and foreign sales corporation (FSC) benefits. The effective income tax rate for 1995 of 23.5 percent is lower than the statutory rate due primarily to utilization of foreign tax credits and FSC benefits. The tax benefit recorded in 1994 also resulted from the utilization of foreign tax credits and FSC benefits. At September 30, 1996, the company had capital loss carryforwards of $211 and tax credit carryforwards of $2,046. The company's financial results are affected by foreign exchange rate fluctuations. Generally, a weakening U.S. dollar causes the price of the company's product to be more attractive in foreign markets and favorably impacts the company's sales and earnings. A strengthening U.S. dollar has an unfavorable effect. This foreign exchange effect cannot be precisely isolated since many other factors affect the company's foreign sales and earnings. These factors include product offerings and pricing policies of the company and its competition, whether competition is foreign or U.S. based, changes in technology and local and worldwide economic conditions. From time to time, the company utilizes hedging techniques designed to mitigate the short-term effect of exchange rate fluctuations on operations and balance sheet position by entering into forward and option currency contracts and by borrowing in foreign currencies. The company's foreign borrowings are used as a hedge of its net investments or of specified transactions. The company does not speculate in foreign currencies or derivative financial instruments, and hedging techniques do not increase the company's exposure to foreign exchange rate fluctuations. 8 LIQUIDITY AND CAPITAL RESOURCES In 1996, net cash provided by operating activities of $2,600 and borrowings for long-term debt of $7,385 were used principally for investments in capital expenditures of $8,539 and to fund $1,408 for acquisitions. The capital expenditures included the purchase of a building and expansion of an existing facility to support future growth from new products and new business initiatives. Additionally, inventory levels increased $4,766 primarily due to new products and businesses. At September 30, 1996 total debt increased to $13,369 from $6,113 at the end of 1995. Due to the increased debt and lower shareholders' equity resulting from the net loss, total debt-to-capital at year-end was 29.6 percent compared to 14.2 percent last year. The company has a $25,000 debt facility ($13,292 outstanding at September 30, 1996) that expires May 31, 1998, which provides unsecured, multi- currency revolving credit at various interest rates based on U.S. prime, LIBOR or FIBOR. Commitment fees of 1/4% are required on the unused portion of the first $15,000 of the revolving credit facility and of 1/8% on the remaining $10,000 of the facility. Additionally, the company has a number of other credit facilities aggregating $6,372. The company has interest rate swaps to fix interest rates on $6,000 of variable rate debt. At September 30, 1996, the company had total unused lines of credit with domestic and foreign banks aggregating $18,080, including short-term and long-term lines of credit of $6,372 and $11,708, respectively. Under certain long-term debt agreements, the company is required to comply with various financial ratios and covenants. Principal payments on long-term debt are scheduled as follows: 1997-$61; 1998-$13,308. The company expects to refinance the principal payment required in 1998 before it becomes due. During 1997, the company expects to finance capital spending and working capital requirements, including cash necessary to fund the relocation of Keithley MetraByte to Cleveland, with cash provided by operations and long-term borrowings. 1997 capital expenditures are expected to be below the 1996 level. OUTLOOK Management is optimistic about the company's long term future, but cautious about the short term. We are encouraged by indications that the semiconductor industry is improving, but the built-in lag in the semiconductor capital equipment industry combined 9 with continued investments in new businesses could limit earnings to near break-even levels through the first half of fiscal 1997. Start-up losses from the company's new businesses are expected to decrease over the next few years as the businesses begin to show increased revenue streams and expenses for these businesses are reduced as a percentage of overall sales. FACTORS THAT MAY AFFECT FUTURE RESULTS Information included in the Letter to Shareholders and in the Outlook section of Management's Discussion and Analysis of Financial Condition and Results of Operations relating to expectations as to revenues, earnings, expenses or gross profits, as well as anticipated new product introductions, constitute "forward-looking" statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Some of the factors that may affect future results are discussed below. Although the company operates in a single industry segment, certain of its products and product lines including the Quantox unit and the company's line of parametric testers, are sold into the semiconductor capital equipment industry. Growth in demand for semiconductors and new technology drive the demand for new semiconductor capital equipment. At the present time, the order growth of this industry has contracted which adversely affects near-term revenues of the company. In September 1996, the company announced its intention to relocate its Keithley MetraByte operation to Cleveland from Taunton, Massachusetts, and form a new business. This relocation could create a decline in sales of the company's personal computer plug-in board business for several reasons, including hiring and training qualified personnel to assume duties of employees who will not relocate from Taunton, and assimilating and establishing sales support and manufacturing processes in Cleveland to sell and produce the plug-in board products. The company's business relies on the development of new high technology products and services to provide solutions to customer's complex measurement needs. This requires accurate anticipation of customers' changing needs and emerging technology trends. The company must make long-term investments and commit significant resources before 10 knowing whether its predictions will eventually result in products that achieve market acceptance. The company incurs significant expenses developing new business opportunities that may or may not result in significant sources of revenue and earnings in the future. In many cases the company's products compete directly with those offered by other manufacturers. If any of the company's competitors were to develop products or services that are more cost-effective or technically superior, demand for the company's product offerings could slow. The company currently has ten subsidiaries or sales offices located outside the United States, and non-U.S. sales make up half of the company's revenue. The company's future results could be adversely affected by several factors, including changes in foreign currency exchange rates, changes in a country's or region's political or economic conditions, trade protection measures, import or export licensing requirements, unexpected changes in regulatory requirements and natural disasters. 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands of Dollars Except for Per-Share Data) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Keithley Instruments, Inc. and its subsidiaries. Intercompany transactions have been eliminated. REVENUE RECOGNITION Sales are recognized at time of shipment for all products. NATURE OF OPERATIONS The company operates in a single industry segment and is engaged in the design, development, manufacture and marketing of complex electronic instruments and systems. Its products provide measurement-based solutions to semiconductor manufacturers and growth segments of the electronics and medical industries. Engineers and scientists around the world use the company's advanced hardware and software for process monitoring, production test and basic research. PRODUCT DEVELOPMENT EXPENSES Expenditures for product development are charged to expense as incurred. These expenses include the cost of computer software, an integral part of certain products. Costs defined by Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," are immaterial to the financial statements and have been expensed as incurred. The company continually reviews the materiality and financial statement classification of computer software expenditures. INVENTORIES Inventories are stated at the lower of cost (determined by the first-in, first-out method) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation is provided over periods approximating the estimated useful lives of the assets. Substantially all manufacturing, laboratory and office equipment is depreciated by the double declining balance method over periods of 3 to 10 years. Buildings are depreciated by the straight-line method over periods of 23 to 45 years. Leasehold improvements are amortized over the shorter of the asset lives or the terms of the leases. 12 INTANGIBLE ASSETS Intangible assets relate to business acquisitions and are amortized on a straight-line basis over their estimated useful lives ranging from 10 to 20 years. Management reviews the carrying value of intangible assets using an estimated future cash flow method (undiscounted and without interest charges) whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. At September 30, 1996, the company wrote off the remaining goodwill associated with its acquisition of Keithley MetraByte in 1989. (See Note B.) As a result of the write off, at September 30, 1996 the remaining intangible assets have asset lives of 10 years. OTHER ASSETS Included in the "Other assets" caption of the Consolidated Balance Sheet at September 30, 1996 and 1995, were $7,152 and $4,827, respectively, in deferred tax assets. Also included in "Other assets" were pension related assets. (See note E.) The "Net cash provided by operating activities" caption of the Consolidated Statement of Cash Flows for the year ended September 30, 1994, included proceeds of $2,503 from redeeming cash surrender value from the company's corporate-owned life insurance program. The remaining cash surrender value is classified in "Other assets." OTHER ACCRUED EXPENSES Included in the "Other accrued expenses" caption of the Consolidated Balance Sheet at September 30, 1996 and 1995, were $1,476 and $1,522, respectively, for commissions payable to outside sales representatives of the company. INCOME TAXES Provision has been made for estimated United States and foreign withholding taxes, less available tax credits, for the undistributed earnings of the non-U.S. subsidiaries as of September 30, 1996. USE 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 reported financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NET INCOME PER SHARE The weighted average number of shares outstanding used in determining net income per share was 7,822,346 in 1996, 7,476,138 (7,719,776 on a fully diluted basis) in 1995 and 7,087,654 in 1994. Both Common Shares and Class B Common Shares are included in calculating the weighted average number of shares outstanding. 13 HEDGING AND RELATED FINANCIAL INSTRUMENTS The company utilizes foreign currency borrowings and foreign exchange forward contracts to hedge foreign exchange risks for sales denominated in foreign currencies and net equity or unremitted foreign earnings. To hedge sales, the company purchases foreign exchange forward contracts to sell foreign currencies to fix the exchange rates related to near-term sales and the company's margins. Underlying hedged transactions are recorded at hedged rates, therefore realized and unrealized gains and losses are recorded when the operating revenue and expenses are recorded. To hedge equity or unremitted earnings, the company borrows foreign currencies or purchases foreign exchange forward contracts. Realized and unrealized after-tax gains or losses on the hedging instruments are reflected in the cumulative translation adjustment component of shareholders' equity. The company has entered into swap instruments to mitigate the risk of interest rate changes. The amounts exchanged under the swap agreements are included in the "Net financing expenses" caption of the Consolidated Statement of Income. The estimated fair value of the swap instruments are determined through quotes from the related financial institutions. The company is exposed to credit loss in the event of nonperformance by the counterparties to these financial instruments. Because the counterparties are major financial institutions, the company does not expect such nonperformance. OTHER ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123), effective for fiscal years beginning after December 15, 1995. Under FAS 123, stock-based compensation expense is measured using either the intrinsic value method, as prescribed by Accounting Principles Board Opinion No. 25, or the fair value method described in FAS 123. Companies choosing the intrinsic value method will be required to disclose in the footnotes to the financial statements the pro forma impact of the fair value method on net income and earnings per share. The company plans to implement FAS 123 in 1997 using the intrinsic value method. 14 NOTE B - SPECIAL CHARGES AND PURCHASED TECHNOLOGY In September 1996, it became apparent to management that due to the lack of growth, the Keithley MetraByte business could not support stand-alone operations. Therefore management made the decision to move the Keithley MetraByte operation located in Taunton, Massachusetts to Cleveland, Ohio. Special charges of $11,645 pretax, or $1.23 per share, recorded in 1996 primarily represent the expected costs of closing the Taunton operation. The special charges are comprised of the following: a noncash charge of $5,737 to write off the remaining goodwill; $3,433 for severance, outplacement and other personnel costs related to approximately 130 employees to be terminated of which 40 employees were terminated by September 30, 1996; $998 for lease and related costs, and $835 in noncash charges related to impaired inventory and equipment. Also included in special charges is $642 representing an accrual for costs to be incurred over the next five years under two operating subleases at the company's European facilities. Of the special charges, noncash charges total $6,572; $194 of severance related costs were paid in fiscal 1996, leaving $4,538 accrued in the Consolidated Balance Sheet under the category "Other accrued expenses" and $341 accrued under the category "Other long-term liabilities." The closing of the Taunton facility and relocation to Cleveland is expected to be complete by July 1, 1997. It is anticipated that once the relocation is complete, employment for the operation will be reduced by a net of over 50 people. Certain costs to move the operation to Cleveland and hire replacements (not included in the special charges incurred in 1996) will approximate $1,000 to $1,500. In 1994, the company expensed $3,300 to acquire the right to develop and commercialize direct wafer measurement technology from IBM. Per the provisions of the license agreement with IBM, the company will also pay future royalties based on specified sales levels. There is no minimum royalty payment required; however, $3,000 must be paid by May 26, 2000 to retain exclusive rights to the technology. 15 NOTE C - FINANCING ARRANGEMENTS
September 30, ------------- 1996 1995 ---- ---- Long-term debt: Revolving loans with various banks with interest due monthly; principal due May 31, 1998: U.S. dollar denominated loans with an interest rate of 6.0% based on LIBOR $ 11,000 $ 4,550 Deutsche mark denominated loans with an interest rate of 3.75% based on FIBOR 2,292 1,401 Obligations under capital leases 77 162 -------- -------- 13,369 6,113 Less-Current installments on long-term debt 61 71 -------- --------- Total long-term debt $ 13,308 $ 6,042 ======= =======
The company has a $25,000 debt facility ($13,292 outstanding at September 30, 1996) that expires May 31, 1998, which provides unsecured, multi-currency revolving credit at various interest rates based on U.S. prime, LIBOR or FIBOR. Commitment fees of 1/4% are required on the unused portion of the first $15,000 of the revolving credit facility and of 1/8% on the remaining $10,000 of the facility. Additionally, the company has a number of other credit facilities aggregating $6,372. At September 30, 1996, the company had total unused lines of credit with domestic and foreign banks aggregating $18,080, including short- term and long-term lines of credit of $6,372 and $11,708, respectively. Under certain long-term debt agreements, the company is required to comply with various financial ratios and covenants. Principal payments on long-term debt are scheduled as follows: 1997-$61; 1998-$13,308. The LIBOR interest rate was 5.4 percent and 5.9 percent at September 30, 1996 and 1995, respectively. The FIBOR interest rate was 3.3 percent and 4.1 percent at September 30, 1996 and 1995, respectively. The company has two interest rate swap agreements with commercial banks to effectively fix its interest rates on $6,000 of variable rate debt. The first agreement effectively fixes the interest rate on a notional $3,000 of variable LIBOR rate debt at 6.8 percent, and expires June 17, 2002. The second agreement effectively fixes the interest rate on another notional $3,000 of variable LIBOR rate debt at 6.9 percent, and expires September 18, 2005. The interest differentials to be paid or received on the notional amounts of the swaps are recognized over the lives of the agreements. At September 30, 1996 interest rate levels, the swaps require the 16 company to make payments to the bank, with the fair value of the swaps totaling approximately $129. Following is an analysis of net financing expenses:
1996 1995 1994 ---- ---- ---- Interest expense $957 $1,092 $939 Investment income (138) (106) (118) ---- ------ ---- $819 $ 986 $821 ==== ====== ====
17 NOTE D - FOREIGN CURRENCY The functional currency for the company's foreign subsidiaries is the applicable local currency. Income and expenses are translated into U.S. dollars at average exchange rates for the period. Assets and liabilities are translated at the rates in effect at the end of the period. Translation gains and losses are recognized in the cumulative translation component of shareholders' equity. Following is an analysis of the cumulative translation component of shareholders' equity:
1996 1995 1994 ---- ---- ---- Balance at beginning of year $ 589 $ 368 $ 188 Adjustments to financial statements for translation of foreign currency (76) 324 232 Gains (losses) from hedging net invest- ments in foreign subsidiaries net of income taxes (benefit) of $25 in 1996, $(53) in 1995 and $(27) in 1994. 49 (103) (52) ------- ------ ------- Balance at end of year $ 562 $ 589 $ 368 ====== ====== ======
Certain transactions of the company and its foreign subsidiaries are denominated in currencies other than the functional currency. The Consolidated Statement of Income includes gains (losses) from such foreign exchange transactions of $91, $(22) and $78 for 1996, 1995 and 1994, respectively. At September 30, 1996, the company had obligations under foreign exchange forward contracts to sell 1,900,000 Deutsche marks, 190,000 British pounds, 1,500,000 French francs and 131,586 Swiss francs at various dates through December 1996. The total U.S. dollar equivalent amount of foreign exchange contracts of $1,973 includes an unrecognized gain of $33 at September 30, 1996. The company has purchased and written currency option contracts that effectively provide minimum and maximum exchange rates that the company would receive for anticipated foreign currency denominated sales. Under the terms of the options, the company has the right to deliver 3,000,000 Deutsche marks at average rates of 1.57 per U.S. dollar and the obligation, if called, to deliver 3,000,000 Deutsche marks at average rates of 1.44 per U.S. dollar. The 18 options expire in equal amounts in October and December 1996. The options had no effect on net income in fiscal 1996, and gains and losses on the options, if any, are recorded as incurred. 19 NOTE E - EMPLOYEE BENEFIT PLANS The company has non-contributory defined benefit pension plans covering approximately three-fourths of its employees in the United States and certain non-U.S. employees. Pension benefits are based upon the employee's length of service and a percentage of compensation above certain base levels. Pension expense for these plans is shown below:
1996 1995 1994 ---- ---- ---- Service cost-benefits earned during the period $ 652 $ 605 $ 675 Interest cost on projected benefit obligation 1,048 945 879 Actual return on assets (2,471) (1,818) (18) Net amortization and deferral 1,328 884 (890) ------ ------ ------ Net periodic pension cost $ 557 $ 616 $ 646 ====== ====== ======
The following table sets forth the funded status of the company's plans and the related amounts recognized in the Consolidated Balance Sheet at September 30, 1996 and 1995:
Non-U.S. United States Plan Plan Overfunded Underfunded* --------------------- ------------ 1996 1995 1996 1995 ---- ---- ---- ---- Actuarial present value of benefit obligations: Vested benefit obligation $10,439 $ 9,028 $ 1,678 $ 1,380 ======= ======== ======= ======== Accumulated benefit obligation $10,890 $ 9,189 $ 1,899 $ 1,573 ======= ======== ======== ======== Projected benefit obligation $13,280 $11,201 $ 2,732 $ 2,358 Plan assets at fair value $16,385 $13,707 $ 498 $ 455 ------- ------- -------- -------- Projected benefit obligation (in excess of) or less than plan assets $ 3,105 $ 2,506 $(2,234) $ (1,903) Unrecognized net gain (1,972) (1,671) (567) (788) Unrecognized prior service cost 1,263 1,293 79 -- Unrecognized initial net (asset) obligation (401) (444) 265 307 -------- -------- -------- -------- Prepaid pension assets (pension liability) recognized in the Consolidated Balance Sheet $ 1,995 $ 1,684 $(2,457) $(2,384) ======= ======= ======= =======
* The company has purchased indirect insurance of $2,514 which is expected to be available to the company as non-U.S. pension liabilities of $2,457 mature. The caption, "Other assets," on the company's Consolidated Balance Sheet includes $2,514 and $2,338 at September 30, 1996 and 1995, respectively, for this asset. In accordance with Statement of Financial 20 Accounting Standards No. 87, "Employers' Accounting for Pensions," this company asset is not included in the non-U.S. plan assets. The significant actuarial assumptions as of the year-end measurement date were as follows:
1996 1995 1994 ---- ---- ---- United States Pension Plan: Discount rates 7.5% 7.5% 7.5% Expected long-term rate of return on plan assets 8.5% 8.5% 8.5% Rate of increase in compensation levels 5.5% 5.5% 5.5% Non-U.S. Pension Plan: Discount rates 6.5% 7.5% 8.0% Expected long-term rate of return on plan assets 7.0% 7.0% 7.5% Rate of increase in compensation levels 3.5% 4.5% 5.0%
The "Projected Unit Credit" Actuarial Cost Method is used to determine the company's annual expense. For the United States plan, the company uses the "Entry Age Normal" Actuarial Cost Method to determine its annual funding requirements. This actuarial method currently results in funding amounts significantly greater than the amounts expensed. United States plan assets are invested primarily in common stocks and fixed-income securities. There are no requirements for the company to fund the non-U.S. pension plan. Non-U.S. plan assets represent employee contributions and are invested in a direct insurance contract payable to the individual participants. In addition to the defined benefit pension plan, the company also maintains a retirement plan for substantially all of its employees in the United States under Section 401(k) of the Internal Revenue Code. The company makes contributions to the 401(k) plan, and expense for this plan amounted to $388, $539 and $324 in 1996, 1995 and 1994, respectively. The company also has an unfunded supplemental executive retirement plan (SERP) for two officers and for former key employees which includes retirement, death and disability benefits. Expense for these benefits was $102 for 1996, $85 for 1995, and $165 for 1994. During 1994, the company settled a portion of its SERP obligation through a lump-sum distribution of $1,236, resulting in a net charge to earnings of $343. Liabilities of $497 and $355 were accrued in the "Other long-term liabilities" caption on the company's Consolidated Balance Sheet to meet all SERP obligations at September 30, 1996 and 1995, respectively. 21 NOTE F - STOCK PLANS The company has employee stock options outstanding under two plans and directors' stock options outstanding under one plan. All incentive options have been granted at or above fair market value at the date of grant. The company also has an employee stock purchase plan. Employee Stock Option Plans Under the 1984 Stock Option Plan and the 1992 Stock Incentive Plan, 675,000 and 1,900,000 of the company's Common Shares, respectively, were reserved for the granting of options to officers and other key employees. After February 11, 1994, no new grants could be issued from the 1984 Stock Option Plan. Shares authorized but not yet granted under the 1992 plan were 862,046 at September 30, 1996. The Compensation and Human Resources Committee administers the plans with incentive stock options granted at not less than fair market price at the date of the grant for an exercise period not to exceed ten years from the grant date. Such grants generally become exercisable over a four year period. The option price under a nonqualified stock option is determined by the Committee on the date the option is granted. The 1992 Stock Incentive Plan also provides for restricted stock awards and stock appreciation rights. This plan will expire on February 8, 2002. All options outstanding at the time of termination of either plan shall continue in full force and effect in accordance with their terms. 22 The following table summarizes the changes in the number of Common Shares under option for both employee stock option plans:
Option Price Shares subject to option at Range September 30, 1993 669,180 $3.50 to $ 8.44 --------- Options granted 391,400 $4.75 to $ 5.38 Options exercised (86,352) $3.50 to $ 4.31 Options forfeited (137,340) $4.13 to $ 8.44 ---------- Shares subject to option at September 30, 1994 836,888 $4.00 to $ 8.44 ---------- Options granted 235,100 $5.19 to $13.69 Options exercised (94,608) $4.00 to $ 8.44 Options forfeited (5,792) $4.75 to $ 6.06 ----------- Shares subject to option at September 30, 1995 971,588 $4.00 to $13.69 ---------- Options granted 370,360 $9.25 to $15.69 Options exercised (149,373) $4.04 to $ 8.44 Options forfeited (38,586) $4.63 to $13.69 ---------- Shares subject to option at September 30, 1996 1,153,989 $4.00 to $15.69 ========= Exercisable options at September 30, 1996 382,044 $4.00 to $ 8.44 ========== Exercisable options at September 30, 1995 288,630 $4.00 to $ 8.44 ==========
1992 Directors' Stock Option Plan The 1992 Directors' Stock Option Plan provides for the issuance of 60,000 of the company's Common Shares to non-employee Directors. Under the terms of the plan, each non-employee Director is automatically granted an option to purchase 600 Common Shares at the close of each annual shareholders' meeting. The option price shall be the fair market value of a Common Share on the date of grant. The option is exercisable six months and one day after the date of grant and will expire after ten years. The plan provides for the granting of stock options through December 7, 2002. During fiscal years 1996, 1995 and 1994, 3,600, 4,200 and 4,800 options were granted at option prices of $14.75, $5.19 and $5.00, respectively. During 1996, no options were exercised. During 1995, 1,800 options were exercised at prices ranging from $5.00 to $7.50. As of September 30, 1996 and 1995, 18,000 and 14,400 shares were exercisable, respectively. Options available for future grants were 40,200 and 43,800 at September 30, 1996 and 1995, respectively. 23 1993 Employee Stock Purchase Plan On February 5, 1994, the company's shareholders approved the 1993 Employee Stock Purchase and Dividend Reinvestment Plan. The plan offers eligible employees the opportunity to acquire the company's Common Shares at a discount and without transaction costs. Eligible employees can only participate in the plan on a year-to-year basis, must enroll prior to the commencement of each plan year and must authorize monthly payroll deductions. The purchase price of the Common Shares is 85 percent of the lower market price at the beginning or ending of the plan year, which is on a calendar year basis. A total of 250,000 Common Shares are available for purchase under the plan. Total shares may be increased with shareholder approval or the plan may be terminated when the 250,000 shares are fully subscribed. The company expects to increase the number of Common Shares available under the plan to 750,000 subject to shareholder approval at the February 1997 shareholders' meeting. During 1996 and 1995, 74,156 and 40,050 shares were issued under the plan at prices of $4.25 and $4.14 per share, respectively. 24 NOTE G - INCOME TAXES For financial reporting purposes, income (loss) before income taxes includes the following components:
1996 1995 1994 ---- ---- ---- United States $(9,383) $ 1,970 $(2,211) Non-U.S. 3,059 4,452 2,335 ------- ------- ----- $(6,324) $ 6,422 $ 124 ======= ======= =======
The provision for income taxes is as follows:
1996 1995 1994 ---- ---- ---- Current: Federal $ 1,330 $ 720 $ 318 Non-U.S. 1,513 1,859 1,009 State and local 45 146 106 ------- ------- ------- Total current 2,888 2,725 1,433 ------- ------- ------- Deferred Federal (3,800) (1,199) (2,154) Non-U.S. 28 (18) (62) ------- ------- ------- Total deferred (3,772) (1,217) (2,216) ------- ------- ------- Total provision (benefit) $ (884) $ 1,508 $ (783) ======= ======= =======
Differences between the statutory United States federal income tax and the effective income tax rate are as follows:
1996 1995 1994 ---- ---- ---- Federal income tax at statutory rate $(2,150) $2,183 $ 42 State and local income taxes 30 96 70 Tax on non-U.S. income and tax credits (884) (881) (1,193) Non-deductible amortization 2,123 158 158 Other (3) (48) 140 ------- ------ -------- Effective income tax (benefit) $ (884) $1,508 $ (783) ======= ====== =======
25 Significant components of the company's deferred tax assets and liabilities as of September 30, 1996 and 1995 are as follows:
Deferred tax assets: 1996 1995 - ------------------- ---- ---- Foreign tax credit carryforwards $ -- $ 79 Capitalized research and development 5,221 2,905 Special charges 1,724 -- Intangibles 1,006 1,274 State and local taxes 1,441 1,089 Alternative minimum tax credit carryforwards 1,174 1,282 Deferred compensation 615 949 Inventory 1,124 971 General business credit carryforwards 872 488 Other 1,252 1,131 ------ ------ Total deferred tax assets 14,429 10,168 ------ ------ Valuation allowance for deferred tax assets (2,994) (2,606) ------ ------ 11,435 7,562 ------ ------ Deferred tax liabilities: - ------------------------ Pension contribution 904 771 Other 351 383 ------ ------ Total deferred tax liabilities 1,255 1,154 ------ ------ Net deferred tax assets $10,180 $6,408 ======= ======
The valuation allowance relates to tax credit carryforwards which more likely than not will not be realized. The current year increase relates primarily to an increase in deferred state tax items. At September 30, 1996, the Company had capital loss and tax credit carryforwards as follows:
Year Expiration Commences --------------- General business credit $872 2002 Capital loss 211 1997 Alternative minimum tax credit 1,174 Indefinite
26 NOTE H - STOCK AND RELATED ACCOUNTS The Class B Common Shares have ten times the voting power of the Common Shares but are entitled to cash dividends of no more than 80% of the cash dividends on the Common Shares. Holders of Common Shares, voting as a class, elect one-fourth of the company's Board of Directors and participate with holders of Class B Common Shares in electing the balance of the Directors and in voting on all other corporate matters requiring shareholder approval. Additional Class B Common Shares may be issued only to holders of such Shares for stock dividends or stock splits. These Shares are convertible at any time to Common Shares on a one-for-one basis. Following is an analysis of changes in stock and related accounts:
Capital in Class B Excess of Common Shares Common Shares Treasury Stock Stated Value ------------- ------------- -------------- ------------ $ Shares $ Shares $ Shares ---- ------ ----- ------ ---- ------ Balance, September 30, 1993 $101 4,033,810 $ 76 3,034,080 $ -- -- $3,387 Shares issued under stock plans, net of 49,366 Shares tendered 1 36,986 -- -- -- -- 82 Conversion of Class B Common Shares to Common Shares 2 86,040 (2) (86,040) -- -- -- ------ ---------- ------ ------- ---- ------ ------ Balance, September 30, 1994 104 4,156,836 74 2,948,040 -- -- 3,469 Shares issued under stock plans net of 13,362 Shares tendered 3 123,096 -- -- -- -- 512 Conversion of Class B Common Shares to Common Shares 1 29,044 (1) (29,044) -- -- -- ------ ---------- ------ ----------- ---- ------ ------ Balance, September 30, 1995 108 4,308,976 73 2,918,996 -- -- 3,981 Shares issued under stock plans net of 3,031 Shares tendered 5 222,906 -- -- (136) (10,155) 1,385 Conversion of Class B Common Shares to Common Shares 3 124,718 (3) (124,718) -- -- -- Fee paid to increase authorized shares -- -- -- -- -- -- (73) ---- --------- ----- ---------- ---- ------ ---------- Balance, September 30, 1996 $116 4,656,600 $ 70 2,794,278 (136) (10,155) $5,293 ==== ========= ===== ========== ==== ====== ==========
On November 6, 1995, the company's Board of Directors approved a two-for-one split of the company's Common Shares and Class B Common Shares. The split was effected in the form of a stock dividend payable on December 11, 1995, to shareholders of record on November 27, 1995. All share amounts have been adjusted to reflect the stock split on a retroactive basis. 27 NOTE I - LEASES The company leases certain equipment under capital leases. Manufacturing, laboratory and office equipment includes $526 and $592 of leased equipment at September 30, 1996 and 1995, respectively. Accumulated depreciation includes $487 and $517 at September 30, 1996 and 1995, respectively, related to these leases. The company also leases certain office and manufacturing facilities and office equipment under operating leases. Rent expense under operating leases, net of sublease income of $245 in 1996, $282 in 1995 and $265 in 1994, for 1996, 1995 and 1994 was $2,178, $2,119 and $2,046, respectively. Future minimum lease payments under operating leases are: 1997 $ 2,639 1998 2,117 1999 1,492 2000 1,397 2001 967 After 2001 2,802 ------ Total minimum operating lease payments $11,414 ======
28 NOTE J - GEOGRAPHIC SEGMENTS The company operates in a single industry segment and is engaged in the design, development, manufacture and marketing of complex electronic instruments and systems. The operations by geographic area are presented below:
1996 1995 1994 ---- ---- ---- NET SALES, INCLUDING INTERCOMPANY SALES: - ----------------------------------------- United States (1) $ 98,232 $ 88,410 $ 72,337 Europe 37,799 37,659 30,107 Intercompany (17,085) (16,495) (13,196) -------- -------- -------- Net sales $118,946 $109,574 $ 89,248 ======== ======== ======== INCOME (LOSS) BEFORE INCOME TAXES (2) - ------------------------------------- United States $ (7,372) $ 4,282 $ 922 Europe 3,180 4,158 2,280 Adjustments/eliminations (34) 77 92 -------- -------- -------- (4,226) 8,517 3,294 -------- -------- -------- Corporate expenses (1,279) (1,109) (2,349) Net financing expenses (819) (986) (821) -------- -------- -------- Income (loss) before income taxes $ (6,324) $ 6,422 $ 124 ======== ======== ======== IDENTIFIABLE ASSETS: - -------------------- United States $ 54,507 $ 49,087 $ 40,378 Europe 9,720 11,164 10,109 Adjustments/eliminations (5,651) (5,429) (5,195) -------- -------- -------- 58,576 54,822 45,292 Corporate assets 15,258 11,287 9,118 -------- -------- -------- Total assets $ 73,834 $ 66,109 $ 54,410 ======== ======== ========
(1) U.S. sales include $21,295, $18,793 and $13,625 in export sales to markets other than Europe in 1996, 1995 and 1994, respectively. (2) 1996 loss before income taxes includes special charges of $11,003 in the U.S. and $642 in Europe. (See Note B.) Intercompany sales were at cost plus a negotiated markup. Assets of geographic areas are identified with the operations of each area. Corporate assets consist of cash and cash equivalents, other receivables, prepaid expenses and deferred income taxes. 29 NOTE K - CONTINGENCIES The company is engaged in various legal proceedings arising in the ordinary course of business. The ultimate outcome of these proceedings is not expected to have a material adverse effect on the company's financial position, results of operations or cash flows. 30 Report of Independent Accountants To the Board of Directors and Shareholders of Keithley Instruments, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of earnings reinvested in the business and of cash flows present fairly, in all material respects, the financial position of Keithley Instruments, Inc. and its subsidiaries at September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, 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. PRICE WATERHOUSE LLP Cleveland, Ohio November 14, 1996 31 Statement of Management Responsibility The consolidated financial statements of Keithley Instruments, Inc. were prepared by management and, accordingly, management is responsible for their accuracy and objectivity. The company utilizes accounting policies which are, in the judgment of management, the most appropriate for the company's circumstances. Certain estimates and judgments are required in the preparation of financial statements. The financial information included in this Annual Report has been prepared using management's best estimates, which were based upon appropriate research and investigation. The company maintains internal accounting control systems that are designed to detect and correct material misstatements of financial information. These systems are regularly modified in response to the company's changing business conditions. Additionally, our independent accountants, Price Waterhouse LLP, obtain a sufficient understanding of the internal control structure in order to plan and complete the annual audit of the company's financial statements. The Audit Committee of the Board of Directors, which consists of three Directors otherwise independent of the company, serves an oversight role in reviewing the internal control monitoring process. The Committee regularly meets with and has direct access to Price Waterhouse LLP. Management acknowledges its responsibility to provide financial information (both audited and unaudited) that is representative of the company's operations and financial position, prepared on a consistent basis and relevant for a meaningful appraisal of the company. Joseph P. Keithley Ronald M. Rebner Chairman, President Vice President and Chief and Chief Executive Officer Financial Officer 32 Stock Market Price and Cash Dividends Beginning November 28, 1995, the company's Common Shares trade on the New York Stock Exchange under the symbol KEI. Prior to November 28, 1995, the company's Common Shares traded on the American Stock Exchange under the symbol KEI. The high and low prices shown below are sales prices of the company's Common Shares as reported on the NYSE or the AMEX. There is no established public trading market for the company's Class B Common Shares; however, they are readily convertible on a one-to-one basis for Common Shares.
Cash Dividends Cash Dividends Per Class B Fiscal 1996 High Low Per Common Share Common Share - ----------- ---- --- ---------------- ------------ First Quarter $18 $14 $ .031 $ .025 Second Quarter 16 7/8 12 7/8 .031 .025 Third Quarter 19 1/8 12 5/8 .031 .025 Fourth Quarter 14 1/4 8 3/8 .031 .025 Fiscal 1995 - ----------- First Quarter $ 5 1/4 $ 4 1/2 $ .025 $ .020 Second Quarter 6 7/16 4 13/16 .025 .020 Third Quarter 11 6 9/16 .025 .020 Fourth Quarter 15 15/16 10 1/4 .031 .025
33 Unaudited Quarterly Results of Operations (In Thousands of Dollars Except for Per-Share Data)
First Second Third Fourth ----- ------ ----- ------ Fiscal 1996 - ----------- Net sales $29,823 $30,019 $29,403 $29,701 Gross profit 17,988 19,052 18,027 17,739 Income (loss) before income taxes (1) 1,659 2,045 1,006 (11,034) Net income (loss) (1) 1,145 1,485 761 (8,831) Net income (loss) per share (1) .15 .19 .10 (1.14) Fully diluted net income (loss) per share (1) .15 .19 .10 (1.14) Fiscal 1995 - ----------- Net sales $23,525 $27,850 $28,975 $29,224 Gross profit 14,428 17,008 17,840 17,926 Income before income taxes 481 1,738 1,992 2,211 Net income 346 1,318 1,494 1,756 Net income per share .05 .18 .20 .23 Fully diluted net income per share .05 .18 .20 .23
(1) Includes special charges totaling $11,645 pretax, or $1.23 per share in the fourth quarter. 34 Eleven Year Summary (In Thousands Of Dollars Except For Per-Share Data)
For the year ended September 30, 1996 1995 1994 1993(b) 1992 1991 1990 1989 1988 1987 1986(d) -------- ------- ------ ------ ------ ------ ------- ------ ------ ------ ------ Operating Results Net sales $118,946 109,574 89,248 91,146 94,666 99,497 100,593 88,728 72,282 57,652 47,681 Income (loss) before income taxes and cumulative effect of accounting change (6,324) 6,422 124 5,530 (10,420) 6,816 5,675 7,311 8,204 5,209 4,323 Net income(loss) (5,440) 4,914 907 4,784 (12,453) 4,233 3,378 4,131 5,414 3,280 2,909 Net income(loss) per share(a) (0.70) 0.66 0.13 0.68 (1.77) 0.60 0.48 0.59 0.78 0.49 0.44 Fully diluted net income (loss) per share (0.70) 0.64 0.13 0.68 (1.77) 0.60 0.48 0.59 0.78 0.49 0.44 Common Stock Information(a) Cash dividends per Common Share $0.125 0.106 0.100 0.100 0.100 0.094 0.089 0.082 0.058 0.046 0.041 Cash dividends per Class B Common Share $0.100 0.085 0.080 0.080 0.080 0.075 0.071 0.066 0.046 0.036 0.033 Weighted average number of shares outstanding-fully diluted (in thousands) 7,822 7,720 7,088 7,061 7,046 7,026 7,014 6,994 6,974 6,790 6,696 At fiscal year-end: Number of shareholders of record 594 535 567 587 618 664 686 699 711 357 313 Dividend payout ratio(e) -- 16.1% 76.9% 14.7% -- 15.7% 18.5% 13.9% 7.4% 9.4% 9.4% Price/earnings ratio(e) -- 23.3 40.4 7.4 -- 10.1 8.5 11.0 11.5 17.5 13.8 Shareholders' equity per share $4.26 5.11 4.50 4.45 4.05 5.85 5.40 4.88 4.37 3.68 3.08 Closing market price $8.875 14.938 5.250 5.000 4.563 6.063 4.063 6.500 8.938 8.500 6.000 Balance Sheet Data Total assets $73,834 66,109 54,410 52,413 53,160 66,637 69,205 69,917 46,602 33,065 28,869 Current ratio 1.7 2.0 1.9 2.2 2.3 2.1 2.3 2.7 2.4 1.9 2.8 Total debt $13,369 6,113 4,816 6,518 8,978 10,506 16,562 22,419 2,027 5,773 2,684 Total debt-to-capital 29.6% 14.2% 13.1% 17.2% 23.9% 20.3% 30.4% 39.6% 6.2% 18.4% 11.5% Shareholders' equity $31,756 36,902 31,946 31,415 28,530 41,129 37,870 34,216 30,518 25,577 20,644 Other Data Return on average shareholders' equity -15.8% 14.3% 2.9% 16.0% -35.8% 10.7% 9.4% 12.7% 19.0% 14.5% 15.6% Return on average total assets -7.8% 8.2% 1.7% 9.1% -20.8% 6.2% 4.9% 7.1% 11.9% 8.5% 9.4% Return on net sales -4.6% 4.5% 1.0% 5.2% -13.2% 4.3% 3.4% 4.7% 7.5% 5.7% 6.1% Number of employees 716 659 625 625 679 716 750 742 579 523 479 Sales per employee $173.0 $170.7 142.8 139.8 135.7 135.7 134.8 134.3 131.2 115.1 99.1 Cash flow Non cash charges to income(c) $7,064 2,573 1,346 1,849 15,185 4,325 6,649 4,234 3,062 2,516 2,086 Net cash provided by operating activities $2,600 2,457 6,641 6,289 4,475 9,399 9,111 4,592 6,812 5,741 4,248 Ten-year compound annual growth rate Net sales 9.6% 8.8% 7.0% 10.0% 11.1% 12.8% 13.7% 16.4% 17.9% 19.2% 19.3% Net income(e) -- 5.7% -14.2% 9.1% -- 39.7% 10.4% 12.5% 21.2% 19.8% 27.7% - --------------- (a) Share data adjusted for two-for-one stock split in November 1995, three-for-two stock split in 1987 and three-for-one stock split in 1985. (b) Includes a benefit for the cumulative effect of adopting FAS 109 of $1,447 or $.21 per share. (c) Noncash charges to income include depreciation, amortization, deferred compensation, deferred taxes, noncash special charges and the cumulative effect of adopting FAS 109. (d) In 1987, the Company adopted Statement of Financial Standards No.87, "Employers' Accounting for Pensions"; prior years have not been restated. (e) These ratios are not meaningful in 1992 and 1996 due to reported net losses.
EX-21 4 EXHIBIT 21 1 21. Subsidiaries of the registrant WHOLLY OWNED SUBSIDIARIES Keithley International Investment Corporation 28775 Aurora Road, Cleveland, Ohio 44139, U.S.A. Keithley Foreign Sales Corporation 5 Norre Gade, Charlotte Amalie St. Thomas, U.S. Virgin Islands 00801 FRANCE: Keithley Instruments SARL BP 60, 3 allee des Garays 91122 Palaiseau Cedex GERMANY: Keithley Instruments GmbH Landsberger Strasse 65 82110 Germering (Munich) GREAT BRITAIN: Keithley Instruments Ltd. The Minister, 58 Portman Road Reading (London), Berkshire RG30 1EA ITALY: Keithley Instruments SRL Viale San Gimignano 38 20146 Milano JAPAN: Keithley Instruments Far East KK Aibido Building 7-20-2 Nishishinjuku Shinjuku-ku, Tokyo 160 NETHERLANDS: Keithley Instruments BV Avenlingen West 49 4202 MS Gorinchem (Amsterdam) SWITZERLAND: Keithley Instruments SA Kriesbachstrasse 4 8600 Dubendorf (Zurich) EX-23 5 EXHIBIT 23 1 23. Consent of experts CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-2496) of Keithley Instruments, Inc. of our report dated November 14, 1996 appearing on page 32 of the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 20 of this Form 10-K. PRICE WATERHOUSE LLP Cleveland, Ohio December 17, 1996 EX-27 6 EXHIBIT 27
5 1,000 YEAR SEP-30-1996 OCT-01-1995 SEP-30-1996 3,995 0 19,168 630 17,426 43,740 37,873 22,531 73,834 25,061 13,308 0 0 186 31,570 73,834 118,946 118,946 46,140 46,140 18,337 0 819 (6,324) (884) (5,440) 0 0 0 (5,540) (.70) (.70)
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