-----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, IyON2LtyLaiKOl5PeL/nXDFnead7fDXJfYC2JKlFeYGAe+ae30Fy4gKkkq7nLXJn DcqYdzX2+3/IY7OKxbIrHQ== 0000950152-98-009871.txt : 19981230 0000950152-98-009871.hdr.sgml : 19981230 ACCESSION NUMBER: 0000950152-98-009871 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981229 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-K405 SEC ACT: SEC FILE NUMBER: 001-09965 FILM NUMBER: 98777194 BUSINESS ADDRESS: STREET 1: 28775 AURORA RD CITY: SOLON STATE: OH ZIP: 44139 BUSINESS PHONE: 2162480400 10-K405 1 KEITHLEY INSTRUMENTS, INC. FORM 10-K405 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, 1998 Commission file number 1-9965 ------------------ ------ KEITHLEY INSTRUMENTS, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) OHIO 34-0794417 - ----------------------------------------- ------------------------------------ (State of incorporation 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 (440) 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. [X] ---- As of December 15, 1998 there were outstanding 4,784,812 Common Shares, without par value, and 2,692,528 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 $34,434,157 and the aggregate market value of the Class B Common Shares of the Registrant held by non-affiliates was $332,801 for a total aggregate market value of all classes of Common Shares held by non-affiliates of $34,766,957. 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 15, 1998, which was $7.75. For purposes of this information, the 341,695 Common Shares and 2,649,586 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 Portions of the following documents are incorporated by reference into the designated parts of this Form 10-K: DOCUMENT Part of 10-K 1. Annual report to shareholders for the fiscal Parts I and II year ended September 30, 1998 2. Proxy statement for the annual meeting of shareholders Part III to be held on February 13, 1999 With the exception of the information specifically incorporated by reference, neither the Company's proxy statement nor the 1998 annual report to shareholders is deemed to be filed as part of this Form 10-K. 2 KEITHLEY INSTRUMENTS, INC. 10-K ANNUAL REPORT TABLE OF CONTENTS
PART I: PAGE - ------- ---- Item 1. Business 1 Item 2. Properties 8 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 9 PART II: Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 11 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 8. Financial Statements and Supplementary Data 11 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 11 PART III. Item 10. Directors and Executive Officers of the Registrant 12 Item 11. Executive Compensation 12 Item 12. Security Ownership of Certain Beneficial Owners and Management 12 Item 13. Certain Relationships and Related Transactions 12 PART IV: Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 13
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 (440) 248-0400. References herein to the "Company" or "Keithley" are to Keithley Instruments, Inc. and its subsidiaries unless the context indicates otherwise. RECENT EVENTS On August 10, 1998, the Company sold the principal assets used in the operation of its Radiation Measurements Division to Inovision Radiation Measurements, L.L.C for $8.7 million in cash. The agreement was effective July 31, 1998. Prior to its sale, the Radiation Measurements Division developed, manufactured and marketed products and systems that accurately measure the radiation emission levels of x-ray machines and nuclear radiation sources and were used to calibrate radiation therapy and x-ray equipment in hospitals and manufacturing processes. The Division accounted for approximately eight percent of the Company's fiscal 1998 net sales. SUBSEQUENT EVENTS On November 9, 1998, the Company sold the principal assets used in the operation of its Quantox oxide monitoring product line to KLA-Tencor Corporation for $9.1 million in cash. The agreement was effective October 31, 1998. The Quantox product line had been sold to semiconductor manufacturers and represented approximately ten percent of the Company's fiscal 1998 net sales. On November 11, 1998, the Company commenced a tender offer to repurchase up to 2,000,000 of its Common Shares, or approximately 40 percent of Common Shares outstanding (25 percent of Class B and Common Shares combined). The offer was conducted through a procedure commonly known as a "Dutch Auction" in which shareholders could tender their shares at prices not in excess of $7.00 nor less than $5.75 per share. The offer expired on December 10, 1998, at which time the Company accepted for purchase and purchased 405,757 Common Shares, or approximately eight percent of the outstanding Common Shares (five percent of Class B and Common Shares combined), for $7.00 per share. PRODUCTS Keithley Instruments, Inc. provides electrical measurement solutions to wireless communications, semiconductor and electronic component manufacturers, other high-growth areas of the electronics industry and research laboratories. Engineers and scientists around the world use Keithley's advanced hardware and software for process monitoring, production test and basis research. 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 1 4 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 product groups of the Company are described below: TEST AND MEASUREMENT. Test and Measurement designs, develops, manufactures and markets sensitive electronic benchtop instrumentation and PC board-level products used in production test, research and data acquisition and analysis. These products measure a wide range of electrical properties such as voltage, resistance, current, capacitance and charge. Benchtop instruments generally range in price from $1,000 to $10,000 and PC board-level products generally range in price from $100 to $4,000. Test and Measurements is composed of 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 resistors and thermistors, and end products which include cellular telephones, computer disk drives, and pace makers. These products are marketed primarily through direct marketing and personal selling. 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. These products are marketed primarily through direct marketing and catalog mailings. 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. Switches and Sources are marketed primarily through personal selling. 2 5 SOURCE MEASURE UNITS. These are programmable instruments capable of sourcing and measuring voltage, current and resistance, 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 communications products. The source measure units also provide the measurement sensitivity needed for materials research and semiconductor characterization applications. These products are marketed primarily through personal selling. PLUG-IN BOARDS. The qualities of these boards include data acquisition capabilities in the form of a board that is installed into a slot of the computer, boards that essentially contain an instrument allowing benchtop engineering and automatic production testing through an expansion slot of almost any personal computer, and IEEE-488 bus interfaces and software for interfacing computers with programmable measurement instrumentation. The boards are marketed worldwide to researchers and scientists engaged in laboratory automation and experimentation, engineers involved with process control and data collection applications, and machine builders and systems integrators involved in production test applications. These products are marketed primarily through direct marketing, catalog mailings, and personal selling. EXTERNAL SYSTEMS. These products include Keithley's MetraBus and SmartLink product offerings. Essentially, external systems are personal computer-based workstations that collect data from, and provide control over, a variety of test and measurement modules, as well as a line of intelligent measurement modules that allow laboratory-grade measurements virtually anywhere due to their small size. These products are primarily used in industrial monitoring and control applications, research, product test and pilot plant process monitoring. These products are marketed primarily through personal selling. ACCULEX. These products include digital panel meters and panel printers. They display machine parameters, capture results for permanent storage and enunciate alarms. These products are marketed primarily through direct marketing and catalog mailings. AGENCY PRODUCTS. The Company markets and distributes certain hardware and software products manufactured by several test and measurement companies. Software products are specialized personal computer-based scientific data acquisition, analysis and graphics software products. Scientists and engineers often combine the software together with data acquisition hardware or test and measurement instrumentation of Keithley or other manufacturers. The agency products are complementary to, but not competitive with, products manufactured by the Company. SEMICONDUCTOR. The Company's Semiconductor business unit designs, develops, manufactures and markets automated parametric test systems and C-V systems used by semiconductor manufacturers to measure various electrical characteristics of semiconductor materials. These products are generally sold through personal selling and can be found in semiconductor fabrication facilities throughout the world. They consist of two main groups: 3 6 APT PRODUCTS. The Company is one of the leading suppliers of these automated 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 system's major components are integrated, and in most cases, customized to customer specification. The systems can also incorporate wafer test structures used for determining the reliability of semiconductor devices at various stages of manufacturing. These test structures 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. 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 $350,000. C-V (CAPACITANCE VERSUS VOLTAGE). C-V systems 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 development and manufacturing facilities, industrial and governmental research laboratories, and educational institutions to research, develop, and characterize semiconductor devices, materials and manufacturing processes. NEW PRODUCTS DURING FISCAL YEAR 1998 Several new products were introduced during fiscal 1998 including the following: THE MODEL 2303 HIGH SPEED PRECISION POWER SUPPLY is optimized for automated testing of portable wireless communication devices such as cellular phones, cordless phones, pagers and mobile radios. Its fast response to load changes is designed to simulate the current drive capacity of a battery. The Model 2303 has features that allow easy verification of power consumption specifications under different operating conditions. This is a valuable feature for verifying performance of a cellular phone's standby mode, which requires the processing of random-interval, control pulse transmissions from base stations. THE MODEL 2182 NANOVOLTMETER is designed for use in applications requiring low voltage measurements. Priced lower than earlier models, it eliminates the need for a computer controller when making precision I-V measurements by providing the ability to control an external source. The Model 2182 is used by researchers, metrology labs and component test engineers. THE MODEL 2000-20 SCANNING MULTIMETER, designed for production test, switch, and measure applications, is a 6 1/2-digit multimeter with a 20-channel scanner card installed in its option slot that can be controlled from the front panel or via the RS-232 or IEEE-488 interface. The Model 2000-20, with 20 channel switching, offers performance at approximately half the cost/channel of a previous 10-channel system. The Model 2000-20 builds upon the standard 4 7 Model 2000's high-performance, cost-effective design, combining a broad range of functions with excellent accuracy specifications. THE KPCI-422/4R SERIAL INTERFACE BOARD permits the easy connection of up to four standard RS-422A communication ports to a single short slot of a PCI-equipped PC. The KPCI-422/4r is useful for applications requiring more serial ports than are available in a standard PC, enabling serial communications with multiple modems, printers, and terminals under Windows(R) 95/98/NT operating systems. Easy to configure and use because of its true plug-and-play capability, the KPCI-422/4r allows users to take advantage of the superior performance of PCs equipped with a 32-bit PCI bus. GEOGRAPHIC MARKETS AND DISTRIBUTION During fiscal 1998, all of the Company's products were manufactured in Ohio and were sold throughout the world in many developed countries. The Company's principal markets are the United States, Europe and the Pacific Basin. 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. United States sales offices are located in Solon, Ohio and Santa Clara, California. The Company markets its products directly in countries in which it has a sales office 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, Taiwan and India. Sales in markets outside the above named locations are made through independent sales representatives and distributors. 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 cannot 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. 5 8 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, 1998 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. BACKLOG The Company's backlog of unfilled orders amounted to approximately $9,049,000 as of September 30, 1998 and approximately $13,486,000 as of September 30, 1997. Included in the backlog at September 30, 1998 and 1997 is $3,015,000 and $6,983,000, respectively, for Quantox products for which the business was sold subsequent to September 30, 1998. It is expected that the majority of the orders included in the 1998 backlog, except the Quantox products, will be delivered during fiscal 1999; 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 and National Instruments, Inc. 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 $13,139,000 in 1998, $17,233,000 in 1997 and $18,337,000 in 1996, or approximately 11%, 14% and 15% of net sales, respectively, for each of the last three fiscal years. 6 9 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. EMPLOYEES As of September 30, 1998, the Company employed 564 persons, 103 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 contained in Note J of the Notes to the Consolidated Financial Statements on page 30 of the Company's 1998 Annual Report to Shareholders, which page is incorporated herein by reference. 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. 7 10 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 This space is available for expansion. 5.5 Acres It is currently leased to other parties. 50,000 square feet
Lease Type of Square Expiration Leased Properties Facility Footage Date - ----------------- -------- ------- ------------ Location -------- Solon, Ohio This space was occupied by the 40,000 October 13, 2006 Radiation Measurements Division that was sold during 1998. The space is being sublet to the buyer; however, the Company remains responsible for the lease at the current time. Solon, Ohio This space was used for manufacturing and administration. Currently, the Company is not occupying any of the space and plans to sublet it. 21,600 March 31, 2002 Santa Clara, Sales and Service 4,355 October 13, 2002 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, 2004 Zurich, Sales and Service 3,229 September 30, 1999 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. 9 12 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 50 Chairman of the Board of Directors since 1991, Chief Executive Officer since November 1993 and President since May 1994. Philip R. Etsler 48 Vice President Human Resources of the Company since 1990. James B. Griswold 52 Secretary and a Director of the Company since 1988; partner in the law firm of Baker & Hostetler LLP from 1982 to present. David H. Patricy 49 Vice President of Test and Measurement of the Company since 1997. Previously General Manager of the Instrument Division from 1994 to 1997 and Director of Manufacturing from 1984 to 1994. Mark J. Plush 49 Vice President and Chief Financial Officer of the Company since October 1998. Previously, Controller since 1982 and an Officer of the Company since 1989. Ronald M. Rebner (1) 54 Vice President and Chief Financial Officer of the Company from 1981 to October 1998. Gabriel A. Rosica 58 Senior Vice President of Semiconductor 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.
(1) On October 1,1998, Mr. Rebner retired from his Executive Officer position with the Company. 10 13 PART II. ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED ----------------------------------------------------- STOCKHOLDER MATTERS. -------------------- See the table under the caption Stock Market Price and Cash Dividends appearing on page 33 of the Keithley Instruments, Inc. 1998 Annual Report to Shareholders, which table and information are incorporated herein by this reference. 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 15, 1998 was 2,460. ITEM 6 - SELECTED FINANCIAL DATA. ------------------------- See the eleven year summary, appearing on pages 34 and 35 of the Keithley Instruments, Inc. 1998 Annual Report to Shareholders, which pages are incorporated herein by this reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS. ----------------------------------- See pages 19 through 21 of the Keithley Instruments, Inc. 1998 Annual Report to Shareholders, which pages are incorporated herein by this reference. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. -------------------------------------------- See pages 16 through 18, pages 22 through 31, and page 33 of the Keithley Instruments, Inc. 1998 Annual Report to Shareholders, together with the report thereon of PricewaterhouseCoopers LLP dated November 23, 1998, appearing on page 32 of the Keithley Instruments, Inc. 1998 Annual Report to Shareholders, which pages are incorporated herein by this reference. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ------------------------------------------------ ACCOUNTING AND FINANCIAL DISCLOSURE. ------------------------------------ None. 11 14 PART III. ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. ---------------------------------------------------- See the table listing the nominees for directors under the caption "Election of Directors" in the Company's Proxy Statement to be used in conjunction with the February 13, 1999 Annual Meeting of Shareholders and filed with the Securities and Exchange Commission pursuant to Section 14(a) of the Securities Exchange Act of 1934, which table is incorporated herein by this reference. The information required for an identification of executive officers is included on page 10 of this Form 10-K Annual Report. ITEM 11 - EXECUTIVE COMPENSATION. ------------------------ See the caption "Executive Compensation and Benefits" in the Company's Proxy Statement to be used in conjunction with the February 13, 1999 Annual Meeting of Shareholders and filed with the Securities and Exchange Commission pursuant to Section 14(a) of the Securities Exchange Act of 1934, which section is incorporated herein by this reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. --------------------------------------------------------------- See the caption "Principal Shareholders" in the Company's Proxy Statement to be used in conjunction with the February 13, 1999 Annual Meeting of Shareholders and filed with the Securities and Exchange Commission pursuant to Section 14(a) of the Securities Exchange Act of 1934, which section is incorporated herein by this reference. 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 LLP. Baker & Hostetler LLP served as general legal counsel to the Company during the fiscal year ended September 30, 1998, and is expected to render services in such capacity to the Company in the future. 12 15 PART IV. ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. ---------------------------------------------------------------- (A)(1) FINANCIAL STATEMENTS OF THE COMPANY The following documents included in the Keithley Instruments, Inc. 1998 Annual Report to Shareholders, are incorporated herein by reference: 1. Consolidated Balance Sheet as of September 30, 1998 and 1997. 2. Consolidated Statement of Income for the years ended September 30, 1998, 1997 and 1996. 3. Consolidated Statement of Cash Flows for the years ended September 30, 1998, 1997 and 1996. 4. Consolidated Statement of Shareholders' Equity for the years ended September 30, 1998, 1997 and 1996. 5. Notes to Consolidated Financial Statements. 6. Report of Independent Accountants dated November 23, 1998. (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. 13 16
(A)(3) INDEX TO EXHIBITS Page Number Sequential Exhibit Numbering Number Exhibit System ------ ------- ------ 2(a) Asset Purchase Agreement by and between Keithley Instruments, Inc. and Inovision Radiation Measurements, LLC dated July 31, 1998. (Reference is made to Exhibit 2(a) of the Company's Current Report on Form 8-K dated July 31, 1998 (File No. 1-9965), which Exhibit is incorporated herein by reference.) -- 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 Mark J. Plush dated April 7, 1994. 22 - 27 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.) -- 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.) --
15 18
Page Number Sequential Exhibit Numbering Number Exhibit System ------ ------- ------ 10(y) First Amendment dated March 28, 1997, to the Credit Agreement dated May 31, 1994. (Reference is made to Exhibit 10(y) of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997 (File No. 1-9965), which Exhibit is incorporated herein by reference.) -- 10(z) 1997 Directors' Stock Option Plan, adopted in February 1997. (Reference is made to Exhibit 10(z) of the Company's Annual Report on form 10-K for the fiscal year ended September 30, 1997 (File No. 1-9965), which Exhibit is incorporated herein by reference.) -- 11 Statement Re Computation of Per Share Earnings. 28 13 Annual Report to Shareholders for the Fiscal Year Ended September 30, 1998. 29-67 21 Subsidiaries of the Company. 68 23 Consent of Experts. 69 27 Financial Data Schedule (EDGAR version only). --
ITEM 14(B) REPORTS ON FORM 8-K. During the fourth quarter ended September 30, 1998, the Company filed a Current Report on Form 8-K under Item 2 - Acquisition or Disposition of Assets for the sale of certain assets of its Radiation Measurements Division. The Form 8-K, dated July 31, 1998, included an Unaudited Pro forma Consolidated Balance Sheet as of June 30, 1998, Unaudited Pro forma Consolidated Statements of Income for the fiscal year ended September 30, 1997 and the nine months ended June 30, 1998, and Notes thereto. 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). 16 19 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 21, 1998 ------------------------------------------ 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, 12/21/98 - -------------------------------------------- President and Chief Executive Officer Joseph P. Keithley (Principal Executive Officer) /s/ Brian R. Bachman Director 12/21/98 - ------------------------------------------- Brian R. Bachman /s/ James T. Bartlett Director 12/21/98 - ------------------------------------------- James T. Bartlett /s/ Arden L. Bement, Jr. Director 12/21/98 - ------------------------------------------- Dr. Arden L. Bement, Jr. /s/ James B. Griswold Director 12/21/98 - ------------------------------------------- James B. Griswold /s/ Leon J. Hendrix, Jr. Director 12/21/98 - ------------------------------------------- Leon J. Hendrix, Jr. /s/ R. Elton White Director 12/21/98 - ------------------------------------------- R. Elton White
17 20 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 23, 1998 appearing on page 32 of the 1998 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. PricewaterhouseCoopers LLP Cleveland, Ohio November 23, 1998 18 21 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 Beginning of Charged to Costs Balance at End Description Period and Expenses Deductions (1) of Period - ----------- ------ ------------ -------------- --------- For the Year Ended September 30, 1998: Valuation allowance for deferred tax assets $3,166 $ 54 $ 93 $3,127 For the Year Ended September 30, 1997: Valuation allowance for deferred tax assets $2,994 $172 -- $3,166 For the Year Ended September 30, 1996: Valuation allowance for deferred tax assets $2,606 $467 $ 79 $2,994
(1) Represents utilization of tax credits and capital loss carryovers. 19 EX-10.K 2 EXHIBIT 10(K) 1 Exhibit 10(k) 10(k) Employment Agreement with Mark J. Plush EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated this 7th day of April 1994 between Keithley Instruments, Inc., an Ohio corporation, (hereinafter called the "Company"), and Mark J. Plush (hereinafter called the "Employee"). WHEREAS, the "Company" considers the establishment and maintenance of sound and vital management to be essential to protecting and enhancing the best interest of the Company and its shareholders; and WHEREAS, the Company wishes to assure itself of the Employee's full-time employment during the period specified herein; and WHEREAS, the Employee is prepared to enter into an employment agreement with the Company and to give the Company the assurances it desires; NOW, THEREFORE, in consideration of the foregoing premises and of the mutual agreements herein set forth, the parties hereto have agreed and do hereby mutually agree as follows: I) TERM OF AGREEMENT A) GENERAL. The term of this Agreement shall commence on the date first above written, and shall continue for three years, through and including April 7, 1997, unless sooner terminated pursuant to Section VI or XII hereinbelow. After the original three year term, the Agreement is renewable automatically for successive one year terms unless either party gives the other party written notice of non-renewal at least thirty (30) days before the end of the term of the Agreement. B) CHANGE IN CONTROL. In the event that Joseph P. Keithley & Trusts of which he is a Partner ceases to have more than fifty percent (50%) voting power of the Company's voting stock ("Change of Control") during the term of this Agreement, as set forth above, this Agreement will continue for the balance of said term. If the balance of said term is less than eighteen months, the term of this Agreement shall be extended so that the term shall not end prior to eighteen months following the date of the Change of Control. II) RESPONSIBILITY It is agreed that the Employee is hereby employed by the Company with responsibility to perform such duties, consistent with his position, as shall be assigned to him by the Chief Executive Officer or Board of Directors of the Company. III) ACCOUNTABILITY It is agreed that in exercising his responsibilities, the Employee will be accountable to the Company's Board of Directors and its Chief Executive Officer. The employee agrees to: (i) devote his business time and efforts full-time to the affairs of the Company and its affiliates, and (ii) use his best efforts to promote the interests of the Company and its affiliates. 2 IV) REMUNERATION A) BASE SALARY. The Employee will be employed during the term of this Agreement at an annual base salary of not less than $109,800, paid on a monthly basis. This base salary maybe increased, but not decreased without the Employee's consent, at the discretion of the Compensation Committee of the Board of Directors of the Company. B) ADDITIONAL COMPENSATION. The Employee shall be eligible to participate in incentive, stock option, profit-sharing, annual cash bonus, deferred compensation and similar plans maintained by the Company for the benefit of its executives. V) OTHER EMPLOYEE FRINGE BENEFITS The Employee shall be included to the extent eligible thereunder (at the expense of the Company, if provided at Company expense for other executives of the Company with a comparable level of responsibility) under any and all existing plans or arrangements (and any plans or arrangements which may be adopted) providing benefits for its employees, including but not limited to group life insurance, hospitalization, medical, pension, automobile, financial services and any and all other similar or comparable benefits as may be in effect for other executives of the Company with a comparable level of responsibility from time to time during the term of this Agreement. Additional or improved fringe benefits are to be calculated for and awarded to the Employee in at least as beneficial a manner as they are calculated for and awarded to such other executive. Nothing in this Agreement shall adversely affect the rights of the Employee or his beneficiaries under the present of any future retirement, profit-sharing, insurance, or other fringe benefit or compensation plans or arrangements which the Company now has or may adopt for its employees, and no rights or the Employee thereunder shall be forfeited by any action set forth in this Agreement unless so provided in such plans or arrangements. VI) TERMINATION OF EMPLOYMENT A) DEATH. If the Employee shall die during the term of this Agreement, the duties of the Company and the Employee, one to the other, under this Agreement shall terminate as of the date of the Employee's death. Notwithstanding the sentence immediately preceding, the death of the Employee shall not adversely affect the rights of this beneficiaries to any benefits under the Company's employee benefit plans or arrangements in which he may be a participant, in accordance with the terms thereof, including but not limited to those referred to in Section VI, F hereof. B) DISABILITY. If the Employee shall become disabled for purposes of the Company's long-term disability program during the term of this Agreement the duties of the Company and the Employee, one to the other, under this Agreement shall terminate as of the date the Employee is determined to be disabled. Notwithstanding the sentence immediately preceding, the disability of the Employee shall not adversely affect his rights to any benefits under the Company's employee benefit plans or arrangements in which he may be a participant, in accordance with the provisions thereof, including but not limited to those referred to in Section VI, F hereof. C) RESIGNATION. If the Employee voluntarily leaves the employ of the Company during the term of this Agreement for any reason, the duties of the Company and the Employee, one to the other, under this Agreement shall terminate as of the date of the Employee's termination of employment. Notwithstanding the sentence immediately preceding, such voluntary termination of employment by the Employee shall not adversely affect his rights to any benefits under the Company's employee benefit plans or arrangements in 3 which he may be a participant, in accordance with the provisions thereof, including but not limited to those referred to in Section VI, F hereof. D) TERMINATION BY COMPANY. The Company may terminate the Employee's employment at any time, without cause, subject to providing the benefits hereinafter specified in accordance with the terms hereof. The Company may terminate the Employee's employment at any time "For Cause". In the event the Company shall terminate the Employee's employment For Cause, the duties of the Company and the Employee, one to the other, under this Agreement shall terminate as of the date of the Employee's termination of employment. Notwithstanding the sentence immediately preceding, such termination of employment of the Employee by the Company For Cause shall not adversely affect his rights to any benefits under the Company's employee benefit plans or arrangements in which he may be a participant, in accordance with the provisions thereof, including but not limited to those referred to in Section VI, F hereof. As used herein the words "For Cause" shall be deemed to mean and include (i) the Employee's conviction of either a felony involving moral turpitude or any crime in connection with his employment by the Company which causes the Company or any affiliated company a substantial detriment; or (ii) the Employee's refusal to submit to a medical examination if directed to do so by the Board to determine whether the Employee is disabled under subsection VI(B) hereof; or (iii) the Employee's willful failure to take actions permitted by law and necessary to implement policies of the Board which the Board has communicated to him in writing, provided that minutes of a Board meeting attended in its entirety by the Employee shall be deemed communicated to the Employee; or (iv) the Employee's continued failure to perform his duties as an executive officer of the Company as set forth in the attached job description (provided that the Employee's competence in such performance shall be irrelevant); or (v) any condition which either resulted from the Employee's habitual drunkenness or addiction to narcotics, or resulted from any intentionally self-inflicted injury; or (vi) acting in breach or contravention of any material obligation, covenant or agreement of the Employee contained in this Agreement, expressly including without limitation, the non-competition and non-solicitation covenants set forth in Section VIII hereof or the provision of the "Employee Agreement" or any similar agreement regarding confidentiality. E) NOTICE OF TERMINATION. Any termination of the Employee's employment by the Company or by the Employee shall be communicated by written Notice of Termination to the other party hereto which notice shall set forth the effective date of such termination which shall not be earlier than the date of mailing, or delivery by other means, of the notice. F) CONTINUATION OF EMPLOYEE BENEFITS. The death, disability or termination of employment of the Employee, whether or not voluntary and whether or not For Cause shall not result in the loss by the Employee or his beneficiaries of any benefits under any life insurance, death benefit, pension, profit sharing, stock option, medical, deferred compensation or other employee benefit plan or arrangement except as provided for in such plan or arrangement. VII) COMPENSATION UPON INVOLUNTARY TERMINATION OTHER THAN FOR CAUSE If the Employee's employment with the Company shall be terminated, during the term of this Agreement, by the Company other than For Cause, then the Employee shall be entitled to the benefits provided below: i) the Company shall pay the Employee, on a monthly basis, his full monthly base salary determined as of the date of his termination of employment, for six 4 months following his termination of employment, or one month following his termination of employment for each full year of his service with the Company, whichever is greater, up to a maximum of eighteen (18) months; ii) full participation in the annual Extra Compensation Plan if his termination of employment is on or subsequent to June 30 of the respective fiscal year; iii) full participation in any performance award if the performance measuring period ends within six months follow his termination of employment; iv) the choice of exercising all vested stock options up to thirty days after his termination of employment, provided this provision shall not extend the term of his options beyond their terms as initially granted, and the Company agrees to request the Compensation Committee of its Board of Directors to permit such exercise pursuant to Section 6(g) of the Keithley Instruments, Inc. 1984 Stock Option Plan or the comparable provision of any future plan; v) the Employee shall be deemed to have vested in his stock, if any, acquired under the Company's restricted stock plan at a rate of 20% per year of service subsequent to the date of sale of such stock to the Employee; vi) the Company shall maintain in full force and effect, following his termination of the Employee's employment for six months following such termination of employment for each full year of his service with the Company, whichever is greater, up to a maximum of eighteen (18) months, all employee fringe benefit plans and arrangement in which he was entitled to participate immediately prior to the date of the Notice of Termination, provided that if such continued coverage would jeopardize the tax qualified status of such plan or arrangement with respect to any other employee or the Company the Company may elect to provide the said benefit on an individual basis or provide cash compensation equivalent to the benefit which otherwise would have been provided so that the Employee shall suffer no financial loss whatsoever due to such substitution; vii) in addition to the retirement benefits to which the Employee is entitled under the Company's Employees' Pension Plan, as amended from time to time (the "Pension Plan"), the Company shall pay a supplemental retirement benefit hereunder, which benefit (except as provided below) shall be determined in accordance with, and payable in the same form and at the same times provided in, the Pension Plan. Such benefit shall equals (a) minus (b) below where: (a) equals the benefit to which the Employee would be entitled under the Pension Plan if: I. he were fully vested; II. his "compensation", as that word is defined in the Pension Plan, were, at all times while he was a participant in said Pension Plan, equal to the annual amount of such compensation for that Company fiscal year from among the final three (3) Company fiscal years ending prior to his termination of employment for which said compensation was the highest; III. his "1977 monthly compensation", "1983 monthly compensation" and any similar updated monthly compensation were calculated by dividing his "compensation", as defined in Section VII, (vii), (a) II. above, by twelve (12); and 5 IV. he was credited with his actual years of "credited service" as determined under the Pension Plan; and b) equals the Employee's actual benefit payable under the Pension Plan; and viii) reimbursement of fees for outplacement services actually used to the extent approved by the Chief Executive Officer in his sole discretion, but not in excess of $10,000. Nothing in this Agreement shall be construed as amending any compensation or fringe benefit plan or arrangement of the Company. All rights of the Employee under any such plan or arrangement upon his termination of employment must be determined under the terms of such plans or arrangements at the time of the Employee's termination of employment. VIII) COVENANT NOT TO COMPETE ----------------------- The Employee agrees that during his employment with the Company, and after his termination of employment for as long as payments hereunder are made by the Company, the Employee shall remain in full compliance with the following conditions: i) He must not accept employment either directly or indirectly, with any competitor of the Company. ii) He must not allow the use of his name by or in any competitive business. iii) He must keep himself at all times reasonably available for consultation by the officers and directors of the Company; provided that no such consultation shall be required after the Employee attains age sixty-five (65). In the event he is called upon to render any such substantial consulting services, he shall receive additional compensation in a reasonable amount, and any travel or other expenses which may be required in connection with such services shall be paid by the Company. The Company shall make payments under this Agreement only so long as the Employee complies with the above conditions except to the extent expressly waived in writing by the Board of Directors. In the event that the Employee shall be determined to be guilty of violation of any of the foregoing conditions by agreement or by the reasonable determination of the Board of Directors and the Employee does not correct such violation within a reasonable time, as determined by the Board after notice to him in writing, the Company may thereafter suspend or terminate in whole or in part any further payments under this Agreement. This Agreement shall not be deemed to modify in any way any agreement between the Company and the Employee concerning the protection of Company secrets. IX) DISSOLUTION, MERGER OR CONSOLIDATION If the Company shall at any time be merged or consolidated into or with any other corporation or corporations or if substantially all the assets of the Company are sold or otherwise transferred to another corporation or party, the provisions of this Agreement shall be binding upon and inure to the benefit of the corporation surviving or resulting from such merger or consolidation or to which such assets shall be sold or transferred, and this provision shall apply in the event of any subsequent sale, merger, consolidation or transfer. 6 X) NON-ASSIGNABILITY This Agreement shall be binding upon and inure to the benefit of the Parties hereto and to their successors. The Employee may not assign, pledge or otherwise encumber any rights or interest hereunder without the written consent of the Company. The Company may not assign this Agreement other than as set forth in IX above. XI) ENTIRE AGREEMENT OF THE PARTIES This Agreement expresses the entire agreement of the parties, and all promises, representations, understandings, arrangement and prior agreements are merged herein and superseded hereby. XII) AMENDMENTS, TERMINATION Except as herein provided, this Agreement cannot be terminated by unilateral action of either party. However, this Agreement can be changed, modified or terminated by mutual written agreement. No person, other than pursuant to a resolution of the Board of Directors of the Company, shall have any authority on behalf of the Company to agree to modify, change or terminate this Agreement or anything in reference thereto, and any such modification, change or termination must be in writing and signed by both parties. XIII) LAWS GOVERNING This Agreement has been entered into in the State of Ohio, and shall be construed, interpreted and governed in accordance with the laws of the State of Ohio. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its officers thereunto duly authorized, and the Employee has hereunto set his hand, as of the day and year first above written. KEITHLEY INSTRUMENTS, INC. ("Company") By /s/ Joseph P. Keithley ------------------------------------- (Chairman, Board of Directors and CEO) And /s/ RONALD M. REBNER ------------------------------------ (CFO) /s/ MARK J. PLUSH ---------------------------------------- ("Employee") EX-11 3 EXHIBIT 11 1 Exhibit 11 11. Statement re computation of per share earnings
Year ended Year ended Year ended September 30, September 30, September 30, 1998 1997 1996 Net income (loss) in thousands $5,004 $790 $(5,440) Weighted average shares outstanding 7,799,507 7,588,094 7,360,412 Assumed exercise of stock options, weighted average of incremental shares 171,758 260,895 -- Assumed purchase of stock under stock purchase plan, weighted average 94,024 17,761 -- Diluted shares-adjusted weighted- average shares and assumed conversions 8,065,289 7,866,750 7,360,412 Basic earnings (loss per share $.64 $.10 $ (.74) Diluted earnings (loss) per share $.62 $.10 $ (.74)
EX-13 4 EXHIBIT 13 1 Exhibit 13 13. Annual Report to Shareholders for the Fiscal Year Ended September 30, 1998 Consolidated Statement of Income For the years ended September 30, 1998, 1997 and 1996 (In Thousands of Dollars Except for Per-Share Data)
1998 1997 1996 --------- --------- --------- Net sales $ 117,776 $ 123,295 $ 118,946 --------- --------- --------- Cost of goods sold 50,332 51,924 46,140 Selling, general and administrative expenses 46,756 51,011 48,329 Product development expenses 13,139 17,233 18,337 Gain on sale of business (2,852) -- -- Special charges 1,172 771 11,645 Net financing expenses 1,040 1,145 819 --------- --------- --------- Income (loss) before income taxes 8,189 1,211 (6,324) Income taxes (benefit) 3,185 421 (884) --------- --------- --------- Net income (loss) $ 5,004 $ 790 $ (5,440) ========= ========= ========= Basic earnings (loss) per share $ .64 $ .10 $ (.74) ========= ========= ========= Diluted earnings (loss) per share $ .62 $ .10 $ (.74) ========= ========= =========
The accompanying notes are an integral part of the financial statements. 2 Consolidated Balance Sheet September 30, 1998 and 1997 (In Thousands of Dollars Except for Share Data)
1998 1997 ------- ------ Assets Current assets: Cash and cash equivalents $ 9,321 $ 1,727 Accounts receivable and other, net of allowances of $704 in 1998 and $675 in 1997 17,586 25,113 Inventories: Raw materials 5,997 7,787 Work in process 3,163 5,671 Finished products 2,490 3,121 -------- -------- Total inventories 11,650 16,579 Deferred income taxes 3,267 2,541 Prepaid expenses 503 566 -------- -------- Total current assets 42,327 46,526 -------- -------- Property, plant and equipment, at cost: Land 1,325 1,325 Buildings and leasehold improvements 14,984 15,917 Manufacturing, laboratory and office equipment 23,025 24,285 -------- -------- 39,334 41,527 Less-Accumulated depreciation and amortization 24,723 24,272 -------- -------- Total property, plant and equipment, net 14,611 17,255 -------- -------- Intangible assets, net of accumulated amortization of $31,755 in 1998 and $29,930 in 1997 -- 1,825 Deferred income taxes 8,087 8,814 Other assets 5,992 4,693 -------- -------- Total assets $ 71,017 $ 79,113 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Current installments on long-term debt $ -- $ 16 Accounts payable 6,191 11,568 Accrued payroll and related expenses 4,203 4,698 Other accrued expenses 6,902 6,951 Income taxes payable 4,591 1,821 -------- -------- Total current liabilities 21,887 25,054 -------- -------- Long-term debt 6,099 17,442 Other long-term liabilities 4,277 3,899 Deferred income taxes 12 35 Shareholders' equity: Common Shares, stated value $.025: Authorized - 30,000,000; issued and outstanding - 5,092,903 in 1998 and 4,877,975 in 1997 127 122 Class B Common Shares, stated value $.025: Authorized - 9,000,000; issued and outstanding - 2,785,378 in 1998 and 2,786,278 in 1997 70 70 Capital in excess of stated value 8,877 7,297 Earnings reinvested in the business 29,870 25,773 Cumulative translation adjustment 429 250 Unamortized portion of restricted stock plan (283) (569) Common Shares held in treasury, at cost (348) (260) -------- -------- Total shareholders' equity 38,742 32,683 -------- -------- Total liabilities and shareholders' equity $ 71,017 $ 79,113 ======== ========
The accompanying notes are an integral part of the financial statements. 3 Consolidated Statement of Shareholders' Equity For the years ended September 30, 1998, 1997 and 1996 (In Thousands of Dollars Except for Share Data)
1998 1997 1996 ---- ---- ---- SHARES $ SHARES $ SHARES $ ----------- ------ ----------- --------- ----------- - Common Shares: Beginning balance 4,877,975 122 4,656,600 116 4,308,976 108 Shares issued under stock plans 214,028 5 213,375 6 222,906 5 Conversion of Class B Common Shares 900 -- 8,000 -- 124,718 3 --------- ------ --------- ------ --------- --- Ending balance 5,092,903 127 4,877,975 122 4,656,600 116 ========= ------ ========= ------ ========= -------- Class B Common Shares: Beginning balance 2,786,278 70 2,794,278 70 2,918,996 73 Conversion to Common Shares (900) -- (8,000) -- (124,718) (3) --------- ------ --------- ------ --------- --- Ending balance 2,785,378 70 2,786,278 70 2,794,278 70 ========= ------- ========= ------- ========= -------- Common Shares held in treasury, at cost: Beginning balance (22,515) (260) (10,155) (136) -- -- Shares repurchased (14,960) (88) (12,360) (124) (10,155) (136) --------- ------ --------- ------ --------- --- Ending balance (37,475) (348) (22,515) (260) (10,155) (136) ========== ------ ========= ------ ========= ------ Capital in excess of stated value: Beginning balance 7,297 5,293 3,981 Shares issued under stock plans 1,473 1,742 1,385 Other 107 262 (73) -------- -------- -------- Ending balance 8,877 7,297 5,293 -------- -------- ------- Cumulative translation adjustment: Beginning balance 250 562 589 Translation adjustments 146 (550) (76) Gains from hedging net investments in foreign subsidiaries 33 238 49 --------- ------- -------- Ending balance 429 250 562 -------- ------- ------- Unamortized portion of restricted stock plan: Beginning balance (569) (14) (6) Shares issued under stock plans -- (742) (14) Amortization 286 187 6 ---------- ---------- --------- Ending balance (283) (569) (14) ---------- ---------- --------- Earnings reinvested in the business: Beginning balance 25,773 25,865 32,157 Net income (loss) 5,004 790 (5,440) Cash dividends: Common Shares ($.125 per share in 1998, 1997 and 1996) (629) (603) (568) Class B Common Shares ($.10 per share in 1998, 1997 and 1996) (278) (279) (284) ------- ------- -------- Ending balance 29,870 25,773 25,865 ------ ------ ------ Total shareholders' equity 38,742 32,683 31,756 ====== ====== ======
The accompanying notes are an integral part of the financial statements. 4
Consolidated Statement of Cash Flows For the years ended September 30, 1998, 1997 and 1996 (In Thousands of Dollars) 1998 1997 1996 -------- -------- ------ Cash flows from operating activities: Net income (loss) $ 5,004 $ 790 $ (5,440) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 3,653 3,823 3,419 Amortization of intangible assets 196 222 634 Deferred income taxes (22) (1,140) (3,772) Deferred compensation 331 229 211 Special charges 551 (771) 11,452 Gain on sale of business (2,852) -- -- Change in current assets and liabilities: Accounts receivable and other 6,625 (6,969) 2,317 Inventories 3,670 486 (5,275) Prepaid expenses (648) 29 (57) Other current liabilities (3,320) 1,427 (143) Other operating activities (155) 863 (746) -------- -------- -------- Net cash provided by (used in) operating activities 13,033 (1,011) 2,600 -------- -------- -------- Cash flows from investing activities: Payments for property, plant and equipment (2,753) (5,849) (8,539) Sale (acquisition) of assets 8,683 -- (1,408) Payments made for sale of assets (759) -- -- Other investing activities 96 202 71 -------- -------- -------- Net cash provided by (used in) investing activities 5,267 (5,647) (9,876) -------- -------- -------- Cash flows from financing activities: Net decrease in short-term debt (16) (45) (10) Borrowing (payment) of long-term debt (11,314) 4,520 7,385 Proceeds from sale of Common Shares 1,458 1,144 974 Cash dividends (907) (882) (852) -------- -------- -------- Net cash provided by (used in) financing activities (10,779) 4,737 7,497 -------- -------- -------- Effect of changes in foreign currency exchange rates on cash and cash equivalents 73 (347) (116) -------- -------- -------- Increase (decrease) in cash and cash equivalents 7,594 (2,268) 105 Cash and cash equivalents at beginning of period 1,727 3,995 3,890 -------- -------- -------- Cash and cash equivalents at end of period $ 9,321 $ 1,727 $ 3,995 ======== ======== ======== Supplemental disclosures of cash flow information Cash paid during the year for: Income taxes $ 972 $ 1,981 $ 2,201 Interest 891 1,140 711 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. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Percent of net sales for the years ended September 30, 1998, 1997 and 1996
1998 1997 1996 ---- ---- ---- Net sales 100.0 100.0 100.0 Cost of goods sold 42.7 42.1 38.8 Selling, general and administrative expenses 39.7 41.4 40.6 Product development expenses 11.2 14.0 15.4 Gain on sale of business (2.4) -- -- Special charges 1.0 0.6 9.8 Net financing expenses 0.9 0.9 0.7 ----- ----- ----- Income (loss) before income taxes 6.9 1.0 (5.3) Income taxes (benefit) 2.7 0.4 (0.7) ----- ----- ----- Net income (loss) 4.2 0.6 (4.6) ===== ===== =====
RESULTS OF OPERATIONS (IN THOUSANDS OF DOLLARS EXCEPT FOR PER-SHARE DATA) Net income was $5,004, or $.62 per share on a diluted basis, in 1998 compared to $790, or $.10 per share, in 1997, and a net loss of $5,440, or $.74 per share, in 1996. Excluding the gain on sale of a business of $2,852 pretax, or $.22 per share, special charges and other personnel cost reductions in all years of $.18 per share in 1998, $.10 per share in 1997, and $1.27 per share in 1996, net income was $4,679, or $.58 per share in 1998, $1,614, or $.20 per share in 1997, and $4,185, or $.53 per share in 1996. Additionally, 1997 and 1996 results included substantial start-up losses for new business opportunities the company was exploring, compared with much smaller start-up losses in 1998. Net sales were $117,776 in 1998, down 4 percent from record sales of $123,295 in 1997. 1997's sales increased 4 percent from $118,946 in 1996. Net sales for 1998 without the Radiation Measurements Division and the Quantox product line were $96,840. (See Notes B and L.) Five years ago, the company developed a strategy of targeting selected growth industries (specifically in semiconductor, wireless communications and electronic components) and has been developing application-specific products for these industries. While shipments continued to ramp up for the company's Quantox oxide monitoring system, continued weakness in the semiconductor capital equipment industry and the Asian financial situation caused sales for the company's parametric test equipment to continue to decline. Additionally, sales of the company's board level products also continued to decline. The increase in sales in 1997 over 1996 was due to very strong demand for the company's products targeted for the wireless communications industry 6 and the first full year's shipments of Quantox, offset somewhat by the decrease in sales of products serving the semiconductor industry and board level products. Geographically, domestic and export sales decreased in 1998 from 1997, but were up in 1997 from 1996. Net sales in Europe increased in 1998 from 1997, but decreased in 1997 from 1996. Cost of goods sold as a percentage of net sales was 42.7 in 1998, 42.1 in 1997 and 38.8 in 1996. The increase during this period has been due to increased sales of Quantox that carry a lower gross margin than the company's other products, higher fixed costs resulting from the 1996 expansion of manufacturing facilities and a continuing strengthening of the U.S. dollar by 5 percent in 1998 and 8 percent in 1997. Foreign exchange hedging had a minimal effect on cost of goods sold in 1998, 1997 and 1996. Selling, general and administrative expenses decreased 8 percent to 39.7 percent of sales in 1998 from 41.4 percent of sales in 1997. The decrease was due mainly to lower expenses resulting from the cost reduction actions taken during the year and lower commissions due to lower net sales. Selling, general and administrative expenses increased 6 percent from 1996 to 1997. The increase in expenses was due mostly to higher marketing costs associated with new business initiatives, the introduction of new products from existing businesses, and higher commissions due to increased sales. Additionally, 1998 and 1997 expenses include approximately $1,210 pretax, or $.09 per share, and $512 pretax, or $.04 per share, respectively, for personnel cost reductions and officer retirement expenses. Product development expenses decreased $4,094, or 24 percent, in 1998 from 1997 and $1,104, or 6 percent, in 1997 from 1996. As a percentage of sales, they were 11.2, 14.0 and 15.4 in 1998, 1997 and 1996, respectively. The decrease in 1998 from 1997 was due primarily to the completion of the company's new business development efforts for the Quantox product line and the company's SmartLink product line. The decrease in 1997 from 1996 was due to substantially lower costs for the company's board level products and the company's Model S600 parametric test system which was substantially complete in 1997, offset somewhat by increased costs for development of new benchtop instrument products and exploration of new business opportunities. On August 10, 1998, the company sold certain assets used in the operation of its Radiation Measurements Division to Inovision Radiation Measurements, L.L.C. The sale 7 was effective July 31, 1998, and resulted in a gain of $2,852 pretax, or $.22 per share. (See Note B.) An analysis of special charges is as follows:
Accrued at Expense September 30, DESCRIPTION: 1998 1997 1996 1998 1997 - ----------- ------- ------- ------- ------- ------- Write off of goodwill $ 519 $ -- $ 5,737 $ -- $ -- Severance, outplacement and other personnel costs 290 (291) 3,433 24 222 Lease and related costs 280 (525) 998 248 3 Impaired inventory and equipment 122 49 835 -- -- Relocation of facility and employees 25 1,073 -- -- -- Recruiting and consulting costs -- 187 -- -- -- Manufacturing start-up costs -- 282 -- -- -- European operating subleases (64) (4) 642 540 574 ------- ------- ------- ------- ------- Totals $ 1,172 $ 771 $11,645 $ 812 $ 799 ======= ======= ======= ======= =======
Due to continued weakness in the semiconductor capital equipment industry, the company incurred special charges in 1998 for cost reduction actions taken in the second quarter relative to its semiconductor business. Also, the company decided to change the methodology of pursuing its WLR business, which was part of the 1996 acquisition of Turner Engineering Technology. As a result of this decision, the company reviewed the carrying value of the goodwill using the estimated future cash flow method and determined that the goodwill was impaired. 1998 special charges include $519 for the write-off of the remaining balance of the goodwill. Additionally, the company decided to further consolidate its manufacturing operations. As a result, special charges in 1998 include lease costs accrued for one year on a leased facility the company will no longer occupy. The reversal of European operating subleases represents a change in circumstances in 1998. The special charges recorded during 1998 of $1,172 pretax, or $.09 per share, include $551 in noncash charges. Special charges of $771 pretax, or $.06 per share, recorded in 1997 include gross costs of $1,902 primarily for the relocation of the Keithley MetraByte operation from Taunton, Massachusetts to Cleveland, Ohio, net of a reversal of $1,131 of expense (noncash) recorded during 1996 primarily for closing the Taunton facility. The reversal of 1996 expense relates to changes in circumstances that occurred during 1997. $256 of the gross expense represents a noncash charge to reserve for additional impaired inventory. In September 1996, management made the decision to relocate the Keithley MetraByte operation to its Cleveland, Ohio facility due 8 to a lack of growth in sales and poor earnings. The relocation was completed in July 1997, and during 1998, the Keithley MetraByte operation was combined with the company's Instruments group to form the Test and Measurement business unit. Special charges of $11,645 pretax, or $1.27 per share, recorded in 1996 primarily represented the expected costs of closing the Keithley MetraByte operation in Taunton. Of the special charges, noncash charges in 1996 total $6,572. Approximately 130 employees were terminated in total as a result of the relocation, 40 of which were terminated by September 30, 1996. Also included in special charges recorded in 1996 is an accrual for costs to be incurred over the next 11 years under two operating subleases at the company's European facilities. At September 30, 1998 and 1997, $272 and $249, respectively, were accrued in the Consolidated Balance Sheet under the category "Other accrued expenses" and $540 and $550, respectively, were accrued under the category "Other long-term liabilities." Net financing expenses of $1,040 decreased $105 from $1,145 in 1997. 1997's expense increased $326 from $819 in 1996. The fluctuations are due to changes in average debt levels during the periods. The effective tax rate for 1998 was 38.9 percent and reflects an adjustment for prior years' taxes. The effective tax rate for 1997 was 34.7 percent. In 1997, foreign sales corporation (FSC) benefits and benefits derived from the remittance of foreign dividends were offset by a deferred tax charge resulting from the company's decision to terminate corporate owned life insurance policies. The company recorded an income tax benefit of $884 in 1996, which resulted from the company's pretax loss. The 1996 effective rate (benefit) of (14.0) percent is less than the statutory rate principally due to the non-deductibility of the Keithley MetraByte goodwill written off, offset by the utilization of foreign tax credits and FSC benefits. At September 30, 1998, the company had tax credit carryforwards of $2,164. 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 9 and its competition, whether competition is foreign or U.S. based, changes in technology and local and worldwide economic conditions. The company utilizes hedging techniques designed to mitigate the short-term effect of exchange rate fluctuations on operations and balance sheet positions 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 and for 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. LIQUIDITY AND CAPITAL RESOURCES In 1998, net cash provided by operating activities was $13,033 and cash received from the sale of a business was $8,683. Cash was used to pay down debt by $11,330, purchase $2,753 of property, plant and equipment and pay $907 in dividends. Total cash of $9,321 at September 30, 1998, increased $7,594 from September 30, 1997. The company plans to use the cash, as well as the proceeds received from the sale of its Quantox product line in November 1998, to fund a stock repurchase program also announced in November 1998. (See Note L.) Total debt of $6,099 at September 30, 1998 decreased substantially from $17,458 at September 30, 1997, and the debt-to-capital ratio at year-end was 13.6 percent versus 34.8 percent at the end of fiscal 1997. Additionally, working capital decreased due to lower sales volume and improved inventory turns. The company's credit agreement, which expires March 28, 2002, is a $25,000 debt facility ($6,099 outstanding at September 30, 1998) that provides unsecured, multi-currency revolving credit at various interest rates based on Prime, LIBOR or FIBOR. The company is required to pay a facility fee of between .125% and .20% on the total amount of the commitment. Additionally, the company has a number of other credit facilities in various currencies aggregating $5,616. At September 30, 1998, the company had total unused lines of credit with domestic and foreign banks aggregating $24,517, including short-term and long-term lines of credit of $5,616 and $18,901, 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 due in 2002. 10 During 1999, the company expects to finance capital spending, working capital requirements and the stock repurchase program with cash on hand, cash provided by operations and proceeds from the sale of the Quantox product line. 1999 capital expenditures are expected to approximate the 1998 levels. OUTLOOK Over the past several years the company has spent a substantial amount of resources to develop new products and businesses. The goal management set and met during 1998 was to bring each of these businesses to break-even levels. With the sale of the Radiation Measurements Division in August 1998 and the Quantox product line in the first quarter of fiscal 1999, the company is now able to focus on serving targeted high growth industries with measurement based solutions composed of products and applications staff that are highly interrelated. With a more concentrated portfolio, the company believes it will be able to leverage technology and resources across applications and product lines. This strategy is driving the company toward a business model that requires less spending and higher profits while measuring success by some growth in sales, but greater growth in earnings. However, due to the softness in current order rates and the continuing recession in the semiconductor capital equipment markets, management is cautious over the short term. During the first quarter of fiscal 1999, the company expects to recognize $.35 to $.40 per share, before giving effect to the stock repurchase tender offer, for the sale of the Quantox product line. (See Note L.) 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 financial performance, revenues, earnings, and expenses or gross profits, 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 are sold into the semiconductor industry. Growth in demand for semiconductors, new technology and pricing drive the demand for new semiconductor 11 capital equipment. Throughout much of the past two years, the order growth of this industry has contracted which adversely affected revenues of the company. If this trend continues, future revenues could also be adversely affected. 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 anticipation of customers' changing needs and emerging technology trends. The company must make long-term investments and commit significant resources before knowing whether its expectations will eventually result in products that achieve market acceptance. The company incurs significant expenses developing new products 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 made up almost half of the company's revenue in fiscal 1998. The company's future results could be adversely affected by several factors, including the length and severity of the Asian financial crisis, 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. The company recognizes the need to ensure that Year 2000 hardware and software issues will not adversely impact its operations. With regard to the company's own information systems, a substantial portion of Year 2000 information technology compliance will be achieved in connection with the company's ongoing program to upgrade its key information and operational systems. The company believes that all key systems that are not already Year 2000 compliant will be modified, upgraded or replaced prior to the year 2000, and that any related costs will not have a material impact on the results of operations, financial condition or cash flows of future periods. Certain of the company's hardware and software products purchased by customers or currently being sold to customers will require upgrade or other remediation to become Year 2000 compliant. Based on an internal assessment of these products, the company does not believe that the 12 cost to modify these products for Year 2000 compliance will have a material effect on the results of operations, financial condition or cash flows of future periods. Lastly, the company is seeking to determine if the information systems of its major suppliers (insofar as they relate to the company's business) comply with Year 2000 requirements. The company has not yet fully determined the extent to which its business may be impacted by third parties whose products and services may not be ready for the year 2000. If it is determined that any third party may not be ready, the company will develop a contingency plan. While management does not expect that the failure of any third party to be fully compliant by 2000 would significantly affect results of operations, financial condition or cash flows of future periods, there can be no assurance that any such failure will not have an adverse effect on the company's operations. The company is in the process of modifying its systems to accommodate the Euro currency by January 1, 1999. The cost of these modifications is immaterial to the company's results of operations. Although difficult to predict, any competitive implications and any impact on existing financial instruments are also expected to be immaterial to the company's results of operations, financial condition or cash flows of future periods. 13 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. Certain amounts in prior years have been reclassified to be consistent with the current year's presentation. 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 electrical measurement-based solutions to the wireless communications, semiconductor and electronic components 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. 14 INTANGIBLE ASSETS Intangible assets relate to business acquisitions and are amortized on a straight-line basis over their estimated useful lives. 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. During 1998, the company wrote off the remaining goodwill associated with its 1996 acquisition of Turner Engineering Technology. (See note C.) At September 30, 1998, there were no intangible assets remaining on the Consolidated Balance Sheet. OTHER ACCRUED EXPENSES Included in the "Other accrued expenses" caption of the Consolidated Balance Sheet at September 30, 1998 and 1997, were $1,599 and $2,496, respectively, for commissions payable to outside sales representatives of the company. CAPITAL STOCK The company has two classes of stock. 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. Included in the "Common shares held in treasury, at cost" caption of the Consolidated Balance Sheet at September 30, 1998 and 1997, were Common Shares repurchased to settle non-employee Directors' fees deferred pursuant to the Keithley Instruments, Inc. 1996 Outside Directors Deferred Stock Plan. On November 11, 1998, the company announced it would commence a tender offer to purchase up to 2,000,000 of its Common Shares. (See Note L.) 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, 1998, 1997 and 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 15 the reported financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share." The Company adopted this standard in 1998. All per share amounts have been restated in accordance with the new standard. Both Common Shares and Class B Common Shares are included in calculating earnings per share. The weighted average number of shares outstanding used in the calculation is set forth below:
1998 1997 1996 ----------- ----------- ----------- Basic 7,799,507 7,588,094 7,360,412 Diluted 8,065,289 7,866,750 7,360,412
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 or option 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 revenues 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 is 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. 16 OTHER ACCOUNTING PRONOUNCEMENTS In March 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). This Statement requires expenses incurred during the application development stage of a software implementation project to be capitalized and amortized over the useful life of the project. SOP 98-1 is required to be adopted in the company's fiscal year ending September 30, 2000. Application of this standard is not expected to have a material impact on the results of the company. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This Statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 is required to be adopted in the company's first quarter of its fiscal year ending September 30, 2000. The company has not yet determined the financial statement impact of this Statement. 17 NOTE B - SALE OF ASSETS On August 10, 1998, the company sold certain assets used in the operation of its Radiation Measurements Division (RMD) to Inovision Radiation Measurements, L.L.C. for $8,215 in cash. Additionally, the company received $468 for certain liabilities incurred in the operation of RMD that were not assumed by the buyer. The agreement, which was effective July 31, 1998, included the sale of RMD's inventory, accounts receivable, machinery, equipment and other tangible personal property, and intangible assets including patents and technology. The sale resulted in a pretax gain of $2,852, or $.22 per share. 18 NOTE C - SPECIAL CHARGES An analysis of special charges recorded in the Consolidated Statement of Income in 1998, 1997 and 1996, and the amount accrued in the Consolidated Balance Sheet at September 30, 1998 and 1997 is as follows:
Accrued at Expense September 30, DESCRIPTION: 1998 1997 1996 1998 1997 - ----------- ---- ---- ---- ---- ---- Write off of goodwill $ 519 $ -- $ 5,737 $ -- $ -- Severance, outplacement and other personnel costs 290 (291) 3,433 24 222 Lease and related costs 280 (525) 998 248 3 Impaired inventory and equipment 122 49 835 -- -- Relocation of facility and employees 25 1,073 -- -- -- Recruiting and consulting costs -- 187 -- -- -- Manufacturing start-up costs -- 282 -- -- -- European operating subleases (64) (4) 642 540 574 ------- ------- ------- ------- ------- Totals $ 1,172 $ 771 $11,645 $ 812 $ 799 ======= ======= ======= ======= =======
Due to continued weakness in the semiconductor capital equipment industry, the company incurred special charges in 1998 for cost reduction actions taken in the second quarter relative to its semiconductor business. Also, the company decided to change the methodology of pursuing its WLR business, which was part of the 1996 acquisition of Turner Engineering Technology. As a result of this decision, the company reviewed the carrying value of the goodwill using the estimated future cash flow method and determined that the goodwill was impaired. 1998 special charges include $519 for the write-off of the remaining balance of the goodwill. Additionally, the company decided to further consolidate its manufacturing operations. As a result, special charges in 1998 include lease costs accrued for one year on a leased facility the company will no longer occupy. The reversal of European operating subleases represents a change in circumstances in 1998. The special charges recorded during 1998 of $1,172 pretax, or $.09 per share, include $551 in noncash charges. Special charges of $771 pretax, or $.06 per share, recorded in 1997 include gross costs of $1,902 primarily for the relocation of the Keithley MetraByte operation from Taunton, Massachusetts to Cleveland, Ohio, net of a reversal of $1,131 of expense (noncash) recorded during 1996 primarily for closing the Taunton facility. The reversal of 1996 expense relates to changes in circumstances that occurred during 1997. $256 of the gross expense represents a noncash charge to reserve for additional impaired inventory. In September 1996, management made the decision to relocate the Keithley MetraByte operation to its Cleveland, Ohio facility due to a lack of growth in sales and poor earnings. The relocation was completed in July 1997, and during 1998, the Keithley MetraByte operation was combined with the company's Instruments group to form the Test and Measurement business unit. 19 Special charges of $11,645 pretax, or $1.27 per share, recorded in 1996 primarily represented the expected costs of closing the Keithley MetraByte operation in Taunton. Of the special charges, noncash charges in 1996 total $6,572. Approximately 130 employees were terminated in total as a result of the relocation, 40 of which were terminated by September 30, 1996. Also included in special charges recorded in 1996 is an accrual for costs to be incurred over the next 11 years under two operating subleases at the company's European facilities. At September 30, 1998 and 1997, $272 and $249, respectively, were accrued in the Consolidated Balance Sheet under the category "Other accrued expenses" and $540 and $550, respectively, were accrued under the category "Other long-term liabilities." 20 NOTE D - FINANCING ARRANGEMENTS
SEPTEMBER 30, ------------- 1998 1997 ---- ---- Long-term debt: Revolving loans with various banks with interest due monthly; principal due March 28, 2002: U.S. dollar denominated loans with an interest rate of 6.4% and 6.0% based on LIBOR September 30, 1998 and 1997, respectively $ 5,500 $ 14,000 U.S. dollar denominated loans with an interest rate of 8.25% and 8.5% based on Prime at September 30, 1998 and 1997, respectively -- 600 Deutsche mark denominated loans with an interest rate of 3.8% based on FIBOR 599 2,842 Obligations under capital leases -- 16 ----------- -------- 6,099 17,458 Less-Current installments on long-term debt -- 16 ----------- --------- Total long-term debt $ 6,099 $ 17,442 ======== =======
The company's credit agreement, which expires March 28, 2002, is a $25,000 debt facility ($6,099 outstanding at September 30, 1998) that provides unsecured, multi-currency revolving credit at various interest rates based on Prime, LIBOR or FIBOR. The company is required to pay a facility fee of between .125% and .20% on the total amount of the commitment. Additionally, the company has a number of other credit facilities in various currencies aggregating $5,616. At September 30, 1998, the company had total unused lines of credit with domestic and foreign banks aggregating $24,517, including short-term and long-term lines of credit of $5,616 and $18,901, 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 due in 2002. The LIBOR interest rate was 5.7 percent at September 30, 1998 and 1997. The FIBOR interest rate was 3.5 percent and 3.3 percent at September 30, 1998 and 1997, 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 6.6 percent, and expires June 21 17, 2002. The second agreement effectively fixes the interest rate on another notional $3,000 of variable LIBOR rate debt at 6.7 percent, and expires September 19, 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, 1998 interest rate levels, the swaps require the company to make payments to the bank and would cost the company approximately $405 to terminate. Following is an analysis of net financing expenses:
1998 1997 1996 ---- ---- ---- Interest expense $ 1,137 $ 1,315 $ 957 Investment income (97) (170) (138) ------- ------- ------- $ 1,040 $ 1,145 $ 819 ======= ======= =======
22 NOTE E - 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. 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 $(138), $95 and $91 for 1998, 1997 and 1996, respectively. At September 30, 1998, the company had obligations under foreign exchange forward contracts to sell 2,100,000 Deutsche marks, 170,000 British pounds, 2,200,000 French francs at various dates through December 1998. The total U.S. dollar equivalent amount of these foreign exchange contracts of $1,849 includes an unrecognized loss of $91 at September 30, 1998. 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 1,500,000 Deutsche marks at a rate of 1.87 per U.S. dollar and the obligation, if called, to deliver 1,500,000 Deutsche marks at a rate of 1.736 per U.S. dollar. The options expire in November 1998. At September 30, 1998, the option amounts were in excess of the anticipated revenue they were intended to hedge, and therefore, the Consolidated Statement of Income includes a loss of $34 related to the value of the options. 23 NOTE F - EMPLOYEE BENEFIT PLANS The company has non-contributory defined benefit pension plans covering all of its eligible 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:
1998 1997 1996 ---- ---- ---- Service cost-benefits earned during the period $ 945 $ 733 $ 652 Interest cost on projected benefit obligation 1,356 1,192 1,048 Actual return on assets (3,791) (3,470) (2,471) Net amortization and deferral 2,073 2,115 1,328 ------- ------- ------- Net periodic pension cost $ 583 $ 570 $ 557 ======= ======= =======
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, 1998 and 1997:
Non-U.S. United States Plan Plan Overfunded Underfunded* --------------------- ------------ 1998 1997 1998 1997 ---- ---- ---- ---- Actuarial present value of benefit obligations: Vested benefit obligation $ 13,105 $ 11,459 $ 3,181 $ 1,694 ======== ======== ======== ======== Accumulated benefit obligation $ 14,480 $ 12,094 $ 3,307 $ 1,917 ======== ======== ======== ======== Projected benefit obligation $ 16,999 $ 14,763 $ 4,098 $ 2,777 Plan assets at fair value $ 23,500 $ 19,474 $ 655 $ 498 -------- -------- -------- -------- Projected benefit obligation (in excess of) or less than plan assets $ 6,501 $ 4,711 $ (3,443) $ (2,279) Unrecognized net (gain) loss (5,146) (3,824) 474 (331) Unrecognized prior service cost 1,470 1,149 63 64 Unrecognized initial net (asset) obligation (314) (358) 201 211 -------- -------- -------- -------- Prepaid pension assets (pension liability) recognized in the Consolidated Balance Sheet $ 2,511 $ 1,678 $ (2,705) $ (2,335) ======== ======== ======== ========
* The company has purchased indirect insurance of $2,776 which is expected to be available to the company as non-U.S. pension liabilities of $2,705 mature. The caption, "Other assets," on the company's Consolidated Balance Sheet includes $2,776 and $2,409 at September 30, 1998 and 1997, respectively, for this asset. In accordance with Statement of 24 Financial 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:
1998 1997 1996 ---- ---- ---- United States Pension Plan: Discount rates 7.25% 7.5% 7.5% Expected long-term rate of return on plan assets 8.25% 8.5% 8.5% Rate of increase in compensation levels 5.0% 5.5% 5.5% Non-U.S. Pension Plan: Discount rates 6.0% 6.25% 6.5% Expected long-term rate of return on plan assets 7.0% 7.0% 7.0% Rate of increase in compensation levels 4.0% 3.5% 3.5%
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. United States plan assets are invested primarily in common stocks and fixed-income securities. Although there are no requirements for the company to fund the non-U.S. pension plan, the company has made contributions in the past. Non-U.S. plan assets represent employee and company contributions and are invested in a direct insurance contract payable to the individual participants. The sale of the Radiation Measurements Division's assets resulted in the termination of essentially all the Division's employees. As a result, the company recognized a gain for pension curtailment of $410 in 1998. The gain is included in the "Gain on sale of business" caption on the company's Consolidated Statement of Income. (See Note B.) In addition to the defined benefit pension plan, the company also maintains a retirement plan for all of its eligible 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 $443, $403 and $388 in 1998, 1997 and 1996, respectively. The company also has an unfunded supplemental executive retirement plan (SERP) for former key employees which includes retirement, death and disability benefits. Expense (income) recognized for these benefits was $12, $(3) and $102, for 1998, 1997 and 1996, respectively. The income recognized during 1997 was due to an officer taking early retirement 25 causing a reversal of previously accrued expense. Liabilities of $345 and $489 were accrued in the "Other long-term liabilities" caption on the company's Consolidated Balance Sheet to meet all SERP obligations at September 30, 1998 and 1997, respectively. 26 NOTE G - STOCK PLANS 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. The Compensation and Human Resources Committee of the Board of Directors administers the plans. Incentive stock options granted under the plans can not be less than the fair market price at the date of the grant with an exercise period not to exceed ten years. Such grants generally become exercisable over a four year period. The option price under nonqualified stock options 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. The 1997 Directors' Stock Option Plan provides for the issuance of 200,000 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 5,000 Common Shares at the close of each annual shareholders' meeting. The plan will expire on February 15, 2007. On February 15, 1997, the company's Board of Directors terminated the 1992 Directors' Stock Option Plan. Prior to its termination, this plan provided for the issuance of 60,000 of the company's Common Shares to non-employee Directors, with each non-employee Director automatically granted an option to purchase 600 Common Shares at the close of each annual shareholders' meeting. All options outstanding at the time of termination of the plans shall continue in full force and effect in accordance with their terms. The option price for grants under both plans is the fair market value of a Common Share on the date of grant. The options under both plans are exercisable six months and one day after the date of grant and will expire after ten years. 27 The activity under all option plans was as follows:
Outstanding Exercisable ----------- ----------- Weighted Weighted Average Average Number Exercise Number Exercise Of Shares Price Of Shares Price --------- ----- --------- ----- September 30, 1995 985,988 $ 7.23 303,030 $ 5.74 Options granted at fair market value 359,400 9.93 Options granted below fair market value 14,560 - Options exercised (149,373) 4.90 Options forfeited (38,586) 8.01 -------------------------------------------------------------- September 30, 1996 1,171,989 8.24 400,044 5.45 Options granted at fair market value 310,000 11.18 Options granted above fair market value 1,100 11.54 Options granted below fair market value 82,528 - Options exercised (124,873) 1.70 Options forfeited (37,212) 9.23 -------------------------------------------------------------- September 30, 1997 1,403,532 8.97 593,607 7.01 Options granted at fair market value 280,050 5.70 Options granted above fair market value 38,204 10.18 Options granted below fair market value 30,322 4.83 Options exercised (111,228) 5.37 Options forfeited (264,011) 9.47 -------------------------------------------------------------- September 30, 1998 1,376,869 $ 8.44 707,844 $ 7.93 ==============================================================
The options outstanding at September 30, 1998 have been segregated into ranges for additional disclosure as follows:
- ---------------------------------------------------------------------------- ---------------------------------- Outstanding Exercisable - ----------------------- ----------------- ---------------- ----------------- ---------------- ----------------- Weighted Average Remaining Weighted Average Weighted Average Range of Exercise Number of Shares Contractual Exercise Number of Shares Exercise Prices Outstanding Life Price Exercisable Price - ----------------------- ----------------- ---------------- ----------------- ---------------- ----------------- $4.00 - $5.00 224,449 4.93 years $ 4.75 224,449 $ 4.75 $5.06 286,682 8.99 years $ 5.06 51,532 $ 5.06 $5.19 - $9.06 156,238 4.44 years $ 6.97 155,088 $ 6.97 $9.25 257,700 7.40 years $9.25 139,100 $ 9.25 $9.88 - $12.75 264,100 8.96 years $11.35 1,500 $12.75 $13.69 - $15.69 187,700 6.73 years $14.02 136,175 $13.93 - ----------------------- ----------------- ---------------- ----------------- ---------------- ----------------- 1,376,869 7.20 years $ 8.44 707,844 $ 7.93 - ----------------------- ----------------- ---------------- ----------------- ---------------- -----------------
28 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 in the case with U.S. employees, must authorize monthly payroll deductions. Non-U.S. employees submit their contribution at the end of the plan year. The purchase price of the Common Shares is 85 percent of the lower market price at the beginning or ending of the calendar plan year. A total of 750,000 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 shares are fully subscribed. No compensation expense is recorded in connection with the plan. During 1998 and 1997, 108,602 and 94,227 shares had been purchased by employees at prices of $7.38 and $7.86 per share, respectively. PRO FORMA DISCLOSURE As of September 30, 1998, the company had various stock-based compensation plans that are described above. The company has elected to continue to account for stock issued to employees according to APB Opinion 25, "Accounting for Stock Issued to Employees" and its related interpretations. Under APB No. 25, no compensation expense is recognized in the company's consolidated financial statements for employee stock options except in certain cases when stock options are granted below the market price of the underlying stock on the date of grant. During 1998 and 1997, $260 and $187, respectively, was recognized in compensation expense for such grants. Alternatively, under the fair value method of accounting provided for under Statement of Financial Accounting Standards No 123, "Accounting for Stock-Based Compensation" (SFAS 123), the measurement of compensation expense is based on the fair value of employee stock options or purchase rights at the grant or right date and requires the use of option pricing models to value the options. The weighted average fair value of options granted under stock options plans in 1998, 1997 and 1996 was $2.29, $4.97 and $4.34, respectively. The fair value of options at the date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:
1998 1997 1996 ---- ---- ---- Expected life (years) 4.4 5.0 4.6 Risk-free interest rate 4.8% 6.0% 6.4% Volatility 41.5% 41.5% 41.5% Dividend yield 1.3% 1.3% 1.3%
29 The weighted average fair value of purchase rights granted under the 1993 Employee Stock Purchase Plan in 1998, 1997 and 1996 was $2.95, $3.05 and $5.49, respectively. The fair value of employees' purchase rights was estimated using the Black-Scholes model with the following assumptions:
1998 1997 1996 ---- ---- ---- Expected life (years) 1.0 1.0 1.0 Risk-free interest rate 5.1% 5.5% 4.9% Volatility 41.5% 41.5% 41.5% Dividend yield 1.3% 1.3% 1.3%
The pro forma impact to both net income and earnings per share from calculating stock-related compensation expense consistent with the fair value alternative of SFAS 123 is indicated below:
1998 1997 1996 ------- ---- ------- Pro forma net income (loss) $4,226 $214 $(5,704) Pro forma earnings (loss) per share: Basic $0.54 $.03 $(0.77) Diluted $0.52 $.03 $(0.77)
For purposes of the pro forma disclosures, the estimated fair value of the stock-based awards is amortized over the vesting period. The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 is applicable only to awards made after fiscal 1995. 30 NOTE H - INCOME TAXES For financial reporting purposes, income (loss) before income taxes includes the following components:
1998 1997 1996 ---- ---- ---- United States $4,923 $ (892) $(9,383) Non-U.S. 3,266 2,103 3,059 ------ ------ ------- $8,189 $1,211 $(6,324) ====== ====== ======= The provision (benefit) for income taxes is as follows: 1998 1997 1996 ---- ---- ---- Current: Federal $1,416 $ 275 $ 1,330 Non-U.S. 1,622 1,091 1,513 State and local 169 195 45 ------ ------ ------- Total current 3,207 1,561 2,888 ------ ------ ------- Deferred: Federal 310 (1,124) (3,800) Non-U.S. (332) (16) 28 ------ ------ ------- Total deferred (22) (1,140) (3,772) ------ ------ ------- Total provision (benefit) $3,185 $ 421 $ (884) ====== ====== =======
Differences between the statutory United States federal income tax and the effective income tax rates are as follows:
1998 1997 1996 ---- ---- ---- Federal income tax at statutory rate $2,784 $ 412 $(2,150) State and local income taxes 111 129 30 Tax on non-U.S. income and tax credits (333) (945) (884) Non-deductible amortization -- -- 2,123 Terminated life insurance contract -- 877 -- Adjustment for prior years' taxes 480 -- -- Other 143 (52) (3) ------ ------ ------- Effective income tax (benefit) $3,185 $ 421 $ (884) ====== ====== =======
31 Significant components of the company's deferred tax assets and liabilities as of September 30, 1998 and 1997 are as follows:
DEFERRED TAX ASSETS: 1998 1997 - -------------------- ---- ---- Capitalized research and development $5,707 $6,589 Depreciation 949 680 Warranty 627 494 Intangibles 965 832 State and local taxes 1,685 1,471 Alternative minimum tax credit carryforwards 1,151 1,276 Deferred compensation 693 558 Inventory 1,673 1,597 General business credit carryforwards 1,013 1,058 Other 1,203 919 ------ ------ Total deferred tax assets 15,666 15,474 ------ ------ Valuation allowance for deferred tax assets (3,127) (3,166) ------ ------ 12,539 12,308 ------ ------ DEFERRED TAX LIABILITIES: Pension contribution 768 818 Other 429 170 ------ -------- Total deferred tax liabilities 1,197 988 ------ -------- Net deferred tax assets $11,342 $ 11,320 ======= ========
The valuation allowance relates to tax credit carryforwards and certain state tax benefits which will likely not be realized. The current year decrease relates primarily to tax credits and capital loss carryovers. At September 30, 1998, the Company had tax credit carryforwards as follows:
Year Expiration Commences --------------- General business credit $1,013 2005 Alternative minimum tax credit 1,151 Indefinite
32 NOTE I - LEASES The company leases certain equipment under capital leases. Manufacturing, laboratory and office equipment includes $495 and $526 of leased equipment at September 30, 1998 and 1997, respectively. Accumulated depreciation includes $483 and $510 at September 30, 1998 and 1997, 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 $95 in 1998, $84 in 1997 and $245 in 1996) for 1998, 1997 and 1996 was $2,165, $2,658 and $2,178, respectively. Future minimum lease payments under operating leases are: 1999 $1,971 2000 1,763 2001 1,313 2002 775 2003 551 After 2003 2,103 ------ Total minimum operating lease payments $8,476 ======
33 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:
1998 1997 1996 ---- ---- ---- NET SALES, INCLUDING INTERCOMPANY SALES: United States (1) $100,818 $106,217 $ 98,232 Europe 33,694 31,606 37,799 Intercompany (16,736) (14,528) (17,085) -------- -------- -------- Net sales $117,776 $123,295 $118,946 ======== ======== ======== INCOME (LOSS) BEFORE INCOME TAXES (2): United States $ 7,024 $ 1,889 $ (7,372) Europe 3,415 2,236 3,180 Adjustments/eliminations (64) (219) (34) -------- -------- -------- 10,375 3,906 (4,226) -------- -------- -------- Corporate expenses (1,146) (1,550) (1,279) Net financing expenses (1,040) (1,145) (819) -------- -------- -------- Income (loss) before income taxes $ 8,189 $ 1,211 $ (6,324) ======== ======== ======== IDENTIFIABLE ASSETS: United States $ 40,798 $ 61,264 $ 54,507 Europe 10,529 9,120 9,720 Adjustments/eliminations (1,955) (4,979) (5,651) -------- -------- -------- 49,372 65,405 58,576 Corporate assets 21,645 13,708 15,258 -------- -------- -------- Total assets $ 71,017 $ 79,113 $ 73,834 ======== ======== ========
(1) U.S. sales include $23,429, $24,186 and $21,295 in export sales to markets other than Europe in 1998, 1997 and 1996, respectively. (2) 1998 income before income taxes includes $2,852 in the U.S. for the gain on the sale of a business. 1998, 1997 and 1996 income (loss) before income taxes includes special charges (benefit) of $1,236, $775 and $11,003 in the U.S., and $(64), $(4) and $642 in Europe, respectively. (See Note C.) 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. 34 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. NOTE L - SUBSEQUENT EVENTS On November 9, 1998, the company sold certain assets used in the operation of its Quantox oxide monitoring product line to KLA-Tencor Corporation. The asset categories include inventory, machinery, equipment and other tangible personal property. The sale was effective as of October 31, 1998. The Quantox product line accounted for approximately 10 percent of the company's fiscal 1998 net sales. The gain on the sale, which will be recorded in the company's first quarter of fiscal 1999, is expected to be $0.35 to $0.40 per share, before giving effect to the stock repurchase tender offer discussed below. On November 12, 1998, the company commenced a tender offer to purchase up to 2,000,000 of its Common Shares, or approximately 40 percent of Common Shares outstanding (25 percent of Class B and Common Shares). The offer was conducted through a procedure commonly known as a "Dutch Auction" in which shareholders could tender their shares at prices not in excess of $7.00 nor less than $5.75 per share. The offer will expire on December 10, 1998, unless extended by the company. Additionally, the company intends to implement an ongoing open market stock repurchase program. 35 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Keithley Instruments, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Keithley Instruments, Inc. and its subsidiaries at September 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Cleveland, Ohio November 23, 1998 36 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, PricewaterhouseCoopers 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 PricewaterhouseCoopers 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 Mark J. Plush Chairman, President Vice President and Chief and Chief Executive Officer Financial Officer 37 Stock Market Price and Cash Dividends The company's Common Shares trade on the New York 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. There is no established public trading market for the company's Class B Common Shares; however, they are readily convertible on a one-for-one basis into Common Shares.
Cash Dividends Cash Dividends Per Class B Fiscal 1998 High Low Per Common Share Common Share - ----------- ---- --- ---------------- ------------ First Quarter $12 3/8 $8 1/8 $ .031 $ .025 Second Quarter 9 1/2 7 1/2 .031 .025 Third Quarter 8 9/16 7 5/16 .031 .025 Fourth Quarter 7 6/16 5 .031 .025 Fiscal 1997 - ----------- First Quarter $11 1/8 $7 3/8 $ .031 $ .025 Second Quarter 9 3/8 7 3/4 .031 .025 Third Quarter 12 7 5/8 .031 .025 Fourth Quarter 12 3/8 10 1/8 .031 .025
38 Unaudited Quarterly Results of Operations (In Thousands of Dollars Except for Per-Share Data)
First Second Third Fourth ----- ------ ----- ------ Fiscal 1998 - ----------- Net sales $ 31,623 $ 29,696 $ 28,578 $ 27,879 Gross profit 18,584 16,688 16,443 15,729 Gain on sale of business -- -- -- 2,852 Income before income taxes (1) (2) 1,636 1,162 996 4,395 Net income (1) (2) (3) 1,096 779 667 2,462 Diluted earnings per share (1) (2) (3) .14 .10 .08 .31 FISCAL 1997 Net sales $ 27,886 $ 28,148 $ 32,410 $ 34,851 Gross profit 16,132 16,402 18,514 20,323 Income (loss) before income taxes (1) (2) (1,171) (464) 1,088 1,758 Net income (loss) (1) (2) (838) (338) 761 1,205 Diluted earnings (loss) per share (1) (2) (.11) (.04) .10 .15 (1) Includes special charges as follows: 1998 Special charges pretax $ -- $ 335 $ -- $ 837 1998 Special charges per share -- .03 -- .06 1997 Special charges pretax 58 375 306 32 1997 Special charges per share -- .03 .02 --
(2) The third and fourth quarter of fiscal 1998 include pretax charges of $663, or $.06 per share, and $547, or $.03 per share, respectively, for severance and other officer retirement expenses. The fourth quarter of fiscal 1998 includes pretax income of $2,852, or $.22 per share, for the gain on the sale of a business. The fourth quarter of fiscal 1997 includes pretax charges of $512, or $.04 per share, for officer retirement expenses. (3) The fourth quarter of fiscal 1998 includes a charge for prior years' taxes of $480, or $.06 per share. 39 Eleven Year Summary (In Thousands Of Dollars Except For Per-Share Data)
For the year ended September 30, 1998 1997 1996 1995 1994 1993(c) - -------------------------------------------------------------------------------------------------------------------------------- Operating Results Net sales $ 117,776 123,295 118,946 109,574 89,248 91,146 Income (loss) before income taxes and cumulative effect of accounting change 8,189 1,211 (6,324) 6,422 124 5,530 Net income (loss) 5,004 790 (5,440) 4,914 907 4,784 Basic earnings (loss) per share (a) 0.64 0.10 (0.74) 0.68 0.13 0.68 Diluted earnings (loss) per share (a) (b) 0.62 0.10 (0.74) 0.66 Common Stock Information (a) Cash dividends per Common Share 0.125 0.125 0.125 0.106 0.100 0.100 Cash dividends per Class B Common Share 0.100 0.100 0.100 0.085 0.080 0.080 Weighted average number of shares outstanding- diluted (in thousands) (b) 8,065 7,867 7,360 7,476 7,088 7,061 At fiscal year-end: Dividend payout ratio (e) 19.5% 125.0% -- 15.6% 76.9% 14.7% Price/earnings ratio (e) 8.2 120.0 -- 23.3 40.4 7.4 Shareholders' equity per share $ 4.92 4.26 4.26 5.11 4.50 4.45 Closing market price $ 5.063 12.000 8.875 14.938 5.250 5.000 Balance Sheet Data Total assets $ 71,017 79,113 73,834 66,109 54,410 52,413 Current ratio 1.9 1.9 1.7 2.0 1.9 2.2 Total debt $ 6,099 17,458 13,369 6,113 4,816 6,518 Total debt-to-capital 13.6% 34.8% 29.6% 14.2% 13.1% 17.2% Shareholders' equity $ 38,742 32,683 31,756 36,902 31,946 31,415 Other Data Return on average shareholders' equity 14.0% 2.5% -15.8% 14.3% 2.9% 16.0% Return on average total assets 6.7% 1.0% -7.8% 8.2% 1.7% 9.1% Return on net sales 4.2% 0.6% -4.6% 4.5% 1.0% 5.2% Number of employees 564 693 716 659 625 625 Sales per employee $ 187.4 175.0 173.0 170.7 142.8 139.8 Cash flow Noncash charges to income (d) $ 4,709 3,390 7,064 2,573 1,346 1,849 Net cash provided by (used in) operating activities $ 13,033 (1,011) 2,600 2,457 6,641 6,289 Ten-year compound annual growth rate Net sales 5.0% 7.9% 9.6% 8.8% 7.0% 10.0% Net income (e) -0.8% -13.3% -- 5.7% -14.2% 9.1% For the year ended September 30, 1992 1991 1990 1989 1988 - ----------------------------------------------------------------------------------------------------------- Operating Results Net sales 94,666 99,497 100,593 88,728 72,282 Income (loss) before income taxes and cumulative effect of accounting change (10,420) 6,816 5,675 7,311 8,204 Net income (loss) (12,453) 4,233 3,378 4,131 5,414 Basic earnings (loss) per share (a) (1.77) 0.60 0.48 0.59 0.78 Diluted earnings (loss) per share (a) (b) Common Stock Information (a) Cash dividends per Common Share 0.100 0.094 0.089 0.082 0.058 Cash dividends per Class B Common Share 0.080 0.075 0.071 0.066 0.046 Weighted average number of shares outstanding- diluted (in thousands) (b) 7,046 7,026 7,014 6,994 6,974 At fiscal year-end: Dividend payout ratio (e) -- 15.7% 18.5% 13.9% 7.4% Price/earnings ratio (e) -- 10.1 8.5 11.0 11.5 Shareholders' equity per share 4.05 5.85 5.40 4.88 4.37 Closing market price 4.563 6.063 4.063 6.500 8.938 Balance Sheet Data Total assets 53,160 66,637 69,205 69,917 46,602 Current ratio 2.3 2.1 2.3 2.7 2.4 Total debt 8,978 10,506 16,562 22,419 2,027 Total debt-to-capital 23.9% 20.3% 30.4% 39.6% 6.2% Shareholders' equity 28,530 41,129 37,870 34,216 30,518 Other Data Return on average shareholders' equity -35.8% 10.7% 9.4% 12.7% 19.0% Return on average total assets -20.8% 6.2% 4.9% 7.1% 11.9% Return on net sales -13.2% 4.3% 3.4% 4.7% 7.5% Number of employees 679 716 750 742 579 Sales per employee 135.7 135.7 134.8 134.3 131.2 Cash flow Noncash charges to income (d) 15,185 4,325 6,649 4,234 3,062 Net cash provided by (used in) operating activities 4,475 9,399 9,111 4,592 6,812 Ten-year compound annual growth rate Net sales 11.1% 12.8% 13.7% 16.4% 17.9% Net income (e) -- 39.7% 10.4% 12.5% 21.2%
(a) Share data adjusted for two-for-one stock split in November 1995. (b) Represents diluted shares for 1995 - 1998 and basic shares prior to 1995. (c) Includes a benefit for the cumulative effect of adopting FAS 109 of $1,447 or $.21 per share. (d) Noncash charges to income include depreciation, amortization, deferred compensation, deferred taxes, noncash special charges and the cumulative effect of adopting FAS 109. (e) These ratios are not meaningful in 1992 and 1996 due to reported net losses. EX-21 5 EXHIBIT 21 1 Exhibit 21 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 3 Allee des Garays, BP 60 91122 Palaiseau Cedex GERMANY: Keithley Instruments GmbH Landsberger Strasse 65 D-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 NETHERLANDS: Keithley Instruments BV Avenlingen West 49 4202 MS Gorinchem (Amsterdam) SWITZERLAND: Keithley Instruments SA Kriesbachstrasse 4 8600 Dubendorf (Zurich) EX-23 6 EXHIBIT 23 1 Exhibit 23 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 23, 1998 appearing on page 32 of the Annual Report to Shareholders which is incorporated by reference 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 18 of this Form 10-K. PricewaterhouseCoopers LLP Cleveland, Ohio December 21, 1998 EX-27 7 EXHIBIT 27
5 1,000 US DOLLARS YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 1 9,321 0 18,290 704 11,650 42,327 39,334 24,723 71,017 21,887 6,099 0 0 197 38,545 71,017 117,776 117,776 50,332 50,332 13,139 0 1,040 8,189 3,185 5,004 0 0 0 5,004 0.64 0.62
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