1
13. Annual report to security-holders
Consolidated Statement of Income
For the years ended September 30, 1996, 1995 and 1994
(In Thousands of Dollars Except for Per-Share Data)
1996 1995 1994
-------- -------- --------
Net sales $118,946 $109,574 $89,248
-------- -------- -------
Cost of goods sold 46,140 42,372 35,259
Selling, general and administrative expenses 47,695 43,945 37,765
Product development expenses 18,337 15,385 11,551
Purchased technology -- -- 3,300
Special charges 11,645 -- (42)
Amortization of intangible assets 634 464 470
Net financing expenses 819 986 821
-------- -------- -------
Income (loss) before income taxes (6,324) 6,422 124
Income taxes (benefit) (884) 1,508 (783)
-------- -------- -------
Net income (loss) $ (5,440) $ 4,914 $ 907
======== ========= =========
Net income (loss) per share $ (.70) $ .66 $ .13
======== ========= =========
Fully diluted net income (loss) per share $ (.70) $ .64 $ .13
======== ========= =========
The accompanying notes are an integral part of the financial statements.
Consolidated Statement of Earnings
Reinvested in the Business
For the years ended September 30, 1996, 1995 and 1994
(In Thousands of Dollars Except for Per-Share Data)
1996 1995 1994
-------- -------- --------
Earnings reinvested in the business at
beginning of year $32,157 $27,943 $27,685
Net income (loss) (5,440) 4,914 907
Cash dividends-Common Shares ($.125 per
share in 1996, $.106 per share in 1995
and $.10 per share in 1994) (568) (450) (410)
Cash dividends-Class B Common Shares
($.10 per share in 1996, $.085 per share
in 1995 and $.08 per share in 1994) (284) (250) (239)
------- ------- -------
Earnings reinvested in the business at end of
year $25,865 $32,157 $27,943
======= ======= =======
The accompanying notes are an integral part of the financial statements.
2
Consolidated Balance Sheet
September 30, 1996 and 1995
(In Thousands of Dollars Except for Per-Share Data)
1996 1995
------- --------
Assets
Current assets:
Cash and cash equivalents $ 3,995 $ 3,890
Accounts receivable and other, net of allowances
of $630 in 1996 and $357 in 1995 18,538 20,856
Inventories:
Raw materials 8,255 4,917
Work in process 4,880 3,981
Finished products 4,291 3,762
------- -------
Total inventories 17,426 12,660
Deferred income taxes 3,082 1,627
Prepaid expenses 699 663
------- -------
Total current assets 43,740 39,696
------- -------
Property, plant and equipment, at cost:
Land 1,325 426
Buildings and leasehold improvements 13,310 9,346
Manufacturing, laboratory and office equipment 23,238 22,755
------- -------
37,873 32,527
Less-Accumulated depreciation and amortization 22,531 21,984
------- -------
Total property, plant and equipment, net 15,342 10,543
------- -------
Intangible assets, net of accumulated amortization
of $29,708 in 1996 and $23,337 in 1995 2,064 6,201
Other assets 12,688 9,669
------- -------
Total assets $73,834 $66,109
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Current installments on long-term debt $ 61 $ 71
Accounts payable 8,162 6,759
Accrued payroll and related expenses 4,525 6,142
Other accrued expenses 9,358 4,575
Income taxes payable 2,955 2,580
------- -------
Total current liabilities 25,061 20,127
------- -------
Long-term debt 13,308 6,042
Other long-term liabilities 3,655 2,992
Deferred income taxes 54 46
Shareholders' equity:
Common Shares, stated value $.025:
Authorized - 30,000,000; issued and outstanding -
4,656,600 in 1996 and 4,308,976 in 1995 116 108
Class B Common Shares, stated value $.025:
Authorized - 9,000,000; issued and outstanding -
2,794,278 in 1996 and 2,918,996 in 1995 70 73
Capital in excess of stated value 5,293 3,981
Earnings reinvested in the business 25,865 32,157
Cumulative translation adjustment and other 548 583
Common shares held in treasury, at cost (136) --
------- -------
Total shareholders' equity 31,756 36,902
------- -------
Total liabilities and shareholders' equity $73,834 $66,109
======= =======
The accompanying notes are an integral part of the financial statements.
3
Consolidated Statement of Cash Flows
For the years ended September 30, 1996, 1995 and 1994
(In Thousands of Dollars)
1996 1995 1994
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ (5,440) $ 4,914 $ 907
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 3,419 3,106 2,902
Amortization of intangible assets 634 464 470
Deferred income taxes (3,772) (1,217) (2,216)
Deferred compensation 211 220 232
Special charges 11,452 -- (42)
Change in current assets and liabilities:
Accounts receivable and other 2,317 (6,108) 241
Inventories (5,275) (2,864) (620)
Prepaid expenses (57) 289 219
Other current liabilities (143) 4,660 3,297
Other operating activities (746) (1,007) 1,251
-------- -------- --------
Net cash provided by operating activities 2,600 2,457 6,641
-------- -------- --------
Cash flows from investing activities:
Payments for property, plant and equipment (8,539) (2,695) (3,591)
Other investing activities 71 69 81
Acquisitions of businesses (1,408) -- --
-------- -------- --------
Net cash used in investing activities (9,876) (2,626) (3,510)
-------- -------- --------
Cash flows from financing activities:
Net decrease in short-term debt (10) (35) (496)
Borrowing (repayment) of long-term debt 7,385 1,367 (1,124)
Proceeds from sale of Common Shares 974 520 85
Cash dividends (852) (700) (649)
-------- -------- --------
Net cash provided by (used in) financing activities 7,497 1,152 (2,184)
-------- -------- --------
Effect of changes in foreign currency exchange
rates on cash (116) 195 113
-------- -------- --------
Increase in cash and cash equivalents 105 1,178 1,060
Cash and cash equivalents at beginning of period 3,890 2,712 1,652
-------- -------- --------
Cash and cash equivalents at end of period $ 3,995 $ 3,890 $ 2,712
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Income taxes $ 2,201 $ 1,419 $ 665
Interest 711 814 813
Supplemental schedule of noncash investing activities
The company's acquisitions included the following
noncash transactions:
Fair value of assets acquired $ 2,525 $ -- $ --
Cash paid (1,408) -- --
Common Shares issued (201) -- --
-------- -------- --------
Liabilities assumed $ 916 $ -- $ --
======== ======== ========
Disclosure of accounting policy
For purposes of this statement, the company considers all highly liquid
investments with maturities of three months or less when purchased to be
cash equivalents. Cash flows resulting from hedging transactions are
classified in the same category as the cash flows from the item being
hedged.
The accompanying notes are an integral part of the financial statements.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Percent of net sales for the years ended September 30, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Net sales 100.0 100.0 100.0
Cost of goods sold 38.8 38.7 39.5
Selling, general and administrative expenses 40.1 40.1 42.3
Product development expenses 15.4 14.0 13.0
Purchased technology -- -- 3.7
Special charges 9.8 -- --
Amortization of intangible assets 0.5 0.4 0.5
Net financing expenses 0.7 0.9 0.9
----- ------ -----
Income (loss) before income taxes (5.3) 5.9 0.1
Income taxes (benefit) (0.7) 1.4 (0.9)
----- ------ -----
Net income (loss) (4.6) 4.5 1.0
===== ====== =====
RESULTS OF OPERATIONS (IN THOUSANDS OF DOLLARS EXCEPT FOR PER-SHARE DATA)
The net loss of $5,440, or $.70 per share, resulted from special charges
totaling $11,645 pretax, or $1.23 per share, due primarily to the company's
decision to relocate the Keithley MetraByte operation to Cleveland. Excluding
special charges, net income was $4,185, or $.53 per share in 1996 versus
$4,914, or $.64 per share on a fully diluted basis in 1995, and $907, or $.13
per share in 1994. The above figures also include expenses to develop
Quantox(R), the company's first product based on the technology licensed from
IBM in 1994, as well as to explore other new business opportunities. These
start-up losses totaled approximately $10,800 and $6,900 pretax in 1996 and
1995, respectively. Net income in 1994 included pretax costs of $3,300 to
license the technology, approximately $1,400 to begin developing the technology
and $925 in other non-recurring charges. Earnings before taxes and special
charges excluding the company's new business losses were approximately $16,100,
$13,300 and $4,800 in 1996, 1995 and 1994, respectively.
For the second consecutive year, the company reported record net sales. Net
sales of $118,946 for 1996 were up 9% from $109,574 in 1995. Increased demand
for the company's instruments used in production test and research and for
those products serving the semiconductor industry accounted for the increase.
Net sales were $89,248 in 1994, with the increase from 1994 to 1995 due mainly
to increased sales demand for the company's products serving the semiconductor
industry. Geographically, domestic and
5
export sales, particularly those to the Pacific Basin region, have increased
for the last two years. Net sales in Europe were flat from 1995 to 1996 and
increased from 1994 to 1995.
Cost of goods sold as a percentage of net sales was 38.8 percent in 1996, 38.7
percent in 1995 and 39.5 percent in 1994. Foreign exchange hedging had no
effect on cost of goods sold as a percentage of net sales in 1996 versus an
increase of 0.2 percentage points in 1995. The slight increase from 1995 to
1996 resulted from increased sales of lower gross margin products offset by
increased manufacturing efficiencies due to higher sales volume. Gross margins
are expected to decrease to the extent sales include a greater mix of Quantox.
Gross margins increased from 1994 to 1995 due mainly to an 11 percent weakening
of the U.S. dollar. The U.S. dollar strengthened less than 1 percent from 1995
to 1996 and had a minimal effect on changes in costs.
Selling, general and administrative expenses increased $3,750 or 9 percent to
$47,695 in 1996 from $43,945 in 1995, and increased $6,180 or 16 percent in
1995 from $37,765 in 1994. As a percentage of net sales, they were 40.1
percent in 1996 and 1995 versus 42.3 percent in 1994. The increases in
expenses were due mostly to higher marketing costs associated with new business
initiatives and the introduction of new products from existing businesses,
higher commissions due to increased sales, and from 1994 to 1995, an 11 percent
weakening of the U.S. dollar.
Product development expenses increased $2,952 or 19 percent to 15.4 percent of
net sales in 1996 from 14.0 percent in 1995, and increased $3,834 or 33 percent
in 1995 from 13.0 percent of net sales in 1994. The increase from 1995 to 1996
was due to increased personnel and development costs associated with the
company's next generation parametric test system, the Model S600, introduced in
the second quarter of fiscal 1996, the development of new bench-top instrument
products and the exploration of other new business opportunities. Almost
two-thirds of the increase from 1994 to 1995 was due to additional spending to
develop the Quantox product. The remainder of the increase from 1994 to 1995
was incurred primarily to develop other products for the company's
semiconductor customers.
Purchased technology of $3,300 in 1994 represents technology rights acquired
from International Business Machines (IBM). Per the provisions of the license
agreement with IBM, the company will also pay future royalties based on
specified sales levels. There is no minimum royalty payment required; however,
$3,000 must be paid by May 26, 2000 to
6
retain exclusive rights to the technology. In fiscal 1996, $79 was expensed
for royalties to IBM.
Special charges of $11,645 pretax, or $1.23 per share, recorded in 1996
primarily represent the expected costs of closing the Keithley MetraByte
operation located in Taunton. Since the acquisition of Keithley MetraByte in
1989, sales have declined for the operation and earnings have been poor. In
September 1996, it became apparent to management that due to the lack of
growth, the business could not support stand-alone operations. Therefore
management made the decision to move the Taunton, Massachusetts operation to
Cleveland, Ohio. The Keithley MetraByte operation will be combined with the
company's Network Measurements organization to form a new business. The
special charges comprise the following: a noncash charge of $5,737 to write
off the remaining goodwill; $3,433 for severance, outplacement and other
personnel costs related to approximately 130 employees to be terminated; $998
for lease and related costs, and $835 in noncash charges related to impaired
inventory and equipment. Also included in special charges is $642 representing
an accrual for costs to be incurred over the next five years under two
operating subleases at the company's European facilities. Of the special
charges, noncash charges total $6,572; $194 of severance related costs were
paid in fiscal 1996, leaving $4,538 accrued in the Consolidated Balance Sheet
under the category "Other accrued expenses" and $341 accrued under the category
"Other long-term liabilities." The closing of the Taunton facility and
relocation to Cleveland is expected to be complete by July 1, 1997. It is
anticipated that once the relocation is complete, employment for the operation
will be reduced by a net of over 50 people. During 1997, management believes
that approximately $2,000 to $2,500 will be saved by the relocation in product
development and selling, general and administrative expenses; however, certain
costs to move the operation and hire replacements (not included in the special
charges incurred in 1996) will approximate $1,000 to $1,500. Additionally,
amortization expense will be reduced by $464 per year due to the write off of
goodwill. Any resultant increase in earnings during fiscal 1997 will be
dependent upon sales volume.
Amortization expense of $634 in 1996 increased $170 from $464 in 1995. This is
due to the amortization of goodwill associated with the acquisitions of
International Sensor Technology in the first quarter of fiscal 1996 and Turner
Engineering Technology in the second quarter of fiscal 1996. Neither
acquisition had a material effect on net sales or earnings for the year.
7
Net financing expenses decreased $167 to $819 in 1996 from $986 in 1995, and
1995 increased $165 from $821 in 1994. Despite higher average debt levels in
1996, the decrease from 1995 was due to lower interest rates on the variable
rate debt and the absence of certain fees related to the pay-off of a higher
interest rate loan in the second quarter of 1995. The increase from 1994 to
1995 was due mainly to higher average debt levels in the later year.
The company recorded an income tax benefit of $884 in 1996, which resulted from
the company's pretax loss. The effective rate (benefit) of (14.0) percent is
less than the statutory rate principally due to the nondeductibility of the
Keithley MetraByte goodwill written off, offset by the utilization of foreign
tax credits and foreign sales corporation (FSC) benefits. The effective income
tax rate for 1995 of 23.5 percent is lower than the statutory rate due
primarily to utilization of foreign tax credits and FSC benefits. The tax
benefit recorded in 1994 also resulted from the utilization of foreign tax
credits and FSC benefits. At September 30, 1996, the company had capital loss
carryforwards of $211 and tax credit carryforwards of $2,046.
The company's financial results are affected by foreign exchange rate
fluctuations. Generally, a weakening U.S. dollar causes the price of the
company's product to be more attractive in foreign markets and favorably
impacts the company's sales and earnings. A strengthening U.S. dollar has an
unfavorable effect. This foreign exchange effect cannot be precisely isolated
since many other factors affect the company's foreign sales and earnings.
These factors include product offerings and pricing policies of the company and
its competition, whether competition is foreign or U.S. based, changes in
technology and local and worldwide economic conditions.
From time to time, the company utilizes hedging techniques designed to mitigate
the short-term effect of exchange rate fluctuations on operations and balance
sheet position by entering into forward and option currency contracts and by
borrowing in foreign currencies. The company's foreign borrowings are used as
a hedge of its net investments or of specified transactions. The company does
not speculate in foreign currencies or derivative financial instruments, and
hedging techniques do not increase the company's exposure to foreign exchange
rate fluctuations.
8
LIQUIDITY AND CAPITAL RESOURCES
In 1996, net cash provided by operating activities of $2,600 and borrowings for
long-term debt of $7,385 were used principally for investments in capital
expenditures of $8,539 and to fund $1,408 for acquisitions. The capital
expenditures included the purchase of a building and expansion of an existing
facility to support future growth from new products and new business
initiatives. Additionally, inventory levels increased $4,766 primarily due to
new products and businesses. At September 30, 1996 total debt increased to
$13,369 from $6,113 at the end of 1995. Due to the increased debt and lower
shareholders' equity resulting from the net loss, total debt-to-capital at
year-end was 29.6 percent compared to 14.2 percent last year.
The company has a $25,000 debt facility ($13,292 outstanding at September 30,
1996) that expires May 31, 1998, which provides unsecured, multi- currency
revolving credit at various interest rates based on U.S. prime, LIBOR or FIBOR.
Commitment fees of 1/4% are required on the unused portion of the first $15,000
of the revolving credit facility and of 1/8% on the remaining $10,000 of the
facility. Additionally, the company has a number of other credit facilities
aggregating $6,372. The company has interest rate swaps to fix interest rates
on $6,000 of variable rate debt.
At September 30, 1996, the company had total unused lines of credit with
domestic and foreign banks aggregating $18,080, including short-term and
long-term lines of credit of $6,372 and $11,708, respectively. Under certain
long-term debt agreements, the company is required to comply with various
financial ratios and covenants. Principal payments on long-term debt are
scheduled as follows: 1997-$61; 1998-$13,308. The company expects to
refinance the principal payment required in 1998 before it becomes due.
During 1997, the company expects to finance capital spending and working
capital requirements, including cash necessary to fund the relocation of
Keithley MetraByte to Cleveland, with cash provided by operations and long-term
borrowings. 1997 capital expenditures are expected to be below the 1996 level.
OUTLOOK
Management is optimistic about the company's long term future, but cautious
about the short term. We are encouraged by indications that the semiconductor
industry is improving, but the built-in lag in the semiconductor capital
equipment industry combined
9
with continued investments in new businesses could limit earnings to near
break-even levels through the first half of fiscal 1997.
Start-up losses from the company's new businesses are expected to decrease over
the next few years as the businesses begin to show increased revenue streams
and expenses for these businesses are reduced as a percentage of overall sales.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Information included in the Letter to Shareholders and in the Outlook section
of Management's Discussion and Analysis of Financial Condition and Results of
Operations relating to expectations as to revenues, earnings, expenses or gross
profits, as well as anticipated new product introductions, constitute
"forward-looking" statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those projected. Some of the factors that may affect future results are
discussed below.
Although the company operates in a single industry segment, certain of its
products and product lines including the Quantox unit and the company's line of
parametric testers, are sold into the semiconductor capital equipment industry.
Growth in demand for semiconductors and new technology drive the demand for new
semiconductor capital equipment. At the present time, the order growth of this
industry has contracted which adversely affects near-term revenues of the
company.
In September 1996, the company announced its intention to relocate its Keithley
MetraByte operation to Cleveland from Taunton, Massachusetts, and form a new
business. This relocation could create a decline in sales of the company's
personal computer plug-in board business for several reasons, including hiring
and training qualified personnel to assume duties of employees who will not
relocate from Taunton, and assimilating and establishing sales support and
manufacturing processes in Cleveland to sell and produce the plug-in board
products.
The company's business relies on the development of new high technology
products and services to provide solutions to customer's complex measurement
needs. This requires accurate anticipation of customers' changing needs and
emerging technology trends. The company must make long-term investments and
commit significant resources before
10
knowing whether its predictions will eventually result in products that achieve
market acceptance. The company incurs significant expenses developing new
business opportunities that may or may not result in significant sources of
revenue and earnings in the future.
In many cases the company's products compete directly with those offered by
other manufacturers. If any of the company's competitors were to develop
products or services that are more cost-effective or technically superior,
demand for the company's product offerings could slow.
The company currently has ten subsidiaries or sales offices located outside the
United States, and non-U.S. sales make up half of the company's revenue. The
company's future results could be adversely affected by several factors,
including changes in foreign currency exchange rates, changes in a country's or
region's political or economic conditions, trade protection measures, import or
export licensing requirements, unexpected changes in regulatory requirements
and natural disasters.
11
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In Thousands of Dollars Except for Per-Share Data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Keithley
Instruments, Inc. and its subsidiaries. Intercompany transactions have been
eliminated.
REVENUE RECOGNITION
Sales are recognized at time of shipment for all products.
NATURE OF OPERATIONS
The company operates in a single industry segment and is engaged in
the design, development, manufacture and marketing of complex electronic
instruments and systems. Its products provide measurement-based solutions to
semiconductor manufacturers and growth segments of the electronics and medical
industries. Engineers and scientists around the world use the company's
advanced hardware and software for process monitoring, production test and
basic research.
PRODUCT DEVELOPMENT EXPENSES
Expenditures for product development are charged to expense as
incurred. These expenses include the cost of computer software, an integral
part of certain products. Costs defined by Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed," are immaterial to the financial statements and
have been expensed as incurred. The company continually reviews the
materiality and financial statement classification of computer software
expenditures.
INVENTORIES
Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is
provided over periods approximating the estimated useful lives of the assets.
Substantially all manufacturing, laboratory and office equipment is depreciated
by the double declining balance method over periods of 3 to 10 years.
Buildings are depreciated by the straight-line method over periods of 23 to 45
years. Leasehold improvements are amortized over the shorter of the asset
lives or the terms of the leases.
12
INTANGIBLE ASSETS
Intangible assets relate to business acquisitions and are amortized on
a straight-line basis over their estimated useful lives ranging from 10 to 20
years. Management reviews the carrying value of intangible assets using an
estimated future cash flow method (undiscounted and without interest charges)
whenever events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable. At September 30, 1996, the company wrote
off the remaining goodwill associated with its acquisition of Keithley
MetraByte in 1989. (See Note B.) As a result of the write off, at September
30, 1996 the remaining intangible assets have asset lives of 10 years.
OTHER ASSETS
Included in the "Other assets" caption of the Consolidated Balance
Sheet at September 30, 1996 and 1995, were $7,152 and $4,827, respectively, in
deferred tax assets. Also included in "Other assets" were pension related
assets. (See note E.)
The "Net cash provided by operating activities" caption of the
Consolidated Statement of Cash Flows for the year ended September 30, 1994,
included proceeds of $2,503 from redeeming cash surrender value from the
company's corporate-owned life insurance program. The remaining cash surrender
value is classified in "Other assets."
OTHER ACCRUED EXPENSES
Included in the "Other accrued expenses" caption of the Consolidated
Balance Sheet at September 30, 1996 and 1995, were $1,476 and $1,522,
respectively, for commissions payable to outside sales representatives of the
company.
INCOME TAXES
Provision has been made for estimated United States and foreign
withholding taxes, less available tax credits, for the undistributed earnings
of the non-U.S. subsidiaries as of September 30, 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the reported
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
NET INCOME PER SHARE
The weighted average number of shares outstanding used in determining
net income per share was 7,822,346 in 1996, 7,476,138 (7,719,776 on a fully
diluted basis) in 1995 and 7,087,654 in 1994. Both Common Shares and Class B
Common Shares are included in calculating the weighted average number of shares
outstanding.
13
HEDGING AND RELATED FINANCIAL INSTRUMENTS
The company utilizes foreign currency borrowings and foreign exchange
forward contracts to hedge foreign exchange risks for sales denominated in
foreign currencies and net equity or unremitted foreign earnings.
To hedge sales, the company purchases foreign exchange forward contracts
to sell foreign currencies to fix the exchange rates related to near-term sales
and the company's margins. Underlying hedged transactions are recorded at
hedged rates, therefore realized and unrealized gains and losses are recorded
when the operating revenue and expenses are recorded.
To hedge equity or unremitted earnings, the company borrows foreign
currencies or purchases foreign exchange forward contracts. Realized and
unrealized after-tax gains or losses on the hedging instruments are reflected
in the cumulative translation adjustment component of shareholders' equity.
The company has entered into swap instruments to mitigate the risk of
interest rate changes. The amounts exchanged under the swap agreements are
included in the "Net financing expenses" caption of the Consolidated Statement
of Income. The estimated fair value of the swap instruments are determined
through quotes from the related financial institutions.
The company is exposed to credit loss in the event of nonperformance by
the counterparties to these financial instruments. Because the counterparties
are major financial institutions, the company does not expect such
nonperformance.
OTHER ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123), effective for fiscal years beginning after December 15, 1995. Under FAS
123, stock-based compensation expense is measured using either the intrinsic
value method, as prescribed by Accounting Principles Board Opinion No. 25, or
the fair value method described in FAS 123. Companies choosing the intrinsic
value method will be required to disclose in the footnotes to the financial
statements the pro forma impact of the fair value method on net income and
earnings per share. The company plans to implement FAS 123 in 1997 using the
intrinsic value method.
14
NOTE B - SPECIAL CHARGES AND PURCHASED TECHNOLOGY
In September 1996, it became apparent to management that due to the lack
of growth, the Keithley MetraByte business could not support stand-alone
operations. Therefore management made the decision to move the Keithley
MetraByte operation located in Taunton, Massachusetts to Cleveland, Ohio.
Special charges of $11,645 pretax, or $1.23 per share, recorded in 1996
primarily represent the expected costs of closing the Taunton operation. The
special charges are comprised of the following: a noncash charge of $5,737 to
write off the remaining goodwill; $3,433 for severance, outplacement and other
personnel costs related to approximately 130 employees to be terminated of
which 40 employees were terminated by September 30, 1996; $998 for lease and
related costs, and $835 in noncash charges related to impaired inventory and
equipment. Also included in special charges is $642 representing an accrual
for costs to be incurred over the next five years under two operating subleases
at the company's European facilities. Of the special charges, noncash charges
total $6,572; $194 of severance related costs were paid in fiscal 1996, leaving
$4,538 accrued in the Consolidated Balance Sheet under the category "Other
accrued expenses" and $341 accrued under the category "Other long-term
liabilities." The closing of the Taunton facility and relocation to Cleveland
is expected to be complete by July 1, 1997. It is anticipated that once the
relocation is complete, employment for the operation will be reduced by a net
of over 50 people. Certain costs to move the operation to Cleveland and hire
replacements (not included in the special charges incurred in 1996) will
approximate $1,000 to $1,500.
In 1994, the company expensed $3,300 to acquire the right to develop and
commercialize direct wafer measurement technology from IBM. Per the provisions
of the license agreement with IBM, the company will also pay future royalties
based on specified sales levels. There is no minimum royalty payment required;
however, $3,000 must be paid by May 26, 2000 to retain exclusive rights to the
technology.
15
NOTE C - FINANCING ARRANGEMENTS
September 30,
-------------
1996 1995
---- ----
Long-term debt:
Revolving loans with various banks with interest
due monthly; principal due May 31, 1998:
U.S. dollar denominated loans with an interest
rate of 6.0% based on LIBOR $ 11,000 $ 4,550
Deutsche mark denominated loans with an interest
rate of 3.75% based on FIBOR 2,292 1,401
Obligations under capital leases 77 162
-------- --------
13,369 6,113
Less-Current installments on long-term debt 61 71
-------- ---------
Total long-term debt $ 13,308 $ 6,042
======= =======
The company has a $25,000 debt facility ($13,292 outstanding at September
30, 1996) that expires May 31, 1998, which provides unsecured, multi-currency
revolving credit at various interest rates based on U.S. prime, LIBOR or FIBOR.
Commitment fees of 1/4% are required on the unused portion of the first $15,000
of the revolving credit facility and of 1/8% on the remaining $10,000 of the
facility. Additionally, the company has a number of other credit facilities
aggregating $6,372.
At September 30, 1996, the company had total unused lines of credit with
domestic and foreign banks aggregating $18,080, including short- term and
long-term lines of credit of $6,372 and $11,708, respectively. Under certain
long-term debt agreements, the company is required to comply with various
financial ratios and covenants. Principal payments on long-term debt are
scheduled as follows: 1997-$61; 1998-$13,308.
The LIBOR interest rate was 5.4 percent and 5.9 percent at September 30,
1996 and 1995, respectively. The FIBOR interest rate was 3.3 percent and 4.1
percent at September 30, 1996 and 1995, respectively.
The company has two interest rate swap agreements with commercial banks
to effectively fix its interest rates on $6,000 of variable rate debt. The
first agreement effectively fixes the interest rate on a notional $3,000 of
variable LIBOR rate debt at 6.8 percent, and expires June 17, 2002. The second
agreement effectively fixes the interest rate on another notional $3,000 of
variable LIBOR rate debt at 6.9 percent, and expires September 18, 2005. The
interest differentials to be paid or received on the notional amounts of the
swaps are recognized over the lives of the agreements. At September 30, 1996
interest rate levels, the swaps require the
16
company to make payments to the bank, with the fair value of the swaps totaling
approximately $129.
Following is an analysis of net financing expenses:
1996 1995 1994
---- ---- ----
Interest expense $957 $1,092 $939
Investment income (138) (106) (118)
---- ------ ----
$819 $ 986 $821
==== ====== ====
17
NOTE D - FOREIGN CURRENCY
The functional currency for the company's foreign subsidiaries is the
applicable local currency. Income and expenses are translated into U.S.
dollars at average exchange rates for the period. Assets and liabilities are
translated at the rates in effect at the end of the period. Translation gains
and losses are recognized in the cumulative translation component of
shareholders' equity.
Following is an analysis of the cumulative translation component of
shareholders' equity:
1996 1995 1994
---- ---- ----
Balance at beginning of year $ 589 $ 368 $ 188
Adjustments to financial statements for
translation of foreign currency (76) 324 232
Gains (losses) from hedging net invest-
ments in foreign subsidiaries net of
income taxes (benefit) of $25 in 1996,
$(53) in 1995 and $(27) in 1994. 49 (103) (52)
------- ------ -------
Balance at end of year $ 562 $ 589 $ 368
====== ====== ======
Certain transactions of the company and its foreign subsidiaries are
denominated in currencies other than the functional currency. The Consolidated
Statement of Income includes gains (losses) from such foreign exchange
transactions of $91, $(22) and $78 for 1996, 1995 and 1994, respectively.
At September 30, 1996, the company had obligations under foreign exchange
forward contracts to sell 1,900,000 Deutsche marks, 190,000 British pounds,
1,500,000 French francs and 131,586 Swiss francs at various dates through
December 1996. The total U.S. dollar equivalent amount of foreign exchange
contracts of $1,973 includes an unrecognized gain of $33 at September 30, 1996.
The company has purchased and written currency option contracts that
effectively provide minimum and maximum exchange rates that the company would
receive for anticipated foreign currency denominated sales. Under the terms of
the options, the company has the right to deliver 3,000,000 Deutsche marks at
average rates of 1.57 per U.S. dollar and the obligation, if called, to deliver
3,000,000 Deutsche marks at average rates of 1.44 per U.S. dollar. The
18
options expire in equal amounts in October and December 1996. The options had
no effect on net income in fiscal 1996, and gains and losses on the options, if
any, are recorded as incurred.
19
NOTE E - EMPLOYEE BENEFIT PLANS
The company has non-contributory defined benefit pension plans
covering approximately three-fourths of its employees in the United States and
certain non-U.S. employees. Pension benefits are based upon the employee's
length of service and a percentage of compensation above certain base levels.
Pension expense for these plans is shown below:
1996 1995 1994
---- ---- ----
Service cost-benefits earned during the period $ 652 $ 605 $ 675
Interest cost on projected benefit obligation 1,048 945 879
Actual return on assets (2,471) (1,818) (18)
Net amortization and deferral 1,328 884 (890)
------ ------ ------
Net periodic pension cost $ 557 $ 616 $ 646
====== ====== ======
The following table sets forth the funded status of the company's plans
and the related amounts recognized in the Consolidated Balance Sheet at
September 30, 1996 and 1995:
Non-U.S.
United States Plan Plan
Overfunded Underfunded*
--------------------- ------------
1996 1995 1996 1995
---- ---- ---- ----
Actuarial present value of benefit obligations:
Vested benefit obligation $10,439 $ 9,028 $ 1,678 $ 1,380
======= ======== ======= ========
Accumulated benefit obligation $10,890 $ 9,189 $ 1,899 $ 1,573
======= ======== ======== ========
Projected benefit obligation $13,280 $11,201 $ 2,732 $ 2,358
Plan assets at fair value $16,385 $13,707 $ 498 $ 455
------- ------- -------- --------
Projected benefit obligation (in excess of)
or less than plan assets $ 3,105 $ 2,506 $(2,234) $ (1,903)
Unrecognized net gain (1,972) (1,671) (567) (788)
Unrecognized prior service cost 1,263 1,293 79 --
Unrecognized initial net (asset) obligation (401) (444) 265 307
-------- -------- -------- --------
Prepaid pension assets (pension liability)
recognized in the Consolidated Balance
Sheet $ 1,995 $ 1,684 $(2,457) $(2,384)
======= ======= ======= =======
* The company has purchased indirect insurance of $2,514 which is expected
to be available to the company as non-U.S. pension liabilities of $2,457
mature. The caption, "Other assets," on the company's Consolidated
Balance Sheet includes $2,514 and $2,338 at September 30, 1996 and 1995,
respectively, for this asset. In accordance with Statement of Financial
20
Accounting Standards No. 87, "Employers' Accounting for Pensions," this
company asset is not included in the non-U.S. plan assets.
The significant actuarial assumptions as of the year-end measurement date
were as follows:
1996 1995 1994
---- ---- ----
United States Pension Plan:
Discount rates 7.5% 7.5% 7.5%
Expected long-term rate of return on plan assets 8.5% 8.5% 8.5%
Rate of increase in compensation levels 5.5% 5.5% 5.5%
Non-U.S. Pension Plan:
Discount rates 6.5% 7.5% 8.0%
Expected long-term rate of return on plan assets 7.0% 7.0% 7.5%
Rate of increase in compensation levels 3.5% 4.5% 5.0%
The "Projected Unit Credit" Actuarial Cost Method is used to determine
the company's annual expense.
For the United States plan, the company uses the "Entry Age Normal"
Actuarial Cost Method to determine its annual funding requirements. This
actuarial method currently results in funding amounts significantly greater
than the amounts expensed. United States plan assets are invested primarily in
common stocks and fixed-income securities.
There are no requirements for the company to fund the non-U.S. pension
plan. Non-U.S. plan assets represent employee contributions and are invested
in a direct insurance contract payable to the individual participants.
In addition to the defined benefit pension plan, the company also
maintains a retirement plan for substantially all of its employees in the
United States under Section 401(k) of the Internal Revenue Code. The company
makes contributions to the 401(k) plan, and expense for this plan amounted to
$388, $539 and $324 in 1996, 1995 and 1994, respectively.
The company also has an unfunded supplemental executive retirement plan
(SERP) for two officers and for former key employees which includes retirement,
death and disability benefits. Expense for these benefits was $102 for 1996,
$85 for 1995, and $165 for 1994. During 1994, the company settled a portion of
its SERP obligation through a lump-sum distribution of $1,236, resulting in a
net charge to earnings of $343. Liabilities of $497 and $355 were accrued in
the "Other long-term liabilities" caption on the company's Consolidated Balance
Sheet to meet all SERP obligations at September 30, 1996 and 1995,
respectively.
21
NOTE F - STOCK PLANS
The company has employee stock options outstanding under two plans and
directors' stock options outstanding under one plan. All incentive options
have been granted at or above fair market value at the date of grant. The
company also has an employee stock purchase plan.
Employee Stock Option Plans
Under the 1984 Stock Option Plan and the 1992 Stock Incentive Plan,
675,000 and 1,900,000 of the company's Common Shares, respectively, were
reserved for the granting of options to officers and other key employees.
After February 11, 1994, no new grants could be issued from the 1984 Stock
Option Plan. Shares authorized but not yet granted under the 1992 plan were
862,046 at September 30, 1996. The Compensation and Human Resources Committee
administers the plans with incentive stock options granted at not less than
fair market price at the date of the grant for an exercise period not to exceed
ten years from the grant date. Such grants generally become exercisable over a
four year period. The option price under a nonqualified stock option is
determined by the Committee on the date the option is granted. The 1992 Stock
Incentive Plan also provides for restricted stock awards and stock appreciation
rights. This plan will expire on February 8, 2002. All options outstanding at
the time of termination of either plan shall continue in full force and effect
in accordance with their terms.
22
The following table summarizes the changes in the number of Common Shares
under option for both employee stock option plans:
Option Price
Shares subject to option at Range
September 30, 1993 669,180 $3.50 to $ 8.44
---------
Options granted 391,400 $4.75 to $ 5.38
Options exercised (86,352) $3.50 to $ 4.31
Options forfeited (137,340) $4.13 to $ 8.44
----------
Shares subject to option at
September 30, 1994 836,888 $4.00 to $ 8.44
----------
Options granted 235,100 $5.19 to $13.69
Options exercised (94,608) $4.00 to $ 8.44
Options forfeited (5,792) $4.75 to $ 6.06
-----------
Shares subject to option at
September 30, 1995 971,588 $4.00 to $13.69
----------
Options granted 370,360 $9.25 to $15.69
Options exercised (149,373) $4.04 to $ 8.44
Options forfeited (38,586) $4.63 to $13.69
----------
Shares subject to option at
September 30, 1996 1,153,989 $4.00 to $15.69
=========
Exercisable options at September 30, 1996 382,044 $4.00 to $ 8.44
==========
Exercisable options at September 30, 1995 288,630 $4.00 to $ 8.44
==========
1992 Directors' Stock Option Plan
The 1992 Directors' Stock Option Plan provides for the issuance of
60,000 of the company's Common Shares to non-employee Directors. Under the
terms of the plan, each non-employee Director is automatically granted an
option to purchase 600 Common Shares at the close of each annual shareholders'
meeting. The option price shall be the fair market value of a Common Share on
the date of grant. The option is exercisable six months and one day after the
date of grant and will expire after ten years. The plan provides for the
granting of stock options through December 7, 2002. During fiscal years 1996,
1995 and 1994, 3,600, 4,200 and 4,800 options were granted at option prices of
$14.75, $5.19 and $5.00, respectively. During 1996, no options were exercised.
During 1995, 1,800 options were exercised at prices ranging from $5.00 to
$7.50. As of September 30, 1996 and 1995, 18,000 and 14,400 shares were
exercisable, respectively. Options available for future grants were 40,200 and
43,800 at September 30, 1996 and 1995, respectively.
23
1993 Employee Stock Purchase Plan
On February 5, 1994, the company's shareholders approved the 1993 Employee
Stock Purchase and Dividend Reinvestment Plan. The plan offers eligible
employees the opportunity to acquire the company's Common Shares at a discount
and without transaction costs. Eligible employees can only participate in the
plan on a year-to-year basis, must enroll prior to the commencement of each plan
year and must authorize monthly payroll deductions. The purchase price of the
Common Shares is 85 percent of the lower market price at the beginning or ending
of the plan year, which is on a calendar year basis. A total of 250,000 Common
Shares are available for purchase under the plan. Total shares may be increased
with shareholder approval or the plan may be terminated when the 250,000 shares
are fully subscribed. The company expects to increase the number of Common
Shares available under the plan to 750,000 subject to shareholder approval at
the February 1997 shareholders' meeting. During 1996 and 1995, 74,156 and
40,050 shares were issued under the plan at prices of $4.25 and $4.14 per share,
respectively.
24
NOTE G - INCOME TAXES
For financial reporting purposes, income (loss) before income taxes
includes the following components:
1996 1995 1994
---- ---- ----
United States $(9,383) $ 1,970 $(2,211)
Non-U.S. 3,059 4,452 2,335
------- ------- -----
$(6,324) $ 6,422 $ 124
======= ======= =======
The provision for income taxes is as follows:
1996 1995 1994
---- ---- ----
Current:
Federal $ 1,330 $ 720 $ 318
Non-U.S. 1,513 1,859 1,009
State and local 45 146 106
------- ------- -------
Total current 2,888 2,725 1,433
------- ------- -------
Deferred
Federal (3,800) (1,199) (2,154)
Non-U.S. 28 (18) (62)
------- ------- -------
Total deferred (3,772) (1,217) (2,216)
------- ------- -------
Total provision (benefit) $ (884) $ 1,508 $ (783)
======= ======= =======
Differences between the statutory United States federal income tax and
the effective income tax rate are as follows:
1996 1995 1994
---- ---- ----
Federal income tax at statutory rate $(2,150) $2,183 $ 42
State and local income taxes 30 96 70
Tax on non-U.S. income and tax credits (884) (881) (1,193)
Non-deductible amortization 2,123 158 158
Other (3) (48) 140
------- ------ --------
Effective income tax (benefit) $ (884) $1,508 $ (783)
======= ====== =======
25
Significant components of the company's deferred tax assets and
liabilities as of September 30, 1996 and 1995 are as follows:
Deferred tax assets: 1996 1995
- ------------------- ---- ----
Foreign tax credit carryforwards $ -- $ 79
Capitalized research and development 5,221 2,905
Special charges 1,724 --
Intangibles 1,006 1,274
State and local taxes 1,441 1,089
Alternative minimum tax credit carryforwards 1,174 1,282
Deferred compensation 615 949
Inventory 1,124 971
General business credit carryforwards 872 488
Other 1,252 1,131
------ ------
Total deferred tax assets 14,429 10,168
------ ------
Valuation allowance for deferred tax assets (2,994) (2,606)
------ ------
11,435 7,562
------ ------
Deferred tax liabilities:
- ------------------------
Pension contribution 904 771
Other 351 383
------ ------
Total deferred tax liabilities 1,255 1,154
------ ------
Net deferred tax assets $10,180 $6,408
======= ======
The valuation allowance relates to tax credit carryforwards which more
likely than not will not be realized. The current year increase relates
primarily to an increase in deferred state tax items.
At September 30, 1996, the Company had capital loss and tax credit
carryforwards as follows:
Year Expiration
Commences
---------------
General business credit $872 2002
Capital loss 211 1997
Alternative minimum tax credit 1,174 Indefinite
26
NOTE H - STOCK AND RELATED ACCOUNTS
The Class B Common Shares have ten times the voting power of the Common
Shares but are entitled to cash dividends of no more than 80% of the cash
dividends on the Common Shares. Holders of Common Shares, voting as a class,
elect one-fourth of the company's Board of Directors and participate with
holders of Class B Common Shares in electing the balance of the Directors and
in voting on all other corporate matters requiring shareholder approval.
Additional Class B Common Shares may be issued only to holders of such Shares
for stock dividends or stock splits. These Shares are convertible at any time
to Common Shares on a one-for-one basis. Following is an analysis of changes
in stock and related accounts:
Capital in
Class B Excess of
Common Shares Common Shares Treasury Stock Stated Value
------------- ------------- -------------- ------------
$ Shares $ Shares $ Shares
---- ------ ----- ------ ---- ------
Balance, September 30, 1993 $101 4,033,810 $ 76 3,034,080 $ -- -- $3,387
Shares issued under stock plans,
net of 49,366 Shares tendered 1 36,986 -- -- -- -- 82
Conversion of Class B Common
Shares to Common Shares 2 86,040 (2) (86,040) -- -- --
------ ---------- ------ ------- ---- ------ ------
Balance, September 30, 1994 104 4,156,836 74 2,948,040 -- -- 3,469
Shares issued under stock plans
net of 13,362 Shares tendered 3 123,096 -- -- -- -- 512
Conversion of Class B Common
Shares to Common Shares 1 29,044 (1) (29,044) -- -- --
------ ---------- ------ ----------- ---- ------ ------
Balance, September 30, 1995 108 4,308,976 73 2,918,996 -- -- 3,981
Shares issued under stock plans
net of 3,031 Shares tendered 5 222,906 -- -- (136) (10,155) 1,385
Conversion of Class B Common
Shares to Common Shares 3 124,718 (3) (124,718) -- -- --
Fee paid to increase authorized
shares -- -- -- -- -- -- (73)
---- --------- ----- ---------- ---- ------ ----------
Balance, September 30, 1996 $116 4,656,600 $ 70 2,794,278 (136) (10,155) $5,293
==== ========= ===== ========== ==== ====== ==========
On November 6, 1995, the company's Board of Directors approved a
two-for-one split of the company's Common Shares and Class B Common Shares.
The split was effected in the form of a stock dividend payable on December 11,
1995, to shareholders of record on November 27, 1995. All share amounts have
been adjusted to reflect the stock split on a retroactive basis.
27
NOTE I - LEASES
The company leases certain equipment under capital leases.
Manufacturing, laboratory and office equipment includes $526 and $592 of leased
equipment at September 30, 1996 and 1995, respectively. Accumulated
depreciation includes $487 and $517 at September 30, 1996 and 1995,
respectively, related to these leases. The company also leases certain office
and manufacturing facilities and office equipment under operating leases. Rent
expense under operating leases, net of sublease income of $245 in 1996, $282 in
1995 and $265 in 1994, for 1996, 1995 and 1994 was $2,178, $2,119 and $2,046,
respectively. Future minimum lease payments under operating leases are:
1997 $ 2,639
1998 2,117
1999 1,492
2000 1,397
2001 967
After 2001 2,802
------
Total minimum operating lease payments $11,414
======
28
NOTE J - GEOGRAPHIC SEGMENTS
The company operates in a single industry segment and is engaged in the
design, development, manufacture and marketing of complex electronic
instruments and systems. The operations by geographic area are presented
below:
1996 1995 1994
---- ---- ----
NET SALES, INCLUDING INTERCOMPANY SALES:
- -----------------------------------------
United States (1) $ 98,232 $ 88,410 $ 72,337
Europe 37,799 37,659 30,107
Intercompany (17,085) (16,495) (13,196)
-------- -------- --------
Net sales $118,946 $109,574 $ 89,248
======== ======== ========
INCOME (LOSS) BEFORE INCOME TAXES (2)
- -------------------------------------
United States $ (7,372) $ 4,282 $ 922
Europe 3,180 4,158 2,280
Adjustments/eliminations (34) 77 92
-------- -------- --------
(4,226) 8,517 3,294
-------- -------- --------
Corporate expenses (1,279) (1,109) (2,349)
Net financing expenses (819) (986) (821)
-------- -------- --------
Income (loss) before income taxes $ (6,324) $ 6,422 $ 124
======== ======== ========
IDENTIFIABLE ASSETS:
- --------------------
United States $ 54,507 $ 49,087 $ 40,378
Europe 9,720 11,164 10,109
Adjustments/eliminations (5,651) (5,429) (5,195)
-------- -------- --------
58,576 54,822 45,292
Corporate assets 15,258 11,287 9,118
-------- -------- --------
Total assets $ 73,834 $ 66,109 $ 54,410
======== ======== ========
(1) U.S. sales include $21,295, $18,793 and $13,625 in export sales to markets
other than Europe in 1996, 1995 and 1994, respectively. (2) 1996 loss before
income taxes includes special charges of $11,003 in the U.S. and $642 in
Europe. (See Note B.)
Intercompany sales were at cost plus a negotiated markup. Assets of
geographic areas are identified with the operations of each area. Corporate
assets consist of cash and cash equivalents, other receivables, prepaid
expenses and deferred income taxes.
29
NOTE K - CONTINGENCIES
The company is engaged in various legal proceedings arising in the
ordinary course of business. The ultimate outcome of these proceedings is not
expected to have a material adverse effect on the company's financial position,
results of operations or cash flows.
30
Report of Independent Accountants
To the Board of Directors and Shareholders of
Keithley Instruments, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income, of earnings reinvested in the
business and of cash flows present fairly, in all material respects, the
financial position of Keithley Instruments, Inc. and its subsidiaries at
September 30, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Cleveland, Ohio
November 14, 1996
31
Statement of Management Responsibility
The consolidated financial statements of Keithley Instruments, Inc. were
prepared by management and, accordingly, management is responsible for their
accuracy and objectivity. The company utilizes accounting policies which are,
in the judgment of management, the most appropriate for the company's
circumstances. Certain estimates and judgments are required in the preparation
of financial statements. The financial information included in this Annual
Report has been prepared using management's best estimates, which were based
upon appropriate research and investigation.
The company maintains internal accounting control systems that are
designed to detect and correct material misstatements of financial information.
These systems are regularly modified in response to the company's changing
business conditions. Additionally, our independent accountants, Price
Waterhouse LLP, obtain a sufficient understanding of the internal control
structure in order to plan and complete the annual audit of the company's
financial statements.
The Audit Committee of the Board of Directors, which consists of three
Directors otherwise independent of the company, serves an oversight role in
reviewing the internal control monitoring process. The Committee regularly
meets with and has direct access to Price Waterhouse LLP.
Management acknowledges its responsibility to provide financial
information (both audited and unaudited) that is representative of the
company's operations and financial position, prepared on a consistent basis and
relevant for a meaningful appraisal of the company.
Joseph P. Keithley Ronald M. Rebner
Chairman, President Vice President and Chief
and Chief Executive Officer Financial Officer
32
Stock Market Price and Cash Dividends
Beginning November 28, 1995, the company's Common Shares trade on the
New York Stock Exchange under the symbol KEI. Prior to November 28, 1995, the
company's Common Shares traded on the American Stock Exchange under the symbol
KEI. The high and low prices shown below are sales prices of the company's
Common Shares as reported on the NYSE or the AMEX. There is no established
public trading market for the company's Class B Common Shares; however, they
are readily convertible on a one-to-one basis for Common Shares.
Cash Dividends
Cash Dividends Per Class B
Fiscal 1996 High Low Per Common Share Common Share
- ----------- ---- --- ---------------- ------------
First Quarter $18 $14 $ .031 $ .025
Second Quarter 16 7/8 12 7/8 .031 .025
Third Quarter 19 1/8 12 5/8 .031 .025
Fourth Quarter 14 1/4 8 3/8 .031 .025
Fiscal 1995
- -----------
First Quarter $ 5 1/4 $ 4 1/2 $ .025 $ .020
Second Quarter 6 7/16 4 13/16 .025 .020
Third Quarter 11 6 9/16 .025 .020
Fourth Quarter 15 15/16 10 1/4 .031 .025
33
Unaudited Quarterly Results of Operations
(In Thousands of Dollars Except for Per-Share Data)
First Second Third Fourth
----- ------ ----- ------
Fiscal 1996
- -----------
Net sales $29,823 $30,019 $29,403 $29,701
Gross profit 17,988 19,052 18,027 17,739
Income (loss) before income taxes (1) 1,659 2,045 1,006 (11,034)
Net income (loss) (1) 1,145 1,485 761 (8,831)
Net income (loss) per share (1) .15 .19 .10 (1.14)
Fully diluted net income (loss) per share (1) .15 .19 .10 (1.14)
Fiscal 1995
- -----------
Net sales $23,525 $27,850 $28,975 $29,224
Gross profit 14,428 17,008 17,840 17,926
Income before income taxes 481 1,738 1,992 2,211
Net income 346 1,318 1,494 1,756
Net income per share .05 .18 .20 .23
Fully diluted net income per share .05 .18 .20 .23
(1) Includes special charges totaling $11,645 pretax, or $1.23 per share in the
fourth quarter.
34
Eleven Year Summary
(In Thousands Of Dollars Except For Per-Share Data)
For the year ended
September 30, 1996 1995 1994 1993(b) 1992 1991 1990 1989 1988 1987 1986(d)
-------- ------- ------ ------ ------ ------ ------- ------ ------ ------ ------
Operating Results
Net sales $118,946 109,574 89,248 91,146 94,666 99,497 100,593 88,728 72,282 57,652 47,681
Income (loss) before
income taxes and
cumulative effect of
accounting change (6,324) 6,422 124 5,530 (10,420) 6,816 5,675 7,311 8,204 5,209 4,323
Net income(loss) (5,440) 4,914 907 4,784 (12,453) 4,233 3,378 4,131 5,414 3,280 2,909
Net income(loss) per
share(a) (0.70) 0.66 0.13 0.68 (1.77) 0.60 0.48 0.59 0.78 0.49 0.44
Fully diluted net
income (loss) per
share (0.70) 0.64 0.13 0.68 (1.77) 0.60 0.48 0.59 0.78 0.49 0.44
Common Stock Information(a)
Cash dividends per
Common Share $0.125 0.106 0.100 0.100 0.100 0.094 0.089 0.082 0.058 0.046 0.041
Cash dividends per
Class B Common Share $0.100 0.085 0.080 0.080 0.080 0.075 0.071 0.066 0.046 0.036 0.033
Weighted average number
of shares
outstanding-fully
diluted (in thousands) 7,822 7,720 7,088 7,061 7,046 7,026 7,014 6,994 6,974 6,790 6,696
At fiscal year-end:
Number of shareholders
of record 594 535 567 587 618 664 686 699 711 357 313
Dividend payout ratio(e) -- 16.1% 76.9% 14.7% -- 15.7% 18.5% 13.9% 7.4% 9.4% 9.4%
Price/earnings ratio(e) -- 23.3 40.4 7.4 -- 10.1 8.5 11.0 11.5 17.5 13.8
Shareholders' equity
per share $4.26 5.11 4.50 4.45 4.05 5.85 5.40 4.88 4.37 3.68 3.08
Closing market price $8.875 14.938 5.250 5.000 4.563 6.063 4.063 6.500 8.938 8.500 6.000
Balance Sheet Data
Total assets $73,834 66,109 54,410 52,413 53,160 66,637 69,205 69,917 46,602 33,065 28,869
Current ratio 1.7 2.0 1.9 2.2 2.3 2.1 2.3 2.7 2.4 1.9 2.8
Total debt $13,369 6,113 4,816 6,518 8,978 10,506 16,562 22,419 2,027 5,773 2,684
Total debt-to-capital 29.6% 14.2% 13.1% 17.2% 23.9% 20.3% 30.4% 39.6% 6.2% 18.4% 11.5%
Shareholders' equity $31,756 36,902 31,946 31,415 28,530 41,129 37,870 34,216 30,518 25,577 20,644
Other Data
Return on average
shareholders' equity -15.8% 14.3% 2.9% 16.0% -35.8% 10.7% 9.4% 12.7% 19.0% 14.5% 15.6%
Return on average
total assets -7.8% 8.2% 1.7% 9.1% -20.8% 6.2% 4.9% 7.1% 11.9% 8.5% 9.4%
Return on net sales -4.6% 4.5% 1.0% 5.2% -13.2% 4.3% 3.4% 4.7% 7.5% 5.7% 6.1%
Number of employees 716 659 625 625 679 716 750 742 579 523 479
Sales per employee $173.0 $170.7 142.8 139.8 135.7 135.7 134.8 134.3 131.2 115.1 99.1
Cash flow
Non cash charges
to income(c) $7,064 2,573 1,346 1,849 15,185 4,325 6,649 4,234 3,062 2,516 2,086
Net cash provided by
operating activities $2,600 2,457 6,641 6,289 4,475 9,399 9,111 4,592 6,812 5,741 4,248
Ten-year compound
annual growth rate
Net sales 9.6% 8.8% 7.0% 10.0% 11.1% 12.8% 13.7% 16.4% 17.9% 19.2% 19.3%
Net income(e) -- 5.7% -14.2% 9.1% -- 39.7% 10.4% 12.5% 21.2% 19.8% 27.7%
<FN>
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(a) Share data adjusted for two-for-one stock split in November 1995,
three-for-two stock split in 1987 and three-for-one stock split in 1985.
(b) Includes a benefit for the cumulative effect of adopting FAS 109 of $1,447
or $.21 per share.
(c) Noncash charges to income include depreciation, amortization, deferred
compensation, deferred taxes, noncash special charges and the cumulative
effect of adopting FAS 109.
(d) In 1987, the Company adopted Statement of Financial Standards No.87,
"Employers' Accounting for Pensions"; prior years have not been restated.
(e) These ratios are not meaningful in 1992 and 1996 due to reported net
losses.