-----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, MvCMzzA0La733usMpYej4760KUIvj6rOxCRXdcbF0rG2GrKcXetRqZz3oPQ6OdtO UEY8imZxzNUAGQlhXEwx+w== 0000313616-98-000017.txt : 19980915 0000313616-98-000017.hdr.sgml : 19980915 ACCESSION NUMBER: 0000313616-98-000017 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980709 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980914 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DANAHER CORP /DE/ CENTRAL INDEX KEY: 0000313616 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 591995548 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-08089 FILM NUMBER: 98708605 BUSINESS ADDRESS: STREET 1: 1250 24TH ST NW STREET 2: SUITE 800 CITY: WASHINGTON STATE: DC ZIP: 20037 BUSINESS PHONE: 2028280850 MAIL ADDRESS: STREET 1: 1250 24TH STREET NW STREET 2: SUITE 800 CITY: WASHINGTON STATE: DC ZIP: 20037 FORMER COMPANY: FORMER CONFORMED NAME: DMG INC DATE OF NAME CHANGE: 19850221 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) July 9, 1998 DANAHER CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 1-8089 59-1995548 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 1250 24th Street, N.W. Washington, D.C. 20037 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 202-828-0850 (Former name or former address, if changed since last report.) Item 2. Acquisition of Assets As previously reported in the Form 10-Q filed on July 16, 1998, on July 9, 1998, Danaher Corporation acquired Fluke Corporation in exchange for 17,785,122 shares of Danaher common stock. The acquisition will be accounted for as a pooling-of- interests. Fluke was founded in 1948 and incorporated under the laws of the State of Washington on October 7, 1953. Fluke is engaged in the design, manufacture and marketing of compact, professional electronic test tools. Fluke's principal products are portable instruments that measure voltage, current, power quality, frequency, temperature, pressure and other key functional parameters of electronic equipment. The principal executive offices of Fluke are located at 6920 Seaway Boulevard, Everett, Washington 98203, and its telephone number is (425) 347-6100. Item 5. Other Events Year 2000 Matters The Securities and Exchange Commission has issued interpretative guidance regarding disclosure of Year 2000 issues and consequences, effective August 4, 1998 (the "Interpretation"). Danaher Corporation (the "Company") is providing this disclosure to supplement the information contained in its 1997 Annual Report on Form 10-K in accordance with this Interpretation. In addition to historical information, this document contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Reference is made in particular to statements regarding the Company's expectations regarding the Company's plans and objectives for testing and remediation for Year 2000 issues, the expected costs associated with such testing and remediation, the Company's contingency plans, the Company's expectations with respect to its customers' and vendors' readiness and the Company's expectations with respect to its operations at Year 2000, and other forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward- looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe" or "continue" or the negative thereof or variations thereon or similar terminology. Such statements are based on management's current expectations and are subject to a number of factors, risks and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements. In particular, careful consideration should be given to the cautionary statements made in this document. State of Readiness As more fully described in Description of Business in its 1997 Annual Report, Danaher conducts its operations through over 100 subsidiary companies. Each of these companies, or in certain instances groups of several companies, has responsibility for its own information technology (IT) requirements, including assuring that its IT and non-IT systems are or will be compliant with Year 2000 processing requirements. Standardized corporate-wide reporting is done via widely used microcomputer software which is substantially Year 2000 ready. To ensure that the IT and non-IT systems are or will be Year 2000 ready at each of the material subsidiary operations, a full survey of the following was conducted in 1997 and goals were established to aid in assuring that all major critical dates were achieved: * assessment of each operating IT system, including hardware and software; * assessment of critical non-IT systems, including logistics, real estate, manufacturing control systems and other embedded technologies; * survey of major customers as to Year 2000 readiness; and * survey of principal vendors as to Year 2000 readiness. The majority of the Company's efforts regarding Year 2000 readiness are associated with internal data processing systems. In all material respects, products manufactured by the Company do not utilize calendar dating in their functionality. Some products within the Process/Environmental Controls segment are components in larger systems manufactured by customers which do reference calendar dates. Where known, the Company has contacted customers to ascertain their awareness of the issues and plans to address them. Most of the production, logistics, real estate and administrative support non-IT systems can be modified or reset to provide for their continued operation in the event that a permanent Year 2000 solution is not achieved by the established deadline. Due to both the recent vintage of many of the Company's operating IT systems and the general use of standardized externally developed systems without substantial internal modifications, a majority of the Company's IT systems are either currently prepared for Year 2000 in all material respects or are in the process of installing upgrades to standardized programming to meet this objective. For both the remaining IT systems and most of the non-IT systems, plans with critical dates are in place and are being monitored. A comprehensive company-wide status update is currently in process, and is scheduled to be completed in the fourth quarter of 1998. Current plans anticipate readiness for Year 2000 in all material respects by mid-year of 1999. The testing component of the Company's Year 2000 readiness plan is conducted on an ongoing basis. Most IT applications which are deemed Year 2000 compliant by the software vendors include documentation of the testing protocol used by the vendor. The Company reviews these results and conducts its own test utilizing date parameters beyond Year 2000. At this time, approximately half of IT systems have been tested as to compliance and most non- IT system testing has not yet been completed. These testing proportions are related to both the magnitude and perceived risk of system noncompliance and future testing will be scheduled in accordance with these criteria. Costs to Address Year 2000 Issues The Interpretation requires disclosure of costs incurred to address Year 2000 issues and an estimate of costs expected to be incurred. In accordance with the Interpretation, the calculation of costs incurred has been limited to costs to bring existing systems into compliance or to accelerate replacement systems to meet these requirements. Costs incurred in the normal maintenance of the Company's IT systems are not included. New systems were implemented at both Fluke Corporation and Pacific Scientific Company before they were acquired by the Company in 1998, and the costs of these systems are not deemed Year 2000 costs in accordance with the Interpretation. The Company began monitoring Year 2000 remediation costs in 1997 and any costs (which are not believed to be material) incurred prior thereto are not included in the estimates which follow. The Company estimates it has incurred approximately $3 million to date in Year 2000 remediation costs, and that total costs through completion will approximate $10 million. While a substantial portion of these costs is not entirely incremental to normal maintenance costs, these costs have been estimated using the guidelines in the Interpretation as summarized above. Key Considerations and Contingency Plans At the current time, the Company's Year 2000 Readiness Plan anticipates that both IT and critical non-IT systems will be Year 2000 compliant in all material respects. This assessment is based on the readiness of a majority of the IT systems at the Company's material subsidiaries at the current time and the assessed degree of difficulty associated with remaining steps of the Plan. There can be no assurance, however, of complete compliance based on the status to date. However, since the Company is not dependent on any single group of systems for more than 20% of its operations' revenue base, it is not likely that any single system non- compliance would have a material adverse effect on the Company as a whole. Contingency plans are generally under development for important non-IT systems and the Company anticipates that acceptable alternatives will be available in the event that the contingencies arise. Contingency plans for IT systems generally anticipate use of standard noncustomized replacement modules in the event of contingencies. Work with major customers and vendors to date has indicated a high awareness of the issues and plans to address them. Alternative vendors are available for most major supplies and raw materials. Nonetheless, it is not possible for the Company to fully assess the likelihood or magnitude of consequences from vendor or customer Year 2000 compliance issues. While there are no indications of major revenue disruptions from actions of such third parties, and alternative markets and sources have been accumulated, there can be no assurance at this time as to the future impacts of Year 2000 actions or inactions by customers or vendors. Item 7. Exhibits (a) Attachment 1 contains pro-forma financial statements and explanatory notes as per Article 11. (b) Attachment 2 contains financial statements of Fluke Corporation as specified under Rule 3.05(b) 1. Years ended April 24, 1998, April 25, 1997 and April 26, 1996. (c) Attachment 3 contains management's discussion and analysis and supplementary financial statements for the combined Danaher and Fluke entities under the pooling- of-interest method for the years ended December 31, 1997, December 31, 1996 and December 31, 1995. (c) Attachment 3 contains pro-forma financial statements and explanatory notes as per Article 11. 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. DANAHER CORPORATION By: /s/ C. Scott Brannan C. Scott Brannan Vice President and Controller Unaudited Pro Forma Combined Statements of Earnings The following unaudited pro forma statements of earnings present, under the method of purchase accounting, the consolidated statements of earnings of Danaher and Pacific Scientific Company (PSX) for the year ended December 31, 1997 and for the six months ended June 26, 1998.
Year Ended December 31, 1997 Pro Forma Danaher PSX Adjustment Results (In thousands , except per share data) Net Sales $2,492,002 $ 310,460 $2,802,462 Cost of Sales 1,598,431 210,468 $ (800)F 1,808,099 SG&A 592,515 77,884 7,800 G 678,199 Other 4,892 (4,892)B 0 Total Expenses 2,190,946 293,244 2,108 2,486,298 Operating Profit 301,056 17,216 (2,108) 316,164 Interest expense, net 13,211 1,578 25,000 H 39,789 Earnings before Taxes 287,845 15,638 (27,108) 276,375 Taxes 111,239 6,359 (10,833)I 106,765 Net Earnings $ 176,606 $ 9,279 $ (16,275) 169,610 EPS - Diluted $ 1.28 $ 1.23 EPS - Basic $ 1.32 $ 1.27 Ave. Shs-Diluted 137,731 137,731 Ave. Shs-Basic 134,000 134,000 Six Months ended June 26, 1998 Pro Forma Danaher PSX Adj. Results (In thousands , except per share data) Net Sales $1,382,668 $ 71,582 $1,454,250 Cost of Sales 881,077 45,614 $ (200)F 926,491 SG&A 335,703 20,980 1,550 G 358,233 Total Expenses 1,216,780 67,908 1,350 1,286,038 Operating Profit 165,888 3,674 (1,350) 168,212 Interest expense, net 10,180 817 4,200H 15,197 Earnings before Taxes 155,708 2,857 (5,550) 153,015 Taxes 59,297 1,100 (2,137) 58,260 Net Earnings $ 96,411 $ 1,757 (3,413) $ 94,755 EPS - Diluted $ 0.70 $ 0.68 EPS - Basic $ 0.72 $ 0.71 Average Shares - Diluted 138,399 138,399 Average Shares - Basic 134,087 134,087
Notes to Pro Forma Combined Financial Information (Unaudited) (F) Represents the effects to the inventory adjustments and the change in depreciation associated with establishing new values and useful lives fo rthe acquired fixed assets. (G) Represents amortization of the excess of cost over the net assets of Pacific Scientific. (H) Represents interest associated with the additional borrowings. (I) Represents an adjustment to reflect an appropriate effective tax rate. EX-99 2 Consolidated Financial Statements Fluke Corporation Fiscal Years Ended April 24, 1998, April 25, 1997, and April 26, 1996 with Report of Independent Auditors Fluke Corporation Consolidated Financial Statements Fiscal Years Ended April 24, 1998, April 25, 1997, and April 26, 1996 Contents Report of Independent Auditors 1 Audited Consolidated Financial Statements Consolidated Balance Sheets 2 Consolidated Statements of Income 4 Consolidated Statements of Stockholders' Equity 5 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8 Report of Independent Auditors The Board of Directors and Stockholders Fluke Corporation We have audited the accompanying consolidated balance sheets of Fluke Corporation and subsidiaries as of April 24, 1998 and April 25, 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended April 24, 1998. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fluke Corporation and subsidiaries at April 24, 1998 and April 25, 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended April 24, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP May 27, 1998, except for Note 2, as to which the date is July 7, 1998 Fluke Corporation Consolidated Balance Sheets (In thousands, except shares and per share amounts) April 24, April 25, 1998 1997 Assets Current assets: Cash and cash equivalents $ 45,053 $ 40,916 Accounts receivable, less allowance of $838 in 1998 and $891 in 1997 83,250 80,689 Inventories 50,472 54,522 Deferred income taxes 14,412 16,968 Prepaid expenses 9,299 7,299 Total current assets 202,486 200,394 Property, plant, and equipment: Land 4,257 5,236 Buildings 45,092 47,414 Machinery and equipment 125,602 115,022 Construction in progress 12,860 5,634 Total property, plant, and equipment 187,811 173,306 Less accumulated depreciation (118,887) (113,660) Net property, plant, and equipment 68,924 59,646 Goodwill and intangible assets 5,802 11,876 Other assets 27,492 20,444 Total assets $ 304,704 $ 292,360 April 24, April 25, 1998 1997 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 15,061 $ 16,504 Accrued liabilities 35,973 35,350 Accrued liabilities related to restructuring 2,665 11,894 Income taxes payable 637 1,584 Current maturities of long-term obligations and short-term debt 388 1,145 Total current liabilities 54,724 66,477 Long-term obligations 292 563 Deferred income taxes 11,092 10,178 Other liabilities 14,076 12,203 Total liabilities 80,184 89,421 Stockholders' equity: Preferred stock,$0.25 par value: Authorized shares - 2,000,000 - - Common stock, $0.25 par value: Authorized shares - 40,000,000 Issued shares - 18,275,747 in 1998 and 18,092,960 in 1997 4,569 4,524 Additional paid-in capital 71,843 69,490 Retained earnings 155,046 133,736 Cumulative translation adjustment (6,938) (4,811) Total stockholders' equity 224,520 202,939 Total liabilities and stockholders' equity $ 304,704 $ 292,360 See accompanying notes. Fluke Corporation Consolidated Statements of Income (In thousands, except shares and per share amounts) Years Ended April 24, April 25, April 26, 1998 1997 1996 Revenues $ 437,767 $ 430,166 $ 413,525 Cost of goods sold 207,572 196,791 191,360 Gross margin 230,195 233,375 222,165 Operating expenses: Marketing and administrative 147,075 149,772 145,121 Research and development 41,767 41,245 40,953 Restructuring - 12,136 - Total operating expense 188,842 203,153 186,074 Operating income 41,353 30,222 36,091 Nonoperating expenses (income): Interest expense 88 279 1,421 Other (1,409) (1,679) (1,302) Total nonoperating expense (income) (1,321) (1,400) 119 Income before income taxes 42,674 31,622 35,972 Provision for income taxes 14,936 12,016 12,269 Net income $ 27,738 $ 19,606 $ 23,703 Earnings per share: Basic $1.52 $1.12 $1.38 Diluted $1.47 $1.08 $1.34 Average shares and share equivalents outstanding: Basic 18,276,739 17,535,766 17,197,272 Diluted 18,836,105 18,155,516 17,724,682 See accompanying notes. Fluke Corporation Consolidated Statements of Stockholders' Equity (In thousands, except shares) Number of Par Value of Additional Common Shares Common Paid-In Retained Outstanding Stock Capital Earnings Balance at April 28, 1995 16,951,450 $ 4,238 $ 60,124 $ 104,106 Net income - - - 23,703 Net grant of shares under stock award plans 3,830 - 75 - Vesting of 4,786 shares under stock award plans - - - - Repurchase and cancellation of common shares (8,688) (2) (169) - Cash dividends declared - - - (6,564) Exercise of stock options 359,318 90 3,574 - Income tax benefit from stock plans - - 1,787 - Net translation adjustment - - - - Balance at April 26, 1996 17,305,910 4,326 65,391 121,245 Net income - - - 19,606 DeskNet acquisition 610,848 154 781 (904) Net grant of shares under stock award plans 76,208 18 1,486 - Vesting of 3,985 shares under stock award plans - - - - Repurchase and cancellation of common shares (3,206) - (67) - Cash dividends declared - - - (6,211) Adjustments related to Forte acquisition - - 1,050 - Exercise of stock options 103,200 26 1,248 - Income tax benefit from stock plans - - 679 - Compensation charges related to stock options - - 460 - Net translation adjustment - - - - Balance at April 25, 1997 18,092,960 4,524 71,028 133,736 Net income - - - 27,738 Net grant of shares under stock award plans 1,094 - 8 - Vesting of 37,862 shares under stock award plans - - - - Repurchase and cancellation of common shares (160,560) (40) (3,843) - Cash dividends declared - - - (6,398) Exercise of stock options 342,253 85 4,620 (30) Income tax benefit from stock plans - - 1,403 - Common shares acquired by the Rabbi Trust for deferred compensation plan - - 62 - Net translation adjustment - - - - Balance at April 24, 1998 18,275,747 $ 4,569 $ 73,278 $ 155,046 See accompanying notes. (CONTINUED) Common Stock Acquired by Repurchased Rabbi Trust Cumulative Total and Nonvested for Deferred Translation Stockholders' Shares Compensation Plan Adjustments Equity Balance at April 28, 1995 $ (145) $ - $ 6,355 $ 174,678 Net income - - - 23,703 Net grant of shares under stock award plans (75) - - 0 Vesting of 4,786 shares under stock award plans 98 - - 98 Repurchase and cancellation of common shares - - - (171) Cash dividends declared - - - (6,564) Exercise of stock options - - - 3,664 Income tax benefit from stock plans - - - 1,787 Net translation adjustment - - (5,118) (5,118) Balance at April 26, 1996 (122) 0 1,237 192,077 Net income - - - 19,606 DeskNet acquisition - - - 31 Net grant of shares under stock award plans (1,504) - - 0 Vesting of 3,985 shares under stock award plans 88 - - 88 Repurchase and cancellation of common shares - - - (67) Cash dividends declared - - - (6,211) Adjustments related to Forte acquisition - - - 1,050 Exercise of stock options - - - 1,274 Income tax benefit from stock plans - - - 679 Compensation charges related to stock options - - - 460 Net translation adjustment - - (6,048) (6,048) Balance at April 25, 1997 (1,538) 0 (4,811) 202,939 Net income - - - 27,738 Net grant of shares under stock award plans (8) - - 0 Vesting of 37,862 shares under stock award plans 761 - - 761 Repurchase and cancellation of common shares - - - (3,883) Cash dividends declared - - - (6,398) Exercise of stock options - - - 4,675 Income tax benefit from stock plans - - - 1,403 Common shares acquired by the Rabbi Trust for deferred compensation plan - (650) - (588) Net translation adjustment - - (2,127) (2,127) Balance at April 24, 1998 $ (785) $ (650) $ (6,938) $ 224,520 See accompanying notes. Fluke Corporation Consolidated Statements of Cash Flows (In thousands) Years Ended April 24, April 25, April 26, 1998 1997 1996 Operating activities Net income $ 27,738 $ 19,606 $ 23,703 Items not affecting cash: Depreciation and amortization 15,905 14,863 15,408 Deferred income taxes 3,293 (2,729) 777 Provision for restructuring - 12,136 - Other items not affecting cash (166) 281 241 Net changes in: Accounts receivable (3,461) (14,336) 5,992 Inventories 3,180 (352) (6,239) Prepaid expenses (2,117) (80) (1,405) Accounts payable (1,210) 2,212 (579) Accrued liabilities 1,867 (68) (234) Accrued liabilities related to restructuring (9,229) (242) - Income taxes payable 4,132 1,163 1,137 Other (5,464) (2,214) (4,837) Net cash provided by operating activities 34,468 30,240 33,964 Investing activities Additions to property, plant, and equipment (28,006) (16,539) (12,532) Proceeds from disposal of property, plant, and equipment 4,425 1,431 2,446 Net cash used in investing activities (23,581) (15,108) (10,086) Financing activities Proceeds from long-term obligations - 705 - Proceeds from short-term obligations 746 785 - Payments on long-term obligations (243) (6,885) (13,351) Payments on short-term obligations (1,531) - - Repurchase of common stock (3,883) (67) (171) Cash dividends paid (6,255) (5,974) (6,460) Proceeds from stock options 4,675 1,274 3,664 Net cash used in financing activities (6,491) (10,162) (16,318) Effect of foreign currency exchange rates on cash and cash equivalents (259) (685) (557) Net increase in cash and cash equivalents 4,137 4,285 7,003 Cash and cash equivalents at beginning of year 40,916 36,631 29,628 Cash and cash equivalents at end of year $ 45,053 $ 40,916 $ 36,631 Supplemental cash flow information Income taxes paid $ 11,794 $ 13,080 $ 12,309 Interest paid $ 90 $ 283 $ 1,420 See accompanying notes. Fluke Corporation Notes to Consolidated Financial Statements April 24, 1998 1. Summary of Significant Accounting Policies Accounting Period Fluke Corporation (the Company) utilizes a 52/53-week fiscal year ending on the last Friday in April. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Nature of Operations The Company is in a single line of business, the manufacture and sale of electronic test tools. This single line of business is primarily made up of two product categories: hand-held service tools and bench test instruments, with hand-held service tools representing approximately 66% of revenues. The Company currently markets its products throughout the world using both indirect and direct sales channels, with indirect sales channels generally used for hand-held service tools and direct sales channels generally used for bench test instruments. Revenue Recognition Revenue is recognized at the time product is shipped or service is rendered to an unaffiliated customer. Revenue from service contracts is recognized ratably over the lives of the contracts. Translation of Foreign Currencies The local currency is deemed to be the functional currency in most of the Company's foreign operations. In these operations, translation gains and losses resulting from converting the local currency financial statements to dollar financial statements are recorded in the Cumulative Translation Adjustment account in the equity section of the balance sheet. In the remaining foreign operations, the U.S. dollar is deemed to be the functional currency. In these operations, translation gains or losses are included in the statements of income. 1. Summary of Significant Accounting Policies (continued) Cash and Cash Equivalents Cash and cash equivalents include cash on hand and highly liquid, short-term investments, which are considered available-for-sale. In general, these instruments, primarily consisting of state and municipal bonds, are issued with long-term maturities but have interest rate reset dates ranging from once per week to once every three months. On the interest rate reset date the Company can sell the investment at par or continue to hold the investment at the prevailing market interest rate for another period. At April 24, 1998 and April 25, 1997, short-term investments totaled $35 million and $37 million, respectively. The carrying amounts of these investments approximate their fair values due to the frequency of the interest rate reset dates and the readily available market for these types of investments. As such, no unrealized gains or losses were recorded. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of investments and trade accounts receivable. The Company's investments, as explained above, consist of high-quality financial instruments. The Company sells its products to a large and diversified customer base in many different industries and geographic areas. The Company has adopted credit policies consistent with the industries and countries in which it sells. The Company performs continuing credit evaluations of the financial condition of its customers, and although the Company does not generally require collateral, letters of credit may be required from some customers. Bad debt losses to date have been insignificant. Financial Instruments The Company is subject to transaction exposures that arise from foreign exchange movements between the date foreign exchange transactions are recorded and the date they are consummated. The Company's exposure to foreign currency movements is somewhat mitigated through naturally offsetting currency positions. Remaining exposure is partially reduced through the purchase of foreign exchange contracts. At April 24, 1998, the Company had foreign exchange contracts for various foreign currencies totaling $2.2 million. 1. Summary of Significant Accounting Policies (continued) Advertising Costs The Company expenses advertising and promotion costs in the period incurred. These expenses were $23 million in 1998, $22 million in 1997, and $20 million in 1996. Inventories Inventories are valued at the lower of cost or market, with cost being the currently adjusted standard cost, which approximates cost on a first-in, first-out basis. Property, Plant, and Equipment Property, plant, and equipment, including improvements and major renewals, are stated at cost. Maintenance and repairs are expensed as incurred. Depreciation is calculated over the estimated useful lives of the related assets on a straight-line basis for financial statement purposes, while an accelerated method is generally used for income tax purposes. Income Taxes The provision for income taxes is computed on pretax income reported in the financial statements. The provision differs from income taxes currently payable because certain items of income and expense are recognized in different periods for financial statement and tax return purposes. Deferred income taxes have been recorded using the liability method in recognition of these temporary differences. The Company has provided for U.S. and foreign taxes on all of the undistributed earnings of its foreign subsidiaries that are expected to be repatriated. Earnings Per Share In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" (SFAS No. 128). The Company adopted SFAS No. 128 for the quarter ended January 23, 1998. SFAS No. 128 requires reporting both basic and diluted earnings per share. Basic earnings per share is computed by dividing the net income available to common stockholders by the weighted average common shares outstanding. Diluted earnings per share is computed by dividing the net income available to common stockholders by the total of the weighted average common shares outstanding plus the 1. Summary of Significant Accounting Policies (continued) dilutive effect of outstanding stock options, the Company's only common share equivalents. Earnings per share for prior years has been restated for the Company's two-for-one stock split, which occurred during the second quarter of fiscal 1998. The following table sets forth the computation of basic and diluted earnings per share: Years Ended April 24, April 25, April 26, 1998 1997 1996 (In thousands, except shares and per share amounts) Total shares outstanding at beginning of the period 18,092,960 17,305,910 16,951,450 Weighted average shares for DeskNet acquisition - 132,574 - Weighted average shares issued under employee stock plans and repurchased shares 183,779 97,282 245,822 Weighted average shares outstanding 18,276,739 17,535,766 17,197,272 Weighted average effect of dilutive stock options 559,366 619,750 527,410 Weighted average shares and share equivalents outstanding 18,836,105 18,155,516 17,724,682 Net income $ 27,738 $ 19,606 $ 23,703 Earnings per share: Basic $ 1.52 $ 1.12 $ 1.38 Diluted $ 1.47 $ 1.08 $ 1.34 Goodwill and Intangibles Excess cost over the fair value of net assets acquired (goodwill) is generally amortized on a straight-line basis over twenty years. Intangible assets are generally amortized over five years. 1. Summary of Significant Accounting Policies (continued) Impairment of Long-lived Assets Long-lived assets consist of intangible assets, goodwill, and certain capital assets. The carrying value of these assets is regularly reviewed to verify they are valued properly. If the facts and circumstances suggest that the value has been impaired, the carrying value of the assets will be reduced appropriately. Stock-Based Compensation The Company has elected to apply the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, the Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation expense, as disclosed in the notes, for stock options is measured as the excess, if any, of the fair value of the Company's common stock at the measurement date over the stock option price. See Note 10 for disclosure. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassification Certain prior year amounts have been reclassified to conform to current year presentation. 2. Business Combination with Danaher On April 24, 1998, the Company and Danaher Corporation (Danaher) entered into a definitive merger agreement pursuant to which the Company will become a wholly-owned subsidiary of Danaher. According to the agreement, the Company's stockholders will receive 0.45239 shares of Danaher common stock for each share of the Company's common stock. On May 29, 1998, the ratio was adjusted to 0.90478 common shares of Danaher for each share of the Company's common stock to reflect a two-for-one stock split of the Danaher stock. The transaction is valued at approximately $33.39 per share to the Company's stockholders or approximately $625 million, based on Danaher's 2. Business Combination with Danaher (continued) April 24, 1998 closing stock price. The merger was approved by the Company's stockholders at a special meeting on July 7, 1998. The Company anticipates approximately $15 million of transaction and employee separation costs related to the merger. 3. Acquisitions On June 26, 1996, Forte Networks, Inc. (Forte) was acquired and merged into the Company. The Company issued 1,154,380 shares of Fluke Corporation common stock in exchange for all outstanding Forte shares. The transaction was a tax-free reorganization and was accounted for as a pooling-of-interests. Accordingly, the financial statements as presented have been restated to reflect the combined companies. On February 6, 1997, the Company completed the acquisition of DeskNet Systems, Inc. (DeskNet). Fluke issued 610,848 shares of Fluke Corporation common stock in exchange for all outstanding DeskNet shares. The transaction was a tax-free reorganization and was accounted for as a pooling-of-interests. This combination did not have a material effect on the financial statements of prior periods, which, therefore, have not been restated. 4. Provisions for Business Restructuring During the fourth quarter of 1997, the Company recorded a pretax charge of $12 million, or $0.47 per share, related to the restructuring of some of the Company's European operations. The restructuring charge consisted primarily of severance-related costs effecting approximately 120 employees. During fiscal 1998, the Company completed substantially all the activities anticipated in the business restructuring and $9 million was paid and charged to the restructuring liability. This included severance costs related to closing its product development operation in Germany, reorganizing the European sales force to better support indirect sales channels, and centralizing the European finance functions and product repair operations. The remaining accrued liabilities related to restructuring of $3 million, are primarily for severance costs, which are anticipated to be paid during fiscal 1999. 5. Inventories April 24, 1998 April 25, 1997 (In thousands) Finished goods $ 14,502 $ 17,789 Work-in-process 11,288 11,160 Purchased parts and materials 24,682 25,573 Total inventories $ 50,472 $ 54,522 6. Accrued Liabilities April 24, 1998 April 25, 1997 (In thousands) Compensation payable $ 11,156 $ 12,133 Accrued expenses 10,852 9,799 Unearned service revenue 1,507 1,585 Other taxes payable 5,735 5,255 Profit-sharing bonus payable 1,896 2,354 Dividends payable 1,599 1,448 Other liabilities 3,228 2,776 Total accrued liabilities $ 35,973 $ 35,350 7. Goodwill and Intangible Assets Goodwill represents the excess of the purchase price over the fair market value of the net assets acquired. Goodwill is being amortized on a straight-line basis over twenty years. The Company also owns intangible assets, which are being amortized over five years. Amortization expense is recorded in marketing and administrative expense. Cumulative amortization was $13 million at April 24, 1998 and $10 million at April 25, 1997. 7. Goodwill and Intangible Assets (continued) A reconciliation of goodwill and intangible assets, net of accumulated amortization, is provided below: April 24, 1998 April 25, 1997 (In thousands) Balance at beginning of year $ 11,876 $ 16,201 Amortization expense (2,012) (2,338) Adjustment related to changes to deferred tax asset valuation allowance (Note 8) (3,672) (866) Translation adjustment (390) (1,121) Balance at end of year $ 5,802 $ 11,876 8. Income Taxes For financial reporting purposes, income before income taxes is as follows: Years Ended April 24, April 25, April 26, 1998 1997 1996 (In thousands) United States $ 29,279 $ 27,452 $ 22,428 Foreign 13,395 4,170 13,544 Income before income taxes $ 42,674 $ 31,622 $ 35,972 8. Income Taxes (continued) The provision for income taxes is as follows: Years Ended April 24, April 25, April 26, 1998 1997 1996 (In thousands) Current taxes on income: United States $ 6,529 $ 11,648 $ 5,883 Foreign 4,937 2,681 5,113 Total current taxes on income 11,466 14,329 10,996 Deferred income taxes 3,470 (2,313) 1,273 Provision for income taxes $ 14,936 $ 12,016 $ 12,269 Significant components of the Company's deferred tax assets and liabilities are as follows: April 24, April 25, 1998 1997 (In thousands) Deferred tax assets: Accrued employee benefit expenses $ 3,656 $ 3,760 Accrued restructuring costs 495 1,609 Inventory adjustments 4,429 5,659 Net operating loss carryforwards 15,203 19,831 Product warranty accruals 898 687 Other items, net 583 618 Total deferred tax assets 25,264 32,164 Valuation reserve (10,852) (15,196) Net deferred tax assets $ 14,412 $ 16,968 Deferred tax liabilities: Fixed asset basis differences $ 5,008 $ 5,303 Pension 5,572 3,746 Intangible assets - 495 Other items, net 512 634 Total deferred tax liabilities $ 11,092 $ 10,178 8. Income Taxes (continued) The deferred tax asset valuation reserve is primarily related to deferred tax assets of foreign operations, including net operating loss (NOL) carryforwards acquired in connection with the 1993 acquisition of the Philips Electronic N.V. of The Netherlands test and measurement business. The acquired NOLs have an unlimited carryover period. A substantial portion of these NOLs were provided for with a valuation allowance at the time of the acquisition. The tax benefit from adjusting the valuation reserve of the acquired NOLs is recorded as a reduction of goodwill. Reductions in goodwill for NOL benefit were $3.7 million in 1998 and $866,000 in 1997. A reconciliation from the U.S. statutory rate to the effective tax rate is as follows: Years Ended April 24, 1998 April 25, 1997 April 26, 1996 Amount Percent Amount Percent Amount Percent (In thousands) Tax at U.S. statutory rate $ 14,936 35.0% $ 11,068 35.0% $ 12,590 35.0% Foreign tax greater than U.S. statutory rate 716 1.7 1,283 4.1 503 1.4 Utilization of foreign tax credits (160) (0.4) (800) (2.5) (542) (1.5) Foreign sales corporation tax benefit (515) (1.2) (560) (1.8) (554) (1.5) State taxes, net of federal benefit 285 0.7 446 1.4 326 0.9 Nondeductible goodwill 146 0.3 202 0.6 264 0.7 Subchapter S income tax effect - - (210) (0.7) (826) (2.3) Other items, net (472) (1.1) 587 1.9 508 1.4 Provision for income taxes $ 14,936 35.0% $ 12,016 38.0% $ 12,269 34.1% 9. Employee Benefit Plans The expense related to employee benefit plans is as follows: Years Ended April 24, April 25, April 26, 1998 1997 1996 (In thousands) Pension Plan, U.S. $ 1,586 $ 2,035 $ 1,444 Pension Plans, foreign 1,156 1,170 1,111 Profit-Sharing Retirement Plan 1,322 1,248 745 Profit-Sharing Bonus Plan 4,458 4,687 3,695 Other benefit plans 539 956 618 Total employee benefit plans $ 9,061 $ 10,096 $ 7,613 Pension Plan - United States The Company's U.S. pension plan includes all U.S. employees with a minimum of one year of service. Pension benefits are based upon years of service with the Company and the highest consecutive sixty months' average compensation earned. The Company's funding policy is to contribute annually the amount required by ERISA. Net periodic U.S. pension cost is as follows: Years Ended April 24, April 25, April 26, 1998 1997 1996 (In thousands) Service cost $ 2,215 $ 2,218 $ 1,899 Interest cost 3,929 3,740 3,260 Return on plan assets (13,420) (5,979) (6,682) Net amortization and deferral 8,862 2,056 2,967 Net periodic pension cost $ 1,586 $ 2,035 $ 1,444 9. Employee Benefit Plans (continued) The funding status of the U.S. pension plan is as follows: Years Ended April 24, April 25, 1998 1997 (In thousands) Vested benefit obligation $ 48,261 $ 40,715 Accumulated benefit obligation $ 49,180 $ 41,537 Projected benefit obligation $ 56,934 $ 50,487 Fair market value of plan assets 65,868 49,933 Projected benefit obligation in excess of (less than) plan assets (8,934) 554 Prior service cost 455 465 Unrecognized net loss (5,221) (9,905) Prepaid pension asset $ (13,700) $ (8,886) For purposes of calculating the funding status of the plan, the weighted average discount rate was 7.1% in 1998, 8.3% in 1997, and 8.0% in 1996. The rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation varied by age group and ranged from 2.7% to 4.0% in 1998, 3.8% to 5.1% in 1997, and from 4.3% to 5.6% in 1996. The expected long-term rate of return on plan assets was 9.0% in 1998, 9.3% in 1997, and 9.5% in 1996. For purposes of calculating the net periodic pension cost, the actuarial assumptions utilized are the actuarial assumptions in place at the end of the previous fiscal year (e.g., the fiscal 1998 net periodic pension cost was based upon the 1997 actuarial assumptions). Upon adoption of Statement of Financial Accounting Standards No. 87 (SFAS No. 87), "Accounting for Pensions" in 1988, the plan had an excess of plan assets, including accrued contributions, over projected benefit obligations (net transition asset) of $5.0 million. The remaining net transition asset was amortized in 1997. 9. Employee Benefit Plans (continued) All of the plan's assets are stated at fair market value and consist primarily of common stock, fixed-income securities, and cash equivalents. The prepaid pension asset is included in Other Assets on the balance sheet. Pension Plans - Foreign The Company has various pension plans covering its foreign employees. Most of these plans are defined contribution plans and are fully funded. The expense for these plans was $466,000 in 1998, $400,000 in 1997, and $355,000 in 1996. The remaining foreign pension plans qualify for accounting under the rules of SFAS No. 87. The tables below include only those foreign pension plans that qualify for SFAS No. 87 treatment. Net periodic pension expense of foreign plans under SFAS No. 87 is as follows: Years Ended April 24, April 25, April 26, 1998 1997 1996 (In thousands) Service cost $ 845 $ 933 $ 746 Interest cost 1,240 1,434 1,307 Return on plan assets (1,376) (1,582) (1,251) Net amortization and deferral (19) (15) (46) Net periodic pension cost $ 690 $ 770 $ 756 9. Employee Benefit Plans (continued) The funding status of the plans is as follows: April 24, April 25, 1998 1997 (In thousands) Vested benefit obligation $ 19,869 $ 14,337 Accumulated benefit obligation $ 21,272 $ 15,474 Projected benefit obligation $ 24,700 $ 21,322 Fair market value of plan assets 23,346 19,888 Projected benefit obligation in excess of plan assets 1,354 1,434 Unrecognized net gain (loss) (311) 128 Accrued pension liability $ 1,043 $ 1,562 The weighted average discount rate was 5.5% in 1998, 6.0% in 1997, and 6.5% in 1996. The rate of increase in future compensation levels used in determining the actuarial present values of the projected benefit obligation varied from 1.0% to 4.0% in 1998, 3.0% to 4.5% in 1997, and from 3.0% to 3.5% in 1996. The expected long-term rate of return on plan assets was 7.0% in 1998, 1997, and 1996. Profit-Sharing Retirement Plan The Company has a profit-sharing retirement plan for all U.S. employees, which provides immediate eligibility and vesting. The Company matches the employee's salary deferrals under Section 401(k) of the Internal Revenue Code, subject to certain profitability and dollar limits. Profit-Sharing Bonus Plan The Company has a profit-sharing bonus plan, which generally provides semiannual cash payments to certain employees. The amount of each eligible employee's bonus is dependent upon the employee's base salary in relation to the total base salary of all eligible employees and the operating performance of the Company. 9. Employee Benefit Plans (continued) Executive Deferred Compensation Plan The Company has a deferred compensation plan for executives that allows salary deferrals to be made on a pretax basis. Participants may choose between several investment options, including the Company's common stock. Assets of the plan are held by a Rabbi Trust. At April 24, 1998, there were $3.7 million of assets held by the Trust, which included 26,017 shares of the Company's common stock, valued at $650,000 and reported in stockholders' equity. At April 24, 1998, and April 25, 1997, the total deferred compensation liability was $3.1 million and $1.3 million, respectively. Early Retirement Incentive Program On April 23, 1998, the Company announced a voluntary early retirement program for certain U.S.-based employees. The eligible class is made up of individuals aged 50 and older with a minimum of 14 years of service with the Company. Acceptance of the early retirement offer must be made by June 30, 1998, and it is estimated that 140 employees will elect to participate. The estimated cost of $6 million related to the program will be recorded in fiscal 1999 and paid out of general corporate funds. Other Benefit Plans The Company has other employee cash and stock award plans designed to recognize and compensate key employees for performance. The long-term liabilities related to the Company's various employee benefit plans are $12.8 million and $11.9 million on April 24, 1998, and April 25, 1997, respectively, and are included in other liabilities on the accompanying consolidated balance sheets. 10. Stockholders' Equity Preferred Stock There are 2,000,000 shares of preferred stock authorized, of which 250,000 shares have been designated as Series A Convertible Preferred Stock. There were no shares of preferred stock outstanding at April 24, 1998 or April 25, 1997. Common Stock On September 10, 1997, the Company's Board of Directors approved increasing the 20 million shares of the authorized common stock to 40 million shares and announced a two-for-one stock split with a record date of September 26, 1997. The two-for-one stock split was effected in the form of a stock dividend, which was distributed on October 15, 1997. Prior period common stock and retained earnings accounts, as well as share and per share amounts, in the accompanying financial statements have been restated for the effect of the stock split. Stock Repurchase Program On December 11, 1997, the Board of Directors authorized a program to purchase up to $30 million of the Company's common stock to offset the dilution associated with stock options issued under the Company's stock incentive plans. During the quarter ended April 24, 1998, the Company repurchased and canceled 160,000 shares of common stock under this program. In April 1, 1998, the Board of Directors terminated the program. Stock Purchase Plan The Company has a voluntary employee stock purchase plan for all employees. The Company's contribution is 25% of the amount invested by the employee plus all commissions and brokerage fees. The Company's expenses related to the plan were $691,000 in 1998, $654,000 in 1997, and $497,000 in 1996. Dividends Per Share Dividends per share have been restated for the two-for-one stock split discussed above. The Company declared cash dividends of $0.35 per share in 1998, $0.32 per share in 1997, and $0.30 per share in 1996. 10. Stockholders' Equity (continued) Following is a breakdown of dividends per share restated for the 1997 Forte acquisition: Years Ended April 24, April 25, April 26, 1998 1997 1996 Fluke dividends $ 0.35 $ 0.32 $ 0.30 Forte dividends 0.00 0.04 0.07 Restated $ 0.35 $ 0.36 $ 0.37 As a Subchapter S Corporation, Forte stockholders were personally liable for paying taxes on their allocated portion of corporate income. Forte dividends were paid for profit sharing and to provide cash to the stockholders to pay taxes on corporate income. Stockholder Rights Plan The Company has a Stockholder Rights Plan and issues one Right for each outstanding share of common stock. The rights become exercisable only if a person or group (an "Acquiring Person") has acquired, or obtained the right to acquire, 25% or more of the outstanding shares of common stock of the Company or following the commencement of a tender or exchange offer for acquiring such same percentage. In the event that a person or group becomes an Acquiring Person, each Right, upon exercise, will entitle its holder (except for an Acquiring Person) to receive common stock of the Company (or, in certain circumstances, cash, property, or other securities of the Company) or of any company with which the Company shall have entered into certain transactions having a value equal to two times the exercise price of the Right. In addition, under certain circumstances, the Continuing Directors can require that each Right (other than Rights held by an Acquiring Person) be exchanged for one share of common stock. The Company may redeem the Rights for $0.01 per Right at any time before they become exercisable. The Rights do not entitle their holders to any voting or dividend rights and, at least until they become exercisable, have no dilutive effect on the earnings of the Company. The plan was adopted to encourage a prospective acquirer of the Company to negotiate acquisition terms with the Board of Directors, including the Continuing Directors, to assure that the terms are in the best interests of the stockholders of the Company. 10. Stockholders' Equity (continued) Stock Options The Company has a 1988 and a 1990 Stock Incentive Plan. Stock options granted under the 1990 plan and those granted after 1989 under the 1988 plan are nonqualified stock options generally exercisable 40% after one year, 30% after three years, and 30% after five years and expire ten years from the date of grant. In 1997, 420,000 options were granted from the 1988 plan which vest in 1999 and expire in 2001. These particular grants have stock price milestones that must be reached before these options become exercisable. In addition, the Company has a Stock Option Plan for outside Directors, which was authorized in 1990 and annually grants nonqualified stock options to the Company's outside directors. Grants under this plan and those made in 1988 and 1989 under the 1988 Stock Incentive Plan are exercisable after one year and expire ten years from the date of grant. There was a modification to selected options issued from the 1988 plan. These particular options were modified to change the term of the options upon retirement from one year to the original life of the option. The modification resulted in a new measurement date for compensation expense recognition resulting in compensation expense of $66,000 in 1998 and $394,000 in 1997 in the accompanying financial statements. At the Annual Meeting of Stockholders on September 10, 1997, the stockholders approved the adoption of the 1998 Stock Incentive Plan (the Plan). The Plan authorizes 3,000,000 shares for new awards and replaces the 1988 Stock Incentive Plan, discussed above, which used most of its authorized shares by the end of the 1998 fiscal year. The Plan is similar to the 1988 plan but: (i) was expanded to include the possibility of issuing freestanding stock appreciation rights and performance awards, (ii) allows Directors to become participants in the Plan so that their annual retainer fee can be paid in restricted stock, and (iii) includes certain limitations imposed by the Internal Revenue Service. General terms and conditions such as vesting, exercisability, term, merger and change of control provisions, etc., remained the same as under the 1988 plan. The 1988 Stock Incentive Plan provided for the issuance of restricted common stock, subject to vesting periods, to key employees. These shares typically have a two-year vesting period. The cost of the awards, determined as the fair market value of the shares on the date of grant, is charged to expense ratably over the vesting period. The Company awarded 1,836 shares, 77,340 shares, and 2,082 shares of restricted common stock to key employees during fiscal 1998, 1997, and 1996, respectively, subject to vesting periods, under this recognition program. 10. Stockholders' Equity (continued) Shares reserved for issuance under stock option plans totaled 6,014,135 shares at April 24, 1998, including 3,105,516 shares available for options to be granted in the future. Changes in options outstanding for the combined plans were as follows: Weighted Options Average Option Outstanding Price Per Share Balance April 28, 1995 (exercisable 886,700) 2,098,876 $ 12.98 Granted 596,626 18.17 Exercised (359,318) 10.21 Expired or terminated (36,000) 14.03 Balance April 26, 1996 (exercisable 1,005,116) 2,300,184 14.76 Granted 975,252 21.23 Exercised (103,200) 12.34 Expired or terminated (20,302) 14.91 Balance April 25, 1997 (exercisable 1,305,942) 3,151,934 16.84 Granted 134,500 24.79 Exercised (342,253) 13.66 Expired or terminated (35,562) 19.50 Balance April 24, 1998 (exercisable 1,498,328) 2,908,619 17.55 The following table summarizes information about stock options outstanding at April 24, 1998: Weighted Average Range of Options Remaining Exercise Outstanding Contractual Prices at April 24, 1998 Life in Years $ 3.50 - $ 4.83 6,433 6.7 4.84 - 8.45 134,356 2.5 8.46 - 15.00 860,010 4.6 15.01 - 24.82 1,907,820 6.6 3.50 - 24.82 2,908,619 5.8 (Continued) Weighted Weighted Average Options Average Exercise Exercisable Exercise Price at April 24, 1998 Price $ 3.89 3,876 $ 3.85 7.53 132,832 7.55 13.06 749,070 13.05 20.32 612,550 19.53 17.55 1,498,328 15.18 10. Stockholders' Equity (continued) The pro forma compensation expense as defined by SFAS No. 123 for the Company's stock option plans included in the pro forma net income below is determined based on the fair value at the grant date for awards after April 28, 1995, with the exception of awards made prior to that date that have been modified. The resulting pro forma net income and earnings per share amounts are calculated as if compensation expense had been recorded based on the fair value of options granted and modified: Years Ended April 24, April 25, April 26, 1998 1997 1996 (In thousands, except per share amounts) Net income - as reported $ 27,738 $ 19,606 $ 23,703 Net income - pro forma 26,234 18,471 23,559 Basic - earnings per share Reported 1.52 1.12 1.38 Pro forma 1.44 1.05 1.37 Diluted - earnings per share: Reported 1.47 1.08 1.34 Pro forma 1.39 1.03 1.34 Compensation expense recognized in these pro forma disclosures may not be representative of the effects on pro forma net income or loss for future years because the above amounts include only the amortization for the fair value of the grants made since April 28, 1995. The fair value of each option granted is estimated using the Black-Scholes option-pricing model based on the measurement date and the following weighted average assumptions: Years Ended April 24, April 25, April 26, 1998 1997 1996 Risk-free interest rate 5.48% 6.50% 6.08% Expected life in years 5.95 4.98 6.02 Expected volatility 20.80% 18.88% 19.80% Expected dividend yield 1.57% 1.75% 2.03% 10. Stockholders' Equity (continued) The weighted average fair value of awards granted in 1998, 1997, and 1996 is $6.75, $3.86, and $4.78, respectively. The weighted average fair value in 1997 includes the effect of the 420,000 shares granted with stock price milestones, which resulted in lower fair values compared to awards granted with the Company's standard vesting criteria. The stock options that were modified resulted in exercise prices that differed from the market price on the measurement date. Modified options with an exercise price above market price had a weighted average fair value of $2.47 and a weighted average exercise price of $20.19. Modified options with an exercise price below the market price had a weighted average fair value of $5.98 and a weighted average exercise price of $12.28. 11. Operations by Geographic Areas The Company is engaged in one line of business, the manufacture and sale of electronic test tools. In the schedule below, revenues, income before income taxes, and assets are reported based on the location of the Company's facilities. Intercompany transfers of products and services are made at arm's length between the various geographic areas. Years Ended April 24, April 25, April 26, 1998 1997 1996 (In thousands) Revenues: United States: Sales to unaffiliated customers $ 201,991 $ 191,212 $ 164,023 Export sales 49,810 49,103 44,956 Interarea transfers 78,239 67,806 67,073 Total United States 330,040 308,121 276,052 Europe: Sales to unaffiliated customers 148,197 152,603 166,551 Interarea transfers 29,436 34,636 30,432 Total Europe 177,633 187,239 196,983 Other areas: Sales to unaffiliated customers 37,769 37,248 37,995 Eliminations (107,675) (102,442) (97,505) Consolidated revenues $ 437,767 $ 430,166 $ 413,525 11. Operations by Geographic Areas (continued) Years Ended April 24, April 25, April 26, 1998 1997 1996 (In thousands) Income before income taxes: United States $ 36,187 $ 40,713 $ 30,328 Europe 10,863 9,102 10,698 Other 2,532 2,801 4,016 Corporate expense and eliminations* (6,908) (20,994) (9,070) Consolidated income before income taxes $ 42,674 $ 31,622 $ 35,972 Assets: United States $ 207,955 $ 192,906 $ 166,553 Europe 87,309 90,911 100,456 Other 12,760 12,831 12,513 Eliminations (3,320) (4,288) (3,850) Consolidated assets $ 304,704 $ 292,360 $ 275,672 * Includes $12 million restructuring charge in 1997. 12. Financing and Commitments The Company has $44 million of committed, noncollateralized, revolving, multicurrency lines of credit. The committed lines of credit contain certain working capital and other minimum financial covenants. The Company is in compliance with all covenants on its lines of credit. Interest rates under the agreements range from LIBOR plus 0.375 of 1% to LIBOR plus 0.625 of 1%, based on leverage ratios. The Company pays commitment fees of 0.125 to 0.225 of 1% on the unused amount of the committed facility based on leverage ratios. The outstanding balances related to these lines of credit were zero at April 24, 1998 and April 25, 1997. The Company has $79 million in short-term uncommitted lines of credit. Under these lines, there was zero outstanding at April 24, 1998 and $785,000 outstanding at April 25, 1997. Long-term obligations include capital lease obligations. The Company's operating lease expense, including leases with a term of less than one year, was $7.2 million in 1998, $7.4 million in 1997, and $7.5 million in 1996. The principal leases are for foreign manufacturing facilities, various sales offices, storage 12. Financing and Commitments (continued) facilities, data processing equipment and automobiles. Most facility leases have escalation clauses to cover increases in direct lease expenses. Below is a schedule of future minimum lease payments under operating leases that have initial noncancelable lease terms in excess of one year as of April 24, 1998: Facilities Equipment Total (In thousands) Fiscal year: 1999 $ 3,229 $ 1,483 $ 4,712 2000 2,717 937 3,654 2001 2,012 393 2,405 2002 1,763 83 1,846 2003 1,214 31 1,245 Total $ 10,935 $ 2,927 $ 13,862 13. Contingencies The Company is a defendant in a lawsuit in Los Angeles County Superior Court titled Talon Instruments, Inc. and Robert E. Corby vs. John Fluke Manufacturing Company, Inc., et al. The plaintiffs alleged that the Company and its lawyers maliciously prosecuted a federal patent infringement action against them in 1988. The jury in that infringement case found that no infringement had occurred. In March 1997, a Los Angeles Superior Court jury found in the plaintiffs' favor and awarded compensatory damages of $2 million and punitive damages of $4 million. The court ordered a new trial as to the punitive damages only. The Court reduced the compensatory damages by $250,000 (the amount paid by other defendants to settle the claims against them). The Company is appealing the original decision. Although the ultimate outcome of this appeal cannot be determined, the Company believes that the jury's finding in the case is contrary to established law. Given these factors, no provision for losses was recorded at April 24, 1998 or April 25, 1997. Even if the appeal is not successful, the Company believes that its insurance should ultimately provide coverage for liability arising from this lawsuit even though the insurance company has indicated it would contest coverage of these damages. The Company is subject to various other pending and threatened legal actions that arise in the normal course of business. In the opinion of management, liabilities arising from these claims will not have a material effect on the financial position of the Company. 14. Year 2000 (Unaudited) The Company has developed plans to make its systems and products year 2000 compliant. The Company has and will continue to make certain investments to modify or convert its internal operational software and hardware systems and applications to ensure that the Company's systems are year 2000 compliant. Although the Company expects some costs associated with the modifications and conversions, the financial impact to the Company has not been and is not anticipated to be material to its financial position or results of operations in any given year. The Company also is implementing programs for assisting customers to obtain year 2000 compliance on older Fluke products either by making software upgrades available or offering programs for migrations to current product versions. The costs incurred in connection with these product programs are not expected to be material. However, if any necessary modifications, conversions, migrations, or upgrades are not made, or not made in a timely or cost-effective manner, the Company or its customers may be unable to implement appropriate year 2000 solutions, which could have a material adverse effect on the Company's business, financial condition, or results of operations. Additionally, if other companies with which the Company does business do not address year 2000 issues on a timely basis, it could have an adverse effect on the Company's systems or business transactions. 15. Selected Quarterly Financial Data (Unaudited) Basic Diluted Dividends Gross Net Earnings Earnings Per Revenues Margin Income Per Share(1) Per Share(1) Share (In thousands, except per share amounts) Fiscal 1998: 1st Quarter $105,580 $ 56,192 $ 6,580 $0.36 $0.34 $0.0875 2nd Quarter 110,184 59,632 7,477 0.41 0.39 0.0875 3rd Quarter 110,181 57,364 7,522 0.41 0.40 0.0875 4th Quarter 111,822 57,007 6,159 0.34 0.33 0.0875 Total $437,767 $230,195 $27,738 $1.52 $1.47 $0.3500 Fiscal 1997: 1st Quarter $101,154 $ 53,960 $ 5,559 $0.32 $0.31 $0.0800 2nd Quarter 105,473 56,889 6,404 0.37 0.36 0.0800 3rd Quarter 108,450 58,627 7,422 0.43 0.41 0.0800 4th Quarter(2)115,089 63,899 221 0.01 0.01 0.0800 Total $430,166 $233,375 $19,606 $1.12 $1.08 $0.3200 The 1997 diluted earnings per share and dividends per share are restated to reflect the two-for-one stock split that occurred in October 1997. (1) The sum of the earnings per share on a quarterly basis will not necessarily equal the earnings per share reported for the year since the average shares and share equivalents outstanding used in the earnings per share computation changes throughout the year. (2) The 1997 fourth quarter net income included the restructuring charge of $12 million with an after-tax impact of reducing earnings per share by $0.45 for the fourth quarter and $0.47 for the fiscal year. 16. Stock Price Information (Unaudited) 1998 1997 High Low High Low 1st Quarter 29 15/16 21 3/4 20 3/16 18 3/8 2nd Quarter 28 1/8 24 7/16 19 5/8 17 1/8 3rd Quarter 26 7/8 22 5/16 23 1/4 18 13/16 4th Quarter 24 13/16 22 7/16 24 7/16 21 1/8 Fluke Corporation common stock is traded on the New York Stock Exchange. Quarterly cash dividends of $0.0875 per share were declared in 1998, $0.08 per share in 1997, and $0.075 per share in 1996. There were 1,589 stockholders of record at April 24, 1998. 17. Financial Summary Years Ended April 24, April 25, April 26, April 28, April 29, 1998 1997 1996 1995 1994 (In thousands, except per share amounts) Revenues $437,767 $430,166 $413,525 $382,066 $357,904 Cost of goods sold $207,572 $196,791 $191,360 $181,805 $181,409 Gross margin $230,195 $233,375 $222,165 $200,261 $176,495 Restructuring $ - $ 12,136 $ - $ - $ - Total operating expenses excluding restructuring $188,842 $191,017 $186,074 $174,184 $162,278 Operating income $ 41,353 $ 30,222 $ 36,091 $ 26,077 $ 14,217 Income before income taxes $ 42,674 $ 31,622 $ 35,972 $ 25,920 $ 13,908 Net income $ 27,738 $ 19,606 $ 23,703 $ 16,787 $ 8,628 Weighted average shares outstanding 18,276,739 17,535,766 17,197,272 16,739,808 16,922,930 Weighted average shares and share equivalents outstanding 18,836,105 18,155,516 17,724,682 17,136,924 17,214,708 Earnings per share: Basic $ 1.52 $ 1.12 $ 1.38 $ 1.00 $ 0.51 Diluted $ 1.47 $ 1.08 $ 1.34 $ 0.98 $ 0.50 Cash dividends declared per share $ 0.35 $ 0.32 $ 0.30 $ 0.28 $ 0.26 Net income as a percentage of revenues 6.34% 4.56% 5.73% 4.39% 2.41% Total assets $304,704 $292,360 $275,672 $274,907 $244,648 Total stockholders' equity $224,520 $202,939 $192,077 $174,678 $156,048 Long-term obligations $ 292 $ 563 $ 7,098 $ 21,613 $ 14,712 Long-term interest expense $ 42 $ 247 $ 1,248 $ 1,423 $ 1,327 -----END PRIVACY-ENHANCED MESSAGE-----