KEI Keithley Instruments, Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

SCHEDULE 14A

(Rule 14a-101)

SCHEDULE 14A INFORMATION

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

Filed by the Registrant  x

 

Filed by a Party other than the Registrant  o

 

Check the appropriate box:

 

o   Preliminary Proxy Statement.

o   Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)).

x   Definitive Proxy Statement.

o   Definitive Additional Materials.

o   Soliciting material Pursuant to §240.14a-12.

 

KEITHLEY INSTRUMENTS, INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

Common shares, without par value, of Keithley Instruments, Inc. (the “Registrant”)

Class B common shares, without par value, of the Registrant

 

 

 

As of October 7, 2010, 13,684,523 common shares, 2,150,502 Class B common shares, options to purchase 2,343,551 Common shares having an exercise price less than $21.60 per share, restricted share units representing 216,675 Common shares and performance share units representing 205,675 Common shares

 

 

 

As of October 7, 2010, there were (i) 13,684,523 common shares, (ii) 2,150,502 Class B common shares, (iii) options to purchase 2,343,551 common shares with an exercise price less than $21.60 per common share outstanding, and (iii) 216,675 restricted share units and 205,675 common shares issuable under performance award units granted under the Registrant’s stock incentive plans. The filing fee was determined by adding (x) the product of (I) the number of common shares and Class B common shares that are proposed to be acquired in the merger and (II) the merger consideration of $21.60 in cash per common share and Class B common share, plus (y) $18,479,820 expected to be paid to holders of options to purchase common shares with an exercise price of less than $21.60 per common share in exchange for the cancellation of such options, plus (z) the product of (I) the aggregate number of restricted share units and performance award units granted under the Registrant’s stock incentive plans and (II) the merger consideration of $21.60 in cash per common share (x, y and z together, the “Total Consideration”). The payment of the filing fee, calculated in accordance with Exchange Rule 0-11(c)(1), was calculated by multiplying the Total Consideration by 0.0000713.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 25, 2010

 

Dear Shareholder:

 

You are cordially invited to attend a special meeting of shareholders of Keithley Instruments, Inc. to be held on Friday, November 19, 2010 at 9:00 a.m. local time. The meeting will take place at the Cleveland Marriott East, 26300 Harvard Road, Warrensville Heights, Ohio 44122.

 

At the special meeting, we will ask the holders of our common shares and Class B common shares to approve and adopt an Agreement and Plan of Merger, dated as of September 29, 2010, among Danaher Corporation, Aegean Acquisition Corp. and Keithley Instruments, Inc., and the transactions contemplated by the merger agreement. If the transactions contemplated by the merger agreement are completed, we will become an indirect, wholly-owned subsidiary of Danaher Corporation, and you will be entitled to receive $21.60 per share in cash, without interest and less any required withholding taxes, for each common share or Class B common share of Keithley Instruments, Inc. that you own at the time of the merger.

 

After careful consideration, our board of directors, by the unanimous vote of the directors voting on the matter, approved the merger agreement, the merger and the other transactions contemplated by the merger agreement and determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable, fair to and in the best interests of Keithley Instruments, Inc. and our shareholders. Our board of directors recommends that our shareholders vote “FOR” approval and adoption of the merger agreement and the transactions contemplated by the merger agreement. The merger agreement and the transactions contemplated by the merger agreement must be approved and adopted by the affirmative vote of holders of a majority of the voting power of our outstanding common shares and Class B common shares (voting together as one class) that are entitled to vote at the special meeting.

 

The proxy statement accompanying this letter provides you with information concerning the merger, the merger agreement and the special meeting. A copy of the merger agreement is attached as Annex A to the proxy statement. We encourage you to read the entire proxy statement and its annexes carefully.

 

Your vote is very important, regardless of the number of common shares or Class B common shares you own.   Under Ohio law and our articles of incorporation and code of regulations, the merger cannot be completed unless holders of a majority of the voting power of our outstanding common shares and Class B common shares (voting together as one class) entitled to vote at the special meeting vote for the approval and adoption of the merger agreement and the transactions contemplated by the merger agreement. You will have one vote for each common share that you owned as of the record date, and you will have ten votes for each Class B common share you owned as of the record date. Pursuant to a voting agreement, a copy of which is attached to the proxy statement as Annex B, Keithley Investment Co. Limited Partnership, a partnership of which Joseph P. Keithley, our chairman of the board of directors, president and chief executive officer, is the general partner, agreed to vote a number of its Class B common shares representing 19.99% of the voting power of Keithley in favor of approval and adoption of the merger agreement and the transactions contemplated by the merger agreement. If you do not vote, it will have the same effect as a vote against approval and adoption of the merger agreement and the transactions contemplated by the merger agreement.

 

Whether or not you plan to attend the special meeting in person, please complete, sign, date and return promptly the enclosed proxy card or submit a proxy by telephone or on the Internet using the instructions provided on the enclosed proxy card. If you hold shares through a bank, brokerage firm or other nominee, you should follow the procedures provided by your broker or nominee. These actions will not limit your right to vote in person if you wish to attend the special meeting and vote in person.

 

Thank you in advance for your cooperation and continued support.

 

Sincerely,

Joseph P. Keithley,
Chairman of the Board, President and Chief Executive Officer

 

The accompanying proxy statement is dated October 25, 2010 and is first being mailed to our shareholders on or about October 25, 2010.

 

KEITHLEY INSTRUMENTS, INC.
28775 AURORA ROAD
CLEVELAND, OHIO 44139
(440) 248-0400

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On November 19, 2010

 

To our Shareholders:

 

NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Keithley Instruments, Inc. (“Keithley” or “we,” “us,” or “our”) will be held on Friday, November 19, 2010 at 9:00 a.m. local time. The meeting will take place at the Cleveland Marriott East, 26300 Harvard Road, Warrensville Heights, Ohio 44122, for the purpose of acting upon the following matters:

 

1. To consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger, dated as of September 29, 2010, among Danaher Corporation, a Delaware corporation (“Danaher”), Aegean Acquisition Corp., an Ohio corporation and an indirect wholly-owned subsidiary of Danaher (“Merger Sub”), and Keithley, and the transactions contemplated by the merger agreement, pursuant to which Merger Sub will merge with and into Keithley and each of our outstanding common shares and Class B common shares (collectively, our “Common Shares”) (other than any Common Share that is held by Danaher or any of its subsidiaries, held in our treasury or by any of our subsidiaries, or held by shareholders who perfect dissenters’ rights under Ohio law) will be converted into the right to receive $21.60 per Common Share in cash, without interest and less any required withholding taxes.

 

2. To consider and act upon any other matters that may properly be brought before the special meeting.

 

After careful consideration, our board of directors, by the unanimous vote of the directors voting on the matter (with one director absent), approved the merger agreement, the merger and the other transactions contemplated by the merger agreement and determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable, fair to, and in the best interests of Keithley and our shareholders. Our board of directors recommends that holders of our Common Shares vote “FOR” approval and adoption of the merger agreement and the transactions contemplated by the merger agreement.

 

All holders of record of our Common Shares as of the close of business on October 22, 2010 are entitled to vote at the special meeting.

 

Approval and adoption of the merger agreement and the transactions contemplated by the merger agreement requires the affirmative vote of the holders of a majority of the voting power of our outstanding Common Shares that are entitled to vote at the special meeting. In connection with the execution of the merger agreement, Keithley Investment Co. Limited Partnership, a partnership of which Joseph P. Keithley, our chairman, president and chief executive officer, is the general partner, entered into a voting agreement pursuant to which it agreed to vote a number of its Class B common shares representing 19.99% of the voting power of our Common Shares in favor of approval and adoption of the merger agreement and the transactions contemplated by the merger agreement.

 

Regardless of the number of Common Shares you own, your vote is important.   Even if you plan to attend the meeting in person, we request that you cast your vote by completing, signing, dating and promptly returning the enclosed proxy card in the enclosed postage-paid envelope or by submitting a proxy by telephone or on the Internet using the instructions provided on the enclosed proxy card. If you sign, date and return your proxy card without indicating how you want to vote, your proxy will be voted in favor of approval and adoption of the merger agreement and the transactions contemplated by the merger agreement. If you fail to return your proxy card, your Common Shares will not be counted for purposes of determining whether a quorum is present at the special meeting, and such failure will have the same effect as voting against approval and adoption of the merger agreement and the transactions contemplated by the merger agreement.

Your proxy may be revoked at any time prior to its exercise by your delivery of a properly executed, later-dated proxy card, by your filing a written revocation of your proxy with our secretary at our address set forth above, by submitting a later proxy by telephone or on the Internet, or by revoking your proxy in open meeting at the special meeting. Simply attending the special meeting, however, will not revoke your proxy.

 

If you own Common Shares and you do not vote in favor of the merger, you can demand to be paid the fair cash value of your Common Shares. In order to do this, you must follow certain procedures mandated by Ohio law, including filing certain notices and not voting your shares in favor of approval and adoption of the merger agreement and the transactions contemplated by the merger agreement. The provisions of the Ohio Revised Code relating to your dissenters’ rights are attached to the accompanying proxy statement as Annex D.

 

We encourage you to read this proxy statement carefully in its entirety. If you have any questions or need assistance voting your Common Shares, please contact our proxy solicitor, Georgeson Inc., at (212) 440-9800 (banks and brokers) or (866) 296-6841 (all others). In addition, you may obtain information about us from certain documents that we have filed with the Securities and Exchange Commission and from our website at www.keithley.com.

 

By Order of the Board of Directors,

John M. Gherlein
Secretary

 

October 25, 2010

 

 

 

TABLE OF CONTENTS

 

 

The following questions and answers address briefly some questions you may have regarding the merger, the merger agreement and the special meeting. These questions and answers may not address all questions that may be important to you as a shareholder of Keithley Instruments, Inc. Please refer to the more detailed information contained elsewhere in this proxy statement, as well as the additional documents to which it refers, including the merger agreement and the voting agreement, copies of which are attached to this proxy statement as Annexes A and B, respectively. In this proxy statement, we refer to Keithley Instruments, Inc. as “we,” “us,” “our” or “Keithley.” We refer to Danaher Corporation as “Danaher” and Aegean Acquisition Corp. as “Merger Sub.” In addition, we refer to the merger of Keithley and Merger Sub as the “merger.” We refer to the time the merger becomes effective under all applicable laws as the “effective time,” we refer to our common shares and our Class B common shares as “Common Shares,” and we refer to holders of our Common Shares as “shareholders.”

 

 

 

SUMMARY TERM SHEET

 

This summary highlights selected information in this proxy statement and may not contain all of the information that is important to you. To understand the merger fully, and for a more complete description of the legal terms of the merger and the other transactions contemplated by the merger agreement, we encourage you to carefully read this entire proxy statement, as well as the additional documents to which it refers, including the merger agreement and the voting agreement, copies of which are attached to this proxy statement as Annexes A and B, respectively. Each item in this summary includes a page reference directing you to a more complete description of that item. This proxy statement is first being mailed to our shareholders on or about October 25, 2010.

 

Keithley Instruments, Inc.

28775 Aurora Road

Cleveland, Ohio 44139

(440) 248-0400

 

Keithley Instruments, Inc. is an Ohio corporation that designs, develops, manufactures and markets complex electronic instruments and systems geared to the specialized needs of electronics manufacturers for high-performance production testing, process monitoring, product development and research.

 

Danaher Corporation

2099 Pennsylvania Avenue N.W.

12 ^th Floor

Washington, D.C. 20006

(202) 828-0850

 

Danaher Corporation is a Delaware corporation that derives its sales from the design, manufacture and marketing of professional, medical, industrial, commercial and consumer products, which are typically characterized by strong brand names, proprietary technology and major market positions.

 

Aegean Acquisition Corp.

2099 Pennsylvania Avenue N.W.

12 ^th Floor

Washington, D.C. 20006

(202) 828-0850

 

Aegean Acquisition Corp. is an Ohio corporation and an indirect wholly-owned subsidiary of Danaher Corporation that was formed exclusively for the purpose of effecting the merger.

 

Purpose (page 8)

 

The special meeting will be held on Friday, November 19, 2010 starting at 9:00 a.m. local time at the Cleveland Marriott East, 26300 Harvard Road, Warrensville Heights, Ohio 44122. At the special meeting, shareholders will be asked to consider and vote upon a proposal to approve and adopt the merger agreement and the transactions contemplated by the merger agreement. In connection with the merger, each of our outstanding Common Shares (other than any Common Share that is owned by Danaher or its subsidiaries, held in our treasury or by any of our subsidiaries, or held by shareholders who perfect dissenters’ rights under Ohio law) will be converted into the right to receive $21.60 per share in cash, without interest and less any required withholding taxes.

 

The persons named in the accompanying proxy will have discretionary authority to vote upon other business that is unknown by us a reasonable time prior to the solicitation of proxies, if any, that properly comes before the special meeting.

Record Date and Voting (page 8)

 

All shareholders of record at the close of business on the record date, which was October 22, 2010, are entitled to receive notice of, to attend, and to vote at the special meeting. You will have one vote for each common share that you owned as of the record date, and you will have ten votes for each Class B common share you owned as of the record date. On the record date, there were outstanding 13,694,023 common shares and 2,150,502 Class B common shares.

 

The presence at the special meeting, either in person or by proxy, of the holders of a majority of the voting power of Common Shares that were outstanding on the record date will constitute a quorum for purposes of the special meeting. Abstentions and properly executed broker non-votes will be counted as Common Shares present at the special meeting for purposes of determining whether a quorum is present.

 

Required Vote (page 8)

 

Completion of the merger requires approval and adoption of the merger agreement and the transactions contemplated by the merger agreement by the affirmative vote of the holders of a majority of the voting power of our outstanding Common Shares entitled to vote at the special meeting. Because the required vote is based on the voting power of our Common Shares outstanding rather than on the number of votes cast, failing to vote your Common Shares (including as a result of broker non-votes) or abstaining will have the same effect as voting against approval and adoption of the merger agreement and the transactions contemplated by the merger agreement.

 

As of the record date, Joseph P. Keithley, our chairman, president and chief executive officer, together with his affiliates beneficially owned Common Shares representing approximately 61.5% of our total voting power. The Keithley Partnership has entered into the Voting Agreement pursuant to which it agreed to vote a number of its Class B common shares representing 19.99% of the voting power of our outstanding Common Shares in favor of approval and adoption of the merger agreement and the transactions contemplated by the merger agreement. Mr. Keithley has indicated that as of the date hereof he and his affiliates intend to vote in favor of approval and adoption of the merger agreement and the transactions contemplated by the merger agreement.

 

Proxies; Revocation (page 9)

 

Our shareholders of record entitled to vote at the special meeting may vote by returning the enclosed proxy, submitting a proxy by telephone or on the Internet, or by attending and voting at the special meeting. If your Common Shares are held in “street name” by a bank, brokerage firm or other nominee, you should instruct your bank, brokerage firm or other nominee on how to vote your Common Shares using the instructions provided by that bank, brokerage firm or other nominee.

 

Any proxy may be revoked at any time prior to its exercise by your filing a written revocation of your proxy with our secretary, by your delivery of a properly executed, later-dated proxy card or by submitting a later proxy by telephone or on the Internet, or by your revoking your proxy in open meeting at the special meeting. Simply attending the special meeting, however, will not revoke your proxy.

 

On the closing date, upon the terms and subject to the conditions of the merger agreement, and in accordance with Ohio law, Merger Sub will be merged with and into Keithley, with Keithley surviving the merger as an indirect, wholly-owned subsidiary of Danaher. The merger of Merger Sub and Keithley will become effective under all applicable laws (1) at the time a certificate of merger is accepted for filing by the Secretary of State of the State of Ohio or (2) on such later date agreed to by us, Danaher and Merger Sub and specified in the certificate of merger.

 

After careful consideration, our board of directors, by unanimous vote of the directors voting on the matter (with one director absent):

 

 

 

Stifel, Nicolaus & Company, Incorporated (“Stifel Nicolaus Weisel”), as successor to the investment banking business of Thomas Weisel Partners LLC, delivered its opinion to our board of directors on September 28, 2010 that, as of the date of such opinion and based upon and subject to the factors and assumptions set forth in the opinion, the $21.60 in cash merger consideration to be received by the holders of Common Shares issued and outstanding immediately prior to the effective time of the merger, other than dissenting shares under applicable law and Common Shares held by Danaher or any subsidiary of Danaher or held by Keithley or any subsidiary of Keithley immediately prior to the effective time of the merger (the “Shares”), in connection with the merger pursuant to the merger agreement was fair to such holders of Shares, from a financial point of view (the “Opinion”).

 

The full text of the written Opinion of Stifel Nicolaus Weisel, dated September 28, 2010, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the Opinion, is attached as Annex C to this proxy statement. Shareholders should read the Opinion in its entirety. Stifel Nicolaus Weisel provided its Opinion for the information and assistance of our board of directors in connection with its consideration of the merger. Stifel Nicolaus Weisel’s Opinion is not a recommendation as to how any shareholder should vote with respect to the merger.

 

Danaher has represented in the merger agreement that it has and will have at the effective time of the merger sufficient cash and cash equivalents and/or available amounts under existing credit facilities to consummate the merger upon the terms contemplated by the merger agreement and to make all payments contemplated by the merger agreement.

 

Each option to purchase Common Shares, whether vested or unvested, that is outstanding immediately prior to the effective time of the merger, will become fully vested and will entitle the holder thereof to receive, without interest and less applicable withholding taxes, an amount in cash equal to the product of:

 

 

In addition, each right of any kind to receive Common Shares or benefits measured by the value of a number of Common Shares granted under the Company’s stock incentive plans and directors’ deferred stock plan (including restricted share units, deferred share units and performance award units) (other than stock options), whether vested or unvested, that is outstanding immediately prior to the effective time of the merger will become fully vested and cease to represent a right or award with respect to Common Shares. Holders of restricted share units and deferred share units will receive, without interest and less applicable tax withholdings, an amount in cash equal to the product of the merger consideration multiplied by the number of restricted share units or deferred share units, as applicable, held by such person. Except as modified by a Change in Control Agreement or the Plush Employment Agreement, holders of performance award units will be entitled to receive, without interest and less applicable tax withholdings, an amount in cash equal to the product of the merger consideration multiplied by the number of Common Shares represented by the initial award value under the agreement evidencing such performance award units. For additional information concerning amounts receivable as a result of a Change in Control Agreement or the Plush Employment Agreement, see “Interests of Our Directors and Executive Officers in the Merger — Change in Control Agreements” and “Interests of Our Directors and Executive Officers in the Merger — Employment Agreement with Mark J. Plush.”

 

Our directors and executive officers have interests in the merger that may be different from, or in addition to, the interests of our shareholders, including the following:

 

 

Our board of directors was aware of these interests and considered them, among other matters, in making its recommendation. See “The Merger Proposal — Reasons for the Merger” beginning on page 14.

 

The merger agreement contains restrictions on our ability to solicit or engage in discussions or negotiations with a third party regarding specified transactions involving Keithley or our subsidiaries. We may, however, engage in such discussions or negotiations with a third party in response to an unsolicited written acquisition proposal that our board of directors determines in good faith (after consultation with outside counsel and its financial advisor) constitutes or could reasonably be expected to result in a superior proposal, subject to certain requirements and limitations specified in the merger agreement.

 

Completion of the merger is subject to the satisfaction or waiver of a number of conditions, including, among others:

 

 

 

The merger agreement may be terminated at any time prior to the effective time of the merger, whether before or after shareholder approval has been obtained, as follows (subject to certain limitations set forth in the merger agreement):

 

 

 

 

 

 

Under certain circumstances, in connection with the termination of the merger agreement, we will be required to pay to Danaher a termination fee of $10 million.

 

In connection with the execution of the merger agreement, the Keithley Partnership, of which Joseph P. Keithley, our chairman, president and chief executive officer, is general partner, entered into the Voting Agreement under which it agreed to vote a number of its Class B common shares representing 19.99% of the voting power of our outstanding Common Shares in favor of approval and adoption of the merger agreement and the transactions contemplated by the merger agreement. In addition, the Keithley Partnership agreed to vote such shares against any proposal that would result in our breach of the merger agreement, or any action or agreement that is intended to, or would be reasonably likely to, impede, interfere with, delay, postpone or attempt to discourage the merger. The Voting Agreement will terminate if the merger agreement is terminated in accordance with its terms and can be terminated by the Keithley Partnership if there is any decrease in the price or change in the form of consideration to be paid per Common Share or the merger agreement is otherwise amended in a manner adverse to our shareholders. As of October 1, 2010, the Keithley Partnership, together with Mr. Keithley, beneficially owned Common Shares representing approximately 61.5% of the total combined voting power of the outstanding Common Shares. Pursuant to the Voting Agreement, the Keithley Partnership also agreed not to transfer or dispose of any of its Common Shares, enter into any other voting arrangement or grant any proxies with respect to its Common Shares, or convert its Class B common shares into common shares.

 

For United States federal income tax purposes, the disposition of our Common Shares pursuant to the merger generally will be treated as a sale of our Common Shares for cash by each of our shareholders. As a result, in general, each shareholder will recognize gain or loss equal to the difference, if any, between the amount of cash received in the merger and such shareholder’s adjusted tax basis in the shares surrendered in the merger. We strongly recommend that shareholders consult their own tax advisors as to the particular tax consequences to them of the merger.

 

Under Ohio law, if the merger agreement is approved and adopted by our shareholders, any shareholder that does not vote in favor of approval and adoption of the merger agreement may be entitled to seek relief as a dissenting shareholder under Section 1701.85 of the Ohio Revised Code. To perfect dissenters’ rights, a record holder must:

 

 

We will not notify shareholders of the expiration of this ten-day period. Common Shares held by any person who desires to dissent but fails to perfect or who effectively withdraws or loses the right to dissent under Section 1701.85 of the Ohio Revised Code will be converted into, as of the effective time of the merger, the right to receive the merger consideration, without interest and less any required withholding taxes. A copy of Section 1701.85 of the Ohio Revised Code is attached as Annex D to this proxy statement. A shareholder’s failure to follow exactly the procedures specified under Section 1701.85 of the Ohio Revised Code will result in the loss of dissenters’ rights.

 

The Hart-Scott-Rodino Act provides that transactions such as the merger may not be completed until certain information has been submitted to the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice and certain waiting period requirements have been satisfied. Except for the required filings under the Hart-Scott-Rodino Act and receipt of any foreign approvals, consents and clearances and the filing of a certificate of merger in Ohio at or before the effective time of the merger, we are unaware of any material federal, state or foreign regulatory requirements or approvals required for the execution of the merger agreement or completion of the merger.

 

Certain statements included in this proxy statement, and in the documents attached to this proxy statement, are forward-looking statements that involve a number of risks and uncertainties and which are based on management’s current beliefs, assumptions and expectations. These statements appear in a number of places in this proxy statement and include statements regarding our intent, belief or current expectations or those of our directors or officers regarding us and the proposed transaction, including those statements regarding projected financial information and the expected effects, timing and completion of the proposed transaction, among others. These forward-looking statements can be identified by the use of predictive or future tense terms such as “anticipate,” “estimate,” “expect,” “believe,” “project,” “may,” “will” or similar terms. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

 

You are cautioned that any such forward-looking statement is not a guarantee of future performance and involves risks and uncertainties, and that our actual results may differ materially from those stated, implied or anticipated in the forward-looking statements as a result of various factors. The factors that could cause actual results to differ materially from those expressed in a forward-looking statement include, among other factors, we may be unable to obtain the shareholder approval required for the merger; conditions to the closing of the merger may not be satisfied; the merger may involve unexpected costs or unexpected liabilities; our businesses may suffer as a result of uncertainty surrounding the merger; and we may be adversely affected by other economic, business and/or competitive factors. Other factors that could cause our actual results to differ from forward-looking statements regarding its business and operations include, but are not limited to, worldwide economic conditions; uncertainties in the credit and capital markets including the ability of our customers to access credit and our risk to cash and short-term investments that are not backed by a government agency; business conditions in the semiconductor, wireless, precision electronics and other segments of the worldwide electronics industry, including the potential for any recovery to stall or for the industries to decline; the timing of large orders from customers or canceling of orders in backlog; timing of recognizing shipments as revenue; changes in product and sales mix, and the related effects on gross margins; our ability to develop new products in a timely fashion and gain market acceptance of those products to remain competitive and gain market share; our ability to work with third parties; competitive factors, including pricing pressures, loss of key employees, technological developments and new products offered by competitors; the impact of our fixed costs in a period of fluctuating sales; our ability to adapt our production capacities to rapidly changing market conditions; our ability to implement and effectively manage IT system enhancements without interruption to our business processes; our ability to realize the benefits of planned cost savings without adversely affecting our product development programs and strategic initiatives; the availability of parts and supplies from third-party suppliers on a timely basis and at reasonable prices; changes in the fair value of our investments; the potential volatility of earnings as a result of the accounting for performance share awards; changes in effective tax rates due to changes in tax law, tax planning strategies, the levels and countries of pre-tax earnings, deferred tax assets or levels of pre-tax earnings; potential changes in pension plan assumptions; foreign currency fluctuations which could affect worldwide operations; costs and other effects of domestic and foreign legal, regulatory and administrative proceedings; government actions which impact worldwide trade; and matters arising out of or related to our stock option grants and procedures and related matters. For a further discussion of risk factors, investors should refer to our periodic reports filed with the SEC.

 

With respect to any such forward-looking statement that includes a statement of its underlying assumptions or bases, we caution that, while we believe such assumptions or bases to be reasonable and have formed them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material depending on the circumstances. When, in any forward-looking statement, we or our management express an expectation or belief as to future results, that expectation or belief is expressed in good faith and is believed to have a reasonable basis, but there can be no assurance that the stated expectation or belief will result or be achieved or accomplished. Moreover, we assume no obligation to update forward-looking statements or update the reasons actual results could differ materially from those anticipated in forward-looking statements, except as required by law.

 

This proxy statement is being furnished to our shareholders in connection with a special meeting to be held at the Cleveland Marriott East, 26300 Harvard Road, Warrensville Heights, Ohio 44122 on Friday, November 19, 2010, at 9:00 a.m. local time and in connection with the solicitation of proxies by our board of directors for use at the special meeting. The purpose of the special meeting is for shareholders to consider and vote upon a proposal to approve and adopt the merger agreement and the transactions contemplated by the merger agreement and to transact any other business that may properly come before the special meeting. Our shareholders must approve and adopt the merger agreement and the transactions contemplated by the merger agreement for the merger to occur. A copy of the merger agreement is attached as Annex A to this proxy statement, which you are encouraged to read carefully in its entirety.

 

Shareholders of record at the close of business on the record date, October 22, 2010, are entitled to receive notice of, to attend, and to vote at the special meeting. Shareholders will have one vote for each common share that they owned as of the record date, and they will have ten votes for each Class B common share they owned as of the record date. On the record date, there were outstanding 13,694,023 common shares and 2,150,502 Class B common shares.

 

The holders of a majority of the voting power of Common Shares that were outstanding on the record date, represented in person or by proxy, will constitute a quorum for purposes of the special meeting. A quorum is necessary to hold the special meeting. Any Common Shares held by any of our subsidiaries are not considered to be outstanding for purposes of determining a quorum. Abstentions and properly executed broker non-votes will be counted as Common Shares present at the special meeting for the purposes of determining the presence of a quorum. “Broker non-votes” result when the beneficial owners of Common Shares do not provide specific voting instructions to their brokers. Under the NYSE rules, brokers are precluded from exercising their voting discretion with respect to the approval of non-routine matters, such as approval and adoption of the merger agreement and the transactions contemplated by the merger agreement.

 

Completion of the merger requires approval and adoption of the merger agreement and the transactions contemplated by the merger agreement by the affirmative vote of the holders of a majority of the voting power of our outstanding Common Shares entitled to vote at the special meeting. Shareholders will have one vote for each common share that they owned as of the record date, and they will have ten votes for each Class B common share they owned as of the record date. Because the required vote is based on the voting power of Common Shares outstanding rather than on the number of votes cast, failing to vote your Common Shares (including as a result of a broker non-vote) or abstaining will have the same effect as voting against approval and adoption of the merger agreement and the transactions contemplated by the merger agreement. Accordingly, in order for your Common Shares to be included in the vote, if you are a shareholder of record, you must have your Common Shares voted by returning the enclosed proxy card by mail, submitting a proxy by telephone or on the Internet using the instructions provided on the enclosed proxy card, or by voting in person at the special meeting.

 

Record holders may cause their Common Shares to be voted using one of the following methods:

 

 

 

Regardless of whether you plan to attend the special meeting, we request that you complete and return a proxy for your Common Shares as described above as promptly as possible.

 

If you hold your Common Shares through a bank, brokerage firm or other nominee ( i.e. , in “street name”), in order to vote you must provide voting instructions on the voting instruction card that your bank, brokerage firm or other nominee provides to you. You should instruct your bank, brokerage firm or other nominee as to how to vote your Common Shares following the directions contained in such voting instruction card. If you have not received such voting instructions or require further information regarding such voting instructions, contact your bank, brokerage firm or other nominee who can give you directions on how to vote your Common Shares. If you do not provide instructions to your bank, brokerage firm or other nominee, your Common Shares will not be voted, and this will have the same effect as voting against approval and adoption of the merger agreement and the transactions contemplated by the merger agreement.

 

In connection with the execution of the merger agreement, the Keithley Partnership, a partnership of which Joseph P. Keithley, our chairman, president and chief executive officer is the general partner, entered into the Voting Agreement pursuant to which it agreed to vote a number of its Class B common shares representing 19.99% of the voting power of our outstanding Common Shares in favor of approval and adoption the merger agreement and the transactions contemplated by the merger agreement.

 

As of October 22, 2010, the record date for the merger, our executive officers and directors owned an aggregate of approximately 2,616,521 Common Shares, entitling them to exercise approximately 62% of the voting power of our Common Shares. We expect that our executive officers and directors will vote their Common Shares in favor of approval and adoption of the merger agreement and the transactions contemplated by the merger agreement.

 

If you submit a proxy, your Common Shares will be voted at the special meeting as you indicate on your proxy. If no instructions are indicated on your signed proxy card, your Common Shares will be voted “FOR” approval and adoption of the merger agreement and the transactions contemplated by the merger agreement.

 

The persons named in the enclosed proxy card will have discretionary authority to vote upon other business that is unknown by us a reasonable time prior to the solicitation of proxies, if any, that properly comes before the special meeting.

 

You may revoke your proxy at any time, but only before the proxy is voted at the special meeting, in any of three ways:

 

 

Attendance at the special meeting will not, in itself, constitute revocation of a previously granted proxy. If you hold your Common Shares in street name, you may revoke or change a previously given proxy by following the instructions provided by the bank, brokerage firm or other nominee that is the record owner of the Common Shares.

 

We will pay the costs of soliciting proxies for the special meeting. Our officers, directors and employees may solicit proxies by telephone, facsimile or mail, on the Internet or in person. They will not be paid any additional amounts for soliciting proxies. We will also request that banks, brokerage firms and others holding Common Shares in their names, or in the names of their nominees, that are beneficially owned by others, send proxy materials to and obtain proxies from those beneficial owners, and, upon request, will reimburse those holders for their reasonable expenses in performing those services. We have retained Georgeson Inc. to assist us in the solicitation of proxies, and will pay it fees of approximately $8,000 plus reimbursement of out-of-pocket expenses. In addition, our

arrangement with Georgeson Inc. includes provisions obligating us to indemnify it for certain liabilities that could arise in connection with its solicitation of proxies on our behalf.

 

Keithley Instruments, Inc. is an Ohio corporation that designs, develops, manufactures and markets complex electronic instruments and systems geared to the specialized needs of electronics manufacturers for high-performance production testing, process monitoring, product development and research. Keithley’s customers are scientists and engineers in the worldwide electronics industry involved with advanced materials research, semiconductor device development and fabrication, and the production of end products such as portable wireless devices. Keithley Instrument’s headquarters are located at 28775 Aurora Road, Cleveland, Ohio 44139, and its telephone number is (440) 248-0400.

 

Danaher Corporation is a Delaware corporation that derives its sales from the design, manufacture and marketing of professional, medical, industrial, commercial and consumer products, which are typically characterized by strong brand names, proprietary technology and major market positions. Danaher Corporation’s business consists of four segments: Professional Instrumentation, Medical Technologies, Industrial Technologies, and Tools & Components. The Professional Instrumentation segment includes a test and measurement line of business. Danaher Corporation’s principal executive offices are located at 2099 Pennsylvania Ave. N.W., 12th Floor, Washington, D.C., 20006 and its telephone number is (202) 828-0850. Danaher Corporation’s common stock is publicly traded on the New York Stock Exchange under the symbol “DHR.”

 

Aegean Acquisition Corp. is an Ohio corporation and an indirect wholly-owned subsidiary of Danaher Corporation that was formed exclusively for the purpose of effecting the merger. Aegean Acquisition Corp. has not carried on any activities to date, except for activities incidental to its formation and activities undertaken in connection with the transactions contemplated by the merger agreement. Upon consummation of the proposed merger, Aegean Acquisition Corp. will merge with and into Keithley Instruments, Inc. and will cease to exist. Aegean Acquisition Corp.’s principal executive offices are located at 2099 Pennsylvania Ave. N.W., 12th Floor, Washington, D.C., 20006 and its telephone number is (202) 828-0850.

 

Under the terms of the merger agreement, Danaher will acquire us through the merger of Merger Sub with and into Keithley. Keithley will continue as the surviving corporation and as an indirect, wholly-owned subsidiary of Danaher.

 

As part of their ongoing activities, our board of directors and senior management have regularly discussed our business strategies and opportunities, including continued operations as an independent public company and the possible expansion of our business through significant product development initiatives or mergers and acquisitions, each with a view toward maximizing shareholder value. In particular, following our exit of the S600 parametric test product line in February 2009 and our sale of the radio frequency product line in November 2009, our board of directors again began to discuss our strategic alternatives in light of our relatively small market capitalization and smaller remaining business. Our directors also began to discuss management succession, including the possibility

of Joseph P. Keithley, our chairman, president and chief executive officer, who is age 61, becoming executive chairman.

 

In light of substantially improved financial performance for the second fiscal quarter ended March 31, 2010 and management’s expectation of continued improvement during the course of the year, at a special meeting of our board of directors held on April 2, 2010, our board of directors discontinued discussions concerning management succession and resolved to interview financial advisors that could assist us in our evaluation of strategic alternatives. The directors interviewed five firms on May 6, 2010, and on May 25, 2010, we engaged Thomas Weisel Partners, which is now part of Stifel Nicolaus Weisel, to assist us in the evaluation of our strategic alternatives.

 

On June 21, 2010, representatives of Stifel Nicolaus Weisel made a presentation to our board of directors regarding strategic alternatives. Our chief operating officer, our chief financial officer and a representative from Baker & Hostetler LLP, or Baker Hostetler, our regular outside counsel, also attended the meeting. The presentation analyzed the following alternatives: (1) maintaining the status quo, or remaining as an independent public company and growing organically, (2) pursuing a strategy of growth through acquisition, (3) selling Keithley, and (4) implementing a significant dividend or share buyback. At that meeting, there was also discussion of whether maintaining the status quo, accompanied by a significant increase in the regular dividend, should be considered. Following Stifel Nicolaus Weisel’s presentation regarding strategic alternatives and a discussion by the board of directors, our board of directors resolved that, subject to reviewing an analysis from Stifel Nicolaus Weisel regarding a significant increase in the regular dividend, it was in the shareholders’ best interest to authorize Stifel Nicolaus Weisel to begin a process to explore a sale of Keithley. The closing price of our common shares on June 21, 2010 was $8.46 per share.

 

At a telephonic meeting on June 25, 2010, in which our chief operating officer, our chief financial officer and a representative from Baker Hostetler participated, representatives of Stifel Nicolaus Weisel provided a supplemental analysis regarding the status quo alternative, coupled with a significant increase in the regular dividend to shareholders. Our directors concluded that the dividend analysis did not alter their earlier conclusion that it was in our shareholders’ best interest to authorize Stifel Nicolaus Weisel to solicit preliminary indications of interest from parties that might be interested in acquiring Keithley. It was also decided that our board of directors would have weekly update calls with senior management and representatives of Stifel Nicolaus Weisel and Baker Hostetler to keep the directors apprised of the status of the process of exploring a sale of Keithley.

 

At our board of directors’ direction, Stifel Nicolaus Weisel contacted 11 financial buyers and 13 strategic buyers (including Danaher) during July 2010, regarding the possibility of entering into a transaction with us. These parties were identified by Stifel Nicolaus Weisel based on a determination as to which parties might be realistic candidates to complete a possible strategic transaction with us and private equity buyers for whom a transaction with Keithley fit their investment objectives and transaction parameters. Of the 24 parties contacted, seven strategic buyers and seven financial buyers entered into confidentiality agreements and received non-public information from us.

 

At our invitation, on July 29, 2010, six parties, including three strategic buyers and three financial buyers, submitted preliminary indications of interest to acquire Keithley, at potential per share values ranging from $10.00 to $13.40. On Sunday evening, August 1, 2010, Danaher submitted a seventh preliminary indication of interest at a price of $12.00 to $13.00 per share. At a weekly update call, our board of directors, based on the recommendation of Stifel Nicolaus Weisel, determined to continue to explore a possible transaction with five of these parties, including two financial buyers, and instructed Stifel Nicolaus Weisel to advise one additional strategic buyer that it could continue in the process if it committed to raise its preliminary indication of interest to $12.00 per share. The strategic buyer subsequently confirmed an increased valuation of $12.00 per share. The closing price of our common shares on July 29, 2010 was $10.06 per share.

 

On August 13, 2010, we entered into change in control agreements with our officers, other than Mr. Plush who had an existing employment agreement with some protections in the event of a change in control, providing for severance benefits upon termination without cause or for good reason following a change in control of Keithley.

 

From August 10, 2010 to August 20, 2010, each of the potential buyers was invited to a management presentation regarding our business and, beginning on August 19, 2010, Stifel Nicolaus Weisel and Baker Hostetler

arranged for the six potential buyers to have access to an electronic data room containing significant non-public information about our business.

 

On August 24, 2010, one of the financial buyers advised Stifel Nicolaus Weisel that it was withdrawing from the process. On August 25, 2010, at our direction, Stifel Nicolaus Weisel circulated a process letter to the remaining bidders asking them to provide a final bid, together with a mark-up of the form of merger agreement, by 5:00 p.m. on September 23, 2010.

 

On September 1, 2010, two forms of merger agreement providing for an all-cash acquisition of Keithley were posted in the data room, one for strategic buyers and one for buyers who required third-party debt financing. Draft disclosure schedules to the merger agreement were posted in the data room on September 14, 2010.

 

From August 23, 2010 through September 23, 2010, the bidders continued their business, financial and legal due diligence review of Keithley. On September 10, 2010, the strategic buyer that had originally submitted the lowest preliminary indication of interest advised Stifel Nicolaus Weisel that it was terminating its participation in the process, and on September 16, 2010, the remaining financial buyer advised Stifel Nicolaus Weisel that it was withdrawing from the process.

 

During the evening of Thursday, September 23, 2010, each of the three remaining parties submitted bids to Stifel Nicolaus Weisel at prices ranging from $13.50 to $16.00 per share. The closing price of our common shares on September 23, 2010 was $11.51 per share. Danaher’s bid was $15.50 per share. The other bidders, referred to as Company A and Company B, made bids of $16.00 per share and $13.50 per share, respectively. Company B’s bid included a condition that required its completion of a capital markets transaction unrelated to a transaction with Keithley before it could enter into a definitive transaction to acquire Keithley. Both Company A and Danaher provided a mark-up of the form of merger agreement with their bids, and Company A provided a form of voting agreement to be entered into with the Keithley Partnership to vote the shares held by it in favor of the merger. Danaher’s proposal also called for a voting agreement from the Keithley Partnership.

 

On September 24, 2010, Stifel Nicolaus Weisel told Danaher that its bid was generally less attractive on both price and contract terms relative to other parties.

 

Also on September 24, 2010, the human resources and compensation committee of the board of directors met and approved the terms of an amended employment agreement with Mr. Plush, which amended the circumstances under which he was entitled to severance payments following a change in control.

 

Late in the evening on Sunday, September 26, 2010, Danaher submitted an improved mark-up of the merger agreement and a proposed form of voting agreement to be entered into by the Keithley Partnership to vote shares held by it representing 19.99% of the voting power of our outstanding Common Shares in favor of approval and adoption of the merger agreement and the transactions contemplated by the merger agreement and, early in the morning of September 27, 2010, Danaher resubmitted a proposal at $17.00 per share.

 

At a telephonic meeting of our board of directors on the morning of September 27, 2010, in which our chief operating officer, our chief financial officer and representatives of Stifel Nicolaus Weisel and Baker Hostetler participated, Stifel Nicolaus Weisel reviewed the sale process to date and presented its analysis of the three bids to our board of directors. In addition, Baker Hostetler provided a comparison of the merger agreement comments submitted by Company A and the revised merger agreement comments submitted by Danaher. Also at the meeting, Stifel Nicolaus Weisel updated its valuation analysis of the Company and compared it to the current proposals of $13.50, $16.00 and $17.00 per share. Stifel Nicolaus Weisel also advised our directors that, based upon publicly available information and statements made in their respective proposals, both Danaher and Company A had adequate cash on hand and borrowing capacity to complete a transaction at the prices of their respective bids. At that meeting, our board of directors accepted Stifel Nicolaus Weisel’s recommendation that Company B be dropped from the process because of its price and the condition in its proposal that could not be timely satisfied and instructed our advisors that negotiations should continue with Danaher and Company A.

 

Following the meeting, Stifel Nicolaus Weisel advised Company A that its price was $1.00 per share lower than the other remaining party in the process. Later that day, Company A was provided with a revised merger

agreement that reflected the terms from Company A’s mark-up and Danaher’s mark-up that the Company was willing to accept.

 

On the evening of September 27, 2010, Company A advised Stifel Nicolaus Weisel that it was increasing its price to $18.00 per share and would substantially accept the terms of the latest draft of the merger agreement.

 

On a telephonic update conference call at 10:00 p.m. on the evening of September 27, 2010, representatives of Stifel Nicolaus Weisel and Baker Hostetler reviewed for our board of directors the events that had transpired over the course of the day, including Company A’s increased price. There was discussion of the appropriate strategy to maximize the price that could be obtained from the remaining bidders. Based on the discussion, our board of directors instructed our advisors to continue final negotiations on the merger agreement with Company A and to notify Danaher of Company A’s revised price and willingness to substantially accept the terms of the latest draft of the merger agreement.

 

Following that meeting, Stifel Nicolaus Weisel informed Danaher that Company A had increased its proposal to $18.00 and provided Danaher with the same revised merger agreement that had been provided to Company A earlier that evening.

 

On September 28, 2010, shortly before noon, Danaher advised Stifel Nicolaus Weisel that it was increasing its price from $17.00 to $19.00 per share and that we had until 5:00 p.m. that day to accept its proposal. Stifel Nicolaus Weisel subsequently advised Company A of the new increased offer from the other remaining party and, later in the afternoon, Company A advised Stifel Nicolaus Weisel that it was prepared to match the $19.00 per share offer.

 

During the course of the day on September 28, 2010, representatives from Baker Hostetler discussed the terms of the two merger agreements with counsel for Company A and with representatives from Skadden, Arps, Slate, Meagher & Flom LLP, or Skadden Arps, counsel to Danaher. By early evening on September 28, 2010, both contracts had been substantially negotiated to a point where Baker Hostetler and management believed they were forms that could be accepted by our board of directors.

 

At approximately 5:00 p.m. on September 28, 2010, Stifel Nicolaus Weisel advised both parties that a board of directors meeting was scheduled for 10:00 p.m. that evening and that they should deliver their best and final offer by 9:00 p.m. Stifel Nicolaus Weisel further advised the parties that it expected our board of directors to accept a winning bidder at that board of directors meeting without further negotiations or bidding.

 

Shortly before the start of the 10:00 p.m. board of directors meeting, Danaher advised Stifel Nicolaus Weisel that its best and final price was $21.60 per share, and Company A advised Stifel Nicolaus Weisel that its best and final price was $19.50 per share.

 

At the board meeting, in which one director did not participate, representatives of Stifel Nicolaus Weisel reviewed for the board the process relating to the sale of Keithley that had been undertaken since June 25 and summarized the terms of the two proposals. Representatives of Stifel Nicolaus Weisel updated the presentation they had provided on September 27, 2010 and analyzed the fairness, from a financial point of view, to holders of Shares of the merger consideration reflected in the Danaher proposal of $21.60 per share. Stifel Nicolaus Weisel also reminded our directors that Danaher’s substantial cash position would permit it to fund the transaction without any financing contingencies. Stifel Nicolaus Weisel then advised the board that it was prepared to deliver its opinion that the merger consideration of $21.60 per share was fair to holders of Shares from a financial point of view.

 

Representatives of Baker Hostetler then reviewed with our board of directors in detail the terms of the merger agreement that had been negotiated with Danaher, including the terms on which the board would have the ability to consider a superior proposal if one were to emerge.

 

Stifel Nicolaus Weisel then delivered its oral opinion to our board of directors, which was subsequently affirmed by delivery of a written opinion, dated September 28, 2010 (which is attached to this proxy statement as Annex C), to the effect that, as of the date of the opinion and based upon and subject to assumptions made, procedures followed, matters considered and limitations of the review undertaken in the opinion, the merger consideration to be received by the holders of Shares was fair to such holders, from a financial point of view.

Following additional discussion and deliberation, our board of directors unanimously resolved (with one director absent) that the merger agreement and the transactions contemplated thereby are advisable and fair to and in the best interests of Keithley and our shareholders, approved the merger agreement and the transactions contemplated thereby, and recommended that our shareholders vote to approve and adopt the merger agreement and the transactions contemplated thereby. Our board also approved the voting agreement between the Keithley Partnership and Danaher, including approving the transaction by which Danaher became an “interested shareholder” for purposes of Chapter 1704 of the Ohio Revised Code.

 

We and Danaher executed the merger agreement at approximately 4:00 a.m. on September 29, 2010 and issued a press release announcing the transaction before the market opened that morning.

 

In reaching its decision to approve the merger agreement, the merger and the other transactions contemplated by the merger agreement, authorize Keithley to enter into the merger agreement and recommend that our shareholders vote to approve and adopt the merger agreement and the transactions contemplated by the merger agreement, our board of directors consulted with its financial and legal advisors and our management. The board of directors considered a number of potentially positive factors, including the following material factors:

 

 

 

 

 

The board of directors also considered and balanced against the potentially positive factors a number of potentially negative factors concerning the merger, including the following material factors:

 

 

 

After taking into account all of the factors set forth above, as well as others, our board of directors determined that the potentially positive factors outweighed the potentially negative factors. Furthermore, our board of directors determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable, fair to and in the best interests of Keithley and our shareholders. The board of directors has approved the merger agreement, the merger and the other transactions contemplated by the merger agreement by a unanimous vote of the directors voting on the matter (with one director absent) and recommends that our shareholders vote to approve and adopt the merger agreement and the transactions contemplated by the merger agreement at the special meeting.

 

Our board of directors did not assign relative weights to the above factors or the other factors considered by it. In addition, our board of directors did not reach any specific conclusion on each factor considered, but conducted an overall analysis of these factors. Individual members of the board of directors may have given different weights to different factors.

 

On September 29, 2010, after evaluating a variety of business, financial and market factors and consulting with our legal and financial advisors, and after due discussion and due consideration, our board of directors approved the merger agreement, the merger and the other transactions contemplated by the merger agreement and declared that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable, fair to and in the best interests of Keithley and our shareholders. Accordingly, our board of directors recommends that you vote “FOR” the approval and adoption of the merger agreement and the transactions contemplated by the merger agreement.

 

On May 25, 2010, our board of directors retained Thomas Weisel Partners LLC to act as its financial advisor and to provide a fairness opinion in connection with the merger contemplated by the merger agreement; Stifel Nicolaus Weisel subsequently succeeded to the investment banking business of Thomas Weisel Partners LLC. On September 28, 2010, Stifel Nicolaus Weisel delivered its written Opinion, dated September 28, 2010, to our board of directors that, as of the date of the Opinion and based upon and subject to the assumptions made, procedures followed, matters considered and limitations of the review undertaken in such Opinion, the merger consideration to be received by the holders of Shares in connection with the merger pursuant to the merger agreement was fair to such holders of Shares, from a financial point of view.

 

The full text of the written Opinion of Stifel Nicolaus Weisel is attached as Annex C to this proxy statement and is incorporated into this document by reference. The summary of Stifel Nicolaus Weisel’s Opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of the Opinion. Shareholders are urged to read the Opinion carefully and in its entirety for a discussion of the procedures followed, assumptions made, other matters considered and limits of the review undertaken by Stifel Nicolaus Weisel in connection with such Opinion.

 

It is understood that the Opinion is solely for the information of, and directed to, our board of directors for its information and assistance in connection with its evaluation of the financial terms of the merger. The Opinion did not constitute a recommendation to Keithley or our board of directors as to whether we should enter into the merger agreement or effect the merger or any other transaction contemplated by the merger agreement, nor does the Opinion constitute a recommendation to any shareholder as to how such shareholder should vote at any shareholders’ meeting at which the merger is considered, or as to whether or not such shareholder should enter into any voting, support or shareholders’ agreement in connection with the merger or exercise any dissenters’ or appraisal rights that may be available to such shareholder. The opinion does not compare the relative merits of the merger with those of any other transaction or business strategy which may have been available to or considered by our board or directors or Keithley as alternatives to the merger and does not address the underlying business decision of our board of directors or Keithley to proceed with or effect the merger.

 

Stifel Nicolaus Weisel’s Opinion is limited to whether, as of the date of the Opinion, the merger consideration was fair to the holders of Shares, from a financial point of view. The Opinion does not consider, address or include: (i) any other strategic alternatives currently (or which have been or may be) contemplated by Keithley or our board of directors; (ii) the legal, tax or accounting consequences of the merger on Keithley or our shareholders; (iii) the fairness of the amount or nature of any compensation to any of our officers, directors or employees, or class of such persons, relative to the compensation to the public holders of our equity securities; or (iv) the treatment of, or effect of the merger on, stock options or other share-based awards.

 

In connection with its Opinion, Stifel Nicolaus Weisel, among other things:

 

 

 

In connection with its review, Stifel Nicolaus Weisel relied upon and assumed, without independent verification, the accuracy and completeness of all financial, operational and other information that was made available, supplied, or otherwise communicated to Stifel Nicolaus Weisel by us or on our behalf, or by our advisors, or that was otherwise reviewed by Stifel Nicolaus Weisel, and did not assume any responsibility for independently verifying any of such information.

 

With respect to any financial forecasts supplied to it by us, Stifel Nicolaus Weisel assumed that the forecasts were reasonably prepared on a basis reflecting the best currently available estimates and judgments of our management as to the future operating and financial performance of Keithley, and that they provided a reasonable basis upon which Stifel Nicolaus Weisel could form its Opinion. Such forecasts and projections were not prepared with the expectation of public disclosure. All such projected financial information is based on numerous variables and assumptions that are inherently uncertain, including, without limitation, factors related to general economic, market and competitive conditions. Accordingly, actual results could vary significantly from those set forth in such projected financial information. Stifel Nicolaus Weisel relied on this projected information without independent verification or analyses and does not in any respect assume any responsibility for the accuracy or completeness thereof. Stifel Nicolaus Weisel further relied upon our assurances that we were unaware of any facts that would make any information provided by us or on our behalf incomplete or misleading. Stifel Nicolaus Weisel assumed, with our consent, that any material liabilities (contingent or otherwise, known or unknown), if any, relating to Keithley and Danaher, respectively, had been disclosed to Stifel Nicolaus Weisel.

 

Stifel Nicolaus Weisel’s Opinion is necessarily based upon financial, economic, monetary, market and other conditions and circumstances existing and disclosed to Stifel Nicolaus Weisel by us or our advisors, as of the date of the Opinion. It is understood that subsequent developments may affect the conclusions reached in the Opinion, and that Stifel Nicolaus Weisel does not have or assume any obligation to update, revise or reaffirm the Opinion. Stifel Nicolaus Weisel also assumed that the merger will be consummated on the terms and conditions described in the draft merger agreement, without any further amendment thereto and without waiver of material terms or conditions by Keithley, Danaher, or any other party, and that obtaining any necessary regulatory approvals or satisfying any other conditions for consummation of the merger will not have an adverse effect on Keithley or our equity securities.

 

Stifel Nicolaus Weisel assumed that the merger will be consummated in a manner that complies in all respects with the applicable provisions of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and all other applicable federal and state statutes, rules and regulations. Stifel Nicolaus Weisel was not requested to make, did not assume responsibility for making, and did not make, an independent evaluation, appraisal or physical inspection of any of the assets or liabilities (contingent or otherwise) of Keithley or Danaher, nor was Stifel Nicolaus Weisel furnished with any such appraisals.

 

The summary set forth below does not purport to be a complete description of the analyses performed by Stifel Nicolaus Weisel, but describes, in summary form, the material elements of the presentation that Stifel Nicolaus Weisel made to our board of directors on September 28, 2010, in connection with Stifel Nicolaus Weisel’s Opinion.

 

In accordance with customary investment banking practice, Stifel Nicolaus Weisel employed generally accepted valuation methods and financial analyses in reaching its Opinion. The following is a summary of the material financial analyses performed by Stifel Nicolaus Weisel in arriving at its Opinion. These summaries of financial analyses alone do not constitute a description of all the financial analyses Stifel Nicolaus Weisel employed in reaching its conclusions. None of the analyses performed by Stifel Nicolaus Weisel was assigned a greater significance by Stifel Nicolaus Weisel than any other, nor does the order of analyses described represent relative

importance or weight given to those analyses by Stifel Nicolaus Weisel. The summary text describing the financial analyses does not constitute a complete description of Stifel Nicolaus Weisel’s financial analyses, including the methodologies and assumptions underlying the analyses, and if viewed in isolation could create a misleading or incomplete view of the financial analyses performed by Stifel Nicolaus Weisel. The summary text set forth below does not represent and should not be viewed by anyone as constituting conclusions reached by Stifel Nicolaus Weisel with respect to any of the analyses performed by it in connection with its Opinion. Rather, Stifel Nicolaus Weisel made its determination, as of the date of its Opinion, as to the fairness to the holders of Shares of the merger consideration to be received by the holders of Shares in the merger pursuant to the merger agreement from a financial point of view, on the basis of its experience and professional judgment after considering the results of all of the analyses performed.

 

Except as otherwise noted, the information utilized by Stifel Nicolaus Weisel in its analyses, to the extent that it is based on market data, is based on market data as it existed on or before September 28, 2010 and is not necessarily indicative of current market conditions. The analyses described below do not purport to be indicative of actual future results, or to reflect the prices at which any securities may trade in the public markets, which may vary depending upon various factors, including changes in interest rates, dividend rates, market conditions, economic conditions and other factors that influence the price of securities.

 

In conducting its analysis, Stifel Nicolaus Weisel used three primary methodologies to assess the fairness of the merger consideration. The three methodologies used included: selected comparable public companies analysis, selected comparable transactions analysis and discounted equity analysis. Each individual methodology was not given a specific weight, nor can any methodology be viewed individually. Additionally, no company or transaction used in any analysis as a comparison is identical to Keithley or to the merger, and they all differ in material ways. Accordingly, an analysis of the results described below is not mathematical; rather it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the public trading value of the comparable companies or transactions to which they are being compared. Stifel Nicolaus Weisel used these analyses to determine the impact of various operating metrics on the implied enterprise value and implied equity value of Keithley. Each of these analyses yielded a range of implied enterprise values and equity values, and therefore, such implied enterprise value ranges and equity value ranges developed from these analyses were viewed by Stifel Nicolaus Weisel collectively and not individually.

 

Some of the summaries of financial analyses performed by Stifel Nicolaus Weisel include information presented in tabular format. In order to fully understand the financial analyses performed by Stifel Nicolaus Weisel, shareholders should read the tables together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the information set forth in the tables without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses performed by Stifel Nicolaus Weisel.

 

Selected Comparable Public Companies Analysis

 

Based on public and other available information, Stifel Nicolaus Weisel calculated Keithley’s implied enterprise value (which Stifel Nicolaus Weisel defined as market capitalization, plus total debt, plus minority interest, less cash, cash equivalents and marketable securities) and Keithley’s implied equity value, in each case, using multiples of projected calendar year (CY) 2010 and projected CY 2011 adjusted revenues, projected adjusted earnings before interest, taxes, stock-based compensation, depreciation and amortization, or EBITDA, and projected adjusted net income, which multiples were implied by the estimated enterprise values and equity values, projected revenues, EBITDA and net income of the selected companies listed below. Projected CY 2010 and projected CY 2011 information for Keithley was provided by our management and in each case was adjusted in the manner described in this proxy statement under “Projected Financial Information” beginning on page 22. Projections for the selected companies were based upon First Call Consensus estimates and publicly available investment banking research. Stifel Nicolaus Weisel believes that the 11 companies listed below have operations

similar to certain operations of Keithley, but noted that none of these companies have identical management, composition, size and/or combination of businesses as Keithley:

 

 

The following table sets forth the multiples indicated by this analysis:

 

 

The multiples derived from the implied estimated enterprise values and applicable projected revenues, EBITDA and net income of the companies listed above were calculated using data that excluded all extraordinary items and non-recurring charges, and were pro forma for pending acquisitions.

 

The implied Keithley per share equity values below were each calculated based on a range of multiples of first quartile to third quartile. The quartiles were calculated using statistical interpolation to divide the probability distribution into four equal areas. In each case, Stifel Nicolaus Weisel multiplied the ratios derived from its analysis by Keithley’s applicable estimated adjusted revenues and adjusted EBITDA to calculate enterprise value, and adding Keithley’s net cash position to derive equity value. Using the Treasury Stock Method, Stifel Nicolaus Weisel then derived Keithley’s implied per share equity value. Stifel Nicolaus Weisel multiplied the ratios derived from its analysis by Keithley’s applicable estimated adjusted net income to calculate equity value. Using the Treasury Stock Method, Stifel Nicolaus Weisel then derived Keithley’s implied per share equity value.

 

 

Selected Comparable Transactions Analysis

 

Based on public and other available information, Stifel Nicolaus Weisel calculated Keithley’s implied enterprise value and implied equity value based on multiples of last 12 months (LTM) and estimated next 12 months (NTM) adjusted revenues and adjusted EBITDA, implied by 15 acquisitions of companies listed below in the test and measurement and semiconductor test and metrology sectors that had been announced since January 1, 2005. Estimated NTM information for Keithley was based on projections provided by our management and in each case were adjusted in the manner described in this proxy statement under “Projected Financial Information” beginning on page 22. The acquisitions reviewed in this analysis were the following:

 

 

 

 

The following table sets forth the multiples indicated by this analysis:

 

 

The implied Keithley per share equity values below were each calculated based on a range of multiples of first quartile to third quartile. The quartiles were calculated using statistical interpolation to divide the probability distribution into four equal areas. In each case, Stifel Nicolaus Weisel multiplied the ratios derived from its analysis by Keithley’s applicable estimated adjusted revenues and adjusted EBITDA to calculate enterprise value, and

adding Keithley’s net cash position to derive equity value. Using the Treasury Stock Method, Stifel Nicolaus Weisel then derived Keithley’s implied per share equity value.

 

 

Discounted Equity Analysis

 

Stifel Nicolaus Weisel used earnings per share projections prepared by our management for CY 2011 and CY 2012 to calculate a range of present equity values per share for Keithley. In conducting this analysis, Stifel Nicolaus Weisel applied a range of CY 2010 price-to-earnings multiples to Keithley’s projected CY 2011 and CY 2012 earnings per share and applied a discount rate of 12% to these ranges, which Stifel Nicolaus Weisel estimated to be Keithley’s cost of equity. The estimated cost of Keithley’s equity was determined based on an analysis using the Capital Asset Pricing Model. This analysis indicated implied equity values per share ranging from $8.93 to $12.50. Stifel Nicolaus Weisel noted that the merger consideration to be received by shareholders is $21.60.

 

Conclusion

 

Based upon the foregoing analyses and the assumptions and limitations set forth in full in the text of Stifel Nicolaus Weisel’s Opinion, Stifel Nicolaus Weisel was of the opinion that, as of the date of Stifel Nicolaus Weisel’s Opinion, the merger consideration to be received by the holders of Shares in the merger pursuant to the merger agreement was fair to such holders of Shares, from a financial point of view.

 

The preparation of a fairness opinion is a complex process and is not necessarily susceptible to a partial analysis or summary description. In arriving at its Opinion, Stifel Nicolaus Weisel considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor considered by it. Stifel Nicolaus Weisel believes that the summary provided and the analyses described above must be considered as a whole and that selecting portions of these analyses, without considering all of them, would create an incomplete view of the process underlying Stifel Nicolaus Weisel’s analyses and Opinion; therefore, the range of valuations resulting from any particular analysis described above should not be taken to be Stifel Nicolaus Weisel’s view of the actual value of Keithley.

 

Stifel Nicolaus Weisel acted as financial advisor to Keithley in connection with the merger. We paid Stifel Nicolaus Weisel a retainer fee of $100,000 in connection with its review of strategic alternatives on our behalf and a fee of $500,000 upon the delivery of its Opinion, neither of which is contingent upon consummation of the merger. Stifel Nicolaus Weisel will receive a transaction fee of $10.37 million upon consummation of the merger, which amount will be reduced by the fees we previously paid. The fee was based on a formula that provided for an increased fee as the deal value increased. Stifel Nicolaus Weisel will not receive any other significant payment or compensation contingent upon the successful consummation of the merger. In addition, we agreed to reimburse Stifel Nicolaus Weisel for its reasonable out-of-pocket expenses, including fees and disbursements of counsel, and to indemnify Stifel Nicolaus Weisel for certain liabilities arising out of its engagement. There are no other material relationships that existed during the two years prior to the date of Stifel Nicolaus Weisel’s Opinion or that are mutually understood to be contemplated in which any compensation was received or is intended to be received as a result of the relationship between Stifel Nicolaus Weisel and any party to the merger. Thomas Weisel Partners LLC, an affiliate of Stifel Nicolaus Weisel, provides investment advisory services to Mr. Joseph P. Keithley, our chairman, president and chief executive officer, and to certain trusts for which he serves as trustee, for which it receives customary compensation. In addition, Thomas Weisel Partners LLC provides investment advisory services to Keithley with respect to our defined benefit plan, for which it receives customary compensation. Stifel Nicolaus Weisel or its affiliates may seek to provide investment banking services to Danaher or its affiliates in the future, for which Stifel Nicolaus Weisel would seek customary compensation. In the ordinary course of business, Stifel Nicolaus Weisel and its affiliates and its and their clients may transact in the equity securities of Keithley and Danaher and may at any time hold a long or short position in such securities. Stifel Nicolaus Weisel’s internal Fairness Opinion Committee approved the issuance of its Opinion.

 

In the course of the process resulting in the merger agreement, our management prepared and provided to Stifel Nicolaus Weisel, Danaher, and the other parties that entered into confidentiality agreements non-public, projected financial information, which was based on our management’s estimate of our future financial performance as of the date they were prepared. The projected financial information covered the fiscal years 2010 through 2013. The information for fiscal year 2010 was based on actual results for the first three fiscal quarters and projected results for the fourth fiscal quarter of the year. In addition, our management provided to Stifel Nicolaus Weisel, for purposes of its financial analyses, adjusted projected financial information for fiscal 2010 and 2011 that eliminated the revenue and expense that our management determined was or would be associated with sales of our S600 product line, which was discontinued in February 2009, and sales of our radio frequency product line, which was sold in November 2009. We made available to Danaher and the other potential buyers all of the information necessary to permit Danaher and the others to make the adjustments we provided to Stifel Nicolaus Weisel. The projected financial information provided to Stifel Nicolaus Weisel and the potential buyers and the adjusted projected financial information provided to Stifel Nicolaus Weisel (the “Forecasts”) were also provided by our management to our board of directors.

 

The Forecasts were not prepared with a view to public disclosure and are included in this proxy statement only because Forecasts were provided to our board of directors, Stifel Nicolaus Weisel and the potential buyers. The Forecasts were not prepared with a view to compliance with the published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants regarding projections. Our Independent Registered Public Accounting Firm has not examined, compiled or performed any procedures with respect to the Forecasts and accordingly does not provide any form of assurance with respect to the Forecasts. Neither we nor any of our representatives (including Stifel Nicolaus Weisel) has made or makes any representations to any person regarding the ultimate performance of Keithley compared to the information contained in the Forecasts, and neither we nor any of our affiliates intend to provide any update or revision thereof, except as required by law.

 

Furthermore, the Forecasts:

 

 

In light of the foregoing factors and the uncertainties inherent in the Forecasts, shareholders are cautioned not to place undue, if any, reliance on the Forecasts.

The Forecasts are summarized in the following table:

 

 

 

 

Neither EBITDA nor any of the adjusted measures in the foregoing table are measures of performance under U.S. generally accepted accounting principles. EBITDA represents earnings before interest, taxes, stock-based compensation, depreciation and amortization and should not be considered as an alternative to net income as a measure of operating performance or cash flows or as a measure of liquidity.

 

Cautionary Statement Regarding the Forecasts

 

The Forecasts are subjective in many respects and thus susceptible to various interpretations based on actual experience and business developments. The Forecasts were based on a number of assumptions that may not be realized and are subject to significant uncertainties and contingencies, many of which are beyond our control. Since the Forecasts cover multiple years, such information by its nature becomes less reliable with each successive year. The Forecasts are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the risks and uncertainties described under “Cautionary Statement Concerning Forward-Looking Information” beginning on page 7 and the risk factors referred to therein. Accordingly, there can be no assurance that the assumptions made in preparing the Forecasts will prove accurate, and actual results may be materially different than those contained in the Forecasts. We do not intend to make publicly available any update or other revisions to the Forecasts to reflect circumstances existing after the date of the Forecasts, except as required by law. Neither we nor our independent auditors nor any of our representatives (including Stifel Nicolaus Weisel) assumes any responsibility for the validity, reasonableness, accuracy or completeness of the projected financial information, and we have made no representations to Danaher and make no representations to shareholders regarding such information. The inclusion of the Forecasts in this proxy statement should not be regarded as an indication that Danaher considered the Forecasts provided to it predictive of actual future events or that the Forecasts should be relied on for that purpose. In light of the uncertainties inherent in any projected data, our shareholders are cautioned not to rely on the Forecasts.

 

Danaher represents in the merger agreement that it has and will have at the effective time of the merger sufficient cash and cash equivalents and/or available amounts under existing credit facilities to consummate the merger upon the terms contemplated by the merger agreement and to make all payments contemplated by the merger agreement, including (1) the merger consideration and all of Danaher’s obligations under the merger agreement, including required payments with respect to stock option, restricted share units and performance award units, (2) all fees and expenses relating to the foregoing and (3) to fund the ongoing operations of Keithley and our subsidiaries.

 

General

 

In addition to their interests in the merger as shareholders, certain of our directors and executive officers have interests in the merger that differ from, or are in addition to, your interests as a shareholder. In considering the recommendation of our board of directors to vote “FOR” the approval and adoption of the merger agreement, you should be aware of these interests. Our board of directors was aware of, and considered the interests of, our directors and executive officers in approving the merger agreement, the merger and the transactions contemplated by the merger agreement. Except as described below, such persons have, to our knowledge, no material interest in the merger that differs from your interests generally.

 

Interests in Common Shares, Stock Options, Restricted Shares, Restricted Share Units, Performance Award Units and Deferred Share Units

 

As October 1, 2010, our executive officers and directors owned an aggregate of 2,618,821 outstanding Common Shares, entitling them to exercise approximately 62.0% of the voting power of the Common Shares entitled to vote at the special meeting, and stock options for approximately 1,502,679 Common Shares, restricted share units representing approximately 36,200 Common Shares and performance share units representing approximately 130,500 Common Shares based on initial award amounts for unvested awards and expected payout for vested awards (see “Security Ownership of Certain Beneficial Owners and Management”).

 

The stock options, restricted share units and performance award units were granted to our current executive officers and directors under our 1997 Directors’ Stock Option Plan, as amended, and our 2002 Stock Incentive Plan, as amended (together, the “Award Plans”). The Award Plans and the award agreements thereunder provide for full vesting of all awards, including restricted shares, granted under the Award Plans at the effective time of the merger.

 

Stock Options.   Under the terms of the merger agreement, each option to purchase Common Shares that is outstanding immediately prior to the effective time of the merger will be canceled in exchange for a cash payment, without interest and less applicable withholding taxes, from Danaher equal to the product of:

 

 

Restricted Share Units.   Under the merger agreement, at the effective time of the merger, all restricted share units granted under the Award Plans and held immediately prior to the effective time will vest and will entitle the holder thereof to receive an amount in cash equal to the product of the $21.60 per share merger consideration multiplied by the number of restricted share units held, without interest and less applicable withholding taxes.

 

Performance Award Units.   Under the merger agreement, at the effective time of the merger, all performance award units granted under the Award Plans and held immediately prior to the effective time will vest and will entitle the holder thereof to receive an amount in cash equal to the product of the $21.60 per share merger consideration multiplied by the number of Common Shares represented by the initial award amount under the award agreement, except as modified by any Change in Control Agreement or the Plush Employment Agreement, without interest and less applicable withholding taxes. As described in “— Change in Control Agreements” and “— Employment Agreement with Mark J. Plush” below, the number of performance award units that our executive officers will be entitled to receive following termination of their employment under certain circumstances is the greater of (1) the initial award amount specified in his or her award agreement, or (2) the award amount that would be paid out under the award agreement if our performance as of the effective time of the merger was deemed to have occurred on September 30, 2012, but such award cannot be more than 1.5 times the initial award amount.

 

Directors’ Deferred Compensation.   Certain of our current and former directors have deferred, pursuant to the 1996 Outside Directors’ Deferred Stock Plan, the payment of all or a portion of the directors’ fees they earned. The plan will be terminated in connection with the merger and, at the effective time of the merger, all amounts deferred as cash will be paid out and all deferred share units held by (or on behalf of) directors or former directors under such plan immediately prior to the effective time will be canceled and each holder thereof will become entitled to receive an amount in cash equal to the merger consideration in respect of each deferred share unit held, without interest and less applicable withholding taxes.

The following table summarizes, as of October 1, 2010, the options to purchase Common Shares with exercise prices of $21.60 or less, unvested restricted shares, restricted share units and performance award units held by our executive officers and directors, and the number of deferred share units held under the directors’ deferred stock plan by each of our directors and the consideration that each of them will receive under the merger agreement in connection with the vesting and cancellation of their restricted shares, units and options:

 

 

 

 

These amounts will be reduced by applicable tax withholdings.

 

Change in Control Agreements

 

We have entered into a change in control agreement (a “Change in Control Agreement”) with each of Joseph P. Keithley, Daniel A. Faia, Mark A. Hoersten, Larry L. Pendergrass and Linda C. Rae, all of whom are executive officers of Keithley. Under the Change in Control Agreements, if the merger occurs and before September 28, 2012, the executive’s employment is terminated without cause or the executive resigns for good reason (a “Triggering Event”), the executive will be entitled to a lump sum payment consisting of:

 

 

 

The executive will also receive continued medical, welfare and other benefit coverage until the earlier of the date on which he or she is eligible to receive comparable benefits from another employer or the one-year or, in the case of Mr. Keithley and Ms. Rae, the 18-month anniversary of the Triggering Event. We will also provide outplacement services up to a cost of $25,000.

 

Equity awards held by the executives as of September 29, 2010 will be treated in accordance with the provisions set forth in the applicable equity award plans and agreements and discussed above under “— Interests in Common Shares, Stock Options, Restricted Share Units, Performance Award Units and Deferred Share Units”, except that in the case of performance award units, the executives will be entitled to a payout equal to the greater of (1) the initial award amount specified in his or her agreement, or (2) the award amount that would be paid out under the agreement if our financial performance as of the vesting date for the award was our actual financial performance as of the effective time of the merger, but such payout cannot be more than 1.5 times the initial award amount.

 

In the event payments to the executive result in the executive becoming liable for the payment of excise taxes pursuant to Section 4999 of the Internal Revenue Code, the payments to be made to the executive as a result of the merger will be reduced to the extent necessary to prevent the payments from being subject to the excise tax, but only if by reason of the reduction, the after-tax benefit of the reduced payments to the executive exceeds the after-tax benefit if such reduction were not made.

 

In addition, payments to the executive are conditioned upon the executive’s execution and delivery of a release in favor of Keithley in the form described in the Change in Control Agreements. The Change in Control Agreements also provide that, for a period of one year from the date of termination of the executive’s employment that results in a severance payment under the Change in Control Agreements, the executive will not (1) solicit the employment of any employee who has been employed by us at any time during the prior six months or (2) solicit customers, business, patronage or orders for, or sell, any products and services in competition with, or for any business, wherever located, that, as of the date of the executive’s termination of employment, competes with, our business.

 

If the merger had been completed on October 1, 2010 and a Triggering Event occurred under the Change in Control Agreements immediately thereafter (1) the estimated total of the cash severance pay, pro rated target bonus, continued medical, welfare and other benefit coverage and outplacement services for each executive officer would be as follows: Mr. Keithley — $1,205,985; Mr. Faia — $451,722; Mr. Hoersten — $347,994; Mr. Pendergrass — $355,790; and Ms. Rae — $708,453, and (2) the executive officers would receive the Incremental Performance Award Payout for their performance award units equal to $0 for Mr. Keithley, $102,600 for Mr. Faia, $71,280 for Mr. Pendergrass and $273,780 for Ms. Rae. These amounts also assume that there is no reduction in the payments made under the Change in Control Agreements to prevent the payments from being subject to the excise tax under Section 4999 of the Internal Revenue Code.

 

Employment Agreement with Mark J. Plush

 

We have entered into an Amended and Restated Employment Agreement (the “Plush Employment Agreement”) with Mark J. Plush, our senior vice president and chief financial officer. The Plush Employment Agreement provides that, if within 36 months following the effective time of the merger, Mr. Plush’s employment is terminated other than for cause (as defined in the Plush Employment Agreement) or he resigns for good reason (as defined in the Plush Employment Agreement) (each, a “Triggering Event”), Mr. Plush will be entitled to the following benefits:

 

 

 

Mr. Plush will also receive continued medical, welfare and other benefit coverage until the earlier of the date on which he is eligible to receive comparable benefits from another employer and the 24-month anniversary of the Triggering Event, as well as continued fringe perquisites to which Mr. Plush was entitled immediately prior to termination for a period of 18 months following the Triggering Event. We will also provide reimbursement for certain outplacement services up to a cost of $10,000.

 

Equity awards held by Mr. Plush as of the effective time of the merger will be treated in accordance with the provisions set forth in the applicable equity award plans and agreements and discussed above under “— Interests in Common Shares, Stock Options, Restricted Share Units, Performance Award Units and Deferred Share Units,” except that in the case of performance award units, he will be entitled to a payout equal to the greater of (1) the initial award amount specified in his agreement, or (2) the award amount that would be paid out under the agreement if our financial performance as of the vesting date for the award was our actual financial performance as of the effective time of the merger, but such payout cannot be more than 1.5 times the initial award amount.

 

In addition, payments to Mr. Plush are conditioned upon his covenant not to (1) accept employment directly or indirectly with any of our competitors, (2) allow use of his name by or in any competitive business, (3) employ the services of any of our employees without our written permission, or (4) be unreasonably unavailable for consultation by our officers and directors until such time as Mr. Plush turns 65.

 

If the merger had been completed on October 1, 2010 and a Triggering Event occurred under the Plush Employment Agreement immediately thereafter (1) the estimated total of the cash severance pay, continued medical, welfare and other benefit coverage, continued fringe perquisites and outplacement services for Mr. Plush would be $465,303 (this amount assumes fringe perquisites are provided at the maximum permitted cost, that there is no payment of a current year bonus (due to the assumed termination date of October 1, which is the first day of our fiscal year) and that no matching contributions are made to Mr. Plush’s 401(k) plan account beyond the base match, since the additional matching amount is based upon our fiscal year financial results that have not yet been determined (the maximum additional amount is $3,834)), (2) the estimated value of Mr. Plush’s supplemental retirement benefit is approximately $867,519 to $1,351,723, which was calculated as a range based on known compensation for fiscal year 2010 and the potential range of Mr. Plush’s bonus for fiscal year 2010, and (3) Mr. Plush would receive the Incremental Performance Award Payout for his performance award units equal to $240,300.

 

Deferred Compensation Plans

 

In accordance with the terms of our Deferred Compensation Plan and Supplemental Deferral Plan, the merger triggers full vesting and payment of all amounts deferred under the plans, including by our executive officers participating in the plans, at the effective time of the merger (or six months and one day thereafter to the extent required under Section 409A of the Internal Revenue Code).

 

Indemnification of Directors and Officers

 

The merger agreement provides that Danaher and the surviving corporation must honor all of our obligations to indemnify our and our subsidiaries’ current and former directors, officers and employees for acts or omissions by such parties occurring at or prior to the effective time of the merger, whether pursuant to our or our subsidiaries’ respective governing documents or individual indemnity agreements disclosed to Danaher in connection with the merger agreement or filed as an exhibit to certain documents filed with the SEC, and such obligations will survive the merger and will continue in full force and effect in accordance with their terms, without amendment or modification adverse to the indemnified individual, for a period of six years from the effective time of the merger.

 

For a period of six years from the effective time of the merger, Danaher and the surviving corporation must maintain a directors’ and officers’ liability insurance policy for those persons currently covered by our directors’

and officers’ liability insurance policy and with coverage and in amounts no less favorable than those of such current insurance policy. Notwithstanding this requirement, in no event will Danaher be required to pay an annual premium for such insurance in excess of 300% of the last annual premium paid by us prior to the date of the merger agreement. In lieu of the foregoing, at Danaher’s option and expense, we may purchase prior to the effective time of the merger six-year “tail” insurance coverage that provides coverage identical in all material respects to the coverage described above.

 

Danaher is required to pay all reasonable expenses, including reasonable attorneys’ fees and fees and disbursements of experts and witnesses, that may be incurred by an indemnified party in enforcing the foregoing indemnity and other obligations.

 

The obligations described above regarding directors’ and officers’ indemnification and insurance must be assumed by any successor entity to the surviving corporation as a result of any consolidation, merger or transfer of all or substantially all of its properties and assets.

 

Voting Agreement with the Keithley Partnership

 

In connection with the execution of the merger agreement, the Keithley Partnership, of which Mr. Keithley, our chairman, president and chief executive officer, is general partner, entered into the Voting Agreement pursuant to which it agreed to vote a number of its Class B common shares representing 19.99% of the voting power of our outstanding Common Shares in favor of approval and adoption of the merger agreement and the transactions contemplated by the merger agreement. In addition, the Keithley Partnership agreed to vote such shares against any proposal that would result in our breach of the merger agreement, or any action or agreement that is intended to, or would be reasonably likely to, impede, interfere with, delay, postpone or attempt to discourage the merger. The Voting Agreement will terminate if the merger agreement is terminated in accordance with its terms and can be terminated by the Keithley Partnership if there is any decrease in the price or change in the form of consideration to be paid per Common Share or if the merger agreement is otherwise amended in a manner adverse to our shareholders. As of October 1, 2010, the Keithley Partnership, together with Mr. Keithley, beneficially owned Common Shares representing approximately 61.5% of the total combined voting power of the outstanding Common Shares. Pursuant to the Voting Agreement, the Keithley Partnership also agreed not to transfer or dispose of any of its Common Shares, enter into any other voting arrangement or grant any proxies with respect to its Common Shares, or convert its Class B common shares into common shares. See “Voting Agreement” beginning on page 48.

 

The following is a discussion of the material United States federal income tax consequences of the merger to U.S. holders (as defined below) whose Common Shares are converted into the right to receive cash in the merger. The discussion is based upon the Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations, published rulings of the Internal Revenue Service (the “IRS”) and judicial and administrative decisions in effect as of the date of this proxy statement, all of which are subject to change (possibly with retroactive effect) and to differing interpretations. The following discussion does not purport to consider all aspects of United States federal income taxation that might be relevant to our shareholders. This discussion applies only to shareholders who, at the effective time of the merger, hold our Common Shares as a capital asset within the meaning of Section 1221 of the Code. The following discussion does not address taxpayers subject to special treatment under United States federal income tax laws, including, without limitation, banks, insurance companies, financial institutions, dealers in securities or currencies, traders of securities that elect the mark-to-market method of accounting for their securities holdings, persons that have a functional currency other than the United States dollar, tax-exempt organizations, cooperatives, mutual funds, real estate investment trusts, S corporations or other pass-through entities (or investors in an S corporation or other pass-through entity) and persons liable for the alternative minimum tax. In addition, the following discussion does not apply to shareholders who acquired their Common Shares upon the exercise of employee stock options or otherwise as compensation for services or through a tax-qualified retirement plan or who hold their shares as part of a hedge, straddle, conversion transaction or other integrated transaction, and does not apply to shareholders who exercise dissenters rights under applicable law. If our Common Shares are held through a partnership, the United States federal income tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships that are holders of our common stock

and partners in such partnerships are urged to consult their own tax advisors regarding the tax consequences to them of the merger.

 

The following discussion also does not address any foreign, state or local tax consequences of the merger, and does not address any United States federal tax consequences other than income tax consequences. We intend this discussion to provide only a general summary of the material U.S. federal income tax consequences of the merger to holders of our Common Shares. We do not intend it to be a complete analysis or description of all potential U.S. federal income tax consequences of the merger. The U.S. federal income tax laws are complex and subject to varying interpretation. Accordingly, the IRS may not agree with the tax consequences described in this proxy statement. All shareholders should consult their own tax advisors regarding the U.S. federal income tax consequences, as well as the foreign, state and local tax consequences, of the disposition of their shares in the merger.

 

For purposes of this summary, a “U.S. holder” is a beneficial owner of our Common Shares who or that is or is treated for U.S. federal income tax purposes as:

 

 

A “non-U.S. holder” is a beneficial owner (other than a partnership or other entity classified as a partnership for U.S. federal income tax purposes) of our Common Shares that is not a U.S. holder.

 

U.S. Holders

 

Exchange of Common Shares for Cash.   Generally, the merger will be taxable to U.S. holders of our Common Shares for U.S. federal income tax purposes. A U.S. Holder of our Common Shares receiving cash in the merger generally will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount of cash received and the U.S. holder’s adjusted tax basis in our Common Shares surrendered. Any such gain or loss generally will be capital gain or loss if our Common Shares are held as a capital asset at the effective time of the merger. Any capital gain or loss will be taxed as long-term capital gain or loss if the U.S. holder has held our Common Shares for more than one year prior to the effective time of the merger. If the U.S. Holder has held our Common Shares for one year or less prior to the effective time of the merger, any capital gain or loss will be taxed as short-term capital gain or loss. Currently, most long-term capital gains for non-corporate taxpayers are taxed at a maximum federal tax rate of 15%. Absent Congressional intervention, the applicable provisions of the United States federal income tax laws relating to the 15% tax rate are scheduled to “sunset,” or revert to the provisions of prior law, effective for taxable years beginning after December 31, 2010, at which time the capital gains tax rate will be increased to 20%. The deductibility of capital losses is subject to certain limitations. If a U.S. Holder acquired different blocks of our Common Shares at different times and different prices, such holder must determine the adjusted tax basis and holding period separately with respect to each such block of our Common Shares.

 

Information Reporting and Backup Withholding.   Cash payments made pursuant to the merger will be reported to our shareholders and the Internal Revenue Service to the extent required by the Internal Revenue Code and applicable Treasury regulations. Backup withholding tax is currently at a rate of 28% and is scheduled to go up to 31% for tax years beginning after December 31, 2010. Backup withholding may apply to such payments if the U.S. holder fails to: furnish his, her or its taxpayer identification number (social security or employer identification number); certify that his, her, or its number is correct; certify that he, she, or it is not subject to backup withholding; and otherwise comply with the applicable requirements of the backup withholding rules. Certain of our shareholders will be asked to provide additional tax information in the letter of transmittal for the Common Shares.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a credit against such U.S. holder’s United States federal income tax liability and may entitle the holder to a refund of any excess amounts withheld under the backup withholding rules, provided the required information is timely furnished to the Internal Revenue Service.

 

Non-U.S. Holders

 

Any gain recognized on the receipt of cash pursuant to the merger by a non-U.S. holder generally will not be subject to U.S. federal income tax unless:

 

 

A non-U.S. holder will be subject to information reporting and, in certain circumstances, backup withholding (currently, at a rate of 28%, and scheduled to go up to 31% for tax years beginning after December 31, 2010) will apply with respect to the cash received by such holder pursuant to the merger, unless such non-U.S. holder certifies under penalties of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that the holder is a United States person as defined under the Code) or such holder otherwise establishes an exemption from backup withholding. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be credited against a non-U.S. holder’s U.S. federal income tax liability, if any, and any excess amounts withheld under the backup withholding rules may be refunded, provided that the required information is timely furnished to the IRS.

 

The foregoing discussion of material United States federal income tax consequences is not intended to be, and should not be construed as, legal or tax advice to any holder of our Common Shares. We urge you to consult your tax advisor to determine the particular tax consequences to you (including the application and effect of any state, local or foreign income and other tax laws) of the receipt of cash in exchange for Common Shares pursuant to the merger.

 

Under the merger agreement, we and the other parties to the merger agreement have agreed to use our commercially reasonable efforts to complete the transactions contemplated by the merger agreement as soon as reasonably practicable, including obtaining all necessary governmental approvals. The Hart-Scott-Rodino Act provides that transactions such as the merger may not be completed until certain information has been submitted to the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice and certain waiting period requirements have been satisfied.

 

Except as noted above with respect to the required filings under the Hart-Scott-Rodino Act and receipt of any foreign approvals, consents and clearances and the filing of a certificate of merger in Ohio at or before the effective time of the merger, we are unaware of any material federal, state or foreign regulatory requirements or approvals required for the execution of the merger agreement or completion of the merger.

 

If the merger agreement is approved and adopted, each shareholder who does not favor the merger agreement may be entitled to seek relief as a dissenting shareholder under Section 1701.85 of the Ohio Revised Code. The following is a summary of the principal steps a shareholder must take to perfect his or her dissenters’ rights under the Ohio Revised Code. This summary is qualified in its entirety by reference to Section 1701.85 of the Ohio Revised Code, a copy of which is attached as Annex C to this proxy statement and incorporated by reference herein. Any dissenting shareholder contemplating exercise of his or her dissenters’ rights is urged to carefully review the provisions of Section 1701.85 and to consult an attorney, since failure to follow fully and precisely the procedural requirements of the statute will result in termination or waiver of these rights.

 

To perfect dissenters’ rights, a dissenting shareholder must satisfy each of the following conditions and must otherwise comply with Section 1701.85 of the Ohio Revised Code:

 

 

We and a dissenting shareholder may come to an agreement as to the fair cash value of the dissenting shareholder’s Common Shares. If we and any dissenting shareholder cannot agree upon the fair cash value of the dissenting shareholder’s Common Shares, then either we or the dissenting shareholder may, within three months after service of the demand by the dissenting shareholder, file a complaint in the Court of Common Pleas of Cuyahoga County, Ohio, for a determination that the shareholder is entitled to exercise dissenters’ rights and to determine the fair cash value of the Common Shares. The court may appoint one or more appraisers to recommend a fair cash value. The fair cash value is to be determined as of the day prior to the date of the special meeting. The fair cash value is the amount that a willing seller, under no compulsion to sell, would be willing to accept, and that a willing buyer, under no compulsion to purchase, would be willing to pay, but in no event may the fair cash value

exceed the amount specified in the dissenting shareholder’s demand. In determining this value, any appreciation or depreciation in the market value of the Common Shares resulting from the merger is excluded. The Ohio Supreme Court, in Armstrong v. Marathon Oil Company , 32 Ohio St. 3d 397 (1987), has held that fair cash value for publicly-traded shares of a company with significant trading activity may be the market price for such shares as of the day prior to the date that the transaction is submitted to the shareholders or directors for final approval, as adjusted to exclude the impact of the transaction giving rise to the dissenters’ rights. The fair cash value may ultimately be more or less than the per share merger consideration. Interest on the fair cash value and costs of the proceedings, including reasonable compensation to any appraisers, are to be assessed or apportioned as the court considers equitable. Shareholders should also be aware that investment banking opinions as to the fairness from a financial point of view of the consideration payable in a merger are not opinions as to fair cash value under Section 1701.85 of the Ohio Revised Code.

 

Payment of the fair cash value must be made within 30 days after the later of the final determination of such value or the closing date of the merger. Such payment shall be made only upon simultaneous surrender to us of the share certificates for which such payment is made.

 

A dissenting shareholder’s rights to receive the fair cash value of his or her Common Shares will terminate if:

 

 

All rights accruing from Common Shares, including voting and dividend and distribution rights, are suspended from the time a dissenting shareholder makes the demand with respect to such Common Shares until the termination or satisfaction of the rights and obligations of the dissenting shareholder and Keithley arising from the demand. During this period of suspension, any dividend or distribution paid on the Common Shares will be paid to the record owner as a credit upon the fair cash value of such Common Shares. If a shareholder’s dissenters’ rights are terminated other than by purchase by us of the dissenting shareholder’s Common Shares, then at the time of termination all rights will be restored and all distributions that would have been made, but for suspension, will be made.

 

We are aware of one purported class action and derivative lawsuit related to the merger. The case, Donald Freidlander v. Danaher Corporation, Brian R. Bachman, James B. Griswold, Leon J. Hendrix, Jr., Brian J. Jackman, Joseph P. Keithley, N. Mohan Reddy, Thomas A. Saponas, Barbara V. Scherer and Keithley Instruments, Inc. , was filed on October 4, 2010 in the Court of Common Pleas of Cuyahoga County, Ohio (Case No. CV 10 738257). The complaint alleges, among other things, that Keithley’s directors breached their fiduciary duties in connection with the merger and that Danaher has aided and abetted Keithley’s directors in their alleged breaches of fiduciary duties. The relief sought by the plaintiff includes a declaration that the action is properly maintainable as a derivative and class action, a declaration that the merger is unlawful and unenforceable, an injunction barring the merger, rescinding (to the extent already implemented) the merger or any of the terms thereof and the payment of costs and disbursements of the action, including attorneys’ and experts’ fees.

 

The summary of the material terms of the merger agreement below and elsewhere in this proxy statement is qualified in its entirety by reference to the merger agreement, a copy of which is attached to this proxy statement as Annex A. This summary may not contain all of the information about the merger agreement that is important to you. The merger agreement has been included to provide you with information regarding its terms, and we recommend that you read carefully the merger agreement in its entirety. Except for its status as a contractual document that establishes and governs the legal relations among the parties thereto with respect to the merger, we do not intend for its text to be a source of factual, business or operational information about Keithley, Danaher or Merger Sub. The merger agreement contains representations, warranties and covenants that are qualified and limited, including by information in the disclosure letter referenced in the merger agreement that Keithley delivered in connection with the execution of the merger agreement. Representations and warranties may be used as a tool to allocate risks between the respective parties to the merger agreement, including where the parties do not have complete knowledge of all facts, instead of establishing such matters as facts. Furthermore, the representations and warranties may be subject to different standards of materiality applicable to the contracting parties, which may differ from what may be viewed as material to shareholders or under the federal securities laws. These representations may or may not have been accurate as of any specific date and do not purport to be accurate as of the date of this proxy statement. Moreover, information concerning the subject matter of the representations and warranties may have changed since the date of the merger agreement and subsequent developments or new information qualifying a representation or warranty may have been included in this proxy statement.

 

The effective time of the merger will occur at the time that we file a certificate of merger with the Secretary of State of the State of Ohio on the closing date of the merger (or such later date provided in such certificate, as agreed upon by us, Danaher and Merger Sub). The closing date will occur no later than the second business day after all of the conditions to the merger set forth in the merger agreement have been satisfied or waived (other than conditions that by their nature are to be satisfied on the closing date, but subject to satisfaction or waiver of such conditions) or on such other date as we and Danaher may agree to in writing.

 

Subject to the terms and conditions of the merger agreement and in accordance with Ohio law, at the effective time of the merger, Merger Sub will merge with and into Keithley. The separate corporate existence of Merger Sub will cease, and Keithley will continue as the surviving corporation and a wholly-owned subsidiary of Danaher. Following the completion of the merger, our common shares will be delisted from the New York Stock Exchange and deregistered under the Exchange Act and will no longer be publicly traded.

 

The articles of incorporation and code of regulations of the surviving corporation will be the articles of incorporation and code of regulations of Merger Sub as in effect immediately before the effective time of the merger, except that the name of the surviving corporation will be provided by Danaher prior to the effective time.

 

The directors of Merger Sub immediately prior to the effective time of the merger and the individuals specified by Danaher prior to the effective time will become the directors and officers, respectively, of the surviving corporation following the merger.

 

Common Shares

 

At the effective time of the merger, each Common Share issued and outstanding immediately prior to the effective time will be converted into the right to receive $21.60 in cash, without interest and less applicable withholding taxes. However, Common Shares that are:

 

 

All Common Shares converted into the right to receive the merger consideration will be automatically canceled and cease to exist and the holder of a certificate for Common Shares will have only the right to receive the merger consideration of $21.60 in cash per share, without any interest and less applicable withholding taxes.

 

Stock Options and Other Share-Based Awards

 

Each option to purchase Common Shares, whether vested or unvested, that is outstanding immediately prior to the effective time of the merger, will become fully vested and cease to represent a right or award with respect to Common Shares and will entitle the holder thereof to receive, without interest and less applicable withholding taxes, an amount in cash equal to the product of:

 

 

In addition, each right of any kind, contingent or accrued, to receive Common Shares or benefits measured in whole or in part by the value of a number of Common Shares granted under the Company’s stock incentive plans and directors’ deferred stock plan (including restricted share units, deferred share units and performance award units) (other than stock options), whether vested or unvested, that is outstanding immediately prior to the effective time of the merger will become fully vested and cease to represent a right or award with respect to Common Shares. Holders of restricted share units and deferred share units will receive, without interest and less applicable tax withholdings, an amount in cash equal to the product of the merger consideration multiplied by the number of restricted share units or deferred share units, as applicable, held by such person. Except as modified by a Change in Control Agreement or the Plush Employment Agreement, holders of performance award units will be entitled to receive, without interest and less applicable tax withholdings, an amount in cash equal to the product of the merger consideration multiplied by the number of Common Shares represented by the initial award value under the agreement evidencing such performance award units. For additional information concerning amounts receivable as a result of a Change in Control Agreement or the Plush Employment Agreement, see “Interests of Our Directors and Executive Officers in the Merger — Change in Control Agreements” and “Interests of Our Directors and Executive Officers in the Merger — Employment Agreement with Mark J. Plush.”

 

As soon as reasonably practicable after the effective time of the merger, the surviving corporation will mail to each holder of a stock option, restricted share unit, deferred share unit or performance award unit a check in the amount payable to such holder pursuant to the terms of the merger agreement.

 

Danaher and Keithley have agreed that at the effective time of the merger each outstanding stock option (whether vested or unvested) with an exercise price equal to or in excess of the merger consideration will be cancelled by virtue of the merger without any conversion thereof or payment therefor. Prior to the effective time of the merger, Keithley will use commercially reasonable efforts to cause this to occur, including, if necessary, using commercially reasonable efforts to enter into option termination or cancellation agreements with the holders of

stock options, without paying any consideration or incurring any debts or obligations on behalf of Keithley or the surviving corporation.

 

In addition, prior to the effective time of the merger, Keithley must take all necessary steps to cause dispositions of Common Shares pursuant to the transactions contemplated by the merger agreement by each individual who is a director or officer of Keithley to be exempt under Rule 16b-3 promulgated under the Exchange Act.

 

Immediately prior to the effective time of the merger, Danaher will deposit, or will cause to be deposited, with a U.S. bank or trust company appointed to act as paying agent and approved by us, cash in an amount sufficient to pay the aggregate merger consideration in exchange for all of the Company Shares outstanding immediately prior to the effective time of the merger. As soon as reasonably practicable after the effective time of the merger, the paying agent will mail a letter of transmittal and instructions to each shareholder. The letter of transmittal and instructions will tell you how to surrender your share certificates or book-entry shares in exchange for the merger consideration.

 

You will not be entitled to receive the merger consideration until you surrender your share certificate or certificates to the paying agent, together with a duly completed and validly executed letter of transmittal and any other documents as may reasonably be required by the paying agent. The merger consideration may be paid to a person other than the person in whose name the corresponding certificate is registered if the certificate or book entry shares formerly representing such Common Shares is presented to the paying agent accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable share transfer taxes have been paid or are not payable.

 

No interest will be paid or will accrue on the cash payable upon surrender of the certificates or book-entry shares. The paying agent and surviving corporation will be entitled to deduct and withhold, and pay to the appropriate taxing authorities, any applicable taxes from the merger consideration. Any sum which is withheld and paid to a taxing authority by the paying agent or the surviving corporation will be deemed to have been paid to the person from whom it is withheld.

 

At the effective time of the merger, our share transfer books will be closed, and there will be no further registration of transfers of outstanding Common Shares. If, after the effective time of the merger, certificates or book-entry shares are presented to the surviving corporation for transfer, they will be canceled and exchanged for the merger consideration.

 

Any portion of the merger consideration deposited with the paying agent that remains undistributed to the former holders of Common Shares on the first anniversary of the effective time of the merger will be delivered, upon demand, to the surviving corporation. Holders of certificates who have not surrendered their certificates prior to the delivery of such funds to the surviving corporation may only look to the surviving corporation for the payment of the merger consideration. None of Keithley, Danaher, the surviving corporation, the paying agent or any other person will be liable to any former holder of Common Shares for any amount properly delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.

 

If you have lost a certificate, or if it has been stolen or destroyed, then before you will be entitled to receive the merger consideration, you will have to make an affidavit of that fact and, if required by the paying agent or reasonably requested by the surviving corporation, post a bond in a customary amount or provide an indemnity against any claim that may be made against it with respect to that certificate.

 

We make various representations and warranties in the merger agreement that are subject, in some cases, to specified exceptions and qualifications contained in the merger agreement or in the disclosure letter delivered in connection therewith. These representations and warranties relate to, among other things:

 

 

 

 

Many of our representations and warranties are qualified by the absence of a material adverse effect on Keithley, which means, for purposes of the merger agreement, any event, change, circumstance or effect that (i) prevents or materially delays or materially impairs our ability to perform our obligations under the merger agreement and to consummate the merger and the other transactions contemplated by the merger agreement or (ii) is materially adverse to our and our subsidiaries’ business, financial condition or results of operations, taken as a whole, provided that in the case of clause (ii) only, events, changes, circumstances or effects will not constitute or be considered in determining a material adverse effect to the extent:

 

 

 

Danaher and Merger Sub make various representations and warranties in the merger agreement with respect to Danaher and Merger Sub. These include representations and warranties regarding:

 

 

 

Certain of the representations and warranties of Danaher and Merger Sub are qualified by the absence of a material adverse effect on Danaher, which means, for purposes of the merger agreement, any event, circumstance, change, occurrence or state of facts that prevents or materially delays or materially impairs the ability of Danaher or Merger Sub to consummate the merger and the other transactions contemplated by the merger agreement.

 

The representations and warranties of each of the parties to the merger agreement will expire upon the effective time of the merger. You should be aware that these representations and warranties made by Keithley to Danaher and Merger Sub and by Danaher and Merger Sub to Keithley, as the case may be, may be subject to important limitations and qualifications agreed to by the parties to the merger agreement, may or may not be accurate as of the date they were made and do not purport to be accurate as of the date of this proxy statement.

 

Under the merger agreement, we have agreed that, subject to certain exceptions including for transactions between us and our wholly-owned subsidiaries, unless required by applicable law or the merger agreement or if Danaher gives its written consent, between the date of the merger agreement and the effective time of the merger, we and our subsidiaries will:

 

 

We have also agreed that during the same time period, subject to certain exceptions including for transactions between us and our wholly-owned subsidiaries, unless required by applicable law or the merger agreement or if Danaher gives its written consent, we will not and will not permit any of our subsidiaries to:

 

 

 

 

We have agreed that we will, and we will cause our subsidiaries and our respective representatives to, cease immediately and cause to be terminated all discussions and negotiations with respect to or that reasonably could be expected to lead to an acquisition proposal. For purposes of the merger agreement, “acquisition proposal” means, other than transactions contemplated by the merger agreement, any inquiry, proposal or offer from any person relating to any:

 

 

We have agreed that until the earlier of the effective time of the merger and the date of termination of the merger agreement, and subject to specified exceptions described below, we will not, nor will we permit any of our

subsidiaries or their officers, directors or employees to, and we will use our commercially reasonable efforts to cause our other representatives to not, directly or indirectly:

 

 

Notwithstanding the foregoing, at any time prior to the approval and adoption of the merger agreement by our shareholders, in response to an unsolicited, written acquisition proposal that did not result from a breach of the non-solicitation provisions of the merger agreement that our board of directors has determined, in good faith, after consultation with outside counsel and its financial advisor, constitutes, or could reasonably be expected to result in, a superior proposal, we may:

 

 

We may not release any third party from, or waive any provision of, any confidentiality or standstill agreement to which we were a party as of September 29, 2010, unless our board of directors determines in good faith (after consultation with outside counsel) that the failure to do so would be inconsistent with its fiduciary duties under applicable law.

 

We must notify Danaher and Merger Sub within 24 hours of our receipt, directly or indirectly, of any proposals, offers, inquiries, information requests, discussions or negotiations regarding an alternative acquisition. Such notice must be made orally and confirmed in writing, and must identify the person or group making the acquisition proposal or request and the material terms and conditions thereof. In addition, we must keep Danaher reasonably informed of the status of such acquisition proposal and any material changes to the acquisition proposal’s terms.

 

We have also agreed that, subject to the exceptions summarized below, our board of directors will not:

 

 

Notwithstanding the foregoing or anything in the merger agreement to the contrary, if, prior to our obtaining shareholder approval of the merger agreement, our board of directors determines in good faith (after consulting with

outside counsel) that the failure to do so would be inconsistent with its fiduciary duties under applicable law , our board of directors may:

 

 

The board may only take the foregoing actions if:

 

 

For purposes of the merger agreement, a “superior proposal” means a bona fide, unsolicited, written acquisition proposal (except the references therein to “15%” shall be replaced by “50%” and the references to “vote or value” shall be replaced by “vote and value”) that our board of directors determines in its good faith judgment (after consulting with outside counsel and its financial advisor), taking into account the financial, regulatory and legal aspects of the proposal and the timing and likelihood of consummation of such proposal, is more favorable to our shareholders (in their capacities as shareholders) than the transactions contemplated by the merger agreement (including any adjustment to the terms and conditions proposed by Danaher in response to such acquisition proposal).

 

Danaher has agreed that it will honor all of our employee benefit plans and compensation arrangements in accordance with their terms and in the forms as disclosed to Danaher in connection with the merger agreement. Until December 31, 2011, Danaher must provide to each of our employees who remains an employee of the surviving corporation base pay, annual incentive opportunities for participants in the management incentive plans and employee benefits (excluding equity-based compensation) that are substantially comparable, in the aggregate, to the base pay, annual management incentive opportunities and employee benefits (excluding equity-based compensation) provided to our employees immediately before the effective time of the merger. In addition, Danaher has agreed that any employee whose employment is terminated involuntarily other than for cause on or after the effective time of the merger but on or prior to December 31, 2011, is entitled to severance benefits comparable to the severance benefits provided to our or our subsidiaries’ employees immediately prior to the effective time of the merger.

 

If an employee participates in a Danaher employee benefit plan after the effective time of the merger, he or she will be credited with his or her hours of service credit with us and our subsidiaries to the same extent as such employee was entitled, before the effective time of the merger, to credit for such service under our employee benefit plans. Such credit for service will not apply to the extent that such credit would result in any duplication of benefits or is prohibited under applicable law or the terms of the applicable Danaher benefit plan.

 

In addition, Danaher and the surviving corporation will ensure that all waiting periods, preexisting condition exclusions, active-at-work requirements or underwriting requirements of each Danaher employee benefit plan

providing group accident and sickness, dental, vision or similar group health benefits to any employee of the surviving corporation are not enforced against such employee and his or her covered dependents. Danaher and the surviving corporation also must cause any eligible expenses incurred by an employee and his or her covered dependents during the portion of the plan year of our employee benefit plan before the effective time of the merger to be taken into account under a Danaher employee benefit plan for purposes of satisfying all deductible or coinsurance obligations under such plan. Notwithstanding the preceding sentences, Danaher and the surviving corporation will not have such obligations in respect of a new plan year.

 

We are permitted to pay any amounts earned under our annual management incentive plans for the fiscal year ending September 30, 2010 and if such amounts are not paid prior to the effective time of the merger, the surviving corporation will make all payments earned thereunder in a manner consistent with past practice. In addition, Danaher and Merger Sub agreed that the surviving corporation will honor Keithley’s annual management incentive plans for fiscal year 2011 for the period prior to the effective time of the merger. All payments earned under the 2011 management incentive plans, including any pro rata portion for the fiscal quarter in which the closing occurs, will be paid promptly after the effective time of the merger in accordance with our past practice.

 

Under the terms of the merger agreement, we have agreed to take all action necessary to terminate our employee stock purchase plan and our supplemental executive retirement plan no later than the effective time of the merger.

 

Danaher and the surviving corporation must honor all of our obligations to indemnify our and our subsidiaries’ current and former directors, officers and employees for acts or omissions by such parties occurring at or prior to the effective time of the merger, whether pursuant to our or our subsidiaries’ respective governing documents or individual indemnity agreements disclosed to Danaher in connection with the merger agreement or filed as an exhibit to certain documents filed with the SEC, and such obligations will survive the merger and will continue in full force and effect in accordance with their terms, without amendment or modification adverse to the indemnified individual for a period of six years from the effective time of the merger.

 

For a period of six years from the effective time of the merger, Danaher and the surviving corporation must maintain a directors’ and officers’ liability insurance policy for those persons currently covered by our directors’ and officers’ liability insurance policy and with coverage and in amounts no less favorable than those of such current insurance policy. Notwithstanding this requirement, in no event will Danaher be required to pay an annual premium for such insurance in excess of 300% of the last annual premium paid by us prior to the date of the merger agreement. In lieu of the foregoing, at Danaher’s option and expense, we may purchase prior to the effective time of the merger six-year “tail” insurance coverage that provides coverage identical in all material respects to the coverage described above.

 

Danaher is required to pay all reasonable expenses, including reasonable attorneys’ fees and fees and disbursements of experts and witnesses, that may be incurred by an indemnified party in enforcing the foregoing indemnity and other obligations.

 

The obligations described above regarding directors’ and officers’ indemnification and insurance must be assumed by any successor entity to the surviving corporation as a result of any consolidation, merger or transfer of all or substantially all of its properties and assets.

 

Shareholders Meeting

 

The merger agreement requires us to duly call, give notice of and hold a meeting of our shareholders to approve and adopt the merger agreement and the transactions contemplated by the merger agreement as promptly as reasonably practicable after the mailing of this proxy statement but in any event within 30 days of mailing this proxy statement. Subject to limited circumstances contemplated by the merger agreement and described above in “— No Solicitation of Transaction; Change of Recommendation,” our board of directors is required to recommend that our shareholders vote in favor of approval and adoption of the merger agreement and the transactions contemplated by

the merger agreement and to use commercially reasonable efforts to solicit proxies in favor of such approval and adoption.

 

Access to Information

 

We have agreed to grant Danaher and Danaher’s representatives reasonable access to our and our subsidiaries’ properties, books, contracts, commitments, personnel and records and all other information concerning our and our subsidiaries’ business, properties and personnel as Danaher reasonably requests. Danaher has agreed to hold any nonpublic information regarding Keithley or our subsidiaries in accordance with the terms of a confidentiality agreement.

 

Commercially Reasonable Efforts

 

Subject to the terms and conditions of the merger agreement, each of the parties has agreed to use its commercially reasonable efforts to complete the merger, including obtaining all necessary approvals and consents from governmental entities or third parties, defending any lawsuit challenging the merger, delivering any additional instrument reasonably necessary to carry out the purposes of the merger agreement and taking all other actions or cause to be done all other things necessary, proper or advisable to consummate the transactions contemplated by the merger agreement.

 

Additionally, subject to the terms and conditions of the merger agreement, we and Danaher must each make their respective filings under the Hart-Scott-Rodino Act within 15 business days of the date of the merger agreement.

 

Cancellation of Stock Options

 

Danaher and Keithley have agreed that at the effective time of the merger each outstanding stock option (whether vested or unvested) with an exercise price equal to or in excess of the merger consideration will be cancelled by virtue of the merger without any conversion thereof or payment therefor. Prior to the effective time of the merger, Keithley will use commercially reasonable efforts to cause this to occur, including, if necessary, using commercially reasonable efforts to enter into option termination or cancellation agreements with the holders of stock options, without paying any consideration or incurring any debts or obligations on behalf of Keithley or the surviving corporation.

 

The respective obligations of the parties to effect the merger are subject to the satisfaction (or waiver by all parties) at or prior to the effective time of the merger of the following conditions:

 

 

Our obligation to effect the merger is further subject to satisfaction or waiver of the following conditions:

 

 

 

The obligation of Danaher and Merger Sub to effect the merger is further subject to satisfaction or waiver of the following conditions:

 

 

No party may rely on the failure of any of the foregoing conditions to be satisfied as grounds for exercising its termination rights under the merger agreement if such failure was caused by such party’s failure to comply with any of the terms of the merger agreement.

 

The merger agreement may be terminated at any time prior to the effective time of the merger, whether before or after shareholder approval has been obtained, as follows (subject to certain limitations set forth in the merger agreement):

 

 

 

 

 

 

 

 

In the event of termination of the merger agreement based on the foregoing provisions, the merger agreement will terminate (except for the confidentiality agreement, the provisions concerning payment of termination fees and certain miscellaneous provisions), and there will be no other liability on the part of Keithley or Danaher to the other, except liability arising out of material and intentional breach of the merger agreement or as provided for in the confidentiality agreement, in which case the aggrieved party will be permitted to recover damages incurred or suffered as a result of such breach.

 

The merger agreement requires us to pay to Danaher a termination fee equal to $10 million in the event (i) any person makes an acquisition proposal, (ii) the merger agreement is terminated (x) by either Danaher or us because the merger has not occurred on or before March 31, 2011 or because shareholder approval is not obtained, or (y) by Danaher based on a breach of the merger agreement by us, and (iii) within 12 months of the date of such termination we enter into an agreement providing for, or consummate, an acquisition proposal (substituting “50%” for all references to “15%” in the definition of “acquisition proposal” discussed above).

 

The merger agreement also requires us to pay to Danaher the termination fee if (i) we terminate the merger agreement in order to enter into an acquisition agreement with respect to a superior proposal as discussed above or (ii) Danaher terminates the merger agreement because our board of directors or any committee thereof has withdrawn or modified its recommendation in a manner adverse to Danaher.

The termination fee payable by us pursuant to the paragraph above is the exclusive remedy to Danaher and Merger Sub in connection with any event or circumstance with respect to which such fee is paid, other than for specific performance and liability arising out of material and intentional breach. If we fail to pay the termination fee when due, and Danaher commences a legal proceeding that results in a final, non-appealable judgment against us for the termination fee, then we must pay the out-of-pocket costs and expenses (including reasonable legal fees and expenses of outside counsel) incurred by Danaher in connection with such proceeding, plus interest on all such unpaid amounts at the prevailing prime lending rate.

 

The merger agreement may be amended at any time, whether before or after the approval and adoption of the merger agreement by our shareholders, if such amendment or waiver is in writing and signed by us, Danaher and Merger Sub. However, after the merger agreement has been adopted by our shareholders, no amendment that by law would require the further approval of our shareholders may be made without obtaining such approval.

 

The parties to the merger agreement are entitled to an injunction or injunctions to prevent breaches of the merger agreement and to enforce specifically the terms and provisions of the merger agreement.

 

In connection with the execution of the merger agreement, on September 29, 2010, Keithley Investment Co. Limited Partnership, or the Keithley Partnership, of which Joseph P. Keithley, Keithley’s chairman, president and chief executive officer, is general partner, entered into the Voting Agreement with Danaher and Merger Sub pursuant to which it agreed to vote a number of its Class B common shares representing 19.99% of the voting power of our outstanding Common Shares in favor of approval and adoption of the merger agreement and the transactions contemplated by the merger agreement. As of October 1, 2010, the Keithley Partnership, together with Mr. Keithley, beneficially owned Common Shares representing approximately 61.5% of the total combined voting power of the outstanding Common Shares. In addition, the Keithley Partnership agreed to vote (or cause to be voted) such shares against (1) any proposal that would result in a breach by us of the merger agreement, or (2) any action or agreement that is intended to, or would be reasonably likely to, impede, interfere with, delay, postpone or attempt to discourage the merger, including, but not limited to: (A) the adoption or approval by us of any acquisition proposal; (B) any amendment of our articles of incorporation or code of regulations; (C) any material change in the present capitalization or dividend policy of Keithley; or (D) any other material change in our corporate structure or business.

 

The Voting Agreement will terminate upon the earliest to occur of (1) the effective time of the merger, (2) the termination of the merger agreement in accordance with its terms, and (3) at the option of the Keithley Partnership, upon the execution or granting of any amendment, modification, change or waiver with respect to the merger agreement subsequent to the date of the Voting Agreement that results in any decrease in the price to be paid per share for the common shares and/or Class B common shares or any change in the form of consideration to be received by the holders of such shares in the merger or is otherwise adverse to our shareholders. Pursuant to the Voting Agreement, the Keithley Partnership also has agreed not to transfer or dispose of any of its Common Shares, enter into any other voting arrangement or grant any proxies with respect to its Common Shares or convert its Class B common shares into common shares.

 

The foregoing summary of the terms of the Voting Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Voting Agreement, which is filed as Annex B to this proxy statement.

 

Our common shares trade on the New York Stock Exchange under the trading symbol “KEI.” There is no established trading market for the Class B common shares; however, they are readily convertible on a one-for-one basis into common shares. The following table sets forth the high and low sales prices for our common shares as reported on the NYSE and the amount of dividends declared on our common shares and Class B common shares during each of the quarterly periods presented:

 

 

The approximate number of shareholders of record of common shares and Class B common shares, including those shareholders participating in the Dividend Reinvestment Plan, as of October 21, 2010 was 1,380 and 4, respectively.

 

Under the merger agreement, we have agreed only to declare or pay the regular quarterly cash dividends on our Common Shares consistent with past practices (not to exceed $0.0375 per Common Share) before the completion of the merger. After the completion of the merger, Keithley will be a privately-held subsidiary of Danaher.

 

The closing sale price of our common shares on September 28, 2010, which was the last trading day before the announcement of the execution of the merger agreement, was $12.39 per share. On October 21, 2010, the closing sale price of our common shares was $21.61 per share. Shareholders should obtain a current market quotation for our common shares before making any decision with respect to the merger.

 

The beneficial ownership of our Common Shares as of October 1, 2010 by (1) each person known to us to be the beneficial owner of more than 5% of our voting securities, (2) each of our directors, our principal executive officer, principal financial officer and our four most highly-compensated executive officers based on compensation for our fiscal year ended September 30, 2009, and (3) all of our current executive officers and directors as a group, is set forth in the table below. Except as set forth below, the address for each listed person is care of, or c/o, Keithley Instruments, Inc., 28775 Aurora Road, Solon, Ohio 44139.

 

 

 

FUTURE SHAREHOLDER PROPOSALS

 

If the merger is completed, there will be no public shareholders of Keithley and no public participation in any future meetings of our shareholders. However, if the merger is not completed, our shareholders will continue to be entitled to attend and participate in meetings of shareholders. Accordingly, we intend to hold an annual meeting in 2011 only if the merger is not completed.

 

In order to be eligible for inclusion in our proxy materials for our 2011 annual meeting, if such a meeting is held, written notice of any shareholder proposal must have been received by us not later August 31, 2010. If a shareholder intends to present a proposal at our 2011 annual meeting without the inclusion of the proposal in our proxy materials, written notice of the proposal must be given to the secretary of Keithley at its principal executive offices no later than November 15, 2010 and no earlier than October 16, 2010. If the meeting date is changed by more than 30 days from the date of the 2010 annual meeting date, the notice is due not less than 90 days prior nor more than 120 days prior to the 2011 annual meeting date and no later than the tenth day following the earlier of (a) the date on which notice of the meeting was mailed and (b) the date on which public disclosure of the annual meeting date was made.

OTHER MATTERS

 

We are not aware of any business or matter that may be properly presented for consideration at the special meeting other than as indicated above. However, if any other matter properly comes before the special meeting, the persons named in the enclosed proxy card will vote on those matters in accordance with their discretion and best judgment.

 

We file annual, quarterly and current reports and proxy statements with the SEC. You may read and copy any reports, proxy statements or other information that we file with the SEC at the following location of the SEC:

 

Public Reference Room
100 F Street, N.E., Room 1580
Washington, D.C. 20549

 

Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. You may also obtain copies of this information by mail from the Public Reference Section of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, at prescribed rates. Our public filings are also available to the public from document retrieval services and the Internet website maintained by the SEC at www.sec.gov and on our website at www.keithley.com.

 

We have supplied all information in this proxy statement relating to us and our subsidiaries, and Danaher has supplied all such information relating to Danaher and its affiliates.

 

Any person, including any beneficial owner, to whom this proxy statement is delivered may request copies of reports, proxy statements or other information concerning us, without charge, by written or telephonic request directed to us at Investor Relations, Keithley Instruments, Inc., 28775 Aurora Road, Cleveland, Ohio 44139, phone number (440) 248-0400.

 

You should only rely on the information contained in this proxy statement. We have not authorized anyone to provide you with any information that is different from that contained in this proxy statement. This proxy statement is dated October 25, 2010. You should not assume that the information contained in this proxy statement is accurate as of any date other than that date, and neither the mailing of this proxy statement to shareholders nor the payment of cash in the merger shall create any implication to the contrary.

 

You are urged to sign and return your proxy promptly in order to make certain your shares will be voted at the special meeting. For your convenience, a return envelope is enclosed requiring no additional postage if mailed in the United States.

Annex A

 

 

AGREEMENT AND PLAN OF MERGER
BY AND AMONG
DANAHER CORPORATION,
AEGEAN ACQUISITION CORP.
AND
KEITHLEY INSTRUMENTS, INC.
Dated as of September 29, 2010

TABLE OF CONTENTS