SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
(Amendment no. 1)
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
[X] Definitive Proxy Statement Commission Only (as permitted by
[ ] Definitive Additional Materials Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Watkins-Johnson Company
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transactions applies:
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(2) Aggregate number of securities to which transactions applies:
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(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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<PAGE>
WATKINS-JOHNSON COMPANY
3333 HILLVIEW AVENUE
STANFORD RESEARCH PARK
PALO ALTO, CALIFORNIA 94304
DEAN A. WATKINS W. KEITH KENNEDY, JR.
CHAIRMAN OF THE BOARD PRESIDENT AND
CHIEF EXECUTIVE OFFICER
H. RICHARD JOHNSON
VICE CHAIRMAN
March 17, 1998
Dear Shareowner:
We, as well as all of the other officers and directors of Watkins-Johnson
Company, cordially invite you to attend the Company's Annual Meeting of
Shareowners, to be held at 10:00 o'clock in the morning on Saturday, April 18,
1998, at the main office of the Company, 3333 Hillview Avenue, Stanford Research
Park, Palo Alto, California 94304.
In addition to conducting the business of the meeting, we will report to
you on the progress of the Company and attempt to answer any questions you may
have.
Please plan to come, but whether you can or cannot, please complete and
return the enclosed proxy card--your participation is important.
Sincerely yours,
/s/ Dean A. Watkins
Dean A. Watkins
/s/ H. Richard Johnson
H. Richard Johnson
/s/ W. Keith Kennedy, Jr.
W. Keith Kennedy, Jr.
<PAGE>
WATKINS-JOHNSON COMPANY
Notice of Annual Meeting of Shareowners
Saturday, April 18, 1998
10:00 a.m.
TO THE SHAREOWNERS:
The Annual Meeting of Shareowners of Watkins-Johnson Company will be held
at the Company's main office, 3333 Hillview Avenue, Stanford Research Park, Palo
Alto, California 94304 on Saturday, April 18, 1998, at 10:00 a.m. to take action
upon the following matters:
1. The election of directors for the ensuing year.
2. The approval of the appointment of independent public accountants for
1998.
3. The transaction of such other business as may properly come before the
meeting.
Only shareowners of record at the close of business on February 19, 1998,
are entitled to notice of and to vote at this meeting and any adjournment or
postponement thereof.
By Order of the Board of Directors
Claudia D. Kelly, Secretary
Palo Alto, California
March 17, 1998
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE MARK, SIGN, DATE
AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
<PAGE>
WATKINS-JOHNSON COMPANY
PROXY STATEMENT
The accompanying proxy is solicited on behalf of the Board of Directors of
Watkins-Johnson Company, a California corporation (the "Company"), for use at
the Annual Meeting of Shareowners of the Company to be held at 10:00 a.m. on
Saturday, April 18, 1998, and, at any adjournment of the annual meeting, to act
upon the matters set forth in the accompanying notice. This Proxy Statement and
the form of proxy, together with the Company's 1997 Annual Report, were first
mailed to shareowners on or about March 17, 1998.
VOTING SECURITIES
Only shareowners of record at the close of business on February 19, 1998,
are entitled to notice of and to vote at the annual meeting. On that date, the
Company had outstanding 8,265,236 shares of common stock. Owners of common stock
are entitled to one vote for each share held. In the election of directors, each
shareowner has cumulative voting rights and is entitled to as many votes as
equal the number of shares held by such shareowner multiplied by the number of
directors to be elected, which votes may be cast for a single candidate or
distributed among any or all of the candidates. However, no shareowner is
entitled to cumulate votes unless the shareowner, or any other shareowner, has
given notice at the meeting before the voting of such intention to cumulate
votes.
SOLICITATION AND REVOCABILITY OF PROXIES
If the enclosed proxy card is properly signed and returned, the shares
represented thereby will be voted at the annual meeting in accordance with the
instructions specified thereon. If the proxy does not specify how the shares
represented thereby are to be voted, the proxy will be voted as recommended by
the Board of Directors. If the shares are held in trust under the Company's
employee stock ownership plans, the shares represented will be voted by the
Trustee, as directed by the participant, pursuant to the plans. Any shareowner
signing a proxy in the form accompanying this proxy statement has the power to
revoke it prior to or at the annual meeting. A proxy may be revoked by a written
notice delivered to the Secretary of the Company stating that the proxy is
revoked, by a subsequent proxy signed by the person who signed the earlier
proxy, or by attendance at the annual meeting and voting in person.
The expense of soliciting proxies will be paid by the Company. Following
the original mailing of the proxies and soliciting materials, employees of the
Company may solicit proxies by mail, telephone, telegraph and personal
interviews. The Company will request brokers, custodians, nominees and other
record holders to forward copies of the proxies and soliciting materials to
persons for whom they hold shares of the Company's common stock and to request
authority for the exercise of proxies; in such cases, the Company will reimburse
such holders for their reasonable expenses. Proxies will also be solicited on
behalf of management by the firm of D. F. King & Co., Inc., whose fee ($8,500)
and out-of-pocket expenses will be paid by the Company.
VOTING RESULTS AT LAST ANNUAL MEETING
There were 7,340,017 shares present and voting or withholding authority to
vote at the Company's Annual Meeting of Shareowners held on April 5, 1997, for
the purpose of electing directors and approval of the appointment of independent
public accountants. A majority vote was required for each of these proposals.
All nominees for director were elected by 98% or more of the votes cast and the
appointment of Deloitte & Touche as the Company's independent public accountants
was approved by 99.3% of the votes cast.
1
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT
The following table sets forth information as of December 31, 1997, with
respect to the ownership of the Company's common stock by any person who is
known to the Company to be the beneficial owner of more than 5% of the Company's
common stock, by all directors, by the chief executive officer and four other
highly compensated officers, and by all directors and officers of the Company as
a group.
Amount and
Nature of
Beneficial
Beneficial Owner Ownership Percent
- ---------------- ---------- -------
Salomon Smith Barney Holdings, Inc. ......... 525,436 (1) 6.4
Travelers Group Inc.
388 Greenwich Street
New York, NY 10013
Mellon Bank Corporation ..................... 780,841 (2) 9.73
One Mellon Bank Center
Pittsburgh, PA 15258
Central Securities Corporation .............. 425,000 (3) 5.1
375 Park Avenue
New York, NY 10152
Directors and Officers
Dean A. Watkins ............................. 259,020 3.1
H. Richard Johnson .......................... 36,259 *
W. Keith Kennedy, Jr. ....................... 317,872 3.8
John J. Hartmann ............................ 15,373 *
Raymond F. O'Brien .......................... 13,673 *
William R. Graham ........................... 22,203 *
Gary M. Cusumano ............................ 8,246 *
Robert L. Prestel ........................... 8,046 *
Malcolm J. Caraballo ........................ 81,448 *
Marc C. Elgaway ............................. 14,786 *
Scott G. Buchanan ........................... 55,517 *
Patrick J. Brady ............................ 8,758 *
All directors and officers as a group
(15 persons) ............................... 868,376 10.2
- ------------
* less than 1% of shares outstanding
(1) According to the Schedule 13 G filed by such shareowner, Smith Barney
Holdings Inc. may be deemed to be the beneficial owner of the aggregate
number of shares shown of the Company's common stock with shared power to
vote, or direct the vote, over 525,436 shares and shared dispositive power
over 525,436 shares.
(2) According to the Schedule 13G filed by such shareowner, Mellon Bank
Corporation may be deemed to be the beneficial owner of the aggregate number
of shares shown of the Company's common stock, with sole power to vote, or
direct the vote, over 751,541 shares and sole dispositive power over 780,841
shares and shared dispositive power over 21,700 shares.
(3) According to the Schedule 13G filed by such shareowner, Central Bank
Corporation may be deemed to be the beneficial owner of the aggregate number
of shares shown of the Company's common stock, with sole power to vote, or
direct the vote, over 425,000 shares and sole dispositive power over 425,000
shares.
The amounts shown include shares covered by options exercisable within 60 days
of December 31, 1997, as follows: Dean A. Watkins, 6,000 shares; H. Richard
Johnson, 6,000 shares; W. Keith Kennedy, 249,767 shares; John J. Hartmann,
14,773 shares; Raymond F. O'Brien, 11,673 shares; William R. Graham, 21,903
shares; Gary M. Cusumano, 7,746 shares; Robert L. Prestel, 7,746 shares; Malcolm
J. Caraballo, 62,533
2
<PAGE>
shares; Marc C. Elgaway, 13,333 shares; Scott G. Buchanan, 44,450 shares;
Patrick J. Brady, 5,999 and all directors and officers as a group, 521,439
shares. Also included are 6,161, 8,115, 1,453, 4,767, and 2,759 shares for
Messrs. Kennedy, Caraballo, Elgaway, Buchanan, and Brady respectively, which are
allocated to their accounts, and 27,695 shares allocated to the accounts of all
officers under the Company's employee stock ownership plans as of December 31,
1997, according to the plans' administrator.
ELECTION OF DIRECTORS
(ITEM 1 ON PROXY CARD)
At the annual meeting in 1998, there are eight nominees standing for
election, each to hold office until his or her successor is elected, or until
death, resignation or removal. All of the nominees are presently directors who
were elected by the shareholders. Pursuant to the Company's Bylaws, the number
of directors may not be less than seven nor more than eleven. The number
currently fixed by resolution is eight. Shares represented by the accompanying
proxy will be voted for the election of the nominees recommended by the Board of
Directors, who are named in the following table, unless the proxy is marked in
such a manner as to withhold authority so to vote. The affirmative vote of a
majority of the common stock voting at the annual meeting is required to elect
any director. The Company has no reason to believe that the nominees will not be
available to serve their prescribed terms. However, if any nominee for any
reason is unable to serve or for good cause will not serve, the proxy may be
voted for such substitute nominee as the persons appointed in the proxy may in
their discretion determine.
The following sets forth certain information concerning the nominees as of
December 31, 1997, which is based on data furnished by them.
NOMINEES FOR ELECTION AS DIRECTORS
DEAN A. WATKINS
[GRAPHIC OMITTED]
Chairman of the Board, Watkins-Johnson Company.
Director since 1957.
Dr. Watkins, 75, has been Chairman of the Board since 1967. He
is a member of the Board of Overseers, Hoover Institution on
War, Revolution and Peace (Chairman, 1971-73 and 1985-86). He is
a Fellow of the Institute of Electrical and Electronics
Engineers and of the American Association for the Advancement of
Science, and a member of the National Academy of Engineering. He
is a former member of the Board of Directors, California Chamber
of Commerce (President, 1981); a former member of the Board of
Regents, University of California (Chairman, 1972-74); a former
Trustee of Stanford University, and a former member of the White
House Science Council.
H. RICHARD JOHNSON
[GRAPHIC OMITTED]
Vice Chairman of the Board, Watkins-Johnson Company.
Director since 1957.
Dr. Johnson, 71, was President and Chief Executive Officer of
the Company from 1973 through 1987, and became Vice Chairman on
December 31, 1987. He is a member of the National Academy of
Engineering and a Fellow of the Institute of Electrical and
Electronics Engineers. He is past President of the Stanford Area
Council, Boy Scouts of America; and has served as a Director of
the National Association of Manufacturers, the Santa Clara
County Manufacturing Group and the Tech Museum of Innovation.
3
<PAGE>
W. KEITH KENNEDY, JR.
[GRAPHIC OMITTED]
President and Chief Executive Officer, Watkins-Johnson Company.
Director since 1987.
Dr. Kennedy, 54, has been President and Chief Executive Officer
of the Company since December 31, 1987. Dr. Kennedy joined the
Company in 1968, and was a Division Manager, Group Vice
President and Vice President of Planning Coordination and
Shareowner Relations prior to becoming President. He is a
Director of CNF Transportation Inc., the Joint Venture Silicon
Valley Network, and the Defense Space Consortium; a member of
the Executive Board of The Center for Quality Management--West,
and the Santa Clara Valley Manufacturing Group; and is a senior
member of the Institute of Electrical and Electronics Engineers.
JOHN J. HARTMANN
[GRAPHIC OMITTED]
Financial Consultant.
Director since 1966.
Mr. Hartmann, 79, is Chairman of both the Audit and Nominating
Committees of the Board of Directors of the Company. He was a
member of the Board of Directors of the Company from 1958 to
1961 and rejoined the Board in 1966. From 1967 to 1970 he was a
general partner of J. Barth & Company, investment bankers, and
prior to that was Chief Financial and Planning Officer of Kern
County Land Company. Since 1970, Mr. Hartmann has had extensive
experience as a director of and consultant to developing
companies involving widely-diverse fields of activity. He has
also been active as a board member and executive in civic
organizations, primarily in the areas of youth activities and
minority affairs.
RAYMOND F. O'BRIEN
[GRAPHIC OMITTED]
Business Consultant
Director since 1986.
Mr. O'Brien, 75, is Chairman of the Compensation Committee of
the Board of Directors of the Company. He retired as Chairman of
the Board of CNF Transportation Co. in 1995 and was elected
Chairman Emeritus. He is a Director of Consolidated Freightways
Corp., and a former Director of Transamerica Corporation,
Champion Road Machinery, Ltd., Union Bank, and the Mont La Salle
Vine yards. He is also a former member of the Executive
Committee of the American Trucking Association, a former Trustee
of the ATA Foundation and former Chairman of the Western Highway
Institute.
4
<PAGE>
WILLIAM R. GRAHAM
[GRAPHIC OMITTED]
Senior Vice President, The Defense Group, Inc., Falls Church,
Virginia.
Director since 1989.
Dr. Graham, 60, is a member of the Audit and Compensation
Committees of the Board of Directors of the Company. Since July
1997, he has served as Chairman of the Board and President of
National Security Research, Inc., and as an officer of the
non-profit National Institute for Public Policy. He formerly
held the position of Senior Vice President, The Defense Group,
Falls Church, Virginia. He is a Director of ElectroSource, Inc.,
was formerly a Director and President of C-COR Electronics, Inc.
He left government service in 1989 after having been Science
Advisor to the President and Director of the Office of Science
and Technology Policy; Chairman of the Federal Coordinating
Council on Science, Engineering and Technology; and Chairman of
the Joint Telecommunications Resources Board from 1986 to 1989.
He is former Deputy Administrator of the National Aeronautics
and Space Administration, and former Chairman of the President's
General Advisory Committee on Arms Control and Disarmament. In
1971 he was a founder of R&D Associates, a defense technology
company, where he served until 1985.
GARY M. CUSUMANO
[GRAPHIC OMITTED]
President, The Newhall Land and Farming Company, Valencia,
California.
Director since 1994.
Mr. Cusumano, 54, is a member of the Compensation and Nominating
Committees of the Board of Directors of the Company. He is a
Director of the Newhall Land and Farming Company and the Zero
Corporation. He is First Vice Chairman of the California Chamber
of Commerce Board of Directors and Chairman of the Henry Mayo
Newhall Memorial Hospital Board of Directors; and a member of
the Stanford Sloan Alumni Advisory Board. He is a former Regent
of the University of California (1984-1986), a former Chairman
of the University of California Davis Foundation, and former
President of the University of California Davis Alumni
Association.
ROBERT L. PRESTEL
[GRAPHIC OMITTED]
Business and Management Consultant.
Director since 1994.
Mr. Prestel, 62, is a member of the Audit and Nominating
Committees of the Board of Directors of the Company. He retired
as Deputy Director of the National Security Agency in February
1994 after serving the Agency since 1962. During his career he
was Director of Education and Training from 1981 to 1983, and
Deputy Director for Research and Engineering from 1985 to 1990.
He is the recipient of the President's Distinguished Executive
Award in 1988; the Department of Defense's Distinguished
Civilian Service Medal in 1988; and the National Intelligence
Distinguished Service Medal in 1991. In 1994 he was named as a
"Reinvention Hero" by President Clinton for instilling quality
management into the National Security Agency and for being a
quality mentor throughout government service. He is a consultant
to Alliant Techsystems, Inc. and a member of the Board of
Trustees for the Institute of Defense Analysis; and formerly was
a consultant for the Joint Advisory Committee of the
Massachusetts Institute of Technology Lincoln Laboratories. He
taught mathematics part-time at the University of Maryland.
5
<PAGE>
FURTHER INFORMATION CONCERNING THE BOARD OF DIRECTORS
The Board of Directors met nine times during 1997. Standing committees of
the Board include an Audit Committee, which met twice during 1997, a
Compensation Committee, which met twice during 1997, and a Nominating Committee,
which did not meet during 1997.
During the past year, the Audit Committee consisted of Directors Hartmann,
Prestel and Graham. Among the Committee's functions are making recommendations
to the Board of Directors regarding the continued engagement of independent
auditors, reviewing with the independent auditors and Company financial
management the plans for and results of the audit engagement, reviewing the
adequacy of the Company's system of internal accounting controls, and reviewing
and approving audit and nonaudit fees.
The Compensation Committee consisted of Directors O'Brien, Graham and
Cusumano. The Committee's primary functions are to establish and administer the
policies that govern the Company's executive compensation programs and to
regularly evaluate these programs for their effectiveness in relation to the
Company's financial performance.
The Nominating Committee consisted of Directors Hartmann, Cusumano and
Prestel. The Committee's primary function is to direct the search for qualified
candidates to fill Board vacancies that may occur and to recommend them to the
full Board.
No incumbent director attended fewer than 75% of the aggregate of (1) the
total number of meetings of the Board of Directors and (2) the total number of
meetings held by all committees of the Board on which he served during 1997.
DIRECTOR COMPENSATION
Directors who are not employees of the Company each receive an annual fee
of $21,600 and a fee of $300 for each Board or Committee meeting attended. In
April 1994, Drs. Watkins and Johnson retired as employees of the Company and the
Board approved execution of certain consulting agreements with them, as
founders; the agreements specify an annual fee payable to Dr. Watkins in the
amount of $265,000, and an annual fee of $125,000 payable to Dr. Johnson, in
addition to the regular directors' fees.
Directors who are not employees also participate in the 1989 Stock Option
Plan for Nonemployee Directors (the "1989 Director Plan"), amended and restated
effective as of January 29, 1996, which was approved at the Company's 1996
Annual Shareowners' Meeting. It provides for each non-employee director to
receive a stock option grant of 3,000 shares annually. In addition, the plan
provides that new directors shall, upon election by the shareowners, receive an
automatic, one-time grant of options to purchase 3,000 shares of the Company's
stock. These options provide for the purchase of shares at not less than the
fair market value of the stock on the grant date, fully vest six months after
grant, and remain exercisable for a period of ten years from the date of grant.
Vested options expire one year after the optionee's date of service ends.
Options granted to directors before April 1996 begin to vest and become
exercisable after two years from grant at a rate of 33 1/3% per year. The
expiration schedule for all grants is the same.
The aggregate number of shares which may be issued under the Plan is
350,000 shares of common stock; and as of December 31, 1997, there were 90,590
shares subject to outstanding options, and there were 196,909 shares available
for future grants.
In 1995 a directors' retirement plan was authorized. This plan stipulates
that each director who has completed at least five years of active service as a
director shall, upon retirement from the Board, receive one-half of his/her
quarterly fee as director for a period of years not to exceed one-half of the
years of service as a director after April 8, 1995.
6
<PAGE>
EXECUTIVE COMPENSATION
The following tables set forth all annual and long-term compensation,
including stock option awards, paid or to be paid to the Company's chief
executive officer, the four other most highly compensated individuals who were
executive officers as of December 31, 1997 and other highly compensated officers
during the fiscal year.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long Term Compensation
---------------------------------------------------- --------------------------
Restricted Securities
Other Annual Stock Underlying All Other
Compensation Award(s) Options/ Compen-
Name and Principal Position Year Salary ($)(1) Bonus ($)(2) ($)(3) ($)(4) SARs (#)(4) sation ($)(5)
- -------------------------------- ------ --------------- -------------- -------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
W. Keith Kennedy ............... 1997 $463,726 $474,854 $18,347 -0- 25,000 $ 6,400
President & Chief 1996 459,290 36,657 11,165 -0- -0- 39,211
Executive Officer 1995 440,000 87,431 5,255 -0- 110,000 87,685
Malcolm J. Caraballo ........... 1997 198,165 182,845 7,608 -0- 2,500 6,400
Wireless Products 1996 184,562 7,028 4,628 -0- -0- 10,574
Group President 1995 156,823 40,722 2,362 -0- 20,000 44,267
Marc C. Elgaway (6) ............ 1997 226,844 143,916 -0- -0- 40,000 6,400
Telecommunications 1996 208,640 68,646 -0- -0- 30,000 70,817
Group President 1995 86,000 33,333 -0- -0- 40,000 -0-
Scott G. Buchanan .............. 1997 216,644 127,808 9,014 -0- 2,500 6,400
Vice President & 1996 208,370 12,827 5,668 -0- -0- 17,268
Chief Financial Officer 1995 197,700 34,260 2,965 -0- 20,000 33,173
Dean A Watkins ................. 1997 292,300 -0- -0- -0- 3,000 -0-
Chairman of the 1996 292,000 -0- -0- -0- 3,000 -0-
Board 1995 292,000 -0- -0- -0- -0- -0-
Patrick J. Brady ............... 1997 227,400 -0- -0- -0- 40,000 6,400
Semiconductor Equipment 1996 175,460 17,581 -0- -0- 30,000 12,895
Group President 1995 115,825 28,096 -0- -0- 10,000 3,963
<FN>
- ------------
(1) Represents total base salary earned by the named officers, including amounts
earned but deferred at the officer's election.
(2) For 1997, the method for calculating the bonus was based on a formula using
revenue and return on controllable assets (ROCA) and individual performance
objectives (IPO). The executive may elect to defer part or all of the bonus
which will then appreciate or depreciate based on the ROCA of the
individual's business unit for two years. After that time the bonus will
appreciate based on the one year T-Bill rate. Also included is the bonus
from the Employees' Cash Profit Sharing Bonus Plan, in which all employees
of the Company participate based on a fixed percentage of pretax profits
allocated over the salary base; however, in 1997 members of the corporate
executive staff did not participate in the Employees' Cash Profit Sharing
Plan. The amounts for 1996 and 1995 represent the vested portion of the Top
Management Incentive Bonus Plan in the year awarded. For 1997 the bonus
awards did not have an unvested component. Dr. Watkins does not participate
in either of the aforementioned plans.
(3) Represents the interest accrued on salary electively deferred in accordance
with the Top Management Deferred Compensation Plan. The aggregate amount of
perquisites and other personal benefits, securities or property, given to
each named officer valued on the basis of aggregate incremental cost to the
Company, was less than either $50,000 or 10% of the total of annual sales
and bonus for that officer during each of these years.
(4) Represents incentive stock option awards; although the Company's 1991 Stock
Option and Incentive Plan permits grants of restricted stock and stock
appreciation rights, no such grants have been made.
(5) Amounts shown for 1997 consist of the following: 401(k) matching
contributions of $4,800 and ESOP contributions of $1,600 each to Messrs.
Kennedy, Caraballo, Elgaway, Buchanan, and Brady. For 1996 and 1995 amounts
shown represent Company matching contributions to the 401(k) portion of the
Employees' Investment Plan, the Company Profit Sharing Plan, and Company
contributions to the Employee Stock Ownership Plan and include the unvested,
deferred portion of the Top Management Incentive Bonus Plan for all named
officers. For 1996 and 1995, the method for calculating the bonus was based
on a formula using certain measurement factors that include profit from
operations, firm orders and return on controllable assets (ROCA). Fifty
percent of the dollar value so awarded was deferred to appreciate or
depreciate based on the ROCA for each participant's organization. This
deferred bonus amount vests after two years from the award date and is then
valued based on the ROCA measurement for the participant's organization at
that time. All unvested bonus dollars or units are subject to a risk of
forfeiture if the executive leaves the Company prior to the vesting dates.
Dr. Watkins does not participate in the ESOP or the Top Management Incentive
Bonus Plan.
(6) In December 1997, Mr. Elgaway resigned as vice-president of the Company.
</FN>
</TABLE>
7
<PAGE>
1997 OPTION/SAR GRANTS TABLE
The following table sets forth incentive stock options granted to the named
officers during 1997 under the Company's 1991 Stock Option and Incentive Plan.
No stock appreciation rights (SARs) were granted in 1997.
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<CAPTION>
Individual Grants
- -----------------------------------------------------------------------------------------
Number of % of Total
Securities Options/SARs Potential Realizable Value
Underlying Granted to Exercise or At Assumed Annual Rates
Of Stock Price Appreciation
Options/SARs Employees in Base Price Expiration ---------------------------------
Name Granted (#)(1) Fiscal Year ($/sh)(2) Date 5%($) 10%($)
- ------------------------------ ---------------- -------------- ------------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
W. Keith Kennedy ............. 25,000 10.33% $ 25.125 02/24/2007 $ 395,000 $ 1,001,000
Malcolm J. Caraballo ......... 2,500 1.03 25.125 02/24/2007 39,000 100,000
Marc C. Elgaway .............. 40,000 16.53 25.125 02/24/2007 632,000 1,602,000
Scott G. Buchanan ............ 2,500 1.03 25.125 02/24/2007 39,000 100,000
Dean A. Watkins .............. 3,000 1.24 26.875 04/28/2007 51,000 128,000
Patrick J. Brady ............. 40,000 16.53 25.125 02/24/2007 632,000 1,602,000
All Optionees (4) ............ 242,000 100.0 3,824,000 9,690,000
All Shareholders (5) ......... -- -- -- -- 131,656,000 333,642,000
All Optionees' Gain as a
percentage of All
Shareholders' Gain .......... 2.9% 2.9%
<FN>
- ------------
(1) For 1997 the Board of Directors determined that it was in the best interest
of the Company to grant fewer stock options to those members of the
executive staff who have, over the past several years received significant
grants. Options granted in 1997 were incentive stock options up to the
maximum allowed for each officer under Internal Revenue Code 422. The
remaining awards were nonqualified stock options. Both incentive and
nonqualified options are exercisable after 2 years from the grant date at a
rate of 33 1/3% per year, with full vesting occurring after the 4th
anniversary date; however, all options become immediately exercisable in the
event of a change in control of the Company. The options were granted for a
term of 10 years, subject to earlier termination in certain events related
to termination of employment.
(2) Exercise or base price is the fair market value of the underlying shares on
the date of grant. Options may be exercised with cash or by delivery of
already-owned shares of Watkins-Johnson Company common stock.
(3) The 5% and 10% assumed annual rate of stock price appreciation would result
from per share prices of $25.125 and $26.875, respectively, for all named
officers. Said assumed rates are not intended to represent a forecast of
possible future appreciation of the Company's common stock or total
shareholder return.
(4) For "All Optionees," the number of options granted is the total of all
options granted to Company employees in fiscal year 1997. The weighted
average exercise price of the grants was $26.41. For purposes of this table,
the potential realizable value is based on the $25.125 per share price of
the options granted to the named executive officer, as well as other
officers, on February 24, 1997, and based on a ten-year option term (the
term of all options granted in fiscal year 1997).
(5) For "All Shareholders," the potential realizable value is based on a
ten-year appreciation of the 8,332,148 shares outstanding on February 24,
1997, and on the $25.125 per share price of the options granted to the named
executive officer, and other officers, on that date.
</FN>
</TABLE>
8
<PAGE>
1997 OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table sets forth stock options exercised by any of the named
executive officers during 1997, and the number and value of all unexercised
options at year end. The value of "in-the-money" options refers to options
having an exercise price which is less than the market price of Watkins-Johnson
stock on December 31, 1997.
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
At FY-End (#) At FY-End ($)(2)
--------------- -----------------
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise(#) Realized ($)(1) Unexercisable Unexercisable
- ------------------------------ ----------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
W. Keith Kennedy ............. 15,500 $151,620 179,766/ $1,151,859/
131,668 122,919
Malcolm J. Caraballo ......... 5,400 70,338 50,865/ 453,409
20,835 17,503
Marc C. Elgaway .............. -0- -0- 13,333/ -0-/
96,667 157,500
Scott G. Buchanan ............ 12,333 280,148 29,449/ 131,770/
24,168 27,919
Dean A. Watkins .............. -0- -0- 6,000/ -0-/
-0- -0-
Patrick J. Brady ............. -0- -0- 5,332/ -0-
77,668 157,500
<FN>
- ------------
(1) Based on the market price of the underlying shares at exercise date less the
exercise price.
(2) Based on the market price of the Company's common stock at 12/31/97, which
was $25.875 per share, less the exercise price.
</FN>
</TABLE>
Executive Employment Agreements
In 1997, the Company executed a three-year employment agreement with Dr.
Kennedy which, in addition to providing for a base salary, contains the
following terms: The agreement may be terminated for cause, in which case
compensation ceases as of the date of notice. If the agreement is terminated
without cause, compensation for the remainder of the term plus six months
severance becomes immediately payable. The employee may not thereafter, for a
period of two years, engage in competition with the Company. In the event of a
change in control, as defined in the agreement, the employee may cancel the
agreement for breach, upon 30 days written notice, and immediately collect the
compensation due for the remainder of the term. The term of the agreement is
three years, with the intention that it will be renewed after one year for three
years in order to reflect his current salary and, in effect, extend the
agreement term for another year. The agreement for Dr. Kennedy was concluded
after his base salary was determined using the financial performance criteria
and factors set forth under the compensation programs and policies described for
the chief executive and other officers in the Compensation Committee report.
The Company maintains three-year severance agreements with other executives
including Messrs. Caraballo, Buchanan, Watkins, and Brady which provide that if
after a change in control, the employee is terminated other than for good cause,
as defined in the agreement, or suffers a substantial alteration in the terms of
employment and terminates his or her own employment because of such alteration,
the
9
<PAGE>
Company is obligated to pay the terminated employee 299.999% of the employee's
yearly base salary compensation. The employee also has the right to terminate
employment after 90 days and within 120 days of the change in control and
receive from the Company one-half of the amount described above.
REPORT OF THE BOARD OF DIRECTORS' COMPENSATION COMMITTEE
Compensation Program and Policies
The Compensation Committee is responsible for establishing and
administering the policies which govern base salaries, short- and long-term
incentive compensation and stock ownership programs for the Chief Executive
Officer and other executive officers. During the past year, the Committee was
composed of three outside directors, Raymond F. O'Brien, Chairman, William R.
Graham and Gary M. Cusumano.
Watkins-Johnson's compensation program is designed to attract and retain
employees at all levels who will contribute to the long-range success of the
Company. At the executive level, the program is broad enough to reward key
managers for achieving both short- and long-term strategic Company goals, to
link executive and shareholder interests through stock-based plans, and to
provide compensation packages that recognize individual contributions as well as
overall business results. Therefore, a significant portion of each executive's
total compensation is intended to be variable and is contingent upon overall
Company results, success of the executive's business unit, and accomplishment of
individual performance goals.
Each year, the Committee conducts a careful review and evaluation of
Watkins-Johnson's corporate performance, its executive compensation, and its
incentive programs compared with two broad-based surveys of high-technology
companies, as well as a smaller selection of geographically-related peer
companies of similar size and organizational structure. These surveys are used
to ensure that the Company's compensation practices are competitive in the
markets in which it operates, and that its employees are fairly paid. The first
two surveys present comparative information on all aspects of executive
compensation used by high-technology companies nationwide, while data from the
selection of peer companies presents compensation practices of companies that
are closely aligned to Watkins-Johnson in terms of size, revenues and product
lines. Analysis of all information combined enables the Company and the
Committee to make well-informed decisions.
The three principal components of the Company's executive compensation
program in 1997 were base salary, stock options, and a combined short- and
long-term incentive award. Following are discussions of the Committee's
philosophy and action in each area.
Base Salaries. Base salaries are designed primarily to attract and retain
individuals, and to be competitive in our marketplace. Based on the information
obtained from the salary surveys referenced above, base salary levels are deemed
competitive if they are between the 50th and 75th percentiles of the marketplace
for similar positions. The Company strives to pay its executives within this
range, with salaries falling at low, high or medium-range depending on the
following performance considerations. To arrive at base salary adjustments for
1997, the Committee considered the Company's financial performance in 1996,
including the executive's business unit performance against the annual profit
plan. Three factors--achieving planned profit, obtaining additional profitable
orders, and developing new business for the long term--were considered. These
factors were not assigned specific weights, but profit was considered most
important, with orders secondary. Other factors considered in arriving at base
salary adjustments related to the executive's individual performance and
included overall managerial effectiveness, success in promoting teamwork and an
ability to recognize and act upon the changing requirements of the workplace.
Adjustments to executive base salaries in 1997 were also based on a qualitative
analysis of each position's current responsibilities and expected contribution
to the Company's fiscal health.
Stock Options. Under the 1991 Stock Option and Incentive Plan, stock
options may be granted to executive officers and other key employees of the
Company. The purpose of the awards is to align the executives' interests with
those of shareowners. The size of stock option grants is measured by the same
financial and individual performance criteria used to determine base salaries,
and by the individual's position and responsibilities in the Company. In
addition, consideration is given to the amount and term
10
<PAGE>
of options already held. All stock options awarded to date under this plan have
been granted with an exercise price equal to the fair market value of the
Company's stock on the date of grant, with current grants beginning to vest
after two years and becoming fully vested after four years. This is designed to
encourage the creation of shareholder value over the long term, since no benefit
is realized from the option grant unless the price of the Company's stock rises
over a period of years.
The Company does not have a policy that requires the Committee to qualify
stock options awarded to executive officers for deductibility under Section
162(m) of the Internal Revenue Code of 1986, as amended. However, consideration
of the net cost to the Company is always a factor in making compensation
decisions.
Short and Long Term Incentive Awards. The Top Management Incentive Bonus
Plan is designed to reward executives based on achievement of certain
predetermined goals, which include overall corporate results, business unit
performance, and certain qualitative factors such as organizational and
management development. The awards are made on a formula-based on performance
against the financial objectives of revenue and return on controllable assets
(ROCA), and a multiplier based on qualitative goals relating to strategic
planning, development of staff, and positioning of the business unit for future
growth. The performance criteria were individually tailored to each executive
and his or her area of responsibility. In order to encourage attainment of the
Company's long-term goals for continued growth and profitability, all or part of
the award can be deferred by the executive to appreciate or depreciate based on
the ROCA for each participant's organization. Thus, executives' interests are
more closely aligned with those of our shareowners. During 1997, the Company
divested a business unit. This divestiture proceeded smoothly and profitably. A
bonus formula based on the sale price above the book value of the divested unit
was developed which added to the incentive bonus of certain key executives.
Short- and Long-term Profit Sharing Plans. In order to encourage employees'
interest and alignment with the Company's business objectives and performance
goals, the Company has established a profit-sharing plan under which it shares a
portion of its profits with all eligible employees, including executive
officers. The Employees' Cash Profit Sharing Bonus Plan distributes about 6% of
annual pretax profits to all employees who have been employed during the prior
fiscal year. The approximately 6% profit amount is based on each business unit's
annual pretax profit, thereby giving employees a good understanding of and
reward for the achievements made within their own work areas. In 1997, members
of the Corporate executive staff did not participate in this plan. Also, the
Company contributes a matching contribution on employee 401(k) deferrals up to
3% of salary. There are no specific performance criteria relating to these
plans.
Top Management Deferred Compensation Plan. In 1994, the Board approved
implementation of a non-qualified deferred compensation plan for the Company's
executives. Under the plan, participants may elect to defer up to 15% of their
base salary which will earn the prime rate in effect at the beginning of each
quarter. The election to defer must be made prior to the year during which the
compensation is earned and cannot be revoked once the elected year begins. Funds
so deferred will be distributed in a lump sum only upon the earlier of
retirement, termination, death, disability, hardship, or change in executive
status.
Compensation of the Chief Executive Officer
The same policies and programs described above were followed by the
Committee in determining the 1997 compensation for Dr. Kennedy. As with the
other executive officers, base salary is set, stock option awards are
considered, and performance criteria are developed for the incentive bonus plan
in February each year, based on the Company's financial performance and the
CEO's individual contributions in the previous year.
The criteria for considering Dr. Kennedy's base salary was based on the
Company's overall performance in 1996. Company performance factors included the
percentage of profitability achieved against the annual profit plan, new orders
booked, and the successful execution of the corporate strategic plan to prepare
the Company for future growth and profitability. There were no specific weights
assigned to these factors; but he continued his strong leadership of the Company
during 1996. After careful study of chief
11
<PAGE>
executive officer salaries from the survey information described under
Compensation Programs and Policies, it was determined that Dr. Kennedy's base
salary was within the range for companies of comparable size and market
position. Therefore, the committee decided that there should be no increase Dr.
Kennedy's base salary for 1997.
The criteria established for Dr. Kennedy's incentive bonus award are the
same as those set for other executive officers. The award is made on a formula
based on performance against the financial objectives of revenue and return on
controllable assets (ROCA) with a multiplier based on qualitative goals relating
to strategic planning, development of staff, and positioning of the company for
future growth. The Committee met at the beginning of 1997 to approve the
formula-based goals for Dr. Kennedy and other executive officers, and to
establish his qualitative goals for the year. As chief executive officer, his
financial measurements related to overall profitability and growth objectives
for the whole Company, rather than individual business units, and his
qualitative goals were based on development and execution of current and
long-term strategies, development of management, and strengthening the total
organization. The Committee then met just before year end 1997 to review the
Company's financial results, and to evaluate his performance against his
qualitative objectives. As with the other executive officers, the extent to
which the formula factors are met, based on progressively difficult levels of
achievement relating to financial returns and individual goals, determines the
size of the award. During 1997, the Company divested a business unit. This
divestiture proceeded smoothly and profitably. A bonus formula based on the sale
price above the book value of the divested unit was developed which added to Dr.
Kennedy's incentive bonus. Dr. Kennedy's corporate financial performance goals
for 1997, together with achievement of his qualitative goals, were met at a
level that resulted in an award to Dr. Kennedy under the incentive bonus plan
equal to 103% of base salary.
The Compensation Committee
Raymond F. O'Brien, Chairman
William R. Graham
Gary M. Cusumano
12
<PAGE>
WATKINS-JOHNSON STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return
(change in stock price plus reinvestment of dividends) of $100 invested on
December 31, 1992, in the Company's common stock, the Standard & Poor's 500
Composite Index, and the Dow Jones Diversified Technology Index for a period of
five years. The Standard & Poor's Composite Index was chosen as our broad equity
market index because of its wide distribution and recognition by shareholders.
The Dow Jones Diversified Technology Index was selected as having a
representative industry peer group of companies. The Dow Jones index includes 11
companies with at least 2 high-technology business segments.
<TABLE>
[The following descriptive data is supplied in acccordance with Rule 304(d) of
Regulation S-T]
<CAPTION>
Cumulative Total Return
----------------------------------------------------------
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
<S> <C> <C> <C> <C> <C> <C>
Watkins Johnson Co WJ 100.00 141.94 215.83 320.89 182.91 196.83
S & P 500 100.00 110.08 111.53 153.45 188.68 251.64
D J DIVERSIFIED TECHNOLOGY 100.00 117.05 120.53 164.56 211.07 240.80
</TABLE>
13
<PAGE>
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
(ITEM 2 ON PROXY CARD)
The Board of Directors has appointed the firm of Deloitte & Touche LLP as
independent accountants of the Company for the current fiscal year, subject to
the approval of shareowners. The Board of Directors expects that a
representative of Deloitte & Touche LLP will be present at the annual meeting of
shareowners, will be given an opportunity to make a statement at the meeting if
desired, and will be available to respond to appropriate questions.
The vote required for approval of such appointment is a majority of the
shares present in person or by proxy at the meeting.
The Board recommends that shareowners vote "FOR" the appointment.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors does not
intend to bring any other business before the meeting and, so far as is known to
the Board of Directors, no matters are to be brought before the annual meeting
except as specified in the notice of the annual meeting. However, as to any
other business that may properly come before the annual meeting, it is intended
that proxies, in the form enclosed, will be voted in respect thereof, in
accordance with the judgment of the persons voting such proxies.
SHAREOWNER PROPOSALS--1999 ANNUAL MEETING
Shareowners are entitled to present proposals for action at a forthcoming
shareowners' meeting if they comply with the requirements of the proxy rules.
Any proposals intended to be presented at the 1999 Annual Meeting of Shareowners
of the Company must be received at the Company's offices on or before October
31, 1998, in order to be considered for inclusion in the Company's proxy
statement and form of proxy relating to such meeting.
Claudia D. Kelly, Secretary
March 17, 1998
Palo Alto, California
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. WHETHER
OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE REQUESTED TO SIGN AND
RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
14
<PAGE>
APPENDIX A
- --------------------------------------------------------------------------------
PROXY WATKINS-JOHNSON COMPANY PROXY
ANNUAL MEETING OF SHAREOWNERS--APRIL 18, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Dr. Dean A. Watkins, Mr. John J. Hartmann,
and Dr. William R. Graham as proxies of the undersigned, each with full power of
substitution, to attend the Annual Meeting of Shareowners of Watkins-Johnson
Company to be held at the main office of the Company, 3333 Hillview Avenue, Palo
Alto, California 94304, at 10:00 o'clock in the morning on Saturday, April 18,
1998, and at any adjournment or postponement thereof, and to vote the number of
shares the undersigned would be entitled to vote if personally present on any of
the following matters and with discretionary authority as to any and all other
matters that may properly come before the meeting.
THIS PROXY WILL BE VOTED AS SPECIFIED, OR IF NO CHOICE IS SPECIFIED, WILL
BE VOTED FOR THE NOMINEES FOR ELECTION AND FOR PROPOSAL 2.
(Continued, and to be signed on the other side)
- --------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
<PAGE>
- --------------------------------------------------------------------------------
[X] Please mark
your votes
as this
MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR
DIRECTOR LISTED BELOW AND FOR PROPOSAL 2.
WITHHOLD
1. Election of Directors FOR FOR ALL
[ ] [ ]
To withhold authority to vote for any
individual nominee, strike a line
through that nominee's name in the
list below:
Dean A. Watkins John J. Hartmann Gary M. Cusumano
H. Richard Johnson Raymond F. O'Brien Robert L. Prestel
W. Keith Kennedy William R. Graham
I PLAN TO ATTEND THE MEETING [ ]
FOR AGAINST ABSTAIN
2. To approve the appointment of [ ] [ ] [ ]
Deloitte & Touche as independent
accountants of the Company for the
fiscal year 1998.
3. In their discretion, to vote upon [ ] [ ] [ ]
any and all such other matters as
may properly come before the
meeting or any adjournment or
postponement thereof.
Please sign exactly as name appears. When shares are held by joint tenants, both
should sign. When signing as attorney, as executor, administrator, trustee or
guardian, please give full title as such. If a corporation, please sign in full
corporate name by president or other authorized officer. If a partnership,
please sign in partnership name by authorized person.
Signature(s) ______________________________________ Dated ______________ , 1998
SHAREOWNERS ARE URGED TO MARK, DATE, SIGN AND RETURN THIS PROXY IN THE ENVELOPE
PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
- --------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
<PAGE>
APPENDIX B
- --------------------------------------------------------------------------------
PROXY DIRECTION TO TRUSTEE PROXY
WATKINS-JOHNSON COMPANY EMPLOYEE STOCK OWNERSHIP PLAN
WATKINS-JOHNSON EMPLOYEES' INVESTMENT PLAN
I hereby direct you as Trustee of the Watkins-Johnson Employee Stock
Ownership Plan and the Watkins-Johnson Employees' Investment Plan to vote the
shares of Watkins-Johnson Company common stock credited to my account under the
aforementioned plans at the Annual Meeting of Shareowners of Watkins-Johnson
Company, to be held at the main office of the Company, 3333 Hillview Avenue,
Palo Alto, California 94304, at 10:00 o'clock in the morning on Saturday, April
18, 1998, and at any adjournment or postponement thereof.
I have filled in the appropriate boxes on the other side of the card, and I
authorize you to vote as indicated. Pursuant to the plans, in the absence of any
instructions from me as to any item, shares credited to my account shall be
voted by you, as Trustee, in the same proportion as shares are voted for which
instructions are received.
(Continued, and to be signed on the other side)
- --------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
<PAGE>
- --------------------------------------------------------------------------------
[X] Please mark
your votes
as this
MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR
DIRECTOR LISTED BELOW AND FOR PROPOSAL 2.
1. Election of Directors WITHHOLD
FOR FOR ALL
To withhold authority to vote for any [ ] [ ]
individual nominee, strike a line
through that nominee's name in the
list below:
Dean A. Watkins John J. Hartmann Gary M. Cusumano
H. Richard Johnson Raymond F. O'Brien Robert L. Prestel
W. Keith Kennedy William R. Graham
I PLAN TO ATTEND THE MEETING [ ]
FOR AGAINST ABSTAIN
2. To approve the appointment of [ ] [ ] [ ]
Deloitte & Touche as independent
accountants of the Company for the
fiscal year 1998.
3. In their discretion, to vote upon [ ] [ ] [ ]
any and all such other matters as
may properly come before the
meeting or any adjournment or
postponement thereof.
Please sign exactly as name appears. When shares are held by joint tenants, both
should sign. When signing as attorney, as executor, administrator, trustee or
guardian, please give full title as such. If a corporation, please sign in full
corporate name by president or other authorized officer. If a partnership,
please sign in partnership name by authorized person.
Signature(s) ______________________________________ Dated ______________ , 1998
SHAREOWNERS ARE URGED TO MARK, DATE, SIGN AND RETURN THIS PROXY IN THE ENVELOPE
PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
- --------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
