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PRESIDENT'S REPORT
Annual Meeting
April 29, 1999
Thank you Dean and good morning, ladies and gentlemen. Before I start, I would
like to recognize some of our former officers who are with us today. I think
this is a record turnout: First Dr. Tom Purl, who was my mentor for many
years--it's good to see him; Carl Avelar; Bruce Bleecker; Don Schaefer; Peter
Pao; Keith Gilbert, who left as part of the divestiture that became Stellex;
Carol Roosen; and Rick Bell. Hopefully I haven't missed any one, but I have
never had this many former officers at a meeting. It is nice to see all of you.
It is a pleasure to address all of you at this meeting of Watkins-Johnson. It's
our 41st, but this is a much different speech than the past annual meetings
since this year on March 1 we announced a milestone decision. On that day, we
announced our decision to pursue the sale of Watkins-Johnson Company.
As I'm sure you can imagine, this was not an easy decision. Watkins-Johnson has
been in business for 41 years and has a wonderfully dedicated and skilled
workforce--many of whom have worked at no other company during their
professional career. We are proud of our history of excellent products and
service in sophisticated technical industries. However, in light of
profitability problems in the past few years, we realized we had to make
significant changes to maximize shareowner value.
After exploring every alternative with our financial advisors (CIBC Oppenheimer
Corporation--we have two representatives here with us today), the board became
convinced that the sale of the company, in its entirety or as separate
businesses, is the best course to maximize shareowner value. We have embarked
upon that process. We recognize that selling only particular segments of the
company will not maximize the shareowner value.
Today, I'm pleased to report to you our progress in implementing that strategy.
o As we have announced, we sold our semiconductor equipment group's
high-density-plasma chemical vapor deposition intellectual property and
associated hardware to Applied Materials. This will result in a second
quarter pre-tax gain of $9 million.
o We entered into a non-binding letter of intent with the Silicon Valley
Group regarding the sale of the Semiconductor Equipment Group. This letter
of intent gave them a period of exclusivity. We are still in detailed
negotiations with them. The negotiations are moving forward and we will
keep you aware of any material developments in this situation.
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o The activity seeking potential buyers for the wireless segment has just
started. As I will discuss later in the first quarter results, I believe
the strength of our wireless activities will become apparent.
We're also working on two separate real estate transactions.
o The marketing of the balance of our property in San Jose, an approximately
190,000 square foot vacant building on nearly 14 acres, is moving forward.
This complements the sale we announced last year of 15 acres of adjacent
undeveloped land. This sale generated approximately $15 million of pre-tax
gain.
o The second real estate piece is the Palo Alto facility in the Stanford
Research Park. It is held under two long-term leases from Stanford
University. One of these leases was obtained in 1957 for 99 years; the
other was obtained in 1974 for 55 years. This property could be redeveloped
and leased at much higher rates today. An example of this possibility is
the property that we returned to Stanford in December of 1997; the building
that they built for TIBCO on that land looks like it has roughly twice the
square footage that WJ had. This process on the two leases in Palo Alto is
also just starting and it is difficult at present to predict its timing.
I would now like to turn to the results of our strong first quarter. I am
pleased to say that each group is now profitable with a growing backlog.
o Mal Caraballo directs the Wireless Products Group, headquartered in Palo
Alto with a facility in Milpitas. This unit has doubled its sales every
year for the past three, and they became profitable last year. We expect to
see 30 to 50 percent revenue growth and continued profitability from them
in 1999. Their first quarter sales of nearly $24 million and roughly a
one-to-one book to bill ratio show them on track. Their pre-tax operating
profit margin this quarter was over our target of five percent.
We are proud of their ability to satisfy their customers. Last November,
for the second year running they received a major supplier award from
Lucent Technologies. In 1998, they were one of only two "WOW"
vendors--that's W-O-W, Lucent's highest vendor award. This year they are
successfully broadening the customer base as they capture new orders.
Unfortunately, non-disclosure agreements and competitive considerations
prevent me from disclosing more about these new customers at this time.
o I am pleased to report that the Telecommunications Group (TG),
headquartered in Gaithersburg under the direction of Bob Hiller, has
stabilized its business. They are now operating profitably and have solid
prospects of continuing to grow on a quarterly basis after reaching the
bottom of their decline in the third quarter of 1998. Their sales of $11
million for the first quarter of 1999 were at the planned operating profit.
TG's first quarter orders of $17 million were their best since the first
quarter of 1997, two years ago. And, I am also happy to report that this
week a major $8 million
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order for the limited rate production quantities on the COBLU system has
been received from Lockheed Sanders. This is a system that we expect will
generate follow-on business for several years.
o The Semiconductor Equipment Group (SEG), headquartered in Scotts Valley and
directed by Pat Brady, is also off to a very good start. Their first
quarter's sales of $30 million were above our earlier expectations; they
have returned to the profit column. In fact, the quarterly operating profit
of $1.1 million was their best in over two years. First quarter bookings
were very strong with a book-to-bill ratio of 1.4 to 1. Several customers
have purchased the new WJ-1500. This tool is aimed at the 0.15 to
0.18-micron geometry integrated circuits. All customers continue to talk
strongly with our sales force about purchases, and right now we expect the
group to exceed the expectations we announced earlier this year when we
said SEG would have profitable sales between $100 and $110 million for
1999.
On behalf of the Board, I would like to take this time to thank the entire WJ
team for their dedicated service through these tough times and the unsettling
period of the business sale.
In turning back to the process of seeking buyers, we plan to keep you informed,
as appropriate, of any other agreements relating to the sale of the company. Of
course, we cannot guarantee you that this activity will be successful, but we
intend to put our best efforts into implementing this strategy.
Your Board of Directors is very committed to maximizing the value of your
investment in Watkins-Johnson. We have taken decisive action to fulfill that
commitment, and will continue to do so.
Dean, I will turn the meeting back over to you.
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