UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 1-5631
WATKINS-JOHNSON COMPANY
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-1402710
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3333 Hillview Avenue, Palo Alto, California 94304-1223
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(Address of principal executive offices) (Zip Code)
(650) 493-4141
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common stock, no par value New York Stock Exchange Pacific
Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes _X_ . No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X].
As of February 5, 1999
Aggregate market value of the voting stock held by ----------------------
non-affiliates of the registrant: $87,673,000
Number of shares outstanding: Common stock, no par value 6,561,000 shares
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Watkins-Johnson Company Notice of Annual Meeting of
Shareowners--April 29, 1999 and Proxy Statement filed with the commission
pursuant to Regulation 14A are incorporated by reference into Part III.
Page 1
<PAGE>
Part I
Item 1. Business
The statements in this Annual Report on Form 10-K that relate to future
plans, events or performance are forward-looking statements. Actual
results could differ materially due to a variety of factors discussed
under "Risks and Uncertainties that May Affect Future Results" and
other risks described in this Annual Report on Form 10-K. The company
undertakes no obligation to publicly update these forward-looking
statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
(a) General Development of Business
Watkins-Johnson Company (the company) had operated in three industry
segments in 1993: Semiconductor Equipment, Electronics and
Environmental Services. At the end of 1994, the Environmental Services
unit was divested. In 1995, Watkins-Johnson divided its former
Electronics Group, recognizing the two major markets that it served,
into the Wireless Communications segment and the Government Electronics
segment for reporting purposes.
During 1997 the company's structure was realigned to focus on its two
high-growth businesses: Wireless Communications and Semiconductor
Equipment. In October 1997, the company divested its Government
Electronics operations and reported such divestiture as discontinued
operations as disclosed in Note 8 to the consolidated financial
statements contained in Part II, Item 8 of this annual report on Form
10-K.
Except for the land sale and write down of discontinued products and
related restructuring discussed below, other than in the ordinary
course of business there were no acquisitions or dispositions of
material amounts of assets during 1998. No material reclassifications,
mergers or consolidations of the company or its subsidiaries occurred
during the year.
During the third quarter of 1998, the company restructured its
operations to focus on its core atmospheric-pressure
chemical-vapor-deposition (APCVD) operations in the Semiconductor
Equipment segment by discontinuing efforts on its high-density-plasma
(HDP) initiative. Also, the company's Wireless Communications segment
evaluated its Base2(TM) base-station product, reassessing key customer
needs and market conditions. Inventory, demo equipment, and customized
fixed assets associated with these products were written down in the
restructuring as discussed in Note 11 to the consolidated financial
statements contained in Part II, Item 8 of this annual report on Form
10-K.
Subsequent Events--On March 1, 1999, Watkins-Johnson announced that,
after a strategic review performed by its investment banking firm, it
would pursue a sale of the company, either in its entirety or through
sales of its individual business segments. On March 4, 1999,
Watkins-Johnson announced that it had signed a non-binding letter of
intent to sell its Semiconductor Equipment Group, exclusive of its
discontinued high-density-plasma and certain other assets, to Silicon
Valley Group, Inc. (SVG). The sale is subject to customary due
diligence, execution of a definitive acquisition agreement, Hart Scot
Rodino filings, and the approval of the boards of directors of
Watkins-Johnson and SVG. There can be no assurance that the sale of the
Semiconductor Equipment Group to SVG will be completed, nor can there
be any assurance that Watkins-Johnson will be able to complete its
strategy for the sale of the entire company.
Page 2
<PAGE>
Item 1. Business (continued)
(b) Financial Information about Industry Segments
The company operates in two industry segments -- Wireless
Communications and Semiconductor Equipment. Financial information
covering these industry segments is included in Note 8 to the
consolidated financial statements contained in Part II, Item 8 of this
annual report on Form 10-K.
(c) Narrative Description of Business
Watkins-Johnson Company is a high-technology corporation specializing
in wireless communications and semiconductor-manufacturing equipment.
Wireless Communications
The company's Wireless Communications business designs and manufactures
solid-state devices, single function components, subassemblies and
equipment for the wireless telecommunications industry. The foundation
of the company's wireless-communications strength lies in the company's
more than 20 year history with gallium-arsenide (GaAs) technology. The
company produces highly reliable proprietary chips that perform
signal-processing functions in subassemblies and systems for PCS, GSM,
cellular, and personal phone equipment.
The company is capitalizing on the healthy market for RF components by
expanding its gallium arsenide (GaAs) integrated-circuit fabrication
capability and actively marketing company-manufactured devices to the
wireless industry. Historically, the company has manufactured GaAs
devices for its own use only. The WJ AH1 GaAs amplifier chip is
achieving acceptance by base station manufacturers worldwide. The
advantage of this amplifier is its ultralinear performance, which base
station producers need for quality digital wireless performance. These
devices offer excellent performance, and an updated and expanded
fabrication facility enables the company to sell them on the open
market at competitive prices. The relocation of the GaAs and thin film
processing and design organization to the Milpitas, California,
facility is on schedule and is expected to be completed early in 1999.
In addition to follow-on orders for PCS converter assemblies, the
company received several large orders in 1998 from Lucent Technologies,
Inc. for a wireless-local-loop assembly. The company had previously
signed a contract with Lucent for the design for a wireless-local-loop
transceiver unit. The contract was for wireless-local-loop subscriber
units, technical consultation and intellectual-property rights. Lucent
is optimistic about the potential for its product and established a
co-production relationship with the company to ensure adequate supply.
Lucent is a major customer for the Wireless Communications segment,
with approximately 29% of that segment's sales in 1998.
The company has a second wireless-local-loop program, which is smaller
than the Lucent program. In addition to the subscriber unit, the
company is making assemblies that go in the transmitter. The company
has a 5-year manufacturing exclusive on this program.
Other products include high-dynamic range converters and terminals
which are produced in high volume for PCS base-station and
wireless-local-loop applications. Related subsystems and equipment
perform signal-conversion, signal-reception, repeater and base-station
functions by government agencies for signals-intelligence mission
requirements.
Page 3
<PAGE>
Item 1. Business (continued)
During 1998, the company discontinued its Base2 base-station product at
its Gaithersburg plant as discussed in Part I, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," and in Note 11 to the consolidated financial statements
contained in Part II, Item 8 of this annual report on Form 10-K.
Sales by the Wireless Communications segment were 54% of consolidated
sales in 1998, 36% in 1997 and 22% in 1996. Marketing and sales are
performed by company direct sales personnel and distributors. Major
accounts are handled by direct company sales and service. Components,
subassemblies, receivers and transceivers are primarily sold to
companies which manufacture base station equipment for various wireless
communication carriers. Communications-intelligence receivers and
tuners are sold to security agencies of the U.S. and other governments.
Lucent Technologies, Inc., Bartleys R.F. Systems Inc. (a Lucent
sub-contractor), Nortel LTD and the United States Government are
significant customers of this business segment. Although the customer
community represents a large business opportunity, the number of
individual customers is not significant. Approximately 19% of the
segment's sales are to international customers.
Domestic and international competition from a number of companies, some
of which are much larger than Watkins-Johnson, is intense. The company
seeks to win customers by excellent service and superior technical
performance. The group's customer, Lucent Technologies, acknowledged
the excellence of the company's products and services by recognizing
Watkins-Johnson Company as a premier supplier for two consecutive
years. The company seeks to protect its intellectual property by an
aggressive patent and trade secret program.
Additional information regarding the company's Wireless Communications
segment along with a discussion risks and uncertainties that may affect
future results is included in Part I, Item 7, of this annual report on
Form 10-K.
Semiconductor Equipment
The company's Semiconductor Equipment segment designs, develops and
manufactures equipment to deposit thin dielectric films by using the
process of atmospheric-pressure chemical-vapor-deposition (APCVD). The
company's products apply insulating, or dielectric, layers of silicon
dioxide (glass) onto silicon wafers during the processing of
integrated-circuit chips. This equipment functions by injecting the
gases needed for the reaction over the substrate material.
The company's APCVD process is mostly used in depositing doped oxide
films, boro-phosphoro-silicate glass (BPSG) and
phosphoro-silicate-glass (PSG), for the initial dielectric layers
deposited on the wafers. These initial layers, sometimes termed the
premetal dielectric (PMD), are deposited prior to the metal layers
which are used to connect the transistors and provide the circuit
action. BPSG is a useful dielectric layer since it self-planarizes,
offering a smoother surface for the following metal and dielectric
layers. The WJ APCVD equipment is well suited for these applications.
Page 4
<PAGE>
Item 1. Business (continued)
The company has two proprietary approaches to the APCVD process. Under
one approach, the substrates are transported under the injectors on a
continuously moving conveyor belt through a resistance heated muffle.
This approach allows high deposition rates with a simpler reactor
design yielding higher reliability operation and high wafer throughput.
The company markets these APCVD systems as the WJ-999, WJ-1000 and the
recently introduced WJ-1500. The WJ-999 and WJ-TEOS999 systems are for
production lines using 150-mm (6-inch) semiconductor wafers; they are
capable of simultaneous processing of two wafers in parallel. The
WJ-1000 and WJ-1500 are specifically designed for production lines
using 200-mm (8-inch) semiconductor wafers. Under a second approach,
the company's recently introduced WJ-3000A is a single wafer,
multiprocessing system with both 300-mm and 200-mm capability.
The semiconductor industry had significant over capacity and capital
equipment investment continued to decline in 1998. The company took a
number of actions to bring its cost structure into alignment with the
extremely low conditions of this cyclical market. As part of the
resizing, the high-density-plasma (HDP) chemical-vapor-deposition (CVD)
system initiative was discontinued as discussed in Part I, Item 7 and
in Note 11 to the consolidated financial statements contained in Part
II, Item 8 of this annual report on Form 10-K.
The company will continue to offer its core APCVD product line to
semiconductor manufacturers. It also intends to preserve its global
service and key development activities to provide new equipment for the
market applications in premetal dielectric and shallow trench
isolation. Its future development activities will be focused on two
recently announced systems, the WJ-1500 and the WJ-3200A which are
described in Part I, Item 7, of this annual report on Form 10-K.
The decreasing feature sizes used in the construction of integrated
circuits are opening a new application for the company's APCVD
equipment. Small feature sizes allow smaller transistors to be defined
and located closer together in the circuits. The desired packing
density is causing the naturally grown LOCOS (local oxide separation)
step to become difficult. The LOCOS step can be replaced with a STI
(shallow trench isolation) approach using CVD. The company believes its
APCVD process is competitive for this more recent step.
Sales in the Semiconductor Equipment segment were 46% of consolidated
sales in 1998 and 64% in 1997 and 78% in 1996. Over the last three
years the company has changed its method of selling and servicing
semiconductor equipment. The company replaced a network of
manufacturers' representatives and distributors, with a direct sales
and service force world-wide to better serve its customers. Currently,
the company has direct sales offices in the United States, Korea,
Taiwan, Singapore, Japan and Europe.
The company's equipment is sold world-wide to major semiconductor
manufacturers, especially to those engaged in high-volume integrated
circuit manufacturing. Customers include both firms that manufacture
and sell their own products and semiconductor foundry firms that
contract manufacturing services to "fabless" companies. As such the
company's equipment is used in the manufacturing of all types of
integrated circuits, from logic circuits to semiconductor memory chips.
Although there are many such customers, a majority of the integrated
circuits world-wide are produced by approximately 20 companies, with
roughly two-thirds of the business outside the United States. Over a
period of years, NEC, Hyundai Electronics Ind. Co. Ltd., Samsung
Pacific International Inc., Motorola and Intel have been significant
customers of the segment. There are several domestic and international
competitors in this field (some of whom are larger than the company)
and competition is intense. In meeting the competition, emphasis is
placed on selling quality products with high technical performance
Page 5
<PAGE>
Item 1. Business (continued)
and operational reliability with a competitive cost of ownership. The
company's global customer-support network is expected to be a
competitive advantage.
Additional information regarding the company's Semiconductor Equipment
segment along with a discussion of risks and uncertainties that may
affect future results is included in Part I, Item 7, of this annual
report on Form 10-K.
Other Business Items
Raw materials for the production of semiconductor equipment and
wireless communications products are acquired from a broad range of
suppliers. Because suppliers are numerous, dependence on any one
supplier is kept to a minimum. On occasion, however, the failure of a
supplier to deliver key parts can jeopardize the on-time shipment of
company products. Business operations are not believed by management to
be significantly seasonal.
With respect to trade receivables from semiconductor equipment systems
sales, generally 10% to 20% of the balance is collectible upon
acceptance of the equipment by the customer. Except for the use of
letters of credit on international sales and negotiated advance or
progress payments from customers on long-term contracts, there are no
other special working capital practices.
The company has been active in securing patents and licensing
agreements to protect certain proprietary technologies and know-how
resulting from its ongoing research and development. The financial
impact of the company's efforts to protect its intellectual property
are unknown. Management believes that the company's competitive
strength derives primarily from its core competence in engineering,
manufacturing and understanding its customers and markets; therefore,
aggressive steps to protect that knowledge are considered justifiable.
Total company backlog at December 31, 1998 was $79.5 million compared
to $98.2 million at December 31, 1997. The percentage of backlog
attributable to the Wireless Communications and Semiconductor Equipment
is 84% and 16%, respectively, in 1998, compared to 61% and 39% in 1997.
The company includes in its backlog customer released orders with firm
schedules for shipment. Approximately 98% of all backlog at December
31, 1998 is expected to be shipped within 12 months, compared to 93% at
December 31, 1997. The company does not have any significant long-term
purchase agreements with any of its customers, and customers can
typically cancel or reschedule their orders without significant
penalty. As a result, customers frequently revise production quantities
and delivery schedules to reflect their changing needs. Since most of
the company's backlog can be canceled or rescheduled, the company does
not believe its backlog is a meaningful indicator of future revenue.
Company-sponsored research and development expense was $49.9 million in
1998, $50.2 million in 1997, and $53.2 million in 1996.
Customer-sponsored research and development was $3.2 million in 1998,
$5.2 million in 1997 and $7.2 million in 1996. Customer-sponsored
research and development was performed by the Wireless Communications
segment.
The company's headcount at December 31, 1998 was 990. None of the
company's employees are covered by a collective-bargaining agreement.
The company's relationship with its employees is generally good.
Environmental issues are discussed in Note 6 to the consolidated
financial statements contained in Part II, Item 8 of this annual report
on Form 10-K.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales.
Page 6
<PAGE>
Item 1. Business (continued)
Combined export sales and sales from foreign operations accounted for
36% of the company's sales in 1998, 42% in 1997 and 59% in 1996. Assets
of foreign operations accounted for 16%, 14% and 15% of consolidated
assets at December 31, 1998, 1997 and 1996, respectively. The inherent
risks of foreign business are similar to domestic business, with the
additional risks of foreign government instability, currency
fluctuations, and export license cancellation. A portion of foreign
product orders in the Wireless Communications segment requires export
licensing by the Department of State prior to shipment. For
international shipments for both company business segments, the company
purchases forward exchange contracts and/or generally obtains customer
letters of credit to reduce foreign currency fluctuation and credit
risks. For further information on foreign sales, see Note 8 to the
consolidated financial statements contained in Part II, Item 8 of this
annual report on Form 10-K.
Item 2. Properties
Watkins-Johnson Company and subsidiaries conduct their main operations
at plants in Palo Alto, Scotts Valley and Milpitas, California and
Gaithersburg, Maryland. The company also has a facility in Kawasaki,
Japan, for its Semiconductor Equipment Group and leases several sales
and service offices throughout the United States, Asia-Pacific and
Europe.
In 1998, approximately 15 acres of undeveloped land adjacent to the
company's San Jose, California, facility was sold, and due to the
downsizing discussed in Note 10 to the consolidated financial
statements (contained in Part II, Item 8 of this annual report on Form
10-K), the company's 190,000 square foot San Jose facility was vacated
and is currently for sale. The company expects to sell this property in
1999. The company is pursuing opportunities to realize the market value
of its properties while ensuring efficient use of available space.
In December 1997, the sale and exchange of a portion of the company's
Palo Alto lease interest was successfully completed. About 7 acres of
the Palo Alto campus were returned to the lessor for consideration as
discussed in Note 10 to the consolidated financial statements
(contained in Part II, Item 8 of this annual report on Form 10-K).
Excluding the San Jose facility, at December 31, 1998, there were
approximately 508,000 square feet of plant space in California, 175,000
square feet in Maryland, and a 36,000 square foot facility in Kawasaki,
Japan. Of the 508,000 square feet of plant space in California,
approximately 133,000 square feet in Palo Alto is subleased to Stellex
Microwave Systems, Inc. (SMS) for a period through October 2000 as part
of the stock purchase agreement included in Part II, Item 14(a)3, by
reference as Exhibit 10.1l. The space is leased to SMS at a price which
recovers utilities, maintenance and other services, and may be canceled
by SMS with 6 months notice. In addition, a small portion of the
Kawasaki, Japan, facility is leased to a tenant. Excluding the San Jose
facility and the subleases discussed above, approximately 85% of the
company's available plant space is occupied for the company's
operations.
The Wireless Communications segment utilizes substantially all of the
Milpitas, Gaithersburg and available Palo Alto facilities. The Scotts
Valley and Kawasaki facilities house the Semiconductor Equipment
segment.
The Palo Alto and Milpitas facilities and all sales office locations
are leased. Information on long-term obligations is discussed in Note 3
to the consolidated financial statements contained in Part II, Item 8
of this annual report on Form 10-K.
Item 3. Legal Proceedings
Information required under this item is contained in Note 6 to the
consolidated financial statements contained in Part II, Item 8 of this
annual report on Form 10-K.
Page 7
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Item 4. Submission of Matters to a Vote of Security Holders
The company submitted no matters to a vote of the shareowners during
the last quarter of the period covered by this report.
<TABLE>
Executive Officers of the Registrant
<CAPTION>
Officer Business Experience
Name Age Office Held Since Last Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dr. Dean A. Watkins 76 Chairman of the Board 1957 Chairman of the Board
Dr. H. Richard Johnson 72 Vice Chairman of the Board 1957 Vice Chairman of the Board
Dr. W. Keith Kennedy, Jr. 55 President and Chief Executive 1977 President and Chief Executive Officer
Officer
Scott G. Buchanan 47 Vice President, Chief Financial 1989 Vice President, Chief Financial Officer and
Officer and Treasurer Treasurer, Prior to 1998, Vice President and
Chief Financial Officer
Dr. Patrick J. Brady 53 Vice President 1996 President, Semiconductor Equipment Group;
Prior to 1996, Vice President of Engineering,
Semiconductor Equipment Group
Malcolm J. Caraballo 43 Vice President 1996 President, Microwave Products Group;
Prior to 1996, Vice President, Microwave
Products Division
Robert G. Hiller 61 Vice President 1997 President, Telecommunications Group, Prior to
1997, Vice President, Telecommunications Group,
Prior to 1996, Director, Engineering,
Electronics Equipment Division
Dr. Frank E. Emery 62 Vice President 1998 Vice President, Corporate Planning and
Communication, Prior to 1998, Manager, Corporate
Planning and Communication
Darryl T. Quan 44 Controller 1991 Controller
Claudia D. Kelly 58 Secretary 1996 Secretary; Prior to 1996, Manager, Palo Alto
Customer and Export Services
</TABLE>
Dr. Watkins and Dr. Johnson have been directors of the company since its
incorporation in 1957. Dr. Kennedy has been a Director since August 1987.
None of the above officers is related to any other officer at Watkins-Johnson
Company.
Page 8
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The company's common stock is principally traded on the New York and
Pacific stock exchanges. At December 31, 1998 there were approximately
8,500 shareowners, which included holders of record and beneficial
owners. The company expects that comparable cash dividends will
continue in the future.
<TABLE>
DIVIDENDS AND STOCK PRICES
<CAPTION>
1998 Quarters 1st 2nd 3rd 4th
- --------------------------------------- ------------------------ ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
Dividends declared per share (in cents) 12 12 12 12
Stock price High 28 1/2 28 1/2 29 1/2 22 9/16
(NYSE-in dollars) Low 22 13/16 23 5/16 17 9/16 16 3/8
1997 Quarters 1st 2nd 3rd 4th
- --------------------------------------- ------------------------- ----------- ----------- ----------- -----------
Dividends declared per share (in cents) 12 12 12 12
Stock price High 26 7/8 32 3/8 37 1/4 35 3/4
(NYSE-in dollars) Low 22 1/8 22 1/4 30 3/4 24 3/16
</TABLE>
<TABLE>
Item 6. Selected Financial Data
<CAPTION>
(Dollars in thousands,
except per share amounts) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Sales $ 212,200 $ 291,271 $ 349,119 $ 284,335 $ 209,330
Net income (loss) from
continuing operations (49,208) (3,962) (1,321) 21,854 19,652
Basic net income (loss) per share
from continuing operations (6.36) (0.48) (0.16) 2.75 2.65
Diluted net income (loss) per share
from continuing operations (6.36) (0.48) (0.16) 2.49 2.41
Dividends per share $ 0.48 $ 0.48 $ 0.48 $ 0.48 $ 0.48
Basic average common shares 7,737,000 8,258,000 8,265,000 7,938,000 7,425,000
Diluted average common shares 7,737,000 8,258,000 8,265,000 8,776,000 8,153,000
FINANCIAL POSITION
Working capital $ 91,018 $ 153,607 $ 122,982 $ 124,796 $ 102,361
Total assets 245,478 358,212 293,744 269,565 220,223
Long-term obligations 32,701 33,234 37,801 20,469 21,332
Shareowners' equity 131,699 220,392 194,711 191,253 149,626
Shareowners' equity per share $ 20.11 $ 26.68 $ 23.38 $ 23.54 $ 19.75
Number of shareowners 8,500 6,500 5,400 4,900 4,600
</TABLE>
Page 9
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
company's consolidated financial statements and related notes included
elsewhere in this annual report. Except for historic actual results
reported, the following discussion may contain predictions, estimates
and other forward-looking statements that involve a number of risks and
uncertainties. See "Risks and Uncertainties that May Affect Future
Results" included below for a discussion of certain factors that could
cause future actual results to differ from those described in the
following discussion.
Financial Condition and Liquidity
At the end of 1998, cash and equivalents and short-term investments
totaled $64.6 million, a decline of $69.9 million from the 1997
year-end cash and equivalent balance of $134.5 million. The decrease
resulted primarily from the company's operating loss, working capital
requirements, and repurchase of the company's common stock. A total of
1,795,800 shares were repurchased for $36.2 million. Proceeds from the
sale of undeveloped land, as described in Note 10 to the consolidated
financial statements, helped fund the company's 1998 capital
acquisitions.
In 1997, cash and equivalents increased $118.8 million from $15.7
million to $134.5 million. The increase was attributed to funds
generated from continuing operations, gain from the sale of
discontinued operations as described in Note 8 to the consolidated
financial statements, and proceeds received from the exchange of a
subleasehold interest as explained in Note 10 to the consolidated
financial statements. The cash inflow from the above activities was
sufficient to fund the acquisition of capital assets totaling $22.2
million in 1997.
In 1996, cash and equivalents decreased $18.9 million, from $34.6
million to $15.7 million. Net cash provided by continuing operations
was $16.0 million. This helped partially fund the company's capital
asset acquisitions totaling $48.3 million, including a facility in
Kawasaki Japan. The company completed the financing of 1996 capital
asset acquisitions with long-term borrowings of $20.2 million as
described in Note 3 to the consolidated financial statements.
As of December 31, 1998, the company's principal source of liquidity
consisted of $19.3 million in cash and equivalents plus short-term
investments valued at $45.4 million. During 1998, the company invested
its excess cash and equivalents in securities with maturities exceeding
90 days to take advantage of the higher yields. These short-term
investments, consisting mostly of high grade debt securities, are
subject to interest rate risk and will rise and fall in value if market
interest rates change.
The company previously had arranged with several banks to provide a
$50.0 million unsecured credit facility, which was scheduled to expire
on March 31, 1999. During 1998, the company did not borrow under this
credit facility. Due to the operating losses reported in 1998, the
company was technically not in compliance with certain terms under this
credit facility. The company evaluated the proposed revised terms and
elected to terminate the facility based on the company's cash balances
and short-term investments. Management does not anticipate any
significant near term borrowing requirements and does not expect the
termination of the credit facility to materially affect the company's
liquidity or financial position.
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
From time to time the company may enter into certain long-term
borrowing arrangements with financial lending institutions for capital
acquisitions of property, plant and equipment. As of December 31, 1998,
long-term borrowings of $20.2 million consisted of three outstanding
loans which are payable through the year 2011, as disclosed in Note 3
to the consolidated financial statements. At the end of 1998, there
were no material commitments for capital expenditures.
Based on current plans and business conditions, the Company believes
that its existing cash and equivalents, short-term investments and cash
generated from operations is expected to be sufficient to satisfy
anticipated cash requirements for the next twelve months.
Current Operations and Business Outlook
For 1998, the company reported sales of $212.2 million and a net loss
of $49.2 million, or $6.36 loss per share. This loss includes $44.4
million of pre-tax charges for the write down of discontinued products
and related restructuring as discussed below and in the company's
announcement on September 8, 1998 reported on Form 8-K. Also included
in 1998 results is a $15.0 million pre-tax gain on the sale of
undeveloped land.
In 1997, sales were $291.3 million and net income was $32.9 million or
$3.99 per share. The 1997 net income was comprised of a net loss from
continuing operations of $4.0 million, or $0.48 loss per share, and a
gain and net income related to discontinued operations of $36.9
million, or $4.47 per share. Firm backlog on December 31, 1998 stood at
$79.5 million, compared to the 1997 backlog of $98.2 million.
During the third quarter of 1998, the company restructured its
operations to focus on its core atmospheric-pressure
chemical-vapor-deposition (APCVD) operations in the Semiconductor
Equipment segment by discontinuing efforts on its high-density-plasma
initiative. Also, the company's Wireless Communications segment
evaluated its Base2(TM) base-station product, reassessing key customer
needs and market conditions. Inventory, demo equipment, and customized
fixed assets associated with these products were written down in the
restructuring. As a result, the company reduced its global work force
and downsized its operations. The company recorded charges of $44.4
million of which $40.5 million relates to the write down of
nonproductive facilities, equipment, and discontinued products; and
$3.9 million relates to severance, benefits, and other exit costs as
disclosed in Note 11 to the consolidated financial statements.
As discussed above, the company faced some very difficult decisions
throughout 1998, especially in the third quarter. The company took a
number of actions required to bring its cost structure into alignment
with the extremely poor market conditions. Looking forward, the company
believes the realignment and refocusing will set the stage for future
growth and profitability. Operations and business outlook for each of
the company's business segments are discussed below.
Page 11
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Wireless Communications
Wireless Communications sales for 1998 totaled $115.2 million, a 10%
increase from the prior year's $104.8 million. The business segment is
entering 1999 with a backlog totaling approximately $67.1 million
compared to $60.3 million on December 31, 1997.
Aside from the restructuring activities discussed previously, the
Wireless Communications segment experienced both positive and negative
events in 1998. The segment sustained strong growth as a high-volume
manufacturer of custom RF (radio frequency) subassemblies for PCS
base-station and wireless-local-loop customer-premise equipment. Fourth
quarter 1998 shipments included the first large order for outdoor
repeaters from a major wireless carrier. However, 1998 revenues were
adversely affected by the company's decision to discontinue marketing
its wideband digital base station product directly to service providers
and the smaller system integrator firms.
Part of the difficulty the company experienced in the Wireless
Communications segment stems from the delay of a major government
order, which is budgeted and has funding established. The company is
following this program closely and is hopeful it will be able to
receive the order during 1999.
Looking forward, it is too early to tell how strong the Wireless
Communications shipment rate will be in 1999. However, the company
expects this segment to continue growing. If the economy in general
stays strong, the company expects the Wireless Communications segment
to be profitable next year. The segment intends to focus on the
following opportunities to continue its growth: gallium-arsenide (GaAs)
semiconductor devices, repeaters, advanced RF technology subassemblies,
and communications surveillance receiver programs with strong follow-on
potential.
The company accelerated its entry to the GaAs semiconductor market with
the purchase of the assets and intellectual property of Samsung
Microwave Semiconductor in December 1997. GaAs devices include
low-noise and power amplifiers, mixers and doublers. The consolidation
of the GaAs and Thin Film processing and design organization to the
Milpitas facility is on schedule and is expected to be completed early
in 1999.
The company offers a line of "over-the-air" repeaters to PCS carriers
to assist in extending cell size and broadening their signal coverage.
The newest products are the PCS in-building repeaters for CDMA, TDMA
and GSM air interfaces. These repeaters provide quick installation and
easy coverage for indoor locations such as shopping malls, airports,
convention centers and multistory office buildings.
Continued worldwide growth of RF infrastructure for wireless telephone
systems is expected. With its strong base in advanced RF technology,
the segment is in an excellent position to participate in this growth.
The communications surveillance receiver requirements and orders are
expected to remain at a fairly steady level. Going forward, the segment
intends to market communications systems, receiving equipment and
sub-systems as a value added supplier to customers in the intelligence
and military communities; and commercial original equipment
manufacturers. The company intends to emphasize programs with strong
follow-on potential, especially those which enhance the segments
overall product strength for additional business opportunities.
Page 12
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Semiconductor Equipment
Sales of semiconductor equipment for 1998 amounted to $97.0 million,
down 48% from the $186.5 million recorded for 1997, as customers
dramatically reduced equipment orders. This business segment is
entering 1999 with a backlog totaling approximately $12.4 million
compared to $37.9 million at December 31, 1997.
The semiconductor industry capital spending dramatically declined in
1998 and the company took a number of actions to bring its cost
structure into line with the extremely unfavorable conditions of this
cyclical market. The high-density-plasma chemical-vapor-deposition
(HDPCVD) system initiative was discontinued, as previously discussed.
The intellectual property relating to the high-density-plasma
development effort is being offered to potential buyers. Employing an
investment banking firm, Alliant Partners, the company continued its
strategic partnering discussions with a number of parties in an effort
to leverage the technology and business prospects of the Semiconductor
Equipment Group.
The group also reviewed the requirements for its global sales and
service force. These operations were reduced in order to bring them in
line with the lower business expectations. While the group is watching
these expenses carefully, the company believes it is taking the proper
steps to assure effective support of customers for both service and new
orders.
The company intends to preserve its global service and key development
activities to provide new equipment for the market applications in
premetal dielectric, shallow trench isolation and very-low dielectric
constant (VLK) films. The company will continue to offer its core
atmospheric-pressure chemical-vapor-deposition (APCVD) product line to
semiconductor manufacturers. Its future development activities will be
focused on two recently announced systems, the WJ-1500 and the
WJ-3000A.
The WJ-1500 extends the continuous processing APCVD to 0.15-micron
design-rule fabrication capability. The system is an upgrade to the
conveyor transport system with improved film capability and higher
reliability for the smaller design rules (0.18 micron) now being
employed. The company believes it will participate in the market as
geometries are scaled down to 0.15 micron with the WJ-1500. In the
third quarter of 1998, the company captured a multiple-system order for
this tool, consisting of three systems and one upgrade kit, from
Samsung Electronics Company.
The WJ-3000A (or AP Next) cluster platform, is a "bridge" product
designed to facilitate chip makers' transition from 200-mm to 300-mm
wafer processing. The WJ-3000A is a single wafer, multiprocessing
system with both 300-mm and 200-mm capability. The company has been
demonstrating its capability to customers during 1998 with excellent
results. The system has performed very narrow gap-fills to 50
nanometers. A number of customers are discussing beta site
opportunities and the company expects to have a beta placement in 2000.
Page 13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Looking forward, the company believes that the Semiconductor Equipment
segment is now sized to match the level of forecasted revenue for 1999.
However, it is difficult to predict what the future might hold in the
semiconductor equipment business. Current semiconductor integrated
circuit demand appears to be increasing slightly in dollar terms over
last year. The recent industry forecasts seem to be in line with the
company's expectations, with demand increasing slightly each quarter as
the year progresses. Based on its interactions with customers, the
company believes that certain customers may be considering moving into
the buying mode. The company believes the Semiconductor Equipment
segment will be appropriately positioned as the industry recovers.
Although the very long-range industry forecasts for the semiconductor
industry remain bright, the industry remains in an overcapacity
situation. Capital equipment decisions are affected by a number of
parameters and the company is watching its customers' market dynamics
closely. The industry is confident of an upturn, but it appears to be
well into or beyond 1999.
1998 Compared to 1997
Wireless Communications sales increased 10% while Semiconductor
Equipment sales decreased 48%, resulting in an overall company decrease
of 27%. Gross margins decreased from 32% to 16%. The decrease in gross
margins is due mostly to the lower sales volume and $17.1 million for
the write down of discontinued products resulting from the
restructuring. As previously discussed, the restructuring and other
charges came primarily from the results of the semiconductor equipment
market decline as the company worked to bring costs in line with
revenues. Gross margins for the fourth quarter of 1998 improved to 33%.
Excluding restructuring charges of $27.3 million, selling and
administrative expenses increased to 24% of sales compared with 20% for
1997, due mostly to the lower sales volume. Actual selling and
administrative expenses, excluding restructuring charges, decreased 13%
from $58.7 million in 1997 to $51.0 million in 1998.
Research and development expenses were $49.9 million in 1998, or 24% of
sales, compared to $50.2 million, or 17% of sales in 1997. Although
research and development is high as a percentage of sales due to the
lower sales volume, spending remained high since the effect of the
downsizing did not impact results until after the third quarter of
1998. As previously discussed, earlier in the year the company began to
curtail research and development efforts on certain projects which are
not expected to have orders impact in 1999, and in September 1998
discontinued its efforts on the HDP initiative and the Base2 product.
The pre-tax operating loss in 1998, before other income and a gain on
the sale of undeveloped land, was $94.7 million compared with a loss
from continuing operations of $14.3 million for 1997. Interest and
other income (net of other expenses) increased to $6.7 million due
primarily to interest income earned on the increased average cash
balance and short-term investments. Also included in other income for
1998 is $1.2 million of net income from two leases, the sub-lease of
part of our Palo Alto facility to Stellex and a lease of a portion of
the company's Japanese facility. In January 1998, the company concluded
the sale of vacant land adjacent to its San Jose, California facility,
resulting in a $15.0 million pre-tax gain reflected as "Gain on real
property" in the consolidated financial statements.
Page 14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
For 1998, the effective tax benefit rate for federal, state and foreign
income taxes was about 33% compared to a 43% tax benefit rate on
continuing operations for 1997. The 33% tax benefit rate in 1998 is a
result of the reported loss and is below the statutory rate primarily
due to taxes accrued for certain profitable foreign operations
offsetting benefits from federal and state research tax credits. The
43% tax benefit rate for 1997 resulted primarily from the effect of the
operating loss with positive benefits from export sales and research
credits, which were offset in part by taxes incurred by profitable
foreign operations.
As a result, the net loss from continuing operations was $49.2 million
in 1998 compared to $4.0 million in 1997, or $6.36 loss per share
compared to $0.48 loss per share, respectively.
1997 Compared to 1996
Wireless Communications sales increased 37% while Semiconductor
Equipment Group sales decreased 32%, resulting in an overall company
decrease of 17%. By the third quarter of 1996, the company began to
experience significant decreases in semiconductor equipment shipments.
Gross margins decreased from 34% to 32%. Gross margins in both years
were adversely affected by write-offs of excess inventory and
nonperforming assets.
Selling and administrative expenses decreased 12%, due mostly to the
decreased volume and cost-cutting efforts, but increased slightly as a
percentage of sales. Research and development expenses remained above
15% of revenue due to continued emphasis on new product development in
both business segments.
Interest income increased $1.4 million over the prior year due to the
increase in cash and cash equivalents. Other income decreased due
primarily to about $1.4 million in foreign currency translation losses
in 1997 from the company's Asia-Pacific subsidiaries. The sale and
exchange of a Palo Alto lease interest was successfully completed in
1997, resulting in a $7.6 million pre-tax gain reflected as "Gain on
real property" in the consolidated financial statements.
The effective tax rate for federal, state and foreign income taxes on
continuing operations resulted in a tax benefit rate of about 43%
compared to 37% in 1996. The 43% tax benefit rate resulted mostly from
the effect of the operating loss with positive benefits from export
sales and research credits, which were offset by taxes incurred by
foreign operations.
Due to the above factors, the net loss from continuing operations
increased from $1.3 million for 1996 to about $4.0 million for 1997, or
$0.16 to $0.48 loss per share, respectively. Including the after tax
gain on the disposition and results of discontinued operations, net
income increased from $3.0 million for 1996 to $32.9 million for 1997.
Page 15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Risks and Uncertainties That May Affect Future Results
All statements in this annual report, other than statements of
historical facts, are forward-looking statements. By way of example
only, those include statements about the company's strategies,
objectives, plans, expectations and anticipated results, and
expectations for the economy generally or for the company's specific
industries. The words "expect", "anticipate", "looking forward" and
other similar expressions used in this annual report are intended to
identify forward-looking statements that involve risks and
uncertainties that may cause actual results and expectations to differ
materially from those expressed. Such risks and uncertainties include,
but are not limited to: product demand and market acceptance risks, the
effect of economic conditions, the impact of competitive products and
pricing, product development, commercialization and technological
difficulties, capacity and supply constraints or difficulties, business
cycles, dependence on single large customers, the results of financing
efforts, the results of the company's decision to pursue the sale of
the company in its entirety or in separate transactions, actual
purchases under agreements, the effect of the company's accounting
policies, U.S. Government export policies, governmental budgeting and
spending cycles, results of restructuring efforts, geographic market
concentrations, natural disasters and other risks. Investors and
prospective investors are cautioned not to place undue reliance on
these forward-looking statements. The company undertakes no obligation
to announce any revisions to its forward-looking statements to reflect
events or circumstances as they actually develop or occur in the
future.
The wireless communications industry is subject to various regulatory
agencies of federal, foreign, state and local governments which can
affect market dynamics, causing unforeseen ebb and flow of orders and
delivery requirements. Domestic and international competition from a
number of wireless communications companies, some of which are much
larger than Watkins-Johnson, is intense. The effect of these and other
factors could significantly affect the company's future operating
results.
The Semiconductor Equipment Group's business depends upon the planned
and actual capital expenditures of the semiconductor manufacturers, who
react to the current and anticipated market demand for integrated
circuits. In 1996 its history of cyclical variations returned with a
market downturn. That downturn was exacerbated in the fourth quarter of
1997 by financial-system collapses and currency devaluations in Asia,
the company's principal overseas market region for capital equipment.
The market downturn continued in 1998. The semiconductor equipment
business can vary rapidly in response to individual customer demand.
Following placement of orders, customers frequently seek either faster
or delayed delivery, based on their changing needs. Uncertainty
increases significantly when projecting product demand in the future.
While the company cannot predict what effect these various factors will
have on operating results, these factors along with other factors could
significantly affect the company's future operating results.
Year 2000 Compatibility
The Year 2000 (Y2K) issue involves the ability of computer software to
properly utilize dates for years after the year 1999. Computers have
traditionally used the last two digits of the year for date
calculations and could interpret the year 2000 as the year 1900. The
critical areas being addressed by the company are its internal computer
systems, products made by the company and relationships with external
organizations. The company is addressing both information technology
("IT") and non-IT systems which typically include embedded technology
such as microcontrollers.
Page 16
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The company regularly updates its information systems capabilities, and
has evaluated significant computer software applications for
compatibility with the year 2000. Several years ago the company adopted
a strategic plan for its internal computer systems with the goal of
going to an off-the-shelf real time system. As a result, the company's
domestic operations run all financial and manufacturing business
applications on an Oracle data base with the associated Oracle
application modules. Oracle's stated solution to Y2K is its version
10.7 of the application software. As of June 1998, the company's
domestic operations are on Oracle version 10.7. The company's
international operations run all business applications on SunSystems
software which is deemed Y2K compliant. There are other software
implementations that are minor in nature that may take until mid 1999
to be completed. There are no known non-IT issues that will adversely
impact the company's information systems capabilities. With the system
changes implemented to date and other planned changes, the company
anticipates that its internal computer software applications will be
compatible with the year 2000. In the event of any Y2K disruptions, the
company will follow the software vendors' contingency directives.
The Y2K issue (both IT and non-IT) for company products is being
addressed by the respective business units. The Semiconductor Equipment
segment has identified the issues, addressed the problems and developed
solutions. The solutions have been tested and found to work
satisfactorily. The Y2K issues do not affect the ability of the
products to process wafers, but involve maintaining temporary records
of wafer production history on systems produced prior to 1998. The Y2K
situation is an issue for only some of the products in the Wireless
Communications segment. The group is in the process of identifying
which products are affected. If a product is affected, the group will
seek to develop a solution and then communicate it to customers. The
current schedule is to identify all affected products and develop
solutions by mid 1999 to ensure timely communication to the customers.
The respective business units have also addressed non-IT issues with
respect to their manufacturing facilities and there are no known non-IT
issues that will adversely impact the company's operations.
The company is dependent on numerous vendors and customers which may
incur disruptions as a result of year 2000 software issues.
Accordingly, no assurance can be given that the company's operations
will not be impacted by this industry-wide issue. The company is
addressing the Y2K issues with external organizations. This involves
customers, suppliers and service providers. Although the initial review
does not indicate any significant risk, this will be an ongoing effort.
The company is considering alternative vendors as a contingency plan.
With the actions that have been taken and the other planned activities,
the company is not anticipating any significant disruption of business,
however, no absolute assurances can be given. The most likely
disruption that could occur is where the company uses wire transfers to
move funds to vendors and subsidiaries, some of which are located in
foreign countries. Since the status of all banking systems in the world
cannot be determined in advance, there may be minor disruption in the
ability to transfer funds in real time along the current routes.
Contingency plans, which include alternative banks and standby letters
of credit, are in place to address what is needed to minimize any
business interruption.
Expenditures specifically related to software modifications for year
2000 compatibility are not expected to have a material effect on the
company's operations or financial position. The cost to address and
remedy the company's Y2K issues were $0.1 million in 1997, $0.2 million
in 1998 and expected to be $0.2 million in 1999.
Page 17
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Single European Currency Conversion
The company has established a team to address issues raised by the
introduction of the Single European Currency (Euro) for initial
implementation as of January 1, 1999, and through the transition period
to January 1, 2002. The company believes it has met the related legal
requirements effective for January 1, 1999, and it expects to be able
to meet the legal requirements through the transition period. The
company does not expect the cost of any system modifications to be
material and does not currently expect that introduction and use of the
Euro will materially affect its foreign exchange and hedging activities
or will result in any material increase in costs to the company. While
the company will continue to evaluate the impact over time of the
introduction of the Euro; based on currently available information
management does not believe that the introduction of the Euro will have
a material adverse impact on the company's financial condition or the
overall trends in results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
The following discussion about the company's market risk disclosures
involves forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements. The
company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates. The company does not use
derivative financial instruments for speculative or trading purposes.
Short-Term Investments--The company maintains a short-term investment
portfolio consisting mainly of debt securities with an average maturity
of less than two years. These available-for-sale securities are subject
to interest rate risk and will rise or fall in value if market interest
rates change. The company has the ability to hold its fixed income
investments until maturity, and therefore the company would not expect
its operating results or cash flows to be affected to any significant
degree by the effect of a sudden change in market interest rates on its
investment portfolio.
The following table provides information about the company's investment
portfolio and constitutes a "forward-looking statement." For investment
securities, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates.
Expected Maturity Weighted
Amounts Average Interest
Expected Maturity Dates (in thousands) Rate
---------------------------- ---------------------- -----------------
Cash and equivalents:
1999 $19,271 4.41%
Short-term investments:
1999 22,021 5.64%
2000 15,235 5.91%
2001 8,097 5.85%
Fair value at
December 31, 1998 $45,353
Page 18
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risks (continued)
Long-term Debt--On December 31, 1998, the company had fixed rate
long-term debt of approximately $20.8 million (including the current
portion of $615,000), which is denominated in Japanese Yen (113.45 yen
per dollar at December 31, 1998). The company has not hedged any
interest rate or foreign currency rate exposures on this loan. The
table below provides information about the company's long-term debt and
constitutes a "forward-looking statement." The table presents expected
debt maturity by year and related weighted average interest rates.
Expected Maturity Weighted
Amounts Average Interest
Expected Maturity Dates (in thousands) Rate
--------------------------- --------------------- -----------------
1999 (current) $ 615 2.50%
2000 615 2.50%
2001 615 2.50%
2002 615 2.50%
2003 615 2.50%
Thereafter 17,764 2.87%
Fair value at
December 31, 1998 $20,839
Additional information regarding market risks with respect to company
borrowings is disclosed in Note 3 to the consolidated financial
statements.
Foreign Exchange Risks--The company has limited involvement with
derivative financial instruments and does not use such instruments for
trading purposes. The derivative financial instruments are used to
manage foreign currency exchange risk. The company enters into foreign
exchange forward contracts to hedge certain balance sheet exposures and
intercompany balances against future movements in foreign exchange
rates. Gains and losses on the forward contracts are largely offset by
gains and losses on the underlying exposure and consequently a sudden
or significant change in foreign exchange rates is not expected to have
a material impact on future net income or cash flows. The company is
exposed to credit-related losses in the event of nonperformance by
counter parties to these financial instruments, but does not expect any
counter party to fail to meet its obligation.
Page 19
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risks (continued)
The maturity of foreign currency exchange contracts held at December
31, 1998 is consistent with the contractual or expected timing of the
transactions being hedged, principally receipt of customer payments in
Japanese Yen. These foreign exchange contracts mature within 1 year and
are as follows:
CONTRACTS TO PURCHASE
(Dollars in thousands)
-----------------------------------------------------------------------
Currency At Contract At Market
Type Contract Date Maturity Date Rate Rate
-----------------------------------------------------------------------
Fourth Quarter First
Yen 1998 Quarter 1999 $5,908 $5,972
-----------------------------------------------------------------------
CONTRACTS TO SELL
(Dollars in thousands)
-----------------------------------------------------------------------
Currency At Contract At Market
Type Contract Date Maturity Date Rate Rate
-----------------------------------------------------------------------
Fourth Quarter First
Yen 1998 Quarter 1999 $13,813 $14,055
-----------------------------------------------------------------------
Additional information regarding market risks are disclosed in Notes 1,
2 and 3 to the consolidated financial statements.
Page 20
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended December 31
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 212,200 $ 291,271 $ 349,119
- -----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of goods sold 161,648 196,675 230,556
Cost of goods sold-write down of
discontinued products 17,119
Selling and administrative 50,965 58,696 66,687
Restructuring charges 27,290
Research and development 49,871 50,182 53,175
- -----------------------------------------------------------------------------------------------------------------------------------
306,893 305,553 350,418
- -----------------------------------------------------------------------------------------------------------------------------------
Loss from operations (94,693) (14,282) (1,299)
Other income (expense):
Interest income 5,681 2,198 789
Interest expense (1,168) (1,425) (1,574)
Other income (expense)--net 2,199 (1,062) (12)
Gain on real property (Note 10) 14,973 7,609
- -----------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations before
income taxes (73,008) (6,962) (2,096)
Income tax benefits 23,800 3,000 775
- -----------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (49,208) (3,962) (1,321)
Discontinued operations (Note 8):
Income from discontinued operations, net of taxes 7,210 4,355
Gain on disposition, net of taxes 29,677
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (49,208) $ 32,925 $ 3,034
===================================================================================================================================
Basic and diluted per share amounts:
Loss from continuing operations $ (6.36) $ (0.48) $ (0.16)
Income from discontinued operations 0.87 0.53
Gain on disposition of discontinued operations 3.60
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (6.36) $ 3.99 $ 0.37
===================================================================================================================================
Basic and diluted average common shares 7,737,000 8,258,000 8,265,000
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
Page 21
<PAGE>
<TABLE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<CAPTION>
Year Ended December 31
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $(49,208) $ 32,925 $ 3,034
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (1,385) (301) (294)
Unrealized holding gains on securities-net
of taxes of $97 152
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss (1,233) (301) (294)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $(50,441) $ 32,624 $ 2,740
===================================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
Page 22
<PAGE>
<TABLE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 19,271 $ 134,462
Short-term investments 45,353
Receivables (net of allowance for doubtful accounts
of $3,354 in 1998 and $3,176 in 1997) 31,942 45,690
Inventories:
Finished goods 2,960 9,283
Work in process 11,954 18,519
Raw materials and parts 8,456 18,873
Deferred income taxes 32,288 24,830
Income taxes receivable 13,570
Other 6,302 6,536
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 172,096 258,193
- -----------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 10,569 12,102
Buildings and improvements 32,733 55,155
Plant facilities, leased 11,184 11,012
Machinery and equipment 85,738 100,526
- -----------------------------------------------------------------------------------------------------------------------------------
140,224 178,795
Accumulated depreciation and amortization (77,585) (82,382)
- -----------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment--net 62,639 96,413
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS 10,743 3,606
- -----------------------------------------------------------------------------------------------------------------------------------
$ 245,478 $ 358,212
====================================================================================================================================
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,704 $ 16,188
Accrued expenses 31,104 23,209
Advances on contracts 2,074 1,867
Provision for warranties and losses on contracts 12,066 15,898
Payroll and profit sharing 10,742 15,825
Income taxes 9,388 31,599
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 81,078 104,586
- -----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS 32,701 33,234
- -----------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 6)
SHAREOWNERS' EQUITY:
Preferred stock, $1.00 par value--authorized
and unissued, 500,000 shares
Common stock, no par value--authorized,
45,000,000 shares; outstanding: 1998,
6,547,687 shares; 1997, 8,261,036 shares 34,454 40,631
Retained earnings 99,073 180,356
Accumulated other comprehensive income (loss) (1,828) (595)
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareowners' equity 131,699 220,392
- -----------------------------------------------------------------------------------------------------------------------------------
$ 245,478 $ 358,212
====================================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
Page 23
<PAGE>
<TABLE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
<CAPTION>
Other
Compre- Total
Common Stock hensive- Share-
(Dollars in thousands, --------------------------- Retained Income owners'
except per share amounts) Shares Dollars Earnings (Loss) Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 8,124,055 $ 34,307 $ 156,946 $ 0 $ 191,253
Net income for 1996 3,034 3,034
Dividends declared-$0.48 per share (3,973) (3,973)
Stock option transactions 205,193 4,691 4,691
Foreign currency translation adjustment (294) (294)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 8,329,248 38,998 156,007 (294) 194,711
Net income for 1997 32,925 32,925
Dividends declared-$0.48 per share (3,974) (3,974)
Stock option transactions 135,988 2,778 2,778
Repurchases of common stock (204,200) (1,145) (4,602) (5,747)
Foreign currency translation adjustment (301) (301)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 8,261,036 40,631 180,356 (595) 220,392
Net loss for 1998 (49,208) (49,208)
Dividends declared-$0.48 per share (3,685) (3,685)
Stock option transactions 82,451 1,605 1,605
Repurchases of common stock (1,795,800) (7,782) (28,390) (36,172)
Foreign currency translation adjustment (1,385) (1,385)
Unrealized holding gains on
securities-net of taxes of $97 152 152
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 6,547,687 $ 34,454 $ 99,073 $ (1,828) $ 131,699
===================================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
Page 24
<PAGE>
<TABLE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (49,208) $ 32,925 $ 3,034
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 15,782 13,112 8,996
Gain on disposal of property, plant and equipment (10,876) (3,513)
Deferred income taxes (8,597) (10,470) (3,280)
Results of discontinued operations and
gain on disposal (36,887) (4,355)
Restructuring write-downs 40,489
Net changes in:
Receivables 14,266 26,897 (4,506)
Inventories 6,548 3,364 16,877
Other assets (12,737) 1,584 (1,752)
Accruals and payables (22,822) 39,635 (4,257)
Advances on contracts 207 435 (1,114)
Provision for warranties and losses on contracts (3,832) 1,420 6,688
Environmental remediation (317) (198) (327)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by continuing operating activities (31,097) 68,304 16,004
Net cash used by discontinued operations (11,180) (2,181)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (31,097) 57,124 13,823
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Additions of property, plant and equipment (15,079) (22,177) (48,303)
Purchase of short-term investments (101,046)
Proceeds from sale of short-term investments 55,943
Restricted plant construction funds 3,738 (3,738)
Proceeds from sale of discontinued operations 77,884
Proceeds on real estate sales and assets retirements 16,718 8,475 (1,070)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (43,464) 67,920 (53,111)
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Long-term borrowings 1,642 20,241
Payments on long-term borrowings (544) (1,132) (135)
Proceeds from issuance of common stock 1,605 2,778 4,691
Repurchase of common stock (36,172) (5,747)
Dividends paid (3,685) (3,974) (3,973)
Other (124) (531) (390)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (38,920) (6,964) 20,434
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1,710) 680
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (115,191) 118,760 (18,854)
Cash and equivalents at beginning of year 134,462 15,702 34,556
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 19,271 $ 134,462 $ 15,702
====================================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
Page 25
<PAGE>
<TABLE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<CAPTION>
Year Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other cash flow information:
- ------------------------------------------------------------------------------------------------------------------------------------
Income taxes paid-net of refunds $9,478 $3,143 $5,700
Interest paid 1,098 1,389 1,574
- ------------------------------------------------------------------------------------------------------------------------------------
Noncash investing and financing activities:
- ------------------------------------------------------------------------------------------------------------------------------------
Reclassification of plant held for sale from
"Property, Plant and Equipment" to "Other Assets",
at book value which is below market $6,422
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
Page 26
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include those
of the company and its subsidiaries after elimination of intercompany balances
and transactions. In 1997, the company disposed of its Government Electronics
operating segment which has been reported as discontinued operations, as
described more fully in Note 8.
Cash Equivalents and Investments--Cash equivalents consist of municipal bond
funds and commercial paper acquired with remaining maturity periods of 90 days
or less and are stated at cost plus accrued interest which approximates market
value. Investments consist of high-grade debt securities (AA rating or better)
with maturities greater than 90 days from the date of acquisition and are
classified as "available-for-sale." Investments classified as available-for-sale
are reported at fair market value with unrealized gains or losses excluded from
earnings and reported as a separate component of stockholders' equity, net of
tax, until realized. The company's investment guidelines limit investments with
a single issuer, excluding the U.S. Government or any agency thereof, to the
greater of $5.0 million or 10 percent of the investment portfolio.
Inventories--Inventories are stated at the lower of cost, using first-in,
first-out and average-cost basis, or market. Cost of inventory items is based on
purchase and production cost. Long-term contract costs and selling and
administrative expenses are excluded from inventory. Progress payments are not
netted against inventory.
Property, Plant and Equipment--Property, plant and equipment are stated at cost.
Provision for depreciation and amortization is primarily based on the
straight-line method. Leases which at inception assure the lessor full recovery
of the fair market value of the property over the lease term are capitalized and
amortized over the lease term in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 13 "Accounting for Leases."
Revenue Recognition--Revenues, other than from long-term contracts, are recorded
upon shipment or completion of tasks as specified in the contract. Estimated
product warranty costs are accrued at the time of shipment. Sales and allowable
fees under cost-reimbursement contracts are recorded as costs are incurred.
Long-term contract sales and cost of goods sold are recognized using the
percentage-of-completion method based on the actual physical completion of work
performed and the ratio of costs incurred to total estimated costs to complete
the contract. Any anticipated losses on contracts are charged to earnings when
identified.
Foreign Currency Translation--The functional currency for all foreign operations
is the U.S. dollar, with the exception of the company's subsidiary located in
Japan, which uses the local functional currency. Gains or losses which result
from the process of remeasuring foreign currency financial statements and
transactions into U.S. dollars are included in other income (expense). For the
Japanese subsidiary, the cumulative translation adjustments are recorded
directly in retained earnings. The company incurred net translation gains of
approximately $0.1 million in 1998 and net translation losses of $1.4 million in
1997, resulting primarily from its Asia-Pacific subsidiaries. Translation gains
or losses were not material prior to 1997.
Page 27
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
Forward Exchange Contracts--The company enters into forward exchange contracts
to hedge sales transactions and firm commitments denominated in foreign
currencies. Gains and losses on the forward contracts are recognized based on
changes in exchange rates, as are offsetting foreign exchange gains and losses
on the underlying transactions.
Income Taxes--The consolidated statements of operations include provisions for
deferred income taxes using the liability method for transactions that are
reported in one period for financial accounting purposes and in another period
for income tax purposes.
Per Share Information--Basic earnings per share is computed using the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock (such as stock options) were exercised or
converted into common stock, however, such adjustments are excluded when there
is a loss from continuing operations, as they are considered antidilutive.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Stock-Based Compensation--The company continues to account for stock-based
compensation granted to employees and directors under the intrinsic value method
as defined in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees."
Recently Issued Accounting Standard--In June 1998, the FASB issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains and losses resulting from changes in
the fair market values of those derivative instruments would be accounted for
depending on the use of the instrument and whether it qualifies for hedge
accounting. SFAS 133 will be effective for the company's year ending December
31, 2000. The company enters into forward exchange contracts to hedge sales
transactions and firm commitments denominated in foreign currencies. Management
does not expect this Statement to have a significant impact on the company's
financial condition or results of operations.
Page 28
<PAGE>
2. FINANCIAL INSTRUMENTS AND SHORT-TERM INVESTMENTS
Financial instruments that potentially subject the company to concentrations of
credit risk consist principally of cash and equivalents, short-term investments,
receivables, and financial instruments used in hedging transactions. The company
invests in a variety of financial instruments such as commercial paper and
municipal bond funds, and, by policy, limits the amount of credit exposure with
any one financial institution or commercial issuer. Concentration of credit risk
with respect to trade receivables is limited due to the variety of customers and
market segments into which the company's products are sold, as well as their
dispersion across geographic areas. The company maintains an allowance for
doubtful accounts based upon the expected collectibility of receivables.
The carrying value of cash and equivalents, short-term investments, receivables,
accounts payable and short-term notes payable are a reasonable approximation of
their fair market value due to the short-term maturities of those instruments.
The carrying value of the company's long-term debt approximates fair value based
on the interest rates currently available to the company for long-term debt with
similar terms as those borrowings of the company. Considerable judgment is
required in interpreting market data to develop estimates of fair value, so
these estimates are not necessarily indicative of the amounts that could be
realized or would be paid in a current market exchange.
The company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to reduce its exposure to fluctuations in foreign
exchange rates. At December 31, 1998 and 1997, the company had forward exchange
contracts to sell Japanese Yen with a market value of approximately $14.1
million and $12.4 million, respectively, for a contract amount of $13.8 million
and $12.8 million, respectively. Also at December 31, 1998 and 1997, the company
had forward exchange contracts to purchase Japanese Yen with a market value of
approximately $6.0 million and $1.7 million, respectively, for a contract amount
of $5.9 million and $1.8 million, respectively. These contracts mature within
one year. The market value of forward exchange contracts were obtained from
published foreign exchange market rates. The company's risk in these contracts
is the cost of replacing, at current market rates, these contracts in the event
of default by the other party. Management believes the risk of incurring such
losses is remote as the contracts are entered into with major financial
institutions.
The fair value and the amortized cost of available-for-sale securities at
December 31, 1998, including unrealized holding gains, are presented in the
table which follows. Fair values are based on quoted market prices obtained from
an independent broker. Available-for-dale securities are classified as current
assets and have an average maturity of less than two years. Gross proceeds from
the sale of marketable securities were $55.9 million during 1998. Gross gains
and losses realized on such sales or maturities were not material. For the
purpose of determining gross realized gains and losses, the cost of securities
sold is based upon specific identification.
Unrealized
(in thousands) Amortized cost Market value holding gains
- --------------------------------------------------------------------------------
Corporate debt securities $45,104 $45,353 $249
================================================================================
Page 29
<PAGE>
3. LONG-TERM OBLIGATIONS AND LINES OF CREDIT
Long-term obligations, excluding amounts due within one year, consist of the
following at December 31:
(in thousands) 1998 1997
- -------------------------------------------------------------------------------
Long-term borrowings $ 20,224 $ 18,630
Deferred compensation 291 1,977
Environmental remediation 7,120 7,437
Long-term leases 5,066 5,190
===============================================================================
Total $ 32,701 $ 33,234
===============================================================================
The current portion of long-term obligations is included in current liabilities.
The expected maturity amounts are as follows: 1999, $1,101,000; 2000,
$1,231,000; 2001, $1,167,000; 2002, $1,197,000; 2003, $1,227,000; thereafter,
$27,879,000.
Long-term Borrowings--Consists of three unsecured loans used for the company's
land, building and equipment located in Kawasaki, Japan. The loans are
denominated in Yen. Approximately $6.8 million is payable in monthly
installments through the year 2011, which bears interest at 2.5%. Approximately
$11.7 million and $1.7 million require a balloon payment due in the year 2006
and 2007, respectively, which bear interest at 3.1% and 2.2%, respectively,
payable semiannually.
Deferred Compensation--The company has several nonqualified deferred
compensation and bonus plans covering selected members of management and key
technical employees. Substantially all these plans were terminated as of
December 31, 1998, and the balances classified as currently payable.
Environmental Remediation--As discussed in Note 6, the company is obligated to
remediate groundwater contamination at its Scotts Valley and Palo Alto,
California, facilities. The portion expected to be paid within one year is
included in current liabilities.
Leases--Certain long-term leases for plant facilities are treated as capital
leases for financial statement purposes. The leases expire during the years 2029
to 2056. The company also has noncancellable operating leases for plant
facilities and equipment expiring through the year 2004. These leases may be
renewed for various periods after the initial term.
Payment obligations under existing capital and operating leases as of December
31, 1998 are as follows:
Capital Operating
(in thousands) Leases Leases
- ----------------------------------------------------------------- -----------
Lease payments:
1999 $ 635 $1,657
2000 635 1,326
2001 635 894
2002 635 311
2003 635 24
Remaining years 6,822 13
- -----------------------------------------------------------------------------
Total 9,997 $4,225
===========
Imputed interest (4,795)
- -----------------------------------------------------------------
Present value of lease payments
(including current portion of $136) $ 5,202
=================================================================
Page 30
<PAGE>
3. LONG-TERM OBLIGATIONS AND LINES OF CREDIT (continued)
The company sub-leases a portion of its of its Palo Alto, California, facility
under a short-term operating lease expiring October 2000. In addition, the
company leases a portion of its facility in Kawasaki, Japan, under a short-term
operating lease. Included in other income for 1998 is approximately $1.2 million
of income after expenses from these rental agreements. Rental income was not
material prior to 1998.
<TABLE>
Rent expense included in continuing operations for property and equipment
relating to operating leases is as follows:
<CAPTION>
(in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real property $ 1,129 $ 2,446 $ 2,384
Equipment 864 1,041 782
- ------------------------------------------------------------------------------------------------------
Total $ 1,993 $ 3,487 $ 3,166
======================================================================================================
</TABLE>
Credit Facility Termination--The company previously had arranged with several
banks to provide a $50.0 million unsecured credit facility which was scheduled
to expire on March 31, 1999. During 1998, the company did not borrow under this
credit facility. Due to the operating loss reported in 1998, the company was
technically not in compliance with certain terms under this credit facility. The
company evaluated the proposed revised terms and elected to terminate the
facility based on the company's cash balances and short-term investments.
The Company has letters of credit of $2.1 million of which $0.9 million was
outstanding at December 31, 1998, with approximately $0.6 million collateralized
by specific cash balances.
4. SHAREOWNERS' EQUITY
Stock Repurchase Program--During 1998, the Board of Directors increased its
common stock repurchase authorization from 2,500,000 to 3,500,000 shares. By
December 31, 1998, all 3,500,000 shares have been repurchased, of which
1,795,800 and 204,200 were repurchased in 1998 and 1997, respectively. No shares
were repurchased in 1996.
Common Share Purchase Rights--During 1998, the Board of Directors amended the
company's Common Share Purchase Rights Plan to decrease from 15% to 10% the
threshold level of common stock ownership that would trigger the exercisability
of common share purchase rights under the Rights Plan. For each share of company
common stock outstanding, one Common Share Purchase Right (the Rights) is
attached. The Rights expire October 20, 2006, and may be redeemed by the company
for $0.01 per Right at any time prior to 10 days after a person or group
acquires 10% or more of the company's common stock. The Rights become
exercisable and trade separately from the common stock if any person or group
acquires 10% or more of the company's outstanding common stock, or announces a
tender or exchange offer which would result in such person or group acquiring
10% or more of the company's common stock. When the Rights first become
exercisable as a result of the announcement of a tender or exchange offer, a
holder of a Right will be entitled to buy one share of the company's common
stock for $160. If a person or group not previously approved by the Board of
Directors acquires 10% or more of the company's shares, a holder of a Right
(other than that person or group) will be entitled to buy that number of shares
of common stock from the company which have a market value of twice the $160
exercise price of each Right. If the company is acquired in a merger or other
business combination after any person or group acquires 10% or more of the
company's common stock, each Right will entitle its holder to buy a number of
shares of common stock of the surviving company having a market value of twice
the $160 exercise price. After the acquisition by any person or group of 10% or
more of the company's common stock and up to the time that such person or group
acquires a 50% interest, the company will also have the ability to exchange some
or all of the Rights (other than Rights held by the acquiror) for one share of
common stock per Right at no expense to the holder.
Page 31
<PAGE>
4. SHAREOWNERS' EQUITY (Continued)
Stock Option Plans--The Employee Stock Option Plans (the Plans) provide for
grants of nonqualifying and incentive stock options to certain key employees and
officers. The company may grant options to purchase up to 4,300,000 shares of
common stock. Options are typically granted at the market price on the date of
grant and expire at the tenth anniversary date. One-third of the options granted
are exercisable on each of the second, third and fourth anniversary dates
following the grant. The Plans allow those employees who are subject to the
insider trading restrictions certain limited rights to receive cash in the event
of a change in control. In addition, the Plans permit the award of restricted
stock rights subject to a fixed vesting schedule. The holder of vested
restricted stock has certain dividend, voting, and other shareowner rights. No
restricted stock awards have been made through December 31, 1998.
The Nonemployee Directors Stock Option Plan provides for a fixed schedule of
options to be granted through the year 2005. Nonemployee directors of the
company are automatically granted 3,000 shares of common stock each year that
such person remains a director of the company. The options are granted at the
market price on the date of grant and expire on the tenth anniversary date. The
options granted become exercisable six months after the date of grant. The total
number of shares to be issued under this plan may not exceed 350,000 shares.
Included in the tables below, 21,000 option shares were granted at $26.50 in
1998, 21,000 option shares were granted at $26.88 in 1997 and 21,000 option
shares were granted at $34.63 in 1996.
Stock option transactions included in the Consolidated Statements of
Shareowners' Equity are shown net of retirement of mature shares used in payment
for options exercised and include tax benefits related to sales under stock
option plans of $217,000, $719,000 and $1,161,000 for 1998, 1997 and 1996,
respectively.
<TABLE>
Activity related to all stock option plans is as follows:
<CAPTION>
Weighted Average
1998 Shares Exercise Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Granted 242,000 $25.72
Exercised 82,451 $16.84
Terminated 151,427 $29.67
At December 31:
Outstanding 1,452,062 $27.41
Exercisable 858,765 $26.57
Reserved for future grants 1,056,709
1997
- --------------------------------------------------------------------------------------------------------------------
Granted 242,000 $26.41
Exercised 135,988 $15.14
Terminated 191,309 $34.76
At December 31:
Outstanding 1,443,940 $27.33
Exercisable 693,966 $23.70
1996
- --------------------------------------------------------------------------------------------------------------------
Granted 205,000 $25.54
Exercised 209,393 $17.57
Terminated 328,443 $29.39
At December 31:
Outstanding 1,529,237 $27.32
Exercisable 463,119 $19.11
</TABLE>
Page 32
<PAGE>
4. SHAREOWNERS' EQUITY (continued)
<TABLE>
The following table summarizes information concerning currently outstanding and
exercisable options at December 31, 1998:
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ----------------------------------
Weighted
Average Years Weighted Weighted
Range of Number of Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------- --------------- -------------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C> <C>
$10.00 to $21.63 319,946 5.3 $15.57 233,608 $13.61
$22.75 to $22.75 263,502 5.2 $22.75 263,502 $22.75
$22.81 to $26.88 395,000 8.7 $25.87 49,666 $26.66
$27.00 to $35.88 84,493 7.2 $32.88 52,326 $33.52
$36.75 to $36.75 259,415 6.2 $36.75 174,482 $36.75
$39.50 to $55.00 129,706 6.7 $48.55 85,181 $48.77
- ----------------------- --------------- -------------------- ------------------ ---------------- -----------------
$10.00 to $55.00 1,452,062 6.6 $27.41 858,765 $26.57
======================= =============== ==================== ================== ================ =================
</TABLE>
<TABLE>
As discussed in Note 1, the company applies Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for its plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans. Had compensation cost for the
company's stock option plans been determined based upon the fair value at the
grant date for awards under these plans, and amortized to expense over the
vesting period of the awards consistent with the methodology prescribed under
SFAS 123, "Accounting for Stock-Based Compensation," the company's pro forma net
income (loss) for 1998, 1997 and 1996 would have been $(50,420,000), $31,724,000
and $1,256,000, respectively, or $(6.52), $3.84 and $0.15 per basic and diluted
share, respectively. However, the impact of outstanding non-vested stock options
granted prior to 1995 has been excluded from the pro forma calculation;
accordingly, the 1998, 1997 and 1996 pro forma adjustments are not indicative of
future period pro forma adjustments, when the calculation will apply to all
applicable stock options. The weighted average fair value of options calculated
on the date of grant using the Black-Scholes option-pricing model along with the
weighted average assumptions used are as follows:
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value $7.70 $8.02 $7.96
Dividend yield 2.1% 1.2% 1.5%
Volatility 41.7% 38.1% 37.5%
Risk free interest rate at the time of grant 5.4% 6.1% 6.2%
Expected term to exercise (in months from the vest date) 4.9 4.5 3.5
</TABLE>
The company's calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. The Black-Scholes model used by the
company to calculate option values, as well as other currently accepted option
valuation models, were developed to estimate the fair values of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the company's stock option awards. These models also require highly
subjective assumptions, including future stock price volatility, and expected
time until exercise, which greatly affect the calculated values.
Page 33
<PAGE>
5. INCOME TAXES
<TABLE>
The provision for income taxes includes deferred taxes reflecting the net tax
effects of temporary differences that are reported in one period for financial
accounting purposes and in another period for income tax purposes. Deferred tax
assets are recognized when management believes realization of future tax
benefits of temporary differences is more likely than not. In estimating future
tax consequences, generally all expected future events are considered other than
enactments of changes in the tax law or rates. The components of income (loss)
from continuing operations before federal, state and foreign income taxes
consists of the following:
<CAPTION>
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $ (67,995) $ (10,330) $ (4,662)
Foreign (5,013) 3,368 2,566
- --------------------------------------------------------------------------------------------------------------------
Total $ (73,008) $ (6,962) $ (2,096)
====================================================================================================================
The provision for federal, state and foreign income tax expense (benefits) on
income (loss) from continuing operations consists of the following:
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Current:
U.S. $(16,092) $ 425 $ 1,928
State 286 1,275 (152)
Foreign 506 1,870 1,264
- --------------------------------------------------------------------------------------------------------------------
Total current (15,300) 3,570 3,040
- --------------------------------------------------------------------------------------------------------------------
Deferred:
U.S. (6,273) (4,385) (3,497)
State (2,227) (2,185) (318)
- --------------------------------------------------------------------------------------------------------------------
Total $ (23,800) $ (3,000) $ (775)
====================================================================================================================
Deferred tax assets (liabilities) are comprised of the following at December 31:
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Deferred compensation $ 2,073 $ 2,556 $ 1,915
Loss accruals 20,147 18,041 10,495
Environmental remediation 3,172 3,274 3,147
Uniform capitalization 135 1,212 1,007
Vacation accrual 1,199 1,663 1,580
Net operating loss and tax credits carried forward 8,653
Other 782 3,334 2,111
- --------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets 36,161 30,080 20,255
- --------------------------------------------------------------------------------------------------------------------
Depreciation (191) (2,610) (3,197)
Other (58)
- --------------------------------------------------------------------------------------------------------------------
Gross deferred tax liabilities (191) (2,610) (3,255)
- --------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 35,970 $ 27,470 $ 17,000
====================================================================================================================
</TABLE>
The company has federal and state operating loss carryforwards of approximately
$10.0 million and $12.3 million, respectively, which expire through the year
2019. In addition, the company has federal and state tax credit carryforwards,
related primarily to research credits, totaling approximately $3.7 million and
$0.9 million, respectively. These tax credit carryforward benefits expire
through the year 2019.
Page 34
<PAGE>
5. INCOME TAXES (Continued)
<TABLE>
The differences between the effective income tax (benefit) rate and the
statutory federal income tax (benefit) rate are as follows:
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax (benefit) rate (35.0)% (35.0)% (34.0)%
Export sales benefit (0.1) (6.5) (10.0)
Research credit (0.7) (8.5) (14.6)
Effect of foreign operations taxed at various rates 3.1 9.8 18.7
State taxes (benefit) net of federal tax (1.2) (8.4) (4.8)
Other 1.3 5.5 7.7
====================================================================================================================
Effective tax (benefit) rate (32.6)% (43.1)% (37.0)%
====================================================================================================================
</TABLE>
6. ENVIRONMENTAL REMEDIATION AND OTHER CONTINGENCIES
In 1991 the company recorded a $15.0 million charge for estimated remediation
actions and cleanup costs. The company remains in compliance with the remedial
action plans being monitored by various regulatory agencies at its Scotts Valley
and Palo Alto sites and no additional provision has been recorded since 1991.
Expenditures charged against the provision totaled $317,000, $198,000 and
$327,000 for the years 1998, 1997 and 1996, respectively. While the timing and
ultimate amount of expenditures of restoring the sites cannot be predicted with
certainty, management believes that the provision taken is adequate based on
facts known at this time. Changes in environmental regulations, improvements in
cleanup technology and discovery of additional information concerning these
sites and other sites could affect the estimated costs in the future.
In addition to the above environmental matters, the company is involved in
various legal actions which arose in the ordinary course of its business
activities. Except for the environmental provision noted above, management
believes the final resolution of these matters should not have a material impact
on its results of operations, cash flows, and financial position.
Page 35
<PAGE>
7. EMPLOYEE BENEFIT PLANS
Employees' Investment Plan--The Watkins-Johnson Employees' Investment Plan
covers substantially all employees and provides that the company match
employees' 401(k) salary deferrals up to 3% of eligible employee compensation.
The amount charged to continuing operations was $1,903,000, $2,001,000 and
$1,920,000 in 1998, 1997 and 1996, respectively.
Employee Stock Ownership Plan (ESOP)--The ESOP was established to encourage
employee participation and long-term ownership of company stock. The Board
determines each year's discretionary contribution depending on the performance
and financial condition of the company and is allocated as a percentage of
eligible employee base compensation. All U.S. employees are eligible to
participate in the plan and vesting is immediate. The Board approved a
contribution equal to 1% of eligible employee compensation for 1998, 1997, and
1996, which resulted in charges to continuing operations of $378,000, $657,000
and $639,000, respectively. The ESOP held 181,624 and 229,231 shares of common
stock at December 31, 1998 and 1997, respectively, and there are no unallocated
or unearned shares held by the plan. Shares held by the ESOP are included in the
company's earnings per share computations. Dividends paid with respect to common
stock held by the ESOP are used to purchase additional shares and were not
material for all years presented.
8. BUSINESS SEGMENT REPORTING
In 1997 the company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." The Statement requires that an enterprise's
operating segments be determined in the manner in which management operates the
business. Specifically, financial information is to be reported on the basis
that is used internally by the chief operating decision maker in making
decisions related to resource allocation and segment performance. The company's
reportable segments are operated and managed as strategic business units and are
organized based on products and services. Business units operated at different
locations are aggregated for reporting purposes when their products and services
are similar.
Under SFAS 131, the company's operations were divided into three industry
segments: Semiconductor Equipment, Wireless Communications, and Government
Electronics. As discussed below, the Government Electronics segment was divested
during 1997. Operations in the Wireless Communications segment involve the
development, manufacture and sale of advanced wireless telecommunication
products for cellular service providers, personal communication systems, and
other radio-frequency products for commercial and government communications
requirements. The Wireless Communications segment is composed of the Palo Alto,
California-based Wireless Products Group and the Gaithersburg, Maryland,
Telecommunications Group, including that group's communications-intelligence
business. Operations in the Semiconductor Equipment segment involve the
development, manufacture, sale and service of chemical-vapor-deposition
equipment used in the manufacture of semiconductor products.
Page 36
<PAGE>
8. BUSINESS SEGMENT REPORTING (continued)
On October 31, 1997 the company completed the sale of its Government Electronics
segment to Stellex Industries, Inc. for consideration of $103 million,
consisting mostly of cash. The sale resulted in a pre-tax gain of approximately
$49.9 million. The divested business is reported as discontinued operations in
the accompanying financial statements. Operations of the divested business
included the development, manufacture and sale of advanced microwave devices and
tactical electronic systems and devices for guided-missile programs and other
government applications.
<TABLE>
Management evaluates segment performance based primarily on segment revenues,
pre-tax operating profit or loss before interest and other nonoperating income
and expenses, and return on assets. Sales between continuing segments are not
significant for any year presented. Continuing operations by business segment
are as follows:
<CAPTION>
(in thousands) Year Ended December 31, 1998
- -------------------------------------------------------------------------------------------------------------------
Pre-tax Year-
Income End Capital
Sales (Loss) Assets Additions Depreciation
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Wireless Communications $ 115,219 $(13,697) $ 50,778 $ 7,324 $ 3,655
Semiconductor Equipment 96,981 (80,996) 67,496 7,742 11,664
Corporate 127,204 13 463
- --------------------------------------------------------------------------------------------------------------------
Loss from operations (94,693)
Other income (expense)--net 21,685
- --------------------------------------------------------------------------------------------------------------------
Total $ 212,200 $(73,008) $ 245,478 $ 15,079 $ 15,782
====================================================================================================================
Year Ended December 31, 1997
- --------------------------------------------------------------------------------------------------------------------
Wireless Communications $ 104,817 $ (954) $ 54,408 $ 6,881 $ 2,510
Semiconductor Equipment 186,454 (13,328) 132,528 15,152 10,144
Corporate 171,276 144 458
- --------------------------------------------------------------------------------------------------------------------
Loss from operations (14,282)
Other income (expense)--net 7,320
- --------------------------------------------------------------------------------------------------------------------
Total $ 291,271 $ (6,962) $ 358,212 $ 22,177 $ 13,112
====================================================================================================================
Year Ended December 31, 1996
- --------------------------------------------------------------------------------------------------------------------
Wireless Communications $ 76,683 $ (8,511) $ 50,754 $ 1,941 $ 1,252
Semiconductor Equipment 272,436 7,212 174,549 46,122 7,231
Corporate 68,441 240 513
- --------------------------------------------------------------------------------------------------------------------
Loss from operations (1,299)
Other income (expense)--net (797)
- --------------------------------------------------------------------------------------------------------------------
Total $ 349,119 $ (2,096) $ 293,744 $ 48,303 $ 8,996
====================================================================================================================
</TABLE>
Corporate assets consist primarily of cash, cash equivalents and deferred taxes,
and included in the 1996 balance are net assets of the discontinued Government
Electronics segment.
Page 37
<PAGE>
8. BUSINESS SEGMENT REPORTING (continued)
<TABLE>
Sales to individual customers representing greater than 10% of company
consolidated sales during at least one of the past three years are as follows:
<CAPTION>
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Wireless Communications:
Lucent Technologies, Inc. $ 33,000 $ 20,000 $ 11,000
United States Government 26,000 36,000 28,000
Semiconductor Equipment:
Hyundai Electronics Industries Co., Ltd.
(and affiliates) 11,000 15,000 37,000
Marubeni Hytech (a Japanese distributor) 5,000 21,000 47,000
Sales to unaffiliated customers by geographic area are as follows:
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
United States $ 135,692 $ 169,001 $ 143,510
Export sales from United States:
Europe 6,479 8,924 29,759
Japan 10,770 23,035 65,952
Korea 5,095 29,531 52,572
Other Asia-Pacific countries 12,368 13,955 35,767
Other 9,753 3,307 3,728
Europe 21,429 34,701 9,759
Japan 4,510 2,742 3,312
Other Asia-Pacific countries 6,104 6,075 4,760
- --------------------------------------------------------------------------------------------------------------------
Total $ 212,200 $ 291,271 $ 349,119
====================================================================================================================
</TABLE>
Intercompany transfers of products and services between geographic regions were
$43.2 million, $59.0 million and $37.5 million in fiscal years 1998, 1997 and
1996, respectively, and are accounted for at prices the company believes to be
arm's length.
<TABLE>
Operating profit (loss) and year-end long-lived assets by geographic area are as
follows:
<CAPTION>
Operating
Profit (Loss)
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $(89,302) $(19,385) $(4,231)
Europe 300 3,640 700
Japan (6,376) 185 952
Other Asia-Pacific countries 685 1,278 1,280
- --------------------------------------------------------------------------------------------------------------------
Total $(94,693) $(14,282) $(1,299)
====================================================================================================================
Year-End
Long-Lived Assets
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
United States $72,168 $118,606 $121,483
Europe 1,290 1,729 2,290
Japan 21,915 26,493 30,076
Other Asia-Pacific countries 3,999 3,762 4,159
- --------------------------------------------------------------------------------------------------------------------
Total $99,372 $150,590 $158,008
====================================================================================================================
</TABLE>
Long-lived assets exclude financial instruments, deferred tax assets, and for
1996 exclude the net assets of discontinued operations totaling $29.8 million.
Page 38
<PAGE>
8. BUSINESS SEGMENT REPORTING (continued)
Summarized below are operating results of the discontinued government
electronics business through its sale on October 31, 1997. Intersegment sales
were transferred based on negotiated prices.
Year Ended December 31
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
Net sales $75,700 $89,200
================================================================================
- --------------------------------------------------------------------------------
Gross profit $21,900 $21,100
================================================================================
Income from operations before income taxes $11,500 $ 6,663
Income taxes (4,290) (2,308)
Gain on disposition-net of taxes of $20,219 29,677
- --------------------------------------------------------------------------------
Net income from discontinued operations $36,887 $ 4,355
================================================================================
9. EARNINGS PER SHARE
Basic and diluted earnings per share were computed based solely on the weighted
average shares outstanding for each period.
For 1998, 1997 and 1996 the incremental shares from the assumed exercise of
120,000, 251,000 and 272,000 stock options, respectively, are not included in
computing the dilutive per share amounts because continuing operations resulted
in a loss and such assumed conversion would be antidilutive. Additionally,
weighted average options outstanding to purchase 887,000, 564,000 and 685,000
shares of common stock were not included in the computation of diluted per share
amounts in 1998, 1997 and 1996, respectively, because the weighted average
exercise prices were greater than the average market prices of the common
shares. Weighted average exercise prices of $33.50 in 1998, $39.61 in 1997 and
$39.62 in 1996 exceeded the average market prices of $23.28, $29.75 and $28.62,
respectively.
10. REAL ESTATE TRANSACTIONS
In 1998 the company sold approximately 15 acres of undeveloped land adjacent to
its San Jose, California, facility for a net sales price of $16.0 million
realizing a pre-tax gain of $15.0 million. Due to the downsizing described in
Note 11, the balance of the San Jose facility was vacated and its carrying value
of $6.4 million (which management believes to be less than market value) was
reclassified as held for sale and included in "Other Assets" (long-term) in the
December 31, 1998 Consolidated Balance Sheet. The company expects to sell this
property in 1999. Any future gain associated with the sale of this property will
be treated as from the sale of a corporate asset for segment reporting purposes.
In 1997 the company exchanged a portion of its subleasehold interest at its Palo
Alto, California, facility for consideration consisting of cash and the
sublessor's leasehold rights in the remaining parcels under the lease. The
exchange resulted in a pre-tax gain of $7.6 million.
Page 39
<PAGE>
11. DISCONTINUED PRODUCT LINES AND RELATED RESTRUCTURING CHARGES
<TABLE>
During the third quarter of 1998, the company restructured its operations to
focus on its core atmospheric-pressure chemical-vapor-deposition (APCVD)
operations in its Semiconductor Equipment segment by discontinuing efforts on
its high-density-Plasma initiative. Also, the company's Wireless Communications
segment evaluated its Base2(TM) base-station product, reassessing key customer
needs and market conditions. Inventory, demo equipment, and specialized fixed
assets associated with these discontinued products were written down in the
restructuring. As a result, the company reduced its global work force and
downsized its operations. The company recorded charges of $44.4 million related
to facilities and fixed assets, inventory, severance and other exit costs as
follows:
<CAPTION>
Accrued
Severance, Write Down of
Benefits, and Facilities and Write Down
(in thousands) Other Costs Fixed Assets of Inventory
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Restructuring provision $3,921 $23,370 $17,119
===================== ====================
Amounts paid 2,210
- ---------------------------------------------------------------------
Balance at December 31, 1998 $1,711
=====================================================================
</TABLE>
Included in the third-quarter 1998 asset write-downs is an approximately $6.0
million charge related to the Semiconductor Equipment segment's facility in
Japan, which was written down to fair market value in accordance with SFAS No.
121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." A portion of this facility is being leased to a tenant (see
Note 3).
The company anticipates substantially all accrued severance and benefits will be
paid within a year.
12. SUBSEQUENT EVENTS
On March 1, 1999, Watkins-Johnson announced that, after a strategic review
performed by its investment banking firm, it would pursue a sale of the company,
either in its entirety or through sales of its individual business segments. On
March 4, 1999, Watkins-Johnson announced that it had signed a non-binding letter
of intent to sell its Semiconductor Equipment Group, exclusive of its
discontinued high-density-plasma and certain other assets, to Silicon Valley
Group, Inc. (SVG). The sale is subject to customary due diligence, execution of
a definitive acquisition agreement, Hart Scot Rodino filings, and the approval
of the boards of directors of Watkins-Johnson and SVG. There can be no assurance
that the sale of the Semiconductor Equipment Group to SVG will be completed, nor
can there be any assurance that Watkins-Johnson will be able to complete its
strategy for the sale of the entire company.
Page 40
<PAGE>
13. QUARTERLY FINANCIAL DATA--UNAUDITED
<TABLE>
Unaudited quarterly financial data are as follows:
<CAPTION>
(in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
1998 Quarters 1st 2nd 3rd 4th
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 68,722 $ 53,739 $ 26,257 $ 63,482
Gross profit (loss) 26,176 16,659 (30,638) 21,236
Net income (loss) 9,701 (6,207) (54,414) 1,712
Basic net income (loss) per share 1.17 (0.75) (6.93) 0.26
Diluted net income (loss) per share $ 1.15 $ (0.75) $ (6.93) $ 0.25
- ------------------------------------------------------------------------------------------------------------------------------------
1997 Quarters 1st 2nd 3rd 4th
- ------------------------------------------------------------------------------------------------------------------------------------
Sales $ 67,216 $ 72,679 $ 79,176 $ 72,200
Gross profit 22,905 26,068 30,435 15,188
Income (loss) from continuing operations (318) 886 1,762 (6,292)
Income from discontinued operations 2,796 2,196 1,828 30,067
Net income 2,478 3,082 3,590 23,775
Basic income (loss) per share from
continuing operations (0.04) 0.11 0.21 (0.76)
Diluted income (loss) per share from
continuing operations (0.04) 0.10 0.21 (0.76)
Basic net income per share 0.30 0.37 0.44 2.88
Diluted net income per share $ 0.30 $ 0.36 $ 0.42 $ 2.88
</TABLE>
The first quarter of 1998 includes a pre-tax gain on the sale of undeveloped
land totaling about $15.0 million.
The third quarter of 1998 includes pre-tax charges for discontinued product
lines and related restructuring totaling $44.4 million, as described in Note 11.
In the fourth quarter 1997, due to the continued overcapacity in the
semiconductor memory market and the Asian financial crisis, the company took
certain actions to minimize its financial exposure. The company deferred
shipment and revenue recognition with certain Asian customers as a result of
financing issues with these customers. The company's semiconductor equipment
business was sized to reflect these market changes and resulted in certain
non-performing assets being written off which consist primarily of inventory and
capital assets. The effect of the above actions resulted in a pre-tax impact of
approximately $17.0 million during the fourth quarter.
The total of quarterly amounts for basic and diluted net income per share does
not necessarily equal the annual amount. The computations exclude common
equivalent shares in loss periods since they are antidilutive, and the
computations are based on the average number of basic and diluted common shares
outstanding during each period.
Page 41
<PAGE>
REPORT OF MANAGEMENT
The consolidated financial statements of Watkins-Johnson Company and
subsidiaries were prepared by management, which is responsible for their
integrity and objectivity. The statements were prepared in conformity with
generally accepted accounting principles and, as such, include amounts that are
based on the best judgments of management.
The system of internal controls of the company is designed to provide reasonable
assurance that assets are safeguarded and that transactions are executed in
accordance with management's authorization and are reported properly. The most
important safeguard for shareowners is the company's emphasis in the selection,
training and development of professional accounting managers to implement and
oversee the proper application of its internal controls and the reporting of
management's stewardship of corporate assets and maintenance of accounts in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP, independent auditors, are retained to provide an
objective, independent review as to management's discharge of its
responsibilities insofar as they relate to the fairness of reported operating
results and financial position. They obtain and maintain an understanding of the
company's accounting and financial controls, and conduct such tests and related
procedures as they deem necessary to arrive at an opinion on the fairness of the
financial statements.
The Audit Committee of the Board of Directors, composed solely of Directors from
outside the company, meets periodically, separately and jointly, with the
independent auditors and representatives of management to review the work of
each. The functions of the Audit Committee include recommending the engagement
of the independent auditors, reviewing the scope and results of the audit and
reviewing management's evaluation of the system of internal controls.
W. Keith Kennedy, Jr. Scott G. Buchanan
President and Vice President and
Chief Executive Officer Chief Financial Officer
Page 42
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareowners and Board of Directors
of Watkins-Johnson Company:
We have audited the accompanying consolidated balance sheets of Watkins-Johnson
Company and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, comprehensive income, shareowners'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Watkins-Johnson Company and
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Jose, California
February 5, 1999
(March 4, 1999 as to Note 12)
Page 43
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item concerning the company's
directors is shown under the caption "Election of Directors" in the
company's definitive proxy statement filed with the Commission pursuant
to Regulation 14A.
The information relating to the company's executive officers is
presented in Part I of this Form 10-K under the caption "Executive
Officers of the Registrant".
Item 11. Executive Compensation
See this caption in the definitive proxy statement which the company
has filed with the Commission pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This information is shown under the captions "Security Ownership of
Certain Beneficial Owners & Management" in the company's definitive
proxy statement filed with the Commission pursuant to Regulation 14A.
Item 13. Certain Relationships and Related Transactions
Information concerning certain business relationships is shown under
the caption "Executive Compensation" in the definitive proxy statement
which the company has filed with the Commission pursuant to Regulation
14A. There were no transactions with management for which disclosure
would be required by Item 404 of Regulation S-K.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Consolidated Financial Statements Page
----
Consolidated Statements of Operations
For the Years Ended December 31, 1998, 1997 and 1996 21
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 1998, 1997 and 1996 22
Consolidated Balance Sheets
December 31, 1998 and 1997 23
Consolidated Statements of Shareowners' Equity
For the Years Ended December 31, 1998, 1997 and 1996 24
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996 25-26
Notes to Consolidated Financial Statements 27-41
Report of Management 42
Independent Auditors' Report 43
Page 44
<PAGE>
2. Financial Statement Schedules Page
----
Independent Auditors' Report 48
II Valuation and Qualifying Accounts and Reserves
For the Years Ended December 31, 1998, 1997 and 1996 49
Schedules not listed above are omitted because of the absence of
conditions under which they are required or because the required
information is included in the financial statements or in the notes
thereto.
3. Exhibits
A list of the exhibits required to be filed as part of this report is
set forth in the Exhibit Index, which immediately precedes such
exhibits. The exhibits are numbered according to Item 601 of Regulation
S-K. Exhibits incorporated by reference to a prior filing are
designated by an asterisk.
------------------------
(b) Reports on Form 8-K and 8-A/A were filed on December 14, 1998. The
reports are referenced as Exhibit 10.16 and Exhibit 10.17,
respectively, in the Exhibit Index. The report 8-K contains disclosures
regarding the December 10, 1998 Board of Director approval and
execution of an amendment to the company by-laws and to the Rights
Agreement, dated September 30, 1996, between the company and
ChaseMellon. Form 8-A/A was filed for registration of the amended
common stock purchase rights. No other reports on Form 8-K were
required to be filed during the last quarter of the period covered by
this report.
(c) The exhibits required to be filed by Item 601 of Regulation S-K are the
same as Item 14(a)3 above.
(d) Financial statement schedules not included herein have been omitted
because of the absence of conditions under which they are required or
because the required information is included in the financial
statements or in the notes thereto.
Page 45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this annual
report to be signed on its behalf by the undersigned, thereunto duly authorized.
WATKINS-JOHNSON COMPANY
-------------------------------
(Registrant)
Date: March 8, 1999 By /s/ Dean A. Watkins
-------------- ---------------------
Dean A. Watkins
Chairman of the
Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Principal Executive Officer:
/s/ W. Keith Kennedy, Jr. President and March 8, 1999
- ---------------------------- Chief Executive Officer --------------
W. Keith Kennedy, Jr.
Principal Financial and Accounting Officer:
/s/ Scott G. Buchanan Vice President, March 8, 1999
- ---------------------------- Chief Financial Officer --------------
Scott G. Buchanan and Treasurer
Page 46
<PAGE>
Signature Title Date
--------- ----- ----
/s/ H. Richard Johnson Director March 8, 1999
- ---------------------------- --------------
H. Richard Johnson
/s/ John J. Hartmann Director March 11, 1999
- ---------------------------- --------------
John J. Hartmann
/s/ Raymond F. O'Brien Director March 11, 1999
- ---------------------------- --------------
Raymond F. O'Brien
/s/ William R. Graham Director March 11, 1999
- ---------------------------- --------------
William R. Graham
/s/ Robert L. Prestel Director March 11, 1999
- ---------------------------- --------------
Robert L. Prestel
/s/ Gary M. Cusumano Director March 11, 1999
- ---------------------------- --------------
Gary M. Cusumano
Page 47
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareowners and Board of Directors of Watkins-Johnson Company:
We have audited the consolidated financial statements of Watkins-Johnson Company
and subsidiaries as of December 31, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998, and have issued our report thereon
dated February 5, 1999 (March 4, 1999 as to Note 12); such consolidated
financial statements and report are included elsewhere in this annual report on
Form 10-K. Our audits also included the consolidated financial statement
schedule of Watkins-Johnson Company and subsidiaries, listed in Item 14(a)2.
This consolidated financial statement schedule is the responsibility of the
company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such consolidated financial statement schedule taken as
a whole, presents fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
San Jose, California
February 5, 1999
(March 4, 1999 as to Note 12 of the
Consolidated Financial Statements)
Page 48
<PAGE>
<TABLE>
Schedule II
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions(1) Period
- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
1998
Allowance for doubtful accounts $ 3,175,923 $ 1,731,422 $ 1,553,090 $ 3,354,255
Product warranty reserve 13,423,700 6,168,000 13,299,600 6,292,100
1997
Allowance for doubtful accounts 746,720 2,467,656 38,453 3,175,923
Product warranty reserve 14,825,300 10,134,000 11,535,600 13,423,700
1996
Allowance for doubtful accounts 633,798 119,649 6,727 746,720
Product warranty reserve 7,193,500 20,095,300 12,463,500 14,825,300
<FN>
(1) With respect to the allowance for doubtful accounts, deductions represent
write-off of uncollectible accounts receivables. With respect to the product
warranty reserve, deductions represent costs incurred for warranty repairs plus
adjustments for expiring warranties.
</FN>
</TABLE>
Page 49
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3.1 *Articles of Incorporation of Watkins-Johnson Company, as
amended May 8, 1989.
3.2 *By-Laws of Watkins-Johnson Company, as amended and restated
on December 10, 1998 (Exhibit 3(ii) to Form 8-K filed on
December 14, 1998, Commission File No. 1-5631).
4.1 *Shareowners' Rights Agreement dated as of September 30, 1996
Between Watkins-Johnson Company and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent (Report on Form 8-K, filed
on October 1, 1996, Commission File No.1-5631).
4.2 *Amendment No. 1 to Rights Agreement, dated as of December 10,
1998, to Rights Agreement, dated as of September 30, 1996,
between the Watkins-Johnson Company ChaseMellon Shareholder
Services, L.L.C., as Rights Agent. (Filed as Exhibit 4.1 to
Form 8-K filed on December 14, 1998, Commission File No.
1-5631).
10 Material Contracts
10.1 *Lease and Agreement between Lindco Properties Company and
Watkins-Johnson Company commencing May 1, 1969 (Exhibit (b) I
to Form 10-K for 1969, Commission File No. 2-22436).
10.2 *Lease and Agreement between Morrco Properties Company and
Watkins-Johnson Company dated October 31, 1975 (Exhibit 2(c)
to Form 10-K for 1976, Commission File No. 1-5631).
10.3 *Watkins-Johnson Company 1976 Stock Option Plan, as amended
September 28, 1987 (Appendix A to the company's definitive
proxy statement dated March 1, 1988 filed with the Commission
pursuant to Regulation 14A).
10.4 *Watkins-Johnson Company 1989 Stock Option Plan for
nonemployee directors (Appendix A to the company's definitive
proxy statement dated February 28, 1990 filed with the
Commission pursuant to Regulation 14A).
10.5 *Watkins-Johnson Company 1976 Stock Option Plan amended and
renamed as the 1991 Stock Option and Incentive plan (Appendix
A to the company's definitive proxy statement dated February
28, 1991 filed with the commission pursuant to Regulation
14A).
10.6 *Watkins-Johnson Company Credit Agreement covering the period
of November 30, 1995 through December 8, 1998, ABN-AMRO BANK
N.V. as Agent (Exhibit 10-a to the 1996 Third Quarter Form
10-Q, Commission File No. 1-5631).
10.7 *Loan Agreement dated as of February 9, 1996 (English
Translation) between Watkins-Johnson International Japan K.K.
and The Bank of Yokohama, LTD, including Loan Guaranty
Agreement with Watkins-Johnson Company dated January 31, 1996
(Exhibit 10-b to the 1996 Third Quarter Form 10-Q, Commission
File No. 1-5631).
Page 50
<PAGE>
Exhibit
Number Description
------ -----------
10.8 *Loan Agreement dated as of June 12, 1996 (English
Translation) between Watkins-Johnson International Japan K.K.
and The Japan Development Bank, including Loan Guaranty
Agreement with Watkins-Johnson Company dated June 12, 1996
(Exhibit 10-c to the 1996 Third Quarter Form 10-Q, Commission
File No. 1-5631).
10.9 *First Amendment to Watkins-Johnson Company Credit Agreement
covering the period of November 30, 1995 through December 8,
1998, ABN-AMRO BANK N.V. as Agent (original agreement filed
as Exhibit 10-a to the 1996 Third Quarter Form 10-Q,
Commission File No. 1-5631; first amendment filed as Exhibit
10-a to the 1997 First Quarter Form 10-Q, Commission File No.
1-5631).
10.10 *Second Amendment to Watkins-Johnson Company Credit Agreement
covering the period of November 30, 1995 through December 8,
1998, ABN-AMRO BANK N.V. as Agent (original agreement filed
as Exhibit 10-a to the 1996 Third Quarter Form 10-Q,
Commission File No. 1-5631; second amendment filed as Exhibit
10-a to the 1997 Second Quarter Form 10-Q, Commission File
No. 1-5631).
10.1l *Stock Purchase Agreement dated as of August 29, 1997 by and
among Registrant and SMS and TSMD Acquisition Corp. (original
agreement filed as Exhibit 99.1 of Report on Form 8-K, filed
on November 14, 1997, reporting the disposition of assets
effective October 31, 1997, Commission File No. 1-5631).
10.12 *Watkins-Johnson Company Unaudited Pro Forma Condensed
Consolidated Financial Information filed as an amendment to
Report on Form 8-K, filed on November 14, 1997, reporting the
disposition of assets effective October 31, 1997 and Stock
Purchase Agreement dated as of August 29, 1997 by and among
Registrant and SMS and TSMD Acquisition Corp., Commission
File No. 1-5631 (Exhibit 10-x originally filed as Report on
Form 8-K/A, filed on January 13, 1998, Commission File No.
1-5631).
10.13 *Asset Purchase Agreement between Watkins-Johnson Company And
Samsung Semiconductor, Inc. dated as of December 31, 1997.
(Filed as Exhibit 10-y to the 1997 Form 10-K, Commission File
No. 1-5631).
10.14 *Assignment of Lease Agreement by and between Taylor Woodrow
Property Company, Inc. ("Assignor") and Watkins-Johnson
Company ("Assignee") dated as of December 30, 1997. (Filed as
Exhibit 10-z to the 1997 Form 10-K, Commission File No.
1-5631).
10.15 *Form 8-K filed on September 10, 1998. The report contains
disclosures regarding the company's announcement of
restructuring plans and related third quarter 1998 charges.
(Commission File No. 1-5631).
10.16 *Form 8-K filed on December 14, 1998. The report contains
disclosures regarding the December 10, 1998 Board of Director
approval to amend and restate the company By-Laws and to
amend the Rights Agreement, dated September 30, 1996, between
the company and ChaseMellon.(Commission File No. 1-5631).
10.17 *Form 8-A/A filed on December 14, 1998. Form 8-A/A was filed
for the registration of the amended common stock purchase
rights approved by the Board of Directors on December 10,
1998 (Commission File No. 1-5631).
Page 51
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Exhibit
Number Description
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10.18 Purchase and Sale Agreement, dated May 2, 1997, by and among
Watkins-Johnson Company and CarrAmerica Realty for sale of
undeveloped land in San Jose, California, including the
August 15, 1997 First Amendment to and Reaffirmation of
Purchase and Sale Agreement.
10.19 Resolution of the Board of Directors of Watkins-Johnson,
effective December 31, 1998, for the termination of the
company's 1994 Top Management Deferred Compensation Plan and
the company's Annual Top Management Incentive Bonus Plan.
10.20 Form of Severance Agreement, dated September 28, 1998, by and
between Watkins-Johnson Company and the following officers of
the company: Dr. Patrick J. Brady, Malcolm J. Caraballo, and
Robert G. Hiller.
10.21 Amended and Restated Employment Agreement made as of March 2,
1998 and amended and restated in its entirety effective as of
January 25, 1999 by and between W. Keith Kennedy and
Watkins-Johnson Company.
10.22 Form of employment Agreement, dated February 22, 1999, by and
between Watkins-Johnson Company and the following officers of
the company: Scott G. Buchanan, Dr. Frank E. Emery, Darryl T.
Quan and Claudia D. Kelly.
10.23 Form of Amended and Restated Severance Agreement originally
dated September 28, 1998 and amended and restated in its
entirety effective as of January 25, 1999 by and between
Watkins-Johnson Company and the following officers of the
company: Dr. Frank E. Emery, Darryl T. Quan and Claudia D.
Kelly.
10.24 Amended and Restated Severance Agreement originally dated
September 28, 1998 and amended and restated in its entirety
effective as of January 25, 1999 by and between
Watkins-Johnson Company and Scott G. Buchanan.
10.25 Terms of Employee Retention Program dated March 1, 1999.
21 Subsidiaries of Watkins-Johnson Company.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
* Incorporated by reference to exhibit indicated for each item.
Page 52
Exhibit 10.18
PURCHASE AND SALE AGREEMENT
This Agreement is entered into as of the 2nd day of May 1997, by
and among Watkins-Johnson Company, a California corporation ("Seller"), and
CarrAmerica Realty Corporation, a Maryland corporation and/or its assigns
("Buyer") and is as follows:
Terms and Conditions of Sale
1. Sale. Seller agrees to sell and convey to Buyer "As Is"
(defined below), and Buyer agrees to purchase from Seller "As Is", for the
purchase price (set forth below), approximately 14.6 net acres of raw land,
located at Trimble Road and Orchard Parkway, in San Jose, California, as shown
on Parcel Map, filed in Book 415 of Maps, pages 40 and 41, Parcel B in Santa
Clara County Records, (the "Property") on all of the terms and conditions set
forth in this Agreement.
2. Purchase Price and Terms of Payment. The Purchase Price for
the Property shall be Seventeen Million One Hundred Seventy Thousand and no/100
Dollars ($17,170,000.00) (the "Purchase Price").
2.1. Within three (3) business days after execution of
this Agreement by both parties, Buyer shall deposit with Escrow Holder (defined
below) the amount of $500,000 as a deposit against the Purchase Price (the
"Deposit"). Said amount shall be placed into an interest-bearing account, with
interest for the benefit of Buyer.
2.3 On or before the Closing Date (as defined below),
Buyer shall deposit with Escrow Holder the balance of the Purchase Price, as
well as Buyer's share of closing costs.
3. Escrow and Closing.
3.1. Opening of Escrow. Within one (1) business day after
the date hereof Buyer shall open escrow (unless previously opened by Seller)
with Santa Clara Land Title, 701 Miller Street, San Jose, California 95110 (the
"Escrow Holder"), escrow officer Linda Tugade, by the deposit of the Deposit and
a copy of this Agreement with the Escrow Holder. Escrow Holder shall place the
Deposit in an interest bearing account, with said interest for the benefit of
Buyer. Seller and Buyer agree to prepare and execute such joint escrow
instructions as may be necessary and appropriate to close the transaction in
accordance with the terms of this Agreement. Should said instructions fail to be
executed as required, Escrow Holder shall be and hereby is directed to close
escrow pursuant to the terms and conditions of this Agreement.
3.2. Close of Escrow. The closing of the escrow ("Close of
Escrow"), which shall mean the date on which the deed transferring title is
recorded, shall occur within one (1) business day of the satisfaction of the
conditions stated in Paragraphs 5 and 6, but in no event
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later than June 10, 1997 (the "Closing Date"), unless the parties mutually agree
otherwise in writing.
3.3. Delivery of Seller's Documents. On or before Closing
Date, Seller shall deposit with Escrow Holder all of the following: (i) the
fully executed and acknowledged grant deed described in subparagraph 5.2 hereof;
(ii) Seller's escrow instructions sufficient to enable Escrow Holder to close
the escrow in accordance with the terms of this Agreement, (iii) the affidavits
described in subparagraph 5.4 hereof; and (iv) any other documents, records, or
agreements called for hereunder that have not previously been delivered.
3.4. Delivery of Buyer's Documents and Funds. On or before
Closing Date, Buyer shall deposit with Escrow Holder all of the following: (i)
the balance of the Purchase Price, as well as Buyer's share of closing costs;
(ii) Buyer's escrow instructions sufficient to enable Escrow Holder to close the
escrow in accordance with the terms of this Agreement; and (iii) any other
documents, records, agreements, or funds called for hereunder that have not
previously been delivered.
3.5. Prorations. Real property taxes of the Property shall
be prorated as of the Closing Date.
3.6. Closing Costs. Each party shall pay their own
attorney's fees associated with the negotiation of this Agreement. Recording and
Escrow fees shall be paid by Seller. The County transfer tax shall be paid by
Seller and the city transfer tax shall be paid 50% each by Buyer and Seller. All
other closing costs not specifically allocated herein to Buyer or Seller, shall
be divided and paid 50% each by Buyer and Seller.
3.7 Traffic Mitigation Costs. At the Close of Escrow,
$1,000,000 of the Purchase Price will be retained by Escrow Holder in an
interest-bearing account for the benefit of Seller ("Traffic Mitigation
Account") to be drawn from by Buyer for any reasonable traffic mitigation costs
attributed directly to the Property being developed by Buyer at a .40 FAR ratio
or less ("Traffic Mitigation Costs") where the Traffic Mitigation Costs exceed
$1,000,000. Buyer is to pay for the first $1,000,000 of Traffic Mitigation Costs
before drawing any money from the Traffic Mitigation Account. Traffic Mitigation
Costs shall mean any onsite and offsite transportation roadway improvements and
traffic impact fees attributed directly to the development of the Property.
Traffic Mitigation Costs for either the first $1,000,000 or from the Traffic
Mitigation Account shall not include any onsite traffic and transportation
roadway improvements. For purposes of this paragraph, "onsite" shall mean
improvements to be located exclusively within the boundaries of the property.
All requests for any draws on the Traffic Mitigation Account by Buyer shall also
be copied to Seller. On October 21, 1997, the remaining balance of funds in the
Traffic Mitigation Account along with any interest earned shall be released to
Seller except to the extent Buyer can establish at that time from a traffic
mitigation plan approved by the City of San Jose for the Property that
additional Traffic Mitigation Costs eligible from the Traffic Mitigation Account
as defined above will be required. Then a sum equal to the reasonable estimate
by Buyer of those Traffic Mitigation Costs not yet expended shall remain in the
Traffic Mitigation Account for draws by Buyer, up to May 1, 1998, at which time
the remaining balance of funds in the Traffic Mitigation Account along with any
interest earned
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thereon shall be released to Seller. Seller shall also have the right to audit
Buyer's requests for draws from the Traffic Mitigation Account to determine
that: (a) Buyer has expended its first $1,000,000 on Traffic Mitigation Costs
and those expenditures are for only Traffic Mitigation Costs required by the
City of San Jose related directly to the development of the Property; and (b)
any draws from the Traffic Mitigation Account are only for legitimate Traffic
Mitigation Costs as defined in (a) above. Seller shall not be responsible for
any Traffic Mitigation Costs or claims for costs over and above the $1,000,000
placed in the Traffic Mitigation Account.
4. Title and Other Contingencies.
4.1. Title to be Conveyed. Seller shall convey a fee title
interest in the Property, by grant deed to Buyer at Close of Escrow, subject
only to the Approved Exceptions (as hereinafter defined).
4.2. Title Insurance. Seller, at Seller's expense, shall
deliver to Buyer not later than five (5) calendar days from the date hereof a
preliminary report (the "Preliminary Report") issued by Escrow Holder ("Title
Company") and dated no earlier than as of fifteen (15) days prior to the date of
this Agreement, together with legible copies of all documents constituting
exceptions to title referred to in the Preliminary Report. Buyer shall have a
period of fifteen (15) days ("Acceptance Period") after Seller's delivery of the
Preliminary Report in which to review and approve same. Buyer shall advise
Seller within the Acceptance Period as to any exceptions to title that are
acceptable to Buyer. If Buyer fails to give notice of any exceptions to the
Preliminary Report within the Acceptance Period, this will be deemed acceptance
of the Preliminary Report by Buyer. Upon receipt of notice of Buyer's approval
and objections to title, Seller may elect to remove any exceptions to title
objected to by Buyer prior to Closing Date, by giving notice to Buyer within two
(2) business days after delivery to Seller of Buyer's objections. If Seller does
not so notify Buyer within such period, Buyer may elect either (i) to proceed
with the purchase and waive its title objections, or (ii) to terminate this
Agreement and receive back any deposits made by Buyer. All exceptions to title
set forth in the Preliminary Report that are approved by Buyer pursuant to this
subparagraph 4.2 shall be hereinafter collectively referred to as the "Approved
Exceptions."
4.3. Form of Title Policy. Upon Close of Escrow, Title
Company shall issue at Seller's expense a standard coverage CLTA owner's policy
of title insurance without extended coverage (the "Title Policy") in the amount
of the Purchase Price, insuring that title to the Property is vested in Buyer,
subject only to the Approved Exceptions. Buyer shall pay for the cost of any
title insurance in excess of the cost(s) of the Title Policy and the cost of all
endorsements requested by Buyer including any additional premium charge(s)
imposed by any title company in the event the Title Policy is not issued, unless
caused by willful default of Seller. Notwithstanding the foregoing, Buyer may,
in its sole discretion, elect to obtain ALTA extended coverage, which shall be
at Buyer's sole expense, together with such endorsements as Buyer may reasonably
require.
4.4. Inspection and Feasibility. Buyer shall have from the
date of this Agreement until close of business on June 6, 1997 (the "Inspection
Period") in which to conduct inspections and feasibility studies of the Property
which may include, but not be limited to,
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surveyors, soils inspections, environmental site assessment, engineering, and
any other physical and environmental tests and inspections which Buyer may elect
to undertake, all at Buyer's sole cost. Buyer shall provide Seller with a plan
outlining the particulars of its proposed inspection of the Property ("Work
Plan"). Buyer shall not proceed with implementing the Work Plan without first
obtaining Seller's written approval, which shall not be unreasonably withheld.
If within the Inspection Period, Buyer for any reason determines that the
Property is not appropriate for its purposes, Buyer shall notify Seller in
writing, and escrow shall be terminated in accordance with subparagraph 5.7
hereof. Failure of written notice of rejection of the Property by Buyer within
the Inspection Period shall be deemed acceptance by Buyer. For said Inspection
Period, Seller grants Buyer and/or Buyer's nominees or consultants, engineers,
and other agents and contractors the right to enter upon the Property during
reasonable business hours for the purpose of conducting such examinations and
tests as approved in the Work Plan. Buyer shall keep the Property free and clear
of any mechanic's liens arising out of Buyer's entry on the Property. Buyer
represents and warrants that Buyer carries not less than $1,000,000 commercial
general liability insurance with contractual liability endorsement to cover this
Agreement which will also cover any person accessing the Property for Buyer's
inspection and feasibility hereunder. Buyer shall deliver evidence of such
insurance coverage to Seller before any such access. Seller shall cooperate with
Buyer in facilitating Buyer's investigation at no cost to Seller, including
obtaining information from and approvals for testing from governmental
authorities. Buyer shall indemnify Seller and hold Seller harmless from the
negligence or willful misconduct of Buyer or Buyer's agents on the Property or
any damage, loss, claim, lien cost or expense including attorneys' fees and
costs arising from the exercise by Buyer or its employees, consultants, agents,
or representatives of access to the Property for inspection and feasibility
under this Agreement. Any inspection, test or other study or analysis of the
Property under this paragraph shall be performed at Buyer's expense and in
strict accordance with applicable law. Buyer agrees at its expense to restore
the Property from any damage or material alteration caused by any inspections or
tests ordered by Buyer or its agents or consultants. Buyer agrees to provide
Seller, upon Seller's request, with a copy of any written inspection or test
report or summary Buyer has caused to have done or received regarding the
Property, provided such material shall be delivered to Seller without any
representations or warranties from Buyer, and Seller agrees it shall not rely on
such material without the prior written consent of the party preparing same.
4.5. Documents. Upon execution of this Agreement, unless
provided earlier Seller shall provide the following documents to Buyer: 1.
Post-Closure Report To San Jose Fire Department Permit No. CR361012595, prepared
by C.H.A.S.E. dated July 1995, covering Seller's neighboring property. 2. Phase
II Investigation dated September 11, 1992 by Watkins-Johnson Environmental,
covering Seller's neighboring property. In addition to the above, Seller shall
make a reasonable effort to gather documents it may have regarding the Property
and give to Buyer access at Seller's Palo Alto offices to those documents for
inspection and copying at Buyer's expense. These documents are provided by
Seller for informational purposes only, and Seller makes no representation or
warranty with respect to the truth, accuracy or completeness of any matter or
information set forth in such documents and only represents that it has not
knowingly falsified the documents.
4.6 Hewlett-Packard and Watkins-Johnson Exchange of
Easements Agreement. On or about February 8, 1994, Seller entered into a road
extension and exchange of
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easements agreement with Hewlett-Packard Company, a copy of which is attached
hereto as Exhibit A ("Hewlett-Packard Agreement") whereby Seller agreed to
exchange easements and property interests, cooperate in the application for land
use approvals, dedication of land to the City of San Jose, and Hewlett-Packard
Company's payment of all costs associated with this agreement including, inter
alia, improving Orchard Parkway along Seller's frontage, costs incurred in
completing the dedications described in the Hewlett-Packard Agreement, including
engineering, mapping and title processing costs, the physical realignment of
Seller's driveways to Orchard Parkway and Trimble Road, and to provide in kind
and at its cost the paving and other improvements necessary to match the
existing and no changed driveway. Seller also agrees to cooperate in
applications to the City for the proposed land use approvals. Seller does hereby
assign to Buyer, Seller's rights and obligations it has pursuant to the
Hewlett-Packard Agreement as it pertains to the Property, and as part of Exhibit
A hereto is providing a written statement from Hewlett-Packard acknowledging (a)
that the Hewlett-Packard Agreement is in the form attached as Exhibit A and has
not been changed; (b) the Hewlett-Packard Agreement is still in full force and
effect; and (c) Hewlett-Packard consents to the assignment set forth in this
sentence. Seller retains any rights and obligations it has pursuant to the
Hewlett-Packard Agreement as it pertains to contiguous property owned by Seller
and represent that the retained rights are not in conflict with or interfere
with the rights being assigned to Buyer in this subparagraph 4.6, and will
cooperate regarding the retained rights in the contiguous property so the
Hewlett-Packard Agreement can be fulfilled in all respects.
5. Buyer's Conditions to Close. For Buyer's sole benefit,
Buyer's obligation to complete the purchase of the Property is subject to
satisfaction of the following conditions at or prior to the Closing Date, unless
waived by Buyer in writing:
5.1. Delivery of Documents, Etc. Seller shall have timely
performed its obligations under subparagraph 3.3 hereof.
5.2. Delivery of Deed. Seller shall have executed,
acknowledged, and delivered into Escrow for recording and subsequent delivery to
Buyer, a grant deed ("Deed") to the Property in recordable form in the form
attached hereto as Exhibit B, conveying Seller's title to the Property to Buyer
subject only to the Approved Exceptions.
5.3. Title Policy. Title Company shall be ready, willing,
and able to issue the Title Policy.
5.4. Affidavit. Seller shall have executed and delivered
to Escrow Holder an affidavit or affidavits satisfying the requirements of
Section 1445 of the Internal Revenue Code of 1986, as amended, as well as
California Revenue and Taxation Code Sections 18661, et seq.
5.5. Condition of the Property. Except as referenced in
paragraph 10, there shall not be any material change in the Property from the
end of the Inspection Period to the Close of Escrow unless caused by Buyer or
its agents.
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5.6. Seller's Performance. Seller shall have performed all
of the other material terms and conditions to be performed by Seller prior to
the Closing Date under the terms of this Agreement, including but not limited to
that Seller's representations and warranties in Paragraph 8 are true and correct
as of the Close of Escrow.
5.7. Termination of Escrow. If any condition described in
this Paragraph 5 is not timely satisfied (or waived by Buyer in writing) on or
prior to the Closing Date, then (i) the Escrow shall terminate immediately upon
receipt by Escrow Holder of notification from Buyer of the failure of such
condition, and Buyer and Seller shall share equally any applicable escrow
cancellation fees, (ii) Escrow Holder shall return all instruments and documents
deposited into the Escrow to the parties depositing the same, (iii) Escrow
Holder shall return to Buyer any funds deposited by Buyer, less only Buyer's
share of applicable escrow cancellation fees, if any, and (iv) neither party
shall have any further rights or obligations under this Agreement, except to the
extent that the failure of a condition also constitutes a default by Seller with
respect to any of Seller's covenants or obligations under this Agreement.
6. Seller's Conditions to Close. For Seller's sole benefit,
Seller's obligation to complete the sale of the Property is subject to
satisfaction of the following conditions at or prior to the Closing Date, unless
waived by Seller in writing:
6.1. Delivery of Documents, Etc. Buyer shall have timely
performed its obligations under Subparagraph 3.4 hereof.
6.2. Receipt of Purchase Price. Title Company shall have
received the Purchase Price for the Property.
6.3. Buyer's Performance. Buyer shall have performed all
of the other terms and conditions to be performed by Buyer prior to the Closing
under the terms of this Agreement, including but not limited to that Buyer's
representations and warranties in Paragraph 7 are true and correct as of the
Close of Escrow.
6.4. Termination of Escrow. If any condition described in
this Paragraph 6 is not timely satisfied (or waived by Seller in writing) on or
prior to Closing Date and the Paragraph 5 conditions have been satisfied, (i)
the Escrow shall terminate immediately upon receipt by Escrow Holder of
notification from Seller of the failure of such condition, (ii) Escrow Holder
shall return all instruments and documents deposited into the Escrow to the
parties depositing the same, and (iii) neither party shall have any further
rights or obligations to the other under this Agreement, except to the extent
that a failure of a condition also constitutes a default by Buyer with respect
to any of Buyer's covenants or obligations under this Agreement.
7. Buyer's Representations and Warranties. Buyer hereby
represents and warrants to Seller, effective both as of the date of this
Agreement and as of Close of Escrow:
7.1. Buyer's Due Organization and Authorization. Buyer and
those individuals and entities signing this Agreement on behalf of Buyer,
respectively have the right, power, and authority to make and perform their
obligations under this Agreement. The
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execution, delivery, and performance of this Agreement does not violate any
contract, agreement, or commitment to which any party comprising Buyer is a
party or by which any party comprising Buyer is bound.
8. Seller's Representations and Warranties. Seller hereby
represents and warrants to Buyer, effective both as of the date of this
Agreement and as of Close of Escrow:
8.1. Seller's Due Organization and Authorization. Seller
and those individuals and entities signing this Agreement on behalf of Seller,
respectively have the right, power, and authority to make and perform their
obligations under this Agreement. The execution, delivery, and performance of
this Agreement does not violate any contract, agreement, judicial order, or
commitment to which any party comprising Seller is a party or by which any party
comprising Seller is bound which affect the Property.
8.2. No Litigation or Proceeding. Seller represents and
warrants that there is, to its knowledge, no litigation or governmental or
agency investigation or governmental or agency proceeding including condemnation
pending, nor, to the knowledge of Seller, threatened against Seller or the
Property which would impair or adversely affect Seller's ability to perform its
obligations under this Agreement.
8.3. Documents. All documents delivered to Buyer by Seller
pursuant to this Agreement are or will be to Seller's knowledge true and correct
copies of originals, to the extent not the originals thereof, and any and all
information supplied to Buyer by Seller in accordance with this Agreement and
all statements or representations made by Seller herein are and will be to
Seller's reasonable knowledge true, complete, and accurate in all material
respects except as specifically qualified otherwise in this Agreement.
8.4. Tax Withholding. Seller is not subject to tax
withholding in connection with this transaction under the Internal Revenue Code
or other federal or state law.
8.5. Bankruptcy or Insolvency. Seller has not made a
general assignment for the benefit of creditors, filed any voluntary petition in
bankruptcy or suffered the filing of an involuntary petition by its creditors,
suffered the appointment of a receiver to take possession of substantially all
of its assets, suffered the attachment or other judicial seizure of
substantially all of its assets, admitted its inability to pay its debts as they
come due, or made an offer of settlement, extension, or compromise to its
creditors generally.
8.6. No Leases, etc. To Seller's knowledge there are no
leases, contracts or permits that affect the Property other than those disclosed
in this Agreement.
8.7. Hazardous Materials. To Seller's knowledge there are
no Hazardous Materials (as defined in Paragraph 26 below) located on the
Property in violation of applicable laws in existence.
The term "Seller's knowledge" or similar phrases, as
used in this Agreement, shall refer to the actual, present knowledge of David M.
Burnham, Director of Treasury and
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Corporate Real Estate for Seller, as of the date of this Agreement without any
duty of investigation or inquiry of any kind or nature whatsoever.
Buyer agrees that if, at any time prior to the Closing Date,
it has knowledge of any information which would require the qualification of any
of the above representations and warranties for such representation and warranty
to be trued, it shall immediately notify Seller in writing of such information.
If Buyer has knowledge of the incorrectness of any representation or warranty
made by Seller in the Agreement prior to Close of Escrow and fails to so notify
Seller prior to the Closing Date, then such representation or warranty shall be
deemed to be stricken from this Agreement ab initio and shall be of no further
force or effect. Seller shall have the right to qualify such representations and
warranties with any information it receives concerning such representations and
warranties after the date of this Agreement; but if it does so then Buyer shall
have three (3) business days from such notice to elect to either terminate this
Agreement and the Escrow pursuant to subparagraph 5.7 herein or agree to proceed
with the Close of Escrow, in which event the above representations and
warranties shall be qualified as noticed by Seller. In the event Buyer fails to
give notice of its election within the three (3) business day period, then Buyer
will be deemed to have elected to terminate this Agreement.
9. Indemnity. Each party hereby agrees to indemnify, defend,
and hold the other party harmless from and against any and all claims, demands,
liabilities, costs, expenses, damages, and loss (including, without limitation,
attorneys' fees and costs) resulting from any misrepresentation, breach of
warranty, or breach of covenant made by such party in this Agreement. This
indemnity shall continue in effect and survive Close of Escrow, the waiver of
any conditions to Closing set forth herein, and the conveyance and delivery of
title, or, if title is not transferred pursuant to this Agreement, beyond any
termination of this Agreement, except as otherwise provided in Paragraph 12.
10. Risk of Loss. The parties agree in the event that, prior to
Closing, any improvements located on the Property, or any part thereof, are
destroyed or materially damaged, the transaction shall go forward without any
adjustment to the Purchase Price, but Buyer shall be entitled to any available
insurance proceeds resulting from such damage or destruction. If there is any
material condemnation or threatened condemnation of the property prior to Close
of Escrow, either party may terminate the Agreement, and it will so terminate as
set forth in paragraph 5.7.
11. Possession. Seller shall deliver possession of the Property
to Buyer, free and clear of any tenancies or contracts or rights of third
parties not previously approved in writing by Buyer as a part of this Agreement
such as Paragraph 4.6, as well as cleared of all equipment, vehicles, materials,
and other personal property, upon Close of Escrow.
12. Default. In the event that the sale of the Property fails to
close as a result of a default of Seller, Buyer may, as its sole and exclusive
remedy, elect to either: (a) enforce the terms of this Agreement by action for
specific performance, but with no reduction in the Purchase Price; provided,
however, that no action for specific performance shall compel Seller to commence
litigation or cure or deal with any matters outside of its reasonable control or
expend funds as to such matters; or (b) terminate this Agreement, in which event
the Deposit shall be returned to Buyer, and the parties shall be released from
all further obligations and liability under
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this Agreement except as otherwise specifically provided in this Agreement.
Under no circumstances of any nature whatsoever shall Buyer have any right to
collect damages, whether actual, punitive, consequential or otherwise, from
Seller under this Agreement. In the event that the sale of the Property fails to
close as a result of a default by Buyer, Seller's sole remedy (except as
otherwise specifically provided hereunder) shall be to declare a forfeiture and
retain the Deposit and all interest earned thereon as liquidated damages, it
being understood that Seller's actual damages in the event of such default are
difficult to ascertain and that such proceeds represent the parties' best
current estimate of such damages. Pending the full and final resolution of any
specific performance or other litigation or disputes instituted by Buyer, Escrow
Holder shall continue to hold the Deposit.
13. Liquidated Damages. BY PLACING THEIR INITIALS IMMEDIATELY
BELOW, BUYER AND SELLER AGREE THAT IT WOULD BE IMPRACTICABLE OR EXTREMELY
DIFFICULT TO FIX ACTUAL DAMAGES IN THE EVENT OF A DEFAULT BY BUYER, THAT THE SUM
OF BUYER'S INITIAL AND ADDITIONAL DEPOSITS IS THE PARTIES' REASONABLE ESTIMATE
OF SELLER'S DAMAGES IN THE EVENT OF BUYER'S DEFAULT, AND THAT IN THE EVENT BUYER
FAILS TO TIMELY PURCHASE THE PROPERTY IN ACCORDANCE WITH THE TERMS OF THIS
AGREEMENT BECAUSE OF A DEFAULT BY BUYER, SELLER SHALL BE RELEASED FROM ITS
OBLIGATION TO SELL THE PROPERTY, AND, AT SELLER'S SOLE ELECTION, SELLER SHALL BE
ENTITLED TO RETAIN BUYER'S INITIAL AND ADDITIONAL DEPOSITS AND ALL INTEREST
EARNED THEREON AS LIQUIDATED DAMAGES.
SELLER'S INITIALS /s/SGB BUYER'S INITIALS /s/RGS
14. No Commissions. Except as to Mark T. Ziemendorf and Rod
Shepard, of Cornish & Carey Commercial, Santa Clara, California, representing
both Buyer and Seller, whose commission (collectively) in the amount of three
percent (3%) of the Purchase Price Seller agrees to pay at its cost, neither
party has had any contact or dealings regarding the Property, or any
communication in connection with the subject matter of this transaction, through
any licensed real estate broker or other person who can claim a right to a
commission or finder's fee as a procuring cause of the sale contemplated herein.
In the event that any broker or finder perfects a claim for a commission or a
finder's fee based upon any contract, dealings, or communication, the party
through whom the broker or finder makes his claim shall be responsible for said
commission or fee and shall indemnify and hold harmless as to all claims,
liabilities, costs, and expenses (including without limitation as to attorneys'
fees and court costs) suffered or incurred by the other party in defending
against same.
15. Assignment. This Agreement shall inure to the benefit of and
be binding upon the parties hereto and their respective successors and assigns.
Notwithstanding the foregoing, neither party may assign this Agreement without
the other party's prior written consent, except Seller hereby consents to Buyer
assigning this Agreement to a related entity such as a Buyer managed LLC.
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16. Attorneys' Fees. In the event either party hereto fails to
perform any of its obligations under this Agreement or in the event a dispute
arises concerning the meaning or interpretation of any provision of this
Agreement, the defaulting party or the party not prevailing in such dispute, as
the case may be, shall pay any and all costs and expenses incurred by the other
party in enforcing or establishing its rights hereunder, including, without
limitation, court costs and attorneys' fees.
17. Time. Time is of the essence of this Agreement as to each
and every provision hereof.
18. Notices. All notices or other communications to be given
hereunder shall be in writing and shall be deemed received when personally
delivered by commercial courier including an overnight courier such as Federal
Express, or upon confirmation of receipt when given by telecopy or facsimile to
the address and facsimile number(s) set forth below, or three (3) business days
after deposit in the United States certified mail, return receipt requested,
postage prepaid, addressed as follows:
If to Seller:
Watkins-Johnson Company
Stanford Research Park
3333 Hillview Avenue
Palo Alto, CA 94304-1223
Attn: David M. Burnham
Tel: (415) 813-2990
Fax: (415) 813-2545
Copy to:
Garth E. Pickett, Esq.
Hopkins & Carley, A Law Corporation
Ten Almaden Boulevard, Eighth Floor
San Jose, CA 95113-2228
Tel: (408) 286-9800
Fax: (408) 998-4790
If to Buyer:
Hunter Barrier
CarrAmerica Realty Corporation
1700 Pennsylvania Avenue, NW
Washington, DC 20006
Tel: (202) 639-3867
Fax: (202) 737-2147
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Copy to:
Caroline Brower
Mayer, Brown & Platt
141 East Palace Avenue
Santa Fe, NM 87501
Tel: (505) 820-8186
Fax: (505) 820-7334
Any party may change its address for the purpose of this paragraph by giving
written notice of such change to the other party in the manner herein provided.
19. Entire Agreement. This Agreement expresses the entire
agreement of the parties and supersedes any and all previous agreements between
the parties with regard to the Property. There are no other understandings, oral
or written, which in any way alter or enlarge its terms, and there are no
warranties or representations of any nature whatsoever, either express or
implied, except as set forth herein. Any future modification of this Agreement
will be effective only if it is in writing and signed by the party to be
charged.
20. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
21. Waiver. The waiver by either party of a breach of any
provision of this Agreement shall not be deemed a continuing waiver or a waiver
of any subsequent breach, whether of a like nature or otherwise.
22. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but such
counterparts together shall constitute only one agreement.
23. Headings. The Paragraph and Subparagraph headings throughout
this Agreement are for convenience and reference only, and the words contained
therein shall not be held to expand, modify, amplify or aid in the
interpretation, construction or meaning of this Agreement.
24. Survival. All representations and warranties by the
respective parties contained herein or made in writing pursuant to this
Agreement are intended to and shall remain true and correct as of the Closing,
shall be deemed material and shall survive the execution and delivery of this
Agreement, the Closing, the delivery of the Grant Deed and the transfer of
title, or, if title is not transferred pursuant to this Agreement, beyond any
termination of this Agreement.
25. Further Assurances. Each party hereto agrees to execute such
other documents or instruments as are necessary or appropriate to effectuate
this Agreement and consummate the transaction provided herein promptly upon
request therefor.
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26. "As Is" Clause. EXCEPT AS TO THOSE SPECIFIC REPRESENTATIONS
AND WARRANTIES BY SELLER IN THIS AGREEMENT, BUYER SPECIFICALLY ACKNOWLEDGES THAT
SELLER IS SELLING AND BUYER IS PURCHASING THE PROPERTY ON AN "AS IS WITH ALL
FAULTS" BASIS AND THAT BUYER IS NOT RELYING ON ANY REPRESENTATIONS OR WARRANTIES
OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, FROM SELLER, ITS AGENTS, OR BROKERS
AS TO ANY MATTERS CONCERNING THE PROPERTY, INCLUDING WITHOUT LIMITATION: (i) the
quality, nature, adequacy, and physical condition of the Property, including,
but not limited to, the quality, nature, adequacy, and physical condition of
soils, geology and any groundwater, (ii) the existence, quality, nature,
adequacy, and physical condition of utilities serving the Property, (iii) the
development potential of the Property, and the Property's use, habitability,
merchantability, or fitness, suitability, value or adequacy of the Property for
any particular purpose, (iv) the zoning or other legal status of the Property or
any other public or private restrictions on use of the Property, (v) the
compliance of the Property or its operation with any applicable codes, laws,
regulations, statutes, ordinances, covenants, conditions and restrictions of any
governmental or quasi-governmental entity or of any other person or entity, (vi)
the presence or removal of Hazardous Materials under or about the Property or
the adjoining or neighboring property; and (vii) the condition of title to the
Property. The term "Hazardous Materials" shall mean any hazardous or toxic
materials, substances or wastes, such as (A) those materials identified in
Sections 66680 through 66685 and Sections 66693 through 66740 of Title 22 of the
California Administrative Code, Division 4, Chapter 30, as amended from time to
time, (B) those materials defined in Section 255010) of the California Health
and Safety Code, (C) any materials, substances or wastes which are toxic,
ignitable, corrosive or reactive and which are regulated by any local
governmental authority, any agency of the state of California or any agency of
the United States Government, (D) asbestos, (E) petroleum and petroleum based
products, (F) urea formaldehyde foam insulation, (G) polychlorinated biphenyls
(PCBs), and (H) freon and other chlorofluorocarbons.
27. Condition of Property. Buyer acknowledges and understands
that Seller's Broker has disclosed that the Property may be situated within (i)
an Earthquake Fault Zone as so designated under the Alquist-Priolo Earthquake
Fault Zoning Act, Section 2621 et. seq. of the California Public Resources Code;
and/or (ii) a Seismic Hazards Zone as so designated under the Seismic Hazards
Mapping Act, Section 2690 et. seq. of the California Public Resources Code
(collectively herein referred to as the "Seismic Disclosure Acts"); and (iii) a
100 year flood zone or potentially other special flood hazard area. Buyer
acknowledged that it has had delivered by Seller's agents the Commercial
Property Owner's Guide to Earthquake Safety, published by the State of
California Seismic Safety Commission. Buyer hereby waives any seismic or flood
zone disclosure requirements imposed on Seller by California law.
28. Approval. Upon Buyer's execution of this Agreement, Seller
shall have two (2) business days in which to approve this Agreement. Failure of
timely delivery of an executed agreement by Seller to Buyer shall be deemed
rejection and Buyer's offer will be deemed withdrawn as of the rejection by
Seller if so elected by Buyer within two (2) business days thereafter.
Executed as of the date first set forth above.
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"BUYER" "SELLER"
CARRAMERICA REALTY, WATKINS-JOHNSON COMPANY,
CORPORATION a California corporation
a Maryland corporation
By: /s/ Robert G. Stuckey By: /s/ Scott G. Buchanan
Its: Managing Director Its: Vice President & CFO
FIRST AMENDMENT TO AND REAFFIRMATION OF
PURCHASE AND SALE AGREEMENT
This First Amendment to and Reaffirmation of Purchase Agreement ("First
Amendment") is made as of August 15, 1997 by and between Watkins-Johnson
Company, a California corporation ("Seller"), and CarrAmerica Realty
Corporation, a Maryland corporation ("Buyer").
RECITALS
A. Seller and Buyer have previously entered into that certain Purchase
and Sale Agreement dated as of the 2nd day of May 1997 (the "Agreement").
Capitalized items not otherwise defined herein shall have the meaning assigned
to them in the Agreement.
B. Seller and Buyer hereby acknowledge that the Agreement was
terminated at the end of the Inspection Period by Buyer. Notwithstanding the
foregoing, Buyer and Seller hereby elect to revive and reaffirm the Agreement
and all the terms thereof, and to amend the Agreement in certain respects,
including to: (i) clarify the description of the Property; (ii) establish an
additional contingency related to receiving a Site Development Permit; (iii)
extend the date for close of escrow; (iv) revise the amount of the Deposit; (v)
give Seller the right to participate in the Site Development Permit Application
and to take over such Application process in the event Buyer terminates the
Agreement; and (vi) Buyer grant to Seller a certain easement to be recorded at
close of escrow, all as hereinafter provided.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
covenants and agreements contained in this agreement and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Seller and Buyer hereby agree to amend the Agreement as follows:
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1. Reaffirmation of Agreement. Seller and Buyer hereby agree that
not withstanding anything to the contrary contained in the Agreement, effective
as of the date hereof, the Agreement shall be in full force and effect and
Seller and Buyer hereby reaffirm the Agreement in accordance with its terms
except as amended by this First Amendment.
2. The Property is more particularly described in Exhibit "A"
attached hereto.
3. Deposit. The Deposit as set forth in Paragraph 2.1 of the
Agreement shall be $1,000,000 with any additional sums necessary to bring the
Deposit to $1,000,000 to be deposited with the escrow holder by close of
business on the third (3rd) business day after the date of this First Amendment.
The Deposit may be increased or decreased by (Delay Damages) as hereafter
defined prior to close of escrow as set forth in Paragraph 5 hereafter. All
reference in the Agreement and this First Amendment to the Deposit shall mean
and refer to the amount of $1,000,000 as may be changed pursuant to Paragraph
6(b) hereafter.
4. Escrow and Closing:
(a) Closing Date. Paragraph 3.2 of the Agreement is amended to
change the Closing Date to three (3) business days after receipt of a Site
Development Permit Approval from the City of San Jose or Buyer's waiver of this
contingency, but in no event later than October 21, 1997 unless the Approval
Date is extended pursuant to Paragraph 6(b) below. All references in the
Agreement to the Closing Date shall mean the above.
(b) Traffic Mitigation Costs. The October 21, 1997 date in
Paragraph 3.7 of the Agreement is changed to the earlier of thirty (30) days
after the "Approval" as hereinafter defined or March 15, 1998. The May 1, 1998
date in Paragraph 3.7 of this Agreement is changed to August 3, 1998.
5. Title Insurance and Inspection Period. Buyer hereby acknowledges
that the Preliminary Report dated July 14, 1997 is acceptable and that the
Acceptance Period has expired, and that the Inspection Period is deemed to have
expired and all inspections satisfied. The Approved Exceptions are those listed
in Exhibit "B" attached hereto. The issuance of the ALTA title policy pursuant
to Paragraph 4.3 of the Agreement is a condition to the Closing with the
endorsements identified in Exhibit "C" attached hereto. At the Closing, Seller
shall execute a standard affidavit or declaration that Seller has not done or
caused to be done any work of improvement on the Property that could create a
mechanic's lien(s) and has been in possession of the Property with no leases or
right of possession having been given to any other party as set forth in the
Approved Exceptions. A new contingency shall be established regarding the
approval of a "Site Development Permit Application" by the City of San Jose
Planning Department (the "City") as set forth below.
6. Site Development Permit Contingency. Section 4 of the Agreement
shall be amended to add as a contingency the City granting approval of the Site
Development Permit Application as set forth herein ("Approval"). The Approval
shall mean the granting of the Site Development Permit, subject to the minimum
acceptable requirements as set forth in Paragraph 6(b) below (the "Permit") plus
the running of any applicable appeal period for appealing to the City Council.
The terms of this contingency are more particularly as follows:
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(a) Site Development Permit Application. Buyer shall submit to
the City a substantially complete Site Development Permit Application (the
"Substantial Application") for the Property no later than August 15, 1997
("Permit Application Date"). A substantially complete application means one that
includes the completed City application form, a Traffic Study and Site Plan
architectural drawings. Buyer shall submit to the City a complete Site
Development Permit Application (the "Application") for the Property no later
than August 22, 1997 ("2nd Permit Application Date"). A complete Application
means one that is intended to include all submittal items that the City
requires, although the City may require further submittals. The Application
shall be a joint application on behalf of the Buyer as the purchaser and
developer and Seller as the owner of the property. Seller will cooperate with
submitting the Application as reasonably requested by Buyer at no cost to
Seller. In the event Buyer fails to submit the Substantial Application by the
Permit Application Date and/or the Application by the 2nd Permit Application
Date, Seller shall be entitled to withdraw from escrow $100,000.00 of the
Deposit as liquidated damages for such delay in filing the Application by Buyer
("Delay Damages"), unless Buyer establishes that the delay is beyond the
reasonable control of Buyer and through no fault of Buyer. The payment of the
Delay Damages shall be applicable to the Purchase Price and Buyer shall not be
required to replace it in the Deposit. If Buyer fails to submit the Substantial
Application by the Permit Application Date and/or the Application by the 2nd
Permit Application Date, Seller shall either terminate the Agreement and the
Deposit less the Delay Damages shall be released to Buyer, or be deemed to have
extended (after payment of the Delay Damages, if applicable), the Permit
Application Date to August 29, 1997 ("Extended Permit Application Date"). If the
Application is not filed by the Extended Permit Application Date, the Agreement
is deemed terminated and the Deposit less the Delay Damages if applicable will
be returned to Buyer.
(b) Approval ("Approval Date") of Application. Buyer shall have
until October 15, 1997 in which to receive the Approval ("Approval Date"). If
Approval from the City is not received by the Approval Date, Buyer shall (i)
waive in writing the Approval contingency; or (ii) extend the Approval Date to
December 15, 1997 ("Extended Approval Date") upon placing into escrow an
additional $250,000 to be added to the Deposit. Thereafter, Deposit shall mean
$1,250,000 less the Delay Damages, if applicable. If Approval is not received by
the Extended Approval Date, Buyer shall (i) waive in writing the Approval
contingency, or (ii) extend the Approval Date to February 15, 1998 (the "Final
Approval Date") upon placing an additional $250,000 into escrow and the Deposit
shall mean $1,500,000 less the Delay Damages, if applicable. If the Final
Approval Date is reached, or Buyer fails to extend the Approval Date as allowed
above and Buyer has not in either case waived in writing the Approval
contingency, the Buyer will be deemed in default, the Agreement shall terminate
and Seller will be entitled to the entire Deposit in escrow pursuant to
Paragraph 13 of the Agreement. The Approval Contingency shall be met if, on or
before the Final Approval Date, the City approves the Application and the
supporting plans, studies and other components of the Application. Approval
includes all administrative action required to make such approval final and
binding under applicable law. Buyer may by written notice to Seller and the
Escrow Agent terminate the Agreement and receive a refund of the Deposit if any
of the following occurs prior to the Final Approval Date:
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(i) the City requires a project specific environmental
impact report ("EIR"), or the City delays approval pending the preparation of a
new or updated EIR for the Rincon De Los Estros Redevelopment area by either the
City or some other party or entity; or
(ii) the City denies the Application substantially as
submitted by Buyer.
The City shall be deemed to have denied the Application
substantially submitted by Buyer thereby allowing Buyer to terminate the
Agreement and receive a refund of the Deposit, less Delay Damages, if any, if
the approval requires any of the following:
(1) Traffic Mitigation Costs, as defined in Paragraph
3.7 of the Agreement that exceeds $3 million in the aggregate, and
Watkins-Johnson has not agreed, in writing, to cover any Traffic Mitigation
Costs in excess of $3 million in the aggregate;
(2) Failure to give fully permitted ingress and egress
access to either Trimble Road or Orchard Parkway from the Property;
(3) An FAR that is less than the smaller of 0.4 or
Buyer's submittal of FAR in the Application for less than 0.4, and
Watkins-Johnson does not agree, in writing, to reduce the purchase price by the
same percentage that the approved FAR is below the above standard. For example,
if the submitted FAR is a 0.4 and the approved FAR is a 0.35, this is a 12-1/2
percent reduction which would be a 12-1/2 percent reduction in the Purchase
Price by Watkins-Johnson for this contingency to be met. Buyer may terminate the
Agreement and receive a refund of the Deposit less Delay Damages, if applicable,
if the approval requires a FAR less than 0.35. Buyer shall not submit in the
Application for an FAR greater than 0.4.
(c) Buyer's Diligent Efforts During Application Period. Buyer
shall diligently, adequately, timely, and in good faith respond to inquiries and
requests from the City during the approval process for the Application
("Standard of Conduct"). However, Buyer may reasonably object to City imposed
requirements, conditions or restrictions and negotiate with the City to secure
favorable approval terms. If Buyer does not meet this Standard of Conduct and as
a result the City denies the Application, then Seller shall be entitled to
retain the Deposit.
(d) Seller's Rights Upon Termination to the Application. Buyer
hereby covenants and agrees to cooperate in the event Buyer terminates this
Agreement pursuant to Paragraph 6(b) above by assigning to Seller all of Buyer's
rights and interest in the Application, and to furnish to Seller, at no cost to
Seller, copies of the traffic studies and any other studies and information
compiled by Seller in preparation of the Application or any other information
requested by the City pursuant to the Application and to turn such over to the
Seller for its use in continuing to pursue the Application in Seller's name.
Buyer agrees at no additional cost to Buyer to cooperate with Seller in the
transfer of Buyer's rights and obligations in the Application to Seller as
reasonably requested by Seller.
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7. Grant of Easement By Buyer To Seller: Section 6 of the Agreement
is amended to add the following:
6.5. Grant Of Easement. Buyer hereby agrees and covenants to
grant, at the close of escrow, to Seller for the benefit of Parcel A a
non-exclusive easement for ingress and egress along the roadway being
conveyed to Buyer as the Property's access to Component Drive, and in
the form and description as attached hereto as Exhibit C.
8. Miscellaneous.
(a) Effect of First Amendment. Except to the extent the
Agreement is modified by this First Amendment, the remaining terms and
conditions of the Agreement shall remain unmodified and in full force and
effect. In the event of conflict between the terms and conditions of the
Agreement and the terms and conditions of this First Amendment, the terms and
conditions of the First Amendment shall prevail and control.
(b) Entire Agreement. The Agreement, together with this First
Amendment, embodies the entire understanding between Seller and Buyer with
respect to its subject matter and supersedes all other prior agreements,
representations and covenants, written or oral, with respect thereto; and can be
changed only by an instrument in writing signed by Seller and Buyer.
(c) Counterparts. This First Amendment may be executed in one or
more counterparts, each of which shall be deemed an original but all of which,
taken together, shall constitute one and the same amendment.
IN WITNESS WHEREOF, this First Amendment has been executed as of the
day and year first set forth above.
"BUYER" "SELLER"
CARRAMERICA REALTY, WATKINS-JOHNSON COMPANY,
CORPORATION, a California corporation
a Maryland corporation
By: /s/ Robert G. Stuckey By: /s/ W. Keith Kennedy
Its: Managing Director Its: President & CEO
17
Exhibit 10.19
RESOLUTION OF THE
BOARD OF DIRECTORS OF
WATKINS-JOHNSON COMPANY
WHEREAS, it has been proposed (the "Proposal") that (i) all existing
deferrals of compensation under the Company's 1994 Top Management
Deferred Compensation Plan ("Deferred Compensation Plan"), (ii) all
existing deferrals of bonuses under the Company's Annual Top Management
Incentive Bonus Plans ("Incentive Bonus Plans") and (iii) all future
opportunities to defer under such plans, be eliminated effective as of
December 31, 1998, and all existing deferrals paid as soon as practical
on or after January 1, 1999, and
WHEREAS, the Proposal has been submitted to the Compensation Committee
and approved by the Committee for submission to the Board for final
action, and
WHEREAS, the Board deems that this action is in the best interests of the
Company;
NOW THEREFORE BE IT RESOLVED, that (i) the Deferred Compensation Plan be
terminated in accordance with Section 9(a) of the Plan effective as of
December 31, 1998, (ii) the balance of all accounts on December 31, 1998,
be paid as a lump sum to all participants as soon as practical on or
after January 1, 1999, and (iii) no future deferrals shall be allowed
after December 31, 1998, and
FURTHER RESOLVED, that (i) all outstanding deferrals under all Incentive
Bonus Plans for years on or before 1998 be terminated effective as of
December 31, 1998, (ii) as soon as practical on or after January 1, 1999,
the participants be paid a lump sum equal to the balances determined
under the Plans on December 31, 1997, or December 31, 1998, whichever is
greater, and
FURTHER RESOLVED, that the officers of the Company are hereby authorized,
directed and empowered in the name of the Company, to prepare, execute
and deliver all such documents and instruments and to take all such
actions in the name of the Company as they deem necessary, advisable,
convenient, proper or appropriate in order to carry out and perform the
purposes of the foregoing resolutions.
Exhibit 10.20
SEVERANCE AGREEMENT
-------------------
THIS SEVERANCE AGREEMENT (the "Agreement"), dated___________________is entered
into by and between Watkins-Johnson Company, a California corporation ("the
Company"), and __________________________("Employee").
The Company's Board of Directors has determined that it is appropriate to
reinforce and encourage the continued attention and dedication of members of the
Company's management, including Employee, to their assigned duties without
distraction in potentially disturbing circumstances arising from the possibility
of a Change in Control (as defined herein) of the Company.
This Agreement sets forth the severance compensation which the Company agrees to
pay to Employee if Employee's employment with the Company terminates under one
of the circumstances described herein.
1. Term.
(a) This Agreement shall terminate, except for any unpaid
obligation of the Company, upon the earliest of (i) three years
from the date hereof if a Change in Control of the Company has
not occurred within such three-year period; (ii) the termination
of the Employee's employment based on death, disability (as
defined in Section 3(b)) or cause (as defined in Section 3(c))
or by the Employee other than for Good Reason (as defined in
Section 3(d)); or (iii) three years from the date of a Change in
Control of the Company.
(b) Nothing in this Agreement shall confer upon Employee any
right to continue in the employ of the Company prior to a Change
in Control of the Company or shall in any way limit the rights
of the Company, which are hereby expressly reserved, to
discharge the Employee at any time prior to the date of a Change
in Control of the Company for any reason whatsoever, with or
without cause.
2. Change in Control.
(a) No compensation shall be payable under this Agreement unless
and until there shall have been a Change in Control of the
Company while the Employee is still an employee of the Company,
and the Employee's employment by the Company thereafter shall
have been terminated by the Company other than pursuant to
Sections 3(b) or 3(c) or by the Employee for Good Reason (as
defined in Section 3(d) below), or by the Employee pursuant to
Section 3(g).
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(b) Definition of Change in Control. A Change in Control shall
be deemed to have occurred if (i) there shall be consummated any
consolidation or merger of the Company in which the Company is
not the continuing or surviving corporation or pursuant to which
shares of the Company's Common Stock would be converted into
cash, securities or other property, other than a merger of the
Company in which the holders of the Company's Common Stock
immediately prior to the merger have the same proportionate
ownership of common stock of the surviving corporation
immediately after the merger, or any sale, lease, exchange or
other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the
Company, or (ii) the stockholders of the Company approve a plan
or proposal for the liquidation or dissolution of the Company,
or (iii) any "person" (as defined in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended, shall become
the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of 30% or more of the
Company's outstanding Common Stock, or (iv) during any period of
two consecutive years, individuals who at the beginning of such
period constitute the entire Board of Directors of the Company
shall cease for any reason to constitute a majority thereof
unless the election, or the nomination for election by the
Company's stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in
office who were directors at the beginning of the period.
3. Termination Following Change in Control.
(a) Termination of Employment. If a Change in Control occurs
while Employee is still an employee of the Company, Employee
shall be entitled to the compensation provided in Section 4 upon
the subsequent termination of the Employee's employment with the
Company unless the termination is a result of Employee's (i)
death; (ii) Disability (Section 3(b)); (iii) termination by the
Company for Cause (Section 3(c)); or (iv) Employee's decision to
terminate employment with the Company other than for Good Reason
(Section 3(d)), or pursuant to Section 3(g).
(b) Disability. If, as a result of the Employee's incapacity due
to physical or mental illness, the Employee shall have been
absent from duties with the Company on a full-time basis for six
consecutive months and within 30 days after written notice of
termination is thereafter given by the Company, the Employee
shall not have returned to the full-time performance of the
Employee's duties, the Company may terminate this Agreement for
"Disability."
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(c) Cause. For purposes of this Agreement only, the Company
shall have "Cause" to terminate Employee's employment hereunder
only on the basis of fraud, misappropriation, embezzlement or
willful engagement by the Employee in misconduct which is
demonstrably and materially injurious to the Company and its
subsidiaries taken as a whole. An act, or omission of the
Employee shall not be considered "willful" unless done, or
omitted to be done, by the Employee without good faith and a
reasonable belief that the act or omission was in the best
interests of the Company and its subsidiaries. The Employee may
not be terminated for Cause unless and until there shall have
been delivered to Employee a copy of a resolution duly adopted
by affirmative vote of not less than three-quarters of the
entire membership of the Company's Board of Directors at a
meeting of the Board called and held for the purpose (after
reasonable notice to the Employee and an opportunity for the
Employee, together with the Employee's counsel, to be heard
before the Board), finding the Employee was guilty of the
conduct set forth in the first sentence of this Section, and
specifying the particulars thereof in detail. Notwithstanding
the foregoing, the Employee shall have the right to contest such
termination for Cause (for purposes of this Agreement) by
arbitration in accordance with the provisions of Section 7.
(d) Good Reason. After a Change in Control of the Company, the
Employee may terminate employment for Good Reason at any time
during the term of this Agreement. For purposes of this
Agreement, "Good Reason" shall mean any of the following
(without the Employee's express written consent):
(i) the assignment to the Employee by the Company of
duties inconsistent with, or a substantial alteration in
the nature or status of, Employee's responsibilities
immediately prior to a Change in Control of the Company
other than any such alteration primarily attributable to
the fact that the Company's securities are no longer
publicly traded;
(ii) a reduction by the Company in the Employee's base
salary in effect on the date of a Change in Control of
the Company or as the same may be increased from time to
time during the term of this Agreement;
(iii) failure by the Company to continue in effect
without substantial change any compensation, incentive,
welfare or benefit plan or arrangement, as well as any
plan or arrangement whereby the Employee may acquire
securities of the Company, in which the Employee is
participating at the time of a Change in Control of the
Company (or any other plans providing the Employee with
substantially similar benefits, hereinafter referred to
as "Benefit Plans"), or the taking of any action by the
Company which would adversely affect the Employee's
participation in or materially reduce the Employee's
benefits under any such Benefit Plan or deprive the
Employee of any material fringe benefit enjoyed by the
Employee at the time of a Change in Control of the
Company; unless an equitable substitute arrangement
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(embodied in an ongoing substitute or alternative Benefit
Plan) has been made for the benefit of Employee with
respect to the Benefit Plan in question. For purposes of
the foregoing, Benefit Plans shall include, but not be
limited to, the Company's Employee Stock Ownership Plan,
Employees' Profit Sharing and Investment Plan, Deferred
Compensation (401K) Plan, 1991 Stock Option and Incentive
Plan, Top Management Incentive Bonus Plan, and/or any
other plan or arrangement to receive and exercise stock
options or stock appreciation rights, incentive, bonus or
other award plans, group life insurance plans, medical,
dental, accident and disability plans;
(iv) a relocation of the Company's principal executive
offices to a location outside the San
Francisco-Oakland-San Jose Bay Area, or the Employee's
relocation to any place other than the principal
executive offices of the Company, except for required
travel by the Employee on Company business to an extent
substantially consistent with the Employee's business
travel obligations at the time of a Change in Control of
the Company;
(v) any material breach by the Company of any provision
of this Agreement;
(vi) any failure by the Company to obtain the assumption
of this Agreement by any successor or assign of the
Company as required in paragraph 6; or
(vii) any purported termination of the Employee's
employment which is not effected pursuant to a Notice of
Termination satisfying the requirements of Section 3(e)
below. For purposes of this Agreement, no such purported
termination shall be effective.
(e) Notice of Termination. Any purported termination of
employment shall be communicated by a written Notice of
Termination to Employee in accordance with Section 8, and shall
state the specific termination provisions in this Agreement
relied upon, and set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of
Employee's employment.
(f) Date of Termination. "Date of Termination" shall mean (a)
for Disability, 30 days after Notice of Termination is given to
the Employee (provided the Employee has not returned to the
performance of the Employee's duties on a full-time basis during
such 30-day period), or (b) if the Employee's employment is
terminated by the Company for any other reason, the date on
which notice is given.
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<PAGE>
(g) Notwithstanding any other provision of this Agreement, if a
Change in Control occurs while Employee is still an employee of
the Company, Employee may, after 90 days and within 120 days of
the Change in Control, terminate employment without Good Reason,
and shall thereupon be entitled to one-half (1/2) of the
compensation, described in paragraph 4.
4. Severance Compensation upon Termination of Employment. If the
Employee's employment shall be terminated (a) by the Company other than
pursuant to Sections 3(b) or 3(c), or (b) by the Employee for Good
Reason, the Company shall:
(a) pay to the Employee as severance pay in a lump sum, in cash,
on the fifth day following the Date of Termination, an amount
equal to 299.999% of the Employee's "Base Compensation" (as
defined below); provided, however, that if the lump sum
severance payment under this Section 4, either alone or together
with other payments which the Employee has the right to receive
from the Company, would not be deductible (in whole or in part)
by the Company as a result of such lump sum payment constituting
a "parachute payment" (as defined in Section 28OG of the
Internal Revenue Code of 1986, as amended (collectively the
"Code")), such lump sum severance payment shall be reduced to
the largest amount as will result in no portion of the lump sum
severance payment under this Section 4 not being fully
deductible by the Company as a result of Section 28OG of the
Code. The determination of any reduction in the lump sum
severance payment under this Section 4 pursuant to the foregoing
provision shall be made exclusively by the Company's auditors
prior to the Change in Control (whose fees and expenses shall be
born by the Company), and such determination shall be conclusive
and binding. The term "Base Compensation" shall mean an average
of the annual cash compensation paid to the Employee by the
Company and any of its subsidiaries in the form of salary or
bonuses during the five taxable years (or such lesser period as
Employee was employed by the Company or any of its subsidiaries)
immediately preceding the Change in Control of the Company which
was includable in gross income by the Employee for federal
income tax reporting purposes; and
(b) arrange to provide Employee, for a six-month period (or such
shorter period as Employee may elect), with disability,
accident, group life, medical and dental insurance substantially
similar to those insurance benefits which Employee is receiving
immediately prior to the Notice of Termination. Benefits
otherwise receivable by Employee pursuant to this Section 4(b)
shall be reduced to the extent comparable benefits are actually
received by the Employee during such six-month period following
termination (or such shorter period elected by the Employee),
and any such benefits actually received by Employee shall be
reported by Employee to the Company.
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<PAGE>
5. No Obligation to Mitigate Damages. The Employee shall not be
required to mitigate damages or the amount of any payment provided for
under this Agreement by seeking other employment or otherwise, nor
shall the amount of any payment provided for under this Agreement be
reduced by any compensation earned by the Employee as a result of
employment by another employer or by retirement benefits after the Date
of Termination, or otherwise, except to the extent provided in Section
4 above.
(a) No Effect on Other Contractual Rights. The provisions of
this Agreement, and any payment provided for hereunder, shall
not reduce any amounts otherwise payable, or in any way diminish
the Employee's existing rights, or rights which would accrue
solely as a result of the passage of time, under any Benefit
Plan, employment agreement or other contract, plan or
arrangement, except that the provisions of this Agreement and
any payment provided for hereunder, shall be in lieu of payments
otherwise due to the Employee under any of the Company's
severance pay policies.
6. Successor to the Company.
(a) The Company shall require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or
assets of the Company, by agreement satisfactory to Employee,
expressly, absolutely and unconditionally to assume and agree to
perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such
succession or assignment had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor or assign to its business and/or
assets which executes and delivers the agreement provided for in
this Section 6 or which otherwise becomes bound by all the terms
and provisions of this Agreement by operation of law.
(b) Heirs of the Employee. This Agreement shall inure to the
benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors,
heirs, distributees, devises and legatees. If the Employee
should die while any amounts are still payable to Employee
hereunder, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to
the Employee's devisee, legatee, or other designee or, if there
be no such designee, to the Employee's estate.
7. Arbitration. Any dispute, controversy or claim arising under or
in connection with this Agreement, or the breach hereof, shall be
settled exclusively by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in
effect. Judgment upon the award rendered by Arbitrator(s) may be
entered in any court having jurisdiction thereof. Any arbitration held
pursuant to this Section 7 shall take place in San Francisco,
California.
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<PAGE>
8. Notice. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by
United States registered mail, return receipt requested, postage
prepaid, as follows:
If to the Company:
Watkins-Johnson Company
3333 Hillview Avenue
Palo Alto, California 94304-1223
Attention: President of the Company
If to the Employee:
___________________
___________________
___________________
___________________
or such other address as either party may have furnished to the other
in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
9. Nonwaiver, Complete Agreement, Governing Law. No provisions of
this Agreement may be modified, waived or discharged unless in writing
signed by both parties. No waiver by either party hereto at any time of
any breach by the other party of, or compliance with, any condition or
provision of this agreement shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been
made by either party which are not set forth expressly in this
Agreement. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
10. Legal Fees and Expenses. The Company shall pay all reasonable
legal fees and expenses which the Employee may incur as a result of the
Company's contesting the validity, enforceability or the Employee's
good faith interpretation of, or good faith determinations under, this
Agreement; provided, however, that the Company shall not pay any legal
fees and expenses incurred by Employee in contesting the termination of
Employee's employment for Cause if, as a result of such contest, it is
determined that the Employee was in fact terminated for Cause.
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<PAGE>
11. Confidentiality. The Employee shall retain in confidence any and
all confidential information known to the Employee concerning the
Company and its business so long as such information is not otherwise
publicly disclosed.
12. Validity. The invalidity or unenforceability of any provisions
of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force
and effect.
13. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all
of which together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WATKINS-JOHNSON COMPANY, a
California corporation
By_____________________
Title:__________________
Title:__________________
8
Exhibit 10.21
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is
made as of March 2, 1998, and amended and restated in its entirety effective as
of January 25, 1999, by and between W. Keith Kennedy (hereinafter called
"Employee") and WATKINS-JOHNSON COMPANY, a California corporation (hereinafter
called the "Company").
In consideration of the mutual covenants herein contained the parties
hereto agree as follows:
1. Term and Scope of Employment.
(a) The Company agrees to employ Employee in Palo Alto,
California for a period of thirty-six (36) months, commencing March 9, 1998, and
ending March 9, 2001, for the purpose of rendering services in connection with
the Company's business. Employee agrees to accept employment with the Company
for such purpose. In performing his duties hereunder, Employee shall observe and
comply with all directions given by the Board of Directors of the Company or by
his superiors.
(b) Employee shall devote his full time, attention, and effort
to the business of the Company, and shall not during the term of this Agreement
engage in any other business (whether as an employee, partner, consultant or
otherwise) without the consent of the Company; but this shall not be construed
as preventing Employee from investing his assets in such form or manner as will
not interfere with the services he agreed to render to the Company hereunder.
(c) Employee agrees to inform the Board of Directors of the
Company, or his superiors, of all of his work and transactions on behalf of the
Company, and to disclose to them his knowledge of the Company's business and
affairs.
<PAGE>
2. Salary.
For his services the Company agrees to pay Employee an annual
salary of not less than Four Hundred and Sixty-Five Thousand Dollars ($465,000)
payable in equal biweekly installments. In addition to the above amount, at the
sole discretion of the Board of Directors, Employee may be granted bonuses or
other compensation in an amount to be determined in accordance with Board
policy.
3. Termination.
(a) For Cause. During the term of this Agreement, Employee's
employment may be terminated by the Company for Cause (as defined below),
effective immediately upon the day it sends Notice of Termination (as required
by Section 10(b)) to Employee, at which time compensation will cease. "Cause"
for this purpose, shall mean fraud, misappropriation, embezzlement or willful
engagement by Employee in misconduct which is demonstrably and materially
injurious to the Company and its subsidiaries taken as a whole. An act or
omission of Employee shall not be considered "willful" unless done, or omitted
to be done, by Employee without good faith and a reasonable belief that the act
or omission was in the best interests of the Company and its subsidiaries.
Employee may not be terminated for Cause unless and until there shall have been
delivered to Employee a copy of a resolution duly adopted by affirmative vote of
not less than three-quarters of the entire membership of the Company's Board of
Directors at a meeting of the Board called and held for that purpose (after
reasonable notice to Employee and an opportunity for Employee, together with
Employee's counsel, to be heard before the Board), finding Employee was guilty
of the conduct set forth in the first sentence of this Section 3(a), and
specifying the particulars thereof in detail. Notwithstanding the foregoing,
Employee shall have the right to contest such termination for Cause (for
purposes of this Agreement) by arbitration in accordance with the provisions of
Section 9.
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<PAGE>
(b) Without Cause. Company may terminate Employee's employment
without Cause. In the event Company terminates Employee's employment without
Cause, in addition to the entire compensation provided for hereunder for the
remainder of the term specified in Section 1(a) (which shall be paid in a lump
sum), Employee shall be entitled to receive upon such termination without Cause
(in a lump sum) severance compensation equal to six (6) month's base salary,
less all amounts required by law to be withheld and deducted; provided, however,
that if the Company terminates Employee's employment other than for death,
Disability or Cause, or Employee terminates his Employment for Good Reason,
prior to the date of occurrence of a Change in Control if such termination is
effected by the Company (or the actions or decisions giving rise to Employee's
termination for Good Reason are taken or made by the Company) in anticipation of
a Change of Control such termination shall for all purposes hereunder have the
same consequences as a termination by Employee under subparagraph (c) of this
Section 3 (any such termination, action or decision effected, taken or made
within 90 days prior to the date of any such Change in Control shall be
conclusively deemed to be in anticipation of a Change in Control).
(c) Change in Control. This Agreement shall not be terminated
upon a Change in Control, as defined in subparagraph (d) of this Section 3. In
the event of a Change in Control, the provisions of this Agreement shall be
binding on and shall inure to the benefit of the surviving or resulting
corporation, or (in the case of a Change in Control of the kind referred to in
Section 3(c)(i)(z)) the corporation to which the applicable assets of the
Company have been transferred; provided, however, that (a) Employee may treat
the occurrence of a Change in Control as a material breach of this Agreement and
may terminate this Agreement upon written notice given (in accordance with
Section 10(b)) within 120 days of the occurrence of a Change in Control, unless
Employee's employment has theretofore been terminated in accordance with any
other provisions of this Agreement, and (b) Employee may terminate this
Agreement for Good Reason at any time following the occurrence of a Change in
Control and during the remainder of the term of this Agreement as specified in
Section 1(a). Upon such termination, or upon a
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<PAGE>
termination of Employee by the Company without Cause at any time following the
occurrence of a Change in Control, the Company shall:
(i) pay to Employee as severance pay in a lump sum,
in cash, on the fifth day following the Date of Termination (as defined in
subparagraph (g) of this Section 3), an amount equal to the aggregate of (x)
299.999% of Employee's "Base Compensation" (as defined below), plus (y) an
amount equal to (A) the amount previously determined by the Board as Employee's
target bonus for the calendar year in which Notice of Termination is given by
Employee or the Company, as the case may be, multiplied by (B) a fraction, the
numerator of which shall be the number of days that have elapsed during such
calendar year, through and including the date on which such Notice of
Termination is given, and the denominator of which shall be 365; provided,
however, that if the lump sum severance payment under this Section 3, either
alone or together with other payments (or the value of other benefits) which
Employee has the right to receive from the Company in connection with a Change
in Control, would not be deductible (in whole or in part) by the Company as a
result of such lump sum payment constituting a "parachute payment" (as defined
in Section 280G of the Internal Revenue Code of 1986, as amended (collectively,
the "Code")), such lump sum severance payment (or, at Employee's election, such
other payments and/or benefits, or a combination of such other payments and/or
benefits and such lump sum severance payment) shall be reduced to the largest
amount as will result in no portion of the lump sum severance payment under this
Section 3 not being fully deductible by the Company as a result of Section 280G
of the Code. The determination of the amount of any such required reduction
pursuant to the foregoing provision, and the valuation of any non-cash benefits
for purposes of such determination, shall be made exclusively by the firm that
was acting as the Company's auditors prior to the Change in Control (whose fees
and expenses shall be borne by the Company), and such determination shall be
conclusive and binding. The term "Base Compensation" shall mean an average of
the annual cash compensation paid to Employee by the Company and any of its
subsidiaries in the form of salary or bonuses (including any amount that is the
subject of an
4
<PAGE>
elective deferral by Employee) during the five taxable years immediately
preceding the Change in Control which was includable in gross income (or would
have been so included but for any such elective deferral) by Employee for
federal income tax reporting purposes; and
(ii) arrange to provide Employee, for a thirty-six
month period (or such shorter period as Employee may elect), with disability,
accident, group life, medical and dental insurance, all of which shall be
prepaid, substantially similar to those insurance benefits which Employee is
receiving immediately prior to a termination by Employee under this Section
3(c). Benefits otherwise receivable by Employee pursuant to this Section 3(c)
shall be reduced to the extent comparable benefits are actually received by
Employee during such thirty-six month period (or such shorter period elected by
Employee), and any such benefits actually received by Employee shall be reported
by Employee to the Company.
(d) Definition of Change in Control. A Change in Control shall
be deemed to have occurred if (i) there shall be consummated (x) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation, (y) any other consolidation or merger to
which the Company is a party, regardless of whether shares of the Company's
Common Stock would be converted into cash, securities or other property, other
than a merger of the Company in which the holders of the Company's Common Stock
immediately prior to the merger have the same proportionate ownership of common
stock (or the equivalent fully voting securities) of the surviving corporation
or other entity immediately after the merger, or (z) any sale, lease, exchange
or other transfer (in one transaction or a series of related transactions) of
all, or substantially all, of the assets of the Company, or (ii) the Company
consummates (in one or a series of transactions) the disposition of
substantially all of its business operations, or (iii) any "person" (as defined
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended,
shall become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of 30% or more of the Company's outstanding Common
Stock, or (iv) during any period of two consecutive years, individuals who at
the beginning of such period constitute the entire Board
5
<PAGE>
of Directors of the Company shall cease for any reason to constitute a majority
thereof unless the election, or the nomination for election by the Company's
stockholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period.
(e) Disability. If, as a result of Employee's incapacity due
to physical or mental illness, Employee shall have been absent from his duties
with the Company on a full-time basis for six consecutive months and within 30
days after written Notice of Termination is thereafter given by the Company
Employee shall not have returned to the full-time performance of Employee's
duties, the Company may terminate this Agreement for "Disability."
(f) Good Reason. For purposes of this Agreement, "Good Reason"
shall mean any of the following (without Employee's express written consent):
(A) the assignment to Employee by the Company of
duties inconsistent with, or a substantial alteration in the nature or status
of, Employee's responsibilities immediately prior to a Change in Control other
than any such alteration primarily attributable to the fact that the Company's
securities are no longer publicly traded;
(B) a reduction by the Company in Employee's base
salary in effect on the date of a Change in Control or as the same may be
increased from time to time during the term of this Agreement;
(C) failure by the Company to continue in effect
without substantial change any compensation, incentive, welfare or benefit plan
or arrangement, as well as any plan or arrangement whereby Employee may acquire
securities, in which Employee is participating at the time of a Change in
Control (or any other plans providing Employee with substantially similar
benefits, hereinafter referred to as "Benefit Plans"), or the taking of any
action by the Company which would adversely affect Employee's
6
<PAGE>
participation in or materially reduce Employee's benefits under any such Benefit
Plan or deprive Employee of any material fringe benefit enjoyed by Employee at
the time of a Change in Control; unless an equitable substitute arrangement
(embodied in an ongoing substitute or alternative Benefit Plan) has been made
for the benefit of Employee with respect to the Benefit Plan in question. For
purposes of the foregoing, Benefit Plans shall include, but not be limited to,
the Company's Employee Stock Ownership Plan, Employees' Profit Sharing and
Investment Plan, Deferred Compensation (401K) Plan, 1991 Stock Option and
Incentive Plan, Top Management Incentive Bonus Plan, and/or any other plan or
arrangement to receive and exercise stock options or stock appreciation rights,
incentive, bonus or other award plans, group life insurance plans, medical,
dental, accident and disability plans;
(D) a relocation of the Company's principal
executive offices to a location outside the San Francisco-Oakland-San Jose Bay
Area, or Employee's relocation to any place other than the principal executive
offices of the Company, except for required travel by Employee on Company
business to an extent substantially consistent with Employee's business travel
obligations at the time of a Change in Control;
(E) any material breach by the Company of any
provision of this Agreement;
(F) any failure by the Company to obtain the
assumption of this Agreement by any successor or assign of the Company as
required in Section 7; or
(G) any purported termination of Employee's
employment which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 10(b) below. For purposes of this Agreement, no such
purported termination shall be effective.
(g) Date of Termination. "Date of Termination" shall mean (a)
for Disability, 30 days after Notice of Termination is given to Employee
(provided Employee has not returned to the
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<PAGE>
performance of Employee's duties on a full-time basis during such 30-day
period), or (b) if Employee's employment is terminated for any other reason, the
date on which Notice of Termination is given by the Company or Employee, as the
case may be.
4. Nondisclosure and Assignment of Rights in Company Data. "Company
Data" is hereby defined to mean for purposes of this Agreement, programs,
improvements, records, ideas, files, drawings, documents, customer lists,
investment opportunities, sales and marketing techniques and devices, formulae,
specifications, research, studies, investigations, processes, data, and
information disclosed to or known by Employee as a consequence, whether directly
or indirectly, of his employment by Company which is not generally known in the
industry in which the Company is or may become engaged and which involves
special techniques or know-how in connection with the industry in which the
Company is or may become engaged, and, without limiting the generality of the
foregoing, anything not within the public domain and public knowledge, whether
or not patentable or copyrightable. The parties hereto acknowledge that in the
course of his employment, Employee will himself, or with others, have access to,
use, come in contact with, obtain, make, evolve or conceive Company Data. As
further consideration for Company's entering into this Agreement, Employee
hereby sells, assigns and transfers to Company all right, title, and interest he
has or at any time may have to Company Data, and to any and all other Company
Data at any time used in the business of Company in which Employee may have a
right, title, or interest, and such Company Data shall be the sole and exclusive
property of Company.
5. Assignment. The rights and obligations of Employee hereunder shall
not be assignable and any attempted assignment shall be void. The rights and
obligations of Company hereunder may be assigned as a part of any transaction
which includes the transfer of all or substantially all of the assets of the
Company, whether such transfer is made pursuant to a sale of assets or stock, or
a merger, reorganization, or otherwise.
8
<PAGE>
6. No Obligation to Mitigate Damages. Employee shall not be required to
mitigate damages or the amount of any payment provided for under this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment
provided for under this Agreement be reduced by any compensation earned by
Employee as a result of employment by another employer or by retirement benefits
after the Date of Termination, or otherwise, except to the extent provided in
Section 3 above.
7. Successor to the Company. The Company shall require any successor or
assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, by agreement satisfactory to Employee, expressly, absolutely and
unconditionally to assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform it if no
such succession or assignment had taken place. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor or
assign to its business and/or assets which executes and delivers the agreement
provided for in this Section 7 or which otherwise becomes bound by all the terms
and provisions of this Agreement by operation of law.
8. Heirs of Employee. This Agreement shall inure to the benefit of and
be enforceable by Employee's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Employee should die while any amounts are still payable to him hereunder, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to Employee's devisees, legatee, or other designee
or, if there be no such designee, to Employee's estate.
9. Arbitration. Any dispute, controversy or claim arising under or in
connection with this Agreement, or the breach hereof, shall be settled
exclusively by arbitration in accordance with the Commercial Arbitration Rules
of the American Arbitration Association then in effect. Judgment upon the
9
<PAGE>
award rendered by Arbitrator(s) may be entered in any court having jurisdiction
thereof. Any arbitration held pursuant to this Section 9 shall take place in San
Francisco, California.
10. Notice.
(a) General. For purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to the Company:
Watkins-Johnson Company
3333 Hillview Avenue
Palo Alto, California 94304
Attention: Corporate Secretary
If to Employee:
W. Keith Kennedy
26955 Orchard Hill Lane
Los Altos Hills, California 94022
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of address shall be effective only
upon receipt.
(b) Notice of Termination. Any purported termination of
employment shall be communicated by a written Notice of Termination to Employee
in accordance with paragraph (a) of this Section 10, and shall state the
specific termination provisions in this Agreement relied upon, and set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Employee's employment.
11. Nonwaiver, Complete Agreement, Governing Law. No provisions of this
Agreement may be modified, waived or discharged unless in writing signed by both
parties. No waiver by either party
10
<PAGE>
hereto at any time of any breach by the other party of, or compliance with, any
condition or provision of this Agreement shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not set forth expressly in this Agreement. This Agreement shall be governed
by and construed in accordance with the laws of the State of California.
12. Legal Fees and Expenses. The Company shall pay all reasonable legal
fees and expenses which Employee may incur as a result of the Company's
contesting the validity, enforceability or Employee's good faith interpretation
of, or good faith determinations under, this Agreement; provided, however, that
the Company shall not pay any legal fees and expenses incurred by Employee in
contesting the termination of Employee's employment for Cause if, as a result of
such contest, it is determined that Employee was in fact terminated for Cause.
13. Validity. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
11
<PAGE>
WATKINS-JOHNSON COMPANY
By /s/ Dean A. Watkins
-------------------
Title: Chairman
/s/ Keith Kennedy
-------------------
Keith Kennedy
12
Exhibit 10.22
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made as of
February 22, 1999, by and between ________________ (hereinafter called
"Employee") and WATKINS-JOHNSON COMPANY, a California corporation (hereinafter
called the "Company").
WHEREAS, Employee and the Company have entered into that certain
Amended and Restated Severance Agreement, dated as of January 25, 1999 (the
"Severance Agreement"); and
WHEREAS, Employee and the Company now desire to enter into an agreement
providing for Employee's continued employment by the Company upon the terms and
subject to the conditions set forth herein, which agreement shall, except as
otherwise set forth herein, apply cumulatively with the Severance Agreement.
In consideration of the mutual covenants herein contained the parties
hereto agree as follows:
1. Term and Scope of Employment.
(a) The Company agrees to continue to employ Employee in Palo
Alto, California for a period of twelve (12) months, commencing on the date
hereof and ending on the first anniversary of the date hereof, for the purpose
of rendering services in connection with the Company's business. Employee agrees
to accept employment with the Company for such purpose. In performing his/her
duties hereunder, Employee shall observe and comply with all directions given by
the Board of Directors of the Company or by his/her superiors.
<PAGE>
(b) Employee shall devote his/her full time, attention, and
effort to the business of the Company, and shall not during the term of this
Agreement engage in any other business (whether as an employee, partner,
consultant or otherwise) without the consent of the Company; but this shall not
be construed as preventing Employee from investing his/her assets in such form
or manner as will not interfere with the services Employee agreed to render to
the Company hereunder.
(c) Employee agrees to inform the Board of Directors of the
Company, or his/her superiors, of all of his/her work and transactions on behalf
of the Company, and to disclose to them his/her knowledge of the Company's
business and affairs.
2. Salary.
For his/her services the Company agrees to pay Employee an
annual salary of not less than ________________________________________________
Dollars ($_________) payable in equal biweekly installments. In addition to the
above amount, at the sole discretion of the Board of Directors, Employee may be
granted bonuses or other compensation in an amount to be determined in
accordance with Board policy.
3. Termination.
(a) For Cause. During the term of this Agreement, Employee's
employment may be terminated by the Company for Cause, effective immediately
upon the day it sends Notice of Termination (as required by Section 10(b)) to
Employee, at which time compensation will cease. Notwithstanding the foregoing,
Employee shall have the right to contest such termination for Cause (for
purposes of this Agreement) by arbitration in accordance with the provisions of
Section 9.
(b) Without Cause. The Company may terminate Employee's
employment without Cause. In the event the Company terminates Employee's
employment without Cause, in addition to the
2
<PAGE>
entire compensation provided for hereunder for the remainder of the term
specified in Section 1(a) (which shall be paid in a lump sum), Employee shall be
entitled to receive upon such termination without Cause (in a lump sum)
severance compensation equal to six (6) months' base salary, less all amounts
required by law to be withheld and deducted.
(c) Change in Control. This Agreement shall not be terminated
upon a Change in Control. In the event of a Change in Control: (i) the
provisions of this Agreement shall be binding on and shall inure to the benefit
of the surviving or resulting corporation, or (in the case of a Change in
Control of the kind referred to in Section 2(a)(i)(z) of the Severance
Agreement) the corporation to which the applicable assets of the Company have
been transferred, and (ii) all of the provisions of the Severance Agreement
shall apply in accordance with its terms. In the event of any inconsistency
between the provisions of the Severance Agreement and this Agreement, the
provisions of the Severance Agreement shall govern. Except to the extent of any
such inconsistency, the provisions of this Agreement and the Severance Agreement
shall apply cumulatively and not exclusively.
4. Nondisclosure and Assignment of Rights in Company Data.
"Company Data" is hereby defined to mean for purposes of this Agreement,
programs, improvements, records, ideas, files, drawings, documents, customer
lists, investment opportunities, sales and marketing techniques and devices,
formulae, specifications, research, studies, investigations, processes, data,
and information disclosed to or known by Employee as a consequence, whether
directly or indirectly, of his/her employment by the Company which is not
generally known in the industry in which the Company is or may become engaged
and which involves special techniques or know-how in connection with the
industry in which the Company is or may become engaged, and, without limiting
the generality of the foregoing, anything not within the public domain and
public knowledge, whether or not patentable or copyrightable. The parties hereto
acknowledge that in the course of his/her employment, Employee will
himself/herself, or with others, have access to, use, come in contact with,
obtain, make, evolve or conceive Company Data. As further consideration for the
Company's
3
<PAGE>
entering into this Agreement, Employee hereby sells, assigns and transfers to
the Company all right, title, and interest he/she has or at any time may have to
Company Data, and to any and all other Company Data at any time used in the
business of the Company in which Employee may have a right, title, or interest,
and such Company Data shall be the sole and exclusive property of the Company.
5. Assignment. The rights and obligations of Employee hereunder
shall not be assignable and any attempted assignment shall be void. The rights
and obligations of the Company hereunder may be assigned as a part of any
transaction which includes the transfer of all or substantially all of the
assets of the Company, whether such transfer is made pursuant to a sale of
assets or stock, or a merger, reorganization, or otherwise.
6. No Obligation to Mitigate Damages. Employee shall not be
required to mitigate damages or the amount of any payment provided for under
this Agreement by seeking other employment or otherwise, nor shall the amount of
any payment provided for under this Agreement be reduced by any compensation
earned by Employee as a result of employment by another employer or by
retirement benefits after the Date of Termination, or otherwise.
7. Successor to the Company. The Company shall require any
successor or assign (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, by agreement satisfactory to Employee, expressly,
absolutely and unconditionally to assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no such succession or assignment had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor or assign to its business and/or assets which executes and delivers
the agreement provided for in this Section 7 or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
4
<PAGE>
8. Heirs of Employee. This Agreement shall inure to the benefit
of and be enforceable by Employee's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If Employee should die while any amounts are still payable to him/her
hereunder, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to Employee's devisees, legatee, or
other designee or, if there be no such designee, to Employee's estate.
9. Arbitration. Any dispute, controversy or claim arising under
or in connection with this Agreement, or the breach hereof, shall be settled
exclusively by arbitration in accordance with the Commercial Arbitration Rules
of the American Arbitration Association then in effect. Judgment upon the award
rendered by Arbitrator(s) may be entered in any court having jurisdiction
thereof. Any arbitration held pursuant to this Section 9 shall take place in San
Francisco, California.
10. Notice.
(a) General. For purposes of this Agreement, notices and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid, as follows:
If to the Company:
Watkins-Johnson Company
3333 Hillview Avenue
Palo Alto, California 94304
Attention: President and Chief Executive Officer of the Company
If to Employee:
__________________
__________________
__________________
5
<PAGE>
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of address shall be effective only
upon receipt.
(b) Notice of Termination. Any purported termination of
employment shall be communicated by a written Notice of Termination to Employee
in accordance with paragraph (a) of this Section 10, and shall state the
specific termination provisions in this Agreement relied upon, and set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Employee's employment.
11. Nonwaiver, Complete Agreement, Governing Law. No provisions of
this Agreement may be modified, waived or discharged unless in writing signed by
both parties. No waiver by either party hereto at any time of any breach by the
other party of, or compliance with, any condition or provision of this Agreement
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement. This Agreement shall be governed by and construed in accordance with
the laws of the State of California.
12. Legal Fees and Expenses. The Company shall pay all reasonable
legal fees and expenses which Employee may incur as a result of the Company's
contesting the validity, enforceability or Employee's good faith interpretation
of, or good faith determinations under, this Agreement; provided, however, that
the Company shall not pay any legal fees and expenses incurred by Employee in
contesting the termination of Employee's employment for Cause if, as a result of
such contest, it is determined that Employee was in fact terminated for Cause.
6
<PAGE>
13. Validity. The invalidity or unenforceability of any provisions
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
15. Certain Defined Terms. Capitalized terms used herein without
definition shall have the meanings given to such terms in the Severance
Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WATKINS-JOHNSON COMPANY
By _____________________
Title:
_____________________
(Employee)
8
Exhibit 10.23
AMENDED AND RESTATED SEVERANCE AGREEMENT
----------------------------------------
THIS AMENDED AND RESTATED SEVERANCE AGREEMENT (the "Agreement"),
originally dated September 28, 1998, and amended and restated in its entirety
effective as of January 25, 1999, is entered into by and between Watkins-Johnson
Company, a California corporation (the "Company"), and ________________
("Employee").
The Company's Board of Directors has determined that it is appropriate
to reinforce and encourage the continued attention and dedication of members of
the Company's management, including Employee, to their assigned duties without
distraction in potentially disturbing circumstances arising from the possibility
of a Change in Control (as defined herein) of the Company.
This Agreement sets forth the severance compensation which the Company
agrees to pay to Employee if Employee's employment with the Company terminates
under one of the circumstances described herein.
1. Term.
(a) This Agreement shall terminate, except for any unpaid
obligation of the Company, upon the earliest of (i) three years from the date
hereof if a Change in Control has not occurred within such three-year period;
(ii) the termination of Employee's employment based on death, Disability (as
defined in Section 2(c)) or Cause (as defined in Section 2(d)) or by Employee
other than for Good Reason (as defined in Section 2(e)); or (iii) three years
from the date of a Change in Control.
<PAGE>
(b) Nothing in this Agreement shall confer upon Employee any
right to continue in the employ of the Company prior to or following a Change in
Control or shall in any way limit the rights of the Company, which are hereby
expressly reserved, to discharge Employee at any time prior to or following the
date of a Change in Control for any reason whatsoever, with or without Cause.
2. Certain Definitions.
(a) Change in Control. A Change in Control shall be deemed to
have occurred if (i) there shall be consummated (x) any consolidation or merger
of the Company in which the Company is not the continuing or surviving
corporation, (y) any other consolidation or merger to which the Company is a
party, regardless of whether shares of the Company's Common Stock would be
converted into cash, securities or other property, other than
2
<PAGE>
a merger of the Company in which the holders of the Company's Common Stock
immediately prior to the merger have the same proportionate ownership of common
stock (or the equivalent fully voting securities) of the surviving corporation
or other entity immediately after the merger, or (z) any sale, lease, exchange
or other transfer (in one transaction or a series of related transactions) of
all, or substantially all, of the assets of the Company, or (ii) the Company
consummates (in one or a series of transactions) the disposition of
substantially all of its business operations, or (iii) any "person" (as defined
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended,
shall become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of 30% or more of the Company's outstanding Common
Stock, or (iv) during any period of two consecutive years, individuals who at
the beginning of such period constitute the entire Board of Directors of the
Company shall cease for any reason to constitute a majority thereof unless the
election, or the nomination for election by the Company's stockholders, of each
new director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period.
3
<PAGE>
(b) Triggering Event. A "Triggering Event" shall be deemed to
have occurred if either (i) (A) a Change in Control occurs while Employee is
still employed by the Company or any of its subsidiaries and (B) Employee's
employment is thereafter terminated (x) by the Company other than for death,
Disability or Cause, (y) by Employee for Good Reason or (z) by Employee pursuant
to the last paragraph of Section 3, or (ii) a Change in Control occurs after the
date on which Employee's employment with the Company or any of its subsidiaries
was terminated (A) by the Company other than for death, Disability or Cause or
(B) by Employee for Good Reason, and such termination is effected by the Company
(or the actions or decisions giving rise to Employee's termination for Good
Reason are taken or made by the Company) in anticipation of a Change in Control
(any such termination, action or decision effected, taken or made within 90 days
prior to the date of any such Change in Control shall be conclusively deemed to
be in anticipation of a Change in Control).
(c) Disability. If, as a result of Employee's incapacity due
to physical or mental illness, Employee shall have been absent from duties with
the Company on a full-time basis for six consecutive months and within 30 days
after written Notice of
4
<PAGE>
Termination (as required by Section 9(b)) is thereafter given by the Company,
Employee shall not have returned to the full-time performance of Employee's
duties, the Company may terminate this Agreement for "Disability."
(d) Cause. For purposes of this Agreement only, the Company
shall have "Cause" to terminate Employee's employment hereunder only on the
basis of fraud, misappropriation, embezzlement or willful engagement by Employee
in misconduct which is demonstrably and materially injurious to the Company and
its subsidiaries taken as a whole. An act, or omission of Employee shall not be
considered "willful" unless done, or omitted to be done, by Employee without
good faith and a reasonable belief that the act or omission was in the best
interests of the Company and its subsidiaries. Employee may not be terminated
for Cause unless and until there shall have been delivered to Employee a copy of
a resolution duly adopted by affirmative vote of not less than three-quarters of
the entire membership of the Company's Board of Directors at a meeting of the
Board called and held for that purpose (after reasonable notice to Employee and
an opportunity for Employee, together with Employee's counsel, to be heard
before the Board), finding Employee was guilty of the conduct set forth in the
first sentence of this Section, and specifying the particulars thereof in
detail. Notwithstanding the foregoing, Employee shall have the right to contest
such termination for Cause (for purposes of this Agreement) by arbitration in
accordance with the provisions of Section 8.
(e) Good Reason. After a Change in Control, Employee may
terminate employment for Good Reason at any time during the term of this
Agreement. For purposes of this Agreement, "Good Reason" shall mean any of the
following (without Employee's express written consent):
5
<PAGE>
(i) the assignment to Employee by the Company of
duties inconsistent with, or a substantial alteration in the nature or status
of, Employee's responsibilities immediately prior to a Change in Control other
than any such alteration primarily attributable to the fact that the Company's
securities are no longer publicly traded;
(ii) a reduction by the Company in Employee's base
salary in effect on the date of a Change in Control or as the same may be
increased from time to time during the term of this Agreement;
(iii) failure by the Company to continue in effect
without substantial change any compensation, incentive, welfare or benefit plan
or arrangement, as well as any plan or arrangement whereby Employee may acquire
securities of the Company, in which Employee is participating at the time of a
Change in Control (or any other plans providing Employee with substantially
similar benefits, hereinafter referred to as "Benefit Plans"), or the taking of
any action by the Company which would adversely affect Employee's participation
in or materially reduce Employee's benefits under any such Benefit Plan or
deprive Employee of any material fringe benefit enjoyed by Employee at the time
of a Change in Control; unless an equitable substitute arrangement (embodied in
an ongoing substitute or alternative Benefit Plan) has been made for the benefit
of Employee with respect to the Benefit Plan in question. For purposes of the
foregoing, Benefit Plans shall include, but not be limited to, the Company's
Employee Stock Ownership Plan, Employees' Profit Sharing and Investment Plan,
Deferred Compensation (401K) Plan, 1991 Stock Option and Incentive Plan, Top
Management Incentive Bonus Plan, and/or any other plan or arrangement to receive
and exercise stock options or stock appreciation rights, incentive, bonus or
other award plans, group
6
<PAGE>
life insurance plans, medical, dental, accident and disability plans;
(iv) a relocation of the Company's principal
executive offices to a location outside the San Francisco-Oakland-San Jose Bay
Area, or Employee's relocation to any place other than the principal executive
offices of the Company, except for required travel by Employee on Company
business to an extent substantially consistent with Employee's business travel
obligations at the time of a Change in Control;
(v) any material breach by the Company of any
provision of this Agreement;
(vi) any failure by the Company to obtain the
assumption of this Agreement by any successor or assign of the Company as
required in Section 6;
(vii) any purported termination of Employee's
employment which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 9(b) below. For purposes of this Agreement, no such
purported termination shall be effective.
7
<PAGE>
(f) Date of Termination. "Date of Termination" shall mean (i)
for Disability, 30 days after Notice of Termination is given to Employee
(provided Employee has not returned to the performance of Employee's duties on a
full-time basis during such 30-day period), or (ii) if Employee's employment is
terminated for any other reason, the date on which notice is given by the
Company or Employee, as the case may be.
3. Severance Compensation upon Termination of Employment in
Connection with a Change in Control. No compensation shall be payable under this
Agreement unless and until a Triggering Event has occurred. Upon the occurrence
of a Triggering Event, the Company shall:
(a) pay to Employee as severance pay in a lump sum, in cash,
on the fifth day following the Date of Termination, an amount equal to 299.999%
of Employee's "Base Compensation" (as defined below); provided, however, that if
the lump sum severance payment under this Section 3, either alone or together
with other payments (or the value of benefits) which Employee has the right to
receive from the Company in connection with a Change in Control, would not be
deductible (in whole or in part) by the Company as a result of such lump sum
payment constituting a "parachute payment" (as defined in Section 280G of the
Internal
8
<PAGE>
Revenue Code of 1986, as amended (collectively the "Code")), such lump sum
severance payment (or, at Employee's election, such other payments and/or
benefits, or a combination of such other payments and/or benefits and such lump
sum severance payment) shall be reduced to the largest amount as will result in
no portion of the lump sum severance payment under this Section 3 not being
fully deductible by the Company as a result of Section 280G of the Code. The
determination of the amount of any such required reduction pursuant to the
foregoing provision, or the valuation of any non-cash benefits for purposes of
such determination, shall be made exclusively by the firm that was acting as the
Company's auditors prior to the Change in Control (whose fees and expenses shall
be borne by the Company), and such determination shall be conclusive and
binding. The term "Base Compensation" shall mean an average of the annual cash
compensation paid to Employee by the Company and any of its subsidiaries in the
form of salary or bonuses (including any amount that is the subject of an
elective deferral by Employee) during the five taxable years (or such lesser
period as Employee was employed by the Company or any of its subsidiaries)
immediately preceding the Change in Control which was includable in gross income
(or would have been so included but for any such
9
<PAGE>
elective deferral) by Employee for federal income tax reporting purposes; and
(b) arrange to provide Employee, for a six-month period (or
such shorter period as Employee may elect), with disability, accident, group
life, medical and dental insurance, all of which shall be prepaid, substantially
similar to those insurance benefits which Employee is receiving immediately
prior to the Notice of Termination. Benefits otherwise receivable by Employee
pursuant to this Section 3(b) shall be reduced to the extent comparable benefits
are actually received by Employee during such six-month period following
termination (or such shorter period elected by Employee), and any such benefits
actually received by Employee shall be reported by Employee to the Company.
Notwithstanding any other provision of this Agreement, if a Change in
Control occurs while Employee is still an employee of the Company, Employee may,
after 90 days and within 120 days of the Change in Control and upon written
notice given in accordance with Section 9(b), terminate employment without Good
Reason, and shall thereupon be entitled to one-half (1/2) of the compensation
described in this Section 3.
10
<PAGE>
4. No Obligation to Mitigate Damages. Employee shall not be required to
mitigate damages or the amount of any payment provided for under this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment
provided for under this Agreement be reduced by any compensation earned by
Employee as a result of employment by another employer or by retirement benefits
after the Date of Termination, or otherwise, except to the extent provided in
Section 3 above.
5. No Effect on Other Contractual Rights. The provisions of this
Agreement, and any payment provided for hereunder, shall not reduce any amounts
otherwise payable, or in any way diminish Employee's existing rights, or rights
which would accrue solely as a result of the passage of time, under any Benefit
Plan, employment agreement or other contract, plan or arrangement, except that
the provisions of this Agreement and any payment provided for hereunder, shall
be in lieu of payments otherwise due to Employee under any of the Company's
severance pay policies on account of Employee's termination of employment upon
(or in anticipation of, as set forth in Section 2(b)) the occurrence of a Change
in Control.
6. Successor to the Company. The Company shall require any successor or
assign (whether direct or indirect, by purchase,
11
<PAGE>
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company, by agreement satisfactory to Employee, expressly,
absolutely and unconditionally to assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no such succession or assignment had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor or assign to its business and/or assets which executes and delivers
the agreement provided for in this Section 6 or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
7. Heirs of Employee. This Agreement shall inure to the benefit of and
be enforceable by Employee's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Employee should die while any amounts are still payable to Employee hereunder,
all such amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to Employee's devisee, legatee, or other
designee or, if there be no such designee, to Employee's estate.
12
<PAGE>
8. Arbitration. Any dispute, controversy or claim arising under or in
connection with this Agreement, or the breach hereof, shall be settled
exclusively by arbitration in accordance with the Commercial Arbitration Rules
of the American Arbitration Association then in effect. Judgment upon the award
rendered by Arbitrator(s) may be entered in any court having jurisdiction
thereof. Any arbitration held pursuant to this Section 8 shall take place in San
Francisco, California.
9. Notice.
(a) General. For purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to the Company:
Watkins-Johnson Company
3333 Hillview Avenue
Palo Alto, California 94304-1223
Attention: President of the Company
If to Employee:
_______________________
_______________________
_______________________
13
<PAGE>
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
(b) Notice of Termination. Any purported termination of
employment shall be communicated by a written Notice of Termination to Employee
in accordance with paragraph (a) of this Section 9, and shall state the specific
termination provisions in this Agreement relied upon, and set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Employee's employment.
10. Nonwaiver, Complete Agreement, Governing Law. No provisions of this
Agreement may be modified, waived or discharged unless in writing signed by both
parties. No waiver by either party hereto at any time of any breach by the other
party of, or compliance with, any condition or provision of this agreement shall
be deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this Agreement.
This Agreement shall be governed by
14
<PAGE>
and construed in accordance with the laws of the State of California.
11. Legal Fees and Expenses. The Company shall pay all reasonable legal
fees and expenses which Employee may incur as a result of the Company's
contesting the validity, enforceability or Employee's good faith interpretation
of, or good faith determinations under, this Agreement; provided, however, that
the Company shall not pay any legal fees and expenses incurred by Employee in
contesting the termination of Employee's employment for Cause if, as a result of
such contest, it is determined that Employee was in fact terminated for Cause.
12. Confidentiality. Employee shall retain in confidence any and all
confidential information known to Employee concerning the Company and its
business so long as such information is not otherwise publicly disclosed.
13. Validity. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an
15
<PAGE>
original but all of which together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WATKINS-JOHNSON COMPANY, a California
corporation
By ____________________________
Title: _____________________
_______________________________
Employee
16
Exhibit 10.24
AMENDED AND RESTATED SEVERANCE AGREEMENT
THIS AMENDED AND RESTATED SEVERANCE AGREEMENT (the "Agreement"),
originally dated September 28, 1998, and amended and restated in its entirety
effective as of January 25, 1999, is entered into by and between Watkins-Johnson
Company, a California corporation (the "Company"), and Scott Buchanan
("Employee").
The Company's Board of Directors has determined that it is appropriate
to reinforce and encourage the continued attention and dedication of Employee to
his assigned duties without distraction in potentially disturbing circumstances
arising from the possibility of a Change in Control (as defined in Section 2(a))
of the Company.
This Agreement sets forth the severance compensation which the Company
agrees to pay to Employee if Employee's employment with the Company terminates
under one of the circumstances described herein.
1. Term.
(a) This Agreement shall terminate, except for any unpaid
obligation of the Company, upon the earliest of (i) three
<PAGE>
years from the date hereof if a Change in Control has not occurred within such
three-year period; (ii) the termination of Employee's employment by the Company
based on death, Disability (as defined in Section 2(c)) or Cause (as defined in
Section 2(d)) or by Employee other than for Good Reason (as defined in Section
2(e); or (iii) three years from the date of a Change in Control.
(b) Nothing in this Agreement shall confer upon Employee any
right to continue in the employ of the Company prior to or following a Change in
Control or shall in any way limit the rights of the Company, which are hereby
expressly reserved, to discharge Employee at any time prior to or following the
date of a Change in Control for any reason whatsoever, with or without Cause.
2. Certain Definitions.
(a) Change in Control. A "Change in Control" shall be deemed
to have occurred if (i) there shall be consummated (x) any consolidation or
merger of the Company in which the Company is not the continuing or surviving
corporation, (y) any other consolidation or merger to which the Company is a
party, regardless of whether shares of the Company's Common Stock would
2
<PAGE>
be converted into cash, securities or other property, other than a merger of the
Company in which the holders of the Company's Common Stock immediately prior to
the merger have the same proportionate ownership of common stock (or the
equivalent fully voting securities) of the surviving corporation or other entity
immediately after the merger, or (z) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company, or (ii) the Company consummates
(in one or a series of transactions) the disposition of substantially all of its
operating businesses, or (iii) any "person" (as defined in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended, shall become the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of 30% or more of the Company's outstanding Common Stock, or (iv)
during any period of two consecutive years, individuals who at the beginning of
such period constitute the entire Board of Directors of the Company shall cease
for any reason to constitute a majority thereof unless the election, or the
nomination for election by the Company's stockholders, of each new director was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period.
(b) Triggering Event. A "Triggering Event" shall be deemed to
have occurred if either (i) a Change in Control occurs while Employee is still
an employee of the Company or any of its subsidiaries or (ii) a Change in
Control occurs after the date on which Employee's employment with the Company or
any of its subsidiaries was terminated (x) by the Company other than for death,
Disability or Cause or (y) by Employee for Good Reason, and such termination is
effected by the Company (or the actions or decisions giving rise to Employee's
termination for Good Reason are taken
3
<PAGE>
or made by the Company) in anticipation of a Change in Control (any such
termination, action or decision effected, taken or made within 90 days prior to
the date of any such Change in Control shall be conclusively deemed to be in
anticipation of a Change in Control).
(c) Disability. If, as a result of Employee's incapacity due
to physical or mental illness, Employee shall have been absent from duties with
the Company on a full-time basis for six consecutive months and within 30 days
after written Notice of Termination (as required by Section 9(b)) is thereafter
given by the Company, Employee shall not have returned to the full-time
4
<PAGE>
performance of Employee's duties, the Company may terminate this Agreement for
"Disability."
(d) Cause. For purposes of this Agreement only, the Company shall
have "Cause" to terminate Employee's employment hereunder only on the basis of
fraud, misappropriation, embezzlement or willful engagement by Employee in
misconduct which is demonstrably and materially injurious to the Company and its
subsidiaries taken as a whole. An act, or omission of Employee shall not be
considered "willful" unless done, or omitted to be done, by Employee without
good faith and a reasonable belief that the act or omission was in the best
interests of the Company and its subsidiaries. Employee may not be terminated
for Cause unless and until there shall have been delivered to Employee a copy of
a resolution duly adopted by affirmative vote of not less than three-quarters of
the entire membership of the Company's Board of Directors at a meeting of the
Board called and held for that purpose (after reasonable notice to Employee and
an opportunity for Employee, together with Employee's counsel, to be heard
before the Board), finding Employee was guilty of the conduct set forth in the
first sentence of this Section, and specifying the particulars thereof in
detail. Notwithstanding the foregoing, Employee shall have the right to contest
such termination for Cause (for purposes of this Agreement) by arbitration in
accordance with the provisions of Section 8.
(e) Good Reason. For purposes of this Agreement, "Good Reason"
shall mean any of the following (without Employee's express written consent):
(i) the assignment to Employee by the Company of duties
inconsistent with, or a substantial alteration in the nature or status of,
Employee's responsibilities immediately prior to a
5
<PAGE>
Change in Control other than any such alteration primarily attributable to the
fact that the Company's securities are no longer publicly traded;
(ii) a reduction by the Company in Employee's base salary in
effect on the date of a Change in Control or as the same may be increased from
time to time during the term of this Agreement;
(iii) failure by the Company to continue in effect without
substantial change any compensation, incentive, welfare or benefit plan or
arrangement, as well as any plan or arrangement whereby Employee may acquire
securities of the Company, in which Employee is participating at the time of a
Change in Control (or any other plans providing Employee with substantially
similar benefits, hereinafter referred to as "Benefit Plans"), or the taking of
any action by the Company which would adversely affect Employee's participation
in or materially reduce Employee's benefits under any such Benefit Plan or
deprive Employee of any material fringe benefit enjoyed by Employee at the time
of a Change in Control; unless an equitable substitute arrangement (embodied in
an ongoing substitute or alternative Benefit Plan) has been made for the benefit
of Employee with respect to the Benefit Plan in question. For purposes of the
foregoing, Benefit Plans shall include, but not be limited to, the Company's
Employee Stock Ownership Plan, Employees' Profit Sharing and Investment Plan,
Deferred Compensation (401K) Plan, 1991 Stock Option and Incentive Plan, Top
Management Incentive Bonus Plan, and/or any other plan or arrangement to receive
and exercise stock options or stock appreciation rights, incentive, bonus or
other award plans, group life insurance plans, medical, dental, accident and
disability plans;
(iv) a relocation of the Company's principal executive
offices to a location outside the San Francisco-Oakland-San Jose Bay Area, or
Employee's relocation to any place
6
<PAGE>
other than the principal executive offices of the Company, except for required
travel by Employee on Company business to an extent substantially consistent
with Employee's business travel obligations at the time of a Change in Control;
(v) any material breach by the Company of any provision of
this Agreement;
(vi) any failure by the Company to obtain the assumption of
this Agreement by any successor or assign of the Company as required in Section
6;
(vii) any purported termination of Employee's employment
which is not effected pursuant to a Notice of Termination satisfying the
requirements of Section 9(b) below. For purposes of this Agreement, no such
purported termination shall be effective.
(f) Date of Termination. "Date of Termination" shall mean (i) for
Disability, 30 days after Notice of Termination is given to Employee (provided
Employee has not returned to the performance of Employee's duties on a full-time
basis during such 30-day period), or (ii) if Employee's employment is terminated
for any other reason, the date on which notice is given by the Company or
Employee, as the case may be.
7
<PAGE>
3. Severance Compensation upon Termination of Employment in Connection
with a Change in Control. No compensation shall be payable under this Agreement
unless and until a Triggering Event has occurred. Upon the occurrence of a
Triggering Event, the provisions of this Agreement shall be binding on and shall
inure to the benefit of the surviving or resulting corporation, or (in the case
of a Change in Control of the kind referred to in Section 2(a)(i)(y)) the
corporation to which the applicable assets of the Company have been transferred;
provided, however, that (a) Employee may treat the occurrence of a Triggering
Event as a material breach of this Agreement and may terminate this Agreement
upon written notice given (in accordance with Section 9(b)) within 120 days of
the occurrence of a Change in Control, unless Employee's employment has
theretofore been terminated for death, Disability or Cause, and (b) Employee may
terminate this Agreement for Good Reason at any time prior to the second
anniversary of a Change in Control and during the remainder of the term of this
Agreement as specified in Section 1(a). Upon such termination by Employee under
this Section 3, or upon the termination of Employee's employment by the Company
without Cause at any time prior to the second anniversary of a Change in
Control, the Company shall:
8
<PAGE>
(i) pay to Employee as severance pay in a lump sum, in
cash, on the fifth day following the Date of Termination, an amount equal to the
aggregate of (x) 299.999% of Employee's "Base Compensation" (as defined below),
plus (y) an amount equal to (A) the amount previously determined by the Board as
Employee's target bonus for the calendar year in which Notice of Termination is
given by Employee or the Company, as the case may be, multiplied by (B) a
fraction, the numerator of which shall be the number of days that have elapsed
during such calendar year, through and including the date on which such Notice
of Termination is given, and the denominator of which shall be 365; provided,
however, that if the lump sum severance payment under this Section 3, either
alone or together with other payments (or the value of other benefits) which
Employee has the right to receive from the Company in connection with a Change
in Control, would not be deductible (in whole or in part) by the Company as a
result of such lump sum payment constituting a "parachute payment" (as defined
in Section 280G of the Internal Revenue Code of 1986, as amended (collectively
the "Code")), such lump sum severance payment (or, at Employee's election, such
other payments and/or benefits, or a combination of such other payments and/or
benefits and such lump sum severance payment) shall be
9
<PAGE>
reduced to the largest amount as will result in no portion of the lump sum
severance payment under this Section 3 not being fully deductible by the Company
as a result of Section 280G of the Code. The determination of the amount of any
such required reduction pursuant to the foregoing provision, and the valuation
of any non-cash benefits for purposes of such determination, shall be made
exclusively by the firm that was acting as the Company's auditors prior to the
Change in Control (whose fees and expenses shall be borne by the Company), and
such determination shall be conclusive and binding. The term "Base Compensation"
shall mean an average of the annual cash compensation paid to Employee by the
Company and any of its subsidiaries in the form of salary or bonuses (including
any amount that is subject of an elective deferral by Employee) during the five
taxable years immediately preceding the Change in Control which was includable
in gross income (or would have been so included but for any such elective
deferral) by Employee for federal income tax reporting purposes; and
(ii) arrange to provide Employee, for a thirty-six month
period (or such shorter period as Employee may elect), with disability,
accident, group life, medical and dental insurance, all of which shall be
prepaid, substantially similar to those
10
<PAGE>
insurance benefits which Employee is receiving immediately prior to a
termination by Employee under this Section 3. Benefits otherwise receivable by
Employee pursuant to this Section 3 shall be reduced to the extent comparable
benefits are actually received by Employee during such thirty-six month period
(or such shorter period elected by Employee), and any such benefits actually
received by Employee shall be reported by Employee to the Company.
4. No Obligation to Mitigate Damages. Employee shall not be required to
mitigate damages or the amount of any payment provided for under this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment
provided for under this Agreement be reduced by any compensation earned by
Employee as a result of employment by another employer or by retirement benefits
after the Date of Termination, or otherwise, except to the extent provided in
Section 3 above.
5. No Effect on Other Contractual Rights. The provisions of this
Agreement, and any payment provided for hereunder, shall not reduce any amounts
otherwise payable, or in any way diminish Employee's existing rights, or rights
which would accrue solely as a result of the passage of time, under any Benefit
Plan, employment agreement or other contract, plan or arrangement,
11
<PAGE>
except that the provisions of this Agreement and any payment provided for
hereunder, shall be in lieu of payments otherwise due to Employee under any of
the Company's severance pay policies on account of Employee's termination of
employment upon (or in anticipation of, as set forth in Section 2(b)) the
occurrence of a Change in Control.
6. Successor to the Company. The Company shall require any successor or
assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, by agreement satisfactory to Employee, expressly, absolutely and
unconditionally to assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform it if no
such succession or assignment had taken place. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor or
assign to its business and/or assets which executes and delivers the agreement
provided for in this Section 6 or which otherwise becomes bound by all the terms
and provisions of this Agreement by operation of law.
7. Heirs of Employee. This Agreement shall inure to the benefit of and
be enforceable by Employee's personal and legal
12
<PAGE>
representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If Employee should die while any amounts
are still payable to Employee hereunder, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
Employee's devisee, legatee, or other designee or, if there be no such designee,
to Employee's estate.
8. Arbitration. Any dispute, controversy or claim arising under or in
connection with this Agreement, or the breach hereof, shall be settled
exclusively by arbitration in accordance with the Commercial Arbitration Rules
of the American Arbitration Association then in effect. Judgment upon the award
rendered by Arbitrator(s) may be entered in any court having jurisdiction
thereof. Any arbitration held pursuant to this Section 8 shall take place in San
Francisco, California.
9. Notice.
(a) General. For purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
13
<PAGE>
If to the Company:
Watkins-Johnson Company
3333 Hillview Avenue
Palo Alto, California 94304-1223
Attention: President of the Company
If to Employee:
Scott Buchanan
5144 Independence Drive
Pleasanton, California 94566
or such other address as either party may have furnished to the other
in writing in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
(b) Notice of Termination. Any purported termination of
employment shall be communicated by a written Notice of Termination to Employee
in accordance with paragraph (a) of this Section 9, and shall state the specific
termination provisions in this Agreement relied upon, and set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Employee's employment.
10. Nonwaiver, Complete Agreement, Governing Law. No provisions of
this Agreement may be modified, waived or discharged unless in writing signed by
both parties. No waiver by either party hereto at any time of any breach by the
other party of, or compliance with, any condition or provision of this agreement
shall be deemed a waiver of similar or dissimilar
14
<PAGE>
provisions or conditions at the same or at any prior or subsequent time. No
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not set forth expressly in this Agreement. This Agreement shall be governed by
and construed in accordance with the laws of the State of California.
11. Legal Fees and Expenses. The Company shall pay all reasonable
legal fees and expenses which Employee may incur as a result of the Company's
contesting the validity, enforceability or Employee's good faith interpretation
of, or good faith determinations under, this Agreement; provided, however, that
the Company shall not pay any legal fees and expenses incurred by Employee in
contesting the termination of Employee's employment for Cause if, as a result of
such contest, it is determined that Employee was in fact terminated for Cause.
12. Confidentiality. Employee shall retain in confidence any and
all confidential information known to Employee concerning the Company and its
business so long as such information is not otherwise publicly disclosed.
15
<PAGE>
13. Validity. The invalidity or unenforceability of any provisions
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WATKINS-JOHNSON COMPANY, a California
corporation
By /s/ W. Keith Kennedy
--------------------
Title: President & CEO
---------------
/s/ Scott G. Buchanan
---------------------
Scott Buchanan
16
Exhibit 10.25
Watkins-Johnson Company Employee Retention Program
March 1, 1999
As WJ has announced its intention to sell itself either in its entirety or as
separate business segments, we want to assure you of the continued importance
you each have to WJ, the products we produce, and the customers we support. We
hope that the bonus programs described below will ensure that every employee
will have an incentive to stay with WJ during these difficult times.
To participate in the following programs, or any other severance payments, you
will be required to waive any claims against WJ. This waiver will be given to
you at the time the entire company or your business unit is sold.
Enhanced Profit Sharing Package
Currently, every employee of Watkins-Johnson Company shares in a profit sharing
bonus that pays a percentage of salary based on either group profit or WJ
profit. Realizing that strong profitability is a large factor in creating value,
WJ will double and annualize the profit sharing for each employee. This means
that when the divestiture transaction for each employees' group closes or when
the sale of all of WJ is complete, whichever comes first, using the regular
profit sharing formula, WJ will compute the profit sharing percentage at the
close of the transaction and then double and extend that percentage for all of
1999.
Transfer Bonus
We want to further reward those people who choose to stay with WJ until their
group's transaction closes or until the sale of the entire company is complete,
whichever comes first, and who then accept and begin employment with the company
that purchases their group or the entire company. These people will receive a
transfer bonus of two weeks base salary to be paid by WJ. The Transfer Bonus
will require the confirmation to WJ that you have begun employment with the
buyer of your group or the entire company.
RIF Protection
With the uncertainties of this period, we recognize the concern employees may
have about the possible necessity for a reduction in force in selected job
areas. To address this concern, in addition to the WJ Enhanced Severance
package, any WJ employee not transferred to the new employer and RIF'd by WJ
during the balance of 1999 will receive the doubled and annualized Enhanced
Profit Sharing Bonus described above. This RIF protection will not be applicable
in circumstances in which the transfer bonus would apply.
The purpose of this document is to summarize the retention program and is
informational only.
Formal documents will be distributed at a later date.
Exhibit 21
SUBSIDIARIES OF WATKINS-JOHNSON COMPANY
Jurisdiction of
Subsidiary Incorporation
- --------------------------------------------------------------------------------
WJ Semiconductor Equipment Group, Inc. California
Watkins-Johnson FSC Guam
Watkins-Johnson International California
Watkins-Johnson International Japan, K.K. Japan
Watkins-Johnson International Korea, Limited Korea
Watkins-Johnson International Singapore PTE, Limited Singapore
Watkins-Johnson International Taiwan Taiwan
Watkins-Johnson Europe, Limited United Kingdom
Page 53
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-21142 on Form S-8 of our reports dated February 5, 1999 (March 4, 1999 as to
Note 12 of the Consolidated Financial Statements) appearing in this Annual
Report on Form 10-K of Watkins-Johnson Company for the year ended December 31,
1998.
Deloitte & Touche LLP
San Jose, California
March 11, 1999
Page 54
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0
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