-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sfvv3oUku6Hvv8RXAsXXKclabEEgIJwnLCDQ4n0mlbPvTjO0UekvpiB31hrF3IsW z7fA6VypcpjTYwJM2YqB9A== 0000950005-99-000245.txt : 19990310 0000950005-99-000245.hdr.sgml : 19990310 ACCESSION NUMBER: 0000950005-99-000245 CONFORMED SUBMISSION TYPE: PRER14A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19990309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WATKINS JOHNSON CO CENTRAL INDEX KEY: 0000105006 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 941402710 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: PRER14A SEC ACT: SEC FILE NUMBER: 001-05631 FILM NUMBER: 99561038 BUSINESS ADDRESS: STREET 1: 3333 HILLVIEW AVE CITY: PALO ALTO STATE: CA ZIP: 94304-1223 BUSINESS PHONE: 4154934141 MAIL ADDRESS: STREET 1: 3333 HILLVIEW AVENUE CITY: PALO ALTO STATE: CA ZIP: 94304-1223 PRER14A 1 PRER14A SCHEDULE 14A INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. 1) Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [X] Preliminary Proxy Statement [ ] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12 [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) Watkins-Johnson Company ------------------------------------------------ (Name of Registrant as Specified In Its Charter) ------------------------------------------------------------------------ (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: WATKINS-JOHNSON COMPANY 3333 HILLVIEW AVENUE STANFORD RESEARCH PARK PALO ALTO, CALIFORNIA 94304 Dean A. Watkins W. Keith Kennedy, Jr. Chairman of the Board President and Chief Executive Officer H. Richard Johnson Vice Chairman March 17, 1999 Dear Shareowner: We, as well as all of the other officers and directors of Watkins-Johnson Company, cordially invite you to attend the Company's Annual Meeting of Shareowners, to be held at 10:00 o'clock in the morning on Thursday, April 29, 1999, at Hotel Sofitel, 233 Twin Dolphin Drive, Redwood City, California 94065. In addition to conducting the business of the meeting, we will report to you on the progress of the Company and answer any appropriate questions you may have. Significant matters will be acted upon at the meeting. Please plan to come, but whether or not you can, your participation is important. We ask that you take the time, immediately, to complete the enclosed proxy card and return it in the enclosed envelope. If you have any questions or need assistance completing your proxy, please call MacKenzie Partners, Inc. at (212) 929-5500 (call collect) or toll-free at (800) 322-2855. Sincerely yours, Dean A. Watkins H. Richard Johnson W. Keith Kennedy, Jr. WATKINS-JOHNSON COMPANY Notice of Annual Meeting of Shareowners Thursday, April 29, 1999 10:00 a.m. TO THE SHAREOWNERS: The Annual Meeting of Shareowners of Watkins-Johnson Company (the "Company") will be held at Hotel Sofitel, 233 Twin Dolphin Drive, Redwood City, California 94065, on Thursday, April 29, 1999, at 10:00 a.m. to: 1. Elect directors for the ensuing year. 2. Approve amendments to the Company's Articles of Incorporation and Bylaws to eliminate their super-majority shareowner voting requirements. The amendments will decrease (from four-fifths of the voting power to a majority of the voting power) the shareowner vote required to (i) amend the Company's Articles of Incorporation, (ii) amend the Company's Bylaws, and (iii) approve a merger or sale of the Company. 3. Approve amendments to the Company's Bylaws to eliminate the super-majority director voting requirements. The amendments will decrease (from 75% of the directors to a majority of a quorum) the director vote required to (i) amend the Bylaws and (ii) take certain corporate actions. 4. Approve the appointment of independent public accountants for fiscal 1999. 5. Consider such other business as may properly be brought before the meeting. Only shareowners of record at the close of business on March 10, 1999 are entitled to notice of and to vote at this meeting and any adjournment or postponement thereof. By order of the Board of Directors Claudia D. Kelly, Secretary Palo Alto, California March 17, 1999 Whether or not you plan to attend the Annual Meeting, please mark, sign, date and return the enclosed proxy as promptly as possible in the enclosed postage-paid envelope. WATKINS-JOHNSON COMPANY PROXY STATEMENT The accompanying proxy is solicited on behalf of the Board of Directors (the "Board") of Watkins-Johnson Company, a California corporation (the "Company"), for use at the Annual Meeting of Shareowners of the Company and at any adjournments or postponements thereof (the "Annual Meeting"). The Annual Meeting will be held on Thursday, April 29, 1999 at 10:00 a.m. The Company's principal executive offices are located at 3333 Hillview Avenue, Stanford Research Park, Palo Alto, California 94304. This Proxy Statement and the form of proxy, together with the Company's 1998 Annual Report, were first mailed to shareowners on or about March 17, 1999. Proxies which are properly executed and received by the Company before the Annual Meeting will be voted at the Annual Meeting. Any shareowner giving a proxy has the power to revoke it at any time before it is voted by filing with the Secretary of the Company either an instrument revoking the proxy or a duly executed proxy bearing a later date. Proxies also may be revoked by any shareowner of record present at the Annual Meeting who expresses a desire to vote in person. Each shareowner of record is entitled to one vote per share of common stock of the Company, no par value (the "Common Stock"), owned on all matters submitted to a vote of shareowners, except that each shareowner is entitled to cumulate his or her votes in electing directors. That is, in voting for directors, a shareowner may cast a number of votes equal to the product of the number of directors to be elected multiplied by the number of shares of Common Stock the shareowner owns of record. All of these votes may be cast for any combination of one or more directors. However, no shareowner shall be entitled to cumulate votes unless a shareowner has given notice at the Annual Meeting prior to the voting of the intention to cumulate the shareowner's vote. If cumulative voting is applicable with respect to the election of directors, then where no vote is specified or where a vote FOR all nominees is marked, the cumulative votes represented by a proxy will be cast, unless contrary instructions are given, at the discretion of the proxies named therein in order to assure the election of all nominees. Accordingly, shareowners should be aware that cumulative voting could prevent their votes being cast in favor of all of the Company's nominees. If a shareowner desires to cumulate his or her votes, the accompanying proxy card should be marked to indicate clearly that the shareowner desires to exercise the right to cumulate votes and to specify how the votes are to be allocated among the nominees for directors. Alternatively, without exercising his or her right to vote cumulatively, a shareowner may instruct the proxies not to vote for one or more nominees by writing the name(s) of such nominee or nominees on the space provided on the proxy card. Unless indicated to the contrary in the space provided on the proxy card, if a shareowner withholds authority to vote for one or more nominees, all cumulative votes of such shareowner will be distributed among one or more of the remaining nominees at the discretion of the proxies. Where no vote is specified, the proxy will be voted FOR proposals 2, 3, and 4 described herein and in the discretion of such proxies with respect to any proposal that properly comes before the Annual Meeting, including a motion to adjourn the Annual Meeting to another time or place (including for the purpose of soliciting additional proxies). Abstentions will be treated as shares that are present for purposes of determining the presence of a quorum. Abstentions will have the effect of a vote against proposals brought before the Annual Meeting. Proxies marked to withhold authority for all directors will not be counted on the election of the directors. If a broker indicates on the proxy that it does not have discretionary authority as to certain shares to vote on a particular matter (a broker non-vote), those shares will be considered as present for quorum purposes on all matters. Broker non-votes will have no effect on any matter to be brought before the Annual Meeting, including the election of directors. Please complete, date and sign the enclosed proxy card and return it promptly in the envelope provided. If your shares are held in "street name," only your bank or broker can vote your shares and only upon your specific instructions. Please contact the person responsible for your account and instruct him or her to vote the proxy card as soon as possible. 2 COST AND METHOD OF SOLICITATION In addition to the solicitation of proxies by use of the mails, proxies may also be solicited by the Company and its directors, officers and management-level employees (who will receive no compensation therefor in addition to their regular salaries and fees) by telephone, telegram, facsimile transmission and other electronic communication methods or personal interview. The Company will reimburse banks and brokers who hold shares of the Common Stock in their name or custody, or in the name of nominees for others, for their out-of-pocket expenses incurred in forwarding copies of the proxy materials to those persons for whom they hold such shares. The Company has retained MacKenzie Partners, Inc. ("MacKenzie") to assist in the solicitation of proxies. Pursuant to the Company's agreement with MacKenzie, MacKenzie will provide various proxy advisory and solicitation services for the Company at a cost of $12,500, plus reasonable out-of-pocket expenses and indemnification against certain liabilities. It is expected that MacKenzie will use approximately 50 persons in such solicitation. The Company has engaged CIBC Oppenheimer Corp. ("CIBC Oppenheimer") to act as its financial advisor in connection with certain extraordinary corporate transactions involving the Company, for which the Company has agreed to pay CIBC Oppenheimer certain fees and to reimburse CIBC Oppenheimer for out-of-pocket expenses related to its services. In addition, the Company has agreed to indemnify CIBC Oppenheimer and certain related persons and entities against certain liabilities, including liabilities under the federal securities laws, arising out of its engagement. CIBC Oppenheimer is an investment banking firm that provides a full range of financial services for institutional and individual clients. In connection with CIBC Oppenheimer's role as financial advisor to the Company, certain employees of CIBC Oppenheimer may communicate in person, by telephone or otherwise with a limited number of institutions, brokers or other persons who are stockholders of the Company. CIBC Oppenheimer does not admit that it or any of its directors, officers or employees is a "participant" as defined in Schedule 14A promulgated under the Securities Act of 1934, as amended, in the solicitation, or that Schedule 14A requires the disclosure of certain information concerning CIBC Oppenheimer. CIBC will not receive a separate fee with respect to any solicitation in which it may engage. 3 VOTING SECURITIES Only shareowners of record at the close of business on March 10, 1999 (the "Record Date") are entitled to notice of and to vote at the Annual Meeting. On the Record Date, the Company had outstanding [____________] shares of Common Stock. 4 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT The following table sets forth information as of December 31, 1998, with respect to the ownership of the Common Stock by (i) any person who is known to the Company to be the beneficial owner of more than 5% of the Common Stock, (ii) all directors, (iii) each of the executive officers named in the Summary Compensation Table beginning on page 11, and (iv) all directors and officers of the Company as a group.
Amount and Nature of Beneficial Owner Beneficial Ownership Percent(1) - ---------------- -------------------- ---------- Mellon Bank Corporation 599,988(2) 9.16 One Mellon Bank Center Pittsburgh, Pennsylvania 15258 Banner Aerospace 512,000(3) 7.82 45025 Aviation Drive Suite 400 Dullas, Virginia 20166 Dimensional Fund Advisors 473,600(4) 7.23 1299 Ocean Avenue, 11th Floor Santa Monica, California 90401 Central Securities Corporation 465,000(5) 7.10 375 Park Avenue New York, New York 10152 The TCW Group, Inc. 439,000(6) 6.70 865 South Figueroa Street Los Angeles, California 90017 Dean A. Watkins 258,020(7) 3.9 H. Richard Johnson 39,259(8) * W. Keith Kennedy, Jr. 353,119(9) 5.4 John J. Hartmann 20,120(10) * Raymond F. O'Brien 22,420(11) * William R. Graham 26,950(12) * Gary M. Cusumano 12,993(13) * Robert L. Prestel 12,793(14) * Malcolm J. Caraballo 87,753(15) * Patrick J. Brady 36,701(16) * Scott G. Buchanan 62,864(17) * Robert G. Hiller 18,253(18) * All directors and officers as a group 973,655(19) 14.9 (15 persons) - -------------- * less than 1% of shares outstanding. 5 (1) Based on 6,547,687 shares of Common Stock issued and outstanding as of December 31, 1998. (2) Based on a Schedule 13G (as amended) filed by such shareowner. Amount includes 138,688 shares beneficially owned by Mellon Bank N.A. The securities reported include all shares held of record by Mellon Bank, N.A. as trustee of the Company's employee benefit plan which have not been allocated to the individual accounts of employee participants in such plan. Mellon Bank, N.A. disclaims beneficial ownership of all shares that have been allocated to the individual accounts of employee participants for such plan for which directions have been received and followed. (3) Based on a Schedule 13D filed by such shareowner. (4) Based on a Schedule 13G filed by such shareowner. (5) Based on a Schedule 13G (as amended) filed by such shareowner. (6) Based on a Schedule 13G filed by such shareowner. (7) Includes 9,000 shares of Common Stock issuable upon exercise of stock options within 60 days of December 31, 1998. (8) Includes 9,000 shares of Common Stock issuable upon exercise of stock options within 60 days of December 31, 1998. (9) Includes 282,000 shares of Common Stock issuable upon exercise of stock options within 60 days of December 31, 1998 and 6,409 shares of Common Stock under the Company's stock ownership plans. (10) Includes 19,520 shares of Common Stock issuable upon exercise of stock options within 60 days of December 31, 1998. (11) Includes 16,420 shares of Common Stock issuable upon exercise of stock options within 60 days of December 31, 1998. (12) Includes 26,650 shares of Common Stock issuable upon exercise of stock options within 60 days of December 31, 1998. (13) Includes 12,493 shares of Common Stock issuable upon exercise of stock options within 60 days of December 31, 1998. (14) Includes 12,493 shares of Common Stock issuable upon exercise of stock options within 60 days of December 31, 1998. (15) Includes 62,633 shares of Common Stock issuable upon exercise of stock options within 60 days of December 31, 1998 and 8,420 shares of Common Stock under the Company's stock ownership plans. (16) Includes 33,665 shares of Common Stock issuable upon exercise of stock options within 60 days of December 31, 1998 and 3,030 shares of Common Stock under the Company's stock ownership plans. (17) Includes 50,590 shares of Common Stock issuable upon exercise of stock options within 60 days of December 31, 1998 and 4,974 shares of Common Stock under the Company's stock ownership plans. (18) Includes 17,666 shares of Common Stock issuable upon exercise of stock options within 60 days of December 31, 1998 and 587 shares of Common Stock under the Company's stock ownership plans. (19) Includes 594,622 shares of Common Stock issuable upon exercise of stock options within 60 days of December 31, 1998 and 42,292 shares of Common Stock under the Company's stock ownership plans.
6 ELECTION OF DIRECTORS (PROPOSAL 1 ON PROXY CARD) Eight directors are to be elected at the Annual Meeting, each to hold office until his successor is elected and qualified, or until death, resignation or removal. It is the intention of the persons named in the enclosed proxy card to vote the proxies in favor of electing the persons named below as directors. If any of the persons named refuses or is unable to serve (which is not anticipated), the persons named as proxies reserve full discretion to vote for any or all other persons as may be nominated. The eight nominees receiving the greatest number of votes will be elected as directors. NOMINEES FOR ELECTION AS DIRECTORS DEAN A. WATKINS; Chairman of the Board, Watkins-Johnson Company; Director since 1957. Dr. Watkins, 76, has been Chairman of the Board since 1967. He is a member of the Board of Overseers, Hoover Institution on War, Revolution and Peace (Chairman, 1971-73 and 1985-86). He is a Fellow of the Institute of Electrical and Electronics Engineers and of the American Association for the Advancement of Science, and a member of the National Academy of Engineering. He is a former member of the Board of Directors, California Chamber of Commerce (President, 1981); a former member of the Board of Regents, University of California (Chairman, 1972-74); a former Trustee of Stanford University, and a former member of the White House Science Council. H. RICHARD JOHNSON; Vice Chairman of the Board, Watkins-Johnson Company; Director since 1957. Dr. Johnson, 72, was President and Chief Executive Officer of the Company from 1973 through 1987, and became Vice Chairman on January 1, 1988. He is a member of the National Academy of Engineering and a Fellow of the Institute of Electrical and Electronics Engineers. He is past President of the Stanford Area Council, Boy Scouts of America; and has served as a Director of the National Association of Manufacturers, the Santa Clara County Manufacturing Group and the Tech Museum of Innovation. W. KEITH KENNEDY, JR.; President and Chief Executive Officer, Watkins-Johnson Company; Director since 1987. Dr. Kennedy, 55, has been President and Chief Executive Officer of the Company since January 1, 1988. Dr. Kennedy joined the Company in 1968, and was a Division Manager, Group Vice President and Vice President of Planning Coordination and Shareowner Relations prior to becoming President. He is a Director of CNF Transportation Inc., the Joint Venture Silicon Valley Network, the Silicon Valley Manufacturing Group, and the California Chamber of Commerce; and is a senior member of the Institute of Electrical and Electronics Engineers. 7 JOHN J. HARTMANN; Financial Consultant; Director since 1966. Mr. Hartmann, 80, is Chairman of both the Audit and Nominating Committees of the Board. He was a member of the Board of Directors of the Company from 1958 to 1961 and rejoined the Board in 1966. From 1967 to 1970 he was a general partner of J. Barth & Company, investment bankers, and prior to that was Chief Financial and Planning Officer of Kern County Land Company. Since 1970, Mr. Hartmann has had extensive experience as a director of and consultant to developing companies involving widely-diverse fields of activity. He has also been active as a board member and executive in civic organizations, primarily in the areas of youth activities and minority affairs. RAYMOND F. O'BRIEN; Business Consultant; Director since 1986. Mr. O'Brien, 76, is Chairman of the Compensation Committee of the Board. He retired as Chairman of the Board of CNF Transportation Co. in 1995 and was elected Chairman Emeritus. He is a Director of Consolidated Freightways Corp., and a former Director of Transamerica Corporation, Union Bank, Champion Road Machinery, Ltd., and the Mont La Salle Vineyards. He is also a former member of the Executive Committee of the American Trucking Association, a former Trustee of the ATA Foundation and former Chairman of the Western Highway Institute. WILLIAM R. GRAHAM; Chairman of the Board and President, National Security Research, Inc.; Director since 1989. Dr. Graham, 61, is a member of the Audit and Compensation Committees of the Board. Since July 1997, he has served as Chairman of the Board and President of National Security Research, Inc. He formerly held the position of Senior Vice President, The Defense Group, Falls Church, Virginia. He was formerly a Director and subsequently President and Chief Operating Officer of C-COR Electronics, Inc. He left government service in 1989 after having been Science Advisor to the President and Director of the Office of Science and Technology Policy; Chairman of the Federal Coordinating Council on Science, Engineering and Technology; and Chairman of the Joint Telecommunications Resources Board from 1986 to 1989. He is a former Deputy Administrator of the National Aeronautics and Space Administration, and former Chairman of the President's General Advisory Committee on Arms Control and Disarmament. In 1971 he was a founder of R&D Associates, a defense technology company, where he served until 1985. GARY M. CUSUMANO; President, The Newhall Land and Farming Company; Director since 1994. Mr. Cusumano, 55, is a member of the Compensation and Nominating Committees of the Board. He is a Director of the Newhall Land and Farming Company. He is Chairman of the California Chamber of Commerce Board of Directors; a member of the Henry Mayo Newhall Memorial Hospital Board of Directors; and a member of the Stanford Sloan Alumni Advisory Board. He is a former Regent of the University of California (1984-1986), a former Chairman of 8 the University of California Davis Foundation, and former President of the University of California Davis Alumni Association. ROBERT L. PRESTEL; Business and Management Consultant; Director since 1994. Mr. Prestel, 63, is a member of the Audit and Nominating Committees of the Board. He retired as Deputy Director of the National Security Agency in February 1994 after serving the Agency since 1962. During his career he was Director of Education and Training, and Deputy Director for Research and Engineering. He is the recipient of the President's Distinguished Executive Award; the Department of Defense's Distinguished Civilian Service Medal; and the National Intelligence Distinguished Service Medal. In 1994 he was named as a "Reinvention Hero" by President Clinton for instilling quality management into the National Security Agency and for being a Quality mentor throughout government service. He is a member of the Board of Trustees for the Institute of Defense Analysis; and formerly was a consultant for the Joint Advisory Committee of the Massachusetts Institute of Technology Lincoln Laboratories. He taught mathematics part-time at the University of Maryland. Sandera Partners, L.P., a Texas-based private investment firm ("Sandera"), had nominated three candidates for election to the Company's Board of Directors prior to the expiration of the deadline for nominations under the advance notice provisions of the Company's Bylaws. On March 1, 1999, Sandera announced that it was withdrawing its nomination in light of the Board's decision to pursue a sale of the Company in its entirety or as separate businesses as the Board's chosen strategy to maximize shareowner value. See "Proposal 2" below. Accordingly, under the advance notice provisions of the Company's Bylaws, no other candidates may be nominated for election at the Annual Meeting. THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" ELECTION OF THE NOMINEES LISTED ABOVE AS DIRECTORS. Committees of the Board The Board met nine times during 1998. Standing committees of the Board are: the Audit Committee, which met twice during 1998; the Compensation Committee, which met three times during 1998; and the Nominating Committee, which did not meet during 1998. During the past year, the Audit Committee consisted of Messrs. Hartmann and Prestel, and Dr. Graham. Among the Audit Committee's functions are making recommendations to the Board regarding the continued engagement of independent auditors, reviewing with the independent auditors and the Company financial management the plans for and results of the audit engagement, reviewing the adequacy of the Company's system of internal accounting controls, and reviewing and approving audit and nonaudit fees. The Compensation Committee consisted of Messrs. O'Brien and Cusumano, and Dr. Graham. The Compensation Committee's primary functions are to establish and administer the policies that govern the Company's executive compensation programs and to evaluate regularly these programs for their effectiveness in relation to the Company's financial performance. The Nominating Committee consisted of Messrs. Hartmann, Cusumano and Prestel. The Nominating Committee's primary function is to direct the search for qualified candidates to fill Board vacancies that may occur and to recommend them to the full Board. No incumbent director attended fewer than 75% of the aggregate of (i) the total number of meetings of the Board and (ii) the total number of meetings held by all committees of the Board on which he served during 1998. 9 Compliance With Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's officers, directors and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the Securities and Exchange Commission ("SEC"). Such officers, directors and 10% stockholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons, the Company believes that, during the fiscal year ended December 31, 1998, all Section 16(a) filing requirements applicable to its officers, directors and 10% stockholders were met. Director Compensation Each director who is not an employee of the Company receives an annual fee of $21,600 and a fee of $300 for each Board or Committee of the Board meeting attended. In April 1994, Drs. Watkins and Johnson retired as employees of the Company and each entered into a consulting agreement with the Company. The agreements specify an annual fee payable to Dr. Watkins in the amount of $265,000, and an annual fee of $125,000 payable to Dr. Johnson, in addition to such regular directors' fees. Each director who is not an employee also participates in the Company's 1989 Stock Option Plan for Nonemployee Directors (the "Nonemployee Directors Plan"). The Nonemployee Directors Plan provides for each nonemployee director to receive a stock option grant of 3,000 shares of Common Stock annually. In addition, the Nonemployee Directors Plan provides that new directors will, upon election by the shareowners, receive an automatic, one-time grant of options to purchase 3,000 shares of the Common Stock. These options provide for the purchase of shares at not less than the fair market value of the Common Stock on the grant date, fully vest six months after grant (except for options granted prior to January 1996, which vest over four years beginning on the second anniversary of grant at a rate of 33 1/3% per year), and remain exercisable for a period of ten years from the date of grant. Vested options expire one year after the optionee's service ends with the Company. There are 350,000 shares of the Common Stock reserved for issuance under the Nonemployee Directors Plan. As of December 31, 1998, there were 111,590 shares subject to outstanding options, and there were 175,909 shares available for future grants under the Nonemployee Directors Plan. The Company's directors retirement plan (the "Retirement Plan") provides that each director who has completed at least five years of active service as a director, upon retirement from the Board, will receive one-half of his or her quarterly fee as director for a period of years not to exceed one-half of the years of service as a director after April 8, 1995. 10 EXECUTIVE COMPENSATION Summary Compensation Table The table set forth below provides certain summary information concerning compensation paid to or accrued for the Company's Chief Executive Officer and each of the five other most highly compensated officers of the Company (the "Named Executive Officers") who served as executive officers at December 31, 1998 for the fiscal years ended December 31, 1998, 1997 and 1996.
Annual Compensation Long Term Compensation ----------------------------------------- --------------------------- Securities Other Annual Restricted Underlying All Other Salary Bonus Compensation Stock Award(s) Options/ Compensation Year ($)(1) ($)(2) ($)(3) ($)(4) SARs(#)(4) ($)(5) ---- ----------- --------- -------- -------- ------------ -------- W. Keith Kennedy, Jr. 1998 $ 481,442(6) $ -0- $ 25,047 -0- 60,000 $ 6,400 President & Chief 1997 463,726 474,854 18,347 -0- 25,000 6,400 Executive Officer 1996 459,290 36,657 11,165 -0- -0- 39,211 Malcolm J. Caraballo 1998 235,154 190,944 11,021 -0- 16,000 6,400 Wireless Products 1997 198,165 182,845 7,608 -0- 2,500 6,400 Group President 1996 184,562 7,028 4,628 -0- 10,574 Dean A. Watkins 1998 292,300 -0- -0- -0- 3,000 -0- Chairman of the Board(7) 1997 292,300 -0- -0- -0- 3,000 -0- 1996 292,000 -0- -0- -0- 3,000 -0- Patrick J. Brady 1998 243,000 11,700 -0- -0- 16,000 6,400 Semiconductor Equipment 1997 227,400 -0- -0- -0- 40,000 6,400 Group President 1996 175,460 17,581 -0- -0- 30,000 12,895 Scott G. Buchanan 1998 226,760 -0- 12,665 -0- 12,000 6,400 Vice President & 1997 216,644 127,808 9,014 -0- 2,500 6,400 Chief Financial Officer 1996 208,370 12,827 5,668 -0- -0- 17,268 Robert G. Hiller 1998 200,200 -0- 5,533 -0- 20,000 6,400 Telecommunications 1997 158,425 76,687 2,951 -0- -0- 6,084 Group President 1996 146,845 31,579 861 -0- 5,000 34,752 - ------------------------ (1) Represents total base salary earned. (2) For 1998, the method for calculating the bonus was based on a formula using revenue and return on controllable assets (ROCA) and individual performance objectives (IPO). Prior to December 31, 1998 the executive may have elected to defer part or all of the bonus which then appreciated or depreciated for two years based on the ROCA of the individual's business unit. After that time the bonus appreciated based on the one-year T-Bill rate. The deferral feature of the bonus plan was discontinued effective December 31, 1998. Also included is the bonus from the Employees' Cash Profit Sharing Bonus Plan, in which all employees of the Company participate based on a fixed percentage of pretax profits allocated over the salary base. The amounts for 1996 represent the vested portion of the Top Management Incentive Bonus Plan in the year awarded. For 1997 and 1998 the bonus awards did not have an unvested component. Dr. Watkins does not participate in any of the aforementioned plans. (3) Represents the interest accrued on salary electively deferred in accordance with the Top Management Deferred Compensation Plan. The aggregate amount of perquisites and other personal benefits, securities or property, given to 11 each named officer valued on the basis of aggregate incremental cost to the Company, was less than either $50,000 or 10% of the total of annual salary and bonus for that officer during each of these years. (4) Represents incentive stock option awards. (5) Amounts shown for 1997 and 1998 represent Company matching contributions of $4,800 to the 401(k) portion of the Employees' Investment Plan and contributions of $1,600 to the Employee Stock Ownership Plan each to Messrs. Kennedy, Caraballo, Brady, Buchanan and Hiller. For 1996, amounts shown represent Company matching contributions to the 401(k), the Company Profit Sharing Plan, ESOP contributions and include the unvested, deferred portion of the Top Management Incentive Bonus Plan for all named officers. For 1996, the method for calculating the bonus was based on a formula using certain measurement factors that include profit from operations, firm orders and ROCA. Fifty percent of the dollar value so awarded was deferred to appreciate or depreciate based on the ROCA for each participant's organization. This deferred bonus amount vested after two years from the award date and was then valued based on the ROCA measurement for the participant's organization at that time. All unvested bonus dollars or units are subject to a risk of forfeiture if the executive leaves the Company prior to the vesting dates. Dr. Watkins does not participate in the ESOP or the Top Management Incentive Bonus Plan. (6) There was no increase in Dr. Kennedy's 1998 salary over his 1997 salary. The $17,716 increase over 1997 reflects an extra pay period in 1998. (7) Under the Bylaws the Chairman of the Board of Directors is deemed to be an officer of the Company. For information with respect to Dr. Watkins' consulting agreement with the Company, see "Director Compensation" above.
1998 Option/SAR Grants Table The following table sets forth stock options granted to the Named Executive Officers during 1998 under the Company's 1991 Stock Option and Incentive Plan. No stock appreciation rights (SARs) were granted in 1998. Option Grants In Last Fiscal Year
Individual Grants Number of % of Total Potential Realizable Value Securities Options Exercise At Assumed Annual Rates of Underlying Granted to or Base Stock Price Appreciation(3) Options/SARs Employees in Price Expiration --------------------------- Name Granted(#)(1) Fiscal Year ($/sh)(2) Date 5%($) 10%($) - ---- ------------- ----------- --------- ----------- ---------- ------------ W. Keith Kennedy, Jr. 60,000 24.79% $26.8750 03/02/2008 $1,014,000 $2,570,000 Malcolm J. Caraballo 16,000 6.61 26.8750 03/02/2008 270,000 685,000 Dean A. Watkins 3,000 1.24 26.5000 04/27/2008 50,000 127,000 Patrick J. Brady 16,000 6.61 26.8750 03/02/2008 270,000 685,000 Scott G. Buchanan 12,000 4.96 26.8750 03/02/2008 203,000 514,000 Robert G. Hiller 20,000 8.26 26.8750 03/02/2008 338,030 856,636 12 - ----------------------- (1) Options granted in 1998 were incentive stock options up to the maximum allowed for each officer under Internal Revenue Code 422. The remaining awards were nonqualified stock options. Both incentive and nonqualified options are exercisable after two years from the grant date at a rate of 33.33% per year, with full vesting occurring after the 4th anniversary date. All options become immediately exercisable in the event of a change in control of the Company. The options were granted for a term of 10 years, subject to earlier termination in certain events related to termination of employment. (2) Exercise or base price is the fair market value of the underlying shares on the date of grant. Options may be exercised with cash or by delivery of already-owned shares of Common Stock. (3) Potential realizable value is based on an assumption that the market price of the stock appreciates at the stated rate, compounded annually, from the date of grant until the end of the option term. These values are calculated based on the requirements promulgated by the Securities and Exchange Commission and do not reflect the Company's estimated future stock price appreciation.
1998 Option Exercises And Year-End Value Table The following table sets forth stock options exercised by each of the Named Executive Officers during fiscal 1998, and the number and value of all unexercised options at year end. The value of "in-the-money" options refers to options having an exercise price which is less than the market price of Common Stock on December 31, 1998. Aggregated Option Exercises In Last Fiscal Year And FY-End Option/SAR Values
Number of Value of Securities Unexercised Underlying In-the-Money Unexercised Options Options at At FY-End (#) FY-End ($)(2) Value -------------------- -------------- Shares Acquired Realized Exercisable/ Exercisable/ Name On Exercise (#) ($)(1) Unexercisable Unexercisable - ---- --------------- ------ ------------- ------------- W. Keith Kennedy 2,566 $35,669 237,201/ $557,613/ 121,667 0 Malcolm J. Caraballo 5,900 44,763 55,133/ 196,988/ 25,167 0 Dean A. Watkins 0 0 9,000/ 0/ 0 0 Patrick J. Brady 0 0 19,666/ 0/ 79,334 0 Scott G. Buchanan 1,000 13,625 43,450/ 38,046/ 21,167 0 Robert G. Hiller 0 0 15,999/ 35,763/ 26,669 0 - ------------------------ (1) Based on the market price of the underlying shares at exercise date less the exercise price. 13 (2) Based on the market price of the Common Stock at December 31, 1998, which was $20.375 per share, less the exercise price.
Executive Officer Employment and Severance Arrangements The Company and Dr. Kennedy are parties to an employment agreement made as of March 2, 1998, and amended and restated effective as of January 25, 1999 (the "Employment Agreement"). The term of the Employment Agreement ends in March 2001. Under the Employment Agreement, Dr. Kennedy receives an annual salary of not less than $465,000. In addition, if Dr. Kennedy's employment is terminated other than for death, disability or cause, Dr. Kennedy will receive (i) the entire compensation provided under the Employment Agreement for the remainder of the term of the Employment Agreement plus (ii) a severance payment equal to six months salary. The Employment Agreement provides, among other things, that in the event of a change in control (as defined in the Employment Agreement), Dr. Kennedy will have the right to terminate the Employment Agreement (i) for any reason within 120 days of the occurrence of the change in control or (ii) for good reason at any time after such 120 day period until March 2001. Upon such termination, Dr. Kennedy will receive an amount equal to 299.999% of his Base Compensation (as defined in the Employment Agreement), a certain percentage of his targeted bonus (as determined by the number of days elapsed in the calendar year before his employment was terminated with the Company) and 36 months of prepaid health benefits. The Employment Agreement was concluded after Dr. Kennedy's base salary was determined using the financial performance criteria and factors set forth under the compensation programs and policies described for the chief executive and other officers in the Compensation Committee Report below. For purposes of the Employment Agreement, (A) "cause" generally means: fraud, misappropriation, embezzlement or willful engagement in conduct which is demonstrably and materially injurious to the Company; and (B) "change in control" generally means: (i) any consolidation or merger of the Company pursuant to which the Company is not the surviving corporation or the Company's shareowners do not have the same proportionate ownership of the surviving corporation; (ii) sale of all or substantially all assets of the Company; (iii) disposition by the Company of substantially all of its business operations; (iv) acquisition by any person (directly or indirectly) of 30% or more of the Common Stock or (v) if, during any two consecutive years, the individuals who at the beginning of such period constituted the entire Board of Directors cease to constitute for any reason the majority of the Board of Directors unless each new director was elected or nominated by a vote of at least two-thirds of the directors in office at the beginning of such period. The Company and Scott Buchanan are parties to a severance agreement made as of September 28, 1998, and amended and restated effective as of January 25, 1999 (the "Severance Agreement"). Under the Severance Agreement, Mr. Buchanan has the right to treat the occurrence of a triggering event (as defined in the Severance Agreement) as a material breach of the Severance Agreement and terminate the Severance Agreement for any reason within 120 days of a change in control. In addition, Mr. Buchanan may terminate the Severance Agreement for good reason at any time before the second anniversary of a change in control. In the event of such termination, Mr. Buchanan will receive an amount equal to 299.999% of his Base 14 Compensation (as defined in the Severance Agreement) plus 36 months of prepaid health benefits. For the purposes of the Severance Agreement, the defined terms used without definition in this paragraph generally have the same meaning given them in the Employment Agreement. A "triggering event" is defined as (A) a change in control of the Company while the employee is still an employee of the Company or (B) a change in control of the Company after the employee's employment with the Company is terminated by (x) the Company for any reason other than death, disability or cause or (y) by employee for good reason and in each case such termination is in anticipation of a change in control. The Company maintains severance agreements with certain of its other executives, including Messrs. Caraballo, Brady and Hiller (each of whom is a Named Executive Officer), which provide that if, after a change in control, the employee is terminated other than for death, disability or cause, or suffers a substantial alteration in the terms of employment and terminates his or her own employment because of such alteration, the Company is obligated to pay the terminated employee 299.999% of the employee's yearly Base Compensation (as defined in the severance agreement) plus 6 months health benefits. The employee also has the right to terminate employment after 90 days and within 120 days of the change in control and receive from the Company one-half of the amount set forth in the preceding sentence. Certain executive officers, including Mr. Buchanan, who are parties to severance agreements are also parties to one-year employment agreements with the Company providing (among other things) for the payment of six months' severance pay (in addition to the base salary payable through the term of their respective agreements) in the event that their employment is terminated without cause. In the event of a change in control, the severance agreements described above will apply with respect to the executives who are parties to these employment agreements. For the purposes of the severance and employment agreements described in this paragraph, the definitions in the Employment Agreement generally apply. With respect to each of Messrs. Brady, Caraballo and Hiller, in the event of a sale of his operating group which does not constitute a change in control under his severance agreement, he would be entitled to receive (A) 1.5 times his then current annualized base salary in lieu of any severance or employment benefits to which he would have been entitled under his severance agreement, (B) two times the annualized amount to which he would be entitled under the Company's Employees' Cash Profit Sharing Bonus Plan, (C) if he accepts and begins employment with the company that acquires his respective operating group, a bonus equal to two weeks' salary, and (D) the entire annualized amount for which he is eligible under the Top Management Incentive Bonus Plan. REPORT OF THE BOARD OF DIRECTORS' COMPENSATION COMMITTEE Compensation Program and Policies The Compensation Committee is responsible for establishing and administering the policies which govern base salaries, short- and long-term incentive compensation and stock ownership programs for the Chief Executive Officer and other executive officers. In fiscal 1998, the Committee was composed of three outside directors, Raymond F. O'Brien, Chairman, William R. Graham and Gary M. Cusumano. The Company's compensation program is designed to attract and retain employees at all levels who will contribute to the long-range success of the Company. At the executive level, the program is broad enough to reward key managers for achieving both short- and long-term strategic Company goals, to link executive and shareowner interests through stock-based plans, and to provide compensation packages that recognize individual contributions as well as overall business results. Therefore, a significant portion of each executive's total compensation is intended to be variable and is contingent upon overall Company results, success of the executive's business unit, and accomplishment of individual performance goals. 15 Each year, the Compensation Committee conducts a careful review and evaluation of the Company's corporate performance, its executive compensation, and its incentive programs compared with broad-based surveys of high-technology companies, as well as geographically-related peer companies of similar size and organizational structure. These surveys are used to ensure that the Company's compensation practices are competitive in the markets in which it operates, and that its employees are fairly paid. The surveys present comparative information on all aspects of executive compensation used by high-technology companies nationwide, while data from the selection of peer companies presents compensation practices of companies that are closely aligned to the Company in terms of size, revenues and product lines. Analysis of all information combined enables the Company and the Compensation Committee to make well-informed decisions. The three principal components of the Company's executive compensation program in 1998 were base salary, stock options, and a combined short- and long-term incentive award. Following are discussions of the Compensation Committee's philosophy and action in each area. Base Salaries. Base salaries are designed primarily to attract and retain individuals, and to be competitive in our marketplace. Based on the information obtained from the salary surveys referenced above, base salary levels are deemed competitive if they are between the 50th and 75th percentiles of the marketplace for similar positions. The Company strives to pay its executives within this range, with salaries falling at low, high or medium-range depending on the following performance considerations. To arrive at base salary adjustments for 1998, the Compensation Committee considered the Company's financial performance in 1997, including the executive's business unit performance against the annual profit plan. Three factors--achieving planned profit, obtaining additional profitable orders, and developing new business for the long term--were considered. These factors were not assigned specific weights, but profit was considered most important, with orders secondary. Other factors considered in arriving at base salary adjustments related to the executive's individual performance and included overall managerial effectiveness, success in promoting teamwork and an ability to recognize and act upon the changing requirements of the workplace. Adjustments to executive base salaries in 1998 were also based on a qualitative analysis of each position's current responsibilities and expected contribution to the Company's fiscal health. Stock Options. Under the 1991 and 1997 Stock Option and Incentive Plans, stock options may be granted to executive officers and other key employees of the Company. The purpose of the awards is to align the executives' interests with those of shareowners. The size of stock option grants is measured by the same financial and individual performance criteria used to determine base salaries, and by the individual's position and responsibilities in the Company. In addition, consideration is given to the amount and term of options already held. All stock options awarded to date under these plans have been granted with an exercise price equal to the fair market value of the Company's stock on the date of grant, with current grants beginning to vest after two years and becoming fully vested after four years. This is designed to encourage the creation of shareowner value over the long term, since no benefit is realized from the option grant unless the price of the Company's stock rises over a period of years. 16 The Company does not have a policy that requires the Compensation Committee to qualify stock options awarded to executive officers for deductibility under Section 162(m) of the Internal Revenue Code of 1986, as amended. However, consideration of the net cost to the Company is always a factor in making compensation decisions. Short and Long-Term Incentive Awards. The Top Management Incentive Bonus Plan is designed to reward executives based on achievement of certain predetermined goals, which include overall corporate results, business unit performance, and certain qualitative factors such as organizational and management development. The awards are made on a formula-based on performance against the financial objectives of revenue and return on controllable assets (ROCA), and a multiplier based on qualitative goals relating to strategic planning, development of staff, and positioning of the business unit for future growth. The qualitative performance criteria were individually tailored to each executive and his or her area of responsibility. All or part of the award could be deferred by the executive to appreciate or depreciate based on the ROCA for each participant's organization. This deferral feature was discontinued effective December 31, 1998. Short-and Long-Term Profit Sharing Plans. In order to encourage employees' interest and alignment with the Company's business objectives and performance goals, the Company has established a profit-sharing plan under which it shares a portion of its profits with all eligible employees, including executive officers. The Employees' Cash Profit Sharing Bonus Plan distributes about 6% of annual pretax profits to all employees who have been employed during the prior fiscal year. The approximately 6% profit amount is based on each business unit's annual pretax profit, thereby giving employees a good understanding of and reward for the achievements made within their own work areas. Also, the Company contributes a matching contribution on employee 401(k) deferrals up to 3% of salary. There are no specific performance criteria relating to these plans. Top Management Deferred Compensation Plan. In 1994, the Board approved implementation of a non-qualified deferred compensation plan for the Company's executives. Under the plan, participants may have elected to defer up to 15% of their base salary which earned the prime rate in effect at the beginning of each quarter. The election to defer must have been made prior to the year during which the compensation was earned and could not be revoked once the elected year begins. Funds so deferred were to be distributed in a lump sum only upon the earlier of retirement, termination, death, disability, hardship, or change in executive status. The Board of Directors discontinued this plan effective December 31, 1998 and all funds were distributed to the participants. Compensation of the Chief Executive Officer The same policies and programs described above were followed by the Compensation Committee in determining the 1998 compensation for Dr. Kennedy. As with the other executive officers, base salary is set, stock option awards are considered, and performance criteria are developed for the incentive bonus plan in February each year, based on the Company's financial performance and the CEO's individual contributions in the previous year. 17 The criteria for considering Dr. Kennedy's base salary were based on the Company's overall performance in 1997. Company performance factors included the percentage of profitability achieved against the annual profit plan, new orders booked, and the successful execution of the corporate strategic plan to prepare the Company for future growth and profitability. There were no specific weights assigned to these factors, but the Committee considered Dr. Kennedy's continued strong leadership of the Company during 1997. After careful study of chief executive officer salaries from the survey information described under Compensation Programs and Policies, it was determined that Dr. Kennedy's base salary was within the range for companies of comparable size and market position. Therefore, the committee decided that there should be no increase Dr. Kennedy's base salary for 1998. The criteria established for Dr. Kennedy's incentive bonus award are the same as those set for other executive officers. The award is made on a formula based on performance against the financial objectives of revenue and return on controllable assets (ROCA) with a multiplier based on qualitative goals relating to strategic planning, development of staff, and positioning of the company for future growth. The Committee met at the beginning of 1998 to approve the formula-based goals for Dr. Kennedy and other executive officers, and to establish his qualitative goals for the year. As chief executive officer, his financial measurements related to overall profitability and growth objectives for the whole Company, rather than individual business units, and his qualitative goals were based on development and execution of current and long-term strategies, development of management, and strengthening the total organization. The Committee then met just before year end 1998 to review the Company's financial results, and to evaluate his performance against his qualitative objectives. As with the other executive officers, the extent to which the formula factors are met, based on progressively difficult levels of achievement relating to financial returns and individual goals, determines the size of the award. During 1998 the Company did not earn a profit; therefore, Dr. Kennedy did not receive a 1998 incentive bonus. The Compensation Committee Raymond F. O'Brien, Chairman William R. Graham Gary M. Cusumano 18 WATKINS-JOHNSON STOCK PERFORMANCE GRAPH The following graph compares the cumulative total shareowner return (change in stock price plus reinvestment of dividends) of $100 invested on December 31, 1993, in the Company's common stock, the Standard & Poor's 500 Composite Index, and the Dow Jones Diversified Technology Index for a period of five years. The Standard & Poor's Composite Index was chosen as our broad equity market index because of its wide distribution and recognition by shareowners. The Dow Jones Diversified Technology Index was selected as having a representative industry peer group of companies. The Dow Jones index includes 10 companies with at least 2 high-technology business segments. [The following descriptive data is supplied in accordance with Rule 304(d) of Regulation S-T]
Cumulative Total Return -------------------------------------------------------------- 12/93 12/94 12/95 12/96 12/97 12/98 WATKINS-JOHNSON COMPANY 100 152 226 129 139 111 S & P 500 100 101 139 171 229 294 DOW JONES DIVERSIFIED TECHNOLOGY 100 103 141 180 206 210
19 ELIMINATION OF SHAREOWNER SUPER-MAJORITY VOTING PROVISIONS (PROPOSAL 2 ON PROXY CARD) The Company's Articles of Incorporation, as amended (the "Articles"), and the Company's Amended and Restated Bylaws, as amended (the "Bylaws"), contain super-majority voting provisions that give a minority of shareowners the ability to block amendments to the Company's charter documents as well as block the merger or sale of the Company even if the Board and the holders of a majority of the Common Stock believe that such actions may be in the best interest of the Company. Accordingly, the Board has authorized (A) an amendment to the Articles, and (B) amendments to the Bylaws, each subject to approval of shareowners, to eliminate such super-majority provisions. Amendment of the Articles of Incorporation And Bylaws The amendment to the Articles (the "Article Amendment") eliminates the requirement for approval by four-fifths of the voting power of the Company of (i) any amendment to the Articles; (ii) a merger with any corporation or consolidation into a new corporation; and (iii) a sale or other disposition of all or substantially all of the property or assets of the Company. The amendments to the Bylaws (the "Bylaw Amendments") (i) decrease the required shareowner vote to adopt, amend or repeal bylaws from four-fifths of the voting power of the Company to a majority of the voting power of the Company; and (ii) eliminate the requirement that a change in the minimum and maximum number of directors of the Company must be approved by four-fifths of the voting power of the Company. Reasons for Amendments to the Articles and Bylaws In the Board's view, the super-majority provisions described above permit a minority of shareowners to defeat an amendment to the Articles or Bylaws or block a merger or sale of the Company even if the holders of a majority of the Common Stock, as well as the Board, believe that such amendment or transaction may be in the best interest of the Company and its shareowners. The Board believes that the super-majority requirements described above give a disproportionate influence to the holders of a minority of the shares by giving such holders a "blocking" position with respect to important and fundamental corporate matters, including the sale of all or substantially all assets of the Company or merger of the Company. On March 1, 1999 the Company issued a press release announcing (among other things) the Board's decision to pursue the sale of the Company in its entirety or as separate businesses as its chosen strategy for maximizing shareowner value. While the Company cannot assure shareowners that it will be successful in its strategy, the Board believes that the super-majority voting requirements described above constitute a potentially significant impedement to the implementation of this strategy. For example, if the Board were to recommend approval of a transaction to the Company's shareowners that it believed was in their best interests, then the Articles' shareowner super-majority provision could be used by holders of 20 20% of the outstanding Common Stock to thwart a transaction that the holders of a majority of the shares wished to approve. Effect of Amendments to the Articles and Bylaws If this Proposal 2 is approved by the shareowners, California general corporation law will govern (i) any subsequent amendment of the Company's Articles; (ii) merger with another corporation or consolidation into a new corporation; and (iii) sale or other disposition of all or substantially all assets or property of the Company. Under current California law, any such action will require the approval of (i) the Board and (ii) a majority of the voting power of the Company's then-outstanding securities entitled to vote. In addition, the holders of a majority of the voting power of the Company will be able to (i) amend, adopt or repeal the Bylaws, and (ii) change the minimum and maximum number of directors. The text of the Amendments to the Articles and Bylaws is set forth in Appendix A to this Proxy Statement. THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THIS PROPOSAL. VOTE REQUIRED In accordance with the Articles and Bylaws, the affirmative vote of four-fifths of the voting power of the Company is required to approve this proposal. Approval of this Proposal 2 is not dependent on approval of Proposal 3. If this Proposal 2 is approved by the shareowners, the Board will implement Proposal 2 regardless of the status of Proposal 3. REPEAL OF DIRECTOR SUPER-MAJORITY VOTING PROVISIONS (PROPOSAL 3 ON PROXY CARD) The Company's Bylaws require the affirmative vote of 75% of the Board before the Board can amend the Bylaws or take certain corporate actions. The Board has authorized, subject to shareowner approval, two amendments to the Bylaws to decrease the 75% affirmative vote requirement to a requirement for the affirmative vote of a majority of the quorum. Under the Bylaws, a majority of the required quorum is necessary for the transaction of business by the Board and the required quorum is a majority of the authorized number of directors. Accordingly, if the 75% super-majority voting requirements were eliminated, any transaction currently subject to such requirements could be approved so long as at least five of the eight authorized directors were present at a duly constituted meeting and at least three of those directors approved the transaction whereas under the current Bylaws at least six directors would have to approve any such transaction. There are two provisions in the Bylaws that require the affirmative vote of 75% of the Board. First, Section 14.2 of the Bylaws requires the affirmative vote of 75% of the directors to amend, adopt new or repeal the Bylaws. Second, Section 10.6 of the Bylaws requires the affirmative vote of 75% of the directors before the Board can (i) declare or authorize any 21 distribution to the shareowners; (ii) sell, exchange, lease or otherwise dispose of the Company's assets having a value in excess of 5% of the equity of the Company; (iii) authorize issuance of or sale of stock of the Company; (iv) authorize or grant any option; (v) appoint an executive committee; (vi) amend the Bylaws; (vii) change the number of directors; and (viii) hold any meeting of the Board at a place other than the principal office of the Company (each a "Designated Board Action"). In the Board's view, the super-majority provisions described above give a minority of directors the ability to create deadlock on the board and thereby hamper the conduct of the Company's business and prevent the Board from acting even if a majority of the Company's directors believes that such actions are in the best interest of the Company's shareowners. For example, if, as part of the Company's strategy for maximizing shareowner value by pursuing a sale of the Company in its entirety or as seperate businesses, a majority of the Board concluded that a particular transaction was in the best interest of the shareowners, the transaction nevertheless may be vetoed by a minority of the Board under these provisions. If the amendment to the Bylaws are approved, the affirmative vote of a majority of a quorum of the directors would be required to amend, adopt new or repeal the Bylaws or take any Designated Board Action. Currently, the authorized number of directors stands at eight with five directors constituting a quorum. Accordingly, three directors would have sufficient authority to take action on behalf of the Board of Directors of the Company, unless action is being taken by written consent in which case the entire Board of Directors must assent in writing. The text of the proposed amendments is set forth in Appendix B to this Proxy Statement. THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THIS PROPOSAL. VOTE REQUIRED In accordance with the Bylaws, the affirmative vote of four-fifths of the voting power of the Company is required to approve this proposal. Approval of this Proposal 3 is not dependent on approval of Proposal 2. If this Proposal 3 is approved by the shareowners, the Board will implement the amendments regardless of the status of Proposal 2. APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS (PROPOSAL 4 ON PROXY CARD) The Board has appointed the firm of Deloitte & Touche LLP as independent accountants of the Company for the current fiscal year, subject to the approval of shareowners. The Board expects that a representative of Deloitte & Touche LLP will be present at the Annual Meeting, 22 will be given an opportunity to make a statement at the meeting if desired and will be available to respond to appropriate questions. THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPOINTMENT. VOTE REQUIRED The vote required for approval of such appointment is a majority of the shares present in person or by proxy at the Annual Meeting. OTHER MATTERS As of the date of this Proxy Statement, the Board does not intend to bring any other business before the meeting and, so far as is known to the Board, no matters are to be brought before the annual meeting except as specified in the notice of the Annual Meeting. However, as to any other business that may properly come before the Annual Meeting, it is intended that proxies, in the form enclosed, will be voted in respect thereof, in accordance with the judgment of the persons voting such proxies. SHAREOWNER PROPOSALS - 2000 ANNUAL MEETING Under the Bylaws, nominations for election to the Board and proposals for other business to be transacted by the shareowners at an annual meeting of shareowners may be made by a shareowner (as distinct from the Company) only if such shareowner (i) was a shareowner of record at the time of the giving of a required notice, (ii) is entitled to vote at the meeting and (iii) has given the required notice. In addition, business other than a nomination for election to the Board must be a proper matter for action under California law, the Articles and Bylaws. The required notice must be in writing, contain specified information and be delivered to the Company's principal executive offices no later than February 1, 2000 or earlier than January 2, 2000; provided, however, that if the date of the annual meeting is earlier than February 16, 2000 or later than April 16, 2000, the notice, to be timely, must be so delivered by the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. 23 Separate and apart from the required notice described in the preceding paragraph, the rules promulgated by the SEC under the Exchange Act (the "SEC Stockholder Proposal Rules") entitle a Company shareowner to require the Company to include a shareowner proposal in the proxy materials distributed by the Company. However, the SEC Stockholder Proposal Rules do not require the Company to include in its proxy materials any nomination for election to the Board (or any other office with the Company), impose certain other limitations on the content of a shareowner proposal, and also contain certain eligibility, timeliness, and other requirements (including the requirement that the proponent must have continuously held at least $2,000 in market value or 1% of the Company's Common Stock for at least one year before the proposal is submitted by the proponent). To be considered as satisfying the timeliness requirement of the SEC Stockholder Proposal Rules in connection with the proxy materials to be distributed by the Company with respect to the 2000 Annual Meeting, shareowner proposals must be submitted to the Secretary of the Company at the Company's principal executive offices not later than November 1, 1999. Claudia D. Kelly, Secretary March 17, 1999 Palo Alto, California You are cordially invited to attend the annual meeting in person. Whether or not you plan to attend the annual meeting, you are requested to sign and return the accompanying proxy in the enclosed postage-paid envelope. 24 APPENDIX A TEXT OF SHAREOWNER SUPER-MAJORITY VOTING PROVISIONS Set forth below is the current text of Article Sixth of the Articles of Incorporation of Watkins-Johnson Company: "SIXTH: The corporation shall not, without the approval (by vote or written consent) of the holders of at least four-fifths (4/5) of the stock of this corporation: (1) Amend these Articles of Incorporation. (2) Merge with any other corporation or consolidate into a new corporation. (3) Sell, lease, convey, exchange or otherwise dispose of all or substantially all of the property and assets of the corporation." If Proposal 2 is approved the shareowners of the Company, Article Sixth will be deleted in its entirety, will be replaced by the words "Intentionally Omitted" and will read as follows: "SIXTH: Intentionally Omitted." Set forth below is the current text of Section 14.1 of the Amended and Restated Bylaws of Watkins-Johnson Company: "Section 14.1 By Shareholders. By-Laws may be adopted, amended or repealed by the vote or written assent of shareholders entitled to exercise four-fifths of the voting power of the corporation." If Proposal 2 is approved by the shareowners, then the words "four-fifths" will be deleted, will be replaced by the words "a majority" and Section 14.1 will read as follows: "Section 14.1 By Shareholders. By-Laws may be adopted, amended or repealed by the vote or written assent of shareholders entitled to exercise a majority of the voting power of the corporation." Set forth below is the current text of Section 2.2 of the Bylaws of Watkins-Johnson Company: "Section 2.2 Number. The number of the corporation's directors shall be the number thereof stated in the Article of Incorporation of the corporation until changed by (a) an amendment of the Articles of Incorporation, or (b) an amendment of this Section duly adopted by the shareholders of the corporation entitled to exercise four-fifths of the voting power of the corporation." A-1 If Proposal 2 is approved by the shareowners, then the words "four-fifths" will be deleted, will be replaced by the words "a majority" and Section 2.2 will read as follows: "Section 2.2 Number. The number of the corporation's directors shall be the number thereof stated in the Article of Incorporation of the corporation until changed by (a) an amendment of the Articles of Incorporation, or (b) an amendment of this Section duly adopted by the shareholders of the corporation entitled to exercise a majority of the voting power of the corporation." A-2 APPENDIX B TEXT OF DIRECTOR SUPER-MAJORITY VOTING PROVISIONS Set forth below is the current text of Section 14.2 of the Bylaws of Watkins-Johnson Company: "Section 14.2. By the Board of Directors. Subject to the right of shareholders to amend, or repeal By-Laws, By-Laws other than a By-Law or amendment thereof (a) changing the authorized number of directors or (b) changing, amending, repealing or in any way modifying the provisions of Section 10.6 of Article X or this Article XIV may be adopted, amended or repealed by the affirmative vote of seventy-five percent (75%) of the Board of Directors. A By-Law adopted by the shareholders may limit or restrict the power of the Directors to adopt, amend or repeal By-Laws, or may deprive them of the power". If Proposal 3 is approved by the shareowners, then the words "seventy-five percent (75%) of the Board of Directors" will be deleted, will be replaced by the words "a majority of a quorum of the Board of Directors", and Section 14.2 will read as follows: "Section 14.2. By the Board of Directors. Subject to the rights of shareholders to amend, or repeal By-Laws, By-Laws other than a By-Law or amendment thereof (a) changing the authorized number of directors or (b) changing, amending, repealing or in any way modifying the provisions of Section 10.6 of Article X or this Article XIV may be adopted, amended or repealed by the affirmative vote of a majority of a quorum of the Board of Directors. A By-Law adopted by the shareholders may limit or restrict the power of the Directors to adopt, amend or repeal By-Laws, or may deprive them of the power". Set forth below is the current text of Section 10.6 of the Bylaws of Watkins-Johnson Company: "Section 10.6 Quorum. Except where the vote of seventy-five percent (75%) of the directors is required to take action as hereinafter provided in this Section 10.6, a majority of the authorized number of directors shall constitute a quorum of the Board for the transaction of business. In the absence of a quorum, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors, provided, however, that the affirmative vote of seventy-five percent (75%) of the Board of Directors shall be required in order to do or make any of the following acts or decisions: B-1 (a) Declare any dividend or authorize any other distribution to the shareholders of the corporation. (b) Sell, exchange, convey, lease, or otherwise dispose of assets of the corporation in other than ordinary course of the operation of the business of the corporation, in any calendar year the value of which in the aggregate shall exceed five percent (5%) of the Shareowners' Equity of the Corporation. (c) Authorize the issuance or sale of any unissued shares of stock of the corporation. (d) Authorize or grant any option for the purchase of any unissued shares of stock of the corporation. (e) Appoint an Executive Committee. (f) Amend these By-Laws. (g) Change the number of directors pursuant to Article Fourth of the Articles of Incorporation. (h) Hold any meeting of the Board of Directors at a place other than the principal office of the corporation for the transaction of business, specified in Section 1.1 hereof." If Proposal 3 is approved by the shareowners, then (A) the clause "Except where the vote of seventy-five percent (75%) of the directors is required to take action as hereinafter provided in this section 10.6" will be deleted, (B) the remainder of the Section 10.6 beginning with the word "provided" will be deleted; and Section 10.6 will read as follows: "Section 10.6 Quorum. A majority of the authorized number of directors shall constitute a quorum of the Board for the transaction of business. In the absence of a quorum, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors. B-2 [FORM OF PROXY CARD] WATKINS-JOHNSON COMPANY ANNUAL MEETING OF SHAREHOLDERS PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The shareowner designated on the reverse of this card appoints Dean A. Watkins, Gary M. Cusumano and Robert L. Prestel as Proxies, and each of them, the shareowner's attorney and proxy, each with full power of substitution, to vote for the election of directors and as instructed below on the propositions set forth herein, and at their discretion on any other matters that may properly come before the meeting all shares of Watkins-Johnson Company Common Stock held as of March 10, 1999, at the Annual Meeting of Shareowners of Watkins-Johnson Company and at all adjournments or postponements, thereof. Such Annual Meeting will be held at Hotel Sofitel, 233 Twin Dolphin Drive, Redwood City, California 94065, at 10:00 a.m. on April 29, 1999. This proxy revokes all prior proxies given by the undersigned. This proxy, when properly executed, will be voted in the manner directed herein. Where no vote is specified, this proxy will be voted FOR all proposals. (Continued and to be signed on the other side.) FOLD AND DETACH HERE Proxy Card-1 The Board of Directors recommends a vote FOR each of the proposals. Please mark /X/ your votes as this Proposal (1) ELECTION OF DIRECTORS Nominee -------------------- / / FOR all nominees listed at right (except as Dean A. Watkins marked to the contrary at right) H. Richard Johnson W. Keith Kennedy, Jr. / / WITHHOLD AUTHORITY to vote for all nominees John J. Hartmann listed at right Raymond F. O'Brien William R. Graham Gary M. Cusumano Robert L. Prestel (INSTRUCTION: To withhold authority to vote for any individual nominee, write that nominee's name on the space below.) ------------------------------------------------- Proposal (2) ELIMINATION OF SHAREHOLDER SUPER-MAJORITY VOTING PROVISIONS / / FOR / / AGAINST / / ABSTAIN Proposal (3) ELIMINATION OF DIRECTOR SUPER-MAJORITY VOTING PROVISIONS / / FOR / / AGAINST / / ABSTAIN Proposal (4) APPROVAL OF INDEPENDENT ACCOUNTANTS / / FOR / / AGAINST / / ABSTAIN Proposal (5) In their discretion the Proxies are authorized to vote for the election of such substitute nominee(s) for director(s) as such Proxies shall select if any nominee(s) named above become(s) unable to serve and upon such other business as may properly come before the Proxy Card-2 meeting and any adjournments thereof, including, among other things, a motion to adjourn the Annual Meeting to another time or place for, among other things, the purpose of soliciting additional proxies. Please date this Proxy and sign exactly as your name(s) appears hereon. When signing as attorney, executor, administrator, trustee, guardian or other representative, give your full title as such. If a corporation, sign the full corporate name by an authorized officer, stating his/her title. If a partnership, sign in partnership name by authorized person. Dated:_____, 1999 - ------------------------- Signature - ------------------------- Title - ------------------------- Signature if held jointly - ------------------------- Title PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY AS PROMPTLY AS POSSIBLE IN THE POSTPAID ENVELOPE PROVIDED. FOLD AND DETACH HERE Proxy Card-3 PROXY DIRECTION TO TRUSTEE PROXY WATKINS-JOHNSON COMPANY EMPLOYEE STOCK OWNERSHIP PLAN WATKINS-JOHNSON EMPLOYEES' INVESTMENT PLAN I hereby direct you as Trustee of the Watkins-Johnson Employee Stock Ownership Plan and the Watkins-Johnson Employees' Investment Plan to vote the shares of Watkins-Johnson Company common stock credited to my account under the aforementioned plans at the Annual Meeting of Shareowners of Watkins-Johnson Company, to be held at Hotel Sofitel, 233 Twin Dolphin Drive, Redwood City, California 94065, at 10:00 o'clock in the morning on Thursday, April 29, 1999, and at any adjournment or postponement thereof. I have filled in the appropriate boxes on the other side of the card, and I authorize you to vote as indicated. Pursuant to the plans, in the absence of any instructions from me as to any item, shares credited to my account shall be voted by you, as Trustee, in the same proportion as shares are voted for which instructions are received. (Continued, and to be signed on the other side) Direction to Trustee-1 The Board of Directors recommends a vote FOR each of the proposals. Please mark /X/ your votes as this Proposal (1) ELECTION OF DIRECTORS Nominee -------------------- / / FOR all nominees listed at right (except as Dean A. Watkins marked to the contrary at right) H. Richard Johnson W. Keith Kennedy, Jr. / / WITHHOLD AUTHORITY to vote for all nominees John J. Hartmann listed at right Raymond F. O'Brien William R. Graham Gary M. Cusumano Robert L. Prestel (INSTRUCTION: To withhold authority to vote for any individual nominee, write that nominee's name on the space below.) ------------------------------------------------- Proposal (2) ELIMINATION OF SHAREHOLDER SUPER-MAJORITY VOTING PROVISIONS / / FOR / / AGAINST / / ABSTAIN Proposal (3) ELIMINATION OF DIRECTOR SUPER-MAJORITY VOTING PROVISIONS / / FOR / / AGAINST / / ABSTAIN Proposal (4) APPROVAL OF INDEPENDENT ACCOUNTANTS / / FOR / / AGAINST / / ABSTAIN Proposal (5) In their discretion the Proxies are authorized to vote for the election of such substitute nominee(s) for director(s) as such Proxies shall select if any nominee(s) named above become(s) unable to serve and upon such other business as may properly come before the Direction to Trustee-2 meeting and any adjournments thereof, including, among other things, a motion to adjourn the Annual Meeting to another time or place for, among other things, the purpose of soliciting additional proxies. Please date this Proxy and sign exactly as your name(s) appears hereon. When signing as attorney, executor, administrator, trustee, guardian or other representative, give your full title as such. If a corporation, sign the full corporate name by an authorized officer, stating his/her title. If a partnership, sign in partnership name by authorized person. Dated:_____, 1999 - ------------------------- Signature - ------------------------- Title - ------------------------- Signature if held jointly - ------------------------- Title PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY AS PROMPTLY AS POSSIBLE IN THE POSTPAID ENVELOPE PROVIDED. FOLD AND DETACH HERE Direction to Trustee-3 -----END PRIVACY-ENHANCED MESSAGE-----