-----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, DKUtSNlS1s2dhT0qGSuNqNYLeXYsRZt6LjNUH+GeFVBr3rgDH1l/fA2/B6mzxn6d TbzFt9ujKRpdfmC7sxelHg== 0000950005-99-000416.txt : 19990510 0000950005-99-000416.hdr.sgml : 19990510 ACCESSION NUMBER: 0000950005-99-000416 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990326 FILED AS OF DATE: 19990507 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-05631 FILM NUMBER: 99613612 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 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 26, 1999 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 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (650) 493-4141 ---------------------------------------------------- (Registrant's telephone number, including area code) 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 ___. Common stock, no par value, outstanding as of March 26, 1999 6,563,000 shares Page 1 *Caution Regarding Forward-looking Statements All statements in this quarterly 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 quarterly 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, and risks associated with year 2000 compliance by the company and third parties. 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. There can be no assurance that the pending sale of the Semiconductor Equipment Group (SEG) to Silicon Valley Group (SVG) will be completed, nor can there be any assurance that Watkins-Johnson will be successful in implementing the strategy to pursue the sale of the company in its entirety or in separate transactions (see Item 2 in Part I). Until the company has had a chance to solicit and evaluate expressions of interest, the company cannot determine whether full value can be realized at this time either for the entire company or for its component businesses. PART I--FINANCIAL INFORMATION Item 1. Financial Statements The interim financial statements are unaudited; however, the company believes that all adjustments necessary to present a fair statement of results for such interim periods have been included and all such adjustments are of a normal recurring nature. The results for the three months ended March 26, 1999, are not necessarily indicative of the results for the year ending December 31, 1999. The consolidated financial statements required by Rule 10-01 of Regulation S-X are included in this report beginning on the next page. Page 2 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS* For the periods ended March 26, 1999 and March 27, 1998 Three Months Ended - ------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) 1999 1998 - ------------------------------------------------------------------------------- Sales $ 65,181 $ 68,722 - ------------------------------------------------------------------------------- Costs and expenses: Cost of goods sold 42,298 42,546 Selling and administrative 10,247 15,821 Research and development 9,131 13,208 - ------------------------------------------------------------------------------- 61,676 71,575 - ------------------------------------------------------------------------------- Income (loss) from operations 3,505 (2,853) Other income (expense)-net 457 1,929 Gain on real property 14,783 - ------------------------------------------------------------------------------- Income before federal, state and foreign income taxes 3,962 13,859 Income tax expense (1,109) (4,158) - ------------------------------------------------------------------------------- Net income $ 2,853 $ 9,701 =============================================================================== Per share amounts: Basic net income per share $ 0.44 $ 1.17 Basic average common shares 6,558,000 8,262,000 Diluted net income per share $ 0.43 $ 1.15 Diluted average common shares 6,645,000 8,416,000 *Unaudited Page 3 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME* For the periods ended March 26, 1999 and March 27, 1998
Three Months Ended - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 2,853 $ 9,701 - ----------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (expense), net of tax: Foreign currency translation adjustments 106 (16) Net unrealized holding gains (losses) on securities arising during period net of reclassification adjustment of $0 (96) (86) - ----------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (expense) 10 (102) - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Comprehensive income $ 2,863 $ 9,599 ==================================================================================================================================== *Unaudited
Page 4 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of March 26, 1999 and December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) 1999* 1998 - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and equivalents $ 15,395 $ 19,271 Short-term investments 40,014 45,353 Receivables 47,562 31,942 Inventories: Finished goods 2,923 2,960 Work in process 8,917 11,954 Raw materials and parts 7,919 8,456 Deferred income taxes 31,557 32,288 Other 17,713 19,872 - ------------------------------------------------------------------------------------------------------------------------------------ Total current assets 172,000 172,096 - ------------------------------------------------------------------------------------------------------------------------------------ Property, plant, and equipment 140,849 140,224 Accumulated depreciation and amortization (79,157) (77,585) - ------------------------------------------------------------------------------------------------------------------------------------ Property, plant, and equipment--net 61,692 62,639 - ------------------------------------------------------------------------------------------------------------------------------------ Other assets 10,714 10,743 - ------------------------------------------------------------------------------------------------------------------------------------ $ 244,406 $ 245,478 ==================================================================================================================================== LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Payables $ 16,200 $ 15,704 Accrued liabilities 62,283 65,374 - ------------------------------------------------------------------------------------------------------------------------------------ Total current liabilities 78,483 81,078 - ------------------------------------------------------------------------------------------------------------------------------------ Long-term obligations 31,901 32,701 - ------------------------------------------------------------------------------------------------------------------------------------ Shareowners' equity: Common stock 34,702 34,454 Retained earnings 101,138 99,073 Accumulated other comprehensive income (loss) (1,818) (1,828) - ------------------------------------------------------------------------------------------------------------------------------------ Total shareowners' equity 134,022 131,699 - ------------------------------------------------------------------------------------------------------------------------------------ $ 244,406 $ 245,478 ==================================================================================================================================== *Unaudited
Page 5 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS* For the periods ended March 26, 1999 and March 27, 1998
Three Months Ended - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: Net income $ 2,853 $ 9,701 Reconciliation of net income to cash flows: Depreciation and amortization 2,425 3,683 Gain on disposal of property, plant and equipment (14,783) Net changes in: Receivables (15,731) (10,588) Inventories 3,535 (1,993) Other assets 2,941 137 Accruals and payables (2,674) (17,225) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used by operating activities (6,651) (31,068) - ------------------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Additions of property, plant, and equipment (1,870) (5,237) Proceeds from sale of short-term investments 5,155 Purchases of short-term investments (34,695) Proceeds on asset retirements and other 39 15,873 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by investing activities 3,324 (24,059) - ------------------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Payments on long-term borrowing (151) (140) Net borrowings (repayments) under line-of-credit 478 Proceeds from issuance of common stock 248 901 Repurchase of common stock (1,408) Dividends paid (787) (991) Other (52) 16 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used by financing activities (742) (1,144) - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash 193 (37) - ------------------------------------------------------------------------------------------------------------------------------------ Net decrease in cash and equivalents (3,876) (56,308) Cash and equivalents at beginning of period 19,271 134,462 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and equivalents at end of period $ 15,395 $ 78,154 ==================================================================================================================================== *Unaudited
Page 6 Item 1. Financial Statements (continued) Supplementary information to the financial statements: A dividend of twelve cents per share was declared and paid during the first quarter of 1999 and 1998. Per share amounts are computed based on the weighted average number of basic and diluted (dilutive stock options) common and common equivalent shares outstanding during the period. Per share amounts were computed as follows (dollars in thousands):
For Three Months Ended ------------------------------------ March 26, 1999 March 27, 1998 -------------- -------------- Net income (numerator) $ 2,853 $ 9,701 ========== ========== Basic per share amounts (denominator): Weighted average shares outstanding 6,558,000 8,262,000 ========== ========== Diluted per share amounts (denominator): Weighted average shares outstanding 6,558,000 8,262,000 Effect of dilutive stock options 87,000 154,000 ---------- ---------- Diluted average common shares 6,645,000 8,416,000 ========== ========== Basic net income per share $ 0.44 $ 1.17 ========== ========== Diluted net income per share $ 0.43 $ 1.15 ========== ==========
Page 7 Item 1. Financial Statements (continued) Weighted average options outstanding to purchase 838,000 and 621,000 shares of common stock were not included in the computation of diluted per share amounts for the three months ended March 26, 1999 and March 27, 1998, respectively, because the weighted average exercise prices were greater than the average market prices of the common shares. Weighted average exercise prices of $33.40 in 1999 and $37.18 in 1998 exceeded the average market prices of $23.66 and $26.31, respectively. This calculation is submitted in accordance with Regulation S-K, Item 601(b)(11). Sales to external customers and pre-tax profit (loss) by business segment for the three months ended March 26, 1999 and March 27, 1998 are as follows:
Sales Pre-tax income (in thousands) 1999 1998 1999 1998 -------------------------------------------------------------------------------------------------- Wireless Communications $34,663 $30,006 $2,419 $ 545 Semiconductor Equipment 30,518 38,716 1,086 (3,398) -------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 3,505 (2,853) Other income (expense)-net 457 16,712 -------------------------------------------------------------------------------------------------- Total $65,181 $68,722 $3,962 $13,859 ==================================================================================================
Recently Issued Accounting Standard--In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 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. Subsequent Events--On March 31, 1999, Watkins-Johnson Company announced it completed the sale of its high-density plasma chemical vapor deposition intellectual property assets plus associated inventory and hardware to Applied Materials, Inc. This sale will result in a second-quarter 1999 pre-tax gain of approximately $9 million. On May 3, 1999, Watkins-Johnson Company announced that it has signed a definitive agreement to sell its Semiconductor Equipment Group to Silicon Valley Group for a total value, including retained receivables, exceeding $50 million. This value includes approximately $20 million of the company's long-term debt to be assumed by Silicon Valley Group. Under its agreement with Silicon Valley Group, the company is selling its semiconductor equipment business associated with the atmospheric-pressure chemical-vapor-deposition products (APCVD) and related real estate. The $20 million in debt secures the land, building and equipment in Kawasaki, Japan. The sale is expected to be completed by the end of June 1999 and is subject to satisfaction of customary closing conditions, including compliance with Hart-Scott-Rodino. There can be no assurance that the sale process will be successfully completed. Page 8 PART I--FINANCIAL INFORMATION Item 2. 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 disclosures included elsewhere in this quarterly 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 "Caution Regarding Forward-looking Statements" included above 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 As of March 26, 1999, cash and equivalents and short-term investments totaled $55.4 million, a decline of $9.2 million from the 1998 year-end balance of $64.6 million. The decrease resulted primarily from the company's working capital requirements, as reflected in the consolidated statement of cash flows for the period ended March 26, 1999. For the first quarter of 1998, cash and equivalents and short-term investments decreased $21.8 million from $134.5 million as of December 31, 1997 to $112.7 million as of March 27, 1998. The decrease was attributed primarily to working capital requirements and purchases of capital equipment which was offset in part by proceeds from the sale of real property. As of March 26, 1999, the company's principal source of liquidity consisted of $15.4 million in cash and equivalents plus short-term investments valued at $40.0 million. The company invests its excess cash and equivalents in securities with maturities exceeding 90 days to take advantage of the higher yields. These short-term investments, which consist primarily of high grade debt securities, are subject to interest rate risk and will rise and fall in value if market interest rates change. 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 March 26, 1999, 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. Divestiture Activities On March 1, 1999 the company announced its intention to pursue the sale of the company. After conducting a wide-ranging strategic review with its investment advisors, CIBC Oppenheimer Corp., the company concluded that selling the company in its entirety or as separate businesses would create the most value for shareholders. On March 31, 1999, the company announced that it completed the sale of its high-density-plasma chemical-vapor-deposition (HDPCVD) intellectual property assets plus associated inventory and hardware to Applied Materials, Inc. This will result in a second-quarter 1999 pre-tax gain of approximately $9 million. Page 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) On May 3, 1999, Watkins-Johnson Company announced that it has signed a definitive agreement to sell its Semiconductor Equipment Group to Silicon Valley Group for a total value, including retained receivables, exceeding $50 million. This value includes approximately $20 million of the company's long-term debt to be assumed by Silicon Valley Group. Under its agreement with Silicon Valley Group, the company is selling its semiconductor equipment business associated with the atmospheric-pressure chemical-vapor-deposition products (APCVD) and related real estate. The $20 million in debt secures the land, building and equipment in Kawasaki, Japan. The sale is expected to be completed by the end of June 1999 and is subject to satisfaction of customary closing conditions, including compliance with Hart-Scott-Rodino. 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. Current Operations and Business Outlook For the first quarter of 1999, the company reported sales of $65.2 million and net income of $2.9 million, or $0.43 diluted net income per share. For the same period in 1998, sales were $68.7 million and net income was $9.7 million, or $1.15 diluted net income per share. Included in the 1998 results is a $15.0 million pre-tax gain on the sale of undeveloped land. Firm backlog on March 26, 1999 stood at $98.3 million, compared to the 1998 first quarter ending backlog of $82.2 million. Since most of the company's backlog can be canceled or rescheduled, backlog is not necessarily a meaningful indicator of future revenue. Operations and business outlook for each of the company's business segments are discussed below. Wireless Communications Wireless Communications sales for the first quarter of 1999 totaled $34.7 million, a 16% increase over the prior year's first quarter sales of $30.0 million. The segment received first-quarter 1999 orders of approximately $41.0 million compared to $35.0 million for the same period last year. The business segment is entering the second quarter of 1999 with a backlog totaling approximately $73.6 million compared to $65.7 million on March 27, 1998. For the first quarter of 1999, the business segment reported pre-tax operating profit of approximately $2.4 million compared to $0.5 million in the first quarter of 1998. Looking forward, the segment intends to focus on the following opportunities to continue its long-term growth: gallium-arsenide (GaAs) semiconductor devices, repeaters, advanced RF technology subassemblies, and communications surveillance receiver programs with strong follow-on potential. 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. Page 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Semiconductor Equipment Sales of semiconductor equipment for the first quarter of 1999 amounted to $30.5 million, down 21% from the $38.7 million recorded for the same period last year, but up 26% from 1998 fourth-quarter sales of $24.2 million. The segment received first-quarter 1999 orders of approximately $43.0 million compared to $22.0 million for the same period last year. First-quarter 1999 orders include multiple orders for the newly introduced WJ-1500 system. This business segment is entering the second quarter of 1999 with a backlog totaling approximately $24.7 million compared to $16.5 million on March 27, 1998. For the first quarter of 1999, the business segment reported pre-tax operating profit of approximately $1.1 million compared to a loss of $3.4 million in the first quarter of 1998. The Semiconductor Equipment segment's first quarter was their best in two years. Bookings were also positive with a book-to-bill ratio of 1.4 to 1. Looking forward, the company expects this segment to continue to rebound. However, it is difficult to predict what the future might hold in the semiconductor equipment business. Capital equipment decisions are affected by a number of parameters and the company is watching its customers' market dynamics closely. 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 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. First Quarter of 1999 Compared to First Quarter of 1998 Wireless Communications sales increased 16% while Semiconductor Equipment sales decreased 21%, resulting in an overall company decrease of 5%. Gross margins decreased from 38% to 35%. Gross margins decreased from the prior year first quarter mostly due to a shift in business volume in both business segments and product mix. Selling and administrative expenses decreased $5.6 million from 23% of sales to 16% , due mostly to the third-quarter 1998 restructurings and cost control efforts. Research and development expenses were $9.1 million in the first quarter of 1999, or 14% of sales, compared to $13.2 million, or 19% of sales for the same period last year. The decrease in research and development spending is due mostly to the third-quarter 1998 discontinuance of efforts on the HDPCVD initiative and the Base2(TM) base station product. The pre-tax operating income for the first quarter of 1999, before other income, was $3.5 million compared with a loss of $2.9 million for the first quarter of 1998. Interest and other income (net of other expenses) decreased by $1.5 million due primarily to lower interest income resulting from the decreased average cash balance and short-term investments. In January 1998, the company concluded the sale of undeveloped 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 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) For the first quarter of 1999, the effective tax rate for federal, state and foreign income taxes was about 28% compared to 30% for the same period last year. The tax rate in 1999 and 1998 is below the statutory rate primarily due to benefits from federal and state research tax credits and foreign export sales. Looking forward, the company expects its effective tax rate to increase if the sale of the Semiconductor Equipment segment is completed. Net income was approximately $2.9 million in first quarter of 1999 compared to $9.7 million in first quarter of 1998, or $0.43 per diluted share compared to $1.15 per diluted share, respectively. Diluted average common shares were 6.6 million and 8.4 million at March 26, 1999 and March 27, 1998, respectively, and decreased mostly because of the repurchase of company common shares. 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. 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. Page 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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. 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 3. Quantitative and Qualitative Disclosures About Market Risks Disclosures about the company's market risk are included in Part II, Item 7A of the company's annual report on Form 10-K for the year ended December 31, 1998, filed March 12, 1999, Commission File No. 1-5631. In the opinion of management, no material changes have occurred with respect to the company's market risks since December 31, 1998. Page 13 PART II--OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders At the annual meeting of shareholders held April 29, 1999, shareowners voted on the following: Item 1: Election of Directors: Nominee For Withheld ------- --- -------- Dean A. Watkins 5,799,421 147,453 H. Richard Johnson 5,787,709 159,165 W. Keith Kennedy 5,864,132 82,742 John J. Hartmann 5,799,661 147,213 Raymond F. O'Brien 5,855,289 91,585 William R. Graham 5,797,795 149,079 Robert L. Prestel 5,862,303 84,571 Gary M. Cusumano 5,854,955 91,919 Item 2: Proposal to amend 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 Bylaws, and (iii) approve a merger or sale of the company. At the annual meeting of the shareowners on April 27, 1999, a motion was made to keep the polls open until 11:00 a.m., pacific standard time, on May 24, 1999, at the company's headquarters in Palo Alto, California. The vote on the motion to keep the polls open was: For 4,208,531 Against 0 ------------- ------------- Abstain 0 Broker non-votes 0 ------------- ------------- Percent of outstanding votes 64% ------------- Item 3: Proposal to amend the company's Articles of Incorporation and Bylaws to eliminate their 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. At the annual meeting of the shareowners on April 27, 1999, a motion was made to keep the polls open until 11:00 a.m., pacific standard time, on May 24, 1999, at the company's headquarters in Palo Alto, California. The vote on the motion to keep the polls open was: For 4,208,531 Against 0 ------------- ------------- Abstain 0 Broker non-votes 0 ------------- ------------- Percent of outstanding votes 64% ------------- Page 14 Item 4. Submission of Matters to a Vote of Security Holders (continued) Item 4: Proposal to ratify the appointment of Deloitte & Touche as the independent auditors of the company for accounting year ending December 31, 1999. For 5,900,118 Against 27,543 ------------- ------------- Abstain 15,765 Broker non-votes 0 ------------- ------------- Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K a) 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. b) No reports on Form 8-K were required to be filed during the quarter. Page 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WATKINS-JOHNSON COMPANY (Registrant) Date May 7, 1999 By: /s/ W. Keith Kennedy, Jr. -------------------------------- --------------------------------- W. Keith Kennedy, Jr. President and Chief Executive Officer Date May 7, 1999 By: /s/ Scott G. Buchanan -------------------------------- --------------------------------- Scott G. Buchanan Executive Vice President, Chief Financial Officer and Treasurer Page 16 EXHIBIT INDEX The Exhibits below are numbered according to Item 601 of Regulation S-K. Exhibit Number Exhibit ------ ------- 27 Financial Data Schedule for the quarter ended March 26, 1999. Page 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-26-1999 15,395 40,014 47,562 0 19,759 172,000 140,849 79,157 244,406 78,483 31,901 0 0 34,702 99,320 244,406 65,181 65,181 42,298 42,298 18,658 0 263 3,962 1,109 2,853 0 0 0 2,853 0.44 0.43
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