-----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, WCFuOrRSDCz+wPH+wBI+n3MxizBpJttLio25BrjdOl+u1DTDZcu26JnFvSEH46kb 1MiV1C8B5ycoZgj9XN43gQ== 0000950005-99-000710.txt : 19990810 0000950005-99-000710.hdr.sgml : 19990810 ACCESSION NUMBER: 0000950005-99-000710 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990625 FILED AS OF DATE: 19990809 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: 99681473 BUSINESS ADDRESS: STREET 1: 3333 HILLVIEW AVE CITY: PALO ALTO STATE: CA ZIP: 94304-1223 BUSINESS PHONE: 6504934141 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 June 25, 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 June 25, 1999 6,569,000 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. The company is continuing its efforts to divest the remaining assets and operating units in accordance with the Board's strategic directive announced on March 1, 1999. However, there can be no assurance that the company will be able to complete its strategy for the sale of the remainder of the company in parts or in its entirety. Page 2 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 six months ended June 25, 1999, are not necessarily indicative of the results for the full year 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 3 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS* For the periods ended June 25, 1999 and June 26, 1998
Three Months Ended Six Months Ended - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Sales $ 34,857 $ 26,835 $ 69,520 $ 56,841 - ----------------------------------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of goods sold 20,580 16,652 43,647 34,891 Selling and administrative 4,911 5,344 9,573 11,091 Research and development 5,572 5,828 10,087 11,303 - ----------------------------------------------------------------------------------------------------------------------------------- 31,063 27,824 63,307 57,285 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) from operations 3,794 (989) 6,213 (444) Interest and other income (expense)--net 810 1,971 1,815 3,898 Interest expense (126) (148) (246) (297) Gain on real property 14,783 - ----------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes 4,478 834 7,782 17,940 Income tax expense 1,446 271 2,520 5,831 - ----------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations 3,032 563 5,262 12,109 Discontinued operations: Income (loss), net of taxes 3,188 (6,770) 3,811 (8,615) Gain on disposition, net of taxes 7,318 7,318 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 13,538 $ (6,207) $ 16,391 $ 3,494 =================================================================================================================================== Basic per share amounts: Income from continuing operations $ 0.46 $ 0.07 $ 0.80 $ 1.46 Discontinued operations: Income (loss), net of taxes 0.49 (0.82) 0.58 (1.04) Gain on disposition, net of taxes 1.11 1.12 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 2.06 $ (0.75) $ 2.50 $ 0.42 =================================================================================================================================== Basic average common shares 6,566,000 8,257,000 6,562,000 8,259,000 Diluted per share amounts: Income from continuing operations $ 0.45 $ 0.07 $ 0.79 $ 1.43 Discontinued operations: Income (loss), net of taxes 0.48 (0.80) 0.57 (1.02) Gain on disposition, net of taxes 1.10 1.10 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 2.03 $ (0.73) $ 2.46 $ 0.41 =================================================================================================================================== Diluted average common shares 6,676,000 8,438,000 6,661,000 8,448,000 *Unaudited
Page 4 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME* For the periods ended June 25, 1999 and June 26, 1998
Three Months Ended Six Months Ended - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $13,538 $(6,207) $16,391 $ 3,494 - ----------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (expense), net of tax: Foreign currency translation adjustments 66 (242) 172 (258) Net unrealized holding gains (losses) on securities, net of reclassification adjustment of $0 (207) 27 (303) (59) - ----------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (expense) (141) (215) (131) (317) - ----------------------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss) $13,397 $(6,422) $16,260 $ 3,177 =================================================================================================================================== *Unaudited
Page 5 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS* As of June 25, 1999 and December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and equivalents $ 6,023 $ 19,271 Short-term investments 54,086 45,353 Receivables 17,907 19,588 Inventories: Finished goods 1,621 875 Work in process 2,101 3,167 Raw materials and parts 5,530 5,664 Deferred income taxes 30,144 32,288 Other 14,932 17,449 - ------------------------------------------------------------------------------------------------------------------------------------ Total current assets 132,344 143,655 - ------------------------------------------------------------------------------------------------------------------------------------ Property, plant, and equipment 66,331 68,420 Accumulated depreciation and amortization (41,834) (44,829) - ------------------------------------------------------------------------------------------------------------------------------------ Property, plant, and equipment--net 24,497 23,591 - ------------------------------------------------------------------------------------------------------------------------------------ Net assets of discontinued operations 45,306 22,438 Other assets 10,692 10,716 - ------------------------------------------------------------------------------------------------------------------------------------ $ 212,839 $ 200,400 ==================================================================================================================================== LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Payables $ 9,017 $ 9,685 Accrued liabilities 48,690 50,405 - ------------------------------------------------------------------------------------------------------------------------------------ Total current liabilities 57,707 60,090 - ------------------------------------------------------------------------------------------------------------------------------------ Long-term obligations 8,386 8,611 - ------------------------------------------------------------------------------------------------------------------------------------ Shareowners' equity: Common stock 34,816 34,454 Retained earnings 113,889 99,073 Accumulated other comprehensive income (loss) (1,959) (1,828) - ------------------------------------------------------------------------------------------------------------------------------------ Total shareowners' equity 146,746 131,699 - ------------------------------------------------------------------------------------------------------------------------------------ $ 212,839 $ 200,400 ==================================================================================================================================== *Unaudited
Page 6 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS* For the periods ended June 25, 1999 and June 26, 1998
Six Months Ended - ----------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 16,391 $ 3,494 Reconciliation of net income to cash flows: Depreciation and amortization 1,960 2,314 (Gain) loss on disposal of property, plant and equipment 68 (14,587) Deferred income taxes 2,363 Results of discontinued operations and gain on disposal (11,129) 8,615 Net changes in: Receivables 1,681 4,066 Inventories 454 (2,959) Other assets 2,310 (223) Accruals and payables 25 (16,645) Advances on contracts 186 (404) Provision for warranties and losses on contracts (2,699) (439) Environmental remediation (44) (82) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by continuing operating activities 11,566 (16,850) Net cash provided (used) by discontinued operations (31,618) (16,019) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities (20,052) (32,869) - ----------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Additions of property, plant, and equipment (1,966) (2,268) Proceeds from sale of short-term investments 23,587 6,005 Purchases of short-term investments (32,841) (85,243) Proceeds from sale of discontinued operations 19,878 Proceeds on asset retirements and other (736) 16,200 - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities 7,922 (65,306) - ----------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Payments on long-term borrowing (77) (71) Proceeds from issuance of common stock 363 992 Repurchase of common stock (1,408) Dividends paid (1,576) (1,983) Other 172 (258) - ----------------------------------------------------------------------------------------------------------------------------- Net cash used by financing activities (1,118) (2,728) - ----------------------------------------------------------------------------------------------------------------------------- Net decrease in cash and equivalents (13,248) (100,903) Cash and equivalents at beginning of period 19,271 134,462 - ----------------------------------------------------------------------------------------------------------------------------- Cash and equivalents at end of period $ 6,023 $ 33,559 ============================================================================================================================ *Unaudited
Page 7 Item 1. Financial Statements (continued) Supplementary information to the financial statements: A dividend of twelve cents per share was declared and paid during the second 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): Earnings per share computation for continuing operations:
(Dollars in thousands, except per share amounts) Three Months Ended Six Months Ended - ------------------------------------------------------------------------------------------------------------------------------------ June 25, 1999 June 26, 1998 June 25, 1999 June 26, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Denominator for basic per share: Weighted average shares outstanding 6,566,000 8,257,000 6,562,000 8,259,000 ==================================================================================================================================== Denominator for diluted per share: Weighted average shares outstanding 6,566,000 8,257,000 6,562,000 8,259,000 Effect of dilutive stock options 110,000 181,000 99,000 189,000 - ------------------------------------------------------------------------------------------------------------------------------------ Diluted average common shares 6,676,000 8,438,000 6,661,000 8,448,000 ==================================================================================================================================== Net income from continuing operations (numerator) $ 3,032 $ 563 $ 5,262 $ 12,109 ==================================================================================================================================== Basic net income per share from continuing operations $ 0.46 $ 0.07 $ 0.80 $ 1.46 ==================================================================================================================================== Diluted net income per share from continuing operations $ 0.45 $ 0.07 $ 0.79 $ 1.43 ====================================================================================================================================
Page 8 Item 1. Financial Statements (continued) The weighted average options outstanding to purchase 656,000 and 709,000 shares of common stock were not included in the computation of diluted per share amounts for the three months ended June 25, 1999 and June 26, 1998, respectively, because the weighted average exercise prices were greater than the average market prices of the common shares. Weighted average exercise prices of $35.36 in 1999 and $35.79 in 1998 exceeded the average market prices of $25.18 and $26.15, respectively. The weighted average options outstanding to purchase 841,000 and 666,000 shares of common stock were not included in the computation of diluted per share amounts for the six months ended June 25, 1999 and June 26, 1998, respectively, because the weighted average exercise prices were greater than the average market prices of the common shares. Weighted average exercise prices of $33.22 in 1999 and $36.42 in 1998 exceeded the average market prices of $24.45 and $26.23, respectively. Recently Issued Accounting Standard--In June 1998 and June 1999, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133". These Statements require 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, 2001. 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. Business Segment Reporting - Prior to the sale of the semiconductor equipment business, the company operated in two segments: Semiconductor Equipment and Wireless Communications. The company now operates in only the Wireless Communications segment, with Semiconductor Equipment disclosed as discontinued operations in this report. For disclosure of the Wireless Communications segment's revenues from external customers, and profit or loss, as required in interim reporting under Financial Accounting Standard Board No. 131, "Disclosures about Segments of an Enterprise and Related Information", refer to the consolidated financial statements included herein. Page 9 PART I--FINANCIAL INFORMATION Item 2 Management's Discussion and Analysis of Financial Conditions and Results of Operations The following discussions 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 June 25, 1999, cash and equivalents and short-term investments totaled $60.1 million, a decrease of $4.5 million from the year-end balance of $64.6 million. The decrease resulted primarily from net cash used by discontinued operations offset by proceeds received for the sale of discontinued operations discussed below. As of June 25, 1999, the company's principal source of liquidity consisted of $6.0 million in cash and equivalents plus short-term investments valued at $54.1 million. The company invests its excess cash and equivalents in securities with maturity periods 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 rise and fall in value as market interest rates change. At the end of the quarter, 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 will satisfy anticipated cash and working capital 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, a CIBC World Markets Company, the company's Board 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 intellectual property assets and associated hardware to Applied Materials, Inc. On July 6, 1999, the company completed the sale of the remainder of its semiconductor equipment business to Silicon Valley Group, Inc. which was detailed in the company's Form 8-K filed on July 21, 1999. These transactions are included in the company's second-quarter financial results as disposition of discontinued operations resulting in a net gain of $7.3 million. The company is continuing its efforts to divest its remaining assets and operating units in accordance with the Board's strategic directive announced on March 1, 1999. In conjunction with the sale of its operations, the company is seeking separately to sell its real estate interests in San Jose and Palo Alto, California. The San Jose property includes an 188,000 square foot building and approximately 14 acres of land. The company has long-term leasehold interests in the property at Stanford Industrial Park, Palo Alto, California. The Palo Alto property includes approximately 262,000 square feet of building space and 22 acres. Lease terms expire in 2029 and 2054. There can be no assurance the company will be able to complete its strategy for the sale of the remainder of the company in parts or in its entirety. Current Operations and Business Outlook With the sale of the semiconductor equipment business, the company is engaged solely in the wireless communications business. Products from the company's Wireless Products Group (WPG) include custom RF (radio frequency) subassemblies for PCS, wireless local loop, point-to-multipoint and optical fiber modulation applications. Page 10 Additional WPG products are "over-the-air" repeaters for PCS applications, and gallium arsenide (GaAs) semiconductor devices such as MESFET transistors and microcircuits. The company's Telecommunications Group (TG) specializes in developing high sensitivity, wideband radio receiving apparatus used in communications surveillance by government agencies. Looking forward, the company expects business growth to come from its GaAs semiconductor devices, advanced RF technology subassemblies and repeaters, and communications surveillance receiver programs with strong follow-on potential. During the quarter ended June 25, 1999, WPG received additional orders for their PCS and OC-192 communications assemblies and orders for new point-to-multipoint (PMP) assemblies. WPG also introduced two new GaAs MESFET devices for general-purpose wireless applications, expanding WJ's line of innovative GaAs-based products. TG announced two new contracts this quarter totaling $8.2 million for electronic-receiving equipment from Sanders, a Lockheed Martin Company. For the continuing business, new orders for the second quarter of 1999 were $30.0 million, down 27% from a comparable $41.0 million of the first quarter 1999 but up 114% from a comparable $14.0 million for the second quarter 1998. Backlog on June 25, 1999 stood at $68.7 million compared to the comparable June 26, 1998 backlog of $53.1 million. Since the company's backlog can be canceled or rescheduled, backlog is not necessarily a meaningful indicator for future revenue. 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 communication companies, some of whom are much larger than Watkins-Johnson, is intense. The effect of these and other factors could significantly affect the company's future operating results. Second Quarter and Year-to-Date of 1999 Compared with Second Quarter and Year-to-Date of 1998 Sales for the continuing wireless communications business grew 30% for the second quarter and 22% for the first half from last year. Gross margins in the second quarter of 1999 improved to slightly above 40% of sales mostly due to higher volume. Selling and administrative expenses decreased notably from 1998 primarily due to restructuring and cost reduction efforts initiated in the third quarter of 1998. Restructuring in 1998 was necessary to discontinue a product line called Base2 as reported in previous filings. All 1998 accrued restructuring charges have been paid or settled at the end of the second quarter 1999. The decrease in research and development expenses in 1999 can also be attributable to the discontinuation of Base2. Funds available for investment decreased substantially from 1998 mostly due to operating losses and restructuring charges occurred in the second half of 1998. This was the primarily reason "interest and other income" declined by more than 50%. In the first half of 1998, income before taxes included a nonrecurring gain on real property of $14.8 million. The company's effective tax rate for continuing operations restated for all periods was about 32.5%. This rate is expected to be effective for the remainder of 1999. The company's semiconductor equipment business was sold in two separate transactions as discussed above. The disposition and financial results of the semiconductor equipment business were reported as discontinued operations--net of tax. Page 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 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 operations are on Oracle version 10.7. 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 Y2K situation is an issue for only some of the products in the Wireless Communications segment. The current schedule is to identify all affected products and develop solutions by third quarter 1999 to ensure timely communication to the customers. The respective business units have also addressed non-IT issues with respect to their manufacturing facilities and there are no known non-IT issues that will adversely impact the company's operations. The company is dependent on numerous vendors and customers which may incur disruptions as a result of year 2000 software issues. Accordingly, no assurance can be given that the company's operations will not be impacted by this industry-wide issue. The company is addressing the Y2K issues with external organizations. This involves customers, suppliers and service providers. Although the initial review does not indicate any significant risk, this will be an ongoing effort. The company is considering alternative vendors as a contingency plan. With the actions that have been taken and the other planned activities, the company is not anticipating any significant disruption of business. However, no absolute assurances can be given. The most likely disruption that could occur is where the company uses wire transfers to move funds to vendors, some of which are located in foreign countries. Since the status of all banking systems in the world cannot be determined in advance, there may be minor disruption in the ability to transfer funds in real time along the current routes. Contingency plans, which include alternative banks and standby letters of credit, are in place to address what is needed to minimize any business interruption. Expenditures specifically related to software modifications for year 2000 compatibility are not expected to have a material effect on the company's operations or financial position. The cost to address and remedy the company's Y2K issues were $0.1 million in 1997, $0.2 million in 1998 and expected to be $0.2 million in 1999. Page 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Single European Currency Conversion The company has addressed the issues raised by the introduction of the Single European Currency (Euro) initially implemented 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 its results of operations. Item 3. Quantitative and Qualitative Disclosures About Market Risks The following discussion about the company's market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. The company does not use derivative financial instruments for speculative or trading purposes. Short-Term Investments--The company maintains a short-term investment portfolio consisting mainly of debt securities with an average maturity of less than two years. These available-for-sale securities are subject to interest rate risk and rise or fall in value as market interest rates change. The company has the ability to hold its fixed income investments until maturity, and therefore the company would not expect its operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on its investment portfolio. The following table provides information about the company's cash and equivalents and short-term investments. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. The information constitutes a "forward-looking" statement. Expected Maturity Amounts Weighted Average Expected Maturity Dates (in thousands) Interest Rate ----------------------- -------------- ------------- Cash and equivalents: 1999 6,023 2.82% Short-term investments: 1999 21,144 4.91% 2000 18,017 5.69% 2001 10,960 5.74% 2002 3,965 5.61% Market value at June 25, 1999 54,086 Page 13 Item 3. Quantitative and Qualitative Disclosures About Market Risks (continued) Foreign Exchange Risks--The company has limited involvement with derivative financial instruments and does not use such instruments for trading purposes. The derivative financial instruments are used to manage foreign currency exchange risk. The company enters into foreign exchange forward contracts to hedge certain balance sheet exposures against future movements in foreign exchange rates. The company is exposed to credit-related losses in the event of nonperformance by counter-parties to these financial instruments, but does not expect any counter-party to fail to meet its obligation. Gains and losses on the forward contracts are largely offset by gains and losses on the underlying exposure. Consequently, a sudden or significant change in foreign exchange rates is not expected to have a material impact on future net income or cash flows. Additional information regarding market risks is disclosed in Item 7A in the company's Form 10-K for the year ended December 31, 1998. Page 14 PART II--OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders At the final session of the 1999 annual meeting of shareowners held June 11, 1999, the shareowners voted as follows: Proposal 2: Proposal to amend the company's Articles of Incorporation and Bylaws to eliminate their super-majority shareowner voting requirements. The amendments would 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. For 5,323,663 Against 212,456 Abstain 49,073 Broker non-votes Not Available Percentage of outstanding shares voted in favor 81% Proposal 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. For 4,769,866 Against 768,729 Abstain 46,598 Broker non-votes Not Available Percentage of outstanding shares voted in favor 73% Proposal 2 was approved by the shareowners with the required 80% majority (a Form 8-K was filed by the company dated June 21, 1999 including the full text of the amendment approved by the shareowners, see Item 6(b)). Proposal 3 did not receive the required 80% for approval. Page 15 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 the exhibits. The exhibits are numbered according to Item 601 of Regulation S-K. b) A Form 8-K was filed on June 21, 1999 reporting the approval by the shareowners for the elimination of the super-majority voting requirement. A Form 8-K filing was filed on July 21, 1999 reporting the completion of the divestiture of the company's semiconductor equipment business on July 6, 1999. Page 16 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 August 9, 1999 By: /s/ W. Keith Kennedy, Jr. -------------------------- ----------------------------------- W. Keith Kennedy, Jr. President and Chief Executive Officer Date August 9, 1999 By: /s/ Scott G. Buchanan -------------------------- ----------------------------------- Scott G. Buchanan Executive Vice President, Chief Financial Officer and Treasurer Page 17 EXHIBIT INDEX The Exhibits below are numbered according to Item 601 of Regulation S-K. Exhibit Number Exhibit ------ ------- 27.1 Financial Data Schedule for the quarter ended June 25, 1999. 27.2 Financial Data Schedule for the year ended December 31, 1998. 27.3 Financial Data Schedule for the quarter ended June 26, 1998. 27.4 Financial Data Schedule for the quarter ended March 26, 1999. Page 18 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 MAR-27-1999 JUN-25-1999 6,203 54,086 17,907 0 9,252 132,344 66,331 41,834 212,839 57,707 8,386 0 0 34,816 111,930 212,839 34,857 34,857 20,580 20,580 9,673 0 126 4,478 1,446 3,032 10,506 0 0 13,538 2.06 2.03
EX-27.2 3 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 19,271 45,353 19,588 0 9,706 143,655 68,420 44,829 200,400 60,090 8,611 0 0 34,454 97,245 200,400 115,219 115,219 81,320 81,320 25,772 0 601 7,526 2,446 5,080 (54,478) 0 0 (49,398) (6.38) (6.28)
EX-27.3 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 MAR-28-1998 JUN-26-1998 33,559 79,141 18,729 0 15,450 252,813 80,884 50,387 284,408 52,253 10,984 0 0 41,371 179,800 284,408 26,835 26,835 16,652 16,652 9,201 0 148 834 271 563 (6,770) 0 0 (6,207) (.75) (.73)
EX-27.4 5 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-26-1999 24,293 40,014 19,980 0 9,444 157,065 69,410 45,082 192,095 49,627 8,446 0 0 34,702 99,320 192,095 34,663 34,663 23,067 23,067 8,172 0 120 3,304 1,074 2,230 623 0 0 2,853 .44 .43
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