-----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, Qchf1bt86DUmRILckTwf5iyeBe1YSRt+jAx8+TrWxBala7l7CCqTg3xrP7xIMrIF 8ytwnH+QgzxqHbik+wo30A== 0000950005-99-000957.txt : 19991109 0000950005-99-000957.hdr.sgml : 19991109 ACCESSION NUMBER: 0000950005-99-000957 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19990924 FILED AS OF DATE: 19991108 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: 99743214 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 September 24, 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 September 24, 1999 6,627,000 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 Watkins-Johnson Company's (the company) 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 Form 10-Q 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, 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, risks of foreign business, risks related to "Year 2000 Compatibility", the risk that the company will not be able to complete the pending sale of its Telecommunications Group and its strategy for the sale of the entire company, and other risks including those detailed in the company's 1998 Form 10-K/A filed with the Securities and Exchange Commission. 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. 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 nine months ended September 24, 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 September 24, 1999 and September 25, 1998
Three Months Ended Nine Months Ended - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands, except per share amounts) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Sales $ 28,791 $ 19,069 $ 98,311 $ 75,910 Costs and expenses: Cost of goods sold 17,348 17,640 60,995 52,531 Cost of goods sold-write down of discontinued products 3,399 3,399 Research and development 4,991 5,412 15,078 16,715 Selling and administrative 5,275 4,670 14,848 15,761 Restructuring 2,700 2,700 Divestiture 1,639 1,639 - ------------------------------------------------------------------------------------------------------------------------------------ 29,253 33,821 92,560 91,106 - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) from operations (462) (14,752) 5,751 (15,196) Interest income 1,084 1,420 2,708 4,677 Interest expense (134) (152) (380) (449) Other income (expense)--net 1 312 192 953 Gain on real property 9,686 9,686 14,783 - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) from continuing operations before income tax 10,175 (13,172) 17,957 4,768 Income tax expense (benefit) 3,316 (4,281) 5,836 1,550 - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) from continuing operations 6,859 (8,891) 12,121 3,218 Discontinued operations: Income (loss), net of taxes (45,523) 3,811 (54,138) Gain on disposition, net of taxes 7,318 - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 6,859 $ (54,414) $ 23,250 $ (50,920) =================================================================================================================================== Basic per share amounts: Net income (loss) from continuing operations $ 1.04 $ (1.13) $ 1.84 $ .40 Discontinued operations: Income (loss), net of taxes (5.80) 0.58 (6.67) Gain on disposition, net of taxes 1.12 - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 1.04 $ (6.93) $ 3.54 $ (6.27) ==================================================================================================================================== Basic average common shares 6,603,000 7,857,000 6,576,000 8,122,000 Diluted per share amounts: Net income (loss) from continuing operations $ 1.00 $ (1.13) $ 1.80 $ .39 Discontinued operations: Income (loss), net of taxes (5.80) 0.57 (6.55) Gain on disposition, net of taxes 1.09 - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 1.00 $ (6.93) $ 3.46 $ (6.16) =================================================================================================================================== Diluted average common shares 6,841,000 7,857,000 6,724,000 8,271,000 *Unaudited
Page 4 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME* For the periods ended September 24, 1999 and September 25, 1998
Three Months Ended Nine Months Ended - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 6,859 $ (54,414) $ 23,250 $ (50,920) - ------------------------------------------------------------------------------------------------------------------------------------ Other comprehensive income (expense), net of tax: Net unrealized holding gains (losses) on securities, arising during period (1) 338 (304) 289 Less reclassification adjustment for losses on securities included in net income (10) - ------------------------------------------------------------------------------------------------------------------------------------ Other comprehensive income (expense) (1) 338 (304) 279 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income (loss) $ 6,858 $ (54,076) $ 22,946 $ (50,641) ==================================================================================================================================== *Unaudited
Page 5 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS* As of September 24, 1999 and December 31, 1998 - -------------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and equivalents $ 66,212 $ 19,271 Short-term investments 44,678 45,353 Receivables 16,927 19,588 Inventories: Finished goods 1,262 875 Work in process 3,767 3,167 Raw materials and parts 5,039 5,664 Deferred income tax 25,100 32,288 Net current assets from discontinued operations 16,954 7,453 Other 3,559 17,449 - -------------------------------------------------------------------------------- Total current assets 183,498 151,108 - -------------------------------------------------------------------------------- Property, plant, and equipment 65,803 68,420 Accumulated depreciation and amortization (41,599) (44,829) - -------------------------------------------------------------------------------- Property, plant, and equipment--net 24,204 23,591 - -------------------------------------------------------------------------------- Net non-current assets of discontinued operations 16,965 Other assets 4,255 10,716 - -------------------------------------------------------------------------------- $ 211,957 $ 202,380 ================================================================================ LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Payables $ 5,709 $ 9,685 Accrued liabilities 44,249 50,405 - -------------------------------------------------------------------------------- Total current liabilities 49,958 60,090 - -------------------------------------------------------------------------------- Long-term obligations 5,868 8,611 - -------------------------------------------------------------------------------- Shareowners' equity: Common stock 36,331 34,454 Retained earnings 119,952 99,073 Accumulated comprehensive income (loss) (152) 152 - -------------------------------------------------------------------------------- Total shareowners' equity 156,131 133,679 - -------------------------------------------------------------------------------- $ 211,957 $ 202,380 ================================================================================ *Unaudited Page 6 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS* For the periods ended September 24, 1999 and September 25, 1998
Nine Months Ended - ------------------------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income (loss) $ 23,250 $ (50,920) Reconciliation of net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 2,919 3,074 (Gain) loss on disposal of property, plant and equipment (9,523) (14,719) Deferred income taxes 7,407 (16,160) Results of discontinued operations and gain on disposal (11,129) 54,138 Net changes in: Receivables 2,661 7,324 Inventories (362) 1,976 Other assets 13,932 (6,177) Accruals and payables (12,764) (24,816) - ------------------------------------------------------------------------------------------- Net cash provided (used) by continuing operating activities 16,391 (46,280) Net cash provided (used) by discontinued operations (1,286) 3,255 - ------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 15,105 (43,025) - ------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Additions of property, plant, and equipment (4,179) (3,075) Proceeds from sale of short-term investments 44,664 32,461 Purchases of short-term investments (44,512) (94,938) Proceeds from sale of discontinued operations 19,878 Proceeds from sale of real property 16,875 15,892 Proceeds on asset retirements and other (283) 5 - ------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities 32,443 (49,655) - ------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Payments on long-term borrowing (113) (103) Proceeds from issuance of common stock 1,877 1,459 Repurchase of common stock (22,963) Dividends paid (2,371) (2,899) - ------------------------------------------------------------------------------------------- Net cash used by financing activities (607) (24,506) - ------------------------------------------------------------------------------------------- Net increase (decrease) in cash and equivalents 46,941 (117,186) Cash and equivalents at beginning of period 19,271 134,462 - ------------------------------------------------------------------------------------------- Cash and equivalents at end of period $ 66,212 $ 17,276 =========================================================================================== *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 third 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. Earnings per share computation for continuing operations:
Dollars in thousands, except per share amounts Three Months Ended Nine Months Ended - --------------------------------------------------------------------------------------------------- September 24, September 25, September 24, September 25, 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------- Denominator for basic per share: Weighted average shares outstanding 6,603,000 7,857,000 6,576,000 8,122,000 ---------- ---------- ---------- ---------- Denominator for diluted per share: Weighted average shares outstanding 6,603,000 7,857,000 6,576,000 8,122,000 Effect of dilutive stock options 238,000 148,000 149,000 ---------- ---------- ---------- ---------- Diluted average common shares 6,841,000 7,857,000 6,724,000 8,271,000 ---------- ---------- ---------- ---------- Net income from continuing operations (numerator) $ 6,859 $ (8,891) $ 12,121 $ 3,218 ========== ========== ========== ========== Basic net income per share from continuing operations 1.04 $ (1.13) $ 1.84 $ 0.40 Diluted net income per share from continuing operations 1.00 $ (1.13) $ 1.80 $ 0.39
The calculation is submitted in accordance with Regulation S-K, Item 601 (b)(11). For the three months ended September 25, 1998, the incremental shares from the assumed exercise of 149,000 stock options, are not included in computing the dilutive per share amounts because continuing operations resulted in a loss and such assumed conversion would be antidilutive. The weighted average options outstanding to purchase 392,000 and 1,194,000 shares of common stock were not included in the computation of diluted per share amounts for the three months ended September 24, 1999 and September 25, 1998, respectively, because the weighted average exercise prices were greater than the average market prices of the common shares. Weighted Page 8 Item 1. Financial Statements (continued) - -------------------------------------------------------------------------------- average exercise prices of $39.91 in 1999 and $30.82 in 1998 exceeded the average market prices of $32.84 and $21.68, respectively. The weighted average options outstanding to purchase 436,000 and 862,000 shares of common stock were not included in the computation of diluted per share amounts for the nine months ended September 24, 1999 and September 25, 1998, respectively, because the weighted average exercise prices were greater than the average market prices of the common shares. Weighted average exercise prices of $39.43 in 1999 and $33.84 in 1998 exceeded the average market prices of $27.32 and $24.64, respectively. Business Segment Reporting -- Prior to the second quarter of 1999, the company operated in two segments: Semiconductor Equipment and Wireless Communications. In July 1999 the company completed the sale of its Semiconductor Equipment Group (SEG) business, which was included in the second quarter 1999 financial results as a discontinued operation. In addition, the company's remaining business, Wireless Communications, was separated into two reportable business segments: Wireless Products Group (WPG) and Telecommunications Group (TG). WPG designs, manufactures and services radio frequency (RF) components, subassemblies, repeaters and related equipment with applications for commercial wire-line and wireless telecommunications infrastructure networks. TG designs, manufactures and services equipment and related processes with applications in government intelligence, signal surveillance and military communications. WPG and TG became significant relative to the continuing operations after the divestiture of the SEG business. Going forward, each Group is expected to focus on its respective core products and markets. Each Group's progress and performance will be reviewed separately based on its respective strategic and tactical plans. Sales to external customers and pre-tax profit (loss) from continuing operations by business segment are as follows:
Three months ended September 24,1999 and September 25, 1998 Sales Pre-tax income (loss) ----------------------------------------------------------- (in thousands) 1999 1998 1999 1998 --------------------------------------------------------------------------------------------------- Wireless Products Group $ 16,524 $ 11,556 $ 125 $ (2,118) Telecommunications Group 12,267 7,513 1,053 (12,634) Corporate (1,640) --------------------------------------------------------------------------------------------------- Income from continuing operations (462) (14,752) Other income (expense)-net 10,637 1,580 --------------------------------------------------------------------------------------------------- Total $ 28,791 $ 19,069 $ 10,175 $(13,172) =================================================================================================== Nine months ended September 24,1999 and September 25, 1998 Sales Pre-tax income (loss) ----------------------------------------------------------- (in thousands) 1999 1998 1999 1998 --------------------------------------------------------------------------------------------------- Wireless Products Group $ 63,740 $ 34,579 $ 4,461 $ (2,206) Telecommunications Group 34,571 41,331 2,930 (12,990) Corporate (1,640) --------------------------------------------------------------------------------------------------- Income from continuing operations 5,751 (15,196) Other income (expense)-net 12,206 19,964 --------------------------------------------------------------------------------------------------- Total $ 98,311 $ 75,910 $ 17,957 $ 4,768 ===================================================================================================
Page 9 Item 1. Financial Statements (continued) - -------------------------------------------------------------------------------- Discontinued Product Line and Related Restructuring Charges -- During the third quarter of 1998, the TG segment discontinued its Base2(TM) base-station product line after reassessing key customer needs and market conditions. Inventory, demo equipment, and specialized fixed assets associated with the discontinued product were written down in the restructuring. The company recorded charges of $6.1 million related to fixed assets, inventory, severance and other exit costs as follows:
Accrued Severance, Benefits, and Write Down of Write Down (in thousands) Other Costs Fixed Assets of Inventory ------------------------------------------------------------------------------------------------------------ Restructuring provision $448 $2,252 $3,399 ======================================= Amount paid in 1998 213 Amount paid in 1999 235 ==================================================================== Balance at September 24, 1999 $ 0 ====================================================================
Subsequent Events -- On October 1, 1999, the company completed the sale of one of its long-term lease interests in Palo Alto to Stanford University resulting in net proceeds of about $54.0 million. This transaction and any resulting gain will be reported in the company's fourth quarter financial results. On October 26, 1999, the company announced it has entered into a definitive merger agreement with FP-WJ Acquisition Corp., a new company formed by certain investment funds managed by Fox Paine & Company, LLC ("FP-WJ"). Under the terms of the merger agreement, the company's outstanding common shares would be converted into the right to receive $41.125 per share in cash. This transaction is not yet complete and is subject to certain conditions in addition to the receipt of funding under financing commitments, approval by the company's shareowners and customary government approvals, and the completion of the sale of TG to Marconi North America, Inc. See Part I, Item 2, under "Divestiture Activities". There can be no assurance that the pending sale of TG or the merger with FP-WJ will be completed nor can there be any assurance that the company will be able to complete its strategy for the sale of the entire company. Subsequent to the third quarter and in connection with the pending merger transaction with an FP-WJ, four purported shareholder class action lawsuits have been filed against the company and its directors in the California Superior Court for the County of Santa Clara: Rosenzweig v. Watkins-Johnson Company, et al., Case No CV7885528; Soshtain v. Watkins-Johnson Co., et al., Case No CV785560; Leong v. Watkins-Johnson Company, et al., Case No CV785617; and Fong v. Watkins-Johnson Co., et al., Case No. CV785683. These lawsuits allege essentially the same ground for relief, namely that the individual defendants breached their fiduciary duty to the company's shareowners in connection with the merger by failing to maximize the value of the company through an approprate process for eliciting and evaluating bids in order to entrench themselves in office and serve their personal interests. Three of the four lawsuits include, in the relief sought, preliminary and permanent injunctions against the completion of the merger. Two of the four lawsuits also seek an order permitting a stockholder's committee comprised exclusively of members of the purported class and their representative to establish procedures, and independent input by the plaintiffs and the classes they purportedly represent in connection with any proposed transction for WJ shares. To the company's knowledge no motion has been filed for injunctive relief in any of these lawsuits. WJ considers that these lawsuits are without merit and intends to defend against all of them vigoursly. Recently Issued Accounting Standard--In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of Page 10 Item 1. Financial Statements (continued) - -------------------------------------------------------------------------------- SFAS 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 these Statements to have a significant impact on the company's financial condition or results of operations. Page 11 PART I--FINANCIAL INFORMATION Item 2 Management's Discussion and Analysis of Financial Conditions 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 On September 24, 1999, cash and equivalents and short-term investments totaled $110.9 million, an increase of $46.3 million from the year-end balance of $64.6 million. The increase is attributable mostly to the following transactions: Net proceeds of $19.9 million from sale of a discontinued operation--SEG business, and $16.9 million from sale of the remaining San Jose, California facility. See a more detailed discussion of these completed transactions under "Divestiture Activities" below. In addition, the company's cash position was improved by an income tax refund of $12.0 million received in 1999 as a result of the 1998 net operating loss. At the end of the third quarter, the company's principal source of liquidity consisted of $66.2 million in cash and equivalents plus short-term investments valued at $44.7 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 third 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 31, 1999, the company sold the high-density plasma chemical vapor deposition (HDPCVD) intellectual property assets and related hardware of SEG. In July 1999, the company sold the remainder of its SEG business, consisting of atmospheric pressure chemical vapor disposition products (APCVD). These transactions completed the divestiture of SEG resulting in a net gain of $7.3 million included in the company's second quarter financial results as a disposition of a discontinued operation. On August 18, 1999, the company announced a definitive agreement to sell substantially all of TG's assets to a unit of Marconi North America, Inc., a subsidiary of the General Electric Company p.l.c. of the United Kingdom. The sale is not yet complete and is subject to certain conditions in addition to approval by the company's shareowners and government approvals. On September 16, 1999, the company completed the sale of its remaining San Jose, California facility including a 190,000 square foot building resulting in a pre-tax gain of $9.7 million. This transaction was included in the company's third quarter financial results. On October 1, 1999, the company completed the sale of one of its long-term lease interests in Palo Alto to Stanford University resulting in net proceeds of about $54.0 million. This transaction and any resulting gain will be reported in the company's fourth quarter financial results. On October 26, 1999, the company announced it has entered into a definitive merger agreement with FP-WJ Acquisition Corp., a new company formed by certain investment funds managed by Fox Paine Page 12 Item 2 Management's Discussion and Analysis of Financial Conditions and Results of Operations (continued) - -------------------------------------------------------------------------------- & Company, LLC ("FP-WJ"). Under the terms of the merger agreement, the company's outstanding common shares would be converted into the right to receive $41.125 per share in cash. This transaction is not yet complete and is subject to certain conditions in addition to the receipt of funding under financing commitments, approval by the company's shareowners and customary government approvals, and the completion of the sale of TG to Marconi North America, Inc. There can be no assurance that the pending sale of TG or the merger with FP-WJ will be completed nor can there be any assurance that the company will be able to complete its strategy for the sale of the entire company. Current Operations and Business Outlook During the third quarter 1999, WPG received $23.5 million of new orders, an increase 49% from the $15.8 million received in the second quarter and an increase of 3.5% from the $22.7 million during the same quarter one year ago. New orders received by WPG included key orders from communication equipment leaders such as Lucent Technologies, Inc. and Nortel Networks. Approximately 20% of the orders were received for WPG's components and repeater products. During the third quarter 1999, TG received $14.5 million of new orders, an increase of 2.8% from the second quarter of $14.1 million and 59% more than the $9.1 million during the same quarter one year ago. Larger than expected orders were received from U.S. government agencies. At the end of the third quarter, the company's total backlog was $77.9 million. This was about 13% higher than the $68.7 at the end of the second quarter, and about 18% higher than the $66.0 million of a year ago. Of the total $77.9 million backlog, WPG's was $43.4 million while TG's was $34.5 million. Since the company's backlog can be canceled or rescheduled, backlog is not necessarily a meaningful indicator for future revenue. With the divestiture of the SEG business completed in the second quarter, the company has been focusing on the WPG and TG businesses. Based on current quarter and year-to-date results, both businesses are on track to exceed their targeted profit plans for the year. Although long-term prospects for both businesses appeared positive, it should be noted that short-term demand variations by key customers may affect short-term quarterly results. In addition, the wireless and telecommunications industries are 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 firms, some of whom are larger than the company, is intense. Other risks and factors discussed in the company's 1998 Form 10-K/A could significantly affect the company's future operating results. Third Quarter 1999 Compared to Third Quarter 1998 Sales for WPG increased to $16.5 million in 1999 from $11.6 million in 1998, or 42%. Sales continued to grow compared to 1998, but grew at a slower rate when compared to the first half of 1999. The increase in sales was from various product areas including radio frequency (RF) devices and subassemblies, repeaters and PCS converters. Sales for TG increased to $12.3 million in 1999 compared to $7.5 million in 1998, or 64%. The 1998 third quarter was a low period for TG as a key product line, Base2(TM), was discontinued and TG refocused on its core products and customers. Gross margin for WPG increased to 41% in 1999 from 27% in 1998 mostly due to higher volume. Also in 1998, start-up costs related to a wireless-local-loop product were incurred. Gross margin for TG increased to 37% in 1999 compared to a loss in 1998. TG's 1999 third quarter results continued to indicate that the 1998 restructuring and realignment were positive relative Page 13 Item 2 Management's Discussion and Analysis of Financial Conditions and Results of Operations (continued) - -------------------------------------------------------------------------------- to current business conditions. Included in the 1998 third quarter was a $3.4 million inventory write down associated with the discontinued Base2 product line, and $6.7 million of charges for problem contracts and slow-moving inventory. WPG research and development expenses were $4.4 million in 1999 or 27% of sales, compared to $3.9 million in 1998, or 34% of sales. Research and development activities are expected to remain at the current level for the rest of 1999. WPG has been focused on bringing new products to market efficiently to take advantage of the growing market. TG research and development expenses decreased from 20% of sales in 1998 to 5% in 1999 as the group halted its spending on the discontinued Base2 product in September 1998. Actual expenses decreased from $1.5 million in 1998 to $0.6 million in 1999. TG believes the current level of research and development activity is sufficient in sustaining its refocused core business. WPG's selling and administrative expenses increased to $2.3 million or 14% of sales in 1999, from $1.3 million or 11% of sales in 1998. For the full year 1999, WPG's selling and administrative expenses are expected to be within planned levels at about 11% of sales. Excluding the 1998 restructuring charges of $2.7 million, TG's selling and administrative expenses were $2.9 million in 1999 compared to $3.4 million in 1998, or a 15% decline. The decline was attributable to the restructuring actions taken in 1998. The company incurred additional expenses totaling $1.6 million related to the pending transactions as discussed under "Divestiture Activities" in this Part I, Item 2. Although the transactions are pending, the related expenses must be charged against earnings as they are incurred. Interest income decreased to $1.1 million in 1999 compared to $1.4 million in 1998 mostly due to higher funds available for investment in the third quarter of 1998. In 1999, the sale of the company's remaining San Jose, California facility was completed in the third quarter resulting in $9.7 million of pre-tax gain. Due to the combined effect of the above, net income from continuing operations in 1999 was $6.9 million, or $1.00 per diluted share, compared to a net loss of $8.9 million in 1998, or $1.13 loss per diluted share. Year-to-date 1999 Compared to Year-to-date 1998 WPG sales increased 84% to $63.7 million in 1999 from $34.6 million in 1998. WPG continued to grow in all product areas particularly with strong shipments of wireless-local-loop products in the first half of 1999. Although TG sales decreased from $41.3 million in 1998 to $34.6 million in 1999, or 16%, it was in line with TG's expectations after restructuring in 1998. TG's efforts in refocusing on its core products and customers have been positive as its orders and sales have been stabilized for the first three quarters of 1999. Gross margin for WPG improved to 38% in 1999 from 32% in 1998 as the group continued to benefit from higher volume and economies of scale. Gross margin for TG was 38% in 1999 compared to 21% in 1998. Included in 1998 was a $3.4 million inventory write down associated with the discontinued Base2 product line, and $6.7 million of charges for problem contracts and slow-moving inventory. WPG research and development expenses increased from $9.1 million in 1998 to $13.0 million in 1999. The expenditures were within WPG's plans. WPG's product development activities are Page 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- expected to continue at its current pace as it is committed to introduce new quality products to its rapidly growing market in a timely manner. TG research and development expenses decreased substantially from $7.6 million in 1998 to $2.1 million in 1999. The drop was mostly due to spending being curbed on the discontinued Base2 product line since third quarter 1998. WPG selling and administrative expenses decreased from 12% of sales in 1998 to 11% of sales in 1999 as expected due to higher business volume. Actual expenses increased from $4.2 million to $6.8 million and were within WPG's plans. Excluding 1998 restructuring charges of $2.7 million, TG selling and administrative expenses decreased from $11.5 million in 1998 to $8.1 million in 1999. Based on the results of the first three quarters of 1999, the decrease was mostly due to the resizing of the TG business in 1998. The company incurred additional expenses totaling $1.6 million related to a number of pending transactions as discussed in this Part I, Item 2, under "Divestiture Activities". Although some of the transactions are still pending, the related expenses have to be charged against earnings as they are incurred. Interest income decreased to $2.7 million in 1999 compared to $4.7 million in 1998 mostly due to higher funds available for investment in 1998 than in 1999. In 1999, the sale of the company's remaining San Jose, California facility was completed in the third quarter resulting in $9.7 million of pre-tax gain. In 1998, the sale of about 15 acres of undeveloped land adjacent to the San Jose, California facility was sold resulting in about $15.0 million of pre-tax gain. Due to the combined effect of the above, net income from continuing operations in 1999 was $12.1 million, or $1.80 per diluted share, compared to $3.2 million in 1998, or $0.39 per diluted share. 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 database 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 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 WPG and TG, respectively. The company believes the Y2K situation is an issue for only certain non-core products. Customers have been notified as to what effect, if any, Y2K will have on their products and solutions developed as needed. The respective business units have also addressed non-IT issues with respect to Page 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- 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 was less than $100,000 for the years 1997 and 1998 and is expected to be the same in 1999. Page 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- Single European Currency Conversion The company has addressed 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 of the Euro, based on current available information management does not believe that 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 - -------------------------------------------------------------------------------- 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 investment portfolio and constitutes a "forward-looking statement." For investment securities, the table presents principal cash flows and related weighted average interest rates by expected maturity dates.
Expected Maturity Weighted Average Amounts Interest Expected Maturity Dates (in thousands) Rate ------------------------------------- --------------------- ------------------- Cash and equivalents: 1999 $ 6,212 4.83% ======== Short-term investments: 1999 1,973 5.39% 2000 27,774 5.74% 2001 10,966 5.74% 2002 3,965 5.61% -------- Fair value at September 24, 1999 $ 44,678 ========
Page 17 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 and specific transactions denominated in a foreign currency. Gains and losses on the forward contracts are largely offset by the underlying transactions' exposure and consequently a sudden or significant change in foreign exchange rates is not expected to have a material impact on future net income or cash flows. The company is exposed to credit-related losses in the event of nonperformance by counter parties to these financial instruments, but does not expect any counter party to fail to meet its obligation. Additional information regarding market risks is disclosed in Notes 1, 2 and 3 to the consolidated financial statements included in Part II, Item 8 of the company's Form 10-K/A for the year ended December 31, 1998. PART II--OTHER INFORMATION Item 1. Legal Proceedings - ----------------------------------- See Part I, Item 1, under "Subsequent Events". Item 2. Changes in Securities and Use of Proceeds - ------------------------------------------------------------ Not applicable. Item 3. Defaults Upon Senior Securities. - -------------------------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. - ---------------------------------------------------------------------- Not applicable. Item 5. Other Information - ----------------------------------- See Part I, Item 1, under "Subsequent Events" and Part I, Item 2, under "Divestiture Activities". Page 18 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 filing was filed on July 21, 1999 reporting the completion of the divestiture of the company's Semiconductor Equipment Group business on July 6, 1999. Form 8-K's were filed on August 18,1999 and September 27, 1999 reporting that the company had entered into a definitive agreement, and an amended and restated agreement, respectively, to sell its Telecommunication Group business to a subsidiary of Marconi North America, Inc. Page 19 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 November 8, 1999 By: /s/ W. Keith Kennedy, Jr. -------------------------- --------------------------------------- W. Keith Kennedy, Jr. President and Chief Executive Officer Date November 8, 1999 By: /s/ Scott G. Buchanan -------------------------- --------------------------------------- Scott G. Buchanan Executive Vice President, Chief Financial Officer and Treasurer Page 20 EXHIBIT INDEX The Exhibits below are numbered according to Item 601 of Regulation S-K. Exhibit Number Exhibit - ------ ------- 3.1 * Articles of Incorporation of Watkins-Johnson Company, as amended May 8, 1989 3.2 * By-Laws of Watkins-Johnson Company, as amended and restated on December 10, 1998 (Exhibit 3(ii) to Form 8-K filed on December 14, 1998, Commission File No. 1-5631). 4.1 * Shareowners' Rights Agreement dated as of September 30, 1996 Between Watkins-Johnson Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (Report on Form 8-K, filed on October 1, 1996, Commission File No.1-5631). 4.2 * Amendment No. 1 to Rights Agreement, dated as of December 10, 1998, to Rights Agreement, dated as of September 30, 1996, between Watkins-Johnson Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. (Filed as Exhibit 4.1 to Form 8-K filed on December 14, 1998, Commission File No. 1-5631). 10 Material Contracts 10.1 * Lease and Agreement between Lindco Properties Company and Watkins-Johnson Company commencing May 1, 1969 (Exhibit (b) I to Form 10-K for 1969, Commission File No. 2-22436). 10.2 * Lease and Agreement between Morrco Properties Company and Watkins-Johnson Company dated October 31, 1975 (Exhibit 2(c) to Form 10-K for 1976, Commission File No. 1-5631). 10.3 * Watkins-Johnson Company 1976 Stock Option Plan, as amended September 28, 1987 (Appendix A to the company's definitive proxy statement dated March 1, 1988 filed with the Commission pursuant to Regulation 14A). 10.4 * Watkins-Johnson Company 1989 Stock Option Plan for nonemployee directors (Appendix A to the company's definitive proxy statement dated February 28, 1990 filed with the Commission pursuant to Regulation 14A). 10.5 * Watkins-Johnson Company 1976 Stock Option Plan amended and renamed as the 1991 Stock Option and Incentive plan (Appendix A to the company's definitive proxy statement dated February 28, 1991 filed with the commission pursuant to Regulation 14A). 10.6 Deleted 10.7 Deleted 10.8 Deleted Page 21 Exhibit Number Exhibit - ------ ------- 10.9 Deleted 10.10 Deleted 10.11 * Stock Purchase Agreement dated as of August 29, 1997 by and among Registrant and SMS and TSMD Acquisition Corp. (original agreement filed as Exhibit 99.1 of Report on Form 8-K, filed on November 14, 1997, reporting the disposition of assets effective October 31, 1997, Commission File No. 1-5631). 10.12 * Watkins-Johnson Company Unaudited Pro Forma Condensed Consolidated Financial Information filed as an amendment to Report on Form 8-K, filed on November 14, 1997, reporting the disposition of assets effective October 31, 1997 and Stock Purchase Agreement dated as of August 29, 1997 by and among Registrant and SMS and TSMD Acquisition Corp., Commission File No. 1-5631 (Exhibit 10-x originally filed as Report on Form 8-K/A, filed on January 13, 1998, Commission File No. 1-5631). 10.13 * Asset Purchase Agreement between Watkins-Johnson Company and Samsung Semiconductor, Inc. dated as of December 31, 1997. (Filed as Exhibit 10-y to the 1997 Form 10-K, Commission File No. 1-5631). 10.14 * Assignment of Lease Agreement by and between Taylor Woodrow Property Company, Inc. ("Assignor") and Watkins-Johnson Company ("Assignee") dated as of December 30, 1997. (Filed as Exhibit 10-z to the 1997 Form 10-K, Commission File No. 1-5631). 10.15 * Form 8-K filed on September 10, 1998. The report contains disclosures regarding the company's announcement of restructuring plans and related third quarter 1998 charges. (Commission File No. 1-5631). 10.16 * Form 8-K filed on December 14, 1998. The report contains disclosures regarding the December 10, 1998 Board of Director approval to amend and restate the company By-Laws and to amend the Rights Agreement, dated September 30, 1996, between the company and ChaseMellon. (Commission File No. 1-5631). 10.17 * Form 8-A/A filed on December 14, 1998. Form 8-A/A was filed for the registration of the amended common stock purchase rights approved by the Board of Directors on December 10, 1998 (Commission File No. 1-5631). 10.18 ** Purchase and Sale Agreement, dated May 2, 1997, by and among Watkins-Johnson Company and CarrAmerica Realty for sale of undeveloped land in San Jose, California, including the August 15, 1997 First Amendment to and Reaffirmation of Purchase and Sale Agreement. 10.19 ** Resolution of the Board of Directors of Watkins-Johnson, effective December 31, 1998, for the termination of the company's 1994 Top Management Deferred Compensation Plan and the company's Top Management Incentive Bonus Plan. 10.20 ** Form of Severance Agreement, dated September 28, 1998, by and between Watkins-Johnson Company and the following officers of the company: Dr. Patrick J. Brady, Malcolm J. Caraballo, and Robert G. Hiller. Page 22 Exhibit Number Exhibit - ------ ------- 10.21 ** Amended and Restated Employment Agreement made as of March 2, 1998 and amended and restated in its entirety effective as of January 25, 1999 by and between W. Keith Kennedy and Watkins-Johnson Company. 10.22 ** Form of employment Agreement, dated February 22, 1999, by and between Watkins-Johnson Company and the following officers of the company: Scott G. Buchanan, Dr. Frank E. Emery, Darryl T. Quan and Claudia D. Kelly. 10.24 ** Amended and Restated Severance Agreement originally dated September 28, 1998 and amended and restated in its entirety effective as of January 25, 1999 by and between Watkins-Johnson Company and Scott G. Buchanan. 10.25 ** Terms of Employee Rentention Program dated March 1, 1999. 10.26 Form of Amended and Restated Severance Agreement originally dated September 28, 1998 and amended and restated in its entirety effective January 25, 1999 and July 9, 1999 by and between Watkins-Johnson Company and the following officers of the company: Dr. Frank E. Emery, Darryl T. Quan and Claudia Kelly. 10.27 Amended and Restated Severance Agreement originally dated September 28, 1998 and amended and restated in its entirety effective January 25, 1999 and July 9, 1999 by and between Watkins-Johnson Company and Scott G. Buchanan. 10.28 Remediation Agreement entered into on July 13, 1999 by and between SECOR International Incorporated ("SECOR"), a Delaware corporation and Watkins-Johnson Company, for professional environmental services for 3333 Hillview Avenue, Palo Alto, California. 10.29 Purchase and Sale Agreement entered into August 21, 1999 by and between Watkins-Johnson Company and Lincoln Property Company Commercial Inc for the sale of land and building at 2525 North First Street, San Jose, California. 10.30 Agreement for Assignment of Leasehold Interest, Sublease of Property, Leaseback of Real Property, and Joint Escrow Instructions entered into on September 30, 1999 by and between the Board of Trustees of the Leland Stanford Junior University and Watkins-Johnson company for buildings 3, 4 and 5 located at 3333 Hillview Avenue, Palo Alto, California. 10.31 * Watkins-Johnson Company Unaudited ProForma Condensed Consolidated Financial Information on Form 8-K, filed on July 21, 1999 reporting the completion of the divestiture of the company's Semiconductor Equipment Group business on July 6, 1999 and related amendment to the Securities Purchase Agreement dated April 30, 1999 between Silicon Valley Group, Inc. and Watkins-Johnson Company (Commission File No. 1-5631). 10.32 * Purchase Agreement, dated August 18, 1999, between Watkins-Johnson Company and Tracor, Inc. providing for the sale of the company's Telecommunications Group (filed as Exhibit 2.1 to Form 8-K filed on August 18, 1999, Commission File No. 1-5631). Page 23 Exhibit Number Exhibit - ------ ------- 10.33 * Amended and Restated Purchase Agreement, dated August 18, 1999, between Watkins-Johnson Company and Tracor, Inc., with Marconi Aerospace Electronics Systems, Inc. as Assignee of the rights and obligations of Tracor, Inc. (filed as Exhibit 10.1 to Form 8-K filed on October 7, 1999, Commission File No. 1-5631). 10.34 Resolution passed by the Board of Directors on July 2, 1999 to provide compensation to retired directors. 27.1 Financial Data Schedule for the quarter ended September 24, 1999 27.2 Restated Financial Data Schedule for the quarter ended September 25, 1998. 27.3 Restated Financial Data Schedule for the year ended December 31, 1998. 27.4 Restated Financial Data Schedule for the year ended December 31, 1997. 27.5 Restated Financial Data Schedule for the year ended December 31, 1996. * Incorporated by reference to exhibits indicated for each item. ** Incorporated by reference to the company's Form 10K/A filed on November 2, 1999 for the fiscal year ended December 31, 1998. Page 24 EX-10.26 2 AMENDED AND RESTATED SEVERANCE AGREEMENT Exhibit 10.26 AMENDED AND RESTATED SEVERANCE AGREEMENT ---------------------------------------- THIS AMENDED AND RESTATED SEVERANCE AGREEMENT (the "Agreement"), originally dated September 28, 1998, and amended and restated in its entirety effective as of January 25, 1999, and July 9, 1999, is entered into by and between Watkins-Johnson Company, a California corporation (the "Company"), and - ________________ ("Employee"). The Company's Board of Directors has determined that it is appropriate to reinforce and encourage the continued attention and dedication of members of the Company's management, including Employee, to their assigned duties without distraction in potentially disturbing circumstances arising from the possibility of a Change in Control (as defined herein) of the Company. This Agreement sets forth the severance compensation which the Company agrees to pay to Employee if Employee's employment with the Company terminates under one of the circumstances described herein. 1. Term. (a) This Agreement shall terminate, except for any unpaid obligation of the Company, upon the earliest of (i) three years from September 28, 1998, if a Change in Control has not occurred within such three-year period; (ii) the termination of Employee's employment based on death, Disability (as defined in Section 2(c)) or Cause (as defined in Section 2(d)) or by Employee other than for Good Reason (as defined in Section 2(e)); or (iii) three years from the date of a Change in Control. (b) Nothing in this Agreement shall confer upon Employee any right to continue in the employ of the Company prior to or following a Change in Control or shall in any way limit the rights of the Company, which are hereby expressly reserved, to discharge Employee at any time prior to or following the date of a Change in Control for any reason whatsoever, with or without Cause. 2. Certain Definitions. (a) Change in Control. A Change in Control shall be deemed to have occurred if (i) there shall be consummated (x) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation, (y) any other consolidation or merger to which the Company is a party, regardless of whether shares of the Company's Common Stock would be converted into cash, securities or other property, other than 2 a merger of the Company in which the holders of the Company's Common Stock immediately prior to the merger have the same proportionate ownership of common stock (or the equivalent fully voting securities) of the surviving corporation or other entity immediately after the merger, or (z) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (ii) the Company consummates (in one or a series of transactions) the disposition of substantially all of its business operations, or (iii) any "person" (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, shall become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30% or more of the Company's outstanding Common Stock, or (iv) during any period of two consecutive years, individuals who at the beginning of such period constitute the entire Board of Directors of the Company shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. 3 (b) Triggering Event. A "Triggering Event" shall be deemed to have occurred if either (i) (A) a Change in Control occurs while Employee is still employed by the Company or any of its subsidiaries and (B) Employee's employment is thereafter terminated (x) by the Company other than for death, Disability or Cause, (y) by Employee for Good Reason or (z) by Employee pursuant to the last paragraph of Section 3, or (ii) a Change in Control occurs after the date on which Employee's employment with the Company or any of its subsidiaries was terminated (A) by the Company other than for death, Disability or Cause or (B) by Employee for Good Reason, and such termination is effected by the Company (or the actions or decisions giving rise to Employee's termination for Good Reason are taken or made by the Company) in anticipation of a Change in Control (any such termination, action or decision effected, taken or made within 90 days prior to the date of any such Change in Control shall be conclusively deemed to be in anticipation of a Change in Control). (c) Disability. If, as a result of Employee's incapacity due to physical or mental illness, Employee shall have been absent from duties with the Company on a full-time basis for 4 six consecutive months and within 30 days after written Notice of Termination (as required by Section 9(b)) is thereafter given by the Company, Employee shall not have returned to the full-time performance of Employee's duties, the Company may terminate this Agreement for "Disability." (d) Cause. For purposes of this Agreement only, the Company shall have "Cause" to terminate Employee's employment hereunder only on the basis of fraud, misappropriation, embezzlement or willful engagement by Employee in misconduct which is demonstrably and materially injurious to the Company and its subsidiaries taken as a whole. An act, or omission of Employee shall not be considered "willful" unless done, or omitted to be done, by Employee without good faith and a reasonable belief that the act or omission was in the best interests of the Company and its subsidiaries. Employee may not be terminated for Cause unless and until there shall have been delivered to Employee a copy of a resolution duly adopted by affirmative vote of not less than three-quarters of the entire membership of the Company's Board of Directors at a meeting of the Board called and held for that purpose (after reasonable notice to Employee and an opportunity for Employee, together with 5 Employee's counsel, to be heard before the Board), finding Employee was guilty of the conduct set forth in the first sentence of this Section, and specifying the particulars thereof in detail. Notwithstanding the foregoing, Employee shall have the right to contest such termination for Cause (for purposes of this Agreement) by arbitration in accordance with the provisions of Section 8. (e) Good Reason. After a Change in Control, Employee may terminate employment for Good Reason at any time during the term of this Agreement. For purposes of this Agreement, "Good Reason" shall mean any of the following (without Employee's express written consent): (i) the assignment to Employee by the Company of duties inconsistent with, or a substantial alteration in the nature or status of, Employee's responsibilities immediately prior to a Change in Control other than any such alteration primarily attributable to the fact that the Company's securities are no longer publicly traded; (ii) a reduction by the Company in Employee's base salary in effect on the date of a Change in Control or as the same may be increased from time to time during the term of this Agreement; 6 (iii) failure by the Company to continue in effect without substantial change any compensation, incentive, welfare or benefit plan or arrangement, as well as any plan or arrangement whereby Employee may acquire securities of the Company, in which Employee is participating at the time of a Change in Control (or any other plans providing Employee with substantially similar benefits, hereinafter referred to as "Benefit Plans"), or the taking of any action by the Company which would adversely affect Employee's participation in or materially reduce Employee's benefits under any such Benefit Plan or deprive Employee of any material fringe benefit enjoyed by Employee at the time of a Change in Control; unless an equitable substitute arrangement (embodied in an ongoing substitute or alternative Benefit Plan) has been made for the benefit of Employee with respect to the Benefit Plan in question. For purposes of the foregoing, Benefit Plans shall include, but not be limited to, the Company's Employee Stock Ownership Plan, Employees' Profit Sharing and Investment Plan, Deferred Compensation (401K) Plan, 1991 Stock Option and Incentive Plan, Top Management Incentive Bonus Plan, and/or any other plan or arrangement to receive and exercise stock options or stock appreciation rights, incentive, bonus or other award plans, group 7 life insurance plans, medical, dental, accident and disability plans; (iv) a relocation of the Company's principal executive offices to a location outside the San Francisco-Oakland-San Jose Bay Area, or Employee's relocation to any place other than the principal executive offices of the Company, except for required travel by Employee on Company business to an extent substantially consistent with Employee's business travel obligations at the time of a Change in Control; (v) any material breach by the Company of any provision of this Agreement; (vi) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company as required in Section 6; (vii) any purported termination of Employee's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 9(b) below. For purposes of this Agreement, no such purported termination shall be effective. 8 (f) Date of Termination. "Date of Termination" shall mean (i) for Disability, 30 days after Notice of Termination is given to Employee (provided Employee has not returned to the performance of Employee's duties on a full-time basis during such 30-day period), or (ii) if Employee's employment is terminated for any other reason, the date on which notice is given by the Company or Employee, as the case may be. 3. Severance Compensation upon Termination of Employment in Connection with a Change in Control. No compensation shall be payable under this Agreement unless and until a Triggering Event has occurred. Upon the occurrence of a Triggering Event, the Company shall: (a) pay to Employee as severance pay in a lump sum, in cash, on the fifth day following the Date of Termination, an amount equal to 299.999% of Employee's "Base Compensation" (as defined below); provided, however, that if the lump sum severance payment under this Section 3, either alone or together with other payments (or the value of benefits) which Employee has the right to receive from the Company in connection with a Change in Control, would not be deductible (in whole or in part) by the Company as a result of such lump sum payment constituting a "parachute payment" (as defined in Section 280G of the Internal 9 Revenue Code of 1986, as amended (collectively the "Code")), such lump sum severance payment (or, at Employee's election, such other payments and/or benefits, or a combination of such other payments and/or benefits and such lump sum severance payment) shall be reduced to the largest amount as will result in no portion of the lump sum severance payment under this Section 3 not being fully deductible by the Company as a result of Section 280G of the Code. The determination of the amount of any such required reduction pursuant to the foregoing provision, or the valuation of any non-cash benefits for purposes of such determination, shall be made exclusively by the firm that was acting as the Company's auditors prior to the Change in Control (whose fees and expenses shall be borne by the Company), and such determination shall be conclusive and binding. The term "Base Compensation" shall mean an average of the annual cash compensation paid to Employee by the Company and any of its subsidiaries in the form of salary or bonuses (including any amount that is the subject of an elective deferral by Employee) during the five taxable years (or such lesser period as Employee was employed by the Company or any of its subsidiaries) immediately preceding the Change in Control which was includable in gross income (or would have been so included but for any such elective deferral) by Employee for federal income tax reporting purposes; and 10 (b) arrange to provide Employee, for a six-month period (or such shorter period as Employee may elect), with disability, accident, group life, medical and dental insurance, all of which shall be prepaid, substantially similar to those insurance benefits which Employee is receiving immediately prior to the Notice of Termination. Benefits otherwise receivable by Employee pursuant to this Section 3(b) shall be reduced to the extent comparable benefits are actually received by Employee during such six-month period following termination (or such shorter period elected by Employee), and any such benefits actually received by Employee shall be reported by Employee to the Company. Notwithstanding any other provision of this Agreement: (x) if a Change in Control occurs while Employee is still an Employee of the Company, Employee may, after 90 days and within 120 days of the Change in Control and upon written notice given in accordance with Section 9(b), terminate employment without Good Reason, and shall thereupon be entitled to one-half (1/2) of the compensation described in this Section 3, or (y) if, during the term of this Agreement and while Employee is employed by Company, (A) any persons shall enter into any agreement one of the purposes of which is to effect a transaction or transactions (the "Transaction") that would constitute, or be part of, a Change in Control and (B) Employee is not provided, on 11 or before seven calendar days prior to the consummation of the Transaction, a binding offer of continued employment following the consummation of the Transaction on terms which would not give rise to Good Reason, the Company shall be obligated unconditionally to pay or provide to Employee the severance pay in Section 3(a) and the benefits in Section 3(b) on the date of the consummation of the Transaction (whether or not the Employee is then employed by Company and without regard to the reasons for any termination of Employee's employment, provided that such payments and benefits shall not be paid or provided if Employee is terminated for cause prior to the consumation of the Transaction) and such funds shall be deposited in an escrow account seven calendar days prior to the consumation of the Transaction with irrevocable instructions to pay such funds to Employee on the consumation of the Transaction. 4. No Obligation to Mitigate Damages. Employee shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Employee as a result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise, except to the extent provided in Section 3 above. 12 5. No Effect on Other Contractual Rights. The provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish Employee's existing rights, or rights which would accrue solely as a result of the passage of time, under any Benefit Plan, employment agreement or other contract, plan or arrangement, except that the provisions of this Agreement and any payment provided for hereunder, shall be in lieu of payments otherwise due to Employee under any of the Company's severance pay policies on account of Employee's termination of employment upon (or in anticipation of, as set forth in Section 2(b)) the occurrence of a Change in Control. 6. Successor to the Company. The Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement satisfactory to Employee, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets which executes and delivers the agreement provided for in this Section 6 or which otherwise 13 becomes bound by all the terms and provisions of this Agreement by operation of law. 7. Heirs of Employee. This Agreement shall inure to the benefit of and be enforceable by Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts are still payable to Employee hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate. 8. Arbitration. Any dispute, controversy or claim arising under or in connection with this Agreement, or the breach hereof, shall be settled exclusively by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment upon the award rendered by Arbitrator(s) may be entered in any court having jurisdiction thereof. Any arbitration held pursuant to this Section 8 shall take place in San Francisco, California. 9. Notice. (a) General. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when 14 delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: Watkins-Johnson Company 3333 Hillview Avenue Palo Alto, California 94304-1223 Attention: President of the Company If to Employee: ___________________ ___________________ ___________________ or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. (b) Notice of Termination. Any purported termination of employment shall be communicated by a written Notice of Termination to Employee in accordance with paragraph (a) of this Section 9, and shall state the specific termination provisions in this Agreement relied upon, and set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment. 10. Nonwaiver, Complete Agreement, Governing Law. No provisions of this Agreement may be modified, waived or discharged unless in writing signed by both parties. No waiver by either party hereto at any time of any breach by the other 15 party of, or compliance with, any condition or provision of this agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 11. Legal Fees and Expenses. The Company shall pay all reasonable legal fees and expenses which Employee may incur as a result of the Company's contesting the validity, enforceability or Employee's good faith interpretation of, or good faith determinations under, this Agreement; provided, however, that the Company shall not pay any legal fees and expenses incurred by Employee in contesting the termination of Employee's employment for Cause if, as a result of such contest, it is determined that Employee was in fact terminated for Cause. 12. Confidentiality. Employee shall retain in confidence any and all confidential information known to Employee concerning the Company and its business so long as such information is not otherwise publicly disclosed. 13. Validity. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or 16 enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. WATKINS-JOHNSON COMPANY, a California corporation By ____________________________ President and CEO _______________________________ (Employee) 17 EX-10.27 3 AMENDED AND RESTATED SEVERANCE AGREEMENT Exhibit 10-27 AMENDED AND RESTATED SEVERANCE AGREEMENT ---------------------------------------- THIS AMENDED AND RESTATED SEVERANCE AGREEMENT (the "Agreement"), originally dated September 28, 1998, and amended and restated in its entirety effective as of January 25, 1999, and July 9, 1999, is entered into by and between Watkins-Johnson Company, a California corporation (the "Company"), and Scott Buchanan ("Employee"). The Company's Board of Directors has determined that it is appropriate to reinforce and encourage the continued attention and dedication of Employee to his assigned duties without distraction in potentially disturbing circumstances arising from the possibility of a Change in Control (as defined in Section 2(a)) of the Company. This Agreement sets forth the severance compensation which the Company agrees to pay to Employee if Employee's employment with the Company terminates under one of the circumstances described herein. 1. Term. (a) This Agreement shall terminate, except for any unpaid obligation of the Company, upon the earliest of (i) three years from September 28, 1998, if a Change in Control has not occurred within such three-year period; (ii) the termination of Employee's employment by the Company based on death, Disability (as defined in Section 2(c)) or Cause (as defined in Section 2(d)) or by Employee other than for Good Reason (as defined in Section 2(e); or (iii) three years from the date of a Change in Control. (b) Nothing in this Agreement shall confer upon Employee any right to continue in the employ of the Company prior to or following a Change in Control or shall in any way limit the rights of the Company, which are hereby expressly reserved, to discharge Employee at any time prior to or following the date of a Change in Control for any reason whatsoever, with or without Cause. 2. Certain Definitions. (a) Change in Control. A "Change in Control" shall be deemed to have occurred if (i) there shall be consummated (x) any consolidation or merger of the Company in which the Company is 2 not the continuing or surviving corporation, (y) any other consolidation or merger to which the Company is a party, regardless of whether shares of the Company's Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's Common Stock immediately prior to the merger have the same proportionate ownership of common stock (or the equivalent fully voting securities) of the surviving corporation or other entity immediately after the merger, or (z) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (ii) the Company consummates (in one or a series of transactions) the disposition of substantially all of its operating businesses, or (iii) any "person" (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, shall become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30% or more of the Company's outstanding Common Stock, or (iv) during any period of two consecutive years, individuals who at the beginning of such period constitute the entire Board of 3 Directors of the Company shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (b) Triggering Event. A "Triggering Event" shall be deemed to have occurred if either (i) a Change in Control occurs while Employee is still an employee of the Company or any of its subsidiaries or (ii) a Change in Control occurs after the date on which Employee's employment with the Company or any of its subsidiaries was terminated (x) by the Company other than for death, Disability or Cause or (y) by Employee for Good Reason, and such termination is effected by the Company (or the actions or decisions giving rise to Employee's termination for Good Reason are taken or made by the Company) in anticipation of a Change in Control (any such termination, action or decision effected, taken or made within 90 days prior to the date of any such Change in Control shall be conclusively deemed to be in anticipation of a Change in Control). (c) Disability. If, as a result of Employee's incapacity due to physical or mental illness, Employee shall have 4 been absent from duties with the Company on a full-time basis for six consecutive months and within 30 days after written Notice of Termination (as required by Section 9(b)) is thereafter given by the Company, Employee shall not have returned to the full-time performance of Employee's duties, the Company may terminate this Agreement for "Disability." (d) Cause. For purposes of this Agreement only, the Company shall have "Cause" to terminate Employee's employment hereunder only on the basis of fraud, misappropriation, embezzlement or willful engagement by Employee in misconduct which is demonstrably and materially injurious to the Company and its subsidiaries taken as a whole. An act, or omission of Employee shall not be considered "willful" unless done, or omitted to be done, by Employee without good faith and a reasonable belief that the act or omission was in the best interests of the Company and its subsidiaries. Employee may not be terminated for Cause unless and until there shall have been delivered to Employee a copy of a resolution duly adopted by affirmative vote of not less than three-quarters of the entire membership of the Company's Board of Directors at a meeting of 5 the Board called and held for that purpose (after reasonable notice to Employee and an opportunity for Employee, together with Employee's counsel, to be heard before the Board), finding Employee was guilty of the conduct set forth in the first sentence of this Section, and specifying the particulars thereof in detail. Notwithstanding the foregoing, Employee shall have the right to contest such termination for Cause (for purposes of this Agreement) by arbitration in accordance with the provisions of Section 8. (e) Good Reason. For purposes of this Agreement, "Good Reason" shall mean any of the following (without Employee's express written consent): (i) the assignment to Employee by the Company of duties inconsistent with, or a substantial alteration in the nature or status of, Employee's responsibilities immediately prior to a Change in Control other than any such alteration primarily attributable to the fact that the Company's securities are no longer publicly traded; (ii) a reduction by the Company in Employee's base salary in effect on the date of a Change in Control or as the same may be increased from time to time during the term of this Agreement; 6 (iii) failure by the Company to continue in effect without substantial change any compensation, incentive, welfare or benefit plan or arrangement, as well as any plan or arrangement whereby Employee may acquire securities of the Company, in which Employee is participating at the time of a Change in Control (or any other plans providing Employee with substantially similar benefits, hereinafter referred to as "Benefit Plans"), or the taking of any action by the Company which would adversely affect Employee's participation in or materially reduce Employee's benefits under any such Benefit Plan or deprive Employee of any material fringe benefit enjoyed by Employee at the time of a Change in Control; unless an equitable substitute arrangement (embodied in an ongoing substitute or alternative Benefit Plan) has been made for the benefit of Employee with respect to the Benefit Plan in question. For purposes of the foregoing, Benefit Plans shall include, but not be limited to, the Company's Employee Stock Ownership Plan, Employees' Profit Sharing and Investment Plan, Deferred Compensation (401K) Plan, 1991 Stock Option and Incentive Plan, Top Management Incentive Bonus Plan, and/or any other plan or arrangement to receive and exercise stock options or stock appreciation rights, incentive, bonus or other award plans, group life insurance plans, medical, dental, accident and disability plans; 7 (iv) a relocation of the Company's principal executive offices to a location outside the San Francisco-Oakland-San Jose Bay Area, or Employee's relocation to any place other than the principal executive offices of the Company, except for required travel by Employee on Company business to an extent substantially consistent with Employee's business travel obligations at the time of a Change in Control; (v) any material breach by the Company of any provision of this Agreement; (vi) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company as required in Section 6; (vii) any purported termination of Employee's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 9(b) below. For purposes of this Agreement, no such purported termination shall be effective. (f) Date of Termination. "Date of Termination" shall mean (i) for Disability, 30 days after Notice of Termination is given to Employee (provided Employee has not returned to the performance of Employee's duties on a full-time basis during such 30-day period), or (ii) if Employee's employment is terminated 8 for any other reason, the date on which notice is given by the Company or Employee, as the case may be. 3. Severance Compensation upon Termination of Employment in Connection with a Change in Control. No compensation shall be payable under this Agreement unless and until a Triggering Event has occurred. Upon the occurrence of a Triggering Event, the provisions of this Agreement shall be binding on and shall inure to the benefit of the surviving or resulting corporation, or (in the case of a Change in Control of the kind referred to in Section 2(a)(i)(y)) the corporation to which the applicable assets of the Company have been transferred; provided, however, that (a) Employee may treat the occurrence of a Triggering Event as a material breach of this Agreement and may terminate this Agreement upon written notice given (in accordance with Section 9(b)) within 120 days of the occurrence of a Change in Control, unless Employee's employment has theretofore been terminated for death, Disability or Cause, and (b) Employee may terminate this Agreement for Good Reason at any time prior to the second anniversary of a Change in Control and during the remainder of the term of this Agreement as specified in Section 1(a). Upon such termination by Employee under this Section 3, or upon the termination of Employee's employment by the Company without Cause at any time prior to the second anniversary of a Change in Control, the Company shall: 9 (i) pay to Employee as severance pay in a lump sum, in cash, on the fifth day following the Date of Termination, an amount equal to the aggregate of (x) 299.999% of Employee's "Base Compensation" (as defined below), plus (y) an amount equal to (A) the amount previously determined by the Board as Employee's target bonus for the calendar year in which Notice of Termination is given by Employee or the Company, as the case may be, multiplied by (B) a fraction, the numerator of which shall be the number of days that have elapsed during such calendar year, through and including the date on which such Notice of Termination is given, and the denominator of which shall be 365; provided, however, that if the lump sum severance payment under this Section 3, either alone or together with other payments (or the value of other benefits) which Employee has the right to receive from the Company in connection with a Change in Control, would not be deductible (in whole or in part) by the Company as a result of such lump sum payment constituting a "parachute payment" (as defined in Section 280G of the Internal Revenue Code of 1986, as amended (collectively the "Code")), such lump sum severance payment (or, at Employee's election, such other payments and/or benefits, or a combination of such other payments and/or benefits and such lump sum severance payment) shall be reduced to the largest amount as will result in no portion of the lump sum severance payment under this Section 3 not being fully deductible by the Company as a result of Section 280G of the 10 Code. The determination of the amount of any such required reduction pursuant to the foregoing provision, and the valuation of any non-cash benefits for purposes of such determination, shall be made exclusively by the firm that was acting as the Company's auditors prior to the Change in Control (whose fees and expenses shall be borne by the Company), and such determination shall be conclusive and binding. The term "Base Compensation" shall mean an average of the annual cash compensation paid to Employee by the Company and any of its subsidiaries in the form of salary or bonuses (including any amount that is subject of an elective deferral by Employee) during the five taxable years immediately preceding the Change in Control which was includable in gross income (or would have been so included but for any such elective deferral) by Employee for federal income tax reporting purposes; and (ii) arrange to provide Employee, for a thirty-six month period (or such shorter period as Employee may elect), with disability, accident, group life, medical and dental insurance, all of which shall be prepaid, substantially similar to those insurance benefits which Employee is receiving immediately prior to a termination by Employee under this Section 3. Benefits otherwise receivable by Employee pursuant to this Section 3 shall be reduced to the extent comparable benefits are actually received by Employee during such thirty-six month period (or such shorter period elected by Employee), and any such benefits 11 actually received by Employee shall be reported by Employee to the Company. Notwithstanding any other provision of this Agreement, if during the term of this Agreement and while Employee is employed by Company, any persons shall enter into any agreement one of the purposes of which is to effect a transaction or transactions (the "Transaction") that would constitute, or be part of, a Change in Control, the Company shall be obligated unconditionally to pay or provide to Employee the severance pay in Section 3(i) and the benefits in Section 3(ii) on the date of the consumation of the Transaction (whether or not Employee is then employed by the Company and without regard to the reason for any termination of Employee's employment, provided that such payments and benefits shall not be paid or provided if Employee is terminated for cause prior to the consumation of the Transaction) and such funds shall be deposited in an escrow account seven calendar days prior to the consumation of the Transaction with irrevocable instructions to pay such funds to Employee on the consumation of the Transaction. 4. No Obligation to Mitigate Damages. Employee shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Employee 12 as a result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise, except to the extent provided in Section 3 above. 5. No Effect on Other Contractual Rights. The provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish Employee's existing rights, or rights which would accrue solely as a result of the passage of time, under any Benefit Plan, employment agreement or other contract, plan or arrangement, except that the provisions of this Agreement and any payment provided for hereunder, shall be in lieu of payments otherwise due to Employee under any of the Company's severance pay policies on account of Employee's termination of employment upon (or in anticipation of, as set forth in Section 2(b)) the occurrence of a Change in Control. 6. Successor to the Company. The Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement satisfactory to Employee, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. As used in this Agreement, "Company" shall mean the 13 Company as hereinbefore defined and any successor or assign to its business and/or assets which executes and delivers the agreement provided for in this Section 6 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 7. Heirs of Employee. This Agreement shall inure to the benefit of and be enforceable by Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts are still payable to Employee hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate. 8. Arbitration. Any dispute, controversy or claim arising under or in connection with this Agreement, or the breach hereof, shall be settled exclusively by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment upon the award rendered by Arbitrator(s) may be entered in any court having jurisdiction thereof. Any arbitration held pursuant to this Section 8 shall take place in San Francisco, California. 14 9. Notice. (a) General. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: Watkins-Johnson Company 3333 Hillview Avenue Palo Alto, California 94304-1223 Attention: President of the Company If to Employee: Scott Buchanan 5144 Independence Drive Pleasanton, California 94566 or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. (b) Notice of Termination. Any purported termination of employment shall be communicated by a written Notice of Termination to Employee in accordance with paragraph (a) of this Section 9, and shall state the specific termination provisions in this Agreement relied upon, and set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment. 15 10. Nonwaiver, Complete Agreement, Governing Law. No provisions of this Agreement may be modified, waived or discharged unless in writing signed by both parties. No waiver by either party hereto at any time of any breach by the other party of, or compliance with, any condition or provision of this agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 11. Legal Fees and Expenses. The Company shall pay all reasonable legal fees and expenses which Employee may incur as a result of the Company's contesting the validity, enforceability or Employee's good faith interpretation of, or good faith determinations under, this Agreement; provided, however, that the Company shall not pay any legal fees and expenses incurred by Employee in contesting the termination of Employee's employment for Cause if, as a result of such contest, it is determined that Employee was in fact terminated for Cause. 12. Confidentiality. Employee shall retain in confidence any and all confidential information known to Employee concerning 16 the Company and its business so long as such information is not otherwise publicly disclosed. 13. Validity. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. WATKINS-JOHNSON COMPANY, a California corporation By /s/ W. Keith Kennedy ----------------------- President and CEO /s/ Scott G. Buchanan ----------------------- Scott G. Buchanan 17 EX-10.28 4 REMEDIATION AGREEMENT Execution Copy Exhibit 10.28 REMEDIATION AGREEMENT 3333 Hillview Avenue, Palo Alto, California and Hillview Porter Regional Site --------------------------- This Remediation Agreement (the "Agreement") is entered into by and between SECOR International Incorporated ("SECOR"), a Delaware corporation and Watkins-Johnson Company, a California corporation, on behalf of itself and its successors and assignees (collectively referred to as "Watkins-Johnson") (SECOR and Watkins-Johnson collectively referred to as the "Parties") for professional environmental services, as more specifically set forth in this Agreement. This Agreement is effective and binding on the Parties upon its execution by both Parties and issuance by AIG Environmental of signed coverage binders for both the Cleanup Cost Cap Insurance Policy and the Pollution Legal Liability Insurance Policy, as provided in Paragraphs 5.F. and 5.G., respectively, of this Agreement, and the date upon which the last of all of these actions is completed shall be the Effective Date of the Agreement. RECITALS WHEREAS, Watkins-Johnson is the sub-lessee of property owned by Leland Stanford Junior University ("Stanford") located at 3333 Hillview Avenue, Palo Alto, California ("the Hillview Ave. Property") under two (2) separate lease arrangements more specifically described in Exhibit A, attached hereto and made a part hereof for all purposes, which property is subject to two separate environmental cleanup orders issued by government agencies, as described more specifically below; and WHEREAS, the Parties acknowledge that Watkins-Johnson intends to sell its leasehold interests in the Hillview Ave. Property and further acknowledge that Watkins-Johnson intends to sell the company in its entirety and that any and all rights and obligations under this Agreement shall inure to the benefit of and shall bind Watkins-Johnson's successors and assignees; and WHEREAS, pursuant to an Imminent Or Substantial Endangerment Order and Remedial Action Order of the State of California Health and Welfare Agency, Execution Copy 2 Department of Health Services, Toxic Substances Control Program, HSA-89/90-012, issued on May 2, 1990 to Watkins-Johnson and Stanford (collectively referred to from time to time as the "Responsible Parties"), as amended by Amendment to Order HSA 89/90-012, transmitted by letter dated February 21, 1996 from the State of California Department of Toxic Substances Control ("DTSC") to Watkins-Johnson (the "Amendment") (collectively, the "Hillview Avenue Order"), a copy of which Hillview Avenue Order is appended hereto as Exhibit B, Watkins-Johnson and Stanford are ordered to undertake numerous obligations, to finance and perform numerous tasks, and to submit to certain procedures with respect to Environmental Conditions (as defined below) at the Hillview Ave. Property (in the context of the Hillview Avenue Order, referred to hereafter as the "Hillview Avenue Site"), and are decreed to remain liable for such obligations and subject to such procedures notwithstanding its conveyance of any interest in the Hillview Ave. Property, or in any part thereof, to another party; and WHEREAS, the procedures, activities, and obligations required by the Hillview Avenue Order included, among numerous others and without limitation, implementation of certain prescribed procedures and activities regarding "Public Participation" (Section 15.4, at p. 1 of the Amendment); preparation of a Remedial Action Plan ("RAP"), (Section 15.5, at pp. 21-23); preparation of a Remedial Design and Implementation Plan, (Section 15.5.2, at p. 22); implementation of an Operation and Maintenance Manual, (Section 15.5.4, at p. 2 of the Amendment to Order); implementation of certain Reporting Requirements (Section 15.8, at pp. 5-7 of the Amendment); securing of certain DTSC authorizations and approvals, (e.g., among others, Section 15.5.5, at p. 2 of the Amendment; Section 15.5.6, at p. 4 of the Amendment; and Section 15.12, at pp. 8-9 of the Amendment); certain "Compliance With Applicable Laws" (Section 15.13 at p. 9 of the Amendment); reimbursement of certain of the DTSC's "costs incurred in responding to the contamination at the [Hillview Ave.] Site," including DTSC's oversight costs, and "Future Costs" (Section 15.22, at p. 11 of the Amendment, and Section 15.23 at p. 30); and implementation of a Final Remedial Action Plan ("Hillview Ave. Final RAP"), including certification by DTSC that certain criteria specified in the Final RAP for discontinuation of remedial action (Section 15.5.3, at p. 23) have been met (collectively, the "Hillview Ave. Order Obligations"); and WHEREAS, Watkins-Johnson and Stanford entered into (1) an Environmental Access Agreement (the "Access Agreement") effective November 1, 1994 pursuant to which Stanford, as fee owner of the Hillview Ave. Property, granted access to Watkins-Johnson, its agents, contractors, subcontractors, and other representatives, in order to allow Watkins-Johnson to conduct the investigation and/or remedial work and activities required by the Hillview Ave. Final RAP and Remedial Design and Implementation Plan under the Hillview Ave. Order, which Environmental Access Agreement remains in force and effect, and is assignable with the prior written consent of Stanford; and (2) a Confidential Environmental Settlement, Release and Covenant Not to Sue, dated Execution Copy 3 September 17, 1997, under which Watkins-Johnson agreed to assume responsibility for, and to release and discharge Stanford, its trustees, officers and directors from any and all claims for, response costs (as defined) relating to the Hillview Avenue Order incurred by Watkins-Johnson; and WHEREAS, pursuant to a Remedial Action Order of the State of California Health and Welfare Agency, Department of Health Services, Toxic Substances Control Division [predecessor to the current Department of Toxic Substances Control] HSA-88/89-016, issued on December 9, 1990 to sixteen (16) different Respondents (the "Regional Order Respondents"), including Watkins-Johnson and Stanford, as amended on July 7, 1990 (collectively, the "Regional Order"), which Regional Order was captioned "In the Matter of: Hillview-Porter Area, Barron Park Neighborhood & Matadero Creek, Palo Alto, California" (collectively, the "Regional Site"), a copy of which Regional Order is appended hereto as Exhibit C, Watkins-Johnson and the other Respondents are ordered to undertake numerous obligations, to finance and perform numerous tasks, and to submit to certain procedures with respect to environmental conditions at the Regional Site, and are decreed to remain liable for such obligations and subject to such procedures notwithstanding conveyance of any interest in their properties within the Regional Site, or in any part thereof, to another party (collectively, the "Regional Order Obligations"); and WHEREAS, the procedures, activities, and obligations required of the Regional respondents by the Hillview Avenue Order included, among numerous others and without limitation, implementation of certain prescribed procedures and activities regarding preparation of a Remedial Investigation and Feasibility Study (Regional Order, Section V., Paragraphs 2-8, at pp. 42-44), including, among other elements, a Community Relations Plan, (Regional Order, Section V., Paragraphs 2-8, at pp. 42-44), a Final Remedial Action Plan (Section V., Paragraphs 9-10, at pp. 44-45) (the "Regional Final RAP"), and Monthly Summary Reports (Regional Order, Section V., Paragraph 14, at pp. 46); and WHEREAS, in response to the Regional Order the sixteen Regional Order Respondents thereto prepared, and the DTSC adopted, the Regional Final RAP on March 31, 1998; and WHEREAS, in response to the Regional Order the sixteen Regional Order Respondents thereto have made certain agreements among themselves (collectively the "Regional Agreements", a list of which are attached hereto as Exhibit D) providing for the implementation of the Regional Order Obligations, including without limitation implementation of investigatory and remedial work for the Regional Site, access agreements (including an access agreement to the Hillview Ave. Property allowing activities on the Hillview Ave. Property to be carried out in response to the Regional Order), creation of a Management Committee to provide for cost-effective management Execution Copy 4 of the investigatory and remedial work, and the allocation and settlement of the costs thereof, including, among other agreements, a "Memorandum of Agreement for Final Cost Sharing and Implementation of the Remedial Action Plan," effective as of October 1, 1993, for the performance of Remedial Action Plan work, and a "Memorandum of Final Allocation," effective as of April 15, 1994, pursuant to which Watkins-Johnson has been assigned a specific percentage allocation share of the overall costs of remediation of the Regional Site going forward and through completion of the Regional Final RAP; and WHEREAS, the Hillview Ave. Site and Regional Site from time to time hereafter will be referred to collectively as "the Sites" or "the Two Sites"; the Hillview Ave. Order and Regional Order will be referred to collectively as "the Orders"; and the Hillview Ave. Final RAP and the Regional Final RAP will be referred to collectively as "the Final RAPs"; and WHEREAS, all of the Hillview Ave. Order Obligations of the Responsible Parties, and all of the Regional Order Obligations of Watkins-Johnson, collectively shall be termed herein the "Work"; and WHEREAS, Watkins-Johnson desires, for the purposes of enhancing the marketability of its leasehold interests in the Hillview Ave. Property and the ability to attract financing to those leasehold interests, (i) to assure satisfactory completion of all of the Work required of the Responsible Parties under the Hillview Avenue Order and not yet completed by the Responsible Parties, and all other remaining obligations of Responsible Parties under the Hillview Avenue Order (hereinafter "Other Hillview Avenue Order Obligations"), necessary to achieve formal approval of the DTSC or successor agency to discontinue the remedial action; (ii) to provide for orderly compliance with the Sampling, Data and Document Availability provision of the Hillview Avenue Order, as set forth therein (Section 15.17, at p. 10); (iii) to undertake any and all other response or remedial activities related to Environmental Conditions at the Hillview Ave. Site necessary to satisfy the requirements of any governmental agency, entity, or instrumentality having jurisdiction over the Site other than the DTSC ("Other Regulatory Agency"); and (iv) to assure satisfactory completion of all of the Work related to the Regional Order, and all of Watkins-Johnson's remaining obligations under the Regional Order and related documents (hereinafter "Other Regional Order Obligations") and the Regional Agreements necessary (A) to help the Management Committee achieve formal approval of the DTSC or successor agency to discontinue the remedial action, and (B) to fulfill any and all cost obligations under the Regional Order and Regional Agreements to Watkins-Johnson; and WHEREAS, Watkins-Johnson desires to retain a qualified, experienced, and competent professional environmental engineering firm, insured by one or more qualified insurance companies with respect to certain risks described in this Agreement, to perform Execution Copy 5 the Services (as defined in Paragraph 1.A. below) required by the DTSC and any applicable Other Regulatory Agency pursuant to the Hillview Avenue Order and the Regional Order, and by this Agreement; and WHEREAS, Watkins-Johnson has made available to SECOR, and SECOR acknowledges it has had access to, either through Watkins-Johnson or through its own activities, and is familiar with the following: (i) with respect to the Hillview Avenue Site and the Hillview Avenue Order: the Hillview Avenue Order itself, the Remedial Design and Implementation Plan, the Operation and Maintenance Manual, the Hillview Ave. Final RAP, the most recent monitoring report and other documentation relating to the Hillview Ave. Site requested by the SECOR and in Watkins-Johnson's possession; and (ii) with respect to the Regional Site and the Regional Order: the Regional Order itself, the Regional Agreements, and the Regional Final RAP, the most recent Monthly Summary Report, and the most recent monitoring report and other documentation relating to the Regional Site requested by SECOR, and SECOR has had an adequate opportunity to visit the Hillview Ave. Site and the Regional Site, and to conduct such other activities and inquiries as SECOR regarding the two Sites as SECOR has deemed prudent to adequately assess the Environmental Conditions at the Two Sites; and WHEREAS, SECOR is qualified and competent to perform Services required by this Agreement and is experienced in providing similar services at similar sites involving similar contamination; and WHEREAS, SECOR, insured by AIG Environmental, Incorporated ("AIG Environmental"), has allied itself with AIG Environmental (the "SECOR/AIG Environmental team") to develop and offer to the Responsible Parties an insurance-backed remediation program intended to provide (i) the technical and management resources required to perform the Services hereunder, and (ii) the financial backing, in the form of insurance policies for the benefit of the Responsible Parties, necessary to insure both payment of the expected costs of the Services and coverage of related contingencies that could result in cost overruns in performance of the Services; and WHEREAS, the insurance policies the SECOR/AIG Environmental team has proposed to provide include, in addition to certain standard insurance policies prescribed herein, (i) an Errors and Omissions Liability Policy as described herein; (ii) a Cleanup Cost Cap Insurance Policy for the Hillview Avenue Site and the Regional Site (the "CCC Policy"), which shall be effective on or prior to the Effective Date; which, with respect to the Hillview Avenue Site, would pay, on behalf of SECOR as the Named Insured and Watkins-Johnson and Stanford as Additional Insureds, for the expected on-going remedial activities and monitoring, as well as related contingencies that might result in cost overruns, at or related to the Hillview Avenue Site; and which, with respect to the Regional Site, would pay, on behalf of SECOR as the Named Insured and Watkins- Execution Copy 6 Johnson as Additional Insured, for the expected on-going remedial activities and monitoring, as well as related contingencies that might result in cost overruns, at or related to the Regional Site; (iii) a Pollution Legal Liability Insurance Policy (the "PLL Policy") providing other coverages related to the Environmental Conditions or other Pollution Conditions (as defined in the PLL Policy), which shall be effective on or prior to the Effective Date; and which shall name Watkins-Johnson as First Named Insured, SECOR as Additional Named Insured, and Stanford and any assignees and sublessees of Watkins-Johnson, and their lenders and equity partners, as Additional Insureds, as described herein; WHEREAS, SECOR agrees to perform all of the obligations and responsibilities of the Responsible Parties, who are "Respondents" under the Hillview Avenue Order, and all of the obligations and responsibilities of Watkins-Johnson, who is one of the sixteen named Respondents under the Regional Site Order; NOW, THEREFORE, in consideration of the mutual promises contained herein, and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Parties hereby agree as follows: 1. Services A. SECOR Services. SECOR shall perform or cause to be performed, with diligence and in a good and workmanlike manner and in accordance with all applicable federal, state, and local laws, rules, regulations, permits, ordinances, orders, decrees, codes, governmental authority directives and other such requirements, and the Access Agreement (collectively, "Applicable Requirements"), the Services, which are defined as (i) all the Work, (ii) all Other Order Obligations at both Sites, (iii) any and all other tasks required by any Other Regulatory Agency relating to, or arising out of Environmental Conditions (as defined below) at both Sites, and (iv) any and all other tasks agreed to hereunder by the Parties, necessary to achieve Project Completion (collectively, the "Services"). "Environmental Conditions" is defined as those environmental conditions (including, without limitation, the contamination of soil, groundwater or surface water) at each of the Sites, response to which is required by the corresponding Order. "Project Completion" is defined, with respect to the Two Sites, as (i) completion of all Work and fulfillment of all Other Order Obligations set forth in the Orders, in the Hillview Ave. Remedial Design and Implementation Plan, and the Final RAPs, to the satisfaction of the DTSC Execution Copy 7 (or "successor agency," defined for the purposes of this Agreement as any government agency that succeeds to DTSC's authority to enforce the Order) such that SECOR satisfies all of Watkins-Johnson's obligations under the Orders to achieve formal approval of DTSC or successor agency to discontinue the remedial action; (ii) completion of any and all other response, remedial, or other activities related to Environmental Conditions necessary (a) to satisfy any requirements of DTSC in addition to those set forth in the Order, and any requirements of any Other Regulatory Agency in accordance with applicable laws, and (b) to secure, as appropriate, documentation from DTSC or any Other Regulatory Agency of case closure, certificate of completion, written concurrence for no further action, or other equivalent documentation of satisfaction of any such requirements; (iii) remediation of any contamination other than Environmental Conditions discovered in areas to be remediated as part of the Services; and (iv) completion of any and all other tasks agreed to hereunder by the Parties as necessary to finish activities related to Environmental Conditions. The Services to be provided shall include with respect to each of the Sites, without limitation, all labor, materials, subcontractor charges, laboratory charges, drilling fees, disposal charges, and permitting fees incurred by SECOR in achieving Project Completion, as well as any and all costs associated with SECOR's (or any representative or agent of SECOR's) negotiations with DTSC and any applicable Other Regulatory Agencies with respect to the Services and Project Completion. The Services include, with respect to the Hillview Avenue Site, any further subsurface investigation activities as SECOR deems necessary to further define the Environmental Conditions at that Site, and abandonment or removal of existing monitoring wells, remediation wells and any wells that are installed by SECOR, in accordance with Applicable Requirements, to the extent required by any Regulatory Agency at that Site or required by Stanford under the Access Agreement, and, with respect to the Regional Site, (A) receipt of all invoices issued by the Management Committee for Watkins-Johnson's allocated share of the costs of Work carried out pursuant to the Regional Order; (B) review and evaluation of all such invoices to confirm that (1) the Work invoiced was reasonably required under the Regional Order and was competently performed, and (2) that the invoice is consistent in all respects with the terms of the Agreement for Final Cost Sharing and Implementation of the Remedial Action Plan, and the Memorandum of Final Allocation, as modified or amended; (C) timely notification of Watkins-Johnson and, as appropriate, the Management Committee, regarding any reason such invoice should not be paid; (D) Execution Copy 8 timely payment of each invoice consistent with applicable agreements among the Respondents, provided, however, that SECOR's payment obligation hereunder shall in no event exceed the 7.131% Adjusted Final Allocation Percentage of the costs of the Regional Site IRM and RAP Work for which Watkins-Johnson is responsible as of the date of this Agreement under Exhibit C, entitled "Adjusted Final Allocation Percentages," of the document entitled "Memorandum of Final Allocation," the effective date of which is April 15, 1994; (E) submittal of SECOR's claims to AIG Environmental based on payment of such invoices; and (F) performance, on behalf of Watkins-Johnson and with prior notice to Watkins-Johnson, of any other responsibilities of Watkins-Johnson reasonably arising under the Regional Order, the Agreement for Final Cost Sharing, and/or the Memorandum of Final Allocation. B. Changes to Hillview Ave. Order or Hillview Ave. Remedial Design and Implementation Plan, Operation and Maintenance Manual, or Final RAP. The Parties acknowledge that deviations from the Hillview Ave. Order, or to the Hillview Ave. Remedial Design and Implementation Plan, Operation and Maintenance Manual, or Final RAP may become necessary as the remediation proceeds, and that, upon approval of the DTSC in accordance with the Hillview Ave. Order, upon approval of any applicable Other Regulatory Agency, and upon approval of Watkins-Johnson and, to the extent the approved cleanup standards are different from the Final RAP, the approval of Stanford (which approval shall not be unreasonably withheld or delayed), SECOR shall be permitted to make such deviations in order to cost-effectively and expeditiously achieve Project Completion with respect to the Hillview Ave. Site. Watkins-Johnson's approval may only be withheld in the event SECOR's proposed deviation: (i) will materially interfere with operations on the Site as reasonably determined by Watkins-Johnson; (ii) will not be reasonably likely to achieve Project Completion; (iii) will be likely to cause the cost of Project Completion to exceed the amount of the Remediation Cost Program as set forth hereinafter; or (iv) will violate any provision of this Agreement or Applicable Requirements. The Parties acknowledge that SECOR may determine that additional investigation and evaluation work is necessary before SECOR can determine the specific technical approach that is appropriate in order to achieve Project Completion with respect to the Hillview Ave. Site. In the event such additional investigation and evaluation is undertaken, SECOR shall strictly comply with the terms and conditions of the Hillview Ave. Order, Hillview Ave. Remedial Design and Implementation Plan, and Hillview Ave. Final RAP, and all Applicable Requirements; and in the Execution Copy 9 event such additional investigation or evaluation will have an adverse impact on the use or operation of the Site (as reasonably determined by Watkins-Johnson), no such work shall be performed without the approval of Watkins-Johnson and, to the extent the approved cleanup standards are different from the Final RAP, the approval of Stanford (which approval shall not be unreasonably withheld or delayed). SECOR shall negotiate the technical approach with the DTSC and shall develop revisions to the Hillview Ave. Order, the Hillview Ave. Remedial Design and Implementation Plan, or the Hillview Ave. Final RAP if required. Any such revisions to the Hillview Ave. Order, Hillview Ave. Remedial Design and Implementation Plan, or Hillview Ave. Final RAP shall require the approval in writing of Watkins-Johnson (which approval shall not be unreasonably withheld or delayed. Watkins-Johnson's approval may only be withheld in the event such revisions: (i) will materially interfere with operations on the Site as reasonably determined by Watkins-Johnson; (ii) will not be reasonably likely to achieve Project Completion; (iii) will be likely to cause the cost of Project Completion to exceed the Remediation Cost Program as set forth hereinafter; or (iv) will violate any provision of this Agreement or Applicable Requirements. Watkins-Johnson shall deliver a written response to SECOR's written request for such revisions within thirty (30) days following receipt of such request. Failure of Watkins-Johnson to deny approval within such thirty (30) day period shall be deemed an approval. SECOR shall consult with Watkins-Johnson on any proposed revisions to the technical approach, including the use of any institutional controls, prior to any meeting with the Regulatory Agency to discuss such revisions. SECOR shall negotiate any changes to the technical and regulatory approach for the Hillview Ave. Site with the DTSC and any other applicable Other Regulatory Agencies. The revised regulatory approach might include active remediation, and/or risk assessment and/or establishment of institutional controls. C. Institutional Controls/Deed Restrictions Related to the Hillview Ave. Site. SECOR shall use reasonable efforts to avoid or minimize the need for deed restrictions, or any other restrictions inconsistent with planned future use, as part of institutional controls with respect to the Hillview Ave. Site. SECOR shall negotiate with the DTSC or Other Regulatory Agency to include in any management plan the provision for the future removal of any deed or use restrictions. No deed restrictions or any other restrictions inconsistent with planned future use shall be permitted on any off-Hillview Ave. Site properties as part of institutional controls, unless specifically Execution Copy 10 required by DTSC or any Other Regulatory Agency; provided, however, that to the extent such deed restrictions are required by DTSC or any Other Regulatory Agency, any such deed or use restrictions shall not prevent Project Completion. D. Electrical and Compressed Air Costs. SECOR will be responsible for obtaining and shall pay for electrical power and compressed air required to operate the vacuum-enhanced groundwater extraction and treatment system at the Hillview Ave. Site. Watkins-Johnson will use its best efforts to obtain for the benefit of SECOR access to an on-Hillview Ave. Site electrical power and compressed air source from any assignee(s) and/or sublessee(s) of Watkins-Johnson's leasehold interests in the Hillview Ave. Site. E. Water Costs and Discharge, Hillview Ave. Site. SECOR shall be responsible for obtaining and paying for any and all required permits for pumping water and/or for extraction of water by the vacuum-enhanced groundwater extraction and treatment system on the Hillview Ave. Site and for discharging contaminated water related to operation of the vacuum-enhanced groundwater extraction and treatment system, including but not limited to groundwater discharge permits issued by the City of Palo Alto's Public Works Department. SECOR shall be responsible and shall pay for any and all costs associated with the testing or processing of contaminated water prior to discharge into the City of Palo Alto's sewer collection system or any other disposal site. F. Demobilization, Hillview Ave. Site. SECOR will, in accordance with Applicable Requirements, demobilize and remove the vacuum-enhanced groundwater extraction and treatment system and all appurtenant above-ground, and (subject to Paragraph 1.I.) below-ground piping systems and wells upon closure of the Hillview Ave. Site. G. Waste Manifesting. The Parties anticipate that the only waste generated from performance of the Services at the Hillview Ave. Site is carbon used in the Granular Activated Carbon Absorption groundwater treatment system. SECOR will be listed as owner and generator of such carbon waste generated as part of the Services, and will sign all manifests required for the transportation and disposition (via recycling) of same. The fees for transportation and recycling of such carbon waste shall be borne by SECOR, and shall be included as part of payment of the Contract Price. Execution Copy 11 The Parties also recognize that Watkins-Johnson intends to assign and/or sublease its leasehold interests in the Hillview Ave. Site, and any assignee(s) and/or sublessee(s) may elect to conduct development activities on the Hillview Ave. Site, including without limitation demolition, grading, re-grading, construction, development or redevelopment, and any such development activities may cause contaminated soils to be exposed or generated ("Development Waste"). Watkins-Johnson and SECOR agree that, absent the express written agreement and consent by SECOR, SECOR shall not be listed as the owner and generator of Development Waste in the event such Development Waste must be disposed of in a location other than the Hillview Ave. Site. Finally, the Parties acknowledge the possibility that, during the course of performing its Services, SECOR could encounter waste, the discovery of which is neither known nor foreseeable. Within five (5) days after such unknown and unforeseeable waste is discovered, the Parties will discuss, in good faith, and agree upon the appropriate disposition of such waste. The Parties agree that in the event DTSC or Other Regulatory Agency requires off-Site disposition of such waste and the Parties mutually agree to transport such waste to a qualified, licensed facility for destruction (e.g., incineration), then SECOR shall be listed as owner and generator of such waste on all manifests required for the transportation and disposition of same, and shall sign all such manifests, and SECOR shall submit the cost of same as a covered "Cleanup Cost" for reimbursement under the CCC Policy and/or as a covered "Loss" under the PLL Policy. To the extent the costs of transportation and destruction of such waste are not covered and reimbursed under the CCC or PLL Policies, then SECOR and Watkins-Johnson shall bear equal responsibility for payment of such costs. The Parties further agree that in the event DTSC or Other Regulatory Agency requires off-Site disposition of such waste, and destruction of such waste (i) is not covered by the CCC or PLL Policies and is economically infeasible to the Parties, or (ii) is not permitted under any applicable law or regulation, then SECOR shall not be listed as the owner and generator of such waste and shall not be required to sign manifests required for transportation and disposition of same. H. Scheduling, Reporting, and Coordination. During the performance of Services, SECOR shall submit to Watkins-Johnson periodic progress reports on the actual progress and updated schedules for the Two Sites, and, within fifteen (15) days of SECOR's receipt, copies of all correspondence, reports (including, without limitation, the semi-annual reports on the Regional Site activities commissioned and issued by the Execution Copy 12 Management Committee), and any other materials delivered to or received from the DTSC (pursuant to the Orders or otherwise) or any Other Regulatory Agency. SECOR recognizes that Watkins-Johnson and other contractors and subcontractors may be working concurrently at the Hillview Ave. Site. SECOR agrees to cooperate with Watkins-Johnson and other contractors so that the performance of the Services as a whole will progress with a minimum of interruption to SECOR, Watkins-Johnson, other contractors, tenants, licensees and invitees. SECOR shall be entitled to rely on Watkins-Johnson's reasonable cooperation and the reasonable cooperation of Watkins-Johnson's other contractors, while SECOR attempts to complete this Agreement in a timely, orderly and efficient manner. In the event that SECOR believes at any time that Watkins-Johnson is failing to cooperate with SECOR, SECOR shall notify Watkins-Johnson in writing and describe with adequate specificity the actions that SECOR would like Watkins-Johnson to take. Thereafter, Watkins-Johnson and SECOR shall meet to mutually agree on the measures that Watkins-Johnson is willing to take. With respect to the Hillview Ave. Site, SECOR shall submit drafts of all reports, work plans, remedial action plans, and any revisions requested for the Hillview Ave. Order to Watkins-Johnson prior to submission to the DTSC or applicable Other Regulatory Agency. Watkins-Johnson shall have fifteen (15) days in which to review the document and provide comments to SECOR. SECOR shall incorporate such comments when feasible and consistent with the technical and regulatory approach of SECOR and shall explain to Watkins-Johnson the reasons for any decision by SECOR not to incorporate any of Watkins-Johnson's comments. Upon request of Watkins-Johnson, SECOR shall meet Watkins-Johnson, as applicable, at the Hillview Ave. Site or at another mutually agreeable location to discuss such comments. Subject to Paragraph 1.B. hereof, SECOR reserves the right to make the final decision on the contents of all documents submitted to the Regulatory Agency to the extent such contents are required with respect to the Services or Project Completion. Watkins-Johnson shall have the right to dispute such contents before the DTSC or any applicable Other Regulatory Agency. Notwithstanding the foregoing, or anything to the contrary contained herein, Watkins-Johnson shall make the final decision on the contents of all documents submitted to the DTSC or any Other Regulatory Agency to the extent such comments relate to contamination outside the scope of the Environmental Conditions or matters not required to be reported for the purpose of performing the Services or achieving Project Completion. Execution Copy 13 I. Hillview Ave. Site Maintenance, Restoration and Closure. SECOR shall keep its work area for Services at the Hillview Ave. Site in a neat, clean and safe condition, in compliance with all Applicable Requirements, and shall remove from the Hillview Ave. Site, and properly dispose of, all wastes generated by SECOR's operations. Within seven (7) days following completion of the Services for the Hillview Ave. Site, SECOR shall remove from the Hillview Ave. Site all of SECOR's equipment and material, and all equipment and material comprising the vacuum-enhanced groundwater extraction and treatment system owned by Watkins-Johnson (except as otherwise determined by Watkins-Johnson, in its sole discretion). SECOR shall repair any and all damage caused to the Hillview Ave. Property as a result of the removal of Equipment, other closure activities, and other activities of SECOR in connection with the Services hereunder and shall leave the Hillview Ave. Site in a condition as close as is reasonably practicable to its condition prior to the installation of such Equipment and conduct of Service-related activities, reasonable wear and tear excepted. J. Authorization to Proceed. SECOR shall be authorized to commence performance of the Services upon execution of this Agreement. K. Independent Contractor. SECOR shall be fully independent in performing the Services and shall not act as Watkins-Johnson's agent or employee, but rather as an independent contractor retained by Watkins-Johnson to perform the Services. SECOR shall not take any action or omit to take any action that is inconsistent with its status as an independent contractor under this Agreement. SECOR shall be responsible for all governmental fees and regulatory oversight or other costs, charges, or fees accruing during the term of the Agreement and during its performance of the Services, for payment of any penalties that may be imposed upon it in performance of the Services, and for payment of all compensation, benefits, contributions, and taxes, if any, due its employees, agents, contractors, and subcontractors. L. Subcontracts. SECOR shall be entitled to subcontract performance of any portion of the Services under this Agreement, provided that such shall not in any manner relieve SECOR of responsibility for undertaking, conducting and completing the Services in a manner consistent in all respects with this Agreement or of responsibility for the actions of its subcontractors, and provided that SECOR's insurance, including the policies itemized in Paragraphs 5.A (1) through (3) hereof, is endorsed to respond as if SECOR had not so subcontracted. Notwithstanding the foregoing, in no event shall SECOR assign this Agreement without the express written consent of Execution Copy 14 Watkins-Johnson, which consent may be granted or denied at the sole discretion of Watkins-Johnson. M. Authorized Representative. SECOR and Watkins-Johnson shall each direct their communications with the others through one designated representative ("Authorized Representative"). The initial Authorized Representatives of the Parties shall be: For SECOR: Name: Bruce Scarbrough Address: SECOR International Incorporated 360 - 22nd Street Oakland, CA 94612 Phone: (510) 285-2556 Fax: (510) 285-2568 E-Mail: bscarbrough@secor.com For Watkins-Johnson: Name: Scott G. Buchanan Address: Watkins-Johnson Company 3333 Hillview Avenue Palo Alto, CA 94304-1223 Phone: (650) 813-2480 Fax: (650) 813-2960 E-mail: scott.buchanan@wj.com Each Party may change its Authorized Representative by giving written notice to the other Party. Execution Copy 15 N. Notices to Authorized Representatives. SECOR shall notify Watkins-Johnson's Authorized Representative within three (3) business days after becoming aware of the occurrence of an event described below: (1) SECOR or any agent or subcontractor receives notice of violation (or threat that such notice may be issued) of the Orders or of any Applicable Law which relates to the performance of Services under this Agreement or to the Hillview Ave. Site; (2) Proceedings are commenced or threatened which could lead to revocation or abeyance of permits, licenses, or other governmental authorizations which relate to the Services with respect to either of the Sites; (3) A permit, license, or other governmental authorization relating to the Services with respect to either of the Sites is revoked; (4) Litigation is commenced or threatened concerning or impacting the Services with respect to either of the Sites or the Hillview Ave. Property or the Hillview Ave. off-Site property; or (5) Any other condition occurs or is threatened to occur which may have a material and adverse effect on the use and occupancy of the Hillview Ave. Property, the timely performance of the Services with respect to either of the Sites under this Agreement, or the timely performance of any duties SECOR or the Responsible Parties may have under any Applicable Law. O. Conflicts. SECOR, its agents, and subcontractors shall not, during the term of this Agreement, undertake any employment or engagement, or, except as required by law, perform any act or allow any omission, which may result in a conflict with any of their respective obligations pursuant to this Agreement. In the event SECOR, its agents, or subcontractors are called upon under a purported requirement of law to do or omit anything that may be in violation of the foregoing, SECOR shall give Watkins-Johnson's Authorized Representative sufficient advance written notice thereof to allow Watkins-Johnson to contest or take such action as Watkins-Johnson deems necessary. 2. Responsibilities of Watkins-Johnson A. Hillview Ave. Site Access; Other Cooperation. Watkins-Johnson shall provide access to the Hillview Ave. Property to allow SECOR to carry out Execution Copy 16 the Services, and shall otherwise reasonably cooperate with SECOR in carrying out the Services, in obtaining access for SECOR's activities in connection with the Services in the vicinity of the project Hillview Ave. Site, and in supporting SECOR in SECOR's negotiation of the technical remediation approach, regulatory approach and scope and level of remediation with the DTSC or applicable Other Regulatory Agency. Watkins-Johnson shall provide in any assignment of its interests hereunder, or in any transfer of its leasehold interests in the Hillview Ave. Property, that any assignee(s) and/or sublessee(s) of Watkins-Johnson shall comply with the terms and obligations under this Paragraph 2.A, including, without limitation, providing access to SECOR as required hereunder. B. Hillview Ave. Site Development. The Parties acknowledge that Watkins-Johnson intends to assign and/or sublease its leasehold interests in the Hillview Ave. Site, and any assignee(s) and/or sublessee(s) may elect to conduct development activities on the Hillview Ave. Site, including without limitation demolition, grading, re-grading, construction, development or redevelopment. The Parties agree that SECOR shall not pay the costs of such development activities, except to the extent any such development activities (i) are required or are included as part of the Services, or (ii) result from the negligence, recklessness, or willful misconduct of, or from the violation of any Applicable Law by, SECOR, its employees, agents, representatives, contractors, subcontractors, successors, or assigns. The Parties contemplate that the term "costs associated with such development activities" includes the development and implementation of construction worker health and safety plans, the design and installation of vapor barriers or other engineering controls under new buildings, and the treatment or disposal of soil (and associated de-watering) that is excavated as a result of such demolition, grading, development, or redevelopment activities. C. Regional Site Responsibilities. Watkins-Johnson acknowledges that it will retain its responsibilities and obligations under the Regional Order and the Regional Agreements. Watkins-Johnson will take such actions as are required to have the Management Committee for the Regional Site recognize SECOR as Watkins-Johnson's designated representative for (1) receiving correspondence, reports, and other communications from the Management Committee, (2) representing Watkins-Johnson in any meetings or group communications of the Management Committee or of any subgroup of the Management Committee that Watkins-Johnson would be entitled or obligated to attend or participate in, and (3) conveying to the Management Committee payments and communications required of Watkins-Johnson, among other activities that may be required of SECOR Execution Copy 17 relative to the Management Committee in performing the Services hereunder. 3. Contract Price and Payment A. Contract Price. SECOR shall complete all the Services, achieve Project Completion with respect to both Sites, and arrange for purchase of the CCC Policy set forth in Paragraph 5.F., for the total fixed price of $2,024,900 ("Contract Price"). Watkins-Johnson shall pay the Contract Price directly to AIG Environmental within 14 days of execution of this Agreement. Watkins-Johnson also shall pay directly to AIG Environmental the premium necessary to purchase the PLL Policy set forth in Paragraph 5.G. within 14 days of execution of this Agreement. B. Additional Contract Payments By Watkins-Johnson. In addition to the amounts paid by Watkins-Johnson to AIG Environmental set forth in Paragraph 3.A., Watkins-Johnson shall pay directly to SECOR, following execution of this Agreement and within ten (10) days of receipt an invoice from SECOR for such amounts, (1) the amount of $140,000, as SECOR's risk transfer and signing fee for entering into this Agreement, and (2) the amount of $39,715, as the amount the Parties have agreed Watkins-Johnson is to pay SECOR to fund SECOR's ability to extend the PLL policy described in Section 5.G. of this Agreement for up to an additional ten-year period. C. Disbursement and Reporting of Funds. SECOR will arrange with AIG Environmental that upon execution of this Agreement, execution of the CCC Policy, and payment of the Contract Price by Watkins-Johnson, and pursuant to the terms of the CCC Policy, AIG Environmental will undertake (1) disbursement of funds to SECOR necessary to complete the Services, including achievement of Project Completion with respect to both Sites, on an invoiced basis as further described below; and (2) preparation and circulation of reports at regular intervals to SECOR and Watkins-Johnson regarding SECOR's activities and aggregate funds disbursed to SECOR for performance of Services and all other payments charged against the cost coverage cap at each of the Sites to that date. D. Payment of SECOR. Under the terms of the CCC Policy, SECOR shall be paid by AIG Environmental on the following basis: (1) Payments Related to Hillview Ave. Site. Prior to execution of the Agreement, and from time to time during the term of the Agreement Execution Copy 18 as may be agreed by the Parties, but in no event at less than annual intervals, SECOR shall prepare and present to Watkins-Johnson for its review and approval, a Planned Services and Annual Estimated Payment Schedule (attached hereto as Exhibit E) for the Hillview Ave. Site, setting forth the planned activities related to performance of the Services related to the Site for the next one-year period. SECOR shall submit Invoices for its Services consistent with the procedures set forth in paragraph 3.C.(3) directly below. (2) Payments Related to the Regional Site. From time to time during the term of the Agreement as may be agreed by the Parties, but in no event at less than annual intervals, SECOR shall prepare and present to Watkins-Johnson a report on the planned activities of the Management Committee at the Regional Site and SECOR's own planned activities, if any, in relation to the Management Committee's activities at that Site, for the next one-year period. Whenever SECOR receives an invoice from the Management Committee for Watkins-Johnson's assessed share of costs for the activities at the Regional Site, SECOR shall be entitled to submit such invoice, together with an invoice for any of its own Services related to review of such invoice, for payment consistent with the procedures set forth in the Paragraph 3.C.(3) directly below. (3) Procedures for Payment of SECOR (a) SECOR shall perform the Services and, in accordance with the Planned Services Schedule and Schedule of Payments submitted and approved for the respective period as described in Paragraphs 3.C.(1) and (2), invoice AIG for payment of its Services in accordance with the Schedule of Costs set forth on Exhibit F attached hereto, as may be amended from time to time. (b) SECOR shall arrange for, and the terms of the CCC Policy shall require, preparation by AIG Environmental and delivery by AIG Environmental to SECOR and Watkins-Johnson of quarterly statements showing all payment activity occurring with respect to the Services both during the subject quarter and cumulatively since execution of the Agreement and the CCC Policy. (c) If, based upon the AIG Environmental quarterly statements described in Paragraph 3.C.(3)(b), SECOR at any time has Execution Copy 19 received 125 percent (125%) or more of the approved Schedule of Payments amount for the approved Planned Service Schedule period, then Watkins-Johnson may, at its sole discretion, notify SECOR and AIG Environmental in writing of Watkins-Johnson's election to activate the "Watkins-Johnson Invoice Approval Mechanism" described in Paragraph 3.C.(3)(d), and SECOR shall, for the remainder of that Planned Service Schedule period (unless the Parties negotiate a mutually acceptable revised Planned Service Schedule and revised Schedule of Payments), be obligated to conform to the Watkins-Johnson Invoice Approval Mechanism set forth in Paragraph 3.C.(3)(d) as a condition of further payment. (d) Watkins-Johnson Invoice Approval Mechanism. In the event the conditions of subsection 3.C.(3)(c) are satisfied and Watkins-Johnson elects to activate the "Watkins-Johnson Invoice Approval Mechanism," SECOR, prior to submitting any invoice to AIG Environmental for payment of Services, shall prepare and submit any invoice related to the Hillview Ave. Site or to the Regional Site to Watkins-Johnson's Authorized Representative, by Federal Express overnight service ("SECOR Invoice"). Watkins-Johnson shall have fourteen (14) days from the receipt (deemed to be the day after SECOR's timely deposit of the invoice into Federal Express overnight service) of each SECOR Invoice within which to send to SECOR written objections concerning such SECOR Invoice. Written objections shall be sent to SECOR by Federal Express overnight service, but additional transmittals of objections may be via facsimile or same-day messenger service. If SECOR has not received a written objection to the invoice by the end of business on the fifteenth day (15th) day following Watkins-Johnson's receipt of the invoice, the invoice shall be deemed approved in all respects, and SECOR may submit the invoice to AIG Environmental Execution Copy 20 for payment. Each objection shall set forth with specificity the nature of the objection. In the event notice of objection to a SECOR Invoice is provided as required herein, Watkins-Johnson and SECOR shall use their best efforts to resolve the objection to the disputed SECOR Invoice. SECOR may submit to AIG Environmental for payment any undisputed portion of a disputed SECOR Invoice. All objections to SECOR Invoices that have not been resolved within sixty (60) days following receipt of the SECOR Invoice shall be subject to binding arbitration as provided herein. Objections to payment of SECOR Invoices must be based on one or more of the following reasons: 1. SECOR has deviated materially from the Final RAPs or related requirements of the Orders, or from this Agreement, including the applicable approved Planned Services Schedule as may be modified from time to time pursuant to Paragraphs 3.C.(1) and (2) hereof, without approval of Watkins-Johnson; 2. SECOR has failed to make payments in accordance with the terms of SECOR's contracts with its subcontractors or for labor, materials, or equipment supplied to the Site, resulting in placement of liens or other encumbrances on the Property; 3. SECOR's negligence or willful misconduct relating to or arising out of the Services performed or to be performed by SECOR has resulted in loss or damage to a third party, which loss or damage SECOR refuses or is unable to repair or remedy; 4. SECOR or its agent, subcontractor, or materials supplier has caused material damage to Watkins-Johnson or the Property, which loss or damage SECOR refuses or is unable to repair or remedy; or 5. SECOR is otherwise failing to comply with a material provision of the Agreement. 4. Representations and Warranties by SECOR A. Applicability. All representations and warranties of SECOR contained herein are made to and for the benefit of Watkins-Johnson. B. Qualifications. SECOR represents and warrants that it is familiar with the geological and environmental conditions at the Sites. SECOR represents and warrants that it has had an adequate opportunity to visit the Hillview Ave. Site and the Regional Site, to study the documents concerning the Two Sites, and to conduct such other activities and inquiries regarding the two Execution Copy 21 Execution Copy 21 Sites as SECOR has deemed prudent to adequately assess the Environmental Conditions at the Two Sites. SECOR represents and warrants that it has the necessary skills, training, and expertise required to perform the Services consistent with this Agreement. SECOR represents and warrants that it shall perform the Services in compliance with this Agreement and all Applicable Requirements, and with the standards of care and diligence practiced by nationally recognized professional firms performing services of a similar nature during the same time and in the same or similar locality. C. Remediation Cost Program. SECOR agrees to pay for all costs, including without limitation labor, materials, laboratory charges, drilling fees, and permitting fees incurred by SECOR in performing all Services and achieving Project Completion up to a limit of $10,000,000 in the aggregate for the Two Sites. Notwithstanding any other provision, covenant, warranty, guarantee, term or condition of this Agreement, SECOR's responsibility for and/or liability to pay for the costs, including time and expenses, of activities necessary to provide all Services and achieve Project Completion under this Agreement shall not, in any event, extend beyond or exceed $10,000,000 in the aggregate; except that this $10,000,000 limit shall not apply to any costs (including any costs that exceed $10,000,000) that result from the negligence, recklessness, or willful misconduct of, or from the violation of any Applicable Law by, SECOR, its employees, agents, representatives, contractors, subcontractors, successors, or assigns and SECOR shall remain liable for any such costs resulting from the negligence, recklessness, or willful misconduct of, or from the violation of any Applicable Law, except to the extent such costs are paid under the CCC Policy or PLL Policy. Except as otherwise set forth herein, after such $10,000,000 threshold is reached, Watkins-Johnson agrees that SECOR shall be released and discharged of any obligation, duty, promise, covenant, or condition of this Agreement, and the Agreement shall be deemed terminated by consent of the Parties. For the purposes of this Agreement, project costs, including time and expenses, shall be accounted for on the basis of the Schedule of Costs attached hereto as Exhibit F. SECOR shall be permitted to increase the amounts set forth in the Schedule of Costs on an annual basis by an amount not to exceed the Consumer Price Index. The term "Consumer Price Index" shall mean the Consumer Price Index, for All Urban Consumers, Subgroup "All Items", for the San Francisco-Oakland-San Jose Metropolitan Area published by the U.S. Department of Labor. If such index is discontinued, "Consumer Price Index" shall thereafter refer to the most nearly comparable Execution Copy 22 official price index of the United States Government as reasonably determined by SECOR. D. Financial Resources. SECOR represents and warrants that it has the financial resources, as augmented by AIG Environmental and the CCC Policy and PLL Policy, to prosecute this Agreement with diligence to Project Completion with respect to both Sites, even if the nature or extent of Environmental Conditions, and thus, the cost estimate thereof, exceeds SECOR's estimate thereof, and SECOR pledges to use such resources as necessary to diligently achieve Project Completion at both Sites. 5. Insurance A. SECOR's Required Insurance. SECOR shall maintain at its own expense, and shall, upon request, provide to DTSC, Watkins-Johnson, and Stanford, certificates of insurance demonstrating that it maintains the following insurance coverage, underwritten by companies and on coverage forms acceptable to Watkins-Johnson, in the following amounts: (1) Worker's compensation and employer's liability insurance in an amount not less than the greater of $1,000,000 or that amount prescribed by law; (2) Comprehensive automobile liability insurance (owned, non-owned, and hired) with limits of one million dollars ($1,000,000) per occurrence and one million dollars ($1,000,000) in the aggregate and umbrella and excess coverage, with a limit of nine million dollars ($9,000,000) each occurrence and in the aggregate (as long as such limit is commercially, reasonably available, but in no event less than $5,000,000 each occurrence and $9,000,000 in the aggregate); (3) Commercial General Liability insurance with limits of one million dollars ($1,000,000) per occurrence and two million dollars ($2,000,000) in the aggregate which policy shall have broad-form contractual liability coverage and such endorsements as may be reasonably acceptable to Watkins-Johnson and umbrella and excess coverage also having broad form contractual liability coverage and such endorsements as may be reasonably acceptable to Watkins-Johnson with a total limit of nine million dollars ($9,000,000) each occurrence and in the aggregate (as long as such limit is commercially, reasonably available, but in no event less than $5,000,000 each occurrence and $9,000,000 in the aggregate); and Execution Copy 23 (4) Professional errors and omissions and contractors pollution legal liability insurance with limits of two million dollars ($2,000,000) per incident and in the aggregate. SECOR's Commercial General Liability, comprehensive automobile liability insurance and professional errors and omissions and pollution legal liability coverage may be provided under one policy. B. Term of Coverage for SECOR's Insurance. With respect to Paragraph 5.A, insurance of a sufficient magnitude to satisfy the foregoing shall be maintained without a reduction in or narrowing of coverage at all times during the course of the Services and for at least four years following the termination of the Agreement or the completion of all Services under this Agreement. The required insurance shall provide coverage for the negligent acts and omissions of SECOR, its agents, employees, contractors, and subcontractors, and shall contain broad form contractual liability coverage. All policies shall require that Watkins-Johnson be provided with thirty (30) days advance written notice of cancellation, reduction, change, or renewal of each such policy. Proof of insurance shall be provided by SECOR prior to execution of this Agreement and will be kept up to date at all times by SECOR. In the event a professional errors and omissions and contractor's pollution legal liability insurance policy is to be terminated, SECOR shall prevent any gap in coverage during the course of the Services and for four (4) years thereafter by extending the present policy to cover the time period before a new policy is obtained. The provisions of this Section 5 shall survive the completion of the Services or termination of this Agreement. In the event that SECOR fails to maintain the required coverage hereunder, Watkins-Johnson shall have the right, after thirty (30) days written notice to SECOR, to obtain such coverage as is reasonably necessary to replace the coverage not maintained by SECOR and to be reimbursed for the costs of such insurance directly by SECOR. C. Copy of SECOR's Policy. SECOR shall provide a current copy of its Professional Errors and Omissions and Contractor's Pollution Legal Liability Insurance policy, as it exists at the inception of this Agreement, to Watkins-Johnson. SECOR represents and warrants that, except as described in detail in Exhibit G, attached and made a part hereof for all purposes, SECOR is not the subject of or a party to any claim, demand, mediation, arbitration, lawsuit, or judgment as would threaten availability of insurance coverage made a part of this Agreement. SECOR shall notify Watkins-Johnson in writing of any change in such representation and warranty within fourteen (14) days following the discovery of such change. Execution Copy 24 D. Additional Insureds on SECOR's Policy. On all insurance coverage provided by SECOR per Paragraph 5.A except worker's compensation coverage, errors and omissions and contractor's pollution legal liability insurance coverage, or except where Watkins-Johnson shall decline same in advance and in writing, Watkins-Johnson, any successors of Watkins-Johnson and their lenders and equity partners (and, if requested by Watkins-Johnson, any assignee(s) and/or sublessee(s) of Watkins-Johnson and their lenders and equity partners) and Stanford shall be named as Additional Insureds (under an endorsement at least as broad as CG 20-10-11-85 issued by the Insurance Services Office, Inc.), with waiver of subrogation rights. E. Waiver of Rights. Watkins-Johnson and SECOR waive all rights against one another for all losses and damages to the extent covered and actually paid by the policies of insurance provided for herein and any other property insurance applicable to the Services except that with respect to coverage for events or circumstances arising out of or relating to the performance of the Services, the CCC Policy and the PLL policy shall be primary, followed by SECOR's other insurance coverages. Each subcontract between SECOR and a subcontractor will contain similar waiver provisions by the subcontractor in favor of Watkins-Johnson and all other parties named as Additional Insureds. F. Cleanup Cost Cap Insurance. On or prior to the Effective Date, SECOR shall arrange for issuance by AIG Environmental, and AIG Environmental shall have issued, the CCC Policy, which shall name and pay on behalf of SECOR as Named Insured, and which shall be in the form attached hereto as Exhibit H, or in such other form as agreed to by the parties. The CCC Policy shall name Watkins-Johnson and Stanford, as Additional Insureds, and shall expressly provide for assignment of the Additional Insureds' rights under the CCC Policy to their successors and assigns (whether or not this Agreement is in effect). Coverage under the CCC Policy shall commence and be effective as of the Effective Date and shall terminate on the earlier of Project Completion or thirty (30) years from the Effective Date, with a limit of ten million dollars ($10,000,000). Watkins-Johnson shall pre-pay for the CCC Policy in a lump sum as set forth in Paragraph 3.A. of this Agreement. Proof of Insurance under this Paragraph 6.F. shall be provided by AIG Environmental on or before the Effective Date and thereafter upon request by SECOR, Watkins-Johnson, and any Additional Insured, its lender or equity partner, or DTSC. In the event that SECOR causes the termination of the CCC Policy hereunder, Watkins-Johnson shall have the right, after thirty (30) days written notice to SECOR, to obtain Execution Copy 25 such coverage as is reasonably necessary to replace the coverage and to be reimbursed for the costs of such insurance directly from SECOR. G. Pollution Legal Liability Insurance. Prior to or on the Effective Date, AIG Environmental shall issue the PLL Policy, which shall name Watkins-Johnson as First Named Insured, and which shall be in the form attached hereto as Exhibit I, or in such other form as agreed to by the parties. The PLL Policy shall name SECOR as Additional Named Insured, and Stanford (and, if requested by Watkins-Johnson, any successors of Watkins-Johnson and their lenders and equity partners) as Additional Insured. The PLL Policy shall expressly provide for assignment of the First Named Insured's rights under the PLL Policy to its successors and assigns as otherwise described in this Paragraph 5.G. (whether or not this Agreement is in effect). The PLL Policy shall have a policy term of ten (10) years following the Effective Date, with a limit of ten million dollars ($10,000,000). In the event Watkins-Johnson or its successor or assign, elects to increase the limits of the PLL Policy, then SECOR shall be named as an Additional Named Insured, up to the increased policy limits, but not to exceed Twenty Million Dollars ($20,000,000). Watkins-Johnson shall pre-pay for the PLL Policy in a lump sum. Proof of Insurance under this Paragraph 5.G. shall be provided by AIG Environmental on or before the Effective Date and thereafter upon request by any Named Insured, Additional Insured, or the DTSC. In the event that SECOR causes the termination of the PLL Policy hereunder, Watkins-Johnson shall have the right, after thirty (30) days written notice to SECOR, to obtain such coverage as is reasonably necessary to replace the coverage and to be reimbursed for the costs of such insurance directly from SECOR. 6. Financial A. Maintenance of Financial Standards. SECOR shall be solely responsible for and Watkins-Johnson shall have no right in respect to the management of SECOR's own internal affairs, including, without limitation, those relating to its compliance with laws, regulations and rules governing its formation, preservation and functioning as a corporation and its management, accounting policies, insurance programs, shareholder and labor relations, for purposes of SECOR's performance of activities related to Services or Project Completion under this Agreement, and otherwise. B. Financial Statements. At any time during the term of this Agreement, within three (3) business days following receipt of Watkins-Johnson's Execution Copy 26 written request SECOR shall provide Watkins-Johnson with such audited financial statements as are necessary to assure Watkins-Johnson of the financial ability of SECOR to perform the Services under this Agreement. Such audited financial statements may reflect SECOR's relationship with AIG Environmental. Watkins-Johnson shall maintain the confidentiality of, and not disclose to anyone (other than officers, counsel, lenders, or those who have a need to know as provided in this Agreement) the contents of same, consistent with the provisions of Section 13 of this Agreement. C. Financial Ability. At all times during the term of this Agreement, SECOR shall maintain the financial resources necessary to meet its obligations hereunder and satisfy all of its other obligations and liabilities. 7. Assignment of Watkins-Johnson's Rights to a Third Party The Parties expressly agree that Watkins-Johnson may convey or assign its rights under this Agreement (provided the duties and obligations hereunder of Watkins-Johnson as transferor or assignor are delegated to and assumed in full by the transferee or assignee) to any third party, including, without limitation, under any of the following circumstances: (i) to any third party in conjunction with a subsequent sale, assignment, or sublease of all or a portion of the Hillview Ave. Site; (ii) to a subsidiary, affiliate, division or corporation controlling, controlled by or under common control with Watkins-Johnson; (iii) to a successor corporation related to Watkins-Johnson by merger, consolidation, nonbankruptcy reorganization, or government action; or (iv) to a purchaser of Watkins-Johnson's assets located on the Site ("Permitted Assignee"). In the event of an assignment of this Agreement by Watkins-Johnson to a Permitted Assignee, SECOR agrees that the transferee or assignee, or a foreclosing lender or other party, shall succeed to the rights of Watkins-Johnson in connection with the project, subject to additional conditions that (1) SECOR's rights and obligations shall remain substantially intact and unaffected by any such transfer or assignment or any disposition of the Sites or portion thereof, and (2) transferee's or assignee's rights shall not be any greater than Watkins-Johnson's hereunder, or enlarged with respect to enforcement or carrying-out of any corresponding obligations of SECOR vis-a-vis the rights and privileges of Watkins-Johnson. Nothing in this Paragraph 7 is intended to or in fact affects or diminishes SECOR's rights under Paragraph 8.C. ("Termination for Cause by SECOR"), Subsection (3). Execution Copy 27 8. Termination A. Termination for Cause. Watkins-Johnson or SECOR may only terminate this Agreement for "cause," as defined in Paragraphs 8.B. and 8.C. The definition of "cause" as set forth in Paragraphs 8.B. and 8.C. shall be strictly construed. In no event shall Watkins-Johnson or SECOR have the right to terminate this Agreement for convenience or for any other reason not strictly constituting "cause" herein (such as economic/business or legal/regulatory considerations affecting use or disposition of the property). Termination for cause shall be initiated by written notice ("Termination Notice") from the terminating party delivered to the allegedly defaulting party at least sixty (60) days prior to the termination date, or three (3) days in case of emergency ("Termination Date"). The allegedly defaulting party shall have until the Termination Date to cure the alleged default. If the default giving rise to "cause" is cured prior to the Termination Date, the Termination Notice shall automatically be deemed of no further force or effect. The CCC Policy shall expressly contemplate and allow that upon termination of this Agreement by Watkins-Johnson pursuant to this Paragraph 8.A., a settlement of claims of SECOR and Watkins-Johnson, shall be made as follows: (1) In the event of such termination by Watkins-Johnson, Watkins-Johnson shall, at its discretion: (i) take possession of any or all materials and equipment, tools, and construction equipment owned by SECOR at the Site; (ii) finish the Services by whatever method Watkins-Johnson may deem expedient; and (iii) shall be assigned, at Watkins-Johnson's option, any and all contracts or subcontracts relating to the performance of the Services. (2) In the event of termination by Watkins-Johnson, SECOR shall, upon request by Watkins-Johnson, promptly advise Watkins-Johnson of all outstanding unperformed or uncompleted subcontracts, rental agreements, and purchase orders which SECOR has with others pertaining to performance of the Services, and shall furnish Watkins-Johnson with complete copies thereof. (3) SECOR shall, no later than thirty (30) days following the Termination Date, deliver to Watkins-Johnson a final invoice for Services rendered to the Termination Date, which invoice shall be subject to the objection and payment procedures set forth in Paragraph 3.C. hereof ("Final Invoice"). Execution Copy 28 (4) Upon termination for cause by Watkins-Johnson, SECOR shall, upon Watkins-Johnson's written request, perform such Services as Watkins-Johnson reasonably deems necessary to preserve and protect the Services already in progress and to dispose of any property as reasonably requested by Watkins-Johnson or its Authorized Representative ("Disengagement Services"). The cost and expense of such Disengagement Services shall be borne equally by SECOR and Watkins-Johnson. (5) Watkins-Johnson shall have the right to waive an event of default or an event giving rise to termination for cause provided such waiver is in writing and signed by Watkins-Johnson. B. Termination for Cause by Watkins-Johnson. With respect to termination for "cause" by Watkins-Johnson, "cause" shall be defined as any of the following circumstances that cause Watkins-Johnson material harm: (1) If the Services have not been or are not being performed in accordance with the provisions of this Agreement so as to materially and adversely affect Watkins-Johnson with respect to either the Hillview Ave. Site or the Regional Site; (2) If SECOR has materially violated or is materially violating either of the Orders, the Final RAPs, or any requirements thereunder, or any other Applicable Requirements pertaining to the Services; (3) If SECOR refuses or otherwise fails in a material manner or degree to supply enough properly skilled labor or proper equipment or materials to accomplish the Services; (4) If any voluntary or involuntary proceedings in bankruptcy or insolvency have been commenced by or against SECOR (in which event Watkins-Johnson may immediately terminate this Agreement, notwithstanding Paragraph 8.A above); (5) If SECOR has committed or is committing any act of bankruptcy or has become insolvent or unable to meet its debts as they mature (in which event Watkins-Johnson may immediately terminate this Agreement, notwithstanding Paragraph 8.A above); (6) If SECOR fails to maintain any insurance required under Paragraph 5.A., and does not, within thirty (30) calendar days after written notice of such failure provide proof to Watkins-Johnson that such insurance has been obtained and that any such policy provides equal Execution Copy 29 coverage during the period of any "gap" between the expiration of the old policy and the effective date of the new policy. If SECOR is in default under this Agreement, Watkins-Johnson shall have, in addition to the termination rights set forth herein, all rights and remedies available to it at law or in equity, including, without limitation, the right to seek specific performance to enforce this Agreement. Nothing contained in the foregoing sentence shall be deemed to imply that Watkins-Johnson shall have the right to terminate this Agreement for any reason other than "cause" or prior to the Termination Date (except as provided in this Paragraph 8.B., Subparagraphs (4) through (6) above). C. Termination for Cause by SECOR. With respect to termination for "cause" by SECOR, "cause" shall be defined as any of the following circumstances that cause SECOR material harm: (1) If Watkins-Johnson wrongfully prevents payment to SECOR of any amounts owed to SECOR by Watkins-Johnson hereunder (excluding the failure of AIG Environmental to pay any amount due through no fault or act of Watkins-Johnson) and such amounts have not been paid within ten (10) days following receipt by Watkins-Johnson of written notice from SECOR that such amounts are due; and/or (2) If Watkins-Johnson wrongfully and materially prevents SECOR from performing its material duties and obligations under this Agreement. (3) If Watkins-Johnson's successor and/or assignee does not provide to SECOR, upon SECOR's written request, reasonable financial assurances, in the form of (i) audited financial statements that demonstrate a net worth of at least ten million dollars ($10,000,000), (ii) a Letter of Credit (evidencing five hundred thousand dollars ($500,000) in credit), (iii) a surety bond (evidencing five hundred thousand dollars ($500,000) in surety), (iv) one or more certificates of insurance evidencing the same types and levels of insurance required of SECOR under Paragraph 5.A (1), (2), and (3), for the same duration and under the same terms as set forth in 5.B., and providing SECOR rights to terminate "for cause" in the event the successor and/or assignee fails to maintain the insurance under the same terms and conditions as set forth in 8.B.(6), or (v) some other evidence of financial assurance, the form of which shall be acceptable to SECOR, which demonstrates financial ability comparable to the levels of ability necessary to satisfy item (i), (ii), or Execution Copy 30 (iii), in this subsection (3), provided, however, that (a) SECOR must provide to such successor and/or assignee written notice, consistent with the provisions of Section 17 of this Agreement, that SECOR requires such financial assurances or that the financial assurances already offered are insufficient, and (b) such successor and/or assignee may have forty-five (45) days from the date such notice is received to provide such financial assurance, during which period SECOR may not terminate this Agreement. If Watkins-Johnson is in default under this Agreement, SECOR shall, in addition to the termination rights set forth herein, have all rights and remedies available to it at law or in equity, including, without limitation, the right to seek specific performance to enforce this Agreement. Nothing contained in the foregoing sentence shall be deemed to imply that SECOR shall have the right to terminate this Agreement for any reason other than "cause" or prior to the Termination Date. D. Additional Watkins-Johnson Remedies (1) In the event a Termination Notice is delivered to SECOR by Watkins-Johnson, Watkins-Johnson may order SECOR to immediately stop performance of such Services, or any portion of such services, until the cause for such failure to perform has been eliminated by SECOR at SECOR's cost and expense. However, the right of Watkins-Johnson to order SECOR to stop the provision of Services at either Site shall not give rise to a duty on the part of Watkins-Johnson to exercise this right for the benefit of SECOR or any other person or entity. (2) In the event of a termination of this Agreement by any party hereto, the following shall apply with respect to either or both of the Two Sites and the Services related to either or both of the Two Sites: (a) Watkins-Johnson may find a new third party contractor to either complete performance of the Services at either or both of the Two Sites, and assume the obligations of SECOR hereunder with respect to the Site or Sites, or to enter into a new contract with Watkins-Johnson for Services related to the Site or Sites on the same terms and conditions as set forth herein ("New Contractor"). (c) In the event: (i) Watkins-Johnson is unable to locate a New Contractor willing to assume SECOR's obligations hereunder Execution Copy 31 for either Site or both Sites or to enter into a new contract on the same terms and conditions as set forth herein; (ii) performance of Services at either Site or both of the Sites is required before a New Contractor is selected as a result of a pending or threatened violation of either Order or both of the Orders or other Applicable Law; or (iii) in the event performance of Services at either Site or both of the Sites is required to minimize adverse consequences of the Environmental Conditions at either Site or both of the Sites, Watkins-Johnson shall have the right (until such time as a New Contractor is selected) to perform such Services. 9. Change Orders A. Parties' Intent. It is the intent of the Parties that this Agreement eliminates as far as reasonably possible the potential for additional charges or change orders to the general scope of Services. B. Hillview Ave. Site (1) With respect to the Hillview Ave. Site, circumstances could arise, caused by the actions or requests of Watkins-Johnson, its successors, or its assigns or sublessees, in which a change order may be warranted, which change order would be paid for by Watkins-Johnson, its successor, assignee, or its sublessee without any claim against, or any reimbursement from SECOR or the CCC Policy. Such circumstances include, but are not limited to the following: (i) the situation where Watkins-Johnson, its successor, assignee, or sublessee chooses to have SECOR remove and relocate a remediation system in order to accommodate a revision to a redevelopment plan that was not disclosed to SECOR as of the Effective Date of this Agreement or at the time SECOR installed the remediation system, or (ii) the situation where Watkins-Johnson's, its successor's, assignee's, or sublessee's other contractors damage SECOR's equipment or remediation installation. Another circumstance that might warrant a change order would be any request by Watkins-Johnson, its successor, assignee, or sublessee to address environmental conditions that are not Environmental Conditions hereunder, the remediation of which would require additional costs and expenses beyond what would be required for the remediation of the Environmental Conditions pursuant to Hillview Execution Copy 32 Ave. Order and the Final RAP for the Hillview Ave. Site. The costs for remediation of such environmental conditions shall be paid by Watkins-Johnson within thirty (30) days of receipt of invoice(s) from SECOR for services performed pursuant to any Change Order(s) executed by the Parties under this Section 9. (2) Upon mutual agreement of Watkins-Johnson and SECOR, upon approval of the DTSC as required under the terms of the Hillview Ave. Order and Final RAP, upon approval of any Other Regulatory Agency to the extent applicable, and subject to execution of a Change Order as herein described, SECOR may perform services in addition to the Services described under Paragraph 1.A. for the Hillview Ave. Site. In no event shall execution of a Change Order limit, impair, or affect SECOR's obligations to perform the Services, except to the extent expressly set forth in such Change Order. C. Regional Site (1) With respect to the Regional Site, Watkins-Johnson and SECOR do not anticipate any Change Orders to be required except to the extent that the Management Committee for the Regional Site undertakes modifications in the approved plan of remediation or in operations of the Management Committee such that SECOR's obligations hereunder at the Regional Site are significantly changed. (2) With respect to the Regional Site, circumstances could arise, caused by the actions or requests of Watkins-Johnson, in which a Change Order may be warranted, which Change Order would be paid for by Watkins-Johnson, its successor, or assignee, without any claim against, or any reimbursement from SECOR or the CCC Policy. Such circumstances include, but are not limited to the situation where (i) Watkins-Johnson, its successor, or assignee chooses to have SECOR remove and relocate all or part of the Regional Site remediation system in order to accommodate a revision to a redevelopment plan that was not disclosed to SECOR as of the Effective Date of this Agreement or at the time the remediation system was installed, or (ii) Watkins-Johnson's, its successor's, or assignee's other contractors damage the equipment or remediation installation being used in the Regional Site remediation, such that the equipment or installation must be replaced. Execution Copy 33 (3) Upon mutual agreement of Watkins-Johnson and SECOR, upon approval of the DTSC, if such approval is required under the terms of the Regional Order and Final RAP, upon approval of the Management Committee or of any Other Regulatory Agency to the extent applicable, and subject to execution of a Change Order as herein described, SECOR may perform services in addition to the Services described under Paragraph 1.A. for the Regional Site. Watkins-Johnson shall pay SECOR for the costs for such additional services performed pursuant to any Change Order(s) executed by the Parties under this Section 9 within thirty (30) days of receipt of invoice(s) from SECOR. In no event shall execution of a Change Order limit, impair, or affect SECOR's obligations to perform the Services, except to the extent expressly set forth in such Change Order. D. Preparation of Change Orders. Change Orders for either Site shall be prepared as follows: (1) Change Order Requirements. A "Change Order" shall be a written agreement between Watkins-Johnson and SECOR, which shall be expressly designated "Change Order." A Change Order may be proposed by Watkins-Johnson or SECOR, or either of their Authorized Representatives. Upon execution by both Watkins-Johnson and SECOR, the Change Order shall be put in effect and paid for by Watkins-Johnson. Watkins-Johnson's Authorized Representative is hereby authorized to prepare, review, and execute Change Orders on behalf of Watkins-Johnson. At a minimum, each Change Order shall state the following: (1) the nature of the change to be addressed; (2) a description of the means by which the change shall be addressed; (3) a fixed price or time-and-materials estimate as agreed upon by the Parties; and (4) the amount of any change in the time frame for completion required to address the change. (2) Change Order Requested by Watkins-Johnson. If a request for a Change Order is initiated by Watkins-Johnson or its Authorized Representative, SECOR shall promptly provide, as appropriate, the Execution Copy 34 information required as described in Paragraph 9.D.(1), and any other relevant information requested. (3) Change Order Requested by SECOR. Change Orders proposed by SECOR shall be in writing and shall be promptly forwarded to Watkins-Johnson's Authorized Representative for review and comment. SECOR's response to such review and comment by the Watkins-Johnson's Authorized Representatives shall be provided promptly by SECOR to Watkins-Johnson's Authorized Representative. (4) Performance. SECOR shall perform the Services as modified by any executed Change Orders. In the event Watkins-Johnson and SECOR fail to agree to a proposed Change Order, unless otherwise directed by Watkins-Johnson, SECOR may not suspend performance of the Services and Watkins-Johnson and SECOR shall submit the disputed Change Order for resolution by binding arbitration as provided for herein. 10. Indemnities A. Indemnity by SECOR. SECOR agrees to indemnify, hold harmless, and defend (with attorneys reasonably acceptable to the applicable indemnified party) Watkins-Johnson and Watkins-Johnson's directors, officers, employees, agents, representatives, shareholders, partners, investors, affiliates, parents, subsidiaries, successors, and assigns from and against, whether direct or indirect, consequential or otherwise, any and all damages, interest, liabilities, proceedings, causes of action, claims, suits, demands, actions, judgments, costs, and expenses (hereinafter collectively referred to as "Claims"), which any or all of them may incur to the extent resulting from or arising out of: (1) Any negligence, recklessness or willful misconduct by SECOR or its employees, agents, representatives, contractors, subcontractors, successors, or assigns arising with respect to this Agreement or the performance of the Services, or (2) Any violation of either Order or both the Orders or other Applicable Requirements, by SECOR or its employees, agents, representatives, contractors, subcontractors, successors, or assigns, provided the party seeking indemnity is not then in default hereunder. Execution Copy 35 B. Indemnity by Watkins-Johnson. Watkins-Johnson agrees to indemnify, hold harmless, and defend (with attorneys reasonably acceptable to the applicable indemnified party) SECOR, and its respective directors, officers, employees, agents, representatives, shareholders, partners, affiliates, parents, subsidiaries, successors, and assigns from and against Claims which any or all of them may incur to the extent such Claims do not result from or arise out of: (1) Any negligence, recklessness or willful misconduct by SECOR or its employees, agents, representatives, contractors, subcontractors, successors, or assigns arising with respect to this Agreement or the performance of the Services; or (2) Any violation of either Order or both the Orders or other Applicable Requirements, by SECOR or its employees, agents, representatives, contractors, subcontractors, successors, or assigns, provided the party seeking indemnity is not then in default hereunder; C. Claim by Agent or Subcontractor. In the event of claims against any person or entity indemnified above brought by any direct or indirect agent or employee of SECOR, or of its subcontractor, or of anyone for whose acts or omissions SECOR or its subcontractor may be liable, the indemnification obligation under this Section 10 shall not be limited by a limitation of any amount or type of damages, compensation, or benefits payable to said employee or agent contained in any worker's compensation acts, disability benefit acts, or other employee benefit acts or in any subcontract. D. Survival of Indemnities. The indemnities under this Section 10 shall survive the termination of this Agreement. 11. Force Majeure A. Force Majeure Event. Neither SECOR nor Watkins-Johnson shall be deemed in default of this Agreement to the extent that any delay or other failure to perform their obligations as required pursuant to the Agreement results without fault or negligence from an event of "Force Majeure." For purposes of this Agreement, the term "Force Majeure" shall be defined as follows: any event, arising from causes beyond the reasonable control of the Parties (other than a Party's lack of or inability to obtain funds to fulfill its obligations or undertakings under this Agreement), that delays or prevents the performance of any obligation arising under this Agreement, such as, without limitation, acts of God, labor disputes, strikes, vandalism, fires, Execution Copy 36 floods, or weather conditions which would prevent or impair the performance of the Services. Upon the occurrence of any event claimed by a Party to be Force Majeure, the claiming Party shall notify the other Party promptly of the occurrence of such event, followed by written notification thereof given within three (3) calendar days after the date the claiming Party discovered or should have discovered the event of Force Majeure has occurred. The written notification shall contain any information which may be required to be disclosed to an applicable regulatory agency under any administrative or court order affecting the Services. Failure to notify the other parties either orally or in writing in accordance with this Section shall constitute a waiver of such claim of Force Majeure, provided, however, no modification of the Services shall be made unless and until written notice is provided. If the Parties cannot agree that the reason for delay or failure of performance is a Force Majeure, the Parties shall submit such issue to arbitration in accordance with Section 17 hereof. In no event shall any event of Force Majeure relieve either SECOR or Watkins-Johnson of any obligation hereunder other than to extend the time of performance required of such Party. 12. Compliance with Training Requirements A. Compliance and Training. SECOR covenants that it and its employees, agents, contractors, subcontractors, and those under its management or supervision, including, without limitation, those with whom SECOR has contracted and their employees, agents, contractors, and subcontractors: (1) Shall comply with all applicable environmental, health and safety and work plans, orders and decrees, and with all applicable laws; and (2) Shall be properly trained, registered, and certified as appropriate or required. B. Safety. SECOR shall take reasonable safety and other precautions in the performance of the Services. SECOR shall comply with all Applicable Requirements, including, without limitation, the Occupational Safety and Health Act of 1970 (84 U.S. Statutes 1590), as amended, and regulations thereunder, to the extent applicable, and SECOR warrants the compliance thereof of materials, equipment, and facilities, whether temporary or permanent, furnished by SECOR in connection with the performance of the Services. Execution Copy 37 13. Confidentiality, Records Retention and Reporting A. Treatment of Confidential Information. SECOR shall ensure that it and its employees, agents, contractors, and subcontractors shall treat as confidential any information, whether verbal or written or of any description whatsoever, developed or obtained in performing the Services or in any way relating to the Site or this Agreement ("Confidential Information"). Confidential Information shall not include any periodic reports or data required to be submitted pursuant to the Orders or otherwise required to be submitted to the DTSC or Other Regulatory Agency to achieve Project Completion. The confidentiality obligation required by this Section 13 shall not apply to information which (I) is in the public domain, (II) is disclosed to SECOR by a third party without restriction, (III) is independently developed by SECOR apart from this Agreement, (IV) was in SECOR's possession prior to entering into this Agreement, or (V) is required to be publicly disclosed under operation of law. Such Confidential Information shall not be disclosed to anyone other than Watkins-Johnson or its Authorized Representatives, except for disclosure to governmental authorities and subcontractors when required to perform the Services and only: (i) in the case of a subcontractor, agent or representative of SECOR, upon receipt by SECOR of a written acknowledgment from such subcontractor, agent or representative that it will comply with the provisions of this Paragraph 13.A. in the same manner as SECOR and shall assume the same rights and obligations as SECOR as set forth in this Paragraph 13.A., and (ii) in the case of governmental authorities, after SECOR has provided Watkins-Johnson with written notice, no later than ten (10) days prior to the submission of such Confidential Information to a governmental authority, that such information shall be submitted. To the extent disclosure of Watkins-Johnson's Confidential Information is mandated by law, Watkins-Johnson shall have the right to exhaust all challenges to the disclosure prior to SECOR's disclosing the Confidential Information, but only within the time period prior to when such law mandates disclosure. To the extent challenges to the disclosure of Watkins-Johnson's Confidential Information involve additional expenses to SECOR for costs of testimony and assistance of counsel, such costs as are reasonably incurred shall promptly be reimbursed by Watkins-Johnson, as applicable. In the event SECOR is ordered to disclose the Confidential Information by any governmental authority and Watkins-Johnson has either exhausted its challenges to such disclosure obligation or has otherwise waived such challenges, SECOR shall only disclose that portion of the Confidential Information that is required to be disclosed. It is further Execution Copy 38 understood and agreed that money damages would not be sufficient remedy for any breach of this Paragraph 13.A. and that, in addition to all other remedies available at law to Watkins-Johnson, Watkins-Johnson shall be entitled to injunctive relief and specific performance as a remedy for a breach of this Paragraph by SECOR. The confidentiality obligations set forth in this Paragraph shall survive termination or completion of this Agreement. B. Disclosure of SECOR's Confidential Information. Watkins-Johnson shall have the right to disclose documents and information (including financial information of SECOR and any financial information related to CCC Policy, its status, or any of the insurance policies hereunder) related to the Services to actual and prospective lenders, buyers, investors, insurance companies, and tenants. Tenants are not to receive proprietary or financial information of SECOR without SECOR's prior written approval, which SECOR shall not unreasonably withhold. In the event Watkins-Johnson plans to submit any confidential information of SECOR to any governmental agency, SECOR shall have the same rights with respect to such confidential information as are granted to Watkins-Johnson paragraph 13.A hereof. This Paragraph 13.B. shall survive termination or completion of this Agreement. C. Use of Project Information. SECOR agrees that any promotional material disseminated in the course of its business may not disclose the specific name, location, and scope of Services to be provided under this Agreement at either Site. SECOR agrees further that any statement of qualifications submitted to any third party in connection with potential projects or business relationships shall disguise the Services to be provided under this Agreement in such a manner that its location, as well as the environmental condition of the Sites, cannot be ascertained or determined. Watkins-Johnson can, in Watkins-Johnson's sole and absolute discretion, allow SECOR to identify the location of the Project and/or the identification of Watkins-Johnson in such materials. Watkins-Johnson must agree to such disclosures in writing before any dissemination by SECOR may occur, which agreement shall not be unreasonably withheld. 14. Staffing A. Adequate Staffing. SECOR shall furnish a competent and adequate staff as necessary for the proper and diligent administration, performance, coordination, and supervision of the Services; organize the procurement of Execution Copy 39 all materials and equipment so that they will be available at the time they are needed for timely completion and performance of the Services; and keep an adequate force of skilled staff on the job to complete the Services in accordance with all provisions of this Agreement. SECOR shall supply a statement of qualifications for those specific persons who shall perform the Services. B. Subcontractors. SECOR shall properly pay all subcontractors for all amounts due and payable and shall indemnify, defend, and hold Watkins-Johnson harmless from any claims or liens of subcontractor. Without limitation on the foregoing, in the event that any such lien is filed against the Hillview Ave. Property and upon adjudication of the lien or obligation in favor of the subcontractor, Watkins-Johnson is hereby authorized to submit invoices directly to AIG Environmental to satisfy such lien and any other costs incurred by Watkins-Johnson with respect to such lien, provided Watkins-Johnson provides SECOR 30 days' prior written notice of its intent to do so. C. Supervision. SECOR shall supervise and direct the Services, using that skill and attention ordinarily exercised by members of the profession practicing under similar conditions at the same time and in the same or similar locality. Subject to the provisions hereof, SECOR shall, with respect to its subcontractors, agents, employees and representatives, be responsible for: (1) construction means, methods, techniques, sequences, and procedures, (2) health or safety precautions and programs in connection with the Services, and (3) coordinating the Services under the Agreement, unless directed otherwise by Watkins-Johnson or its Authorized Representative. 15. Watkins-Johnson's Site Activities A. Watkins-Johnson Activities at the Site. Watkins-Johnson reserves the right to perform construction, operations, or other activities at the Site outside the scope of Services, or not related to the Services, through Watkins-Johnson's own forces or through award of separate contracts to other contractor or contractors. Upon written request from SECOR, Watkins-Johnson shall provide information reasonably requested by SECOR with respect to such activities. Watkins-Johnson shall provide a representative to meet with representatives of SECOR to coordinate the Services with construction activities at the Site. Execution Copy 40 B. Cooperation by SECOR. SECOR shall afford Watkins-Johnson and any of Watkins-Johnson's separate contractors reasonable opportunity for performance of such other activities at the Site and shall reasonably coordinate the Services with such other activities. Upon written request from Watkins-Johnson, SECOR shall promptly provide any Watkins-Johnson contractor with instructions and other information reasonably requested by Watkins-Johnson, such as maps showing the location of monitoring wells, recovery wells, and any other equipment used for or in connection with the Services and remediation of the Environmental Conditions (collectively, the "Equipment"), in order to identify the location of any Equipment to enable such contractors to avoid impeding or delaying any construction activities at the Site and avoiding any damage or destruction of the Equipment. SECOR shall provide a representative to meet with representatives of Watkins-Johnson or Watkins-Johnson's contractors from time to time as necessary to coordinate the Services with construction activities at the Site. SECOR shall relocate all Equipment to the extent necessary to accommodate any redevelopment plans for the Site, provided such plans are disclosed to SECOR no less than thirty (30) days prior to any planned redevelopment in a manner sufficient to identify the location, layout, and depth of redevelopment construction and Watkins-Johnson shall reimburse SECOR for its costs associated with relocation of the Equipment. 16. Claims A. Notice of Claim. Any claim against a Party pursuant to this Agreement must be in writing, must set forth the facts upon which it is based, and except as expressly provided to the contrary herein, must be received by the non-claiming Party at least thirty (30) days prior to the filing of any demand for arbitration involving such claims and such notice; which notice, the Parties agree, shall be a jurisdictional prerequisite to bringing any claim. B. Arbitration of Disputes. Claims, disputes and other matters in question between the Parties to this Agreement arising out of or relating to this Agreement or the Services shall be submitted to and settled by arbitration conducted in the County of Santa Clara, California, in accordance with the rules then in effect of the American Arbitration Association by three (3) arbitrators appointed in accordance with such rules. The award rendered by the arbitrators shall be final and binding, and judgment may be entered upon it in any court having jurisdiction thereof. Notwithstanding the foregoing, the Parties may apply to any court of competent jurisdiction for a Execution Copy 41 temporary restraining order, preliminary injunction, or other interim or conservatory relief, as necessary, without breach of this arbitration agreement and without any abridgment of the powers of the arbitrators. No arbitration arising out of or relating to this Agreement or the Services shall include, by consolidation or joinder or in any other manner, an additional person not a party hereto, except by written consent signed by the Parties and any other person sought to be joined. Consent to arbitration involving an additional person or persons shall not constitute consent to arbitration of a dispute not described or with a person not named therein. This provision shall be specifically enforceable in any court of competent jurisdiction. Notice of demand for arbitration shall be filed in writing with the other Party to this Agreement and with the American Arbitration Association. The demand shall be made within a reasonable time after the written notice of claim above. In no event shall the demand for arbitration be made after the date when the applicable statute of limitations would bar institution of a legal or equitable proceeding based on such claim, dispute, or other matter in question. However, once a claim is made, the statute of limitations shall be tolled during the thirty (30) day period from the time the claim is filed until the demand for arbitration is filed. If agreed to in writing by Watkins-Johnson, and unless this Agreement has been terminated in accordance with the terms hereof, SECOR shall carry on the Services and maintain its progress during any claim filing and arbitration proceedings, and SECOR shall be entitled to continue to receive payments in accordance with this Agreement; provided, however, that if Watkins-Johnson does not agree to the continued performance of the Services by SECOR, such Services shall cease and no invoices shall be submitted to the AIG Environmental for the contested payment pending the completion of the arbitration proceeding. This Paragraph 16.B. shall survive Project Completion or termination of this Agreement. 17. Notices All notices and other communications required to be made under this Agreement shall be made by hand delivery or by overnight mail and shall be deemed to have been made as of the time and date of receipt. All such notices and communications to SECOR shall be addressed for delivery to SECOR's Authorized Representative identified in Paragraph 1.M.. All such notices and communications to Watkins- Execution Copy 42 Johnson shall be addressed for delivery to Watkins-Johnson's Authorized Representative identified in Paragraph 1.M.. 18. Miscellaneous A. Entire Agreement. This Agreement represents the final embodiment of the Parties' intentions and understandings with respect to the subject matter hereof. It supersedes any prior understandings, whether written or oral, or of any description whatsoever. B. Modification. No modification of this Agreement shall be binding upon all Parties except by a written instrument executed by Watkins-Johnson and SECOR. C. Conflict. In the event of any conflict among or between the applicable provisions of the documents comprising this Agreement, SECOR shall immediately notify Watkins-Johnson's Authorized Representative of such conflict or potential conflict among or between the applicable provisions of the above Agreement and any other parts of this Agreement. Watkins-Johnson's Authorized Representative shall make a good faith effort to resolve the disputed with SECOR within fifteen (15) days, and if such dispute is not resolved after fifteen (15) days, then the Parties shall submit the dispute for resolution by binding arbitration as provided for herein. D. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of (1) Watkins-Johnson, including, but not limited to, its successors and their lenders and equity partners, and any assignees and/or sublessees of Watkins-Johnson, and their lenders and equity partners, irrespective of whether a particular provision of the Agreement refers simply to "Watkins-Johnson" or refers as well to such additional entities; and (2) SECOR, and its successors and assigns. SECOR shall be responsible for its representations, warranties, duties, obligations, and responsibilities under the Agreement. Notwithstanding anything to the contrary contained herein, SECOR may not assign its rights or obligations under this Agreement without the prior written consent of Watkins-Johnson, which consent may be not be unreasonably withheld. E. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. F. Captions and Headings. The captions and headings throughout this Agreement are for convenience and reference only, and the words contained Execution Copy 43 therein shall in no way be held or deemed to define, limit, describe, modify, or add to the interpretation, construction, or meaning of any provision of or scope or intent of this Agreement. G. Severability. (1) General. If any provision of this Agreement, or application thereof to any person or circumstance, shall to any extent be determined to be invalid, then such provision shall be modified, if possible, to fulfill the intent of the Parties as reflected in the original provision. The remainder of this Agreement, or the application of such provision to persons or circumstances other than those as to which it is held invalid, shall not be affected thereby, and each provision of this Agreement shall be valid and enforced to the fullest extent permitted by law. (2) Agreement Addresses Two Separate Sites. It is understood and acknowledged by the Parties to this Agreement that the Agreement addresses SECOR's obligations and rights with respect to two different Sites, and termination of this Agreement with respect to rights and obligations of the Parties in connection with one of the Two Sites shall not automatically result in termination of the Agreement with respect to rights and obligations of the Parties in connection with the other of the Two Sites. H. No Waiver. No waiver by any Party of any default by another Party in the performance of any provision of this Agreement shall operate as or be construed as a waiver of any future default, whether like or different in character. I. Counterparts. This Agreement may be executed in any number of counterparts, all of which together shall constitute one original Agreement. J. Rule of Construction. The Parties hereto acknowledge that they each enter into this Agreement after having had an opportunity for thorough review by, and on advice of, their respective legal counsel. The judicial rule of construction requiring or allowing an instrument to be construed to the detriment of or against the interests of the maker thereof shall not apply to this Agreement. K. Attorneys Fees. In the event of any dispute between or among the Parties hereto not involving third party claims to which the indemnity applies, the Prevailing Party in such dispute shall be entitled to recover from the other Execution Copy 44 or others reasonable attorneys fees, disbursements, and costs incurred directly in connection with such dispute and the resolution thereof. The "Prevailing Party," for purposes of this agreement, shall be deemed to be the Party which obtains substantially all of the result sought, whether by dismissal, award or judgment. In no event shall a Party bringing any claim, demand, arbitration or suit for monetary damages be entitled to recover attorneys fees where any final award or judgment does not exceed a bona-fide offer of settlement or judgment made by the other party. Executed by the undersigned duly authorized representatives to be effective as of the Effective Date as set forth above. SECOR International, Inc. By: /s/ James Vain Title: President Date: July 13, 1999 Watkins-Johnson Company By: /s/ Scott G. Buchanan Title: Executive Vice President and CFO Date: July 13, 1999 Execution Copy 45 List of Exhibits to Remediation Agreement ----------------------------------------- Exhibit A: Description of Watkins-Johnson Lease Arrangements, 3333 Hillview Ave., Palo Alto, CA Exhibit B: Hillview Avenue Order for Watkins-Johnson Company Site, 3333 Hillview Avenue, Palo Alto, CA Exhibit C: Regional Order for Hillview-Porter Area, Barron Park Neighborhood & Matadero Creek, Palo Alto, California Exhibit D: List of the "Regional Agreements" Exhibit E: SECOR Planned Services and Annual Estimated Payment Schedule Exhibit F: SECOR Schedule of Costs Exhibit G: Schedule of Pending Claims Against SECOR Exhibit H: Form of Cleanup Cost Cap ("CCC") Insurance Policy Exhibit I: Form of Pollution Legal Liability ("PLL") Insurance Policy EX-10.29 5 PURCHASE AND SALE AGREEMENT Exhibit 10.29 PURCHASE AND SALE AGREEMENT This Purchase and Sale Agreement (the "Agreement") is entered into as of the 21 day of August, 1999, by and among Watkins-Johnson Company, a California Corporation ("Seller"), and Lincoln Property Company Commercial, Inc., a Texas Corporation, and/or its assigns ("Buyer") and is as follows: Terms and Conditions of Sale 1. Sale. Seller agrees to sell and convey to Buyer "As Is" (as defined in paragraph 26 below), and Buyer agrees to purchase from Seller "As Is", for the purchase price set forth below, the land and buildings and other real property improvements thereon, and easements, entitlements, privileges, and other appurtenances thereto, located at 2525 North First Street, San Jose, Santa Clara County, California, A.P.N. 97-45-40, comprising approximately 14.19 acres, as set forth in Exhibit "A" attached hereto, with certain easements as set forth in the Preliminary Report as hereinafter defined (the "Property"), on all of the terms and conditions set forth in this Agreement. There is no personal property associated with this sale except as specifically set forth in this Agreement. 2. Purchase Price and Terms of Payment. The Purchase Price for the Property shall be Seventeen Million Five Hundred Thousand and no/100 Dollars ($17,500,000.00) (the "Purchase Price"). 2.1. Within one (1) business day after the date hereof, Buyer shall deposit with Escrow Holder (as defined below) a deposit of One Million and no/100 Dollars ($1,000,000.00) to be placed into an interest-bearing account, with interest for the benefit of Buyer's application to the Purchase Price ("Deposit"). 2.2 On or before the Closing Date (as defined below), Buyer shall deposit with Escrow Holder the balance of the Purchase Price, as well as Buyer's share of closing costs. 3. Escrow and Closing. 3.1. Opening of Escrow. Within one (1) business day after the date hereof the parties shall open escrow with Alliance Title Company, 701 Miller Street, San Jose, California 95110 (the "Escrow Holder"), escrow officer, Liz Zankich, by the deposit of a copy of this Agreement with the Escrow Holder. Seller and Buyer agree to prepare and execute such joint escrow instructions as may be necessary and appropriate to close the transaction in accordance with the terms of this Agreement, provided that neither party shall be obligated to execute escrow instructions that are inconsistent with the terms of this Agreement. Should said instructions fail to be executed as required, Escrow Holder shall be and hereby is directed to close escrow pursuant to the terms and conditions of this Agreement. 3.2. Close of Escrow. The closing of the escrow ("Close of Escrow"), which shall mean the date on which the deed transferring title is recorded (the "Closing Date"), and shall occur on or before September 15, 1999 (the "Final Closing Date"). 3.3 Delivery of Seller's Documents. On or before the Closing Date, Seller shall deposit with Escrow Holder all of the following: (i) the Deed described in Paragraph 5.1.1 below; (ii) the Assignment of Permits described in Paragraph 5.1.3 below, if any; (iii) Seller's escrow instructions (or an original set of joint escrow instructions executed by Seller) sufficient to enable Escrow Holder to close the escrow in accordance with the terms of this Agreement; (iv) the FIRPTA affidavit and other documents described in Paragraph 5.3 hereof. 3.4. Delivery of Buyer's Documents and Funds. On or before the Closing Date, Buyer shall deposit with Escrow Holder all of the following: (i) balance of the purchase price as well as Buyer's share of closing costs; (ii) Buyer's escrow instructions sufficient to enable Escrow Holder to close the escrow in accordance with the terms of this Agreement; and (iii) any other documents, records, agreements, or funds called for hereunder that have not previously been delivered. 3.5. Prorations. Escrow holder shall prorate the following between the parties as of the Close of Escrow: real estate taxes and assessments. All prorations shall be based on a thirty (30) day month. 3.6. Utilities and Service Contracts. Seller shall cause all meters read and final bills rendered for all utilities and Service Contracts servicing the Property, including, without limitation, water, sewer, gas, electricity, and elevator and HVAC Service Contracts for the period to and including the day preceding the Close of Escrow, and Seller shall pay such bills and terminate such Service Contracts effective as of Close of Escrow. Buyer shall arrange for utility service and Service Contracts to the Property after the Closing Date. 3.7. Closing Costs. Each party shall pay its own attorney's fees associated with the negotiation of this Agreement. Recording and Escrow fees and the cost of the Title Policy (as hereinafter defined) shall be paid by Seller. The County transfer tax shall be paid by Seller and the City transfer tax shall be paid fifty percent (50%) each by Buyer and Seller. All other closing costs not specifically allocated hereafter to Buyer or Seller shall be divided and paid fifty percent (50%) each by Buyer and Seller. -2- 4. Title and Other Contingencies. 4.1. Title to be Conveyed. Seller shall convey a fee title interest in the Property, by grant deed to Buyer at Close of Escrow, subject only to the Approved Exceptions (as hereinafter defined). 4.2. Title Insurance and Survey. Buyer acknowledges the receipt of that certain Preliminary Title Report No. 99006567-004, issued by Alliance Title, dated July 15, 1999 (the "Title Report") and the survey prepared by Kier & Wright, dated July 16, 1999 (the "Survey") concerning the Property. Buyer hereby accepts the Title Report, except for items 12 and 14 of Schedule B thereof, and the Survey. All of the fourteen (14) exceptions to title set forth in the Title Report with the exception of items 12 and 14 of Schedule B thereof, shall be hereinafter collectively referred to as the "Approved Exceptions." 4.3. [Intentionally omitted] 4.4. Form of Title Policy. Upon the Close of Escrow, Title Company shall issue its ALTA Extended Coverage owner's policy of title insurance (the "Title Policy") in the face amount of the Purchase Price, insuring that fee title to the Property is vested in Buyer subject only to the Approved Exceptions. Seller shall pay that portion of the premium which would be payable for a CLTA Standard policy without extended coverage and Buyer shall pay the excess premium. Buyer shall also pay for the cost of any endorsements or further coverage in excess of the cost of the Title Policy, provided, however, that Seller shall pay the cost of any endorsements which Seller agrees to cause the Title Company to issue to cure title exceptions which are disapproved by Buyer. The unwillingness of Title Company to issue the Title Policy shall not constitute an event of default hereunder by Seller, except to the extent such unwillingness is solely caused by the breach of any Seller's obligations hereunder, but shall entitle the Buyer to terminate this Agreement pursuant to Paragraph 5.6 hereof, if the Title Company is unable to deliver the Title Policy except for any special endorsements that may be requested by Buyer. Seller hereby covenants and agrees that from and after the date of this Agreement, Seller shall not sell, assign, encumber, or create any right, title, or interest in the Property, or any part thereof, or permit to exist any lien, encumbrance, or charge thereon, not shown on the Preliminary Report, without the prior written consent of Buyer. Seller will give the necessary information, at no cost to Seller, for the issuance of an ALTA policy. 4.5. [Intentionally omitted] 4.6. Delivery of Certain Documents. Seller has delivered to Buyer true copies of the following documents: (i) Post-closure report to San Jose Fire Department Permit No. CR 361012595, prepared by C.H.A.S.E. dated July 1995 and a Phase II Investigation Report dated September 11, 1992 by Watkins-Johnson Environmental; (ii) copies of all maintenance agreements and/or service contracts in effect relating to the -3- Property (the "Service Contracts"); (iii) each permit issued by any governmental entity(ies) having jurisdiction over the Property (the "Permits"), if any, and in Seller's possession. 4.7. [Intentionally omitted] 5. Buyer's Conditions to Close. For Buyer's sole benefit, Buyer's obligation to complete the purchase of the Property is subject to satisfaction of the following condition at or prior to the Closing Date, unless waived by Buyer in writing: 5.1. Delivery of Title Documents. 5.1.1. Grant Deed. Seller shall have executed, acknowledged and delivered into Escrow for recording and subsequent delivery to Buyer, a grant deed ("Deed") to the Property in recordable form, conveying Seller's fee title to the Property to Buyer, subject only to the Approved Exceptions. 5.1.2. [Intentionally omitted] 5.1.3. Assignment of Permits. Seller shall have executed, acknowledged and delivered into Escrow for delivery to Buyer, an assignment of all of Seller's right, title, and interest, in and to each of the Permits, if any and/or if assignable and Seller's intangible rights to the Property, if any exist (the "Assignment of Permits"). 5.1.4. [Intentionally omitted] 5.2. Title Policy. Title Company shall be irrevocably committed to issue the Title Policy. 5.3. FIRPTA Affidavit. Seller shall have executed and delivered to Escrow Holder an affidavit satisfying the requirements of Section 1445 of the Internal Revenue Code of 1986, as amended (the "FIRPTA Affidavit"), as well as the appropriate California documents contemplated under California Revenue and Tax Code Sections 18805 and 26131. 5.4. Seller's Performance. Seller shall have performed all of the other material terms and conditions to be performed by Seller prior to the Close of Escrow under the terms of this Agreement, including but not limited to that Seller's representations and warranties in Paragraph 8 and elsewhere in this Agreement, if any, are true and correct as of the Close of Escrow. 5.5. Condition of Property. Except as otherwise provided in Paragraph 10, the physical condition of the Property shall be substantially the same on the day of Closing as at the date of execution of this Agreement, unless caused by Buyer or its agents. -4- 5.6. Termination of Escrow. If any condition described in this Paragraph 5 is not timely satisfied (or waived by Buyer in writing) on or prior to the Close of Escrow, then (i) the Escrow shall terminate immediately upon receipt by Escrow Holder of notification from Buyer of the failure of such condition, and Buyer and Seller shall share equally any applicable escrow cancellation fees, (ii) Escrow Holder shall return all instruments and documents deposited into the Escrow to the parties depositing the same, (iii) Escrow Holder shall return to Buyer any funds in Escrow Holder's possession deposited by Buyer including the Deposit to the extent delivered to Escrow by Buyer, and interest collected thereon, less only Buyer's share of applicable escrow cancellation fees, if any, and (iv) neither party shall have any further rights or obligations under this Agreement, except to the extent that the failure of a condition also constitutes a default by Seller with respect to any of Seller's covenants or obligations under this Agreement and in that case, Buyer shall have the rights and remedies set forth in Paragraph 12. 6. Seller's Conditions to Close. For Seller's sole benefit, Seller's obligation to complete the sale of the Property is subject to satisfaction of the following conditions at or prior to the Closing Date, unless waived by Seller in writing: 6.1. Delivery of Documents. Buyer shall have timely performed its obligations under Paragraph 3.4 hereof. 6.2. Receipt of Purchase Price. Title Company, and/or Seller, shall have received the Purchase Price for the Property. 6.3. Buyer's Performance. Buyer shall have performed all of the other material terms and conditions to be performed by Buyer prior to the Close of Escrow under the terms of this Agreement, including but not limited to that Buyer's representations and warranties in Paragraph 7 are true and correct as of the Close of Escrow. 6.4. Termination of Escrow. If any condition described in this Paragraph 6 is not timely satisfied (or waived by Seller in writing) on or prior to Closing Date and the Paragraph 5 conditions have been satisfied, (i) the Escrow shall terminate immediately upon receipt by Escrow Holder of notification from Seller of the failure of such condition, (ii) Escrow Holder shall return all instruments and documents deposited into the Escrow to the parties depositing the same, (iii) neither party shall have any further rights or obligations to the other under this Agreement, except to the extent that a failure of a condition also constitutes a default by Buyer with respect to any of Buyer's covenants or obligations under this Agreement, and (iv) the provisions of Paragraph 13 apply. 7. Buyer's Representations and Warranties. Buyer hereby represents and warrants to Seller, effective both as of the date of this Agreement and as of Close of Escrow: -5- 7.1. Buyer's Due Organization and Authorization. Buyer and those individuals and entities signing this Agreement on behalf of Buyer, respectively have the right, power, and authority to make and perform their obligations under this Agreement. The execution, delivery, and performance of this Agreement does not violate any contract, agreement, or commitment to which any party comprising Buyer is a party or by which any party comprising Buyer is bound. 7.2. Inspection and Feasibility. Buyer represents, warrants and acknowledges that prior to the date of execution of this Agreement, Buyer conducted all inspections and investigations with respect to the Property that Buyer deemed necessary and that Buyer waives, denies, and disclaims any inspection or feasibility contingency with respect to the Property. 7.3. Seller to Deliver Documents. Except for the documents set forth in Paragraph 3.3, Buyer represents, warrants and acknowledges that Seller has delivered all documents required by Buyer pertaining to the Property. 7.4. Zoning. Buyer represents, warrants and acknowledges that it accepts the zoning and the status of all permits regulatory requirements of the Property. 7.5. Buyer's Knowledge. If Buyer has knowledge of the incorrectness of any representation or warranty made by Seller in the Agreement prior to Close of Escrow and fails to so notify Seller prior to the Closing Date, then such representation or warranty shall be deemed to be stricken from this Agreement ab initio and shall be of no further force or effect. Seller shall have the right to qualify such representations and warranties with any information it receives concerning such representations and warranties after the date of this Agreement by written notice to Buyer. Seller shall not take or knowingly permit any action after the date of this Agreement which would cause any representation or warranty made by Seller in the Agreement to be untrue or inaccurate, and Seller's taking of or knowingly permitting any such action shall be a breach of this Agreement by Seller. If Seller qualifies a representation such that it materially affects the value of the Property, Buyer's sole remedy is to terminate this Agreement pursuant to Paragraph 5.6. 8. Seller's Representations and Warranties. Seller hereby represents and warrants to Buyer, effective both as of the date of this Agreement and as of Close of Escrow: 8.1. Seller's Due Organization and Authorization. Seller and those individuals and entities signing this Agreement on behalf of Seller, respectively have the right, power, and authority to make and perform their obligations under this Agreement. The execution, delivery, and performance of this Agreement does not violate any contract, agreement, judicial order, or commitment to which any party comprising Seller is a party or by which any party comprising Seller is bound. -6- 8.2. No Litigation or Proceeding. Seller represents and warrants that there is, to its knowledge, no litigation or governmental or agency investigation or governmental or agency proceeding including condemnation pending, nor, to the knowledge of Seller, threatened against Seller or the Property which would impair or adversely affect the property or Seller's ability to perform its obligations under this Agreement. 8.3. Documents. All documents delivered to Buyer by Seller pursuant to this Agreement are or will be to Seller's knowledge true and correct copies of originals, to the extent not the originals thereof, and any and all information supplied to Buyer by Seller in accordance with this Agreement and all statements or representations made by Seller herein are and will be to Seller's reasonable knowledge true, complete, and accurate in all material respects except as specifically qualified otherwise in this Agreement. 8.4. Tax Withholding. Seller is not subject to tax withholding in connection with this transaction under the Internal Revenue Code or other federal or state law. Seller agrees to furnish to Buyer at least ten (10) days prior to the Close of Escrow appropriate exemption certificates under the Internal Revenue Code and the California Revenue and Taxation Code. 8.5. Bankruptcy or Insolvency. Seller has not made a general assignment for the benefit of creditors, filed any voluntary petition in bankruptcy or suffered the filing of an involuntary petition by its creditors, suffered the appointment of a receiver to take possession of substantially all of its assets, suffered the attachment or other judicial seizure of substantially all of its assets, admitted its inability to pay its debts as they come due, or made an offer of settlement, extension, or compromise to its creditors generally. 8.6. No Leases, etc. There are no leases of the Property, no management or leasing agreements, and to Seller's knowledge no other contracts or permits that affect the Property other than those provided pursuant to Paragraph 4.6 of this Agreement. 8.7. Hazardous Materials. To Seller's knowledge and except as disclosed by Seller to Buyer in writing, there are no Hazardous Materials (as defined in Paragraph 26 below) located on or under the Property. 8.8. Seller's Knowledge. The term "Seller's knowledge" or similar phrases, as used in this Agreement, shall refer to the actual, present knowledge of Scott Buchanan, V.P. and CFO and Keith Kennedy, CEO for Seller, as of the date of this Agreement and as of Close of Escrow without any duty of investigation or inquiry of any kind or nature whatsoever. There are no individual employees of Seller that to Seller's reasonable knowledge are more knowledgeable about the Property than the above listed individual. 8.9. Violation of Law: Notices: To Seller's knowledge, no part of the Property is in violation of any governmental order, regulation, statute, ordinance, rule or -7- restriction dealing with the use, operation, safety or maintenance thereof, and Seller has received no notices from any governmental authority or insurance carriers requiring repairs or alterations to the Property. 9. Indemnity. Each party hereby agrees to indemnify, defend, and hold the other party harmless from and against any and all claims, demands, liabilities, costs, expenses, damages, and loss (including, without limitation, attorneys' fees and costs) resulting from any misrepresentation or breach of warranty made by such party in this Agreement. This indemnity shall continue in effect and survive Close of Escrow, the waiver of any conditions to Closing set forth herein, and the conveyance and delivery of title, or, if title is not transferred pursuant to this Agreement, beyond any termination of this Agreement, except as otherwise provided in Paragraph 12 below. 10. Risk of Loss. The parties agree in the event that, prior to Closing, any improvements located on the Property, or any part thereof, are destroyed or materially damaged, the transaction shall go forward without any adjustment to the Purchase Price, but Buyer shall be entitled to any available insurance proceeds resulting from such damage or destruction to be paid to Buyer by Seller at the Close of Escrow (if received by Seller prior to Close of Escrow), or after the Close of Escrow by Seller or the insurer ("Insurance Proceeds") and a credit for Seller's insurance deductible. Seller agrees to maintain its property damage insurance on the Property up through the Closing Date. 11. Possession. Seller shall deliver possession of the Property to Buyer, free and clear of any tenancies or contracts or rights of third parties not previously approved in writing by Buyer as a part of this Agreement as well as cleared of all vehicles and personal property upon Close of Escrow. 12. Default. In the event that the sale of the Property fails to close as a result of a default of Seller, Buyer may, as its sole and exclusive remedy, elect to either: (a) enforce the terms of this Agreement by action for specific performance, but with no reduction in the Purchase Price; provided, however, that no action for specific performance shall compel Seller to commence litigation or cure or deal with any matters outside of its reasonable control or expend funds as to such matters; or (b) terminate this Agreement, in which event the Deposit shall be returned to Buyer, and the parties shall be released from all further obligations and liability under this Agreement except as otherwise specifically provided in this Agreement and Buyer's right to seek reimbursement of its due diligence costs not to exceed One Hundred Thousand and no/100 Dollars ($100,000.00). Under no circumstances of any nature whatsoever shall Buyer have any right to collect damages, whether actual, punitive, consequential or otherwise, from Seller under this Agreement except actual damages for breach of representations or warranties under this Agreement discovered after the Close of Escrow or covenants expressly intended to survive Close of Escrow. In the event that the sale of the Property fails to close on or before the Closing Date for any reason other than default on the part of Seller, or a failure of a Buyer condition set forth in -8- Paragraph 5, Seller shall retain the Deposit and all interest earned thereon as liquidated damages, it being understood that Seller's actual damages in such event are difficult to ascertain and that such proceeds represent the parties' best current estimate of such damages. 13. Liquidated Damages. BY PLACING THEIR INITIALS IMMEDIATELY BELOW, BUYER AND SELLER AGREE THAT IT WOULD BE IMPRACTICABLE OR EXTREMELY DIFFICULT TO FIX ACTUAL DAMAGES IN THE EVENT ESCROW FAILS TO CLOSE ON ACCOUNT OF A DEFAULT BY BUYER, THAT THE SUM OF BUYER'S DEPOSIT IS THE PARTIES' REASONABLE ESTIMATE OF SELLER'S DAMAGES IN THE EVENT OF BUYER'S DEFAULT, AND THAT IN THE EVENT BUYER FAILS TO TIMELY PURCHASE THE PROPERTY IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT BECAUSE OF A DEFAULT BY BUYER, SELLER SHALL BE RELEASED FROM ITS OBLIGATION TO SELL THE PROPERTY, AND SELLER SHALL BE ENTITLED TO RETAIN BUYER'S DEPOSIT AND ALL INTEREST EARNED THEREON AS LIQUIDATED DAMAGES. SELLER'S INITIALS ___ BUYER'S INITIALS ___ 14. No Commissions. Except as to Mark T. Ziemendorf and James Beeger of Cornish & Carey Commercial, Santa Clara, California ("Broker"), representing Seller, neither party has had any contact or dealings regarding the Property, or any communication in connection with the subject matter of this transaction, through any licensed real estate broker or other person who can claim a right to a commission or finder's fee as a procuring cause of the sale contemplated herein. Seller shall be responsible for any commission to Broker. In the event that any broker or finder other than Broker asserts a claim for a commission or a finder's fee based upon any contract, dealings, or communication, the party through whom the broker or finder makes his claim for a commission or fee shall be responsible for said commission or fee and shall indemnify and hold harmless as to all claims, liabilities, costs, and expenses (including without limitation as to attorneys' fees and court costs) suffered or incurred by the other party in defending against same. 15. Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. 16. Attorneys' Fees. In the event either party hereto fails to perform any of its obligations under this Agreement or in the event a dispute arises concerning the meaning or interpretation of any provision of this Agreement, the defaulting party or the party not prevailing in such dispute, as the case may be, shall pay any and all costs and expenses incurred by the other party in enforcing or establishing its rights hereunder, including, without limitation, court costs and attorneys' fees. 17. Time. Time is of the essence of this Agreement as to each and every provision hereof. -9- 18. Notices. All notices or other communications to be given hereunder shall be in writing and shall be deemed received when personally delivered by commercial courier, including an overnight courier such as Federal Express, or upon confirmation of receipt when given by telecopy or facsimile to the addressee and facsimile number(s) set forth below or otherwise, or three (3) business days after deposit in the United States certified mail, return receipt requested, postage prepaid, addressed as follows: If to Seller: Copy to: Watkins-Johnson Company Garth E. Pickett, Esq. Stanford Research Park Hopkins & Carley 3333 Hillview Avenue 2 West Santa Clara Street, 6th Flr. Palo Alto, California 94304-1223 San Jose, California 95113-1824 Attn: Scott Buchanan Tele: (408) 286-9800 Tele: (650) 813-2742 Fax: (408) 998-4790 Fax: (650) 813-2545 If to Buyer: Copy to: Lincoln Property Company William D. Powell, Esq. Commercial Inc. Powell, Sweet & Coleman 1750 Montgomery Street 8080 North Central Expressway San Francisco, CA 94111 Suite 1380 Attention: John S. Herr Dallas, TX 75206 Tele: (415) 788-3000 Tele: (214) 373-8781 Fax: (415) 954-8586 Fax: (214) 373-8768 Lincoln Property Company 500 North Akard Suite 3300 Dallas, TX 75201 Attention: Gregory Courtwright Tele: (214) 740-3300 FAX: (214) 740-3460 Any party may change its address for the purpose of this paragraph by giving written notice of such change to the other party in the manner herein provided. 19. Entire Agreement. This Agreement expresses the entire agreement of the parties and supersedes any and all previous agreements between the parties with regard to the Property. There are no other understandings, oral or written, which in any way alter or enlarge its terms, and there are no warranties or representations of any nature whatsoever, -10- either express or implied, except as set forth herein. Any future modification of this Agreement will be effective only if it is in writing and signed by the party to be charged. 20. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 21. Waiver. The waiver by either party of a breach of any provision of this Agreement shall not be deemed a continuing waiver or a waiver of any subsequent breach, whether of a like nature or otherwise. 22. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but such counterparts together shall constitute only one agreement. 23. Headings. The paragraph and subparagraph headings throughout this Agreement are for convenience and reference only, and the words contained therein shall not be held to expand, modify, amplify or aid in the interpretation, construction or meaning of this Agreement. 24. Survival. All representations and warranties by the respective parties contained herein or made in writing pursuant to this Agreement are intended to and shall remain true and correct as of the Closing, shall be deemed material and shall survive the execution and delivery of this Agreement, the Closing, the delivery of the Grant Deed and the transfer of title, or, if title is not transferred pursuant to this Agreement, beyond any termination of this Agreement. 25. Further Assurances. Each party hereto agrees to execute such other documents or instruments as are necessary or appropriate to effectuate this Agreement and consummate the transaction provided herein promptly upon request therefor. 26. "As Is" Clause. EXCEPT AS TO THOSE SPECIFIC REPRESENTATIONS AND WARRANTIES BY SELLER IN THIS AGREEMENT, BUYER SPECIFICALLY ACKNOWLEDGES THAT SELLER IS SELLING AND BUYER IS PURCHASING THE PROPERTY ON AN "AS IS WITH ALL FAULTS" BASIS AND THAT BUYER IS NOT RELYING ON ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, FROM SELLER, ITS AGENTS, OR BROKERS AS TO ANY MATTERS CONCERNING THE PROPERTY, INCLUDING WITHOUT LIMITATION: (i) the quality, nature, adequacy, and physical condition of the Property, including, but not limited to, the quality, nature, adequacy, and physical condition of soils, geology and any groundwater, (ii) the existence, quality, nature, adequacy, and physical condition of utilities serving the Property, (iii) the development potential of the Property, and the Property's use, habitability, merchantability, or fitness, suitability, value or adequacy of the Property for any particular purpose, (iv) the zoning or other legal status of -11- the Property or any other public or private restrictions on use of the Property, (v) the compliance of the Property or its operation with any applicable codes, laws, regulations, statutes, ordinances, covenants, conditions and restrictions of any governmental or quasi-governmental entity or of any other person or entity, (vi) the presence or removal of Hazardous Materials under or about the Property or the adjoining or neighboring property; and (vii) the condition of title to the Property. The term "Hazardous Materials" shall mean any hazardous or toxic materials, substances or wastes, such as (A) those materials identified in Sections 66680 through 66685 and Sections 66693 through 66740 of Title 22 of the California Administrative Code, Division 4, Chapter 30, as amended from time to time, (B) those materials defined in Section 25501 of the California Health and Safety Code, (C) any materials, substances or wastes which are toxic, ignitable, corrosive or reactive and which are regulated by any local governmental authority, any agency of the state of California or any agency of the United States Government, (D) asbestos, (E) petroleum and petroleum based products, (F) urea formaldehyde foam insulation, (G) polychlorinated biphenyls (PCBs), and (H) freon and other chlorofluorocarbons. Buyer further represents and warrants that it has performed to the extent it deems appropriate investigations and inspections of the Property, and has satisfied itself to the extent it deems appropriate as to the condition of the Property and its suitability for the purposes intended by Buyer. "As Is" shall include but not be limited to, except as to any representation or warranty set forth in the Agreement, the Property's present state and condition, including, without limitation, as to toxic or hazardous materials, and that any and all improvements and utilities required within the perimeter of the Property ("On-site") and any and all improvements, utilities, and utility extensions outside the perimeter of the Property ("Off-site") required to serve the Property, and all costs and expenses thereof, shall be the sole responsibility of Buyer. In purchasing the Property, Buyer is relying solely upon its own inspection and investigation of the Property, including, without limitation, as to toxic or hazardous materials contamination, and except as expressly provided in or pursuant to this Agreement, not upon any representation, warranty, statement, study, report, description, guideline, or other information or material made or furnished by Seller or any of its officers, employees, agents, brokers, attorneys, or representatives, whether written or oral, express or implied, of any nature whatsoever. 27. Condition of Property. Buyer acknowledges and understands that Seller's Broker has disclosed that the Property may be situated within (i) an Earthquake Fault Zone as so designated under the Alquist-Priolo Earthquake Fault Zoning Act, Section 2621 et. seq. of the California Public Resources Code; and/or (ii) a Seismic Hazards Zone as so designated under the Seismic Hazards Mapping Act, Section 2690 et. seq. of the California Public Resources Code (collectively herein referred to as the "Seismic Disclosure Acts"); and (iii) a 100 year flood zone or potentially other special flood hazard area. Buyer acknowledged that it has had delivered by Seller's agents the Commercial Property Owner's Guide to Earthquake Safety, published by the State of California Seismic Safety Commission. Buyer hereby waives any seismic or flood zone disclosure requirements imposed on Seller by California law. -12- 28. Limited Liability. Buyer and Seller, on behalf of their respective partners, directors, officers, representatives, successors, and assigns, hereby agrees that in no event or circumstance shall any of the partners, members, directors, officers, representatives or employees of the other party and/or any related or affiliated entities thereof, have any personal liability under or in connection with this Agreement, to the other party or its creditors in connection with Buyer's purchase of the Property, or this Agreement. 29. Confidentiality. Prior to Closing, each party agrees to keep the terms of this Agreement confidential except that Buyer may disclose the terms hereof to its consultants and advisors and further as required to be disclosed in connection with its inspection and development approvals or by applicable laws and to its investors and lender and prospective tenants. 30. Exclusive Period. Seller agrees not to negotiate with any other party as a back up offer to the purchase and sale of the Property so long as Buyer is proceeding with and not in breach of the terms of this Agreement, except that if unsolicited requests for information occur, Seller may provide an offering package and if an offer is submitted, Seller will respond to the offer that the offer, if acceptable, will be considered as a backup offer to this Agreement. 31. Road Dedication. The Property has a portion of a road known as Component Drive which will eventually be dedicated to the City of San Jose. Buyer agrees as the owner of the Property to honor this obligation agreed to by Seller to dedicate to the City of San Jose that portion of Component Drive as set forth in Exhibit B attached hereto. 32. Approval. Upon Buyer's execution of this Agreement, Seller shall have two (2) business days in which to approve this Agreement. Failure to timely delivery of an executed agreement by Seller to Buyer shall be deemed rejected and Buyer's offer will be deemed withdrawn as of the rejection by Seller if no election by Buyer within two (2) business days thereafter. 33. Business Days. If the final day of any period or any date of performance under this Agreement falls on a Saturday, Sunday or legal holiday under the laws of the State of California or the United States, then the final day of the period or the date of performance shall be extended to the second consecutive day which is not a Saturday, Sunday or legal holiday. -13- Executed as of the date first set forth above. SELLER BUYER WATKINS-JOHNSON COMPANY, LINCOLN PROPERTY a California Corporation COMPANY COMMERCIAL, INC., a Texas Corporation /s/ Scott G. Buchanan /s/ John S. Herr - ----------------------------------- ----------------------------------- By: Scott B. Buchanan By: John S. Herr Its: Vice President and Its: Executive Vice President Chief Financial Officer By: /s/ W. Keith Kennedy By: /s/ John S. Herr ---------------------------- ---------------------------- Its: President and CEO Its: Executive Vice President -14- EX-10.30 6 AGREEMENT FOR ASSIGNMENT OF LEASEHOLD INTEREST Exhibit 10.30 AGREEMENT FOR ASSIGNMENT OF LEASEHOLD INTEREST, SUBLEASE OF PROPERTY, LEASEBACK OF REAL PROPERTY AND JOINT ESCROW INSTRUCTIONS This AGREEMENT FOR ASSIGNMENT OF LEASEHOLD INTEREST, SUBLEASE OF PROPERTY, LEASEBACK OF REAL PROPERTY, AND JOINT ESCROW INSTRUCTIONS (the "Agreement") is made and entered into as of this 30th day of September, 1999, by and between the Board of Trustees of the Leland Stanford Junior University, a body having corporate powers under the laws of the State of California ("Buyer") and WATKINS-JOHNSON COMPANY, a California corporation, whose address is Stanford Research Park, 3333 Hillview Avenue, Palo Alto, California, 94304-1204, Attention: Scott G. Buchanan, CFO, Facsimile No. (650) 813-2960 ("Seller"). R E C I T A L S: A. By that certain Lease dated November 1, 1959, as amended (the "Master Lease") Buyer leased certain unimproved real property consisting of approximately sixteen and three hundred five-one thousandths (16.305) acres, located in the City of Palo Alto, County of Santa Clara, identified as Santa Clara County Assessor's Parcel Number 142-17-014, commonly known as 3333 Hillview Avenue, Buildings 3, 4, and 5, and more particularly described in Exhibit A, which is attached hereto and incorporated herein by reference (the "Leased Land"), to Kern County Land Company, a California corporation, predecessor in interest to Seller. Under Section 31 of the Master Lease (as amended by Section 6 of the Agreement Amending Ground Lease dated September 15, 1997) Buyer has a right of first refusal with respect to any proposed assignment or sublease to a third party of Seller's rights thereunder (the "Stanford First Refusal"). A copy of the Master Lease is attached hereto as Exhibit B and incorporated herein by reference. B. Seller has caused to be constructed upon the Leased Land certain improvements consisting of three (3) light industrial buildings containing in the aggregate approximately one hundred fifty-five thousand (155,000) gross square feet (collectively referred to herein as the "Buildings"). C. By that certain Commercial Sub-Sublease (Buildings 3/4/5), dated as of ___________________, 1997, as amended (the "Sublease"), Seller has subleased portions of the Leased Land and the Buildings (the "Subleased Premises") to W-J TSMD, INC., a California corporation, doing business as Stellex. A copy of the Sublease is attached hereto as Exhibit C and incorporated herein by reference. D. By that certain Lease and Agreement, dated October 31, 1975 (the "Morrco Lease"), Seller is also the tenant in possession of that certain improved real property located adjacent to the Leased Land in the City of Palo Alto, County of Santa Clara, consisting of approximately eight and four hundred forty-three one thousandths (8.443) acres, which property is identified as Santa Clara County Assessor's Parcel Number 142-17-020, commonly known as 3333 Hillview Avenue, Building 6, and more particularly described in Exhibit D, which is attached hereto and incorporated herein by reference (the "Building 6 Property"). E. Seller has entered into a contract to assign its rights under the Master Lease to Higgins Development Partners, LLC ("Higgins") under an Agreement for Assignment for Leasehold Interest, Sublease of Property, Leaseback of Real Property and Joint Escrow Instructions dated August 25, 1999 as amended on September 13, 1999 ("Higgins Agreement"), subject to the Stanford First Refusal. F. Pursuant to notice from Susan B. Meaney, Managing Director of Real Estate, Stanford Management Company, dated September 27, 1999 Buyer has exercised the Stanford First Refusal. G. Accordingly, Seller desires to assign its rights under the Master Lease to Buyer and Buyer desires to assume all of Seller's obligations under the Master Lease. In connection with the foregoing, commencing upon the Closing and continuing for a period of two (2) years thereafter (the "License Term"), Seller desires to grant to Buyer, and Buyer's successors and assigns, and Buyer desires to grant to Seller, and Seller's successors and assigns, a mutual and reciprocal, revocable, non-exclusive license to use those portions of the driveway described in Exhibit E attached hereto and incorporated herein by reference (the "Driveway"), which are located on the Building 6 Property for purposes of ingress and egress to the Leased Land and those portions of the Driveway that are located on the Leased Land for purposes of ingress and egress to the Building 6 Property. H. Seller has entered into a Remediation Agreement dated July 13, 1999 (the "Remediation Agreement") with SECOR International Incorporated ("Consultant") under the terms of which Consultant will provide professional environmental services fulfilling Seller's obligations with respect to site remediation and closure of the Property. A copy of the Remediation Agreement is attached hereto as Exhibit F and incorporated herein by reference. In connection with the foregoing, Seller has purchased "Cleanup Cost Cap" insurance and "Pollution Legal Liability" insurance (collectively referred to herein as the "Environmental Insurance") for the benefit of Seller, Seller's successors in interest to the Property, Consultant, and Buyer. I. Subject to Seller's Option to Terminate (as defined in Section 4(c) below), Seller desires to assign its rights under the Master Lease to Buyer, whereupon Seller shall be released and relieved from further liability under the Master Lease, and to thereupon leaseback the Leased Land and the Buildings from Buyer until October 31, 2000 (the -2- "Leaseback Expiration Date"), and Buyer desires to assume all of Seller's obligations under the Master Lease and to leaseback the Property to Seller, upon the terms and conditions set forth in this Agreement. NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Buyer and Seller hereby agree that the terms and conditions of this Agreement and the instructions to First American Title Guaranty Company ("Escrow Holder") with regard to the escrow ("Escrow") created pursuant hereto are as follows: AGREEMENT: 1. Certain Basic Definitions. For purposes of this Agreement, the following terms shall have the following definitions: (a) "Business Day" means any day that is not (i) a Saturday, Sunday, (ii) a holiday as defined in the California Government Code, or (iii) an optional bank holiday as defined in Section 7.1 of the California Civil Code. (b) "Closing Date" means the date upon which the "Close of Escrow" (as defined in Section 1(c) below) shall occur. (c) "Close of Escrow" means the date that the documents evidencing the transfers contemplated by this Agreement are recorded in the Official Records and/or delivered to the parties entitled thereto. (d) "Contingency Period" means the period commencing upon the date of full execution of this Agreement and ending upon the first of the following dates to occur (the "Contingency Removal Date"): (i) the date of Buyer's removal of the due diligence contingency (the "Early Contingency Removal Date"); or (ii) 5:00 p.m. on September 20, 1999 (the "Final Contingency Removal Date"). (The actual date of the removal of contingencies by Buyer, whether upon an Early Contingency Removal Date or upon the Final Contingency Removal Date, shall be referred to herein as the "Contingency Removal Date"). (e) "Deposit" means the amount of two million five hundred thousand dollars and no cents ($2,500,000.00). (f) "Escrow Holder" or "Title Company" means First American Title Guaranty Company. -3- (g) "Escrow Holder's Address" means: Escrow Number 516364 Attention: Ms. Peg Larkin First American Title Guaranty Company 1737 North First Street San Jose, California 95112 Facsimile No.: (408) 451-7836 Telephone No.: (408) 451-7828 (h) "Final Closing Date" shall mean the later to occur of the following dates: (i) September 30, 1999. (i) "Property" means, except as set forth in the next sentence, all of Seller's rights to the Leased Land and to the Buildings, together with all rights, title, and interest possessed by Seller pertaining to the Leased Land and/or the Buildings in each of the following: (i) legal and equitable rights of way, easements, servitudes, appurtenances, mineral rights, licenses, development rights, air rights, and water rights; (ii) improvements other than the Buildings, if any; and (iii) all licenses, permits, consents, entitlements, and approvals issued by authorized governmental entities. Notwithstanding the foregoing, Buyer's right to enter the Building 6 Property for purposes of ingress and egress to the Leased Land shall be only as set forth in the Driveway License (as defined in Section 13(g) of this Agreement). (j) "Purchase Price" means the sum of fifty-nine million dollars and no cents ($59,000,000.00), unless Seller fails to timely exercise the Early Exit Option (as defined in Section 8(c) below), in which case the Purchase Price shall be fifty-six million dollars and no cents ($56,000,000.00) (the "Adjusted Purchase Price"). (k) "Official Records" means the office of the County Recorder of Santa Clara, State of California. (l) "Opening of Escrow" shall have the meaning set forth in Section 4(a) below. (m) "Seller's Counsel's Address" means: Garth E. Pickett, Esq. Hopkins & Carley, ALC PO Box 1469 San Jose, California 95109-1469 Facsimile No.: (408) 998-4790 Telephone No.: (408) 286-9800 -4- (n) "Buyer's Counsel's Address" means: Carol K. Dillon, Esq. McCutchen, Doyle, Brown & Enersen, LLP 3150 Porter Drive Palo Alto, CA 94304 Facsimile No.: (650) 849-4800 Telephone No.: (650) 849-4812 (o) "Hazardous Materials" means any hazardous or toxic materials, substances or wastes, as so defined or classified as of the date of execution of this Agreement, including without limitation: (i) those materials identified in Sections 66260.1, et seq. of Title 22 of the California Administrative Code, Division 4.5, Chapters 10 and 11, as amended from time to time, (ii) those materials defined in Section 25501 of the California Health and Safety Code, (iii) any materials, substances or wastes which are toxic, ignitable, corrosive or reactive and which are regulated by any local governmental authority, any agency of the State of California or any agency of the United States Government, (iv) asbestos, (v) petroleum and petroleum based products, (vi) urea formaldehyde foam insulation, (vii) polychlorinated biphenyls (PCBs), and (viii) freon and other chlorofluorocarbons. (p) "Site Closure Certification" means and shall collectively refer to any site closure certification(s) concerning the Property that Seller and/or Stellex is required to obtain from the City of Palo Alto Fire Department and any other governmental agency having jurisdiction thereof (collectively referred to herein as the "Certifying Agencies") before possession of the Property, and/or any portions thereof, may legally be surrendered by Seller. (q) "Closure Certification Date" means either: (i) the date upon which all Site Closure Certification(s) shall have been obtained by Seller and/or Stellex; or (ii) if a Site Closure Certification is not legally required in connection with the surrender of possession of the Property to Buyer by Seller and Stellex, then Closure Certification Date shall mean the date upon which Seller and/or Consultant (as defined herein) shall have delivered to Buyer and to any Certifying Agencies a letter from Consultant certifying same. 2. Sale of Property; Consideration. At the Close of Escrow, the Purchase Price shall be delivered to Seller, Seller shall transfer, assign, and convey the Property to Buyer, and Buyer shall acquire the Property from Seller on the terms and conditions set forth in this Agreement. 3. Payment of Purchase Price. The Purchase Price shall be paid by Buyer as follows: (a) Deposit. Simultaneous with Buyer's execution of this Agreement, Buyer shall deliver the Deposit, or cause the Deposit to be delivered, to the Escrow Holder, -5- in either of the following forms: (i) in cash, by certified or bank cashier's check made payable to Escrow Holder, or by a confirmed wire transfer of funds (hereinafter referred to as "Immediately Available Funds"); or (ii) an unconditional irrevocable special Letter of Credit made payable to Escrow Holder (the "Letter of Credit"). 1. Interest On Deposit. If Buyer elects to deliver the Deposit to Escrow Holder in the form of Immediately Available Funds, Escrow Holder shall place such funds into an interest bearing account approved by Buyer. Any interest earned on the Deposit shall be added to the principal amount of the Deposit and become part of the Deposit and shall be credited towards the Purchase Price upon the Close of Escrow. 2. Terms of the Letter of Credit. The Letter of Credit shall be (i) in a form reasonably satisfactory to Seller; (ii) shall not terminate or expire prior to July 31, 2000; and (iii) shall be issued by a bank authorized to do business in the State of California, which (x) is a member of the Federal Reserve banking system, (y) has a teller window for receiving cash deposits located within the County of Santa Clara, California, and (z) is otherwise reasonably acceptable to Seller. Escrow Holder shall hold the Letter of Credit for the benefit of both Seller and Buyer, subject to the terms of this Agreement. 3. Escrow Holder to Draw Upon Letter of Credit. If Buyer elects to deliver the Deposit to Escrow Holder in the form of a Letter of Credit, unless this Agreement shall have previously been terminated on or before the Final Contingency Removal Date in accordance with the terms of this Agreement, Escrow Holder shall, on the first (1st) business day following the Contingency Removal Date, at the sole cost and expense of Buyer, submit the Letter of Credit to the issuing bank thereof for payment in full of the face amount thereof. All funds received by Escrow Holder in satisfaction of the Letter of Credit shall replace the Letter of Credit as the Deposit herein, and shall be held by the Escrow Holder subject to the terms of this Agreement. 4. Buyer's Right to Substitute Immediately Available Funds. Buyer shall have the right, at any time prior to the Contingency Removal Date, to replace the Letter of Credit by delivering to the Escrow Holder Immediately Available Funds in the amount of the Deposit, whereupon Escrow Holder shall deliver the original Letter of Credit to Buyer free from any claim by Escrow Holder or Seller. 5. Deposit Non-Refundable on Contingency Removal Date. Upon the Contingency Removal Date, the Deposit shall become non-refundable, except as otherwise provided in this Agreement. Failure to timely pay any installment of the Deposit when due shall be an event of default by Buyer under this Agreement. 6. Deposit as Liquidated Damages. The Deposit (including any interest accrued thereon) shall be retained by Seller as liquidated damages pursuant to Section 16 hereof, if the Close of Escrow does not occur by the Final Closing Date as a result -6- of Buyer's default. If the Close of Escrow does not occur for any reason other than Buyer's default, the Deposit shall be returned to the Buyer. (b) Closing Funds. At least one (1) business day prior to the Close of Escrow, Buyer shall deposit or cause to be deposited with Escrow Holder, in Immediately Available Funds, the balance of the Purchase Price, plus Escrow Holder's estimate of Buyer's share of closing costs, prorations, and charges payable by Buyer pursuant to this Agreement. 4. Escrow. (a) Opening of Escrow. For purposes of this Agreement, the Escrow shall be deemed opened on the date Escrow Holder shall have received a fully executed original or originally executed counterparts of this Agreement from Buyer and Seller (the "Opening of Escrow"), together with Buyer's payment of the Deposit. Buyer and Seller agree to execute, deliver and be bound by any reasonable supplemental escrow instructions of Escrow Holder or other instruments as may reasonably be required by Escrow Holder in order to consummate the transactions contemplated by this Agreement. Any such supplemental instructions shall not conflict with, amend or supersede any portions of this Agreement unless expressly consented or agreed to in writing by Buyer and Seller. (b) Close of Escrow. The Close of Escrow shall occur not later than the Final Closing Date. (c) Seller's Option to Terminate. Seller, in Seller's sole and absolute discretion, shall have the option to terminate this contract and cancel the escrow established herein ("Seller's Option to Terminate") by delivering written notice thereof to Buyer and Escrow Holder (the "Termination Option Notice"), whereupon escrow shall cancel and this contract shall terminate, without further obligation to Buyer on the part of Seller, upon the following terms and conditions: 1. Time for Exercise of Option. Seller's Option to Terminate shall expire at 6:00 p.m. Pacific Daylight Time upon the first to occur of the following dates (the "Option Expiration Date"): (i) the first (1st) business day following the Final Contingency Removal Date (whether or not there shall have been established an Early Contingency Removal Date); or (ii) the second (2nd) business day immediately preceding the Final Closing Date. 2. Effect of Exercise of Option. Notwithstanding any other provision of this Agreement, if Seller shall exercise Seller's Option to Terminate, the Escrow Holder shall refund to Buyer all deposits theretofore paid by Buyer pursuant to this Agreement and Seller shall pay any fees charged by Escrow Holder as the result of the cancellation of escrow. -7- 3. Payment of Buyer's Inspection Costs. If this Agreement should be terminated and escrow canceled prior to the Contingency Removal Date for any reason other than default hereunder on the part of Buyer, Seller shall pay to Buyer the amount of one hundred thousand dollars and no cents ($100,000.00). 5. Condition of Title. Buyer shall accept title to the Property subject to the standard printed exceptions to such title policy and the following matters ("Approved Conditions of Title"): (a) Any lien to secure payment of general and special real property taxes and assessments, not delinquent (collectively, "Special Taxes"); (b) All exceptions which are disclosed by the Preliminary Report Number 516364 ("Preliminary Report") dated as of July 20, 1999 at 7:30 a.m. prepared by Title Company. A copy of the Preliminary Report is attached hereto as Exhibit G and incorporated herein by reference; (c) The Master Lease; (d) The New Lease (as defined in Section 8(c)); (e) The Sublease; and (f) All matters created by or with the written consent of Buyer. 6. Title Policy. (a) Owner's Policy. It shall be a condition to the Close of Escrow for Buyer's benefit, upon Buyer's sole election, that the Title Company shall be irrevocably committed to issue, upon payment of its normal premium, its CLTA Leaseholder's Form Policy of Title Insurance or binder with a CLTA Endorsement 116.7 or its equivalent, in the amount of the Purchase Price, insuring that the Property does not violate the California Subdivision Map Act or any local ordinances adopted pursuant thereto ("Buyer's Title Policy") showing the lessee's interest under the Master Lease in the Leased Land vested in Buyer free and clear of any interest of Seller, and otherwise in the Approved Condition of Title. (b) Additional Coverage. Buyer may, at its option, request an Extended Coverage ALTA Leaseholder's Form Policy of Title Insurance with additional endorsements that may be required ("ALTA Policy") and endorsements, provided that the issuance of said ALTA Policy or endorsements does not extend or delay the Contingency Period or the Close of Escrow, and any additional costs, including, but not limited to, title and endorsement fees and ALTA survey costs incurred in connection with the issuance of such ALTA Policy shall be the requesting party's sole responsibility. The willingness to issue or issuance by the Title -8- Company of Buyer's Title Policy shall be conclusive evidence that Seller has complied with the obligation to convey good and marketable title to the Property. 7. Conditions to Close of Escrow. (a) Conditions to Buyer's Obligations. Buyer's obligation to consummate the transaction contemplated by this Agreement is subject to the satisfaction of the following conditions on or prior to the dates designated below for the satisfaction of such conditions (or Buyer's written waiver thereof, it being agreed that Buyer may waive any or all of such conditions). (i) Inspection and Studies. Buyer's approval of the physical and environmental condition of the Property, in its sole and absolute discretion, and the results of any architectural, engineering, geologic, use, development or other feasibility studies that Buyer chooses to perform, at Buyer's sole cost and expense, prior to the expiration of the Contingency Period as follows: (A) Buyer and its representatives shall have the right to carry out physical inspections of the Property and to undertake any architectural, engineering, environmental, soils or other studies of the Property immediately after the Opening of Escrow, provided that Buyer gives Seller not less than twenty-four (24) hours prior notice of its intended inspection(s). Buyer's physical inspection of and/or testing on the Property shall be conducted during normal business hours at times mutually acceptable to Buyer and Seller. No invasive testing or boring shall be done without prior written notification to Seller and Seller's written permission of the same, which Seller may withhold in its reasonable discretion. Notwithstanding any other provision of this Agreement, not less than three (3) days prior to commencing any such investigations or inspections, Buyer shall submit to Seller for review and approval a work plan (the "Work Plan") describing any and all proposed environmental due diligence work to be conducted on the Property by Buyer or Buyer's authorized representatives (such as the collection of soil or groundwater samples or similar tests involving the penetration of the surface or subsurface of the Property) and any testing of the Buildings or other improvements for environmental considerations or otherwise, (all hereinafter the "Work"), and shall secure any permits required for such Work. It shall be reasonable for Seller to withhold its consent to any proposed Work Plan, which does not require Buyer and/or Buyer's representatives to carry the insurance required in Section 7(a)(i)(D) below. In addition, Seller, in its reasonable discretion, shall have the right to request in writing modifications to the Work Plan within two (2) business days of its receipt thereof. Seller's failure to request in writing modifications in the Work Plan within said two (2) business day period shall be deemed Seller's approval of the Work Plan. If Buyer and Seller are unable to agree upon the scope and content of the Work Plan, Buyer may terminate this Agreement in the manner provided below. Buyer shall not enter the Property or commence the Work prior to Seller's approval of the Work Plan. Any material modification of, or deviation from, the approved Work Plan shall require Seller's prior written consent. Seller shall have the right to be present during Work on the Property and -9- Buyer shall provide Seller with split samples of all samples taken for testing, at Seller's request. Promptly following completion of the Work, Buyer shall, at its sole cost and expense, remove from the Property any and all wastes or drill cuttings generated from its activities and restore the Property to its condition as it existed immediately prior to Buyer's entry to the Property, to the extent reasonably practicable. Buyer shall use reasonable care and consideration in connection with any of the Work. (B) Buyer shall protect, indemnify, defend (with counsel reasonably acceptable to Seller) and hold Seller and Seller's officers, directors and employees, free and harmless from and against any and all claims, damages, liens, stop notices, liabilities, losses, costs and expenses, including reasonable attorneys' fees and court costs, resulting from Buyer's entry onto the Property and inspection and testing pursuant to Section 7(a)(i)(A), including, without limitation, repairing any and all physical damage to any portion of the Property caused by Buyer or its representatives. Buyer's indemnification obligations set forth herein shall survive the Close of Escrow and shall survive the termination of this Agreement and Escrow prior to the Close of Escrow. (C) Immediately after the Opening of Escrow, Buyer and its representatives shall be provided with reasonable access to Seller's files and documents pertaining to or affecting the physical and environmental condition of the Property, which Seller will make available to Buyer and its representatives (including environmental reports, if any), except for appraisals and financial analyses generated by or made on behalf of Seller and those documents which are protected by the attorney-client and/or attorney work product privileges. Such files and documents shall be made available to Buyer and its representatives, upon reasonable prior notice to Seller, during normal business hours. Buyer shall rely solely upon its own independent investigation concerning matters contained in such files and/or documents. Without limiting the provisions of this section or Section 13 below, Buyer acknowledges and agrees that Seller does not make any representation or warranty, express or implied, as to the accuracy, content, or completeness of any information contained in Seller's files or in the documents produced by Seller, including, without limitation, any environmental audit or report (if any); provided, however, that to the actual knowledge of Seller (as defined in Section 13 below), none of Seller's files or documents are false or misleading in any material respect. (D) Prior to any entry upon the Property by Buyer or Buyer's agents, contractors, subcontractors or employees, Buyer shall deliver to Seller evidence that Buyer is carrying a commercial general liability insurance policy (including contractual liability) and builder's risk insurance with a financially responsible insurance company acceptable to Seller, covering the activities of Buyer, and Buyer's agents, contractors, subcontractors and employees on or upon the Property. Such insurance policy shall have a per occurrence limit of at least two million dollars and no cents ($2,000,000). If, during the Contingency Period, Buyer determines that it is satisfied, in Buyer's sole and absolute discretion, with all aspects of the Property, and/or its -10- condition or suitability for Buyer's proposed use or development, then Buyer shall deliver written notice thereof to Seller and Escrow Holder on or before the expiration of the Contingency Period. If Buyer fails to deliver any such written notice to Seller and Escrow Holder on or before the expiration of the Contingency Period, then Buyer shall be conclusively deemed to be dissatisfied with the Property and both Seller and Buyer shall be relieved of all further obligations and liabilities under this Agreement, except for the respective rights and obligations of Buyer and Seller set forth in Section 7(a)(i)(B), Section 20, Section 21, Section 22, Section 23(a), and Section 24, which shall survive such termination. (ii) Buyer's Review of Title. As of the Closing Date, Title Company shall be irrevocably committed to issue upon payment of its normal premium Buyer's Title Policy as set forth in Section 6(a). (iii) No Action. As of the Closing Date, no suit, action or other proceeding shall be pending or threatened which seeks, nor shall there exist any judgment the effect of which is, to restrain the transfers hereunder. (iv) Seller's Obligations. As of the Closing Date, Seller shall have performed each and all of its covenants and obligations under this Agreement, within the times provided therefor. (v) Consent of Master Landlord. Intentionally Omitted. (vi) No Material Change. Between the date of this Agreement and the Closing Date, no material change shall have occurred in the environmental or physical condition of the Property. (vii) Reaffirmation of Representations and Warranties. One (1) business day prior to the Closing Date, Seller shall have delivered to Buyer or to Escrow Holder a statement that, as of said date, Seller reaffirms all of its representations and warranties set forth in this Agreement (the "Seller Certificate"), provided that, if matters have come to Seller's attention following the date of execution hereof that result in any of Seller's representations or warranties being false or misleading in any respect, the Seller Certificate may be amended to include such matters coming to Seller's attention (the "Seller Amended Certificate"). Except as otherwise set forth in this Agreement, if the Seller Amended Certificate alters matters set forth in the Seller Certificate in any material respect in Buyer's reasonable discretion, Buyer may elect to treat such condition as having not been satisfied. (b) Conditions to Seller's Obligations. For the benefit of Seller, the Close of Escrow shall be subject to the satisfaction of the following conditions (or Seller's written waiver thereof, it being agreed that Seller may waive any or all of such conditions): -11- (i) Buyer's Obligations. As of the Closing Date, Buyer shall have performed all of its covenants and obligations required to be performed by Buyer under this Agreement, within the time periods provided therefor. (ii) Reaffirmation of Representations and Warranties. One (1) business day prior to the Closing Date, Buyer shall have delivered to Seller a statement that, as of said date, Buyer reaffirms all of its representations and warranties set forth in this Agreement (the "Buyer Certificate") or, if matters have come to Buyer's attention following the date hereof that result in any of Buyer's representations or warranties being false or misleading in any respect, such certificate, amended by such matters coming to Buyer's attention (the "Buyer Amended Certificate"). (c) Deliverables. If the Close of Escrow does not occur for any reason other than a default by Seller, Buyer shall promptly deliver to Seller (no later than fourteen (14) days after the termination of this Agreement) at no cost or expense to Seller (except as otherwise provided in this Agreement), all of the engineering, architectural, and other studies, drawings, reports, surveys, entitlement applications (including but not limited to subdivision and zoning applications and information, if any) of any kind or nature, and similar materials prepared by or on behalf of Buyer with respect to the Property and/or Buyer's proposed use or development of the Property ("Deliverables"), but only to the extent Buyer has any ownership interest in the Deliverables and is not prohibited from providing such copies to third parties pursuant to the provisions of any applicable contracts respecting the Deliverables. Buyer's provision of the Deliverables to Seller shall be without any representation or warranty as to accuracy or correctness of the Deliverables and subject to the agreement of Seller not to rely on the Deliverables. 8. Deposits by Seller. At least one (1) business day prior to the Close of Escrow, Seller shall deposit or cause to be deposited with Escrow Holder the following documents and instruments: (a) Deed to the Buildings. A quitclaim deed to the Buildings (the "Deed") and/or such other title documents as may be reasonably requested by Title Company in order to issue Buyer's Title Policy, duly executed by Seller and acknowledged; (b) The Master Lease Assignment Agreement. An assignment and assumption agreement relating to the Master Lease, in substantially the form attached hereto as Exhibit H and incorporated herein by reference (the "Master Lease Assignment Agreement") duly executed by Seller and acknowledged, whereby Seller assigns to Buyer all of Seller's leasehold interest under the Master Lease and Buyer assumes all of such obligations. Except as otherwise set forth in this Agreement and/or the New Lease, Seller shall indemnify, defend, and hold Buyer harmless from any injury, loss, claims, or damage, including, without limitation, attorneys fees and court costs, arising from obligations under the Master Lease to be performed by Seller prior to the Close of Escrow. -12- (c) The New Lease. Seller, as Tenant, shall have executed and delivered into Escrow for delivery to Buyer, as Landlord, a Facility Leaseback Agreement (the "New Lease"), relating to the Property, which shall be in substantially the form attached hereto as Exhibit I and incorporated herein by reference. The New Lease shall be for a term commencing on the Closing Date and expiring on the Leaseback Expiration Date, and shall provide for the payment by Seller of base rent in the amount of one dollar and no cents ($1.00) per year, together with such additional costs and expenses as are provided therein. Notwithstanding the foregoing, Seller shall have the option for a period of sixty (60) days following the Closing Date to shorten the term of the New Lease, by providing written notice thereof to Buyer and Escrow Holder, whereupon the term of the New Lease shall expire on July 1, 2000 (the "Early Exit Option"). The New Lease shall provide that upon commencement of the term of the New Lease, Seller shall deposit with Escrow Holder a security deposit in the amount of five million dollars and no cents ($5,000,000.00) (the "Security Deposit") as security for the faithful performance by Seller of all of the terms, covenants, and conditions of the New Lease applicable to Seller. Seller shall have the right to deliver the Security Deposit in the form of an irrevocable Letter of Credit (i) in form reasonably satisfactory to Buyer, (ii) which provides that it shall not terminate or expire until the latest to occur of (a) ninety (90) days after the expiration or earlier termination of the New Lease after Tenant has vacated the Property, (b) ninety (90) days after the Closure Certification Date, or (c) the completion of the Additional Environmental Work, as hereinafter defined; (iii) which is issued by a bank authorized to do business in the State of California, which (x) is a member of the Federal Reserve banking system, (y) has a teller window for receiving cash deposits located within the County of Santa Clara, California, and (z) is otherwise reasonably acceptable to Buyer (the "Security Deposit LC"). The Security Deposit LC shall state on its face that is payable to Escrow Holder upon Buyer's certificate to the issuing bank that an event of material default exists under the New Lease beyond applicable cure periods, if any. From time to time throughout the term of the New Lease, Seller may replace and/or renew the Security Deposit LC then acting as the Security Deposit pursuant to this section, with Immediately Available Funds and/or a replacement Security Deposit LC, provided that: (i) such replacement Security Deposit LC or renewal shall be delivered to Escrow Holder on or before the thirtieth (30th) day prior to the expiration of the Security Deposit LC then held by Escrow Holder as the Security Deposit under this section; and (ii) such replacement Security Deposit LC or renewal shall otherwise comply with all terms and conditions of this paragraph pertaining to the original Security Deposit LC. Failure to deliver such a replacement Security Deposit LC and/or renewal within thirty (30) days prior to the expiration of the Security Deposit LC then held as the Security Deposit (except where Seller shall have no remaining monetary obligation to Buyer under the terms of the New Lease) shall constitute an event of default under the New Lease. If Seller defaults under the New Lease, Buyer may (but shall not be required to) use, apply or retain all or any part of the Security Deposit for the payment of any amount which Buyer may spend by reason of such Seller's default or to compensate Buyer for any loss or damage which Buyer may suffer by reason of Seller's default. The rights of Buyer with respect to the Security Deposit shall be in addition to any other rights or remedies which Buyer may possess -13- pursuant to the terms of the New Lease or this Agreement. If Seller elects to deposit the Security Deposit with Escrow Holder in the form of Immediately Available Funds, Escrow Holder shall deposit the Security Deposit into an interest bearing account for the benefit of Seller at a member bank of the Federal Deposit Insurance Corporation with a teller window for the acceptance of deposits located in the county wherein the Property is situated. All interest earned upon the Security Deposit shall be added to principal and become part of the Security Deposit. The Security Deposit, or any remaining balance thereof shall be returned to Seller upon the latest to occur of (i) ninety (90) days after the expiration or earlier termination of the New Lease after Tenant has vacated the Property, (ii) ninety (90) days after the Closure Certification Date, and (iii) the completion of the Additional Environmental Work, as hereinafter defined. (d) The Subordination Agreement. The Subordination Agreement (as defined in Section 14(c) below) duly executed by Seller; (e) Seller's Non-Foreign Status Certificates. A federal FIRPTA Certificate and a California Form 590 (collectively, "Seller's Non-Foreign Status Certificates"), duly executed by Seller; and (f) Other Instruments. Such other instruments and documents as are required under this Agreement. (g) Assignment of Remediation Agreement and Insurance Policy. An assignment of the Remediation Agreement as described in Section 24 in the form attached hereto as Exhibit M and incorporated herein by reference (the "Environmental Assignment") duly executed by Seller. (h) Acknowledgment of Merger of Estates and Termination Lease. Buyer and Seller acknowledge that the Landlord and Tenant Estates under the Master Lease have merged and that effective on the Final Closing Date, the Master Lease shall terminate. An Acknowledgment of Merger of Estates and Termination of Lease Agreement as described herein is in the form attached hereto as Exhibit N and incorporated herein by reference (the "Merger Acknowledgment"). 9. Deposits by Buyer. At least one (1) business day prior to the Close of Escrow, Buyer shall deposit or cause to be deposited with Escrow Holder: (a) Purchase Price. The Purchase Price, less the amount of any deposits previously paid and the accrued interest thereon; (b) Assumption of the Master Lease. The Assignment of Master Lease Agreement duly executed by Buyer and acknowledged; (c) The New Lease. Buyer, as Landlord, shall have executed and delivered into Escrow the New Lease. -14- (d) The Subordination Agreement. The Subordination Agreement (as defined in Section 14(c) below) duly executed by Buyer; and (e) Other Instruments. Such other fees, documents and instruments as are required under this Agreement. (f) Assignment of Remediation Agreement and Insurance Policy. The Environmental Assignment duly executed by Buyer. (g) Acknowledgment of Merger of Estates and Termination Lease. Buyer and Seller acknowledge that the Landlord and Tenant Estates under the Master Lease have merged and that effective on the Final Closing Date, the Master Lease shall terminate. An Acknowledgment of Merger of Estates and Termination of Lease Agreement as described herein is in the form attached hereto as Exhibit N and incorporated herein by reference (the "Merger Acknowledgment"). Buyer shall be responsible for filing all transfer tax affidavits, preliminary change of ownership reports, and other similar documents, relating to the transfer of the Property to Buyer, and Buyer shall indemnify, defend and hold harmless Seller from and against any and all claims, damages, expenses, penalties, and other liabilities resulting from the valuation or other statements contained in such documents. The foregoing obligations of Buyer shall survive the Close of Escrow. 10. Costs and Expenses. The escrow fee of Escrow Holder shall be split 50/50 between Buyer and Seller. Seller shall pay the premium for a Standard Form CLTA owner's policy of title insurance on the Property in the amount of the Purchase Price. Any extra costs arising from additional coverage(s) requested by Buyer, including, without limitation, the extra cost of the premium for an ALTA policy (if requested by Buyer) and/or any special endorsements, shall be paid by Buyer. Any County transfer tax respecting the transfers contemplated herein shall be paid by Seller and any City transfer tax respecting the transfers contemplated herein shall be split 50/50 between Buyer and Seller. Buyer and Seller shall pay, respectively, Escrow Holder's customary charges for document drafting and miscellaneous charges for services requested by such party. If, due to no fault on the part of either Buyer or Seller, Escrow fails to close, Buyer and Seller shall share equally all of Escrow Holder's fees and charges. The parties will cooperate to mitigate the costs of the transfer taxes. 11. Prorations. (a) The following prorations shall be made between Seller and Buyer as of the Close of Escrow on the basis of a thirty (30) day month: None (b) Escrow Statement. At least one (1) business day prior to the Close of Escrow the parties shall agree upon all of the prorations, including rent, to be made and -15- submit a statement to the Escrow Holder (or sign a statement prepared by Escrow Holder) setting forth the same. In the event that any prorations, apportionments or computations made under this section shall require final adjustment, then the parties shall make the appropriate adjustments promptly when accurate information becomes available and either party shall be entitled to an adjustment to correct the same. Any corrected adjustment or proration will be paid in cash to the party entitled thereto. 12. Disbursements and Other Actions by Escrow Holder. Upon the Close of Escrow, Escrow Holder shall perform all of the following in the manner indicated: (a) Prorations. Prorate all matters referenced in Section 11 based upon the statement delivered into escrow signed by the parties. (b) Recording. Cause all recordable documents to be recorded in the Official Records in the order required to issue Buyer's Title Policy and Seller's Title Policy. (c) Funds. Disburse from funds deposited by Buyer with Escrow Holder payment of all items chargeable to the account of Buyer pursuant hereto, including, without limitation, the payment of the Purchase Price to Seller, and disburse the balance of such funds, if any, to Buyer. (d) Title Policies. Issue Buyer's Title Policy to Buyer. (e) Documents to Seller. Deliver to Seller any documents to be delivered to Seller hereunder. (f) Documents to Buyer. Deliver to Buyer the Seller's Non-Foreign Status Certificates, and any other documents to be delivered to Buyer hereunder. (g) The Price Adjustment Account. Upon the Close of Escrow, the Escrow Holder shall withhold the amount of three million dollars and no cents ($3,000,000.00) from the proceeds payable to Seller, which amount shall be deposited into an interest bearing account for the benefit of Seller (the "Price Adjustment Account"). If Seller shall timely provide written notice to Buyer and Escrow Holder that Seller has elected to exercise the Early Exit Option, then the entire balance of the Price Adjustment Account, including all interest earned thereon, shall immediately be paid to Seller out of escrow by the Escrow Holder on account of the Purchase Price, without the necessity of further instruction from either Buyer or Seller, and there shall be no adjustment to the Purchase Price. If Seller fails to timely exercise the Early Exit Option, then Buyer shall so notify Seller and Escrow Holder, whereupon: (i) the entire balance of the Price Adjustment Account, including all interest earned thereon, shall immediately be refunded to Buyer out of escrow by the Escrow Holder, without the necessity of further instruction from either Buyer or Seller; (ii) the Adjusted Purchase Price shall be deemed to be the Purchase Price of the Property for all purposes; and (iii) Escrow Holder shall immediately prepare revised Settlement Statements -16- for execution by both Buyer and Seller reflecting the Adjusted Purchase Price. Buyer and Seller shall take all further actions as may be reasonably requested of them in order to effectuate properly the purpose and intent of this section, including, without limitation approving any escrow instructions which are not inconsistent with this Agreement in connection with distribution of the Price Adjustment Account. 13. Seller's Covenants, Representations, and Warranties. Seller hereby makes the following representations and warranties to Buyer as of the date of this Agreement, each of which is material and being relied upon by Buyer and shall survive the Close of Escrow. The term "actual knowledge of Seller," or similar phrases, as used in this Agreement shall refer to the actual, present knowledge of Scott Buchanan and Roy Smith [Head of Facilities] as of the date of this Agreement without any duty of investigation or inquiry of any kind or nature whatsoever, and "written notice" shall mean written notice actually received at Seller's office. Seller further represents and warrants that the individuals named above are familiar with the Property and likely to have had information relating to the Property come to their attention. (a) Authority. Seller is duly organized and validly existing and in good standing under the laws of the State of California. Seller has the legal right, power and authority to enter into this Agreement and to consummate the transactions contemplated hereby, and the execution, delivery and performance of this Agreement have been duly authorized and no other action by Seller is requisite to the valid and binding execution, delivery and performance of this Agreement. Neither the execution and delivery of this Agreement by Seller, nor performance of any of its obligations hereunder, nor consummation of the transactions contemplated hereby shall conflict with, result in a breach of, or constitute a default under, the terms and conditions of the organizational documents of Seller, or any indenture, mortgage, agreement, instrument or document to which Seller is a party or is bound, or any order or regulation of any court, regulatory body, administrative agency or governmental body having jurisdiction over Seller. All the documents executed by Seller which are to be delivered at the Close of Escrow will be duly authorized, executed, and delivered by Seller. (b) Foreign Person Affidavit. Seller is not a foreign person as defined in Section 1445 of the Internal Revenue Code or Section 18662(e) of the California Revenue and Taxation Code. (c) Actions. Seller has no actual knowledge of and has received no written notice of any pending or threatened actions, suits, claims or proceedings affecting Seller's ability to fulfill its obligations under this Agreement or which adversely affect the Property or its value, use, or operation, except as set forth in Section 24 below. (d) Hazardous Materials. To Seller's actual knowledge, except as otherwise disclosed in this Agreement and collateral documentation, including, without -17- limitation, the Remediation Agreement, there are no Hazardous Materials present in, on or under the Property, except in accordance with applicable laws. (e) No Encumbrances. To Seller's actual knowledge, there are no unrecorded encumbrances, liens or claims against the Property other than the Sublease. (f) No Contracts. To Seller's knowledge, except as otherwise disclosed in this Agreement and collateral documentation delivered to Buyer prior to the Contingency Removal Date, there are no contracts or other agreements for services, supplies or materials relating to the use, operation or management of the Property which will be binding on Buyer after expiration or earlier termination of the New Lease. (g) The Driveway License. During the License Term, Buyer, and Buyer's successors, assigns, invitees, and guests, shall have a revocable, non-exclusive license to enter those portions of the Building 6 Property upon which the Driveway is located and Seller and Seller's successors, assigns, invitees, and guests, shall have a revocable, non-exclusive license to enter those portions of the Property upon which the Driveway is located (the "Driveway License"). During the License Term, Buyer shall maintain the Driveway in good condition and repair. The cost of maintaining and repairing the Driveway shall be shared between Buyer and Seller proportionately according to the use made of the Driveway by each party and its designees. Upon expiration of the License Term or earlier termination of the Driveway License, all rights of Buyer, and Buyer's successor and assigns, to enter the Building 6 Property and/or to use all or any portion of the Driveway located within the Building 6 Property, all rights of Seller, and Seller's successor and assigns, to enter the Property and/or to use all or any portion of the Driveway located within the Property, shall immediately terminate. The rights, duties, and obligations of the parties set forth in this section shall survive the Close of Escrow. In connection with the foregoing, Seller may revoke the Driveway License at any time, with or without cause and with or without prior notice to Buyer. (h) The Demolition Plan. Not later than one (1) month following the expiration or earlier termination of the New Lease and surrender of possession of the Property by the tenant thereunder, Seller, at Seller's sole cost and expense, shall complete, or cause to be completed, all asbestos removal work (the "Demolition Work") required to be performed by Seller concerning the Buildings under the demolition plan dated June 15, 1999 prepared by E2C, Inc. (the "Demolition Plan"). A copy of the Demolition Plan is attached hereto as Exhibit J, and incorporated herein by reference. The Demolition Work shall be performed by persons duly qualified and licensed to perform such work and in accordance with all applicable laws, rules, ordinances, and regulations. In connection with the foregoing, upon the Closing, the Escrow Holder shall withhold the amount of five hundred thousand dollars and no cents ($500,000.00) from the proceeds payable to Seller, which amount shall be deposited into an interest bearing account for the benefit of Seller (the "Demolition Withhold Account"). The Escrow Holder shall be authorized and directed to administer and disburse the Demolition Withhold Account for the benefit of both Seller and Buyer as -18- a construction escrow according to escrow instructions mutually acceptable to Seller, Buyer, and the Escrow Holder, in order to fund the completion of the Demolition Work; provided, however that if, in the reasonable determination of the Escrow Holder, Buyer, and Seller, the balance of the Demolition Escrow Account shall be insufficient to pay all remaining anticipated costs of the Demolition Work, Seller shall pay any such deficiency to the Escrow Holder within ten (10) days after receipt of notice of the amount of such deficiency; and, provided further that upon completion of the Demolition Work, any unused balance of the Demolition Withhold Account shall be disbursed to Seller by the Escrow Holder. The initial deposit into the Demolition Withhold Account is a good faith estimate of the anticipated costs of the Demolition Work, but shall not be construed as a cap upon the obligation of Seller to pay the reasonable cost of the Demolition Work. In connection with the foregoing, Buyer and Seller agree to execute any escrow instructions reasonably requested by the Escrow Holder, in order to carry into effect the purposes of this section. Seller shall not be entitled to an extension of time for the completion of the Demolition Work as a result of any holdover by Subtenant under the Sublease. Seller and Buyer acknowledge and agree that both Seller and Buyer may be performing work on the Property at the same time and shall cooperate to minimize interference with work being performed by each on the Property. Seller shall obtain and maintain during the time it is conducting the Demolition Work commercial general liability insurance and all-risk insurance with a financing responsible insurance company acceptable to Buyer, covering the activities of Seller, and Sellers agents, contractors, subcontractors and employees on or upon the Property. Such insurance policy shall have a per occurrence limit of at least two million dollars ($2,000,000). Seller shall protect, indemnify, defend (with counsel reasonably acceptable to Buyer) and hold Buyer and Buyer's officers, directors and employees harmless from and against any and all claims, damages, liens, stop notices, liabilities, losses costs and expenses, including reasonable attorneys fees and court costs, resulting from Seller's entry on the Property and the Demolition Work. Seller's indemnification obligations set forth in this paragraph shall survive the Close of Escrow and the termination of the New Lease. In the event that Seller has not timely completed the Demolition Work, Buyer may, at its option, elect to cause the Demolition Work to be performed and shall be entitled to recover all costs and expenses incurred in connection with such completion from Seller. (i) No Undisclosed Violations of Law. Except as otherwise disclosed in this Agreement and collateral documentation delivered to Buyer prior to the Contingency Removal Date, Seller has not received any notice that the Property is in violation of any applicable building codes, environmental, zoning or land use laws, or other applicable local, state and federal laws and regulations including, without limitation, The Americans with Disabilities Act of 1990. (j) Status of the Master Lease. Seller is the lessee or tenant under the Master Lease. To the actual knowledge of Seller, no party to the Master Lease is in default thereunder. -19- (k) No Current Construction. At the time of Closing there will be no outstanding written or oral contracts made by Seller or, to Seller's knowledge, any other party for any improvements to the Property which have not been fully paid for and Seller shall cause to be discharged any mechanics' and materialmen's liens arising from any labor or materials furnished to the Property at the request of Seller or Stellex prior to the time of Closing, including, without limitation pursuant to any leases affecting the Property. (l) No Undisclosed Option Rights. Except as otherwise disclosed in this Agreement and collateral documentation delivered to Buyer prior to the Contingency Removal Date, Seller has not granted any option or right of first refusal or first opportunity to any party to acquire any interest in any of the Property. (m) No Undisclosed Occupants. No person or entity other than Seller and Subtenant has any right to use or occupy all or any portion of the Property. To Seller's knowledge, except for Seller and Subtenant, no person or entity is currently occupying all or any portion of the Property. 14. Buyer's Covenants, Representations and Warranties. Buyer makes the following covenants, representations and warranties, as of the date of this Agreement, each of which is material and is being relied upon by Seller and shall survive the Close of Escrow: (a) Authority. Buyer is duly organized and validly existing and in good standing under the laws of the State of California. Buyer has the legal right, power and authority to enter into this Agreement and to consummate the transactions contemplated hereby, and the execution, delivery and performance of this Agreement have been duly authorized and no other action by Buyer is requisite to the valid and binding execution, delivery and performance of this Agreement, except as otherwise expressly set forth herein. Neither the execution and delivery of this Agreement by Buyer, nor performance of any of its obligations hereunder, nor consummation of the transactions contemplated hereby shall conflict with, result in a breach of, or constitute a default under, the terms and conditions of the organizational documents of Buyer, or any indenture, mortgage, agreement, instrument or document to which Buyer is a party or is bound, or any order or regulation of any court, regulatory body, administrative agency or governmental body having jurisdiction over Buyer. All the documents executed by Buyer which are to be delivered at the Close of Escrow will be duly authorized, executed, and delivered by Buyer. (b) Seller's Environmental Inquiry. Buyer acknowledges that Seller has advised Buyer of the Order and the Remediation Agreement (as each is defined in Section 24(a) below) in connection with the environmental condition of the Property and that the delivery of any reports referenced in connection with this Agreement constitutes written notice thereof to Buyer. (c) The Subordination Agreement. Buyer acknowledges that Seller shall not assign to Buyer any of Seller's rights or obligations with respect to the Sublease, and all -20- such rights and obligations belong exclusively to Seller. In connection with the foregoing, Buyer shall execute a subordination agreement and consent in substantially the form attached hereto as Exhibit K, and incorporated herein by reference (the "Subordination Agreement") confirming that, effective upon the Close of Escrow, the Sublease is a sublease of (and subordinate to) the New Lease. (d) Performance by Buyer. Buyer shall take all actions required of it in order to effectuate properly the purpose and intent of this section including, without limitation approving any reasonable construction escrow instructions which are not inconsistent with this Agreement in connection with the Demolition Work, and making all deliveries required of it at the Close of Escrow. (e) The Driveway License Agreement. During the License Term, Buyer shall perform Buyer's proportionate share of maintenance and repair obligations with respect to those portions of the Building 6 Property Driveway located on the Building 6 Property. Buyer acknowledges as follows: (i) neither Seller nor any successor owner of the Building 6 Property shall be required to maintain any portion of the Driveway located exclusively within the Leased Land; and (ii) upon expiration of the License Term or earlier termination of the Driveway License, all rights of Buyer, and Buyer's successor and assigns, to enter the Building 6 Property and/or to use all or any portion of the Driveway located within the Building 6 Property shall immediately terminate; 15. Condition of the Property. (a) Except as otherwise set forth in this Agreement, Buyer acknowledges and agrees that (i) Buyer is acquiring the Property based solely upon Buyer's inspection and investigation of the Property and all documents related thereto, including, without limitation the Remediation Agreement, and (ii) Buyer is acquiring the Property in "AS IS" condition without relying upon any representations or warranties, express, implied or statutory, of any kind. Except as otherwise specifically set forth in this Agreement without limiting the above, Buyer acknowledges that neither Seller, nor any person or entity acting on behalf of Seller has made any representations or warranties, express or implied, on which Buyer is relying as to any matters, directly or indirectly, concerning the Property including, but not limited to, the land, the area of the Leased Land, the Buildings, and/or the Subleased Premises, improvements and infrastructure, if any, development rights and exactions, expenses associated with any taxes, assessments, bonds, permissible uses, title exceptions, water or water rights, topography, utilities, zoning, soil, subsoil, the purposes for which the Property is to be used, drainage, environmental or building laws, rules or regulations, the presence or removal of toxic waste or Hazardous Materials on, under, or about the Property or any adjoining or neighboring property, or any other matters affecting or relating to the Property. Buyer hereby expressly acknowledges that no such representations have been made. Buyer shall perform and rely solely upon its own investigation concerning its intended use of the Property, the fitness therefor of the Property, and the availability of such intended use under applicable statutes, ordinances, and regulations. -21- (b) Natural Hazards Report. Buyer acknowledges and understands that the Property may be situated within (i) an Earthquake Fault Zone as so designated under the Alquist-Priolo Earthquake Fault Zoning Act, Sections 2621 et seq. of the California Public Resources Code; and/or (ii) a Seismic Hazards Zone as so designated under the Seismic Hazards Mapping Act, Sections 2690 et seq. of the California Public Resources Code (collectively herein referred to as the "Seismic Disclosure Acts"). If so situated, the Property may be particularly exposed to the risks of seismic activity by reason of its close proximity to earthquake faults or other geologic hazards, and any future construction or development of the Property may be restricted. Buyer acknowledges that Buyer has received a copy of the Commercial Property Owner's Guide to Earthquake Safety, published by the State of California Seismic Safety Commission, which informs property owners generally of the risks attendant to earthquakes and the effect earthquakes could have on their property. Seller is making and has made no representations regarding the seismic or other geologic hazards affecting the Property, or the effect thereof on the future use or development of the Leased Land and/or the Buildings. Further, Buyer hereby waives, to the fullest extent permitted by law, any seismic disclosure requirements imposed upon Seller by California law, including without limitation, the requirements contained in the Seismic Disclosure Acts. Notwithstanding the foregoing, Buyer acknowledges that Buyer has received a copy of The JCP Report Natural Hazard Disclosure Statement, dated 05/19/1999, Report Number 1999051800050 (the "Natural Hazards Report"), which was prepared by JCP GEOLOGISTS, INC. with respect to the Property, and that Buyer has reviewed and does approve the Natural Hazards Report. A copy of the Natural Hazards Report is attached hereto as Exhibit L and incorporated herein by reference. 16. LIQUIDATED DAMAGES. IF BUYER COMMITS A DEFAULT UNDER THIS AGREEMENT NOT WAIVED BY SELLER AND CLOSING DOES NOT OCCUR ON OR BEFORE THE FINAL CLOSING DATE AS A RESULT OF SUCH DEFAULT, THEN IN SUCH EVENT, THE ESCROW HOLDER SHALL BE INSTRUCTED BY SELLER TO CANCEL THE ESCROW AND SELLER SHALL THEREUPON BE RELEASED FROM ITS OBLIGATIONS HEREUNDER. BUYER AND SELLER AGREE THAT BASED UPON THE CIRCUMSTANCES NOW EXISTING, KNOWN AND UNKNOWN, IT WOULD BE IMPRACTICAL OR EXTREMELY DIFFICULT TO ESTABLISH SELLER'S DAMAGE BY REASON OF BUYER'S DEFAULT UNDER THIS AGREEMENT. ACCORDINGLY, BUYER AND SELLER AGREE THAT IN THE EVENT OF DEFAULT BY BUYER UNDER THIS AGREEMENT, IT WOULD BE REASONABLE AT SUCH TIME TO AWARD SELLER, AS SELLER'S SOLE AND EXCLUSIVE REMEDY, "LIQUIDATED DAMAGES" EQUAL TO THE AMOUNT REPRESENTED BY THE DEPOSIT PLUS ANY AND ALL ACCRUED INTEREST THEREON. THEREFORE, IF BUYER COMMITS A DEFAULT UNDER THIS AGREEMENT NOT WAIVED IN WRITING BY SELLER AND CLOSING DOES NOT OCCUR ON OR BEFORE THE FINAL CLOSING DATE AS A RESULT OF SUCH DEFAULT, SELLER SHALL INSTRUCT THE ESCROW HOLDER TO CANCEL THE ESCROW WHEREUPON ESCROW HOLDER SHALL IMMEDIATELY PAY OVER TO -22- SELLER THE DEPOSIT, IF HELD BY ESCROW HOLDER, AND SELLER SHALL BE RELIEVED FROM ALL OBLIGATIONS AND LIABILITIES HEREUNDER, AND, PROMPTLY FOLLOWING ESCROW HOLDER'S RECEIPT OF SUCH INSTRUCTION, ESCROW HOLDER SHALL CANCEL THE ESCROW. NOTHING CONTAINED IN THIS SECTION SHALL SERVE TO WAIVE OR OTHERWISE LIMIT SELLER'S REMEDIES OR DAMAGES FOR CLAIMS OF SELLER AGAINST BUYER ARISING OUT OF SECTIONS 7(a)(i)(B), 7(a)(i)(D) AND 24 HEREOF OR WAIVE OR OTHERWISE LIMIT SELLER'S RIGHTS TO OBTAIN FROM BUYER ALL COSTS AND EXPENSES OF ENFORCING THIS LIQUIDATED DAMAGES PROVISION, INCLUDING ATTORNEYS' FEES AND EXPERT COSTS AND FEES, PURSUANT TO SECTION 22, AND SPECIFIC PERFORMANCE OF SECTIONS 23(a) AND 23(b) OF THIS AGREEMENT. SELLER AND BUYER ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTAND THE PROVISIONS OF THIS SECTION 16 AND BY THEIR INITIALS IMMEDIATELY BELOW AGREE TO BE BOUND BY ITS TERMS. ---------------- ---------------- Seller's Initials Buyer's Initials 17. BUYER'S REMEDIES. IF SELLER SHALL FAIL TO PERFORM ANY OBLIGATION IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT, AND SUCH FAILURE CONSTITUTES A DEFAULT ON THE PART OF SELLER HEREUNDER, THEN BUYER, AS BUYER'S SOLE REMEDY HEREUNDER, MAY PURSUE AN ACTION FOR SPECIFIC PERFORMANCE OF THE TRANSFERS DESCRIBED IN SECTIONS 2 AND 23(b) OF THIS AGREEMENT. SELLER AND BUYER ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTAND THE PROVISIONS OF THIS SECTION 17 AND BY THEIR INITIALS IMMEDIATELY BELOW AGREE TO BE BOUND BY ITS TERMS. ---------------- ---------------- Seller's Initials Buyer's Initials 18. Damage and/or Destruction or Condemnation Prior to Close of Escrow. If prior to Closing, any improvements located on the Property, or any part thereof, are destroyed or materially damaged, the transaction shall go forward without any adjustment to the Purchase Price, but Buyer shall be entitled to any available insurance proceeds resulting from such damage or destruction. In connection with the foregoing, during the period from the date of full execution of this Agreement through and including the Closing Date, Seller shall not cancel, nor allow to be canceled, any policies of property insurance carried by Seller with respect to the Property. -23- 19. Notices. All notices, approvals, demands, or other communications required or permitted hereunder shall be in writing, and shall be personally delivered or sent by a nationally recognized overnight courier or sent by registered or certified mail, postage prepaid, return receipt requested, or delivered or sent by telecopy and shall be deemed received upon the earlier of (i) if personally delivered or sent by overnight courier, the date of delivery to the address of the person to receive such notice, (ii) if mailed, three (3) Business Days after the date of posting by the United States post office, or (iii) if given by telecopy or facsimile, when sent with confirmation of receipt. Any notice, request, demand, direction or other communication sent by cable, telex or telecopy must be confirmed within forty-eight (48) hours by letter mailed or delivered in accordance with the foregoing. All notices to Seller shall be sent to Seller's Address with a copy to Seller's Counsel's Address. All notices to Buyer shall be sent to Buyer's Address with a copy to Buyer's Counsel's Address. All notices to Escrow Holder shall be sent to Escrow Holder's Address. If the date on which any notice to be given hereunder falls on a Saturday, Sunday or legal holiday, then such date shall automatically be extended to the next Business Day immediately following such Saturday, Sunday or legal holiday. Notice of change of address shall be given by written notice in the manner detailed in this section. Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given shall be deemed to constitute receipt of the notice, demand, request or communication sent. 20. Brokers. Neither party has dealt with any person or entity who may have a claim to be paid a commission or finder's fee as the result of this transaction other than Colliers Parrish International, Inc., who has represented Seller in this transaction ("Seller's Broker") Upon the Close of Escrow, Seller shall pay any real estate brokerage commission due to Seller's Broker, with respect to this transaction in accordance with a separate listing agreement with Seller's Broker. Seller's Broker shall pay any commission due to any corresponding Broker as the result of this transaction. Except as set forth in this section, if any claim(s) for commissions or finders' fees should arise as the result of the consummation of the transactions contemplated in this Agreement, then Buyer shall indemnify, save harmless and defend Seller from and against such claims if they shall be based upon any action, statement, representation or agreement by Buyer, and Seller shall indemnify, save harmless and defend Buyer from and against such claims if they shall be based upon any action, statement, representation or agreement made by Seller. The provisions of this Section 20 shall survive the Closing or the termination of this Agreement. 21. Legal Fees. In the event of the bringing of any action or suit by a party hereto against another party hereunder by reason of any breach of any of the covenants or agreements or any inaccuracies in any of the representations and warranties on the part of the other party arising out of this Agreement, then in that event, the prevailing party in such action or dispute, whether by final judgment or out of court settlement, shall be entitled to have and recover of and from the other party all costs and expenses of suit, including actual attorneys' fees. Any judgment or order entered in any final judgment shall contain a specific provision providing for the recovery of all costs and expenses of suit, including actual -24- attorneys' fees (collectively "Costs") incurred in enforcing, perfecting and executing such judgment. For the purposes of this section, Costs shall include, without limitation, attorneys' and experts' fees, costs and expenses incurred in the following: (i) post judgment motions; (ii) contempt proceeding; (iii) garnishment, levy, and debtor and third party examination; (iv) discovery; and (v) bankruptcy litigation. This section shall survive any termination of this Agreement prior to the Close of Escrow and the Close of Escrow and shall not be deemed merged into such upon their recordation. 22. Confidentiality. Except as specifically provided herein, Buyer and Seller shall exercise reasonable efforts not to disclose any of the terms or provisions of this Agreement prior to the Close of Escrow to any person or entity not a party to this Agreement, nor shall Buyer or Seller issue any press releases or make any public statements relating to this Agreement or Buyer's intended use of the Property prior to Close of Escrow, except for disclosures required by law. In addition, Buyer shall exercise reasonable efforts to keep all materials provided or made available to Buyer by Seller, and all materials generated by Buyer in the course of conducting its inspections, review of books and records, and other due diligence activities relating to the Property (including, without limitation, matters relating to the environmental condition of the Property), whether obtained through documents, oral or written communications, or otherwise, but excluding information that has entered the public domain (collectively, the "Confidential Information"), in the strictest confidence until the Close of Escrow. Notwithstanding the foregoing, Buyer and Seller may make necessary disclosures to potential lenders, partners, attorneys, consultants, brokers, tenants, accountants, SEC disclosures and purchasers that likewise are advised not to disclose the Agreement to the market but limit disclosure of the Confidential Information to their respective potential lenders, partners, attorneys, consultants, brokers, tenants, accountants and purchasers. Except as required by law, under no circumstances shall any of the Confidential Information be used for any purpose other than the investigation of the Property in connection with its purchase by Buyer as contemplated under this Agreement. Within fourteen (14) days of any termination of this Agreement for any reason, Buyer shall return to Seller all original materials, together with any copies made by Buyer, and all copies of any reports or compilations of data generated from Confidential Information provided by Seller to Buyer, except for appraisals and financial analyses generated by or made on behalf of Buyer and those documents which are protected by attorney-client and/or attorney work product privileges, and Buyer will use reasonable efforts to cause third parties acting on behalf of Buyer to deliver to Seller all such materials in their possession. 23. Miscellaneous. (a) Survival of Covenants. The covenants, representations and warranties of Buyer and Seller set forth in this Agreement shall survive the Close of Escrow and shall not be deemed merged upon their recordation. (b) Required Actions of Buyer and Seller. Buyer and Seller agree to execute such instruments and documents and to diligently undertake such actions as may be -25- required in order to consummate the transfers herein contemplated and shall use good faith efforts to accomplish the Close of Escrow in accordance with the provisions hereof. (c) Time of Essence. Time is of the essence of each and every term, condition, obligation and provision hereof. All references herein to a particular time of day shall be deemed to refer to California time. (d) Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which, together, shall constitute one and the same instrument. (e) Captions. Any captions to, or headings of, the sections or subsections of this Agreement are solely for the convenience of the parties hereto, are not a part of this Agreement, and shall not be used for the interpretation or determination of the validity of this Agreement or any provision hereof. (f) No Obligations to Third Parties. Except as otherwise expressly provided herein, the execution and delivery of this Agreement shall not be deemed to confer any rights upon, nor obligate any of the parties thereto, to any person or entity other than the parties hereto. (g) Exhibits. The Exhibits attached hereto are hereby incorporated herein by this reference for all purposes. (h) Amendment to this Agreement. The terms of this Agreement may not be modified or amended except by an instrument in writing executed by each of the parties hereto. (i) Waiver. The waiver or failure to enforce any provision of this Agreement shall not operate as a waiver of any future breach of any such provision or any other provision hereof. (j) Applicable Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California. Any action or proceeding brought to enforce or interpret this Agreement shall be commenced within the County of Santa Clara, California. (k) Fees and Other Expenses. Except as otherwise provided herein, each of the parties shall pay its own fees and expenses in connection with this Agreement. (l) Entire Agreement. This Agreement supersedes any prior agreements, negotiations and communications, oral or written, and contains the entire agreement between Buyer and Seller as to the subject matter hereof. No subsequent agreement, representation, or promise made by either party hereto, or by or to an employee, officer, agent or -26- representative of either party shall be of any effect unless it is in writing and executed by the party to be bound thereby. (m) Successors and Assigns. Subject to the assignment provisions of this Agreement, this Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of the parties hereto. (n) Independent Counsel. Buyer and Seller each acknowledge that: (i) they have been represented by independent counsel in connection with this Agreement; (ii) they have executed this Agreement with the advice of such counsel; and (iii) this Agreement is the result of negotiations between the parties hereto and the advice and assistance of their respective counsel. The fact that this Agreement was prepared by Seller's counsel as a matter of convenience shall have no import or significance. Any uncertainty or ambiguity in this Agreement shall not be construed against Seller because Seller's counsel prepared this Agreement in its final form. (o) This Instrument. Seller's delivery of unsigned copies of this Agreement (and unsigned copies of documents referred to in this Agreement) is solely for the purpose of review by the party to whom delivered, and neither the delivery nor any prior communications between the parties, whether oral or written, shall in any way be construed as an offer by Seller, nor in any way imply that Seller is under any obligation to enter the transaction which is the subject of this Agreement. This instrument, once it has been signed by Seller and Buyer and a duplicate original thereof delivered by Seller and Buyer, shall contain the entire and only agreement between the parties, and no oral statements, representations, or prior written matter not contained in this instrument shall have any force or effect. (p) Delivery of Possession. Upon the Close of Escrow, Seller shall deliver possession of the Property to Buyer, free and clear of any tenancies or contracts or rights of third parties not previously disclosed in writing by Seller to Buyer. For purposes of this Agreement, delivery of possession of the Property shall mean the assignment by Seller to Buyer of Seller's interest in the Master Lease. 24. Environmental Provisions. (a) Site Cleanup. The Property is subject to: (i) an Imminent Or Substantial Endangerment Order and Remedial Action Order issued by the State of California, Health and Welfare Agency, Department of Health Services, Toxic Substances Control Program ("DTSC"), HSA-89/90-012, as amended (the "Hillview Avenue Order"); and (ii) a Remedial Action Order of the State issued by the State of California, Health and Welfare Agency, Department of Health Services, Toxic Substances Control Division [predecessor to the DTSC] HSA88/89-016, as amended (the "Regional Order"). (The Hillview Avenue Order and the Regional Order are sometimes collectively referred to herein as the "Order"). In addition, Seller and Buyer have entered into that certain Confidential -27- Environmental Settlement Agreement, Release and Covenant Not To Sue, dated September 17, 1997 (the "Covenant Not To Sue"). (b) Assignment of Seller's Rights Under The Remediation Agreement. In lieu of any other right or remedy (whether under this Agreement, at law, or in equity), which might otherwise have been possessed by Buyer as the result of the presence of Hazardous Materials on the Property whenever occurring, upon the Close of Escrow, Seller shall, and does hereby: (i) grant, assign, and convey to Buyer the non-exclusive right, in common with Seller, to assert Seller's rights and remedies under the Remediation Agreement and the Environmental Insurance; and (ii) delegate to Buyer all of Seller's duties arising under the Remediation Agreement after the Close of Escrow. In connection with the foregoing, Buyer acknowledges that Buyer is familiar with the terms and conditions of the Remediation Agreement, and, effective upon the Close of Escrow, Buyer shall, and does hereby, assume and agree to perform all of the obligations of Seller arising after the Close of Escrow under the Remediation Agreement, including, without limitation (and subject to the terms of the New Lease) the obligation to provide Consultant, and Consultant's employees, agents, and contractors, with access to the Property as set forth therein. Notwithstanding the foregoing, Buyer shall timely execute any assignment and/or assumption agreement reasonably requested by Consultant and/or Seller in connection with such assumption. Seller represents and warrants to Buyer that, to the best of Seller's knowledge, on the date of execution of this Agreement: (i) Seller has performed all obligations of Seller to be performed under the Remediation Agreement on or before the date of execution of this Agreement; and (ii) no event of default exists under the Remediation Agreement on the part of either party and no condition exists that, with the passage of time or otherwise, would give rise to an event of default under the Remediation Agreement. Buyer acknowledges and agrees that performance of Consultant's obligations under the Remediation Agreement will continue in, on, under, and/or about the Property after the Close of Escrow and may continue after the expiration or earlier termination of the New Lease. Buyer further acknowledges and agrees that neither Seller nor Consultant can accurately estimate the time for completion of performance of Consultant's obligations under the Remediation Agreement. (c) Waiver of Hazardous Materials Claims Against Seller. Buyer shall have the right for a period of ninety (90) days following the latest of the following to occur ("Inspection Period"): (i) the Closure Certification Date; (ii) the expiration or earlier termination of the New Lease; or (iii) surrender of possession of the Property by Seller; to conduct such testing and inspections as Buyer reasonably deems necessary or appropriate in order to determine whether or not any Hazardous Materials (other than those previously disclosed to Buyer, including, without limitation, those subject to the Remediation Agreement, the Hillview Avenue Order, and the Regional Order) are then present in the soil beneath the pads of the Buildings in sufficient quantities to require remediation under applicable environmental laws, and to provide written notice of the presence of such Hazardous Materials to Seller (such additional remediation shall be referred to herein as the "Additional Environmental Work"). If Buyer reasonably determines that any Additional -28- Environmental Work is required, all such Additional Environmental Work shall be done at the reasonable direction of Buyer, but at Seller's reasonable cost and expense. Seller acknowledges and agrees that the cost of such work may be paid through the Environmental Insurance or otherwise deducted from the Security Deposit given by Seller pursuant to the New Lease. Buyer shall notify Seller in writing not less than two (2) business days prior to Buyer and/or Buyer's representatives conducting any excavations, investigations, sampling, testing, analysis (collectively referred to herein as the "Investigation Activities") and/or remediation activity relating to the Property, whether such Investigation Activities are conducted in, on, under, or off the Property, and Seller and/or Seller's representatives shall have the right to be present during any such Investigation Activities and/or remediation activity conducted by Buyer and/or Buyer's representatives. In addition, during the Inspection Period, Seller may conduct independent testing of any areas of the Property which could be subject to Additional Environmental Work and any samples obtained by Buyer ("Seller's Investigation Activities"). Upon request from Seller, Buyer shall provide Seller with "split" samples of any samples taken from any location as part of Investigation Activities conducted by Buyer and/or Buyer' representatives in accordance with this section. Seller shall notify Buyer in writing not less than two (2) business days prior to conducting any Seller's Investigation Activities relating to the Property, whether such Seller's Investigation Activities are conducted in, on, under, or off the Property, and Buyer and/or Buyer's representatives shall have the right to be present during any such Seller's Investigation Activities conducted by Seller and/or Seller's representatives. Upon request from Buyer, Seller shall provide Buyer with "split" samples of any samples taken from any location as part of Investigation Activities conducted by Seller and/or Seller's representatives in accordance with this section. Other than with respect to claims arising: (i) under the Remediation Agreement; (ii) in connection with obtaining any Site Closure Certification; (iii) which are required to be remediated as Additional Environmental Work; or (iv) in connection with a breach by Seller of Seller's obligations under the New Lease, Buyer shall have no right to assert any claim(s) against Seller, and/or any of Seller's directors, officers, shareholders, employees, agents, or contractors (other than Consultant and the Environmental Insurers), and/or any of their respective successors and assigns, arising from the presence of Hazardous Materials in, on, under, or about the Property, whenever occurring, whether presently known or unknown, and Buyer does hereby waive, deny, disclaim, and release any and all such claims, liabilities, charges, costs, damages, and/or expenses (including without limitation reasonable attorneys' fees and costs). In connection with the foregoing, Buyer waives the protections of Section 1542 of the California Civil Code, which states as follows: "General Release--Claims Extinguished. A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." (d) Site Closure. Buyer acknowledges that the Property, and/or portions thereof, may require a Site Closure Certification. Seller, at its sole cost and expense, shall take all action required to obtain such Site Closure Certification, if required, prior to the -29- expiration of the term of the New Lease. If Seller determines that a Site Closure Certification is not required, Seller shall deliver evidence reasonably satisfactory to Buyer that a Site Closure Certification is not required. For purposes of this paragraph, a letter signed by Consultant delivered to Buyer and to any Certifying Agencies certifying that a Site Closure Certification is not required with respect to surrender of the Property to Buyer by Seller and/or Stellex shall be deemed satisfactory to Buyer. 25. Consent of Master Landlord. Intentionally Omitted 26. Post Closing Indemnity. Buyer shall indemnify, defend, and hold Seller harmless from and against any and all liabilities, charges, claims, costs, damages, and expenses (including, without limitation, reasonable attorneys' fees and costs) arising out of any failure or alleged failure by Buyer to perform any of the obligations of Buyer relating to the Property, including, without limitation, all obligations of Buyer as successor tenant under the Master Lease, and, except as set forth in the Remediation Agreement, all other documents and agreements in effect concerning the Property, and as tenant in possession under all laws affecting the Property, as well as any Hazardous Materials contamination of the Property, whenever occurring, unless such contamination was not disclosed by Seller to Buyer prior to the Close of Escrow, and such contamination is shown by Buyer through clear and convincing evidence to have resulted from the sole active negligence or intentional act of Seller and/or Seller's employees, agents, or contractors. This indemnity shall survive the Close of Escrow and recordation of the deed. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. SELLER: BUYER: WATKINS-JOHNSON COMPANY, THE BOARD OF TRUSTEES OF THE LELAND a California corporation STANFORD JUNIOR UNIVERSITY, a body having corporate powers under the laws of the State of California /s/ Scott G. Buchanan /s/ L. R. Hoagland, Jr. - --------------------------------------- ----------------------------------- By: Scott G. Buchanan By: Stanford Management Company - --------------------------------------- Its: President Its: Executive Vice President and CFO --------------------------------- -30- ACCEPTANCE BY ESCROW HOLDER The undersigned First American Title Guaranty Company hereby acknowledges receipt of a fully executed original of the foregoing Agreement for Assignment of Leasehold Interest, Sublease of Property, Leaseback of Real Property, and Joint Escrow Instructions, or a true copy thereof, and agrees to act as the Escrow Holder for the transactions contemplated thereunder. ESCROW HOLDER: FIRST AMERICAN TITLE GUARANTY COMPANY Dated: September 30, 1999 /s/ P. J. Larkin ---------------------------------- By: P. J. Larkin ---------------------------------- Its: Assistant Secretary ---------------------------------- AGREEMENT FOR ASSIGNMENT OF LEASEHOLD INTEREST, SUBLEASE OF PROPERTY, LEASEBACK OF REAL PROPERTY AND JOINT ESCROW INSTRUCTIONS SCHEDULE OF EXHIBITS EXHIBIT A - Legal Description of the Leased Land EXHIBIT B - The Master Lease EXHIBIT C - The Sublease EXHIBIT D - Legal Description of the Building 6 Property EXHIBIT E - Legal Description of the Driveway EXHIBIT F - The Remediation Agreement EXHIBIT G - The Preliminary Report EXHIBIT H - Master Lease Assignment Agreement EXHIBIT I - The New Lease EXHIBIT J - The Demolition Plan EXHIBIT K - The Subordination Agreement EXHIBIT L - The Natural Hazards Report EXHIBIT M Environmental Assignment EXHIBIT N Merger Acknowledgment EX-10.34 7 RESOLUTION OF CONSENT Exhibit 10.34 RESOLUTION PASSED BY UNANIMOUS CONSENT OF THE BOARD OF DIRECTORS ON JULY 2, 1999 RESOLUTION OF THE BOARD OF DIRECTORS OF WATKINS-JOHNSON COMPANY The undersigned constitute all the directors of Watkins-Johnson Company (the "Company"). In that capacity, they hereby adopt the following resolutions: WHEREAS, Watkins-Johnson Company has determined that it is in the best interest of shareowners to seek to sell the Company or all of its assets either in its entirety or in separate transactions, and WHEREAS, on April 8, 1995 the Directors adopted a resolution providing compensation to retired directors who would have served at least five years as director after April 8, 1995; NOW THEREFORE BE IT RESOLVED, that upon the sale of the final portion of Watkins-Johnson Company each director shall receive an amount equal to the amount each would have received had he or she retired on April 8, 2000. RESOLVED FURTHER, that the appropriate officers of the Company are, and each of them is, hereby authorized and directed to ensure that the necessary funds be deposited in an escrow account to pay such funds to these directors on the consumation of a Change in Control of Watkins-Johnson Company. Dated as of July 2, 1999 /s/ Dean A. Watkins ---------------------------- Dean A Watkins /s/ H. Richard Johnson ---------------------------- H. Richard Johnson /s/ W. Keith Kennedy ---------------------------- W. Keith Kennedy /s/ John J. Hartmann ---------------------------- John J. Hartmann /s/ Raymond F. O'Brien ---------------------------- Raymond F. O'Brien /s/ William R. Graham ---------------------------- William R. Graham /s/ Gary M. Cusumano ---------------------------- Gary M. Cusumano /s/ Robert L. Prestel ---------------------------- Robert L. Prestel EX-27.1 8 FINANCIAL DATA SCHEDULE
5 1000 3-MOS DEC-31-1999 JUN-26-1999 SEP-24-1999 66,212 44,678 17,927 1,000 10,068 183,498 65,803 41,599 211,957 49,958 5,868 0 0 36,331 119,800 211,957 28,791 28,791 17,348 17,348 1,134 0 134 10,175 3,316 6,859 0 0 0 6,859 1.04 1.00
EX-27.2 9 FINANCIAL DATA SCHEDULE
5 1000 9-MOS DEC-31-1998 JUN-27-1998 SEP-25-1998 17,276 62,945 17,215 1,743 10,515 152,239 66,008 44,024 199,676 42,886 10,846 0 0 37,732 108,212 199,676 19,069 19,069 17,640 17,640 14,449 0 152 (13,172) (4,281) (8,891) (45,523) 0 0 (54,414) (6.93) (6.93)
EX-27.3 10 FINANCIAL DATA SCHEDULE
5 1000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 19,271 45,353 21,021 1,433 9,706 151,108 68,420 44,829 202,380 60,091 8,611 0 0 34,454 99,225 202,380 115,219 115,219 81,320 81,320 25,772 0 601 7,526 2,446 5,080 (54,288) 0 0 (49,208) (6.36) (6.26)
EX-27.4 11 FINANCIAL DATA SCHEDULE
5 1000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 134,462 0 24,087 1,291 12,491 223,028 66,766 42,302 300,942 69,421 10,534 0 0 40,631 180,356 300,942 104,817 104,817 65,558 65,558 30,695 0 795 7,769 2,733 5,036 27,889 0 0 32,925 3.99 3.87
EX-27.5 12 FINANCIAL DATA SCHEDULE
5 1000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 15,702 0 26,241 (550) 9,158 147,993 74,347 52,134 233,139 25,010 13,124 0 0 38,997 156,008 233,139 76,683 76,683 53,942 53,942 30,972 0 1,574 (9,805) 3,470 (6,335) 9,369 0 0 3,034 .36 .36
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