-----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, Nl+XFPoKZdm8cE7ykucJEUdXihrPWx1UUt1o8v/ODi74iWNMYNtdkWhpRQimb6xc UIVoVAHtRdoB8iJR+yXu9A== 0000950005-99-001073.txt : 19991214 0000950005-99-001073.hdr.sgml : 19991214 ACCESSION NUMBER: 0000950005-99-001073 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19991210 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-K405/A SEC ACT: SEC FILE NUMBER: 001-05631 FILM NUMBER: 99773056 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-K405/A 1 FORM 10-K405/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________________ to _____________________ Commission file number 1-5631 WATKINS-JOHNSON COMPANY --------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 94-1402710 - ---------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3333 Hillview Avenue, Palo Alto, California 94304-1223 - ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (650) 493-4141 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ---------------------------------- ---------------------------------- Common stock, no par value New York Stock Exchange Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]. As of September 24, 1999 Aggregate market value of the voting stock ------------------------ held by non-affiliates of the registrant: $170,616,287 Number of shares outstanding: Common stock, no par value 6,627,000 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the Watkins-Johnson Company Notice of Annual Meeting of Shareowners--April 29, 1999 and Proxy Statement filed with the commission pursuant to Regulation 14A are incorporated by reference into Part III. Page 1 Explanatory Note: This Form 10-K/A is being filed to restate in its entirety the Form 10-K/A filed on November 2, 1999, and provide certain additional information. The statements in this Form 10-K/A that relate to future plans, events or performance are forward-looking statements. Actual results could differ materially due to a variety of factors discussed under "Risks and Uncertainties that May Affect Future Results" in Part I, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and other risks described in this Form 10-K/A. The company undertakes no obligation to publicly update these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Part I Item 1. Business (a) General Development of Business Watkins-Johnson Company (the company) had operated in three industry segments in 1993: Semiconductor Equipment, Electronics and Environmental Services. At the end of 1994, the Environmental Services unit was divested. In 1995, Watkins-Johnson divided its former Electronics Group, recognizing the two major markets that it served, into the Wireless Communications segment and the Government Electronics segment for reporting purposes. In October 1997, the company divested its Government Electronics operations and accounted for it as a discontinued operation. Since the divestiture of Government Electronics, the company has been operating and reporting its financial results in two business segments: Semiconductor Equipment and Wireless Communications. Subsequent Events Affecting this Form 10-K/A--On March 1, 1999, the company announced that, after a strategic review performed by its investment banking firm, it would pursue a sale of the company, either in its entirety or through sales of its individual business segments. On July 6, 1999, Watkins-Johnson completed the sale of its Semiconductor Equipment Group as reported on a Form 8-K filed on July 21, 1999. See other subsequent events that occurred after December 31, 1998 in Note 12 to the consolidated financial statements. This Form 10-K/A is being filed to restate information and financial data about the company's continuing operations and reflect the divestiture of the Semiconductor Equipment Group as a discontinued operation in this report. In addition, the company's remaining business, Wireless Communications, is being separated into two reportable business segments: Wireless Products Group and Telecommunications Group. The Wireless Products Group (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. The Telecommunications Group (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 semiconductor equipment 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. Except for the sale of real property discussed in Note 10 to the consolidated financial statements and write down of discontinued products and related restructuring discussed in Note 11 to the consolidated financial statements, there were no material acquisitions or dispositions of assets during 1998. No material reclassifications, mergers or consolidations of the company or its subsidiaries occurred during 1998. Page 2 Item 1. Business (continued) (b) Financial Information about Industry Segments The company's continuing operations are in two business segments - WPG and TG. Financial information covering these segments is included in Note 8 to the consolidated financial statements contained in Part II, Item 8 of this Form 10-K/A. (c) Narrative Description of Business Watkins-Johnson Company is a high-technology corporation specializing in wireless and telecommunications products. Wireless Products Group (WPG) WPG, which began operations in 1996, designs and manufactures solid-state devices, single function components, subassemblies and equipment for the wireless telecommunications industry. The foundation of the company's wireless-communications strength lies in WPG's more than 20 year history with gallium-arsenide (GaAs) technology. WPG produces highly reliable proprietary chips that perform signal-processing functions in subassemblies and systems for PCS, GSM, cellular, and personal phone equipment. WPG is penetrating the growing market for RF components by expanding its gallium arsenide (GaAs) integrated-circuit fabrication capability and actively marketing WJ-manufactured devices to the wireless industry. Historically, WPG has manufactured GaAs devices only for its own use. The WJ AH1 and RH1 GaAs amplifier chips are getting good acceptance by base station manufacturers worldwide. The advantage of this amplifier is its ultralinear performance, which base station producers need for quality digital wireless performance. These devices offer excellent performance, and an updated and expanded fabrication facility enables the company to sell them on the open market at competitive prices. The relocation and consolidation of the GaAs and thin film processing and design organization to the Milpitas, California, facility is on schedule and is expected to be completed in the first half of 1999. In addition to follow-on orders for PCS converter assemblies, WPG received several large orders in 1998 from Lucent Technologies, Inc. for a wireless-local-loop assembly. WPG had previously signed a contract with Lucent for the design of a wireless-local-loop transceiver unit. The contract was for wireless-local-loop subscriber units, technical consultation and intellectual-property rights. Lucent is optimistic about the potential for its product and established a co-production relationship with the company to ensure adequate supply. Lucent is a major customer for WPG, with approximately 52% of that segment's sales in 1998. WPG has a second wireless-local-loop program, which is smaller than the Lucent program. In addition to the subscriber unit, WPG is making assemblies that go in the transmitter. WPG has a 5-year manufacturing exclusive on this program. Other WPG products include high-dynamic range converters and terminals which are produced in high volume for PCS base-station and wireless-local-loop applications and point-to-multipoint applications. Other high volume oscillator assemblies are used in OC-192 fiber-optic communications networks. Page 3 Item 1. Business (continued) Sales of WPG were $63,568,000 or 55% of consolidated continuing operations sales in 1998, $31,174,000 or 30% in 1997, and $12,633,000 or 16% in 1996, respectively. Company direct sales personnel and distributors perform marketing and sales. Direct company sales and service personnel handle major accounts. Components, subassemblies, receivers and transceivers are primarily sold to firms which manufacture infrastructure equipment for various wireline and wireless communication carriers. Lucent Technologies, Inc., Bartleys R.F. Systems Inc., (a Lucent subcontractor), and Nortel Networks Ltd. are significant customers of this business segment. Approximately 16% of the segment's sales in 1998 are to international customers. Domestic and international competition from a number of firms, some of which are much larger than the company, is intense. The company seeks to win competitions by excellent service and superior technical performance. WPG's major customer, Lucent Technologies, Inc., recognized the excellence of the company's products and services by naming Watkins-Johnson Company its "Supplier of the Year" for 1997 and 1998. Additional information regarding this business segment along with a discussion of risks and uncertainties that may affect future results is included in Part I, Item 7, of this Form 10-K/A. Telecommunications Group (TG) TG designs, manufactures and services equipment and related processes with applications in government intelligence, signal surveillance and military communications. TG offers a selection of products with wide-bandwidth capabilities that the customer may adjust using company software for specific applications. This business segment draws upon its 40 years working with U.S. and selected international security agencies for its business. Nearly all of the group's products are the result of the company's internal research and development program. The group is beginning efforts to allow customization of the product line for specific purposes desired by its agency customers. During 1998, TG discontinued its Base2 base-station product as discussed in Part I, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in Note 11 to the consolidated financial statements contained in Part II, Item 8 of this Form 10-K/A. Sales of TG were $51,651,000 or 45% of consolidated sales from continuing operations sales in 1998, $73,643,000 or 70% in 1997 and $64,050,000 or 84% in 1996, respectively. Company direct sales personnel and distributors perform marketing and sales. Direct company sales and service personnel handle major accounts. Communications-intelligence receivers and tuners are sold to security agencies of the U.S. and other governments. Various prime contractors, such as Lockheed-Martin, Raytheon Electronic Systems, and the United States Government are major customers. Approximately 23% of the segment's sales in 1998 are to international customers. Page 4 Item 1. Business (continued) Although TG sells its products on a world-wide basis, its predominant market is in the United States. TG faces domestic and international competition from a number of companies, some of whom are much larger than TG. Competition is intense and TG is often at a disadvantage for some foreign sales because of local government policies and the fact that its products are only exported under strict U.S. government control. Additional information regarding TG along with a discussion of risks and uncertainties that may effect future results is included in Part I, Item 7, of this Form 10-K/A. Other Business Items Raw materials for the production of wireless and telecommunications products are acquired from a broad range of suppliers. Because suppliers are numerous, dependence on any one supplier is kept to a minimum. On occasion, however, the failure of a supplier to deliver key parts can impact the timely shipment of company products. Business operations are not believed by management to be significantly seasonal. Except for the use of letters of credit on international sales and negotiated advance or progress payments from customers on long-term contracts, there are no other special working capital practices in either of the company's business segments. The company has been active in securing patents and licensing agreements to protect certain proprietary technologies and know-how resulting from its ongoing research and development. The financial impact of the company's efforts to protect its intellectual property are unknown. Management believes that the company's competitive strength derives primarily from its core competence in engineering, manufacturing and understanding its customers and markets; therefore, aggressive steps to protect that knowledge are considered justifiable. Total backlog at December 31, 1998 was $67.0 million compared to $60.3 million at December 31, 1997. The percentage of backlog attributable to WPG and TG is 65.5% and 34.5% respectively in 1998; and 44.4% and 55.6% in 1997. Substantially all of the backlog at the end of 1998 and 1997 were shippable within 12 months. The company does not have any significant long-term purchase agreements with any of its customers, and customers can typically cancel or reschedule their orders without significant penalty. As a result, customers frequently revise production quantities and delivery schedules to reflect their changing needs. Since most of the company's backlog can be canceled or rescheduled, the company does not believe its backlog is a meaningful indicator of future revenue. Company-sponsored research and development expense was $21.9 million in 1998, $22.9 million in 1997, and $14.0 million in 1996. Customer-sponsored research and development was $3.2 million in 1998, $5.2 million in 1997 and $7.2 million in 1996. Customer-sponsored research and development was performed mostly by TG. The company's employment for continuing operations at December 31, 1998 was 554. None of the company's employees are covered by a collective-bargaining agreement. The company's relationship with its employees is generally good. Environmental issues are discussed in Note 6 to the consolidated financial statements contained in Part II, Item 8 of this report on Form 10-K/A. Page 5 Item 1. Business (continued) (d) Financial Information about Foreign and Domestic Operations and Export Sales. Combined export sales and sales from foreign operations accounted for 19% of the company's total sales in 1998, 11% in 1997 and 10% in 1996. Assets of foreign operations were not significant and accounted for less than 5% of consolidated assets at December 31, 1998, 1997 and 1996. The inherent risks of foreign business are similar to domestic business, with the additional risks of foreign government instability, currency fluctuations, and export license cancellation. A small portion of products to foreign customers in both business segments require export licensing by the Department of State prior to shipment. International shipments denominated in a foreign currency are not material. Nevertheless, the company maintains a policy to purchase forward exchange contracts and/or generally obtains customer letters of credit to reduce foreign currency fluctuation and credit risks. For further information on foreign sales, see Note 8 to the consolidated financial statements contained in Part II, Item 8 of this Form 10-K/A. Item 2. Properties The company conducts its main operations at plants in Palo Alto and Milpitas, California and Gaithersburg, Maryland. In 1998, approximately 15 acres of undeveloped land adjacent to the company's San Jose, California, facility was sold. The remainder property including a 190,000 square foot building in San Jose was vacated in 1998 and held for sale and is therefore included in "Other Assets" (long-term) in the December 31, 1998 Consolidated Balance Sheet. The company expects to sell this property in 1999. In December 1997, the sale and exchange of a portion of the company's Palo Alto lease interest was successfully completed. About 7 acres of the Palo Alto campus were returned to the lessor for consideration as discussed in Note 10 to the consolidated financial statements. Excluding the San Jose facility, there were approximately 262,000 square feet of plant space in California and 175,000 square feet in Maryland available for the company's continuing operations. Of the 262,000 square feet of plant space in California, approximately 133,000 square feet in Palo Alto was occupied by Stellex Microwave Systems, Inc. (SMS) on a sublease expiring on October 31, 2000 as part of the stock purchase agreement included in Part II, Item 14(a)3, by reference as Exhibit 10.11. The space is leased to SMS at a price which includes utilities, maintenance and other services, and may be canceled by SMS with 6 months notice. Excluding the San Jose facility and the sublease discussed above, approximately 85% of the company's available plant space is being utilized by the company's continuing operations. WPG utilizes the Palo Alto and Milpitas, California plant space while TG utilizes the Gaithersburg, Maryland plant. The Palo Alto and Milpitas, California facilities are leased while the Gaithersburg, Maryland property is owned by the company with no outstanding mortgage or debt. Information on long-term obligations is discussed in Note 3 to the consolidated financial statements contained in Part II, Item 8 of this Form 10-K/A. Item 3. Legal Proceedings Information required under this item is contained in Note 6 to the consolidated financial statements contained in Part II, Item 8 of this Form 10-K/A. Page 6 Item 4. Submission of Matters to a Vote of Security Holders The company submitted no matters to a vote of the shareowners during the last quarter of the period covered by this report.
Executive Officers of the Registrant as of December 31, 1998 Officer Business Experience Name Age Office Held Since Last Five Years - ----------------------------------- ------- -------------------------------- ---------- ------------------------------------ Dr. Dean A. Watkins (1) 76 Chairman of the Board 1957 Chairman of the Board Dr. H. Richard Johnson (1) 72 Vice Chairman of the Board 1957 Vice Chairman of the Board Dr. W. Keith Kennedy, Jr. (2) 55 President and Chief Executive 1977 President and Chief Executive Officer Officer Scott G. Buchanan 47 Vice President, Chief 1989 Vice President, Chief Financial Financial Officer and Officer and Treasurer; Prior Treasurer to 1998, Vice President and Chief Financial Officer Dr. Patrick J. Brady 53 Vice President 1996 (3) President, Semiconductor Equipment Group; Prior to 1996, Vice President of Engineering, Semiconductor Equipment Group Malcolm J. Caraballo 43 Vice President 1996 President, Wireless Products Group; Prior to 1997, President, Microwave Products Group; Prior to 1996, Vice President, Microwave Products Division Robert G. Hiller 61 Vice President 1997 President, Telecommunications Group; Prior to 1997, Vice President, Telecommunications Group; Prior to 1996, Director, Engineering, Electronics Equipment Division Dr. Frank E. Emery 62 Vice President 1998 Vice President, Corporate Planning and Communication; Prior to 1998, Manager, Corporate Planning and Communication Darryl T. Quan 44 Controller 1991 Controller Claudia D. Kelly 58 Secretary 1996 Secretary; Prior to 1996, Manager, Palo Alto Customer and Export Services (1) Dr. Watkins and Dr. Johnson have been directors of the company since its incorporation in 1957. (2) Dr. Kennedy has been a director of the company since August 1987. (3) Semiconductor Equipment Group is reported as a discontinued operation in this Form 10-K/A. See Part I, Item 1(a) and Notes 8, 10 and 12 to the consolidated financial statements contained in Part II, Item 8 of the Form 10-K/A. None of the above officers is related to any other officer at Watkins-Johnson Company.
Page 7 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The company's common stock is principally traded on the New York and Pacific stock exchanges. At December 31, 1998 there were approximately 8,500 shareowners, which included holders of record and beneficial owners. The company expects that comparable cash dividends will continue in the future.
DIVIDENDS AND STOCK PRICES 1998 Quarters 1st 2nd 3rd 4th - --------------------------------------- ------------------------ ------------ ---------- ------------ ----------- Dividends declared per share (in cents) 12 12 12 12 Stock price High 28 1/2 28 1/2 29 1/2 22 9/16 (NYSE-in dollars) Low 22 13/16 23 5/16 17 9/16 16 3/8 1997 Quarters 1st 2nd 3rd 4th - --------------------------------------- ------------------------- ----------- ----------- ----------- ----------- Dividends declared per share (in cents) 12 12 12 12 Stock price High 26 7/8 32 3/8 37 1/4 35 3/4 (NYSE-in dollars) Low 22 1/8 22 1/4 30 3/4 24 3/16
Item 6. Selected Financial Data
(Dollars in thousands, except per share amounts) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- OPERATING RESULTS* Sales $ 115,219 $ 104,817 $ 76,683 $ 62,123 $ 65,794 Net income (loss) from continuing operations 5,080 5,036 (6,335) (3,184) 3,969 Basic net income (loss) per share from continuing operations 0.66 0.61 (0.77) (0.40) 0.53 Diluted net income (loss) per share from continuing operations 0.65 0.59 (0.77) (0.40) 0.49 Dividends per share $ 0.48 $ 0.48 $ 0.48 $ 0.48 $ 0.48 Basic average common shares 7,737,000 8,258,000 8,265,000 7,938,000 7,425,000 Diluted average common shares 7,857,000 8,509,000 8,265,000 7,938,000 8,153,000 FINANCIAL POSITION* Working capital** $ 83,565 $ 128,381 $ 41,576 $ 41,124 $ 36,273 Total assets 202,380 300,942 233,139 232,246 192,428 Long-term obligations 8,611 10,534 13,124 16,088 16,574 Shareowners' equity 133,679 220,987 195,005 191,253 149,626 Shareowners' equity per share $ 20.42 $ 26.75 $ 23.41 $ 23.54 $ 19.75 Number of shareowners 8,500 6,500 5,400 4,900 4,600 *Restated to reflect the Semiconductor Equipment Group as a discontinued operation as a result of the sale of this segment in July 1999. **Working capital does not include "Net assets of discontinued operations". See Note 8 to the consolidated financial statements for divested businesses.
Page 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the company's consolidated financial statements and related notes included elsewhere in this report. Except for historic actual results reported, the following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties. See "Risks and Uncertainties that May Affect Future Results" included below for a discussion of certain factors that could cause future actual results to differ from those described in the following discussion. Financial Condition and Liquidity At the end of 1998, cash and equivalents and short-term investments totaled $64.6 million, a decline of $69.9 million from the 1997 year-end cash and equivalent balance of $134.5 million. The decrease resulted primarily from the company's operating loss from discontinued operations, working capital requirements and repurchase of the company's common stock. A total of 1,795,800 shares were repurchased for $36.2 million. Proceeds from the sale of undeveloped land, as described in Note 10 to the consolidated financial statements included in Part II, Item 8 of this Form 10-K/A, helped fund the company's 1998 capital acquisitions. In 1997, cash and equivalents increased $118.8 million from $15.7 million to $134.5 million. The increase was attributed to funds generated from continuing and discontinued operations, gain from the sale of discontinued operations as described in Note 8 to the consolidated financial statements, and proceeds received from the exchange of a subleasehold interest as explained in Note 10 to the consolidated financial statements. The cash inflow from the above activities was more than sufficient to fund the acquisition of capital assets totaling $7.0 million in 1997. In 1996, cash and equivalents decreased $18.9 million, from $34.6 million to $15.7 million. Net cash used by continuing operations was $19.4 million. As of December 31, 1998, the company's principal source of liquidity consisted of $19.3 million in cash and equivalents plus short-term investments valued at $45.3 million. During 1998, the company invested its excess cash and equivalents in securities with maturities exceeding 90 days to take advantage of the higher yields. These short-term investments, consisting mostly of high grade debt securities, are subject to interest rate risk and will rise and fall in value if market interest rates change. The company previously had arranged with several banks to provide a $50.0 million unsecured credit facility, which was scheduled to expire on March 31, 1999. During 1998, the company did not borrow under this credit facility. Due to the operating losses reported in 1998, the company was technically not in compliance with certain terms under this credit facility. The company evaluated the proposed revised terms and elected to terminate the facility based on the company's healthy cash balances and short-term investments. Management does not anticipate any significant near term borrowing requirements and does not expect the termination of the credit facility to materially affect the company's liquidity or financial position. From time to time the company may enter into certain long-term borrowing arrangements with financial lending institutions for capital acquisitions of property, plant and equipment. At the end of 1998, there were no material commitments for capital expenditures. Page 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The company believes that its year-ending cash and equivalents and short-term investments are expected to be sufficient to satisfy anticipated cash requirements for the next twelve months. Current Operations and Business Outlook For 1998, the company reported sales of $115.2 million and net income from continuing operations of $5.1 million or $0.65 per share. The net loss including discontinued operations was $49.2 million, or $6.26 loss per share. This loss includes $6.1 million of pre-tax charges for the write down of discontinued products and related restructuring. Also included in 1998 results is a $15.0 million pre-tax gain on the sale of undeveloped land, see Note 10 to the consolidated financial statements included in Part II, Item 8 of this Form 10-K/A. In 1997, sales were $104.8 million and net income from continuing operations was $5.0 million or $0.59 per share. The net income including discontinued operations was $32.9 million or $3.87 per share. Backlog on December 31, 1998 stood at $67.0 million, compared to the 1997 backlog of $60.3 million. During the third quarter of 1998, TG discontinued its Base2(TM) base-station product line after reassessing key customer needs and market conditions. The reassessment involved extensive sales effort throughout the world and visiting targeted OEM customers. It was concluded that the Base2 system was too costly for smaller carriers and was incompatible with the mobile switching equipment requirements of the larger carriers. A series of sales discussions with large base station OEMs revealed that the system, as designed, could not be directly partitioned for sale as separate subsystems. There was no other known alternative use for the product. As a result, inventory, demo equipment, and customized fixed assets associated with this product line were written down in the restructuring. The company recorded charges of $6.1 million related to the write down of nonproductive equipment, discontinued products and exit costs as more fully described in Note 11 to the consolidated financial statements included in Part II, Item 8 of this Form 10-K/A. The annual savings from these actions are estimated to be about $2.0 million beginning in 1999. Looking forward, the company believes the restructuring allows TG to refocus on its core business, which is the designing and manufacturing of equipment and related processes with applications in government intelligence, signal surveillance and military communications. See a more detail discussion about TG's business in Part I, Item 1of this Form 10-K/A. Operations and business outlook for each of the company's business segments are discussed in more detail below. Wireless Products Group (WPG) WPG sales for 1998 totaled $63.6 million which was more than double the prior year's $31.2 million. WPG is entering 1999 with a backlog totaling $43.9 million compared to $26.8 million on December 31, 1997. WPG had a very encouraging year in 1998. WPG sustained strong growth as a high-volume manufacturer of custom RF (radio frequency) subassemblies for PCS base-station and wireless-local-loop customer-premise equipment. Fourth quarter 1998 shipments included the first large order for outdoor repeaters from a major wireless carrier. Page 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The company accelerated WPG's entry to the GaAs semiconductor market with the purchase of the assets and intellectual property of Samsung Microwave Semiconductor in December 1997. GaAs devices include low-noise and power amplifiers, mixers and doublers. The consolidation of the GaAs and Thin Film processing and design organization to the Milpitas facility is on schedule and is expected to be completed in the first half of 1999. WPG offers a line of "over-the-air" repeaters to PCS carriers to assist in extending cell size and broadening their signal coverage. The newest products are the PCS in-building repeaters for CDMA, TDMA and GSM air interfaces. These repeaters provide quick installation and easy coverage for indoor locations such as shopping malls, airports, convention centers and multistory office buildings. Continued worldwide growth of RF infrastructure for wireless telephone systems is expected. With its strong base in advanced RF technology, WPG is in an excellent position to participate in this growth. Looking forward, the company expects WPG to continue growing although no assurance can be given. If the economy in general stays strong, the company expects WPG to be profitable in 1999. WPG intends to focus on the following opportunities to continue its growth: gallium-arsenide (GaAs) semiconductor devices, repeaters, and advanced RF technology. Telecommunications Group (TG) TG sales for 1998 totaled $51.7 million which was 30% less than the prior year's $73.6 million. TG's backlog on December 31, 1998 was $23.1 million compared to $33.6 million on December 31, 1997. TG's financial results were adversely affected by the decision to discontinue marketing its wideband digital Base2 product. Adding to TG's difficulty was a delay of a major government order which was expected to start work by year-end. The company is following this program closely and is hopeful TG will be able to receive the order during 1999. The communications surveillance receiver requirements and orders are expected to remain at a fairly steady level. Going forward, TG intends to market communications systems, receiving equipment and sub-systems as a value added supplier to customers in the intelligence and military communities, and commercial original equipment manufacturers. TG intends to emphasize programs with strong follow-on potential, especially those which enhance the segment's overall product strength for additional business opportunities. 1998 Compared to 1997 Sales for WPG increased from $31.2 million to $63.6 million, or 104% in 1998. Despite a softer overall base station market, WPG sustained strong growth as a high-volume manufacturer of custom RF subsystems for PCS base-station and wireless-local-loop customer-premise equipment. Fourth Quarter 1998 shipments included the first large order for outdoor repeaters from a major wireless carrier. Sales for TG decreased from $73.6 million to $51.7 million, or 30% in 1998. Reasons for the decrease were a slowdown in new orders for certain catalog products, delay of a major government order, and the effects of discontinuing its wideband digital Base2 product. Page 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Gross margin for WPG increased from 18% to 31%, reflecting the benefits resulting from higher volume sales and increased production efficiencies. Gross margin for TG decreased from 46% of sales to 20%. The reasons for the drop in gross margin were attributable to the lower sales volume, a $3.4 million inventory write down associated with the discontinued Base2 product line, and $6.7 million of charges for slow-moving inventory and loss contracts related to the continuing operations. WPG's selling and administrative expenses decreased from 11% of sales to 9% of sales as the group benefited from higher sales volume. Actual expenses increased from $3.5 million to $5.8 million. Excluding restructuring charges of $2.7 million in 1998 associated with the discontinued Base2 product, TG selling and administrative expenses increased from 19% of sales to 27% of sales mostly due to the lower sales volume while actual expenses decreased slightly from $13.9 million to $13.8 million. WPG research and development expenses were $14.1 million in 1998 or 22% of sales, compared to $10.2 million in 1997, or 33% of sales. Research and development activities were intense as WPG was focused to bring certain key products to market. TG research and development expenses decreased from 17% of sales to 15% as TG halted its spending on the Base2 product in September 1998. Actual expenses decreased from $12.7 million to $7.7 million. Pre-tax operating loss in 1998, before other income and a gain on the sale of undeveloped land, was $13.7 million compared with a loss from continuing operations of $1.0 million for 1997. Interest and other income (net of other expenses) increased to $6.3 million due primarily to interest income earned on the increased average cash balance and short-term investments. Included in other income for 1998 is $1.2 million of rental income from subleasing part of the Palo Alto facility; see Note 3 to the consolidated financial statements included in Part II, Item 8 of this Form 10-K/A. Also in 1998, the company concluded the sale of vacant land adjacent to its San Jose, California facility, resulting in a $15.0 million pre-tax gain (see Note 10 in the consolidated financial statements). The 1998 effective tax rate for income taxes was 32.5% compared to 35.0% in 1997, mostly due to higher export sales benefit earned in 1998. As a result of the above factors, net income from continuing operations was $5.1 million in 1998 compared to $5.0 million in 1997, or $0.65 per diluted share compared to $0.59 per diluted share, respectively. 1997 Compared to 1996 WPG sales increased from $12.6 million to $31.2 million, or 148%, in 1997 as its radio-frequency assemblies for cellular and PCS systems gained customer acceptance. WPG's gross margin in 1997 increased to 18% of sales from 3% in 1996 as it began to achieve higher production levels over the small volume produced in 1996. Page 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) TG sales increased from $64.1 million in 1996 to $73.6 million in 1997, or 15%, as TG shipped at a higher unit volume of matured products for U.S. government agencies. Gross margin for TG improved from 35% of sales to 46%. WPG selling and administrative expenses decreased from 33% of sales to 11% of sales. Actual expenses decreased from $4.1 million to $3.5 million. WPG group expects that such expenses, as a percentage of sales, should continue to decline as volume improves. TG selling and administrative expenses increased slightly from $13.2 million in 1996 to $13.9 million, but decreased as a percentage of sales from 21% to 19% due to the higher sales volume. WPG research and development expenses increased from $6.6 million to $10.2 million. WGP's product development activities were intense as the new business segment was focused to introduce new products to market. TG research and development expenses increased from $7.4 million, or 12% of sales in 1996 to $12.7 million, or 17% of sales in 1997, mostly due to an increase in spending of $3.9 million on the Base2 program. Pre-tax operating loss in 1997, before other income, was $1.0 million compared with a loss from continuing operations of $8.5 million for 1996. Interest and other income (net of other expenses) increased to $1.1 million due primarily to interest income earned on higher funds available for investments. Interest expense decreased due to a credit line of $10.0 million drawn in 1996. Included in other income for 1997 is a real estate gain of $7.6 million on the exchange of the subleasehold interest at the Palo Alto facility; see Note 10 to the consolidated financial statements included in Part II, Item 8 of this Form 10-K/A. As a result of the above factors, net income from continuing operations was $5.0 million in 1997 compared to a net loss of $6.3 million in 1996, or $0.59 net income per diluted share compared to $0.77 net loss per diluted share, respectively. Page 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Risks and Uncertainties That May Affect Future Results All statements in this annual report, other than statements of historical facts, are forward-looking statements. By way of example only, those include statements about the company's strategies, objectives, plans, expectations and anticipated results, and expectations for the economy generally or for the company's specific industries. The words "expect", "anticipate", "looking forward" and other similar expressions used in this Form 10-K/A 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 discussed in Part I, Item 1(d) above, risks related to "Year 2000 Compatibility" as discussed below, the risk that the company will not be able to complete its strategy for the sale of the entire company, and other risks. Investors and prospective investors are cautioned not to place undue reliance on these forward-looking statements. The company undertakes no obligation to announce any revisions to its forward-looking statements to reflect events or circumstances as they actually develop or occur in the future. The wireless 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 wireless and telecommunications companies, some of which are much larger than the company, is intense. The effect of these and other factors could significantly affect the company's future operating results. Year 2000 Compatibility The Year 2000 (Y2K) issue involves the ability of computer software to properly utilize dates for years after the year 1999. Computers have traditionally used the last two digits of the year for date calculations and could interpret the year 2000 as the year 1900. The critical areas being addressed by the company are its internal computer systems, products made by the company and relationships with external organizations. The company is addressing both information technology ("IT") and non-IT systems which typically include embedded technology such as microcontrollers. Page 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The company regularly updates its information systems capabilities, and has evaluated significant computer software applications for compatibility with the year 2000. Several years ago the company adopted a strategic plan for its internal computer systems with the goal of going to an off-the-shelf real time system. As a result, the company's 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 which the company's operations are using. There is other software implementations that are minor in nature that may take until mid 1999 to be completed. There are no known non-IT issues that will adversely impact the company's information systems capabilities. With the system changes implemented to date and other planned changes, the company anticipates that its internal computer software applications will be compatible with the year 2000. In the event of any Y2K disruptions, the company will follow the software vendors' contingency directives. The Y2K issue (both IT and non-IT) for company products is being addressed by WPG and TG, respectively. The company believes the Y2K situation is an issue for only certain non-core products. Each of the two business segments is developing a communication plan and recommended solutions to distribute to customers who may be affected by mid-1999. The segments have also addressed non-IT issues with respect to their respective manufacturing facilities and there are no known non-IT issues that will adversely impact the company's operations. The company is dependent on numerous vendors and customers which may incur disruptions as a result of year 2000 software issues. Accordingly, no assurance can be given that the company's operations will not be impacted by this industry-wide issue. The company is addressing the Y2K issues with external organizations. This involves customers, suppliers and service providers. Although the initial review does not indicate any significant risk, this will be an ongoing effort. The company is considering alternative vendors as a contingency plan. With the actions that have been taken and the other planned activities, the company is not anticipating any significant disruption of business, however, no absolute assurances can be given. The most likely disruption that could occur is where the company uses wire transfers to move funds to vendors and subsidiaries, some of which are located in foreign countries. Since the status of all banking systems in the world cannot be determined in advance, there may be minor disruption in the ability to transfer funds in real time along the current routes. Contingency plans, which include alternative banks and standby letters of credit, are in place to address what is needed to minimize any business interruption. Expenditures specifically related to software modifications for year 2000 compatibility are not expected to have a material effect on the company's operations or financial position. The cost to address and remedy the company's Y2K issues was less than $100,000 for each of the years 1997 and 1998 and is expected to be the same for 1999. Page 15 Item 7. 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 7A. Quantitative and Qualitative Disclosures About Market Risks The following discussion about the company's market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. The company does not use derivative financial instruments for speculative or trading purposes. Short-term Investments--The company maintains a short-term investment portfolio consisting mainly of debt securities with an average maturity of less than two years. These available-for-sale securities are subject to interest rate risk and will rise or fall in value if market interest rates change. The company has the ability to hold its fixed income investments until maturity, and therefore the company would not expect its operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on its investment portfolio. The following table provides information about the company's investment portfolio and constitutes a "forward-looking statement." For investment securities, the table presents principal cash flows and related weighted average interest rates by expected maturity dates.
Expected Maturity Weighted Average Amounts Interest Expected Maturity Dates (in thousands) Rate ----------------------------------- ----------------------- --------------------- Cash and equivalents: 1999 $19,271 4.41% ======= Short-term investments: 1999 22,021 5.64% 2000 15,235 5.91% 2001 8,097 5.85% ------- Fair value at December 31, 1998 $45,353 =======
Page 16 Item 7A. 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 are disclosed in Notes 1, 2 and 3 to the consolidated financial statements included in Part II, Item 8 of this Form 10-K/A. Page 17 Item 8. Financial Statements and Supplementary Data WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31 - -------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) 1998 1997 1996 ----------------------------------------- (As Restated - Note 12) - -------------------------------------------------------------------------------------------------------- Sales $ 115,219 $ 104,817 $ 76,683 - -------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of goods sold 81,320 65,558 53,942 Cost of goods sold-write down of discontinued products 3,399 Selling and administrative 19,636 17,352 17,267 Restructuring charges 2,700 Research and development 21,861 22,861 13,985 - -------------------------------------------------------------------------------------------------------- 128,916 105,771 85,194 - -------------------------------------------------------------------------------------------------------- Loss from operations (13,697) (954) (8,511) Other income (expense): Interest income 5,681 2,198 789 Interest expense (601) (795) (1,574) Other income (expense)--net 1,170 (289) (509) Gain on real property (Note 10) 14,973 7,609 - -------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes 7,526 7,769 (9,805) Income tax benefits (expense) (2,446) (2,733) 3,470 - -------------------------------------------------------------------------------------------------------- Net income (loss) from continuing operations 5,080 5,036 (6,335) Discontinued operations (Note 8): Income (loss) from discontinued operations, net of taxes (54,288) (1,788) 9,369 Gain on disposition, net of taxes 29,677 - -------------------------------------------------------------------------------------------------------- Net income (loss) $ (49,208) $ 32,925 $ 3,034 ======================================================================================================== Basic per share amounts: Income (loss) from continuing operations $ 0.66 $ 0.61 $ (0.77) Income (loss) from discontinued operations (7.02) (0.22) 1.13 Gain on disposition of discontinued operations 3.60 - -------------------------------------------------------------------------------------------------------- Net income (loss) $ (6.36) $ 3.99 $ 0.36 ======================================================================================================== Basic average common shares 7,737,000 8,258,000 8,265,000 Diluted per share amounts: Income (loss) from continuing operations $ 0.65 $ 0.59 $ (0.77) Income (loss) from discontinued operations (6.91) (0.21) 1.13 Gain on disposition of discontinued operations 3.49 - -------------------------------------------------------------------------------------------------------- Net income (loss) $ (6.26) $ 3.87 $ 0.36 ======================================================================================================== Diluted average common shares 7,857,000 8,509,000 8,265,000 See notes to consolidated financial statements.
Page 18 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31 - ----------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1998 1997 1996 -------------------------------------------- (As Restated - Note 12) - ----------------------------------------------------------------------------------------------------------------- Net income (loss) $(49,208) $ 32,925 $ 3,034 - ----------------------------------------------------------------------------------------------------------------- Other comprehensive income, net of tax: Unrealized holding gains on securities-net of taxes of $97 152 - ----------------------------------------------------------------------------------------------------------------- Other comprehensive income 152 - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Comprehensive income (loss) $(49,056) $ 32,925 $ 3,034 ================================================================================================================= See notes to consolidated financial statements.
Page 19 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 - ---------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) 1998 1997 ---------------------- (As Restated - Note 12) - ---------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and equivalents $ 19,271 $ 134,462 Short-term investments 45,353 Receivables (net of allowance for doubtful accounts of $1,433 in 1998 and $1,291 in 1997) 19,588 22,796 Inventories: Finished goods 875 1,180 Work in process 3,167 5,978 Raw materials and parts 5,664 5,333 Deferred income taxes 32,288 24,830 Income taxes receivable 13,570 Net current assets of discontinued operations 7,453 25,226 Other 3,879 3,223 - ---------------------------------------------------------------------------------- Total current assets 151,108 223,028 - ---------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT: Land 2,591 3,080 Buildings and improvements 7,523 6,394 Plant facilities, leased 11,184 11,012 Machinery and equipment 47,122 46,280 - ---------------------------------------------------------------------------------- 68,420 66,766 Accumulated depreciation and amortization (44,829) (42,302) - ---------------------------------------------------------------------------------- Property, plant and equipment--net 23,591 24,464 - ---------------------------------------------------------------------------------- OTHER ASSETS: Net noncurrent assets of discontinued operations 16,965 49,894 Other 10,716 3,556 - ---------------------------------------------------------------------------------- $ 202,380 $ 300,942 ================================================================================== LIABILITIES AND SHAREOWNERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 9,685 $ 5,540 Accrued expenses 16,702 17,501 Advances on contracts 1,663 1,867 Provision for losses on contracts 5,774 2,475 Payroll and profit sharing 7,343 10,439 Income taxes 18,923 31,599 - ---------------------------------------------------------------------------------- Total current liabilities 60,090 69,421 - ---------------------------------------------------------------------------------- LONG-TERM OBLIGATIONS 8,611 10,534 - ---------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 3 and 6) SHAREOWNERS' EQUITY: Preferred stock, $1.00 par value--authorized and unissued, 500,000 shares Common stock, no par value--authorized, 45,000,000 shares; outstanding: 1998, 6,547,687 shares; 1997, 8,261,036 shares 34,454 40,631 Retained earnings 99,073 180,356 Accumulated other comprehensive income 152 - ---------------------------------------------------------------------------------- Total shareowners' equity 133,679 220,987 - ---------------------------------------------------------------------------------- $ 202,380 $ 300,942 ================================================================================== See notes to consolidated financial statements.
Page 20 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
Other Total Compre- Share- (Dollars in thousands, Common Stock Retained hensive- owners' except per share amounts) Shares Dollars Earnings Income Equity - ----------------------------------------------------------------------------------------------------------- (As Restated - Note 12) Balance, January 1, 1996 8,124,055 $ 34,307 $ 156,946 $ 0 $ 191,253 Net income for 1996 3,034 3,034 Dividends declared-$0.48 per share (3,973) (3,973) Stock option transactions 205,193 4,691 4,691 - ----------------------------------------------------------------------------------------------------------- (As Restated - Note 12) Balance, December 31, 1996 8,329,248 38,998 156,007 195,005 Net income for 1997 32,925 32,925 Dividends declared-$0.48 per share (3,974) (3,974) Stock option transactions 135,988 2,778 2,778 Repurchases of common stock (204,200) (1,145) (4,602) (5,747) - ----------------------------------------------------------------------------------------------------------- (As Restated - Note 12) Balance, December 31, 1997 8,261,036 40,631 180,356 220,987 Net loss for 1998 (49,208) (49,208) Dividends declared-$0.48 per share (3,685) (3,685) Stock option transactions 82,451 1,605 1,605 Repurchases of common stock (1,795,800) (7,782) (28,390) (36,172) Unrealized holding gains on securities-net of taxes of $97 152 152 - ----------------------------------------------------------------------------------------------------------- (As Restated - Note 12) Balance, December 31, 1998 6,547,687 $ 34,454 $ 99,073 $ 152 $ 133,679 =========================================================================================================== See notes to consolidated financial statements.
Page 21 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 - ------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) 1998 1997 1996 ---------------------------------------------- (As Restated - Note 12) - ------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: Net income (loss) $ (49,208) $ 32,925 $ 3,034 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 4,118 2,968 2,352 Gain on disposal of property, plant and equipment (13,545) (6,732) Deferred income taxes (8,597) (10,785) (2,980) Results of discontinued operations and (gain) loss on disposal 54,288 (27,889) (9,369) Restructuring write-downs - non-cash portion 5,651 Net changes in: Receivables 3,207 2,895 (16,271) Inventories (613) (3,334) 3,187 Other assets (20,346) (1,792) 3,353 Accruals and payables (14,986) 40,363 (3,208) Advances on contracts (204) 435 555 Provision for losses on contracts 3,299 3,411 43 Environmental remediation (176) (26) (126) ------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by continuing operating activities (37,112) 32,439 (19,430) Net cash provided (used) by discontinued operations (3,585) 16,229 3,218 ------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by operating activities (40,697) 48,668 (16,212) ------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Additions of property, plant and equipment (7,337) (7,025) (3,394) Purchase of short-term investments (101,046) Proceeds from sale of short-term investments 55,943 Proceeds from sale of discontinued operations 77,884 Proceeds on real property sales and assets retirements 16,334 8,538 157 ------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by investing activities (36,106) 79,397 (3,237) ------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Payments on long-term borrowings (136) (2,362) (123) Proceeds from issuance of common stock 1,605 2,778 4,691 Repurchase of common stock (36,172) (5,747) Dividends paid (3,685) (3,974) (3,973) ------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by financing activities (38,388) (9,305) 595 ------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and equivalents (115,191) 118,760 (18,854) Cash and equivalents at beginning of year 134,462 15,702 34,556 - ------------------------------------------------------------------------------------------------------------------------------ Cash and equivalents at end of year $ 19,271 $ 134,462 $ 15,702 ============================================================================================================================== See notes to consolidated financial statements.
Page 22 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year Ended December 31 - --------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------- Other cash flow information: - --------------------------------------------------------------------------------------------------------------------- Income taxes paid-net of refunds $ 9,478 $ 3,143 $ 5,700 Interest paid 1,098 1,389 1,574 - --------------------------------------------------------------------------------------------------------------------- Noncash investing and financing activities: - --------------------------------------------------------------------------------------------------------------------- Reclassification of plant held for sale from "Property, Plant and Equipment" to "Other Assets", at book value which is below market (1) $ 6,422 - --------------------------------------------------------------------------------------------------------------------- (1) The company's San Jose, California plant was vacated in 1998 and held for sale. See additional information in Note 10 to the consolidated financial statements. See notes to consolidated financial statements.
Page 23 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation--The consolidated financial statements include those of the company and its subsidiaries after elimination of intercompany balances and transactions. The company disposed of its Government Electronics segment in 1997 and Semiconductor Equipment segment in July 1999. The consolidated financial statements reflect such disposition and result of operations of these businesses as discontinued operations. For additional information on discontinued operations, see Note 8 and 12 to the consolidated financial statements. Cash Equivalents and Investments--Cash equivalents consist of municipal bond funds and commercial paper acquired with remaining maturity periods of 90 days or less and are stated at cost plus accrued interest which approximates market value. Investments consist of high-grade debt securities (AA rating or better) with maturity greater than 90 days from the date of acquisition and are classified as "available-for-sale." Investments classified as available-for-sale are reported at fair market value with unrealized gains or losses excluded from earnings and reported as a separate component of stockholders' equity, net of tax, until realized. The company's investment guidelines limit investments with a single issuer, excluding the U.S. Government or any agency thereof, to the greater of $5.0 million or 10 percent of the investment portfolio. Inventories--Inventories are stated at the lower of cost, using first-in, first-out and average-cost basis, or market. Cost of inventory items is based on purchase and production cost. Long-term contract costs and selling and administrative expenses are excluded from inventory. Progress payments are not netted against inventory. Property, Plant and Equipment--Property, plant and equipment are stated at cost. Provision for depreciation and amortization is primarily based on the straight-line method. Leases which at inception assure the lessor full recovery of the fair market value of the property over the lease term are capitalized and amortized over the lease term in accordance with Statement of Financial Accounting Standards ("SFAS") No. 13 "Accounting for Leases." Revenue Recognition--Revenues, other than from long-term contracts, are recorded upon shipment or completion of tasks as specified in the contract. Estimated product warranty costs are accrued at the time of shipment. Sales and allowable fees under cost-reimbursement contracts are recorded as costs are incurred. Long-term contract sales and cost of goods sold are recognized using the percentage-of-completion method based on the actual physical completion of work performed and the ratio of costs incurred to total estimated costs to complete the contract. Any anticipated losses on contracts are charged to earnings when identified. Foreign Currency Translation--The company's continuing operations have no foreign operations subject to foreign currency translation. Forward Exchange Contracts--The company enters into forward exchange contracts to hedge sales transactions and firm commitments denominated in foreign currencies. Gains and losses on the forward contracts are recognized based on changes in exchange rates, as are offsetting foreign exchange gains and losses on the underlying transactions. Income Taxes--The consolidated statements of operations include provisions for deferred income taxes using the liability method for transactions that are reported in one period for financial accounting purposes and in another period for income tax purposes. Page 24 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Per Share Information--Basic earnings per share is computed using the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options) were exercised or converted into common stock, however, such adjustments are excluded when there is a loss from continuing operations, as they are considered antidilutive. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock-Based Compensation--The company continues to account for stock-based compensation granted to employees and directors under the intrinsic value method as defined in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Recently Issued Accounting Standard--In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of 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. 2. FINANCIAL INSTRUMENTS AND SHORT-TERM INVESTMENTS Financial instruments that potentially subject the company to concentrations of credit risk consist principally of cash and equivalents, short-term investments, receivables, and financial instruments used in hedging transactions. The company invests in a variety of financial instruments such as commercial paper and municipal bond funds, and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer. Concentration of credit risk with respect to trade receivables is limited due to the variety of customers and market segments into which the company's products are sold, as well as their dispersion across geographic areas. The company maintains an allowance for doubtful accounts based upon the expected collectibility of receivables. The carrying value of cash and equivalents, short-term investments, receivables, accounts payable and short-term notes payable are a reasonable approximation of their fair market value due to the short-term maturities of those instruments. The carrying value of the company's long-term debt approximates fair value based on the interest rates currently available to the company for long-term debt with similar terms as those borrowings of the company. Considerable judgment is required in interpreting market data to develop estimates of fair value, so these estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. Page 25 2. FINANCIAL INSTRUMENTS AND SHORT-TERM INVESTMENTS (continued) The fair value and the amortized cost of available-for-sale securities at December 31, 1998, including unrealized holding gains, are presented in the table which follows. Fair values are based on quoted market prices obtained from an independent broker. Available-for-sale securities are classified as current assets and have an average maturity of less than two years. Gross proceeds from the sale of marketable securities were $55.9 million during 1998. Gross gains and losses realized on such sales or maturities were not material. For the purpose of determining gross realized gains and losses, the cost of securities sold is based upon specific identification. Unrealized Amortized Market holding (in thousands) cost value gains - -------------------------------------------------------------------------------- Corporate debt securities $45,104 $45,353 $249 ================================================================================ 3. LONG-TERM OBLIGATIONS AND LINES OF CREDIT Long-term obligations, excluding amounts due within one year, consist of the following at December 31: (in thousands) 1998 1997 - -------------------------------------------------------------------------------- Deferred compensation $ 291 $ 1,913 Environmental remediation 3,254 3,431 Long-term leases 5,066 5,190 - -------------------------------------------------------------------------------- Total $8,611 $10,534 ================================================================================ The current portion of long-term obligations is included in current liabilities. The expected maturity amounts are as follows: 1999, $311,000; 2000, $441,000; 2001, $378,000; 2002, $407,000; 2003, $438,000; thereafter, $6,947,000. Deferred Compensation--The company has several nonqualified deferred compensation and bonus plans covering selected members of management and key technical employees. Substantially all these plans were terminated as of December 31, 1998, and the balances classified as currently payable. Environmental Remediation--As discussed in Note 6, the company is obligated to remediate groundwater contamination at its Palo Alto, California, facility. The portion expected to be paid within one year is included in current liabilities. Leases--Certain long-term leases for plant facilities are treated as capital leases for financial statement purposes. The leases expire during the years 2029 to 2056. The company also has noncancellable operating leases for plant facilities and equipment expiring through the year 2002. These leases may be renewed for various periods after the initial term. Payment obligations under existing capital and operating leases as of December 31, 1998 are as follows: Capital Operating (in thousands) Leases Leases - -------------------------------------------------------------------------------- Lease payments: 1999 $ 635 $ 564 2000 635 503 2001 635 416 2002 635 2 2003 635 Remaining years 6,822 - ------------------------------------------------------------------------------- Total 9,997 $1,485 =========== Imputed interest (4,795) - -------------------------------------------------------------------- Present value of lease payments (including current portion of $136) $ 5,202 ==================================================================== Page 26 3. LONG-TERM OBLIGATIONS AND LINES OF CREDIT (continued) The company sub-leases a portion of its of its Palo Alto, California, facility under a short-term operating lease expiring October 2000. Included in other income for 1998 is approximately $1.2 million of income after expenses from this rental agreement. Rental income was not material prior to 1998. Rent expense included in continuing operations for property and equipment relating to operating leases is as follows: (in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Real property $ 514 $ 126 $ 164 Equipment 192 593 417 - -------------------------------------------------------------------------------- Total $ 706 $ 719 $ 581 ================================================================================ Credit Facility Termination--The company previously had arranged with several banks to provide a $50.0 million unsecured credit facility which was scheduled to expire on March 31, 1999. During 1998, the company did not borrow under this credit facility. Due to the operating loss reported in 1998, the company was technically not in compliance with certain terms under this credit facility. The company evaluated the proposed revised terms and elected to terminate the facility based on the company's cash balances and short-term investments. The company has letters of credit of $2.1 million of which $0.9 million was outstanding at December 31, 1998, with approximately $0.6 million collateralized by specific cash balances. 4. SHAREOWNERS' EQUITY Stock Repurchase Program--During 1998, the company's Board of Directors increased the company's common stock repurchase authorization from 2,500,000 to 3,500,000 shares. By December 31, 1998, all 3,500,000 shares have been repurchased, of which 1,795,800 and 204,200 were repurchased in 1998 and 1997, respectively. No shares were repurchased in 1996. Common Share Purchase Rights--During 1998, the company's Board of Directors amended the company's Common Share Purchase Rights Plan to decrease from 15% to 10% the threshold level of common stock ownership that would trigger the exercisability of common share purchase rights (the Rights) under the Rights Plan. For each share of company common stock outstanding, one Common Share Purchase Right (the Rights) is attached. The Rights expire October 20, 2006, and may be redeemed by the company for $0.01 per Right at any time prior to 10 days after a person or group acquires 10% or more of the company's common stock. The Rights become exercisable and trade separately from the common stock if any person or group acquires 10% or more of the company's outstanding common stock, or announces a tender or exchange offer which would result in such person or group acquiring 10% or more of the company's common stock. When the Rights first become exercisable as a result of the announcement of a tender or exchange offer, a holder of a Right will be entitled to buy one share of the company's common stock for $160. If a person or group not previously approved by the Board of Directors acquires 10% or more of the company's shares, a holder of a Right (other than that person or group) will be entitled to buy that number of shares of common stock from the company which have a market value of twice the $160 exercise price of each Right. If the company is acquired in a merger or other business combination after any person or group acquires 10% or more of the company's common stock, each Right will entitle its holder to buy a number of shares of common stock of the surviving company having a market value of twice the $160 exercise price. After the acquisition by any person or group of 10% or more of the company's common stock and up to the time that such person or group acquires a 50% interest, the company will also have the ability to exchange some or all of the Rights (other than Rights held by the acquiror) for one share of common stock per Right at no expense to the holder. Page 27 4. SHAREOWNERS' EQUITY (Continued) Stock Option Plans--The Employee Stock Option Plans (the Plans) provide for grants of nonqualifying and incentive stock options to certain key employees and officers. The company may grant options to purchase up to 4,300,000 shares of common stock. Options are typically granted at the market price on the date of grant and expire at the tenth anniversary date. One-third of the options granted are exercisable on each of the second, third and fourth anniversary dates following the grant. The Plans allow those employees who are subject to the insider trading restrictions certain limited rights to receive cash in the event of a change in control. In addition, the Plans permit the award of restricted stock rights subject to a fixed vesting schedule. The holder of vested restricted stock has certain dividend, voting, and other shareowner rights. No restricted stock awards have been made through December 31, 1998. The Nonemployee Directors Stock Option Plan provides for a fixed schedule of options to be granted through the year 2005. Nonemployee directors of the company are automatically granted 3,000 shares of common stock each year that such person remains a director of the company. The options are granted at the market price on the date of grant and expire on the tenth anniversary date. The options granted become exercisable six months after the date of grant. The total number of shares to be issued under this plan may not exceed 350,000 shares. As included in the tables below, options on 21,000 shares were granted at $26.50 in 1998, options on 21,000 shares were granted at $26.88 in 1997 and options on 21,000 shares were granted at $34.63 in 1996. Stock option transactions included in the Consolidated Statements of Shareowners' Equity are shown net of retirement of outstanding shares used in payment for options exercised and include tax benefits related to sales under stock option plans of $217,000, $719,000 and $1,161,000 for 1998, 1997 and 1996, respectively. Activity related to all stock option plans is as follows: Weighted Average 1998 Shares Exercise Price - -------------------------------------------------------------------------------- Granted 242,000 $25.72 Exercised 82,451 $16.84 Terminated 151,427 $29.67 At December 31: Outstanding 1,452,062 $27.41 Exercisable 858,765 $26.57 Reserved for future grants 1,056,709 1997 - -------------------------------------------------------------------------------- Granted 242,000 $26.41 Exercised 135,988 $15.14 Terminated 191,309 $34.76 At December 31: Outstanding 1,443,940 $27.33 Exercisable 693,966 $23.70 1996 - -------------------------------------------------------------------------------- Granted 205,000 $25.54 Exercised 209,393 $17.57 Terminated 328,443 $29.39 At December 31: Outstanding 1,529,237 $27.32 Exercisable 463,119 $19.11 Page 28 4. SHAREOWNERS' EQUITY (continued) The following table summarizes information concerning currently outstanding and exercisable options at December 31, 1998:
Options Outstanding Options Exercisable - -------------------------------------------------------------------------------- ---------------------------------- Weighted Weighted Average Years Weighted Average Range of Number of Remaining Average Number Exercise Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Price - -------------------------------------------------------------------------------- ---------------------------------- $10.00 to $21.63 319,946 5.3 $15.57 233,608 $13.61 $22.75 to $22.75 263,502 5.2 $22.75 263,502 $22.75 $22.81 to $26.88 395,000 8.7 $25.87 49,666 $26.66 $27.00 to $35.88 84,493 7.2 $32.88 52,326 $33.52 $36.75 to $36.75 259,415 6.2 $36.75 174,482 $36.75 $39.50 to $55.00 129,706 6.7 $48.55 85,181 $48.77 ================================================================================ ================================== $10.00 to $55.00 1,452,062 6.6 $27.41 858,765 $26.57 ================================================================================ ==================================
As discussed in Note 1, the company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans. Had compensation cost for the company's stock option plans been determined based upon the fair value at the grant date for awards under these plans, and amortized to expense over the vesting period of the awards consistent with the methodology prescribed under SFAS 123, "Accounting for Stock-Based Compensation," the company's pro forma net income (loss) for 1998, 1997 and 1996 would have been $(50.4) million, $31.7 million and $1.3 million, respectively, or $(6.52), $3.84 and $0.15 per basic and diluted share, respectively. However, the impact of outstanding non-vested stock options granted prior to 1995 has been excluded from the pro forma calculation; accordingly, the 1998, 1997 and 1996 pro forma adjustments are not indicative of future period pro forma adjustments, when the calculation will apply to all applicable stock options. The weighted average fair value of options calculated on the date of grant using the Black-Scholes option-pricing model along with the weighted average assumptions used are as follows:
1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------- Fair value $ 7.70 $ 8.02 $ 7.96 Dividend yield 2.1% 1.2% 1.5% Volatility 41.7% 38.1% 37.5% Risk free interest rate at the time of grant 5.4% 6.1% 6.2% Expected term to exercise (in months from the vest date) 4.9 4.5 3.5
The company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. The Black-Scholes model used by the company to calculate option values, as well as other currently accepted option valuation models, were developed to estimate the fair values of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the company's stock option awards. These models also require highly subjective assumptions, including future stock price volatility, and expected time until exercise, which greatly affect the calculated values. Page 29 5. INCOME TAXES The provision for income taxes includes deferred taxes reflecting the net tax effects of temporary differences that are reported in one period for financial accounting purposes and in another period for income tax purposes. Deferred tax assets are recognized when management believes realization of future tax benefits of temporary differences is more likely than not. In estimating future tax consequences, generally all expected future events are considered other than enactments of changes in the tax law or rates. The components of income (loss) from continuing operations before federal, state and foreign income taxes consists of the following: (in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- U.S. $ 6,379 $ 7,769 $(9,642) Foreign 1,147 (163) - -------------------------------------------------------------------------------- Total $ 7,526 $ 7,769 $(9,805) ================================================================================ The provision for federal, state and foreign income tax expense (benefits) on income (loss) from continuing operations consists of the following: (in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Current: U.S $ 6,541 $ 4,271 $(2,917) State 340 1,261 (557) Foreign (168) - -------------------------------------------------------------------------------- Total current 6,881 5,532 (3,642) - -------------------------------------------------------------------------------- Deferred: U.S (2,852) (1,076) 90 State (1,583) (1,723) 82 - -------------------------------------------------------------------------------- Total $ 2,446 $ 2,733 $(3,470) ================================================================================ Deferred tax assets (liabilities) are comprised of the following at December 31: (in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------- Deferred compensation $ 1,902 $ 1,380 $ 1,202 Loss accruals 9,887 5,576 681 Environmental remediation 1,596 1,576 1,305 Uniform capitalization 66 296 324 Vacation accrual 717 1,011 858 NOL and tax credits carried forward 19,925 15,861 12,090 Depreciation and amortization 1,202 747 Other 675 1,023 893 - ------------------------------------------------------------------------------- Gross deferred tax assets 35,970 27,470 17,353 - ------------------------------------------------------------------------------- Depreciation (295) Other (58) - ------------------------------------------------------------------------------- Gross deferred tax liabilities (353) - ------------------------------------------------------------------------------- Net deferred tax asset $35,970 $ 27,470 $ 17,000 =============================================================================== Page 30 5. INCOME TAXES (Continued) The differences between the effective income tax (benefit) rate and the statutory federal income tax (benefit) rate are as follows: 1998 1997 1996 - -------------------------------------------------------------------------------- Statutory federal tax (benefit) rate 35.0% 35.0% (34.0)% Export sales benefit (3.0) (1.7) (1.2) Research credit (2.7) (2.6) (1.1) State taxes (benefit) net of federal tax 2.6 2.1 (1.1) Other .6 2.2 2.0 - -------------------------------------------------------------------------------- Effective tax (benefit) rate 32.5% 35.0% (35.4)% ================================================================================ 6. ENVIRONMENTAL REMEDIATION AND OTHER CONTINGENCIES In 1991 the company recorded a $5.2 million charge for estimated remediation actions and cleanup costs. The company remains in compliance with the remedial action plans being monitored by various regulatory agencies at its Palo Alto site and no additional provision has been recorded since 1991. Expenditures charged against the provision totaled $176,000, $26,000 and $126,000 for the years 1998, 1997 and 1996, respectively. While the timing and ultimate amount of expenditures of restoring the sites cannot be predicted with certainty, management believes that the provision taken is adequate based on facts known at this time. Changes in environmental regulations, improvements in cleanup technology and discovery of additional information concerning these sites and other sites could affect the estimated costs in the future. In addition to the above environmental matters, the company is involved in various legal actions which arose in the ordinary course of its business activities. Except for the environmental provision noted above, management believes the final resolution of these matters should not have a material impact on its results of operations, cash flows, and financial position. 7. EMPLOYEE BENEFIT PLANS Employees' Investment Plan--The Watkins-Johnson Employees' Investment Plan covers substantially all employees and provides that the company match employees' 401(k) salary deferrals up to 3% of eligible employee compensation. The amount charged to continuing operations was $959,000, $982,000 and $873,000 in 1998, 1997 and 1996, respectively. Employee Stock Ownership Plan (ESOP)--The ESOP was established to encourage employee participation and long-term ownership of company stock. The company's Board of Directors determines each year's discretionary contribution depending on the performance and financial condition of the company and is allocated as a percentage of eligible employee base compensation. All U.S. employees are eligible to participate in the plan and vesting is immediate. The Board approved a contribution equal to 1% of eligible employee compensation for 1998, 1997, and 1996, which resulted in charges to continuing operations of $208,000, $330,000 and $324,000, respectively. The ESOP held 181,624 and 229,231 shares of common stock at December 31, 1998 and 1997, respectively, and there are no unallocated or unearned shares held by the plan. Shares held by the ESOP are included in the company's earnings per share computations. Dividends paid with respect to common stock held by the ESOP are used to purchase additional shares and were not material for all years presented. 8. BUSINESS SEGMENT REPORTING AND DISCONTINUED OPERATIONS In 1997 the company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." The Statement requires that an enterprise's operating segments be determined in the manner in which management operates the business. Specifically, financial information is to be reported on the basis that is used internally by the chief operating decision maker in making decisions related to resource allocation and segment performance. The company's reportable segments are operated and managed as strategic business units and are organized based on products and services. Page 31 8. BUSINESS SEGMENT REPORTING AND DISCONTINUED OPERATIONS (continued) Under SFAS 131, the company's continuing operations were divided into two 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. As discussed below, two divested segments are being reported as discontinued operations. The Government Electronics segment was divested in 1997 and the Semiconductor Equipment Group segment was divested in July 1999. Management evaluates segment performance based primarily on segment revenues, pre-tax operating profit or loss before interest and other nonoperating income and expenses, and return on assets. Sales between continuing segments are not significant for any year presented. Continuing operations by business segment are as follows:
(in thousands) Year Ended December 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------ Pre-tax Year- Income End Capital Sales (Loss) Assets Additions Depreciation - ------------------------------------------------------------------------------------------------------------------------------ Wireless Products Group $ 63,568 $ 198 $ 27,059 $ 5,692 $ 1,519 Telecommunications Group 51,651 (13,895) 22,203 1,632 2,136 Corporate 153,118 13 463 - ------------------------------------------------------------------------------------------------------------------------------ Loss from operations (13,697) Other income (expense)--net 21,223 - ------------------------------------------------------------------------------------------------------------------------------ Total $ 115,219 $ 7,526 $ 202,380 $ 7,337 $ 4,118 ============================================================================================================================== Year Ended December 31, 1997 - ------------------------------------------------------------------------------------------------------------------------------ Wireless Products Group $ 31,174 $ (8,080) $ 15,386 $ 2,743 $ 658 Telecommunications Group 73,643 7,126 37,423 4,138 1,852 Corporate 248,133 144 458 - ------------------------------------------------------------------------------------------------------------------------------ Loss from operations (954) Other income (expense)--net 8,723 - ------------------------------------------------------------------------------------------------------------------------------ Total $ 104,817 $ 7,769 $ 300,942 $ 7,025 $ 2,968 ============================================================================================================================== Year Ended December 31, 1996 - ------------------------------------------------------------------------------------------------------------------------------ Wireless Products Group $ 12,633 $ (10,214) $ 8,275 $ 473 $ 419 Telecommunications Group 64,050 1,703 41,805 2,681 1,420 Corporate 183,059 240 513 ============================================================================================================================== Loss from operations (8,511) Other income (expense)--net (1,294) - ------------------------------------------------------------------------------------------------------------------------------ Total $ 76,683 $ (9,805) $ 233,139 $ 3,394 $ 2,352 ==============================================================================================================================
Corporate assets consist primarily of cash, cash equivalents and deferred taxes, and net assets of the discontinued Government Electronics and Semiconductor Equipment Group segments. Page 32 8. BUSINESS SEGMENT REPORTING AND DISCONTINUED OPERATIONS (continued) Sales to individual customers representing greater than 10% of company consolidated sales during at least one of the past three years are as follows: (in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Wireless Products Group: Lucent Technologies, Inc. $33,000 $20,000 $11,000 Telecommunications Group: United States Government 26,000 36,000 28,000 Raytheon Electronic Systems 6,000 3,000 1,000 Sales to unaffiliated customers by geographic area are as follows: (in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- United States $ 93,419 $ 93,114 $ 69,376 Export sales from United States: Europe 5,717 3,842 978 Canada 8,010 1,228 0 Singapore 4,518 2,388 1,622 Other Asia-Pacific countries 1,829 2,306 1,003 Other 1,726 1,939 3,704 - -------------------------------------------------------------------------------- Total $115,219 $104,817 $ 76,683 ================================================================================ Intercompany transfers of products and services between continuing operations' geographic regions were not material for the years 1998, 1997 and 1996. The company's continuing operations' operating profit (loss) and year-end long-lived assets by geographic area are substantially all located in the United States. The company's Government Electronics segment was divested on October 31, 1997 and resulted in a net gain of $29.7 million. Operations of Government Electronics included the development, manufacture and sale of advanced microwave devices and tactical electronic systems and devices for guided-missile programs and other government applications. Summarized below are operating results of the discontinued Government Electronics business through its sale on October 31, 1997. Intersegment sales were transferred based on negotiated prices and were not significant for the years presented. Year Ended December 31 (in thousands) 1997 1996 - -------------------------------------------------------------------------------- Net sales $ 75,700 $ 89,200 ================================================================================ Gross profit $ 21,900 $ 21,100 ================================================================================ Income from operations before income taxes $ 11,500 $ 6,663 Income taxes (4,290) (2,308) Gain on disposition-net of taxes of $20,219 29,677 - -------------------------------------------------------------------------------- Net income from discontinued operations $ 36,887 $ 4,355 ================================================================================ Page 33 8. BUSINESS SEGMENT REPORTING AND DISCONTINUED OPERATIONS (continued) The company's Semiconductor Equipment segment was divested on July 6, 1999 and resulted in a net gain of $7.3 million. Operations in the Semiconductor Equipment segment involve the development, manufacture, sale and service of chemical-vapor-deposition equipment used in the manufacture of semiconductor products. Summarized below are the net assets of the discontinued Semiconductor Equipment business. Year Ended December 31 (in thousands) 1998 1997 - -------------------------------------------------------------------------------- Accounts receivable $ 12,354 $ 22,895 Other assets 16,087 37,496 Current liabilities (20,988) (35,165) - -------------------------------------------------------------------------------- Net assets of discontinued operations, current $ 7,453 $ 25,226 ================================================================================ Fixed assets, net $ 39,048 $ 71,949 Other assets 2,007 646 Long-term obligations (20,224) (18,695) Environmental remediation (3,866) (4,006) - -------------------------------------------------------------------------------- Net assets of discontinued operations, noncurrent $ 16,965 $ 49,894 ================================================================================ Summarized below are operating results of the discontinued Semiconductor Equipment business. Year Ended December 31 (in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Net sales $ 97,000 $ 186,500 $ 272,400 Gross profit $ 16,653 $ 55,337 $ 95,822 ================================================================================ Loss from operations before income taxes $ (80,534) $ (14,731) $ 7,709 Income taxes (benefit) (26,246) (5,733) 2,695 - -------------------------------------------------------------------------------- Net loss from discontinued operations $ (54,288) $ (8,998) $ 5,014 ================================================================================ During the third quarter of 1998, the Semiconductor Equipment segment discontinued its high-density-plasma (HDP) chemical-vapor-deposition (CVD) product line and restructured its operations to focus on its core atmospheric-pressure chemical-vapor-deposition (APCVD) products. Inventory, demo equipment, and specialized fixed assets which have no market value and no known alternative use were written down in the restructuring. In addition, employment was reduced from 590 to 430. Terminated employees were mostly related to the discontinued product line. Of the total employees terminated, 120 were from the domestic operations, while 40 were from foreign operations. Employees were notified of the reduction-in-force in the third quarter. The segment incurred charges of $38.3 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 $3,473 $21,118 $13,720 ============================== Amount paid 1,997 - ----------------------------------------------- Balance at December 31, 1998 $1,476 =============================================== Page 34 8. BUSINESS SEGMENT REPORTING AND DISCONTINUED OPERATIONS (continued) On July 6, 1999, the date on which the sale of the segment was completed, $320,000 of the accrued amount was not yet paid. The amount was included in determining the gain on the disposition of the segment. Included in the third quarter 1998 asset write-down was a $6.0 million charge related to the facility in Japan. The asset was written down to fair market value in accordance with SFAS No.121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Fair market value was determined by an independent certified appraiser in Japan based on the intended use of the facility. Foreign Exchange Risks - Prior to the sale of the Semiconductor Equipment segment, the segment in its normal course of business entered into foreign exchange forward contracts to hedge commitments in the underlying foreign currency exposure. The maturity of foreign currency exchange contracts held at December 31, 1998 was consistent with the contractual or expected timing of the transactions being hedged, principally receipt of customer payments in Japanese Yen. The company expects to close its position on these contracts in conjunction with any foreign currency exposure outstanding after the sale of the segment. These foreign exchange contracts mature within 1 year and are as follows: CONTRACTS TO PURCHASE (Dollars in thousands) - -------------------------------------------------------------------------------- Currency At Contract At Market Type Contract Date Maturity Date Rate Rate - -------------------------------------------------------------------------------- Fourth Quarter First Quarter Yen 1998 1999 $5,908 $5,972 - -------------------------------------------------------------------------------- CONTRACTS TO SELL (Dollars in thousands) - -------------------------------------------------------------------------------- Currency At Contract At Market Type Contract Date Maturity Date Rate Rate - -------------------------------------------------------------------------------- Fourth Quarter First Quarter Yen 1998 1999 $13,813 $14,055 - -------------------------------------------------------------------------------- Page 35 9. EARNINGS PER SHARE Basic and diluted earnings per share were computed as follows:
Year Ended December 31 (in thousands, except per share amounts) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ Basic per share amounts: - ------------------------------------------------------------------------------------------------------------ Net income (loss) from continuing operations (numerator) $ 5,080 $ 5,036 $(6,335) - ------------------------------------------------------------------------------------------------------------ Weighted average shares outstanding (denominator) 7,737 8,258 8,265 - ------------------------------------------------------------------------------------------------------------ Basic net income (loss) per share $ 0.66 $ 0.61 $ (0.77) ============================================================================================================ - ------------------------------------------------------------------------------------------------------------ Diluted per share amounts: - ------------------------------------------------------------------------------------------------------------ Net income (loss) from continuing operations (numerator) $ 5,080 $ 5,036 $(6,335) - ------------------------------------------------------------------------------------------------------------ Weighted average shares outstanding 7,737 8,258 8,265 Effect of dilutive stock options 120 251 - ------------------------------------------------------------------------------------------------------------ Dilutive shares outstanding (denominator) 7,857 8,509 8,265 - ------------------------------------------------------------------------------------------------------------ Diluted net income (loss) per share $ 0.65 $ 0.59 $ (0.77) ============================================================================================================
For 1996 the incremental shares from the assumed exercise of 272,000 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. Additionally, weighted average options outstanding to purchase 887,000, 564,000 and 685,000 shares of common stock were not included in the computation of diluted per share amounts in 1998, 1997 and 1996, respectively, because the weighted average exercise prices were greater than the average market prices of the common shares. Weighted average exercise prices of $33.50 in 1998, $39.61 in 1997 and $39.62 in 1996 exceeded the average market prices of $23.28, $29.75 and $28.62, respectively. 10. REAL ESTATE TRANSACTIONS In 1998 the company sold approximately 15 acres of undeveloped land adjacent to its San Jose, California, facility for a net sales price of $16.0 million realizing a pre-tax gain of $15.0 million. The balance of the San Jose facility was vacated and its carrying value of $6.4 million (which management believes to be less than market value) was reclassified as held for sale and included in "Other Assets" (long-term) in the December 31, 1998 Consolidated Balance Sheet. The company expects to sell this property in 1999. Any future gain associated with the sale of this property will be treated as from the sale of a corporate asset for segment reporting purposes. In 1997 the company exchanged a portion of its subleasehold interest at its Palo Alto, California, facility for consideration consisting of cash and the sublessor's leasehold rights in the remaining parcels under the lease. The exchange resulted in a pre-tax gain of $7.6 million. Page 36 11. 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. The reassessment concluded that TG had exhausted all potential sales avenues for the product, and determined that there was no market value and alternative use for the specialized fixed assets and equipment. In addition, TG employment was reduced from 320 to 290. Terminated employees were mostly related to the Base2 product line. Employees were notified of the reduction-in-force in the third quarter. Inventory, demo equipment, and specialized fixed assets associated with the discontinued product were written down in the third quarter and subsequently disposed of in the fourth quarter of 1998. 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 ================================ Amounts paid 213 - ----------------------------------------------- Balance at December 31, 1998 $235 =============================================== The company anticipates substantially all accrued severance and benefits will be paid within a year. 12. SUBSEQUENT EVENTS On March 1, 1999, the company announced that, after a strategic review performed by its investment banking firm, it would pursue a sale either of the company, in its entirety or its component businesses. On March 31, 1999, the company sold the high-density plasma chemical vapor deposition (HDPCVD) intellectual property assets and related hardware of its Semiconductor Equipment Group. In July 1999, the company sold the remainder of its Semiconductor Equipment Group business, consisting of atmospheric pressure chemical vapor disposition products (APCVD), completing the divestiture of its Semiconductor Equipment Group. The transactions resulted in a net gain of $7.3 million included in the second quarter of 1999. The accompanying consolidated financial statements and related notes have been restated to reflect the Semiconductor Equipment Group as a discontinued operation. In August 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 subject to certain conditions in addition to approval by the company's shareowners and government approvals. In September 1999, the company completed the sale of its remaining San Jose, California facility including a 190,000 square foot building resulting in net proceeds of about $17.0 million. 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. On October 26, 1999, the company announced it has entered into a definitive merger agreement with FP-WJ Acquisition Corp. ("FP-WJ"), a new company formed by certain investment funds managed by Fox Paine & Company, LLC. 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. The transaction is subject to certain conditions in addition to approval by the company's shareowners and government approvals and the completion of the sale of TG to Marconi North America, Inc. There can be no assurance that the 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. Page 37 13. QUARTERLY FINANCIAL DATA--UNAUDITED Unaudited quarterly financial data are as follows:
(in thousands, except per share amounts) - ------------------------------------------------------------------------------------------------------------------------------ 1998 Quarters 1st 2nd 3rd 4th - ------------------------------------------------------------------------------------------------------------------------------ Sales $ 30,006 $ 26,835 $ 19,069 $ 39,309 Gross profit (loss) 11,767 10,183 (1,970) 10,520 Net income (loss) from continuing operations 11,546 563 (8,891) 1,862 Net income (loss) from discontinued operations (1,845) (6,770) (45,523) (150) Net income (loss) 9,701 (6,207) (54,414) 1,712 Basic net income (loss) per share from continuing operations 1.40 0.07 (1.13) 0.28 Diluted net income (loss) per share from continuing operations 1.37 0.07 (1.13) 0.28 Basic net income (loss) per share 1.17 (0.75) (6.93) 0.26 Diluted net income (loss) per share $ 1.15 $ (0.74) $ (6.93) $ 0.25 - ------------------------------------------------------------------------------------------------------------------------------ 1997 Quarters 1st 2nd 3rd 4th - ------------------------------------------------------------------------------------------------------------------------------ Sales $ 23,054 $ 24,688 $ 28,853 $ 28,222 Gross profit 8,280 9,471 11,328 10,180 Net income (loss) from continuing operations (339) 378 1,553 3,444 Net income (loss) from discontinued operations 2,817 2,704 2,037 (9,346) Net income 2,478 3,082 3,590 23,775 Basic net income (loss) per share from continuing operations (0.04) 0.05 0.19 0.42 Diluted net income (loss) per share from continuing operations (0.04) 0.04 0.18 0.41 Basic net income per share 0.30 0.37 0.44 2.88 Diluted net income per share $ 0.30 $ 0.36 $ 0.42 $ 2.80
The first quarter of 1998 includes a pre-tax gain on the sale of undeveloped land in San Jose totaling about $15.0 million. See Note 10. The third quarter of 1998 includes pre-tax charges for a discontinued product line and related restructuring totaling $6.1 million. See Note 11. The fourth quarter of 1997 includes a pre-tax gain of $7.6 million related to an exchange of subleasehold interest in its Palo Alto, California facility. The total of quarterly amounts for basic and diluted net income per share does not necessarily equal the annual amount. The computations exclude common equivalent shares in loss periods since they are antidilutive, and the computations are based on the average number of basic and diluted common shares outstanding during each period. 14. ACCRUED EXPENSES Accrued expenses consist of the following:
Year Ended December 31 (in thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ Retained liabilities related to sale of Government Electronics segment(1) $ 8,268 $10,000 Government contract claims 3,111 3,228 Other 5,323 4,273 - ------------------------------------------------------------------------------------------------------------------------ Total $16,702 $17,501 ======================================================================================================================== (1) Amount accrued was for estimated liabilities including product warranty and certain obligations from the stock purchase agreement.
Page 38 REPORT OF MANAGEMENT The consolidated financial statements of Watkins-Johnson Company and subsidiaries were prepared by management, which is responsible for their integrity and objectivity. The statements were prepared in conformity with generally accepted accounting principles and, as such, include amounts that are based on the best judgments of management. The system of internal controls of the company is designed to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorization and are reported properly. The most important safeguard for shareowners is the company's emphasis in the selection, training and development of professional accounting managers to implement and oversee the proper application of its internal controls and the reporting of management's stewardship of corporate assets and maintenance of accounts in conformity with generally accepted accounting principles. Deloitte & Touche LLP, independent auditors, are retained to provide an audit of the consolidated financial statements. They obtain and maintain an understanding of the company's accounting and financial controls, and conduct such tests and related procedures, as they deem necessary to arrive at an opinion on the fairness of the financial statements. The Audit Committee of the Board of Directors, composed solely of Directors from outside the company, meets periodically, separately and jointly, with the independent auditors and representatives of management to review the work of each. The functions of the Audit Committee include recommending the engagement of the independent auditors, reviewing the scope and results of the audit and reviewing management's evaluation of the system of internal controls. W. Keith Kennedy, Jr. Scott G. Buchanan President and Executive Vice President and Chief Executive Officer Chief Financial Officer and Treasurer Page 39 INDEPENDENT AUDITORS' REPORT The Shareowners and Board of Directors of Watkins-Johnson Company: We have audited the accompanying consolidated balance sheets of Watkins-Johnson Company and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, comprehensive income, shareowners' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Watkins-Johnson Company and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. As discussed in Note 12, the accompanying consolidated financial statements have been restated to reflect the Semiconductor Equipment segment as a discontinued operation as a result of the sale of this segment in July 1999. Deloitte & Touche LLP San Jose, California February 5, 1999 (October 29, 1999 as to Note 12) Page 40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Part III Item 10. Directors and Executive Officers of the Registrant The information required by this item concerning the company's directors is shown under the caption "Election of Directors" in the company's definitive proxy statement filed with the Securities and Exchange Commission (Commission) pursuant to Regulation 14A. The information relating to the company's executive officers is presented in Part I of this Form 10-K/A under the caption "Executive Officers of the Registrant". Item 11. Executive Compensation See this caption in the definitive proxy statement filed with the Commission pursuant to Regulation 14A. Item 12. Security Ownership of Certain Beneficial Owners and Management This information is shown under the captions "Security Ownership of Certain Beneficial Owners & Management" in the company's definitive proxy statement filed with the Commission pursuant to Regulation 14A. Item 13. Certain Relationships and Related Transactions Information concerning certain business relationships is shown under the caption "Executive Compensation" in the definitive proxy statement filed with the Commission pursuant to Regulation 14A. There were no transactions with management for which disclosure would be required by Item 404 of Regulation S-K. Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Consolidated Financial Statements Page Consolidated Statements of Operations For the Years Ended December 31, 1998, 1997 and 1996 18 Consolidated Statements of Comprehensive Income For the Years Ended December 31, 1998, 1997 and 1996 19 Consolidated Balance Sheets December 31, 1998 and 1997 20 Consolidated Statements of Shareowners' Equity For the Years Ended December 31, 1998, 1997 and 1996 21 Consolidated Statements of Cash Flows For the Years Ended December 31, 1998, 1997 and 1996 22 Notes to Consolidated Financial Statements 24 Report of Management 39 Independent Auditors' Report 40 Page 41 2. Financial Statement Schedules Page Independent Auditors' Report 45 II Valuation and Qualifying Accounts and Reserves For the Years Ended December 31, 1998, 1997 and 1996 46 Schedules not listed above are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or in the notes thereto. 3. Exhibits A list of the exhibits required to be filed as part of this Form 10-K/A is set forth in the Exhibit Index, which immediately precedes such exhibits. The exhibits are numbered according to Item 601 of Regulation S-K. Exhibits incorporated by reference to a prior Commission filing are designated by an asterisk. ------------------- (b) Reports on Form 8-K and 8-A/A were filed on December 14, 1998. The reports are referenced as Exhibit 10.16 and Exhibit 10.17, respectively, in the Exhibit Index. The report 8-K contains disclosures regarding the December 10, 1998 Board of Director approval and execution of an amendment to the company by-laws and to the Rights Agreement, dated September 30, 1996, between the company and ChaseMellon. Form 8-A/A was filed for registration of the amended common share purchase rights issued under the Rights Agreement. No other reports on Form 8-K were required to be filed during the last quarter of the period covered by this report. (c) The exhibits required to be filed by Item 601 of Regulation S-K are the same as Item 14(a)3 above. (d) Financial statement schedules not included herein have been omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or in the notes thereto. Page 42
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. WATKINS-JOHNSON COMPANY ------------------------------------------- (Registrant) Date: December 10, 1999 By /s/ Dean A. Watkins ------------------------------------- Dean A. Watkins Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- Principal Executive Officer: /s/ W. Keith Kennedy, Jr. President and December 10, 1999 - ----------------------------------------- Chief Executive Officer W. Keith Kennedy, Jr. Principal Financial and Accounting Officer: /s/ Scott G. Buchanan Executive Vice President, December 10, 1999 - ----------------------------------------- Chief Financial Officer Scott G. Buchanan and Treasurer Page 43 Signature Title Date --------- ----- ---- /s/ H. Richard Johnson Director December 10, 1999 - ----------------------------------------- H. Richard Johnson /s/ John J. Hartmann Director December 10, 1999 - ----------------------------------------- John J. Hartmann /s/ Raymond F. O'Brien Director December 10, 1999 - ----------------------------------------- Raymond F. O'Brien /s/ William R. Graham Director December 10, 1999 - ----------------------------------------- William R. Graham /s/ Robert L. Prestel Director December 10, 1999 - ----------------------------------------- Robert L. Prestel /s/ Gary M. Cusumano Director December 10, 1999 - ----------------------------------------- Gary M. Cusumano
Page 44 INDEPENDENT AUDITORS' REPORT The Shareowners and Board of Directors of Watkins-Johnson Company: We have audited the consolidated financial statements of Watkins-Johnson Company and subsidiaries as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated February 5, 1999 (October 29, 1999 as to Note 12); such consolidated financial statements and report are included elsewhere in this annual report on Form 10-K/A. Our audits also included the consolidated financial statement schedule of Watkins-Johnson Company and subsidiaries, listed in Item 14(a)2. This consolidated financial statement schedule is the responsibility of the company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP San Jose, California February 5, 1999 (October 29, 1999 as to Note 12 of the Consolidated Financial Statements) Page 45 Schedule II WATKINS-JOHNSON COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
Balance at Charged to Balance at Beginning Costs and End of Description of Period* Expenses* Deductions(1)* Period* - ----------- ---------- --------- -------------- ------- 1998 Allowance for doubtful accounts $1,291,169 $180,072 $ 38,399 $1,432,842 1997 Allowance for doubtful accounts 550,321 740,848 0 1,291,169 1996 Allowance for doubtful accounts 454,871 95,450 0 550,321 *As restated to reflect the Semiconductor Equipment Group as a discontinued operation as a result of the sale of this segment in July 1999. See Note 12 to the consolidated financial statements. (1) With respect to the allowance for doubtful accounts, deductions represent write-off of uncollectible accounts receivables.
Page 46 EXHIBIT INDEX Exhibit Number Description ------ ----------- 3.1 *Articles of Incorporation of Watkins-Johnson Company, as amended May 8, 1989. 3.2 *By-Laws of Watkins-Johnson Company, as amended and restated on December 10, 1998 (Exhibit 3(ii) to Form 8-K filed on December 14, 1998, Commission File No. 1-5631). 4.1 *Shareowners' Rights Agreement dated as of September 30, 1996 Between Watkins-Johnson Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (Report on Form 8-K, filed on October 1, 1996, Commission File No.1-5631). 4.2 *Amendment No. 1 to Rights Agreement, dated as of December 10, 1998, to Rights Agreement, dated as of September 30, 1996, between 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 *Watkins-Johnson Company Credit Agreement covering the period of November 30, 1995 through December 8, 1998, ABN-AMRO BANK N.V. as Agent (Exhibit 10-a to the 1996 Third Quarter Form 10-Q, Commission File No. 1-5631). 10.7 *Loan Agreement dated as of February 9, 1996 (English Translation) between Watkins-Johnson International Japan K.K. and The Bank of Yokohama, LTD, including Loan Guaranty Agreement with Watkins-Johnson Company dated January 31, 1996 (Exhibit 10-b to the 1996 Third Quarter Form 10-Q, Commission File No. 1-5631). Page 47 Exhibit Number Description ------ ----------- 10.8 *Loan Agreement dated as of June 12, 1996 (English Translation) between Watkins-Johnson International Japan K.K. and The Japan Development Bank, including Loan Guaranty Agreement with Watkins-Johnson Company dated June 12, 1996 (Exhibit 10-c to the 1996 Third Quarter Form 10-Q, Commission File No. 1-5631). 10.9 *First Amendment to Watkins-Johnson Company Credit Agreement covering the period of November 30, 1995 through December 8, 1998, ABN-AMRO BANK N.V. as Agent (original agreement filed as Exhibit 10-a to the 1996 Third Quarter Form 10-Q, Commission File No. 1-5631; first amendment filed as Exhibit 10-a to the 1997 First Quarter Form 10-Q, Commission File No. 1-5631). 10.10 *Second Amendment to Watkins-Johnson Company Credit Agreement covering the period of November 30, 1995 through December 8, 1998, ABN-AMRO BANK N.V. as Agent (original agreement filed as Exhibit 10-a to the 1996 Third Quarter Form 10-Q, Commission File No. 1-5631; second amendment filed as Exhibit 10-a to the 1997 Second Quarter Form 10-Q, Commission File No. 1-5631). 10.11 *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). Page 48 Exhibit Number Description ------ ----------- 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. 10.21 Amended and Restated Employment Agreement made as of March 2, 1998 and amended and restated in its entirety effective as of January 25, 1999 by and between W. Keith Kennedy and Watkins-Johnson Company. 10.22 Form of employment Agreement, dated February 22, 1999, by and between Watkins-Johnson Company and the following officers of the company: Scott G. Buchanan, Dr. Frank E. Emery, Darryl T. Quan and Claudia D. Kelly. 10.23 Form of Amended and Restated Severance Agreement originally dated September 28, 1998 and amended and restated in its entirety effective as of January 25, 1999 by and between Watkins-Johnson Company and the following officers of the company: Dr. Frank E. Emery, Darryl T. Quan and Claudia D. Kelly. 10.24 Amended and Restated Severance Agreement originally dated September 28, 1998 and amended and restated in its entirety effective as of January 25, 1999 by and between Watkins-Johnson Company and Scott G. Buchanan. 10.25 Terms of Employee Retention Program dated March 1, 1999. 21 Subsidiaries of Watkins-Johnson Company. 23 Consent of Independent Auditors. 27.1 Financial Data Schedule for the year ended December 31, 1998. 27.2 Restated Financial Data Schedule for the year ended December 31, 1997. 27.3 Restated Financial Data Schedule for the year ended December 31, 1996. * Incorporated by reference to exhibit indicated for each item. Page 49 EX-10.18 2 PURCHASE AND SALE AGREEMENT Exhibit 10.18 PURCHASE AND SALE AGREEMENT This Agreement is entered into as of the 2nd day of May 1997, by and among Watkins-Johnson Company, a California corporation ("Seller"), and CarrAmerica Realty Corporation, a Maryland corporation and/or its assigns ("Buyer") and is as follows: Terms and Conditions of Sale 1. Sale. Seller agrees to sell and convey to Buyer "As Is" (defined below), and Buyer agrees to purchase from Seller "As Is", for the purchase price (set forth below), approximately 14.6 net acres of raw land, located at Trimble Road and Orchard Parkway, in San Jose, California, as shown on Parcel Map, filed in Book 415 of Maps, pages 40 and 41, Parcel B in Santa Clara County Records, (the "Property") on all of the terms and conditions set forth in this Agreement. 2. Purchase Price and Terms of Payment. The Purchase Price for the Property shall be Seventeen Million One Hundred Seventy Thousand and no/100 Dollars ($17,170,000.00) (the "Purchase Price"). 2.1. Within three (3) business days after execution of this Agreement by both parties, Buyer shall deposit with Escrow Holder (defined below) the amount of $500,000 as a deposit against the Purchase Price (the "Deposit"). Said amount shall be placed into an interest-bearing account, with interest for the benefit of Buyer. 2.3 On or before the Closing Date (as defined below), Buyer shall deposit with Escrow Holder the balance of the Purchase Price, as well as Buyer's share of closing costs. 3. Escrow and Closing. 3.1. Opening of Escrow. Within one (1) business day after the date hereof Buyer shall open escrow (unless previously opened by Seller) with Santa Clara Land Title, 701 Miller Street, San Jose, California 95110 (the "Escrow Holder"), escrow officer Linda Tugade, by the deposit of the Deposit and a copy of this Agreement with the Escrow Holder. Escrow Holder shall place the Deposit in an interest bearing account, with said interest for the benefit of Buyer. Seller and Buyer agree to prepare and execute such joint escrow instructions as may be necessary and appropriate to close the transaction in accordance with the terms of this Agreement. Should said instructions fail to be executed as required, Escrow Holder shall be and hereby is directed to close escrow pursuant to the terms and conditions of this Agreement. 3.2. Close of Escrow. The closing of the escrow ("Close of Escrow"), which shall mean the date on which the deed transferring title is recorded, shall occur within one (1) business day of the satisfaction of the conditions stated in Paragraphs 5 and 6, but in no event 1 later than June 10, 1997 (the "Closing Date"), unless the parties mutually agree otherwise in writing. 3.3. Delivery of Seller's Documents. On or before Closing Date, Seller shall deposit with Escrow Holder all of the following: (i) the fully executed and acknowledged grant deed described in subparagraph 5.2 hereof; (ii) Seller's escrow instructions sufficient to enable Escrow Holder to close the escrow in accordance with the terms of this Agreement, (iii) the affidavits described in subparagraph 5.4 hereof; and (iv) any other documents, records, or agreements called for hereunder that have not previously been delivered. 3.4. Delivery of Buyer's Documents and Funds. On or before Closing Date, Buyer shall deposit with Escrow Holder all of the following: (i) the balance of the Purchase Price, as well as Buyer's share of closing costs; (ii) Buyer's escrow instructions sufficient to enable Escrow Holder to close the escrow in accordance with the terms of this Agreement; and (iii) any other documents, records, agreements, or funds called for hereunder that have not previously been delivered. 3.5. Prorations. Real property taxes of the Property shall be prorated as of the Closing Date. 3.6. Closing Costs. Each party shall pay their own attorney's fees associated with the negotiation of this Agreement. Recording and Escrow fees shall be paid by Seller. The County transfer tax shall be paid by Seller and the city transfer tax shall be paid 50% each by Buyer and Seller. All other closing costs not specifically allocated herein to Buyer or Seller, shall be divided and paid 50% each by Buyer and Seller. 3.7 Traffic Mitigation Costs. At the Close of Escrow, $1,000,000 of the Purchase Price will be retained by Escrow Holder in an interest-bearing account for the benefit of Seller ("Traffic Mitigation Account") to be drawn from by Buyer for any reasonable traffic mitigation costs attributed directly to the Property being developed by Buyer at a .40 FAR ratio or less ("Traffic Mitigation Costs") where the Traffic Mitigation Costs exceed $1,000,000. Buyer is to pay for the first $1,000,000 of Traffic Mitigation Costs before drawing any money from the Traffic Mitigation Account. Traffic Mitigation Costs shall mean any onsite and offsite transportation roadway improvements and traffic impact fees attributed directly to the development of the Property. Traffic Mitigation Costs for either the first $1,000,000 or from the Traffic Mitigation Account shall not include any onsite traffic and transportation roadway improvements. For purposes of this paragraph, "onsite" shall mean improvements to be located exclusively within the boundaries of the property. All requests for any draws on the Traffic Mitigation Account by Buyer shall also be copied to Seller. On October 21, 1997, the remaining balance of funds in the Traffic Mitigation Account along with any interest earned shall be released to Seller except to the extent Buyer can establish at that time from a traffic mitigation plan approved by the City of San Jose for the Property that additional Traffic Mitigation Costs eligible from the Traffic Mitigation Account as defined above will be required. Then a sum equal to the reasonable estimate by Buyer of those Traffic Mitigation Costs not yet expended shall remain in the Traffic Mitigation Account for draws by Buyer, up to May 1, 1998, at which time the remaining balance of funds in the Traffic Mitigation Account along with any interest earned 2 thereon shall be released to Seller. Seller shall also have the right to audit Buyer's requests for draws from the Traffic Mitigation Account to determine that: (a) Buyer has expended its first $1,000,000 on Traffic Mitigation Costs and those expenditures are for only Traffic Mitigation Costs required by the City of San Jose related directly to the development of the Property; and (b) any draws from the Traffic Mitigation Account are only for legitimate Traffic Mitigation Costs as defined in (a) above. Seller shall not be responsible for any Traffic Mitigation Costs or claims for costs over and above the $1,000,000 placed in the Traffic Mitigation Account. 4. Title and Other Contingencies. 4.1. Title to be Conveyed. Seller shall convey a fee title interest in the Property, by grant deed to Buyer at Close of Escrow, subject only to the Approved Exceptions (as hereinafter defined). 4.2. Title Insurance. Seller, at Seller's expense, shall deliver to Buyer not later than five (5) calendar days from the date hereof a preliminary report (the "Preliminary Report") issued by Escrow Holder ("Title Company") and dated no earlier than as of fifteen (15) days prior to the date of this Agreement, together with legible copies of all documents constituting exceptions to title referred to in the Preliminary Report. Buyer shall have a period of fifteen (15) days ("Acceptance Period") after Seller's delivery of the Preliminary Report in which to review and approve same. Buyer shall advise Seller within the Acceptance Period as to any exceptions to title that are acceptable to Buyer. If Buyer fails to give notice of any exceptions to the Preliminary Report within the Acceptance Period, this will be deemed acceptance of the Preliminary Report by Buyer. Upon receipt of notice of Buyer's approval and objections to title, Seller may elect to remove any exceptions to title objected to by Buyer prior to Closing Date, by giving notice to Buyer within two (2) business days after delivery to Seller of Buyer's objections. If Seller does not so notify Buyer within such period, Buyer may elect either (i) to proceed with the purchase and waive its title objections, or (ii) to terminate this Agreement and receive back any deposits made by Buyer. All exceptions to title set forth in the Preliminary Report that are approved by Buyer pursuant to this subparagraph 4.2 shall be hereinafter collectively referred to as the "Approved Exceptions." 4.3. Form of Title Policy. Upon Close of Escrow, Title Company shall issue at Seller's expense a standard coverage CLTA owner's policy of title insurance without extended coverage (the "Title Policy") in the amount of the Purchase Price, insuring that title to the Property is vested in Buyer, subject only to the Approved Exceptions. Buyer shall pay for the cost of any title insurance in excess of the cost(s) of the Title Policy and the cost of all endorsements requested by Buyer including any additional premium charge(s) imposed by any title company in the event the Title Policy is not issued, unless caused by willful default of Seller. Notwithstanding the foregoing, Buyer may, in its sole discretion, elect to obtain ALTA extended coverage, which shall be at Buyer's sole expense, together with such endorsements as Buyer may reasonably require. 4.4. Inspection and Feasibility. Buyer shall have from the date of this Agreement until close of business on June 6, 1997 (the "Inspection Period") in which to conduct inspections and feasibility studies of the Property which may include, but not be limited to, 3 surveyors, soils inspections, environmental site assessment, engineering, and any other physical and environmental tests and inspections which Buyer may elect to undertake, all at Buyer's sole cost. Buyer shall provide Seller with a plan outlining the particulars of its proposed inspection of the Property ("Work Plan"). Buyer shall not proceed with implementing the Work Plan without first obtaining Seller's written approval, which shall not be unreasonably withheld. If within the Inspection Period, Buyer for any reason determines that the Property is not appropriate for its purposes, Buyer shall notify Seller in writing, and escrow shall be terminated in accordance with subparagraph 5.7 hereof. Failure of written notice of rejection of the Property by Buyer within the Inspection Period shall be deemed acceptance by Buyer. For said Inspection Period, Seller grants Buyer and/or Buyer's nominees or consultants, engineers, and other agents and contractors the right to enter upon the Property during reasonable business hours for the purpose of conducting such examinations and tests as approved in the Work Plan. Buyer shall keep the Property free and clear of any mechanic's liens arising out of Buyer's entry on the Property. Buyer represents and warrants that Buyer carries not less than $1,000,000 commercial general liability insurance with contractual liability endorsement to cover this Agreement which will also cover any person accessing the Property for Buyer's inspection and feasibility hereunder. Buyer shall deliver evidence of such insurance coverage to Seller before any such access. Seller shall cooperate with Buyer in facilitating Buyer's investigation at no cost to Seller, including obtaining information from and approvals for testing from governmental authorities. Buyer shall indemnify Seller and hold Seller harmless from the negligence or willful misconduct of Buyer or Buyer's agents on the Property or any damage, loss, claim, lien cost or expense including attorneys' fees and costs arising from the exercise by Buyer or its employees, consultants, agents, or representatives of access to the Property for inspection and feasibility under this Agreement. Any inspection, test or other study or analysis of the Property under this paragraph shall be performed at Buyer's expense and in strict accordance with applicable law. Buyer agrees at its expense to restore the Property from any damage or material alteration caused by any inspections or tests ordered by Buyer or its agents or consultants. Buyer agrees to provide Seller, upon Seller's request, with a copy of any written inspection or test report or summary Buyer has caused to have done or received regarding the Property, provided such material shall be delivered to Seller without any representations or warranties from Buyer, and Seller agrees it shall not rely on such material without the prior written consent of the party preparing same. 4.5. Documents. Upon execution of this Agreement, unless provided earlier Seller shall provide the following documents to Buyer: 1. Post-Closure Report To San Jose Fire Department Permit No. CR361012595, prepared by C.H.A.S.E. dated July 1995, covering Seller's neighboring property. 2. Phase II Investigation dated September 11, 1992 by Watkins-Johnson Environmental, covering Seller's neighboring property. In addition to the above, Seller shall make a reasonable effort to gather documents it may have regarding the Property and give to Buyer access at Seller's Palo Alto offices to those documents for inspection and copying at Buyer's expense. These documents are provided by Seller for informational purposes only, and Seller makes no representation or warranty with respect to the truth, accuracy or completeness of any matter or information set forth in such documents and only represents that it has not knowingly falsified the documents. 4.6 Hewlett-Packard and Watkins-Johnson Exchange of Easements Agreement. On or about February 8, 1994, Seller entered into a road extension and exchange of 4 easements agreement with Hewlett-Packard Company, a copy of which is attached hereto as Exhibit A ("Hewlett-Packard Agreement") whereby Seller agreed to exchange easements and property interests, cooperate in the application for land use approvals, dedication of land to the City of San Jose, and Hewlett-Packard Company's payment of all costs associated with this agreement including, inter alia, improving Orchard Parkway along Seller's frontage, costs incurred in completing the dedications described in the Hewlett-Packard Agreement, including engineering, mapping and title processing costs, the physical realignment of Seller's driveways to Orchard Parkway and Trimble Road, and to provide in kind and at its cost the paving and other improvements necessary to match the existing and no changed driveway. Seller also agrees to cooperate in applications to the City for the proposed land use approvals. Seller does hereby assign to Buyer, Seller's rights and obligations it has pursuant to the Hewlett-Packard Agreement as it pertains to the Property, and as part of Exhibit A hereto is providing a written statement from Hewlett-Packard acknowledging (a) that the Hewlett-Packard Agreement is in the form attached as Exhibit A and has not been changed; (b) the Hewlett-Packard Agreement is still in full force and effect; and (c) Hewlett-Packard consents to the assignment set forth in this sentence. Seller retains any rights and obligations it has pursuant to the Hewlett-Packard Agreement as it pertains to contiguous property owned by Seller and represent that the retained rights are not in conflict with or interfere with the rights being assigned to Buyer in this subparagraph 4.6, and will cooperate regarding the retained rights in the contiguous property so the Hewlett-Packard Agreement can be fulfilled in all respects. 5. Buyer's Conditions to Close. For Buyer's sole benefit, Buyer's obligation to complete the purchase of the Property is subject to satisfaction of the following conditions at or prior to the Closing Date, unless waived by Buyer in writing: 5.1. Delivery of Documents, Etc. Seller shall have timely performed its obligations under subparagraph 3.3 hereof. 5.2. Delivery of Deed. Seller shall have executed, acknowledged, and delivered into Escrow for recording and subsequent delivery to Buyer, a grant deed ("Deed") to the Property in recordable form in the form attached hereto as Exhibit B, conveying Seller's title to the Property to Buyer subject only to the Approved Exceptions. 5.3. Title Policy. Title Company shall be ready, willing, and able to issue the Title Policy. 5.4. Affidavit. Seller shall have executed and delivered to Escrow Holder an affidavit or affidavits satisfying the requirements of Section 1445 of the Internal Revenue Code of 1986, as amended, as well as California Revenue and Taxation Code Sections 18661, et seq. 5.5. Condition of the Property. Except as referenced in paragraph 10, there shall not be any material change in the Property from the end of the Inspection Period to the Close of Escrow unless caused by Buyer or its agents. 5 5.6. Seller's Performance. Seller shall have performed all of the other material terms and conditions to be performed by Seller prior to the Closing Date under the terms of this Agreement, including but not limited to that Seller's representations and warranties in Paragraph 8 are true and correct as of the Close of Escrow. 5.7. Termination of Escrow. If any condition described in this Paragraph 5 is not timely satisfied (or waived by Buyer in writing) on or prior to the Closing Date, then (i) the Escrow shall terminate immediately upon receipt by Escrow Holder of notification from Buyer of the failure of such condition, and Buyer and Seller shall share equally any applicable escrow cancellation fees, (ii) Escrow Holder shall return all instruments and documents deposited into the Escrow to the parties depositing the same, (iii) Escrow Holder shall return to Buyer any funds deposited by Buyer, less only Buyer's share of applicable escrow cancellation fees, if any, and (iv) neither party shall have any further rights or obligations under this Agreement, except to the extent that the failure of a condition also constitutes a default by Seller with respect to any of Seller's covenants or obligations under this Agreement. 6. Seller's Conditions to Close. For Seller's sole benefit, Seller's obligation to complete the sale of the Property is subject to satisfaction of the following conditions at or prior to the Closing Date, unless waived by Seller in writing: 6.1. Delivery of Documents, Etc. Buyer shall have timely performed its obligations under Subparagraph 3.4 hereof. 6.2. Receipt of Purchase Price. Title Company shall have received the Purchase Price for the Property. 6.3. Buyer's Performance. Buyer shall have performed all of the other terms and conditions to be performed by Buyer prior to the Closing under the terms of this Agreement, including but not limited to that Buyer's representations and warranties in Paragraph 7 are true and correct as of the Close of Escrow. 6.4. Termination of Escrow. If any condition described in this Paragraph 6 is not timely satisfied (or waived by Seller in writing) on or prior to Closing Date and the Paragraph 5 conditions have been satisfied, (i) the Escrow shall terminate immediately upon receipt by Escrow Holder of notification from Seller of the failure of such condition, (ii) Escrow Holder shall return all instruments and documents deposited into the Escrow to the parties depositing the same, and (iii) neither party shall have any further rights or obligations to the other under this Agreement, except to the extent that a failure of a condition also constitutes a default by Buyer with respect to any of Buyer's covenants or obligations under this Agreement. 7. Buyer's Representations and Warranties. Buyer hereby represents and warrants to Seller, effective both as of the date of this Agreement and as of Close of Escrow: 7.1. Buyer's Due Organization and Authorization. Buyer and those individuals and entities signing this Agreement on behalf of Buyer, respectively have the right, power, and authority to make and perform their obligations under this Agreement. The 6 execution, delivery, and performance of this Agreement does not violate any contract, agreement, or commitment to which any party comprising Buyer is a party or by which any party comprising Buyer is bound. 8. Seller's Representations and Warranties. Seller hereby represents and warrants to Buyer, effective both as of the date of this Agreement and as of Close of Escrow: 8.1. Seller's Due Organization and Authorization. Seller and those individuals and entities signing this Agreement on behalf of Seller, respectively have the right, power, and authority to make and perform their obligations under this Agreement. The execution, delivery, and performance of this Agreement does not violate any contract, agreement, judicial order, or commitment to which any party comprising Seller is a party or by which any party comprising Seller is bound which affect the Property. 8.2. No Litigation or Proceeding. Seller represents and warrants that there is, to its knowledge, no litigation or governmental or agency investigation or governmental or agency proceeding including condemnation pending, nor, to the knowledge of Seller, threatened against Seller or the Property which would impair or adversely affect Seller's ability to perform its obligations under this Agreement. 8.3. Documents. All documents delivered to Buyer by Seller pursuant to this Agreement are or will be to Seller's knowledge true and correct copies of originals, to the extent not the originals thereof, and any and all information supplied to Buyer by Seller in accordance with this Agreement and all statements or representations made by Seller herein are and will be to Seller's reasonable knowledge true, complete, and accurate in all material respects except as specifically qualified otherwise in this Agreement. 8.4. Tax Withholding. Seller is not subject to tax withholding in connection with this transaction under the Internal Revenue Code or other federal or state law. 8.5. Bankruptcy or Insolvency. Seller has not made a general assignment for the benefit of creditors, filed any voluntary petition in bankruptcy or suffered the filing of an involuntary petition by its creditors, suffered the appointment of a receiver to take possession of substantially all of its assets, suffered the attachment or other judicial seizure of substantially all of its assets, admitted its inability to pay its debts as they come due, or made an offer of settlement, extension, or compromise to its creditors generally. 8.6. No Leases, etc. To Seller's knowledge there are no leases, contracts or permits that affect the Property other than those disclosed in this Agreement. 8.7. Hazardous Materials. To Seller's knowledge there are no Hazardous Materials (as defined in Paragraph 26 below) located on the Property in violation of applicable laws in existence. The term "Seller's knowledge" or similar phrases, as used in this Agreement, shall refer to the actual, present knowledge of David M. Burnham, Director of Treasury and 7 Corporate Real Estate for Seller, as of the date of this Agreement without any duty of investigation or inquiry of any kind or nature whatsoever. Buyer agrees that if, at any time prior to the Closing Date, it has knowledge of any information which would require the qualification of any of the above representations and warranties for such representation and warranty to be trued, it shall immediately notify Seller in writing of such information. If Buyer has knowledge of the incorrectness of any representation or warranty made by Seller in the Agreement prior to Close of Escrow and fails to so notify Seller prior to the Closing Date, then such representation or warranty shall be deemed to be stricken from this Agreement ab initio and shall be of no further force or effect. Seller shall have the right to qualify such representations and warranties with any information it receives concerning such representations and warranties after the date of this Agreement; but if it does so then Buyer shall have three (3) business days from such notice to elect to either terminate this Agreement and the Escrow pursuant to subparagraph 5.7 herein or agree to proceed with the Close of Escrow, in which event the above representations and warranties shall be qualified as noticed by Seller. In the event Buyer fails to give notice of its election within the three (3) business day period, then Buyer will be deemed to have elected to terminate this Agreement. 9. Indemnity. Each party hereby agrees to indemnify, defend, and hold the other party harmless from and against any and all claims, demands, liabilities, costs, expenses, damages, and loss (including, without limitation, attorneys' fees and costs) resulting from any misrepresentation, breach of warranty, or breach of covenant made by such party in this Agreement. This indemnity shall continue in effect and survive Close of Escrow, the waiver of any conditions to Closing set forth herein, and the conveyance and delivery of title, or, if title is not transferred pursuant to this Agreement, beyond any termination of this Agreement, except as otherwise provided in Paragraph 12. 10. Risk of Loss. The parties agree in the event that, prior to Closing, any improvements located on the Property, or any part thereof, are destroyed or materially damaged, the transaction shall go forward without any adjustment to the Purchase Price, but Buyer shall be entitled to any available insurance proceeds resulting from such damage or destruction. If there is any material condemnation or threatened condemnation of the property prior to Close of Escrow, either party may terminate the Agreement, and it will so terminate as set forth in paragraph 5.7. 11. Possession. Seller shall deliver possession of the Property to Buyer, free and clear of any tenancies or contracts or rights of third parties not previously approved in writing by Buyer as a part of this Agreement such as Paragraph 4.6, as well as cleared of all equipment, vehicles, materials, and other personal property, upon Close of Escrow. 12. Default. In the event that the sale of the Property fails to close as a result of a default of Seller, Buyer may, as its sole and exclusive remedy, elect to either: (a) enforce the terms of this Agreement by action for specific performance, but with no reduction in the Purchase Price; provided, however, that no action for specific performance shall compel Seller to commence litigation or cure or deal with any matters outside of its reasonable control or expend funds as to such matters; or (b) terminate this Agreement, in which event the Deposit shall be returned to Buyer, and the parties shall be released from all further obligations and liability under 8 this Agreement except as otherwise specifically provided in this Agreement. Under no circumstances of any nature whatsoever shall Buyer have any right to collect damages, whether actual, punitive, consequential or otherwise, from Seller under this Agreement. In the event that the sale of the Property fails to close as a result of a default by Buyer, Seller's sole remedy (except as otherwise specifically provided hereunder) shall be to declare a forfeiture and retain the Deposit and all interest earned thereon as liquidated damages, it being understood that Seller's actual damages in the event of such default are difficult to ascertain and that such proceeds represent the parties' best current estimate of such damages. Pending the full and final resolution of any specific performance or other litigation or disputes instituted by Buyer, Escrow Holder shall continue to hold the Deposit. 13. Liquidated Damages. BY PLACING THEIR INITIALS IMMEDIATELY BELOW, BUYER AND SELLER AGREE THAT IT WOULD BE IMPRACTICABLE OR EXTREMELY DIFFICULT TO FIX ACTUAL DAMAGES IN THE EVENT OF A DEFAULT BY BUYER, THAT THE SUM OF BUYER'S INITIAL AND ADDITIONAL DEPOSITS IS THE PARTIES' REASONABLE ESTIMATE OF SELLER'S DAMAGES IN THE EVENT OF BUYER'S DEFAULT, AND THAT IN THE EVENT BUYER FAILS TO TIMELY PURCHASE THE PROPERTY IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT BECAUSE OF A DEFAULT BY BUYER, SELLER SHALL BE RELEASED FROM ITS OBLIGATION TO SELL THE PROPERTY, AND, AT SELLER'S SOLE ELECTION, SELLER SHALL BE ENTITLED TO RETAIN BUYER'S INITIAL AND ADDITIONAL DEPOSITS AND ALL INTEREST EARNED THEREON AS LIQUIDATED DAMAGES. SELLER'S INITIALS /s/SGB BUYER'S INITIALS /s/RGS 14. No Commissions. Except as to Mark T. Ziemendorf and Rod Shepard, of Cornish & Carey Commercial, Santa Clara, California, representing both Buyer and Seller, whose commission (collectively) in the amount of three percent (3%) of the Purchase Price Seller agrees to pay at its cost, neither party has had any contact or dealings regarding the Property, or any communication in connection with the subject matter of this transaction, through any licensed real estate broker or other person who can claim a right to a commission or finder's fee as a procuring cause of the sale contemplated herein. In the event that any broker or finder perfects a claim for a commission or a finder's fee based upon any contract, dealings, or communication, the party through whom the broker or finder makes his claim shall be responsible for said commission or fee and shall indemnify and hold harmless as to all claims, liabilities, costs, and expenses (including without limitation as to attorneys' fees and court costs) suffered or incurred by the other party in defending against same. 15. Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. Notwithstanding the foregoing, neither party may assign this Agreement without the other party's prior written consent, except Seller hereby consents to Buyer assigning this Agreement to a related entity such as a Buyer managed LLC. 9 16. Attorneys' Fees. In the event either party hereto fails to perform any of its obligations under this Agreement or in the event a dispute arises concerning the meaning or interpretation of any provision of this Agreement, the defaulting party or the party not prevailing in such dispute, as the case may be, shall pay any and all costs and expenses incurred by the other party in enforcing or establishing its rights hereunder, including, without limitation, court costs and attorneys' fees. 17. Time. Time is of the essence of this Agreement as to each and every provision hereof. 18. Notices. All notices or other communications to be given hereunder shall be in writing and shall be deemed received when personally delivered by commercial courier including an overnight courier such as Federal Express, or upon confirmation of receipt when given by telecopy or facsimile to the address and facsimile number(s) set forth below, or three (3) business days after deposit in the United States certified mail, return receipt requested, postage prepaid, addressed as follows: If to Seller: Watkins-Johnson Company Stanford Research Park 3333 Hillview Avenue Palo Alto, CA 94304-1223 Attn: David M. Burnham Tel: (415) 813-2990 Fax: (415) 813-2545 Copy to: Garth E. Pickett, Esq. Hopkins & Carley, A Law Corporation Ten Almaden Boulevard, Eighth Floor San Jose, CA 95113-2228 Tel: (408) 286-9800 Fax: (408) 998-4790 If to Buyer: Hunter Barrier CarrAmerica Realty Corporation 1700 Pennsylvania Avenue, NW Washington, DC 20006 Tel: (202) 639-3867 Fax: (202) 737-2147 10 Copy to: Caroline Brower Mayer, Brown & Platt 141 East Palace Avenue Santa Fe, NM 87501 Tel: (505) 820-8186 Fax: (505) 820-7334 Any party may change its address for the purpose of this paragraph by giving written notice of such change to the other party in the manner herein provided. 19. Entire Agreement. This Agreement expresses the entire agreement of the parties and supersedes any and all previous agreements between the parties with regard to the Property. There are no other understandings, oral or written, which in any way alter or enlarge its terms, and there are no warranties or representations of any nature whatsoever, either express or implied, except as set forth herein. Any future modification of this Agreement will be effective only if it is in writing and signed by the party to be charged. 20. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 21. Waiver. The waiver by either party of a breach of any provision of this Agreement shall not be deemed a continuing waiver or a waiver of any subsequent breach, whether of a like nature or otherwise. 22. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but such counterparts together shall constitute only one agreement. 23. Headings. The Paragraph and Subparagraph headings throughout this Agreement are for convenience and reference only, and the words contained therein shall not be held to expand, modify, amplify or aid in the interpretation, construction or meaning of this Agreement. 24. Survival. All representations and warranties by the respective parties contained herein or made in writing pursuant to this Agreement are intended to and shall remain true and correct as of the Closing, shall be deemed material and shall survive the execution and delivery of this Agreement, the Closing, the delivery of the Grant Deed and the transfer of title, or, if title is not transferred pursuant to this Agreement, beyond any termination of this Agreement. 25. Further Assurances. Each party hereto agrees to execute such other documents or instruments as are necessary or appropriate to effectuate this Agreement and consummate the transaction provided herein promptly upon request therefor. 11 26. "As Is" Clause. EXCEPT AS TO THOSE SPECIFIC REPRESENTATIONS AND WARRANTIES BY SELLER IN THIS AGREEMENT, BUYER SPECIFICALLY ACKNOWLEDGES THAT SELLER IS SELLING AND BUYER IS PURCHASING THE PROPERTY ON AN "AS IS WITH ALL FAULTS" BASIS AND THAT BUYER IS NOT RELYING ON ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, FROM SELLER, ITS AGENTS, OR BROKERS AS TO ANY MATTERS CONCERNING THE PROPERTY, INCLUDING WITHOUT LIMITATION: (i) the quality, nature, adequacy, and physical condition of the Property, including, but not limited to, the quality, nature, adequacy, and physical condition of soils, geology and any groundwater, (ii) the existence, quality, nature, adequacy, and physical condition of utilities serving the Property, (iii) the development potential of the Property, and the Property's use, habitability, merchantability, or fitness, suitability, value or adequacy of the Property for any particular purpose, (iv) the zoning or other legal status of the Property or any other public or private restrictions on use of the Property, (v) the compliance of the Property or its operation with any applicable codes, laws, regulations, statutes, ordinances, covenants, conditions and restrictions of any governmental or quasi-governmental entity or of any other person or entity, (vi) the presence or removal of Hazardous Materials under or about the Property or the adjoining or neighboring property; and (vii) the condition of title to the Property. The term "Hazardous Materials" shall mean any hazardous or toxic materials, substances or wastes, such as (A) those materials identified in Sections 66680 through 66685 and Sections 66693 through 66740 of Title 22 of the California Administrative Code, Division 4, Chapter 30, as amended from time to time, (B) those materials defined in Section 255010) of the California Health and Safety Code, (C) any materials, substances or wastes which are toxic, ignitable, corrosive or reactive and which are regulated by any local governmental authority, any agency of the state of California or any agency of the United States Government, (D) asbestos, (E) petroleum and petroleum based products, (F) urea formaldehyde foam insulation, (G) polychlorinated biphenyls (PCBs), and (H) freon and other chlorofluorocarbons. 27. Condition of Property. Buyer acknowledges and understands that Seller's Broker has disclosed that the Property may be situated within (i) an Earthquake Fault Zone as so designated under the Alquist-Priolo Earthquake Fault Zoning Act, Section 2621 et. seq. of the California Public Resources Code; and/or (ii) a Seismic Hazards Zone as so designated under the Seismic Hazards Mapping Act, Section 2690 et. seq. of the California Public Resources Code (collectively herein referred to as the "Seismic Disclosure Acts"); and (iii) a 100 year flood zone or potentially other special flood hazard area. Buyer acknowledged that it has had delivered by Seller's agents the Commercial Property Owner's Guide to Earthquake Safety, published by the State of California Seismic Safety Commission. Buyer hereby waives any seismic or flood zone disclosure requirements imposed on Seller by California law. 28. Approval. Upon Buyer's execution of this Agreement, Seller shall have two (2) business days in which to approve this Agreement. Failure of timely delivery of an executed agreement by Seller to Buyer shall be deemed rejection and Buyer's offer will be deemed withdrawn as of the rejection by Seller if so elected by Buyer within two (2) business days thereafter. Executed as of the date first set forth above. 12 "BUYER" "SELLER" CARRAMERICA REALTY, WATKINS-JOHNSON COMPANY, CORPORATION a California corporation a Maryland corporation By: /s/ Robert G. Stuckey By: /s/ Scott G. Buchanan Its: Managing Director Its: Vice President & CFO FIRST AMENDMENT TO AND REAFFIRMATION OF PURCHASE AND SALE AGREEMENT This First Amendment to and Reaffirmation of Purchase Agreement ("First Amendment") is made as of August 15, 1997 by and between Watkins-Johnson Company, a California corporation ("Seller"), and CarrAmerica Realty Corporation, a Maryland corporation ("Buyer"). RECITALS A. Seller and Buyer have previously entered into that certain Purchase and Sale Agreement dated as of the 2nd day of May 1997 (the "Agreement"). Capitalized items not otherwise defined herein shall have the meaning assigned to them in the Agreement. B. Seller and Buyer hereby acknowledge that the Agreement was terminated at the end of the Inspection Period by Buyer. Notwithstanding the foregoing, Buyer and Seller hereby elect to revive and reaffirm the Agreement and all the terms thereof, and to amend the Agreement in certain respects, including to: (i) clarify the description of the Property; (ii) establish an additional contingency related to receiving a Site Development Permit; (iii) extend the date for close of escrow; (iv) revise the amount of the Deposit; (v) give Seller the right to participate in the Site Development Permit Application and to take over such Application process in the event Buyer terminates the Agreement; and (vi) Buyer grant to Seller a certain easement to be recorded at close of escrow, all as hereinafter provided. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and agreements contained in this agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer hereby agree to amend the Agreement as follows: 13 1. Reaffirmation of Agreement. Seller and Buyer hereby agree that not withstanding anything to the contrary contained in the Agreement, effective as of the date hereof, the Agreement shall be in full force and effect and Seller and Buyer hereby reaffirm the Agreement in accordance with its terms except as amended by this First Amendment. 2. The Property is more particularly described in Exhibit "A" attached hereto. 3. Deposit. The Deposit as set forth in Paragraph 2.1 of the Agreement shall be $1,000,000 with any additional sums necessary to bring the Deposit to $1,000,000 to be deposited with the escrow holder by close of business on the third (3rd) business day after the date of this First Amendment. The Deposit may be increased or decreased by (Delay Damages) as hereafter defined prior to close of escrow as set forth in Paragraph 5 hereafter. All reference in the Agreement and this First Amendment to the Deposit shall mean and refer to the amount of $1,000,000 as may be changed pursuant to Paragraph 6(b) hereafter. 4. Escrow and Closing: (a) Closing Date. Paragraph 3.2 of the Agreement is amended to change the Closing Date to three (3) business days after receipt of a Site Development Permit Approval from the City of San Jose or Buyer's waiver of this contingency, but in no event later than October 21, 1997 unless the Approval Date is extended pursuant to Paragraph 6(b) below. All references in the Agreement to the Closing Date shall mean the above. (b) Traffic Mitigation Costs. The October 21, 1997 date in Paragraph 3.7 of the Agreement is changed to the earlier of thirty (30) days after the "Approval" as hereinafter defined or March 15, 1998. The May 1, 1998 date in Paragraph 3.7 of this Agreement is changed to August 3, 1998. 5. Title Insurance and Inspection Period. Buyer hereby acknowledges that the Preliminary Report dated July 14, 1997 is acceptable and that the Acceptance Period has expired, and that the Inspection Period is deemed to have expired and all inspections satisfied. The Approved Exceptions are those listed in Exhibit "B" attached hereto. The issuance of the ALTA title policy pursuant to Paragraph 4.3 of the Agreement is a condition to the Closing with the endorsements identified in Exhibit "C" attached hereto. At the Closing, Seller shall execute a standard affidavit or declaration that Seller has not done or caused to be done any work of improvement on the Property that could create a mechanic's lien(s) and has been in possession of the Property with no leases or right of possession having been given to any other party as set forth in the Approved Exceptions. A new contingency shall be established regarding the approval of a "Site Development Permit Application" by the City of San Jose Planning Department (the "City") as set forth below. 6. Site Development Permit Contingency. Section 4 of the Agreement shall be amended to add as a contingency the City granting approval of the Site Development Permit Application as set forth herein ("Approval"). The Approval shall mean the granting of the Site Development Permit, subject to the minimum acceptable requirements as set forth in Paragraph 6(b) below (the "Permit") plus the running of any applicable appeal period for appealing to the City Council. The terms of this contingency are more particularly as follows: 14 (a) Site Development Permit Application. Buyer shall submit to the City a substantially complete Site Development Permit Application (the "Substantial Application") for the Property no later than August 15, 1997 ("Permit Application Date"). A substantially complete application means one that includes the completed City application form, a Traffic Study and Site Plan architectural drawings. Buyer shall submit to the City a complete Site Development Permit Application (the "Application") for the Property no later than August 22, 1997 ("2nd Permit Application Date"). A complete Application means one that is intended to include all submittal items that the City requires, although the City may require further submittals. The Application shall be a joint application on behalf of the Buyer as the purchaser and developer and Seller as the owner of the property. Seller will cooperate with submitting the Application as reasonably requested by Buyer at no cost to Seller. In the event Buyer fails to submit the Substantial Application by the Permit Application Date and/or the Application by the 2nd Permit Application Date, Seller shall be entitled to withdraw from escrow $100,000.00 of the Deposit as liquidated damages for such delay in filing the Application by Buyer ("Delay Damages"), unless Buyer establishes that the delay is beyond the reasonable control of Buyer and through no fault of Buyer. The payment of the Delay Damages shall be applicable to the Purchase Price and Buyer shall not be required to replace it in the Deposit. If Buyer fails to submit the Substantial Application by the Permit Application Date and/or the Application by the 2nd Permit Application Date, Seller shall either terminate the Agreement and the Deposit less the Delay Damages shall be released to Buyer, or be deemed to have extended (after payment of the Delay Damages, if applicable), the Permit Application Date to August 29, 1997 ("Extended Permit Application Date"). If the Application is not filed by the Extended Permit Application Date, the Agreement is deemed terminated and the Deposit less the Delay Damages if applicable will be returned to Buyer. (b) Approval ("Approval Date") of Application. Buyer shall have until October 15, 1997 in which to receive the Approval ("Approval Date"). If Approval from the City is not received by the Approval Date, Buyer shall (i) waive in writing the Approval contingency; or (ii) extend the Approval Date to December 15, 1997 ("Extended Approval Date") upon placing into escrow an additional $250,000 to be added to the Deposit. Thereafter, Deposit shall mean $1,250,000 less the Delay Damages, if applicable. If Approval is not received by the Extended Approval Date, Buyer shall (i) waive in writing the Approval contingency, or (ii) extend the Approval Date to February 15, 1998 (the "Final Approval Date") upon placing an additional $250,000 into escrow and the Deposit shall mean $1,500,000 less the Delay Damages, if applicable. If the Final Approval Date is reached, or Buyer fails to extend the Approval Date as allowed above and Buyer has not in either case waived in writing the Approval contingency, the Buyer will be deemed in default, the Agreement shall terminate and Seller will be entitled to the entire Deposit in escrow pursuant to Paragraph 13 of the Agreement. The Approval Contingency shall be met if, on or before the Final Approval Date, the City approves the Application and the supporting plans, studies and other components of the Application. Approval includes all administrative action required to make such approval final and binding under applicable law. Buyer may by written notice to Seller and the Escrow Agent terminate the Agreement and receive a refund of the Deposit if any of the following occurs prior to the Final Approval Date: 15 (i) the City requires a project specific environmental impact report ("EIR"), or the City delays approval pending the preparation of a new or updated EIR for the Rincon De Los Estros Redevelopment area by either the City or some other party or entity; or (ii) the City denies the Application substantially as submitted by Buyer. The City shall be deemed to have denied the Application substantially submitted by Buyer thereby allowing Buyer to terminate the Agreement and receive a refund of the Deposit, less Delay Damages, if any, if the approval requires any of the following: (1) Traffic Mitigation Costs, as defined in Paragraph 3.7 of the Agreement that exceeds $3 million in the aggregate, and Watkins-Johnson has not agreed, in writing, to cover any Traffic Mitigation Costs in excess of $3 million in the aggregate; (2) Failure to give fully permitted ingress and egress access to either Trimble Road or Orchard Parkway from the Property; (3) An FAR that is less than the smaller of 0.4 or Buyer's submittal of FAR in the Application for less than 0.4, and Watkins-Johnson does not agree, in writing, to reduce the purchase price by the same percentage that the approved FAR is below the above standard. For example, if the submitted FAR is a 0.4 and the approved FAR is a 0.35, this is a 12-1/2 percent reduction which would be a 12-1/2 percent reduction in the Purchase Price by Watkins-Johnson for this contingency to be met. Buyer may terminate the Agreement and receive a refund of the Deposit less Delay Damages, if applicable, if the approval requires a FAR less than 0.35. Buyer shall not submit in the Application for an FAR greater than 0.4. (c) Buyer's Diligent Efforts During Application Period. Buyer shall diligently, adequately, timely, and in good faith respond to inquiries and requests from the City during the approval process for the Application ("Standard of Conduct"). However, Buyer may reasonably object to City imposed requirements, conditions or restrictions and negotiate with the City to secure favorable approval terms. If Buyer does not meet this Standard of Conduct and as a result the City denies the Application, then Seller shall be entitled to retain the Deposit. (d) Seller's Rights Upon Termination to the Application. Buyer hereby covenants and agrees to cooperate in the event Buyer terminates this Agreement pursuant to Paragraph 6(b) above by assigning to Seller all of Buyer's rights and interest in the Application, and to furnish to Seller, at no cost to Seller, copies of the traffic studies and any other studies and information compiled by Seller in preparation of the Application or any other information requested by the City pursuant to the Application and to turn such over to the Seller for its use in continuing to pursue the Application in Seller's name. Buyer agrees at no additional cost to Buyer to cooperate with Seller in the transfer of Buyer's rights and obligations in the Application to Seller as reasonably requested by Seller. 16 7. Grant of Easement By Buyer To Seller: Section 6 of the Agreement is amended to add the following: 6.5. Grant Of Easement. Buyer hereby agrees and covenants to grant, at the close of escrow, to Seller for the benefit of Parcel A a non-exclusive easement for ingress and egress along the roadway being conveyed to Buyer as the Property's access to Component Drive, and in the form and description as attached hereto as Exhibit C. 8. Miscellaneous. (a) Effect of First Amendment. Except to the extent the Agreement is modified by this First Amendment, the remaining terms and conditions of the Agreement shall remain unmodified and in full force and effect. In the event of conflict between the terms and conditions of the Agreement and the terms and conditions of this First Amendment, the terms and conditions of the First Amendment shall prevail and control. (b) Entire Agreement. The Agreement, together with this First Amendment, embodies the entire understanding between Seller and Buyer with respect to its subject matter and supersedes all other prior agreements, representations and covenants, written or oral, with respect thereto; and can be changed only by an instrument in writing signed by Seller and Buyer. (c) Counterparts. This First Amendment may be executed in one or more counterparts, each of which shall be deemed an original but all of which, taken together, shall constitute one and the same amendment. IN WITNESS WHEREOF, this First Amendment has been executed as of the day and year first set forth above. "BUYER" "SELLER" CARRAMERICA REALTY, WATKINS-JOHNSON COMPANY, CORPORATION, a California corporation a Maryland corporation By: /s/ Robert G. Stuckey By: /s/ W. Keith Kennedy Its: Managing Director Its: President & CEO 17 EX-10.19 3 RESOLUTION OF THE BOARD OF DIRECTORS Exhibit 10.19 RESOLUTION OF THE BOARD OF DIRECTORS OF WATKINS-JOHNSON COMPANY WHEREAS, it has been proposed (the "Proposal") that (i) all existing deferrals of compensation under the Company's 1994 Top Management Deferred Compensation Plan ("Deferred Compensation Plan"), (ii) all existing deferrals of bonuses under the Company's Annual Top Management Incentive Bonus Plans ("Incentive Bonus Plans") and (iii) all future opportunities to defer under such plans, be eliminated effective as of December 31, 1998, and all existing deferrals paid as soon as practical on or after January 1, 1999, and WHEREAS, the Proposal has been submitted to the Compensation Committee and approved by the Committee for submission to the Board for final action, and WHEREAS, the Board deems that this action is in the best interests of the Company; NOW THEREFORE BE IT RESOLVED, that (i) the Deferred Compensation Plan be terminated in accordance with Section 9(a) of the Plan effective as of December 31, 1998, (ii) the balance of all accounts on December 31, 1998, be paid as a lump sum to all participants as soon as practical on or after January 1, 1999, and (iii) no future deferrals shall be allowed after December 31, 1998, and FURTHER RESOLVED, that (i) all outstanding deferrals under all Incentive Bonus Plans for years on or before 1998 be terminated effective as of December 31, 1998, (ii) as soon as practical on or after January 1, 1999, the participants be paid a lump sum equal to the balances determined under the Plans on December 31, 1997, or December 31, 1998, whichever is greater, and FURTHER RESOLVED, that the officers of the Company are hereby authorized, directed and empowered in the name of the Company, to prepare, execute and deliver all such documents and instruments and to take all such actions in the name of the Company as they deem necessary, advisable, convenient, proper or appropriate in order to carry out and perform the purposes of the foregoing resolutions. EX-10.20 4 SEVERANCE AGREEMENT Exhibit 10.20 SEVERANCE AGREEMENT ------------------- THIS SEVERANCE AGREEMENT (the "Agreement"), dated___________________is entered into by and between Watkins-Johnson Company, a California corporation ("the Company"), and __________________________("Employee"). The Company's Board of Directors has determined that it is appropriate to reinforce and encourage the continued attention and dedication of members of the Company's management, including Employee, to their assigned duties without distraction in potentially disturbing circumstances arising from the possibility of a Change in Control (as defined herein) of the Company. This Agreement sets forth the severance compensation which the Company agrees to pay to Employee if Employee's employment with the Company terminates under one of the circumstances described herein. 1. Term. (a) This Agreement shall terminate, except for any unpaid obligation of the Company, upon the earliest of (i) three years from the date hereof if a Change in Control of the Company has not occurred within such three-year period; (ii) the termination of the Employee's employment based on death, disability (as defined in Section 3(b)) or cause (as defined in Section 3(c)) or by the Employee other than for Good Reason (as defined in Section 3(d)); or (iii) three years from the date of a Change in Control of the Company. (b) Nothing in this Agreement shall confer upon Employee any right to continue in the employ of the Company prior to a Change in Control of the Company or shall in any way limit the rights of the Company, which are hereby expressly reserved, to discharge the Employee at any time prior to the date of a Change in Control of the Company for any reason whatsoever, with or without cause. 2. Change in Control. (a) No compensation shall be payable under this Agreement unless and until there shall have been a Change in Control of the Company while the Employee is still an employee of the Company, and the Employee's employment by the Company thereafter shall have been terminated by the Company other than pursuant to Sections 3(b) or 3(c) or by the Employee for Good Reason (as defined in Section 3(d) below), or by the Employee pursuant to Section 3(g). 1 (b) Definition of Change in Control. A Change in Control shall be deemed to have occurred if (i) there shall be consummated any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company's Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (ii) the stockholders of the Company approve a plan or proposal for the liquidation or dissolution of the Company, or (iii) any "person" (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, shall become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30% or more of the Company's outstanding Common Stock, or (iv) during any period of two consecutive years, individuals who at the beginning of such period constitute the entire Board of Directors of the Company shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. 3. Termination Following Change in Control. (a) Termination of Employment. If a Change in Control occurs while Employee is still an employee of the Company, Employee shall be entitled to the compensation provided in Section 4 upon the subsequent termination of the Employee's employment with the Company unless the termination is a result of Employee's (i) death; (ii) Disability (Section 3(b)); (iii) termination by the Company for Cause (Section 3(c)); or (iv) Employee's decision to terminate employment with the Company other than for Good Reason (Section 3(d)), or pursuant to Section 3(g). (b) Disability. If, as a result of the Employee's incapacity due to physical or mental illness, the Employee shall have been absent from duties with the Company on a full-time basis for six consecutive months and within 30 days after written notice of termination is thereafter given by the Company, the Employee shall not have returned to the full-time performance of the Employee's duties, the Company may terminate this Agreement for "Disability." 2 (c) Cause. For purposes of this Agreement only, the Company shall have "Cause" to terminate Employee's employment hereunder only on the basis of fraud, misappropriation, embezzlement or willful engagement by the Employee in misconduct which is demonstrably and materially injurious to the Company and its subsidiaries taken as a whole. An act, or omission of the Employee shall not be considered "willful" unless done, or omitted to be done, by the Employee without good faith and a reasonable belief that the act or omission was in the best interests of the Company and its subsidiaries. The Employee may not be terminated for Cause unless and until there shall have been delivered to Employee a copy of a resolution duly adopted by affirmative vote of not less than three-quarters of the entire membership of the Company's Board of Directors at a meeting of the Board called and held for the purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee's counsel, to be heard before the Board), finding the Employee was guilty of the conduct set forth in the first sentence of this Section, and specifying the particulars thereof in detail. Notwithstanding the foregoing, the Employee shall have the right to contest such termination for Cause (for purposes of this Agreement) by arbitration in accordance with the provisions of Section 7. (d) Good Reason. After a Change in Control of the Company, the Employee may terminate employment for Good Reason at any time during the term of this Agreement. For purposes of this Agreement, "Good Reason" shall mean any of the following (without the Employee's express written consent): (i) the assignment to the Employee by the Company of duties inconsistent with, or a substantial alteration in the nature or status of, Employee's responsibilities immediately prior to a Change in Control of the Company other than any such alteration primarily attributable to the fact that the Company's securities are no longer publicly traded; (ii) a reduction by the Company in the Employee's base salary in effect on the date of a Change in Control of the Company or as the same may be increased from time to time during the term of this Agreement; (iii) failure by the Company to continue in effect without substantial change any compensation, incentive, welfare or benefit plan or arrangement, as well as any plan or arrangement whereby the Employee may acquire securities of the Company, in which the Employee is participating at the time of a Change in Control of the Company (or any other plans providing the Employee with substantially similar benefits, hereinafter referred to as "Benefit Plans"), or the taking of any action by the Company which would adversely affect the Employee's participation in or materially reduce the Employee's benefits under any such Benefit Plan or deprive the Employee of any material fringe benefit enjoyed by the Employee at the time of a Change in Control of the Company; unless an equitable substitute arrangement 3 (embodied in an ongoing substitute or alternative Benefit Plan) has been made for the benefit of Employee with respect to the Benefit Plan in question. For purposes of the foregoing, Benefit Plans shall include, but not be limited to, the Company's Employee Stock Ownership Plan, Employees' Profit Sharing and Investment Plan, Deferred Compensation (401K) Plan, 1991 Stock Option and Incentive Plan, Top Management Incentive Bonus Plan, and/or any other plan or arrangement to receive and exercise stock options or stock appreciation rights, incentive, bonus or other award plans, group life insurance plans, medical, dental, accident and disability plans; (iv) a relocation of the Company's principal executive offices to a location outside the San Francisco-Oakland-San Jose Bay Area, or the Employee's relocation to any place other than the principal executive offices of the Company, except for required travel by the Employee on Company business to an extent substantially consistent with the Employee's business travel obligations at the time of a Change in Control of the Company; (v) any material breach by the Company of any provision of this Agreement; (vi) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company as required in paragraph 6; or (vii) any purported termination of the Employee's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3(e) below. For purposes of this Agreement, no such purported termination shall be effective. (e) Notice of Termination. Any purported termination of employment shall be communicated by a written Notice of Termination to Employee in accordance with Section 8, and shall state the specific termination provisions in this Agreement relied upon, and set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment. (f) Date of Termination. "Date of Termination" shall mean (a) for Disability, 30 days after Notice of Termination is given to the Employee (provided the Employee has not returned to the performance of the Employee's duties on a full-time basis during such 30-day period), or (b) if the Employee's employment is terminated by the Company for any other reason, the date on which notice is given. 4 (g) Notwithstanding any other provision of this Agreement, if a Change in Control occurs while Employee is still an employee of the Company, Employee may, after 90 days and within 120 days of the Change in Control, terminate employment without Good Reason, and shall thereupon be entitled to one-half (1/2) of the compensation, described in paragraph 4. 4. Severance Compensation upon Termination of Employment. If the Employee's employment shall be terminated (a) by the Company other than pursuant to Sections 3(b) or 3(c), or (b) by the Employee for Good Reason, the Company shall: (a) pay to the Employee as severance pay in a lump sum, in cash, on the fifth day following the Date of Termination, an amount equal to 299.999% of the Employee's "Base Compensation" (as defined below); provided, however, that if the lump sum severance payment under this Section 4, either alone or together with other payments which the Employee has the right to receive from the Company, would not be deductible (in whole or in part) by the Company as a result of such lump sum payment constituting a "parachute payment" (as defined in Section 28OG of the Internal Revenue Code of 1986, as amended (collectively the "Code")), such lump sum severance payment shall be reduced to the largest amount as will result in no portion of the lump sum severance payment under this Section 4 not being fully deductible by the Company as a result of Section 28OG of the Code. The determination of any reduction in the lump sum severance payment under this Section 4 pursuant to the foregoing provision shall be made exclusively by the Company's auditors prior to the Change in Control (whose fees and expenses shall be born by the Company), and such determination shall be conclusive and binding. The term "Base Compensation" shall mean an average of the annual cash compensation paid to the Employee by the Company and any of its subsidiaries in the form of salary or bonuses during the five taxable years (or such lesser period as Employee was employed by the Company or any of its subsidiaries) immediately preceding the Change in Control of the Company which was includable in gross income by the Employee for federal income tax reporting purposes; and (b) arrange to provide Employee, for a six-month period (or such shorter period as Employee may elect), with disability, accident, group life, medical and dental insurance substantially similar to those insurance benefits which Employee is receiving immediately prior to the Notice of Termination. Benefits otherwise receivable by Employee pursuant to this Section 4(b) shall be reduced to the extent comparable benefits are actually received by the Employee during such six-month period following termination (or such shorter period elected by the Employee), and any such benefits actually received by Employee shall be reported by Employee to the Company. 5 5. No Obligation to Mitigate Damages. The Employee shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by the Employee as a result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise, except to the extent provided in Section 4 above. (a) No Effect on Other Contractual Rights. The provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish the Employee's existing rights, or rights which would accrue solely as a result of the passage of time, under any Benefit Plan, employment agreement or other contract, plan or arrangement, except that the provisions of this Agreement and any payment provided for hereunder, shall be in lieu of payments otherwise due to the Employee under any of the Company's severance pay policies. 6. Successor to the Company. (a) The Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement satisfactory to Employee, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets which executes and delivers the agreement provided for in this Section 6 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) Heirs of the Employee. This Agreement shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Employee should die while any amounts are still payable to Employee hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's devisee, legatee, or other designee or, if there be no such designee, to the Employee's estate. 7. Arbitration. Any dispute, controversy or claim arising under or in connection with this Agreement, or the breach hereof, shall be settled exclusively by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment upon the award rendered by Arbitrator(s) may be entered in any court having jurisdiction thereof. Any arbitration held pursuant to this Section 7 shall take place in San Francisco, California. 6 8. Notice. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: Watkins-Johnson Company 3333 Hillview Avenue Palo Alto, California 94304-1223 Attention: President of the Company If to the Employee: ___________________ ___________________ ___________________ ___________________ or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 9. Nonwaiver, Complete Agreement, Governing Law. No provisions of this Agreement may be modified, waived or discharged unless in writing signed by both parties. No waiver by either party hereto at any time of any breach by the other party of, or compliance with, any condition or provision of this agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 10. Legal Fees and Expenses. The Company shall pay all reasonable legal fees and expenses which the Employee may incur as a result of the Company's contesting the validity, enforceability or the Employee's good faith interpretation of, or good faith determinations under, this Agreement; provided, however, that the Company shall not pay any legal fees and expenses incurred by Employee in contesting the termination of Employee's employment for Cause if, as a result of such contest, it is determined that the Employee was in fact terminated for Cause. 7 11. Confidentiality. The Employee shall retain in confidence any and all confidential information known to the Employee concerning the Company and its business so long as such information is not otherwise publicly disclosed. 12. Validity. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. WATKINS-JOHNSON COMPANY, a California corporation By_____________________ Title:__________________ Title:__________________ 8 EX-10.21 5 AMENDED AND RESTATED EMPLOYMENT AGREEMENT Exhibit 10.21 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is made as of March 2, 1998, and amended and restated in its entirety effective as of January 25, 1999, by and between W. Keith Kennedy (hereinafter called "Employee") and WATKINS-JOHNSON COMPANY, a California corporation (hereinafter called the "Company"). In consideration of the mutual covenants herein contained the parties hereto agree as follows: 1. Term and Scope of Employment. (a) The Company agrees to employ Employee in Palo Alto, California for a period of thirty-six (36) months, commencing March 9, 1998, and ending March 9, 2001, for the purpose of rendering services in connection with the Company's business. Employee agrees to accept employment with the Company for such purpose. In performing his duties hereunder, Employee shall observe and comply with all directions given by the Board of Directors of the Company or by his superiors. (b) Employee shall devote his full time, attention, and effort to the business of the Company, and shall not during the term of this Agreement engage in any other business (whether as an employee, partner, consultant or otherwise) without the consent of the Company; but this shall not be construed as preventing Employee from investing his assets in such form or manner as will not interfere with the services he agreed to render to the Company hereunder. (c) Employee agrees to inform the Board of Directors of the Company, or his superiors, of all of his work and transactions on behalf of the Company, and to disclose to them his knowledge of the Company's business and affairs. 2. Salary. For his services the Company agrees to pay Employee an annual salary of not less than Four Hundred and Sixty-Five Thousand Dollars ($465,000) payable in equal biweekly installments. In addition to the above amount, at the sole discretion of the Board of Directors, Employee may be granted bonuses or other compensation in an amount to be determined in accordance with Board policy. 3. Termination. (a) For Cause. During the term of this Agreement, Employee's employment may be terminated by the Company for Cause (as defined below), effective immediately upon the day it sends Notice of Termination (as required by Section 10(b)) to Employee, at which time compensation will cease. "Cause" for this purpose, shall mean fraud, misappropriation, embezzlement or willful engagement by Employee in misconduct which is demonstrably and materially injurious to the Company and its subsidiaries taken as a whole. An act or omission of Employee shall not be considered "willful" unless done, or omitted to be done, by Employee without good faith and a reasonable belief that the act or omission was in the best interests of the Company and its subsidiaries. Employee may not be terminated for Cause unless and until there shall have been delivered to Employee a copy of a resolution duly adopted by affirmative vote of not less than three-quarters of the entire membership of the Company's Board of Directors at a meeting of the Board called and held for that purpose (after reasonable notice to Employee and an opportunity for Employee, together with Employee's counsel, to be heard before the Board), finding Employee was guilty of the conduct set forth in the first sentence of this Section 3(a), and specifying the particulars thereof in detail. Notwithstanding the foregoing, Employee shall have the right to contest such termination for Cause (for purposes of this Agreement) by arbitration in accordance with the provisions of Section 9. 2 (b) Without Cause. Company may terminate Employee's employment without Cause. In the event Company terminates Employee's employment without Cause, in addition to the entire compensation provided for hereunder for the remainder of the term specified in Section 1(a) (which shall be paid in a lump sum), Employee shall be entitled to receive upon such termination without Cause (in a lump sum) severance compensation equal to six (6) month's base salary, less all amounts required by law to be withheld and deducted; provided, however, that if the Company terminates Employee's employment other than for death, Disability or Cause, or Employee terminates his Employment for Good Reason, prior to the date of occurrence of a Change in Control if such termination is effected by the Company (or the actions or decisions giving rise to Employee's termination for Good Reason are taken or made by the Company) in anticipation of a Change of Control such termination shall for all purposes hereunder have the same consequences as a termination by Employee under subparagraph (c) of this Section 3 (any such termination, action or decision effected, taken or made within 90 days prior to the date of any such Change in Control shall be conclusively deemed to be in anticipation of a Change in Control). (c) Change in Control. This Agreement shall not be terminated upon a Change in Control, as defined in subparagraph (d) of this Section 3. In the event of a Change in Control, the provisions of this Agreement shall be binding on and shall inure to the benefit of the surviving or resulting corporation, or (in the case of a Change in Control of the kind referred to in Section 3(c)(i)(z)) the corporation to which the applicable assets of the Company have been transferred; provided, however, that (a) Employee may treat the occurrence of a Change in Control as a material breach of this Agreement and may terminate this Agreement upon written notice given (in accordance with Section 10(b)) within 120 days of the occurrence of a Change in Control, unless Employee's employment has theretofore been terminated in accordance with any other provisions of this Agreement, and (b) Employee may terminate this Agreement for Good Reason at any time following the occurrence of a Change in Control and during the remainder of the term of this Agreement as specified in Section 1(a). Upon such termination, or upon a 3 termination of Employee by the Company without Cause at any time following the occurrence of a Change in Control, the Company shall: (i) pay to Employee as severance pay in a lump sum, in cash, on the fifth day following the Date of Termination (as defined in subparagraph (g) of this Section 3), an amount equal to the aggregate of (x) 299.999% of Employee's "Base Compensation" (as defined below), plus (y) an amount equal to (A) the amount previously determined by the Board as Employee's target bonus for the calendar year in which Notice of Termination is given by Employee or the Company, as the case may be, multiplied by (B) a fraction, the numerator of which shall be the number of days that have elapsed during such calendar year, through and including the date on which such Notice of Termination is given, and the denominator of which shall be 365; provided, however, that if the lump sum severance payment under this Section 3, either alone or together with other payments (or the value of other benefits) which Employee has the right to receive from the Company in connection with a Change in Control, would not be deductible (in whole or in part) by the Company as a result of such lump sum payment constituting a "parachute payment" (as defined in Section 280G of the Internal Revenue Code of 1986, as amended (collectively, the "Code")), such lump sum severance payment (or, at Employee's election, such other payments and/or benefits, or a combination of such other payments and/or benefits and such lump sum severance payment) shall be reduced to the largest amount as will result in no portion of the lump sum severance payment under this Section 3 not being fully deductible by the Company as a result of Section 280G of the Code. The determination of the amount of any such required reduction pursuant to the foregoing provision, and the valuation of any non-cash benefits for purposes of such determination, shall be made exclusively by the firm that was acting as the Company's auditors prior to the Change in Control (whose fees and expenses shall be borne by the Company), and such determination shall be conclusive and binding. The term "Base Compensation" shall mean an average of the annual cash compensation paid to Employee by the Company and any of its subsidiaries in the form of salary or bonuses (including any amount that is the subject of an 4 elective deferral by Employee) during the five taxable years immediately preceding the Change in Control which was includable in gross income (or would have been so included but for any such elective deferral) by Employee for federal income tax reporting purposes; and (ii) arrange to provide Employee, for a thirty-six month period (or such shorter period as Employee may elect), with disability, accident, group life, medical and dental insurance, all of which shall be prepaid, substantially similar to those insurance benefits which Employee is receiving immediately prior to a termination by Employee under this Section 3(c). Benefits otherwise receivable by Employee pursuant to this Section 3(c) shall be reduced to the extent comparable benefits are actually received by Employee during such thirty-six month period (or such shorter period elected by Employee), and any such benefits actually received by Employee shall be reported by Employee to the Company. (d) Definition of Change in Control. A Change in Control shall be deemed to have occurred if (i) there shall be consummated (x) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation, (y) any other consolidation or merger to which the Company is a party, regardless of whether shares of the Company's Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's Common Stock immediately prior to the merger have the same proportionate ownership of common stock (or the equivalent fully voting securities) of the surviving corporation or other entity immediately after the merger, or (z) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (ii) the Company consummates (in one or a series of transactions) the disposition of substantially all of its business operations, or (iii) any "person" (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, shall become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30% or more of the Company's outstanding Common Stock, or (iv) during any period of two consecutive years, individuals who at the beginning of such period constitute the entire Board 5 of Directors of the Company shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (e) Disability. If, as a result of Employee's incapacity due to physical or mental illness, Employee shall have been absent from his duties with the Company on a full-time basis for six consecutive months and within 30 days after written Notice of Termination is thereafter given by the Company Employee shall not have returned to the full-time performance of Employee's duties, the Company may terminate this Agreement for "Disability." (f) Good Reason. For purposes of this Agreement, "Good Reason" shall mean any of the following (without Employee's express written consent): (A) the assignment to Employee by the Company of duties inconsistent with, or a substantial alteration in the nature or status of, Employee's responsibilities immediately prior to a Change in Control other than any such alteration primarily attributable to the fact that the Company's securities are no longer publicly traded; (B) a reduction by the Company in Employee's base salary in effect on the date of a Change in Control or as the same may be increased from time to time during the term of this Agreement; (C) failure by the Company to continue in effect without substantial change any compensation, incentive, welfare or benefit plan or arrangement, as well as any plan or arrangement whereby Employee may acquire securities, in which Employee is participating at the time of a Change in Control (or any other plans providing Employee with substantially similar benefits, hereinafter referred to as "Benefit Plans"), or the taking of any action by the Company which would adversely affect Employee's 6 participation in or materially reduce Employee's benefits under any such Benefit Plan or deprive Employee of any material fringe benefit enjoyed by Employee at the time of a Change in Control; unless an equitable substitute arrangement (embodied in an ongoing substitute or alternative Benefit Plan) has been made for the benefit of Employee with respect to the Benefit Plan in question. For purposes of the foregoing, Benefit Plans shall include, but not be limited to, the Company's Employee Stock Ownership Plan, Employees' Profit Sharing and Investment Plan, Deferred Compensation (401K) Plan, 1991 Stock Option and Incentive Plan, Top Management Incentive Bonus Plan, and/or any other plan or arrangement to receive and exercise stock options or stock appreciation rights, incentive, bonus or other award plans, group life insurance plans, medical, dental, accident and disability plans; (D) a relocation of the Company's principal executive offices to a location outside the San Francisco-Oakland-San Jose Bay Area, or Employee's relocation to any place other than the principal executive offices of the Company, except for required travel by Employee on Company business to an extent substantially consistent with Employee's business travel obligations at the time of a Change in Control; (E) any material breach by the Company of any provision of this Agreement; (F) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company as required in Section 7; or (G) any purported termination of Employee's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 10(b) below. For purposes of this Agreement, no such purported termination shall be effective. (g) Date of Termination. "Date of Termination" shall mean (a) for Disability, 30 days after Notice of Termination is given to Employee (provided Employee has not returned to the 7 performance of Employee's duties on a full-time basis during such 30-day period), or (b) if Employee's employment is terminated for any other reason, the date on which Notice of Termination is given by the Company or Employee, as the case may be. 4. Nondisclosure and Assignment of Rights in Company Data. "Company Data" is hereby defined to mean for purposes of this Agreement, programs, improvements, records, ideas, files, drawings, documents, customer lists, investment opportunities, sales and marketing techniques and devices, formulae, specifications, research, studies, investigations, processes, data, and information disclosed to or known by Employee as a consequence, whether directly or indirectly, of his employment by Company which is not generally known in the industry in which the Company is or may become engaged and which involves special techniques or know-how in connection with the industry in which the Company is or may become engaged, and, without limiting the generality of the foregoing, anything not within the public domain and public knowledge, whether or not patentable or copyrightable. The parties hereto acknowledge that in the course of his employment, Employee will himself, or with others, have access to, use, come in contact with, obtain, make, evolve or conceive Company Data. As further consideration for Company's entering into this Agreement, Employee hereby sells, assigns and transfers to Company all right, title, and interest he has or at any time may have to Company Data, and to any and all other Company Data at any time used in the business of Company in which Employee may have a right, title, or interest, and such Company Data shall be the sole and exclusive property of Company. 5. Assignment. The rights and obligations of Employee hereunder shall not be assignable and any attempted assignment shall be void. The rights and obligations of Company hereunder may be assigned as a part of any transaction which includes the transfer of all or substantially all of the assets of the Company, whether such transfer is made pursuant to a sale of assets or stock, or a merger, reorganization, or otherwise. 8 6. No Obligation to Mitigate Damages. Employee shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Employee as a result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise, except to the extent provided in Section 3 above. 7. Successor to the Company. The Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement satisfactory to Employee, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets which executes and delivers the agreement provided for in this Section 7 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 8. Heirs of Employee. This Agreement shall inure to the benefit of and be enforceable by Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts are still payable to him hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisees, legatee, or other designee or, if there be no such designee, to Employee's estate. 9. Arbitration. Any dispute, controversy or claim arising under or in connection with this Agreement, or the breach hereof, shall be settled exclusively by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment upon the 9 award rendered by Arbitrator(s) may be entered in any court having jurisdiction thereof. Any arbitration held pursuant to this Section 9 shall take place in San Francisco, California. 10. Notice. (a) General. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: Watkins-Johnson Company 3333 Hillview Avenue Palo Alto, California 94304 Attention: Corporate Secretary If to Employee: W. Keith Kennedy 26955 Orchard Hill Lane Los Altos Hills, California 94022 or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of address shall be effective only upon receipt. (b) Notice of Termination. Any purported termination of employment shall be communicated by a written Notice of Termination to Employee in accordance with paragraph (a) of this Section 10, and shall state the specific termination provisions in this Agreement relied upon, and set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment. 11. Nonwaiver, Complete Agreement, Governing Law. No provisions of this Agreement may be modified, waived or discharged unless in writing signed by both parties. No waiver by either party 10 hereto at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 12. Legal Fees and Expenses. The Company shall pay all reasonable legal fees and expenses which Employee may incur as a result of the Company's contesting the validity, enforceability or Employee's good faith interpretation of, or good faith determinations under, this Agreement; provided, however, that the Company shall not pay any legal fees and expenses incurred by Employee in contesting the termination of Employee's employment for Cause if, as a result of such contest, it is determined that Employee was in fact terminated for Cause. 13. Validity. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. 11 WATKINS-JOHNSON COMPANY By /s/ Dean A. Watkins ------------------- Title: Chairman /s/ Keith Kennedy ------------------- Keith Kennedy 12 EX-10.22 6 EMPLOYMENT AGREEMENT Exhibit 10.22 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is made as of February 22, 1999, by and between ________________ (hereinafter called "Employee") and WATKINS-JOHNSON COMPANY, a California corporation (hereinafter called the "Company"). WHEREAS, Employee and the Company have entered into that certain Amended and Restated Severance Agreement, dated as of January 25, 1999 (the "Severance Agreement"); and WHEREAS, Employee and the Company now desire to enter into an agreement providing for Employee's continued employment by the Company upon the terms and subject to the conditions set forth herein, which agreement shall, except as otherwise set forth herein, apply cumulatively with the Severance Agreement. In consideration of the mutual covenants herein contained the parties hereto agree as follows: 1. Term and Scope of Employment. (a) The Company agrees to continue to employ Employee in Palo Alto, California for a period of twelve (12) months, commencing on the date hereof and ending on the first anniversary of the date hereof, for the purpose of rendering services in connection with the Company's business. Employee agrees to accept employment with the Company for such purpose. In performing his/her duties hereunder, Employee shall observe and comply with all directions given by the Board of Directors of the Company or by his/her superiors. (b) Employee shall devote his/her full time, attention, and effort to the business of the Company, and shall not during the term of this Agreement engage in any other business (whether as an employee, partner, consultant or otherwise) without the consent of the Company; but this shall not be construed as preventing Employee from investing his/her assets in such form or manner as will not interfere with the services Employee agreed to render to the Company hereunder. (c) Employee agrees to inform the Board of Directors of the Company, or his/her superiors, of all of his/her work and transactions on behalf of the Company, and to disclose to them his/her knowledge of the Company's business and affairs. 2. Salary. For his/her services the Company agrees to pay Employee an annual salary of not less than ________________________________________________ Dollars ($_________) payable in equal biweekly installments. In addition to the above amount, at the sole discretion of the Board of Directors, Employee may be granted bonuses or other compensation in an amount to be determined in accordance with Board policy. 3. Termination. (a) For Cause. During the term of this Agreement, Employee's employment may be terminated by the Company for Cause, effective immediately upon the day it sends Notice of Termination (as required by Section 10(b)) to Employee, at which time compensation will cease. Notwithstanding the foregoing, Employee shall have the right to contest such termination for Cause (for purposes of this Agreement) by arbitration in accordance with the provisions of Section 9. (b) Without Cause. The Company may terminate Employee's employment without Cause. In the event the Company terminates Employee's employment without Cause, in addition to the 2 entire compensation provided for hereunder for the remainder of the term specified in Section 1(a) (which shall be paid in a lump sum), Employee shall be entitled to receive upon such termination without Cause (in a lump sum) severance compensation equal to six (6) months' base salary, less all amounts required by law to be withheld and deducted. (c) Change in Control. This Agreement shall not be terminated upon a Change in Control. In the event of a Change in Control: (i) the provisions of this Agreement shall be binding on and shall inure to the benefit of the surviving or resulting corporation, or (in the case of a Change in Control of the kind referred to in Section 2(a)(i)(z) of the Severance Agreement) the corporation to which the applicable assets of the Company have been transferred, and (ii) all of the provisions of the Severance Agreement shall apply in accordance with its terms. In the event of any inconsistency between the provisions of the Severance Agreement and this Agreement, the provisions of the Severance Agreement shall govern. Except to the extent of any such inconsistency, the provisions of this Agreement and the Severance Agreement shall apply cumulatively and not exclusively. 4. Nondisclosure and Assignment of Rights in Company Data. "Company Data" is hereby defined to mean for purposes of this Agreement, programs, improvements, records, ideas, files, drawings, documents, customer lists, investment opportunities, sales and marketing techniques and devices, formulae, specifications, research, studies, investigations, processes, data, and information disclosed to or known by Employee as a consequence, whether directly or indirectly, of his/her employment by the Company which is not generally known in the industry in which the Company is or may become engaged and which involves special techniques or know-how in connection with the industry in which the Company is or may become engaged, and, without limiting the generality of the foregoing, anything not within the public domain and public knowledge, whether or not patentable or copyrightable. The parties hereto acknowledge that in the course of his/her employment, Employee will himself/herself, or with others, have access to, use, come in contact with, obtain, make, evolve or conceive Company Data. As further consideration for the Company's 3 entering into this Agreement, Employee hereby sells, assigns and transfers to the Company all right, title, and interest he/she has or at any time may have to Company Data, and to any and all other Company Data at any time used in the business of the Company in which Employee may have a right, title, or interest, and such Company Data shall be the sole and exclusive property of the Company. 5. Assignment. The rights and obligations of Employee hereunder shall not be assignable and any attempted assignment shall be void. The rights and obligations of the Company hereunder may be assigned as a part of any transaction which includes the transfer of all or substantially all of the assets of the Company, whether such transfer is made pursuant to a sale of assets or stock, or a merger, reorganization, or otherwise. 6. No Obligation to Mitigate Damages. Employee shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Employee as a result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise. 7. Successor to the Company. The Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement satisfactory to Employee, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets which executes and delivers the agreement provided for in this Section 7 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 4 8. Heirs of Employee. This Agreement shall inure to the benefit of and be enforceable by Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts are still payable to him/her hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisees, legatee, or other designee or, if there be no such designee, to Employee's estate. 9. Arbitration. Any dispute, controversy or claim arising under or in connection with this Agreement, or the breach hereof, shall be settled exclusively by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment upon the award rendered by Arbitrator(s) may be entered in any court having jurisdiction thereof. Any arbitration held pursuant to this Section 9 shall take place in San Francisco, California. 10. Notice. (a) General. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: Watkins-Johnson Company 3333 Hillview Avenue Palo Alto, California 94304 Attention: President and Chief Executive Officer of the Company If to Employee: __________________ __________________ __________________ 5 or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of address shall be effective only upon receipt. (b) Notice of Termination. Any purported termination of employment shall be communicated by a written Notice of Termination to Employee in accordance with paragraph (a) of this Section 10, and shall state the specific termination provisions in this Agreement relied upon, and set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment. 11. Nonwaiver, Complete Agreement, Governing Law. No provisions of this Agreement may be modified, waived or discharged unless in writing signed by both parties. No waiver by either party hereto at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 12. Legal Fees and Expenses. The Company shall pay all reasonable legal fees and expenses which Employee may incur as a result of the Company's contesting the validity, enforceability or Employee's good faith interpretation of, or good faith determinations under, this Agreement; provided, however, that the Company shall not pay any legal fees and expenses incurred by Employee in contesting the termination of Employee's employment for Cause if, as a result of such contest, it is determined that Employee was in fact terminated for Cause. 6 13. Validity. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 15. Certain Defined Terms. Capitalized terms used herein without definition shall have the meanings given to such terms in the Severance Agreement. 7 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. WATKINS-JOHNSON COMPANY By _____________________ Title: _____________________ (Employee) 8 EX-10.23 7 AMENDED AND RESTATED SEVERANCE AGREEMENT Exhibit 10.23 AMENDED AND RESTATED SEVERANCE AGREEMENT ---------------------------------------- THIS AMENDED AND RESTATED SEVERANCE AGREEMENT (the "Agreement"), originally dated September 28, 1998, and amended and restated in its entirety effective as of January 25, 1999, is entered into by and between Watkins-Johnson Company, a California corporation (the "Company"), and ________________ ("Employee"). The Company's Board of Directors has determined that it is appropriate to reinforce and encourage the continued attention and dedication of members of the Company's management, including Employee, to their assigned duties without distraction in potentially disturbing circumstances arising from the possibility of a Change in Control (as defined herein) of the Company. This Agreement sets forth the severance compensation which the Company agrees to pay to Employee if Employee's employment with the Company terminates under one of the circumstances described herein. 1. Term. (a) This Agreement shall terminate, except for any unpaid obligation of the Company, upon the earliest of (i) three years from the date hereof if a Change in Control has not occurred within such three-year period; (ii) the termination of Employee's employment based on death, Disability (as defined in Section 2(c)) or Cause (as defined in Section 2(d)) or by Employee other than for Good Reason (as defined in Section 2(e)); or (iii) three years from the date of a Change in Control. (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 six consecutive months and within 30 days after written Notice of 4 Termination (as required by Section 9(b)) is thereafter given by the Company, Employee shall not have returned to the full-time performance of Employee's duties, the Company may terminate this Agreement for "Disability." (d) Cause. For purposes of this Agreement only, the Company shall have "Cause" to terminate Employee's employment hereunder only on the basis of fraud, misappropriation, embezzlement or willful engagement by Employee in misconduct which is demonstrably and materially injurious to the Company and its subsidiaries taken as a whole. An act, or omission of Employee shall not be considered "willful" unless done, or omitted to be done, by Employee without good faith and a reasonable belief that the act or omission was in the best interests of the Company and its subsidiaries. Employee may not be terminated for Cause unless and until there shall have been delivered to Employee a copy of a resolution duly adopted by affirmative vote of not less than three-quarters of the entire membership of the Company's Board of Directors at a meeting of the Board called and held for that purpose (after reasonable notice to Employee and an opportunity for Employee, together with Employee's counsel, to be heard before the Board), finding Employee was guilty of the conduct set forth in the first sentence of this Section, and specifying the particulars thereof in detail. Notwithstanding the foregoing, Employee shall have the right to contest such termination for Cause (for purposes of this Agreement) by arbitration in accordance with the provisions of Section 8. (e) Good Reason. After a Change in Control, Employee may terminate employment for Good Reason at any time during the term of this Agreement. For purposes of this Agreement, "Good Reason" shall mean any of the following (without Employee's express written consent): 5 (i) the assignment to Employee by the Company of duties inconsistent with, or a substantial alteration in the nature or status of, Employee's responsibilities immediately prior to a Change in Control other than any such alteration primarily attributable to the fact that the Company's securities are no longer publicly traded; (ii) a reduction by the Company in Employee's base salary in effect on the date of a Change in Control or as the same may be increased from time to time during the term of this Agreement; (iii) failure by the Company to continue in effect without substantial change any compensation, incentive, welfare or benefit plan or arrangement, as well as any plan or arrangement whereby Employee may acquire securities of the Company, in which Employee is participating at the time of a Change in Control (or any other plans providing Employee with substantially similar benefits, hereinafter referred to as "Benefit Plans"), or the taking of any action by the Company which would adversely affect Employee's participation in or materially reduce Employee's benefits under any such Benefit Plan or deprive Employee of any material fringe benefit enjoyed by Employee at the time of a Change in Control; unless an equitable substitute arrangement (embodied in an ongoing substitute or alternative Benefit Plan) has been made for the benefit of Employee with respect to the Benefit Plan in question. For purposes of the foregoing, Benefit Plans shall include, but not be limited to, the Company's Employee Stock Ownership Plan, Employees' Profit Sharing and Investment Plan, Deferred Compensation (401K) Plan, 1991 Stock Option and Incentive Plan, Top Management Incentive Bonus Plan, and/or any other plan or arrangement to receive and exercise stock options or stock appreciation rights, incentive, bonus or other award plans, group 6 life insurance plans, medical, dental, accident and disability plans; (iv) a relocation of the Company's principal executive offices to a location outside the San Francisco-Oakland-San Jose Bay Area, or Employee's relocation to any place other than the principal executive offices of the Company, except for required travel by Employee on Company business to an extent substantially consistent with Employee's business travel obligations at the time of a Change in Control; (v) any material breach by the Company of any provision of this Agreement; (vi) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company as required in Section 6; (vii) any purported termination of Employee's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 9(b) below. For purposes of this Agreement, no such purported termination shall be effective. 7 (f) Date of Termination. "Date of Termination" shall mean (i) for Disability, 30 days after Notice of Termination is given to Employee (provided Employee has not returned to the performance of Employee's duties on a full-time basis during such 30-day period), or (ii) if Employee's employment is terminated for any other reason, the date on which notice is given by the Company or Employee, as the case may be. 3. Severance Compensation upon Termination of Employment in Connection with a Change in Control. No compensation shall be payable under this Agreement unless and until a Triggering Event has occurred. Upon the occurrence of a Triggering Event, the Company shall: (a) pay to Employee as severance pay in a lump sum, in cash, on the fifth day following the Date of Termination, an amount equal to 299.999% of Employee's "Base Compensation" (as defined below); provided, however, that if the lump sum severance payment under this Section 3, either alone or together with other payments (or the value of benefits) which Employee has the right to receive from the Company in connection with a Change in Control, would not be deductible (in whole or in part) by the Company as a result of such lump sum payment constituting a "parachute payment" (as defined in Section 280G of the Internal 8 Revenue Code of 1986, as amended (collectively the "Code")), such lump sum severance payment (or, at Employee's election, such other payments and/or benefits, or a combination of such other payments and/or benefits and such lump sum severance payment) shall be reduced to the largest amount as will result in no portion of the lump sum severance payment under this Section 3 not being fully deductible by the Company as a result of Section 280G of the Code. The determination of the amount of any such required reduction pursuant to the foregoing provision, or the valuation of any non-cash benefits for purposes of such determination, shall be made exclusively by the firm that was acting as the Company's auditors prior to the Change in Control (whose fees and expenses shall be borne by the Company), and such determination shall be conclusive and binding. The term "Base Compensation" shall mean an average of the annual cash compensation paid to Employee by the Company and any of its subsidiaries in the form of salary or bonuses (including any amount that is the subject of an elective deferral by Employee) during the five taxable years (or such lesser period as Employee was employed by the Company or any of its subsidiaries) immediately preceding the Change in Control which was includable in gross income (or would have been so included but for any such 9 elective deferral) by Employee for federal income tax reporting purposes; and (b) arrange to provide Employee, for a six-month period (or such shorter period as Employee may elect), with disability, accident, group life, medical and dental insurance, all of which shall be prepaid, substantially similar to those insurance benefits which Employee is receiving immediately prior to the Notice of Termination. Benefits otherwise receivable by Employee pursuant to this Section 3(b) shall be reduced to the extent comparable benefits are actually received by Employee during such six-month period following termination (or such shorter period elected by Employee), and any such benefits actually received by Employee shall be reported by Employee to the Company. Notwithstanding any other provision of this Agreement, if a Change in Control occurs while Employee is still an employee of the Company, Employee may, after 90 days and within 120 days of the Change in Control and upon written notice given in accordance with Section 9(b), terminate employment without Good Reason, and shall thereupon be entitled to one-half (1/2) of the compensation described in this Section 3. 10 4. No Obligation to Mitigate Damages. Employee shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Employee as a result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise, except to the extent provided in Section 3 above. 5. No Effect on Other Contractual Rights. The provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish Employee's existing rights, or rights which would accrue solely as a result of the passage of time, under any Benefit Plan, employment agreement or other contract, plan or arrangement, except that the provisions of this Agreement and any payment provided for hereunder, shall be in lieu of payments otherwise due to Employee under any of the Company's severance pay policies on account of Employee's termination of employment upon (or in anticipation of, as set forth in Section 2(b)) the occurrence of a Change in Control. 6. Successor to the Company. The Company shall require any successor or assign (whether direct or indirect, by purchase, 11 merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement satisfactory to Employee, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets which executes and delivers the agreement provided for in this Section 6 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 7. Heirs of Employee. This Agreement shall inure to the benefit of and be enforceable by Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts are still payable to Employee hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate. 12 8. Arbitration. Any dispute, controversy or claim arising under or in connection with this Agreement, or the breach hereof, shall be settled exclusively by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment upon the award rendered by Arbitrator(s) may be entered in any court having jurisdiction thereof. Any arbitration held pursuant to this Section 8 shall take place in San Francisco, California. 9. Notice. (a) General. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: Watkins-Johnson Company 3333 Hillview Avenue Palo Alto, California 94304-1223 Attention: President of the Company If to Employee: _______________________ _______________________ _______________________ 13 or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. (b) Notice of Termination. Any purported termination of employment shall be communicated by a written Notice of Termination to Employee in accordance with paragraph (a) of this Section 9, and shall state the specific termination provisions in this Agreement relied upon, and set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment. 10. Nonwaiver, Complete Agreement, Governing Law. No provisions of this Agreement may be modified, waived or discharged unless in writing signed by both parties. No waiver by either party hereto at any time of any breach by the other party of, or compliance with, any condition or provision of this agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. This Agreement shall be governed by 14 and construed in accordance with the laws of the State of California. 11. Legal Fees and Expenses. The Company shall pay all reasonable legal fees and expenses which Employee may incur as a result of the Company's contesting the validity, enforceability or Employee's good faith interpretation of, or good faith determinations under, this Agreement; provided, however, that the Company shall not pay any legal fees and expenses incurred by Employee in contesting the termination of Employee's employment for Cause if, as a result of such contest, it is determined that Employee was in fact terminated for Cause. 12. Confidentiality. Employee shall retain in confidence any and all confidential information known to Employee concerning the Company and its business so long as such information is not otherwise publicly disclosed. 13. Validity. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an 15 original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. WATKINS-JOHNSON COMPANY, a California corporation By ____________________________ Title: _____________________ _______________________________ Employee 16 EX-10.24 8 AMENDED AND RESTATED SEVERANCE AGREEMENT Exhibit 10.24 AMENDED AND RESTATED SEVERANCE AGREEMENT THIS AMENDED AND RESTATED SEVERANCE AGREEMENT (the "Agreement"), originally dated September 28, 1998, and amended and restated in its entirety effective as of January 25, 1999, is entered into by and between Watkins-Johnson Company, a California corporation (the "Company"), and Scott Buchanan ("Employee"). The Company's Board of Directors has determined that it is appropriate to reinforce and encourage the continued attention and dedication of Employee to his assigned duties without distraction in potentially disturbing circumstances arising from the possibility of a Change in Control (as defined in Section 2(a)) of the Company. This Agreement sets forth the severance compensation which the Company agrees to pay to Employee if Employee's employment with the Company terminates under one of the circumstances described herein. 1. Term. (a) This Agreement shall terminate, except for any unpaid obligation of the Company, upon the earliest of (i) three years from the date hereof if a Change in Control has not occurred within such three-year period; (ii) the termination of Employee's employment by the Company based on death, Disability (as defined in Section 2(c)) or Cause (as defined in Section 2(d)) or by Employee other than for Good Reason (as defined in Section 2(e); or (iii) three years from the date of a Change in Control. (b) Nothing in this Agreement shall confer upon Employee any right to continue in the employ of the Company prior to or following a Change in Control or shall in any way limit the rights of the Company, which are hereby expressly reserved, to discharge Employee at any time prior to or following the date of a Change in Control for any reason whatsoever, with or without Cause. 2. Certain Definitions. (a) Change in Control. A "Change in Control" shall be deemed to have occurred if (i) there shall be consummated (x) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation, (y) any other consolidation or merger to which the Company is a party, regardless of whether shares of the Company's Common Stock would 2 be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's Common Stock immediately prior to the merger have the same proportionate ownership of common stock (or the equivalent fully voting securities) of the surviving corporation or other entity immediately after the merger, or (z) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (ii) the Company consummates (in one or a series of transactions) the disposition of substantially all of its operating businesses, or (iii) any "person" (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, shall become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30% or more of the Company's outstanding Common Stock, or (iv) during any period of two consecutive years, individuals who at the beginning of such period constitute the entire Board of Directors of the Company shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (b) Triggering Event. A "Triggering Event" shall be deemed to have occurred if either (i) a Change in Control occurs while Employee is still an employee of the Company or any of its subsidiaries or (ii) a Change in Control occurs after the date on which Employee's employment with the Company or any of its subsidiaries was terminated (x) by the Company other than for death, Disability or Cause or (y) by Employee for Good Reason, and such termination is effected by the Company (or the actions or decisions giving rise to Employee's termination for Good Reason are taken 3 or made by the Company) in anticipation of a Change in Control (any such termination, action or decision effected, taken or made within 90 days prior to the date of any such Change in Control shall be conclusively deemed to be in anticipation of a Change in Control). (c) Disability. If, as a result of Employee's incapacity due to physical or mental illness, Employee shall have been absent from duties with the Company on a full-time basis for six consecutive months and within 30 days after written Notice of Termination (as required by Section 9(b)) is thereafter given by the Company, Employee shall not have returned to the full-time 4 performance of Employee's duties, the Company may terminate this Agreement for "Disability." (d) Cause. For purposes of this Agreement only, the Company shall have "Cause" to terminate Employee's employment hereunder only on the basis of fraud, misappropriation, embezzlement or willful engagement by Employee in misconduct which is demonstrably and materially injurious to the Company and its subsidiaries taken as a whole. An act, or omission of Employee shall not be considered "willful" unless done, or omitted to be done, by Employee without good faith and a reasonable belief that the act or omission was in the best interests of the Company and its subsidiaries. Employee may not be terminated for Cause unless and until there shall have been delivered to Employee a copy of a resolution duly adopted by affirmative vote of not less than three-quarters of the entire membership of the Company's Board of Directors at a meeting of the Board called and held for that purpose (after reasonable notice to Employee and an opportunity for Employee, together with Employee's counsel, to be heard before the Board), finding Employee was guilty of the conduct set forth in the first sentence of this Section, and specifying the particulars thereof in detail. Notwithstanding the foregoing, Employee shall have the right to contest such termination for Cause (for purposes of this Agreement) by arbitration in accordance with the provisions of Section 8. (e) Good Reason. For purposes of this Agreement, "Good Reason" shall mean any of the following (without Employee's express written consent): (i) the assignment to Employee by the Company of duties inconsistent with, or a substantial alteration in the nature or status of, Employee's responsibilities immediately prior to a 5 Change in Control other than any such alteration primarily attributable to the fact that the Company's securities are no longer publicly traded; (ii) a reduction by the Company in Employee's base salary in effect on the date of a Change in Control or as the same may be increased from time to time during the term of this Agreement; (iii) failure by the Company to continue in effect without substantial change any compensation, incentive, welfare or benefit plan or arrangement, as well as any plan or arrangement whereby Employee may acquire securities of the Company, in which Employee is participating at the time of a Change in Control (or any other plans providing Employee with substantially similar benefits, hereinafter referred to as "Benefit Plans"), or the taking of any action by the Company which would adversely affect Employee's participation in or materially reduce Employee's benefits under any such Benefit Plan or deprive Employee of any material fringe benefit enjoyed by Employee at the time of a Change in Control; unless an equitable substitute arrangement (embodied in an ongoing substitute or alternative Benefit Plan) has been made for the benefit of Employee with respect to the Benefit Plan in question. For purposes of the foregoing, Benefit Plans shall include, but not be limited to, the Company's Employee Stock Ownership Plan, Employees' Profit Sharing and Investment Plan, Deferred Compensation (401K) Plan, 1991 Stock Option and Incentive Plan, Top Management Incentive Bonus Plan, and/or any other plan or arrangement to receive and exercise stock options or stock appreciation rights, incentive, bonus or other award plans, group life insurance plans, medical, dental, accident and disability plans; (iv) a relocation of the Company's principal executive offices to a location outside the San Francisco-Oakland-San Jose Bay Area, or Employee's relocation to any place 6 other than the principal executive offices of the Company, except for required travel by Employee on Company business to an extent substantially consistent with Employee's business travel obligations at the time of a Change in Control; (v) any material breach by the Company of any provision of this Agreement; (vi) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company as required in Section 6; (vii) any purported termination of Employee's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 9(b) below. For purposes of this Agreement, no such purported termination shall be effective. (f) Date of Termination. "Date of Termination" shall mean (i) for Disability, 30 days after Notice of Termination is given to Employee (provided Employee has not returned to the performance of Employee's duties on a full-time basis during such 30-day period), or (ii) if Employee's employment is terminated for any other reason, the date on which notice is given by the Company or Employee, as the case may be. 7 3. Severance Compensation upon Termination of Employment in Connection with a Change in Control. No compensation shall be payable under this Agreement unless and until a Triggering Event has occurred. Upon the occurrence of a Triggering Event, the provisions of this Agreement shall be binding on and shall inure to the benefit of the surviving or resulting corporation, or (in the case of a Change in Control of the kind referred to in Section 2(a)(i)(y)) the corporation to which the applicable assets of the Company have been transferred; provided, however, that (a) Employee may treat the occurrence of a Triggering Event as a material breach of this Agreement and may terminate this Agreement upon written notice given (in accordance with Section 9(b)) within 120 days of the occurrence of a Change in Control, unless Employee's employment has theretofore been terminated for death, Disability or Cause, and (b) Employee may terminate this Agreement for Good Reason at any time prior to the second anniversary of a Change in Control and during the remainder of the term of this Agreement as specified in Section 1(a). Upon such termination by Employee under this Section 3, or upon the termination of Employee's employment by the Company without Cause at any time prior to the second anniversary of a Change in Control, the Company shall: 8 (i) pay to Employee as severance pay in a lump sum, in cash, on the fifth day following the Date of Termination, an amount equal to the aggregate of (x) 299.999% of Employee's "Base Compensation" (as defined below), plus (y) an amount equal to (A) the amount previously determined by the Board as Employee's target bonus for the calendar year in which Notice of Termination is given by Employee or the Company, as the case may be, multiplied by (B) a fraction, the numerator of which shall be the number of days that have elapsed during such calendar year, through and including the date on which such Notice of Termination is given, and the denominator of which shall be 365; provided, however, that if the lump sum severance payment under this Section 3, either alone or together with other payments (or the value of other benefits) which Employee has the right to receive from the Company in connection with a Change in Control, would not be deductible (in whole or in part) by the Company as a result of such lump sum payment constituting a "parachute payment" (as defined in Section 280G of the Internal Revenue Code of 1986, as amended (collectively the "Code")), such lump sum severance payment (or, at Employee's election, such other payments and/or benefits, or a combination of such other payments and/or benefits and such lump sum severance payment) shall be 9 reduced to the largest amount as will result in no portion of the lump sum severance payment under this Section 3 not being fully deductible by the Company as a result of Section 280G of the Code. The determination of the amount of any such required reduction pursuant to the foregoing provision, and the valuation of any non-cash benefits for purposes of such determination, shall be made exclusively by the firm that was acting as the Company's auditors prior to the Change in Control (whose fees and expenses shall be borne by the Company), and such determination shall be conclusive and binding. The term "Base Compensation" shall mean an average of the annual cash compensation paid to Employee by the Company and any of its subsidiaries in the form of salary or bonuses (including any amount that is subject of an elective deferral by Employee) during the five taxable years immediately preceding the Change in Control which was includable in gross income (or would have been so included but for any such elective deferral) by Employee for federal income tax reporting purposes; and (ii) arrange to provide Employee, for a thirty-six month period (or such shorter period as Employee may elect), with disability, accident, group life, medical and dental insurance, all of which shall be prepaid, substantially similar to those 10 insurance benefits which Employee is receiving immediately prior to a termination by Employee under this Section 3. Benefits otherwise receivable by Employee pursuant to this Section 3 shall be reduced to the extent comparable benefits are actually received by Employee during such thirty-six month period (or such shorter period elected by Employee), and any such benefits actually received by Employee shall be reported by Employee to the Company. 4. No Obligation to Mitigate Damages. Employee shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Employee as a result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise, except to the extent provided in Section 3 above. 5. No Effect on Other Contractual Rights. The provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish Employee's existing rights, or rights which would accrue solely as a result of the passage of time, under any Benefit Plan, employment agreement or other contract, plan or arrangement, 11 except that the provisions of this Agreement and any payment provided for hereunder, shall be in lieu of payments otherwise due to Employee under any of the Company's severance pay policies on account of Employee's termination of employment upon (or in anticipation of, as set forth in Section 2(b)) the occurrence of a Change in Control. 6. Successor to the Company. The Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement satisfactory to Employee, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets which executes and delivers the agreement provided for in this Section 6 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 7. Heirs of Employee. This Agreement shall inure to the benefit of and be enforceable by Employee's personal and legal 12 representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts are still payable to Employee hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate. 8. Arbitration. Any dispute, controversy or claim arising under or in connection with this Agreement, or the breach hereof, shall be settled exclusively by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment upon the award rendered by Arbitrator(s) may be entered in any court having jurisdiction thereof. Any arbitration held pursuant to this Section 8 shall take place in San Francisco, California. 9. Notice. (a) General. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: 13 If to the Company: Watkins-Johnson Company 3333 Hillview Avenue Palo Alto, California 94304-1223 Attention: President of the Company If to Employee: Scott Buchanan 5144 Independence Drive Pleasanton, California 94566 or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. (b) Notice of Termination. Any purported termination of employment shall be communicated by a written Notice of Termination to Employee in accordance with paragraph (a) of this Section 9, and shall state the specific termination provisions in this Agreement relied upon, and set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment. 10. Nonwaiver, Complete Agreement, Governing Law. No provisions of this Agreement may be modified, waived or discharged unless in writing signed by both parties. No waiver by either party hereto at any time of any breach by the other party of, or compliance with, any condition or provision of this agreement shall be deemed a waiver of similar or dissimilar 14 provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 11. Legal Fees and Expenses. The Company shall pay all reasonable legal fees and expenses which Employee may incur as a result of the Company's contesting the validity, enforceability or Employee's good faith interpretation of, or good faith determinations under, this Agreement; provided, however, that the Company shall not pay any legal fees and expenses incurred by Employee in contesting the termination of Employee's employment for Cause if, as a result of such contest, it is determined that Employee was in fact terminated for Cause. 12. Confidentiality. Employee shall retain in confidence any and all confidential information known to Employee concerning the Company and its business so long as such information is not otherwise publicly disclosed. 15 13. Validity. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. WATKINS-JOHNSON COMPANY, a California corporation By /s/ W. Keith Kennedy -------------------- Title: President & CEO --------------- /s/ Scott G. Buchanan --------------------- Scott Buchanan 16 EX-10.25 9 EMPLOYEE RETENTION PROGRAM Exhibit 10.25 Watkins-Johnson Company Employee Retention Program March 1, 1999 As WJ has announced its intention to sell itself either in its entirety or as separate business segments, we want to assure you of the continued importance you each have to WJ, the products we produce, and the customers we support. We hope that the bonus programs described below will ensure that every employee will have an incentive to stay with WJ during these difficult times. To participate in the following programs, or any other severance payments, you will be required to waive any claims against WJ. This waiver will be given to you at the time the entire company or your business unit is sold. Enhanced Profit Sharing Package Currently, every employee of Watkins-Johnson Company shares in a profit sharing bonus that pays a percentage of salary based on either group profit or WJ profit. Realizing that strong profitability is a large factor in creating value, WJ will double and annualize the profit sharing for each employee. This means that when the divestiture transaction for each employees' group closes or when the sale of all of WJ is complete, whichever comes first, using the regular profit sharing formula, WJ will compute the profit sharing percentage at the close of the transaction and then double and extend that percentage for all of 1999. Transfer Bonus We want to further reward those people who choose to stay with WJ until their group's transaction closes or until the sale of the entire company is complete, whichever comes first, and who then accept and begin employment with the company that purchases their group or the entire company. These people will receive a transfer bonus of two weeks base salary to be paid by WJ. The Transfer Bonus will require the confirmation to WJ that you have begun employment with the buyer of your group or the entire company. RIF Protection With the uncertainties of this period, we recognize the concern employees may have about the possible necessity for a reduction in force in selected job areas. To address this concern, in addition to the WJ Enhanced Severance package, any WJ employee not transferred to the new employer and RIF'd by WJ during the balance of 1999 will receive the doubled and annualized Enhanced Profit Sharing Bonus described above. This RIF protection will not be applicable in circumstances in which the transfer bonus would apply. The purpose of this document is to summarize the retention program and is informational only. Formal documents will be distributed at a later date. EX-21 10 SUBSIDIARIES OF WATKINS-JOHNSON COMPANY Exhibit 21 SUBSIDIARIES OF WATKINS-JOHNSON COMPANY Jurisdiction of Subsidiary Incorporation - -------------------------------------------------------------------------------- Watkins-Johnson FSC Guam Watkins-Johnson International California EX-23 11 INDEPENDENT AUDITORS' CONSENT Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-21142 on Form S-8 of our reports (which report on the consolidated financial statements expresses an unqualified opinion and includes an explanatory paragraph concerning the restatement to reflect the Semiconductor Equipment Group as a discontinued operation) dated February 5, 1999 (October 29, 1999 as to Note 12 of the Consolidated Financial Statements) appearing in this report on Form 10-K/A of Watkins-Johnson Company to be filed on or about December 10, 1999 for the year ended December 31, 1998. Deloitte & Touche LLP San Jose, California December 10, 1999 EX-27.1 12 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 60,090 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-27.2 13 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-27.3 14 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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