Fill and Sign the Recapitalization Agreement Form

RECAPITALIZATION AGREEMENT BY AND BETWEEN WATKINS-JOHNSON COMPANY AND WATKINS TRUST DATED SEPTEMBER 19, 1988 DATED AS OF OCTOBER 25, 1999 RECAPITALIZATION AGREEMENT RECAPITALIZATION AGREEMENT (the "Agreement"), dated as of October 25, 1999, by and between Watkins-Johnson Company, a California corporation (the "Company"), and Watkins Trust Dated September 19, 1988 (the "Shareholder"). WITNESSETH: WHEREAS, pursuant to that certain Agreement and Plan of Merger (the "Merger Agreement") dated as of October 25, 1999, by and between the Company and FP-WJ Acquisition Corp., a California corporation (the "Purchaser"), subject to the terms and conditions thereof, (i) the Purchaser will merge with and into the Company with the Company continuing as the surviving corporation, (ii) except as expressly provided in the Merger Agreement, the outstanding common stock of the Company, without par value (the "Common Stock") will be converted into the right to receive $41.125 per share in cash, and (iii) each share of the issued and outstanding Series A Convertible Participating Preferred Stock of the Company will be converted into one fully paid and nonassessable share of common stock of the surviving corporation; and WHEREAS, it is a requirement to the Purchaser's agreement to execute the Merger Agreement that Shareholder remain a shareholder of the Company following the Merger (as defined in the Merger Agreement); WHEREAS, to facilitate the Merger Agreement, subject to the terms of this Agreement, the Company will issue up to 249,020 shares of its Series A Convertible Participating Preferred Stock (the "Shares"), par value $1.00, the rights, preferences, privileges and restrictions of which will be as set forth in the form of the Certificate of Determination substantially in the form attached hereto as EXHIBIT A (the "Certificate of Determination") in exchange for shares of Common Stock of the Company held by Shareholder in a transaction intended to be described by Section 368(a)(1)(E) of the Internal Revenue Code of 1986, as amended. Shareholder shall exchange all of its shares of Common Stock of the Company, consisting of not less than 120,000 shares (the "Common Shares"), in the ratio of one Share for each Common Share. NOW, THEREFORE, in order to implement the foregoing and in consideration of the mutual representations, warranties, covenants and agreements contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I. DEFINITIONS Section 1.1. DEFINITIONS. As used in this Agreement, the following terms shall have the meanings ascribed to them below: EXCHANGE ACT: shall mean the Securities Exchange Act of 1934, as amended, including the rules and regulations promulgated thereunder, or any similar federal statute then in effect, and a reference to a particular section thereof shall be deemed to include a reference to the comparable section, if any, of such similar federal statute. SEC: shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act or the Exchange Act. SECURITIES ACT: shall mean the Securities Act of 1933, as amended, including the rules and regulations promulgated thereunder, or any similar federal statute then in effect, and a reference to a B-1 particular section thereof shall be deemed to include a reference to the comparable section, if any, of any such similar federal statute. ARTICLE II. ISSUANCE OF SHARES Section 2.1. ISSUANCE OF SHARES. Pursuant to the terms and subject to the conditions set forth in this Agreement, Shareholder hereby agrees to acquire, and Company hereby agrees to issue to Shareholder on the Closing Date, the Shares in exchange for the Common Shares. Section 2.2. THE CLOSING. The closing (the "Closing") of the transactions contemplated by this Article II shall take place at the offices of Irell & Manella LLP, 333 South Hope Street, Suite 3300, Los Angeles, California 90071-3042 immediately prior to the consummation of the Merger, or at such other time and place as the parties hereto mutually agree. The date of such Closing is hereinafter referred to as the "Closing Date." Section 2.3. CLOSING DELIVERIES. Subject to Article IV: (a) at the Closing, the Company shall deliver to Shareholder, against delivery of the Common Shares, duly issued stock certificates representing the Shares; and (b) at the Closing, Shareholder shall deliver to Company, against delivery to Shareholder of stock certificates representing the Shares, stock certificates representing the Common Shares, together with one or more stock powers separate from certificate as specified by the Company, free and clear of any and all liens, charges and encumbrances whatsoever. Section 2.4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SHAREHOLDER. Shareholder represents, warrants and covenants to the Company as follows: (a) Shareholder has full right, power and authority to execute and deliver this Agreement, and to perform Shareholder's obligations hereunder, and this Agreement has been duly authorized, executed and delivered by Shareholder and is valid, binding and enforceable against Shareholder in accordance with its terms; (b) none of the execution and delivery of this Agreement and the performance of the transactions contemplated by this Agreement by Shareholder will (i) result in any breach of any terms or provisions of, or constitute a default under, any contract, agreement or instrument to which Shareholder is a party or by which Shareholder is bound, (ii) violate any law, statute, ordinance, writ, judgment, injunction, rule, regulation, order or decree of any court or of any governmental or regulatory body, agency or authority, federal, state, local or foreign (a "GOVERNMENTAL ENTITY"), applicable to Shareholder or by which any of its properties or assets may be bound, or (iii) require any filing with, or permit, consent or approval of, or the giving of any notice to, any Governmental Entity (other than the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, to the extent applicable; in the event that a filing under said Act is required in connection with the transactions contemplated by this Agreement, Shareholder and the Company agree to reasonably cooperate with one another to make such filing and thereafter achieve the early termination or expiration of the waiting period under said Act); (c) this Agreement and the transactions contemplated hereby have been authorized by all necessary action of Shareholder on or prior to the date hereof and no other proceedings on the part of Shareholder are necessary to authorize this Agreement and the transactions contemplated hereby; (d) In connection with this Agreement and the transactions contemplated hereby, Shareholder may disclose to its representatives any nonpublic information it receives regarding the Company; PROVIDED that Shareholder shall, and shall cause its representatives to, otherwise hold such information B-2 in confidence and not disclose such information to any third party without the prior written consent of the Company; and (e) Shareholder holds all right, title and interest in and to the shares of Common Stock to be exchanged for the Shares pursuant to this Agreement, free and clear of any and all liens, charges and encumbrances whatsoever, and upon delivery of such shares to the Company in payment of the Purchase Price, the Company will acquire good and valid title thereto, free and clear of any and all liens, charges and encumbrances whatsoever. Section 2.5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company represents, warrants and covenants to Shareholder as follows: (a) Each of the representations and warranties of the Company made to Purchaser in the Merger Agreement are incorporated herein by reference to the Merger Agreement such that such representations and warranties are herein made to Shareholder to the extent the same are made to Purchaser in the Merger Agreement; (b) the Shares to be issued to Shareholder pursuant to this Agreement, when issued and delivered in accordance with the terms hereof and the Certificate of Determination, will be duly and validly issued and fully paid and nonassessable; (c) none of the execution, delivery and performance of this Agreement and the transactions contemplated hereby by the Company will conflict with the Company's Articles of Incorporation, as amended, or by-laws or result in any breach of any terms or provisions of, or constitute a default under, any contract, agreement or instrument to which the Company is a party or by which the Company is bound; and (d) prior to the Closing, the Company shall duly authorize, execute and file the Certificate of Determination with the Secretary of State of the State of California. ARTICLE III. INVESTMENT REPRESENTATIONS OF SHAREHOLDER Section 3.1. INVESTMENT INTENTION; NO RESALES. Shareholder represents and warrants that Shareholder is acquiring the Shares for investment purposes only, solely for Shareholder's own account and not with a view to, or for resale in connection with, the distribution or other disposition thereof or with any present intention of distributing or reselling any Shares (except as contemplated by Section 6.1 hereof). Shareholder agrees and acknowledges that Shareholder will not, directly or indirectly, offer, transfer, sell, assign, pledge, hypothecate or otherwise dispose of any Shares (except as contemplated by Section 6.1 hereof), or solicit any offers to purchase or otherwise acquire or take a pledge of any Shares, other than (i) transfers, sales, assignments, pledges, hypothecations or other dispositions pursuant to an effective registration statement under the Securities Act and pursuant to qualification or exemption from qualification under all applicable state securities, or "blue sky," laws, or (ii) Shareholder shall have furnished the Company with an opinion of counsel (which counsel and the form and substance of which opinion shall be reasonably satisfactory to the Company), to the effect that no such registration is required because of the availability of an exemption from registration under the Securities Act and the rules and regulations in effect thereunder and under all applicable state securities, or "blue sky," laws. Section 3.2 ADDITIONAL INVESTMENT REPRESENTATIONS. Shareholder represents and warrants that (a) Shareholder's financial situation is such that Shareholder can afford to bear the economic risk of holding the Shares for an indefinite period of time and suffer complete loss of Shareholder's investment in the Shares; (b) Shareholder's knowledge and experience in financial and business matters are such that Shareholder is capable of evaluating the merits and risks of Shareholder's investment in B-3 the Shares; (c) Shareholder understands that the Shares are a speculative investment which involve a high degree of risk of loss of Shareholder's investment therein, that there are substantial restrictions on the transferability of the Shares and that on the Closing Date and for an indefinite period following the Closing there will be no public market for the Shares and, accordingly, it may not be possible to liquidate such Shareholder's investment in the Company at all, including in case of emergency; (d) Shareholder and such Shareholder's representatives, including Shareholder's professional, tax and other advisors, have carefully reviewed the financial and other information with respect to the Company and the Purchaser (including with respect to the Merger) supplied to them and such Shareholder understands and has taken cognizance of (and has been advised by Shareholder's representatives as to) all the risks related to an investment in the Shares; (e) in making Shareholder's decision to invest in the Shares hereunder, Shareholder has relied upon independent investigations made by Shareholder and, to the extent believed by Shareholder to be appropriate, Shareholder's representatives, including Shareholder's own professional, tax and other advisors; (f) Shareholder and Shareholder's representatives have been given the opportunity to examine all documents and to ask questions of, and to receive answers from, the Company and its representatives concerning the terms and conditions of the investment in the Shares and to obtain any additional information necessary to verify the accuracy of the information supplied to them, and no representations have been made to Shareholder or such representatives concerning the Shares, the Company or the Purchaser, their respective subsidiaries, their businesses or prospects or other matters, except as set forth herein. ARTICLE IV. CONDITIONS Section 4.1 CONDITIONS TO SHAREHOLDER'S OBLIGATIONS. Shareholder's obligation hereunder to purchase the Shares is conditioned upon the following: (a) the fulfillment, as of the Closing, or the waiver by Purchaser (other than with respect to the conditions set forth in Section 5.2(a) and Section 5.2(b) of the Merger Agreement, which conditions may not be waived by Purchaser for the purpose of this Section 4.1), of all conditions to Purchaser's obligations under the Merger Agreement; (b) the representations and warranties of the Company set forth in Section 2.5(b) and Section 2.5(c) of this Agreement shall be true and correct in all material respects as the date of this Agreement and (except for those representations and warranties made only as of a specified date) as of the Closing Date as though made on and as of the Closing Date; (c) the Company shall have performed all obligations required by it to be performed under this Agreement at or prior to the Closing Date. Section 4.2. CONDITIONS TO THE COMPANY'S OBLIGATIONS. The Company's obligation to consummate the transactions contemplated hereby are conditioned upon the fulfillment, as of the Closing, or the waiver by the Company, of all conditions to the Company's obligations under the Merger Agreement. ARTICLE V. APPROVAL OF THE MERGER AGREEMENT Section 5.1. APPROVAL OF THE MERGER AGREEMENT. Shareholder, with respect to the Shares, does hereby irrevocably consent to, adopts and approves and votes in favor of (i) the Merger, the Merger Agreement and the transactions contemplated thereby and any and all corporate action required to effectuate the Merger and the other transactions contemplated by the Merger Agreement, and (ii) to the extent applicable, the Telecom Sale Transaction (as defined in the Merger Agreement) and the transactions contemplated thereby. Shareholder, with respect to the Shares, further covenants and B-4 agrees to (i) provide such additional votes, consents or approvals and to perform all other acts reasonably requested by the Company or the Purchaser from time to time for the purpose of effectuating the Merger and the other transactions contemplated by the Merger Agreement and, to the extent applicable, the Telecom Sale Transaction and (ii) waive any dissenters' rights with respect to the Merger to which Shareholder might otherwise be entitled under Section 1300 et. seq. of the General Corporation Law of the State of California. Section 5.2 POWER OF ATTORNEY. Shareholder hereby irrevocably constitutes and appoints, to the extent necessary to fulfill Shareholder's obligations pursuant to Section 5.1 hereof, Purchaser as Shareholder's true and lawful agent and attorney-in-fact, with full power and authority in Shareholder's name, place and stead to execute such proxies and shareholder consents necessary or useful to approve the Merger Agreement and the Merger and the other transactions contemplated thereby. ARTICLE VI. STOCKHOLDERS AGREEMENT Section 6.1. PURCHASE OF ROLLOVER SHARES. (a) Shareholder and Purchaser (which is executing this Agreement as a party solely with respect to this Article VI., and to acknowledge the balance of this Agreement) hereby agree that, immediately following the acquisition of the Shares by Shareholder pursuant to Section 2.1 and immediately prior to the Effective Time (as defined in the Merger Agreement) of the Merger, Purchaser shall cause Fox Paine Capital Fund, L.P. ("Sponsor") to purchase all of the Shares in excess of 120,000 Shares (the "Purchased Shares") from Shareholder for cash consideration, in immediately available funds, equal to the Merger Consideration per Purchased Share. With respect to the Purchased Shares, Shareholder hereby reiterates for the benefit of Purchaser and Sponsor the representations and warranties set forth in Section 2.4 hereof, as if made with respect to the Purchased Shares and to Purchaser and Sponsor. The 120,000 Shares not purchased by Sponsor pursuant to this Section 6.1 are referred to herein as the "Rollover Shares". Shareholder agrees that, as of the time immediately prior to the Merger, he will own not less than 120,000 Shares, to ensure that the number of Rollover Shares is 120,000. (b) Purchaser (on behalf of itself and Sponsor) represents, warrants and covenants to Shareholder that: (i) Sponsor shall purchase the Purchased Shares with its own funds and not with funds provided by Purchaser or the Company; (ii) neither Purchaser nor the Company shall assume or guarantee any indebtedness of Sponsor obtained in connection with the acquisition of the Purchased Shares; and (iii) except for the conversion of the Purchased Shares to common stock of the surviving corporation in the Merger, Sponsor will not sell the Purchased Shares (or the common stock of the surviving corporation in the Merger received in exchange therefor in the Merger) to the Company within three years following the date hereof. Section 6.2 STOCKHOLDERS AGREEMENT TERM SHEET. The Company, Shareholder and Purchaser hereby agree to all of the terms and conditions set forth in the term sheet attached hereto as ANNEX A, and, unless and until definitive documentation incorporating the terms set forth therein has been executed and delivered, each of the foregoing parties agrees that such term sheet constitutes a binding agreement among them, enforceable against each such party in accordance with its terms. Section 6.3 EXECUTION OF DEFINITIVE DOCUMENTATION. Each of the parties agrees to negotiate in good faith and use all reasonable efforts to prepare, execute and deliver a definitive agreement and other instruments implementing the terms set forth in the term sheet attached hereto as Annex A on reasonable and customary terms, such agreement and other instruments to be executed not later than the Closing Date. B-5 ARTICLE VII. INDEMNIFICATION Section 7.1. ADDITIONAL INDEMNIFICATION RIGHTS. In addition to rights to indemnification that Shareholder has pursuant to the Merger Agreement, and not in lieu thereof, the Company (for all purposes of this Article VII., including, from and after the Effective Time of the Merger, the Surviving Corporation, as defined in the Merger Agreement) agrees to indemnify Shareholder against claims, actions, suits, proceedings and investigations (for purposes of this Article VII, indemnifiable claims, actions, suits, proceedings and investigations to include only such matters asserted by third parties and such matters in the nature of derivative actions, but not to include such matters asserted by Shareholder against the Company), to the fullest extent permitted by applicable law with respect to the transactions contemplated by this Agreement (excluding any such matter to the extent that (i) it corresponds to or involves a breach by Shareholder of any provision of this Agreement, or (ii) it relates to the assertion of a tax obligation by a Governmental Entity). Without limiting the foregoing, if Shareholder is or becomes involved in any capacity in any such action, proceeding or investigation in connection with the transactions contemplated by this Agreement, the Company will pay as incurred Shareholder's reasonable legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith upon receipt by the Company of a customary undertaking in a form to be provided by the Company, with Shareholder being entitled to representation by counsel not representing any other indemnified party to the extent that a conflict of interest precludes the effective representation of more than one indemnified party with respect to the applicable action, proceeding or investigation. Subject to Section 7.2 below and the limitations described above, the Company shall pay all reasonable expenses, including attorneys' fees, that may be incurred by Shareholder in enforcing this Section 7.1 or any action involving Shareholder resulting from the transactions contemplated by this Agreement. If the indemnity provided for in this Section 7.1 is not available with respect to Shareholder, then the Company and Shareholder shall contribute to the amount payable in such proportion as is appropriate to reflect relative faults and benefits. Section 7.2 PROCEDURES CONCERNING INDEMNIFICATION. If Shareholder wishes to claim indemnification under Section 7.1 above with respect to any claim, action, suit, proceeding or investigation, Shareholder shall, upon learning of any such claim, action, suit, proceeding or investigation, promptly notify the Company thereof, PROVIDED, HOWEVER, that failure to give, or delay in giving, such notice shall not impair Shareholder's rights under Section 7.1 except to the extent (if any) to which the Company is materially prejudiced by such failure or delay. In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time): (i) the Company shall have the right to assume the defense thereof (with counsel engaged by the Company to be reasonably acceptable to Shareholder), Shareholder shall cooperate in the defense of such matter and the Company shall not be liable to Shareholder for any legal expenses of other counsel or any other expenses subsequently incurred by Shareholder in connection with the defense thereof, and (ii) the Company shall not be liable for any settlement effected without its prior written consent. Notwithstanding anything in this Agreement to the contrary, the Company shall not have any obligation hereunder to Shareholder when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final, that the indemnification of Shareholder in the manner contemplated hereby is prohibited by applicable law. B-6 ARTICLE VIII. MISCELLANEOUS Section 8.1. BINDING EFFECT. The provisions of this Agreement shall be binding upon the parties hereto and their respective heirs, legal representatives, successors and assigns. Section 8.2 THIRD-PARTY BENEFICIARY. Purchaser (and, as indicated in Section 6.1, Sponsor) is an express third-party beneficiary of all of the representations, warranties, covenants and agreements contained herein. Section 8.3 WAIVER AND AMENDMENT. Any party hereto may waive its rights under this Agreement at any time. Any agreement on the part of any such party to any such waiver shall be valid only if set forth in an instrument in writing signed by such party. This Agreement may be amended only by a written instrument signed by the Company and by Shareholder. Section 8.4. NOTICES. all notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt or, in the case of notice by registered or certified mail, three business days after deposit with the United States Postal Service) by delivery in person, by cable, facsimile, telecopy transmission, or telegram or by registered or certified mail (postage prepaid, return receipt requested) to the respective party at the following addresses (or at such other address for a party as shall be specified by like notice): (a) IF TO THE COMPANY, TO IT AT THE FOLLOWING ADDRESS: Watkins-Johnson Company 3333 Hillview Avenue Palo Alto, California 94303-1223 Facsimile: (650) 813-2502 Attention: Chief Executive Officer WITH A COPY TO: Heller Ehrman White & McAuliffe 333 Bush Street San Francisco, California 94104 Facsimile: (415) 772-6268 Attention: Daniel E. Titelbaum, Esq. AND WITH A COPY TO: Irell & Manella LLP 333 South Hope Street, Suite 3300 Los Angeles, California 90071 Facsimile (213) 229-0515 Attention: Anthony T. Iler, Esq. (b) IF TO SHAREHOLDER, TO IT AT THE FOLLOWING ADDRESS: Watkins Trust Dated September 19, 1988 c/o Dean A. Watkins Waktins-Johnson Company 3333 Hillview Avenue Palo Alto, California 94304-1223 Facsimile: (650) 813-2502 B-7 WITH A COPY TO: Morrison & Foerster LLP 425 Market Street San Francisco, California 94105-2482 Facsimile: (415) 268-7522 Attention: Marshall L. Small AND WITH A COPY TO: Irell & Manella LLP 333 South Hope Street, Suite 3300 Los Angeles, California 90071 Facsimile (213) 229-0515 Attention: Anthony T. Iler, Esq. Section 8.5 APPLICABLE LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, without regard to the principles of conflicts of law. Section 8.6 INTEGRATION. This Agreement and the documents referred to herein or delivered pursuant hereto which form a part hereof contain the entire understanding of the parties with respect to its subject matter. There are no restrictions, agreements, promises, representations, warranties, covenants or undertakings with respect to the subject matter hereof other than those expressly set forth herein and the other agreements referred to herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to its subject matter other than those agreements and understandings set forth herein. Section 8.7 DESCRIPTIVE HEADINGS, ETC. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning of terms contained herein. Unless the context of this Agreement otherwise requires, (i) words of any gender shall be deemed to include each other gender; (ii) words using the singular or plural number shall also include the plural or singular number, respectively; and (iii) references to "hereof," "herein," "hereby" and similar terms shall refer to this entire Agreement unless the context otherwise requires. Section 8.8 COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 8.9 EXPENSES. Each party hereto shall pay the legal fees and the expenses incurred thereby in connection with this Agreement. Section 8.10 SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable law in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. Section 8.11 FURTHER ASSURANCES. The parties hereto shall from time to time execute and deliver all such further documents and do all acts and things as the other party may reasonably require to effectively carry out or better evidence or perfect the full intent and meaning of this Agreement. B-8 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. WATKINS-JOHNSON COMPANY By: /s/ W. KEITH KENNEDY -------------------------------------------- Name: W. Keith Kennedy Title: President WATKINS TRUST DATED SEPTEMBER 19, 1988 By: /s/ DEAN A. WATKINS -------------------------------------------- Dean A. Watkins, its Trustee ACKNOWLEDGED (AND AGREED WITH RESPECT TO ARTICLE VI.): FP-WJ ACQUISITION CORP. By: /s/ DEXTER PAINE -------------------------------------------- Name: Dexter Paine Title: CEO