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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended October 1, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-25393
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VARIAN, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0501995
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
3120 Hansen Way, Palo Alto, California 94304-1030
(650) 213-8000
(Address and telephone number of principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act:
Title
of
each
class Name of each exchange on which registered
----- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Preferred Stock Purchase Rights
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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 (or for such shorter period that the
registrant was required to file such reports), 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. YES [_] NO [X]
The aggregate market value of the registrant's common stock held by non-
affiliates as of December 1, 1999 was $646,689,393.
The number of shares of the registrant's common stock outstanding as of
December 13, 1999 was 30,976,250.
Documents Incorporated by Reference:
<TABLE>
<CAPTION>
Document Description 10-K Part
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<S> <C>
Certain sections, identified by caption, of the Definitive Proxy
Statement for the Registrant's 2000 Annual Meeting of Stockholders
(the "Proxy Statement")............................................ III
</TABLE>
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An index of exhibits filed with this Form 10-K is located on page 24.
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VARIAN, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 1, 1999
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
PART I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 7
Item 3. Legal Proceedings.............................................. 8
Item 4. Submission of Matters to a Vote of Security Holders............ 8
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................ 9
Item 6. Selected Financial Data........................................ 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 9
Item 7A. Quantitative and Qualitative Disclosure about Market Risk...... 18
Item 8. Financial Statements and Supplementary Data.................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 19
PART III
Item 10. Directors and Executive Officers of the Registrant............. 20
Item 11. Executive Compensation......................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 20
Item 13. Certain Relationships and Related Transactions................. 20
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K.............................................................. 21
</TABLE>
Risk Factors Relating to Forward-Looking Information
This Annual Report on Form 10-K contains "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
which provides a "safe harbor" for these types of statements. These forward-
looking statements are subject to risks and uncertainties that could cause
actual results of Varian, Inc. (the "Company") to differ materially from
management's current expectations. Those risks and uncertainties include,
without limitation: new product development and commercialization; demand and
acceptance for the Company's products; competitive products and pricing;
economic conditions in the Company's product and geographic markets; foreign
currency fluctuations; market investment in capital equipment; the ability to
realize anticipated cost-savings from the Company's reorganization and
restructuring; the lack of recent operating history for the Company as a
separate entity; increased operating margins on higher sales; successful
implementation by the Company and certain third parties of corrective action
to address the impact of the Year 2000; and other risks detailed from time to
time in the Company's filings with the Securities and Exchange Commission.
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PART I
Item 1. Business
GENERAL
Overview
Varian, Inc. together with its subsidiaries (collectively, the "Company" or
the "Registrant") is a technology company engaged in the development,
manufacture, sale and service of scientific instruments and vacuum
technologies, and in contract electronics manufacturing. The Company's
operations are grouped into three corresponding segments: Scientific
Instruments, Vacuum Technologies, and Electronics Manufacturing. These
segments, their products and the markets they serve are described below.
Varian, Inc. became a separate, publicly traded company on April 2, 1999.
Until that date, the business of the Company was operated as the Instruments
business of Varian Associates, Inc. ("VAI"). VAI contributed its Instruments
business to the Company; then on April 2, 1999, VAI distributed to the holders
of record of VAI common stock on March 24, 1999 one share of common stock of
the Company for each share of VAI common stock outstanding on April 2, 1999.
At the same time, VAI contributed its Semiconductor Equipment business to
Varian Semiconductor Equipment Associates, Inc. ("VSEA") and distributed to
the holders of record of VAI common stock on March 24, 1999 one share of
common stock of VSEA for each share of VAI common stock outstanding on April
2, 1999. These transactions (collectively referred to as the "Distribution")
were accomplished under the terms of an Amended and Restated Distribution
Agreement dated as of January 14, 1999 by and among the Company, VAI and VSEA
(the "Distribution Agreement"). References in this section to the Company's
business for periods prior to April 2, 1999 refer to the historical business
and operations of the Instruments business conducted by VAI prior to the
Distribution.
Business Segments and Products
The Company's products can be classified into the following three
categories, which correspond to the Company's three business segments:
Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing.
Scientific Instruments
The Company's Scientific Instruments business designs, manufactures, sells,
and services chromatography, optical spectroscopy, and nuclear magnetic
resonance equipment used in a broad range of life science, environmental,
industrial and research applications requiring identification, quantification
and analysis of the elemental, molecular, physical, and biological composition
and structure of liquids, solids, and gases. The business is organized into
the Chromatography Systems, Optical Spectroscopy Instruments, and NMR Systems
operations.
The Chromatography Systems operation is a worldwide supplier of
chromatography instruments and consumable laboratory supplies. The instruments
include gas chromatographs (GC), high performance liquid chromatographs
(HPLC), gas chromatograph/mass spectrometers, sample automation products, and
data analysis systems. The consumable laboratory supplies include sample
preparation products, GC and HPLC columns, and GC filters. The business also
provides related customer support services such as applications consulting,
training, and product service. Chromatography is a technique for separating,
identifying and quantifying the individual chemical components of substances
based on the physical and chemical characteristics specific to each component.
Mass spectroscopy is a technique for further analysis of components by
breaking molecules into multiple electrically charged ions which are then
sorted for analysis.
The Optical Spectroscopy Instruments (OSI) operation is a worldwide
supplier of spectroscopy instruments and consumable laboratory supplies. The
instruments include atomic absorption spectrometers, inductively
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coupled plasma spectrometers, inductively coupled plasma/mass spectrometers,
fluorescence spectrometers, ultraviolet/visible and near-infrared
spectrophotometers, sample automation products, and data analysis systems. The
consumable laboratory supplies include sample preparation products, xenon
lamps, cuvettes, and graphite furnace replacement parts. The business also
provides related customer support services such as applications consulting,
training, and product service. Optical spectroscopy is a technique for
analyzing the individual chemical components of substances based on the
absorption, or emission, by matter of electromagnetic radiation of a specific
wavelength or frequency.
The NMR Systems operation is a worldwide supplier of nuclear magnetic
resonance ("NMR") spectrometers, NMR imaging spectrometers, and related
accessories, such as probes, applications software, and customer support
services. NMR is a non-destructive analytical technique that uses magnetic and
electromagnetic fields to interact with the magnetic property of atomic
nuclei. NMR spectroscopy is used to determine and analyze the molecular
content and structure of liquids and solids. This type of spectroscopy is used
in the study of liquids containing substances such as proteins, nucleic acids
(DNA and RNA), carbohydrates and membranes, and solid materials such as
crystals, plastics, rubbers, ceramics and polymers. NMR imaging systems are
used to obtain non-invasive images of, primarily, biological materials and to
probe the chemical processes within these materials. They find application in
the studies of material science, drug metabolism, the characterization of
human diseases and in helping to understand the function of the human brain.
Scientific Instruments' products are used in a broad range of applications,
including by pharmaceutical companies in drug development, manufacturing and
quality control; by biotechnology and biopharmaceutical companies in studying
human genomics and ways to prevent, diagnose and treat diseases; by
environmental laboratories in testing waters, soil, air, solids and food
products; by petroleum and natural gas companies in refining and quality
control; by petrochemical, agribusiness and other chemical companies in
research and quality control; by mining and metallurgy companies in research
and quality control; by semiconductor companies in manufacturing and quality
control; by food and beverage processing companies in research and quality
control; by government and private laboratories in forensic analysis and drug
testing; by research hospitals in biological and biochemistry research; and by
other industrial, governmental and academic research laboratories in general
research. Major customers include American Home Products, Bayer, Bristol-Myers
Squibb, Eli Lilly, Glaxo Wellcome, Merck, Novartis, Pfizer, Rhone-Poulenc,
SmithKline Beecham, Zeneca, Du Pont, Monsanto, British Petroleum, BASF,
Formosa Plastics, Huntsman Polymers, Proctor & Gamble, Laboratory Corporation
of America, various U.S. governmental agencies, and numerous academic
institutions and research hospitals.
Vacuum Technologies
The Company's Vacuum Technologies business is a worldwide supplier of high
vacuum pumps, leak detection equipment and related products and services, all
of which are used to create, control, measure and/or test a vacuum environment
in industrial and scientific applications requiring ultra-clean or high-vacuum
environments. Vacuum Technologies' products include a wide range of high
vacuum pumps (diffusion, turbo-molecular and ion pumps), rough vacuum pumps
(rotary vane, mechanical, sorption, dry screw and dry scroll pumps) and
related products (vacuum instruments, flanges, gauges, valves, meters, and
other hardware) and manufacturing solutions such as assistance with the
designs and integration of vacuum systems. Its products also include helium
mass spectrometry leak detection equipment for use in identifying and
measuring leaks in sealed components. In addition to product sales, it
provides a pump exchange and repair program, applications support, and
training in basic and advanced vacuum technology.
Vacuum Technologies' products are used in a broad range of applications,
including in the manufacture of semiconductors, flat panel displays,
television tubes, decorative coating, architectural glass, optical lenses,
light bulbs, automobile components; in food packaging; in testing of aircraft
components, automobile airbags, refrigeration components, medical devices and
industrial processing equipment; and in high-energy and life science and other
analytical research. Major customers include Samsung, Texas Instruments,
Brooks Automation, KLA-Tencor, Tokyo Electron, Varian Semiconductor Equipment
Associates, Agilent Technologies,
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PE Biosystems, Abar Ipsen, Cameca, Von Ardenne, Lawrence Livermore Labs, and
Stanford Linear Accelerator Center.
Electronics Manufacturing
The Company's Electronics Manufacturing business is a contract manufacturer
of advanced electronic assemblies and subsystems, such as printed circuit
boards, for original equipment manufacturers ("OEMs"). For some customers, the
business provides total manufacturing services including customized
manufacturing (such as just-in-time and inventory management) and post-
manufacturing services (such as direct end-user shipping, warehousing and
repair depots).
The Electronics Manufacturing business serves customers in a wide range of
industries, including communications (e.g., satellite, networking, telephony,
voice and data transfer), medical and semiconductor manufacturing. The
business focuses on customers with high-mix, low-to-medium volume
manufacturing needs. Major customers include Anchor Gaming, Inter-Tel,
Microtest, OEC Medical Systems, RC Networks, Sensormatic Electronics, Varian
Medical Systems, and Varian Semiconductor Equipment Associates. The business
also supplies components to the Company's Scientific Instruments and Vacuum
Technologies businesses (although 85% of its sales are to customers other than
the Company).
Marketing and Sales
In the United States, the Company markets the largest portion of its
products directly through its own sales and distribution organizations,
although certain products are marketed through independent distributors and
sales representatives. Sales to major markets outside the United States are
generally made by the Company's foreign-based sales and service staff,
although some sales are made directly from the United States to foreign
customers. In certain foreign countries, sales are made through various
representative and distributorship arrangements. The Company owns or leases
sales and service offices in strategic regional locations in the United States
and in foreign countries through its foreign sales subsidiaries and
distribution operations. None of the Company's products are distributed
through retail outlets.
The markets in which the Company competes are globalized. International
sales accounted for 45%, 47%, and 47% of sales for fiscal years 1999, 1998,
and 1997, respectively. As a result, the Company's customers increasingly
require service and support on a worldwide basis. In addition to the United
States, the Company has sales and service offices located throughout Europe,
Asia, and Latin America. The Company has invested substantial financial and
management resources to develop an international infrastructure to meet the
needs of its customers worldwide. The Company intends to continue to expand
its presence in the United States and international markets.
Demand for the Company's products is dependent upon the size of the markets
for its products, the level of capital expenditures of the Company's
customers, the rate of economic growth in the Company's major markets, and
competitive considerations. The Company believes that demand for its products
does not exhibit any significant seasonal pattern. No single customer
accounted for 10% or more of the Company's sales in fiscal year 1999.
The Company differentiates its products from those of its competitors based
on customer requirements and demands, as determined through market research.
Although specific customer requirements can vary depending on applications,
customers in recent years have demanded superior performance, high quality and
improved levels of automation. The Company has responded to these customer
demands by introducing new products in all its business segments focused on
these emerging requirements in the markets it serves. For example, customers
of Scientific Instruments' products have demanded higher levels of analytical
throughput to support their research programs aimed at drug discovery and
advanced life sciences. The Company has responded to these needs by
introducing products with higher levels of automation and computerized data
analysis routines. The Company believes that by focusing on emerging customer
requirements, it will be able to develop and market new products that will
impart significant competitive advantages in the marketplace.
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Backlog
The Company's recorded backlog was $165 million at October 1, 1999, $125
million at October 2, 1998, and $132 million at September 26, 1997. It is the
Company's general policy to include in backlog only purchase orders or
production releases that have firm delivery dates within one year. Recorded
backlog may not result in sales because of cancellations or other factors.
However, the Company currently believes that over 95% of orders included in
the October 1, 1999 backlog will be delivered before the close of fiscal year
2000.
Competition
Competition in the Company's markets is based upon the performance
capabilities of products, technical support and after-market service, the
manufacturer's reputation as a technological leader, and the selling price.
The Company believes that performance capabilities are the most important of
these criteria. The markets in which the Company competes are highly
competitive and are characterized by the application of advanced technology.
There are numerous companies that specialize in, and a number of larger
companies that devote a significant portion of their resources to, the
development, manufacture, and sale of products that compete with those
manufactured or sold by the Company. Many of the Company's competitors are
well-known manufacturers with a high degree of technical proficiency. In
addition, competition is intensified by the ever-changing nature of the
technologies in the industries in which the Company is engaged. The markets
for the Company's products are characterized by specialized manufacturers that
often have strength in narrow segments of these markets. While the absence of
reliable statistics makes it difficult to determine the Company's relative
market position in its industry segments, the Company is confident it is one
of the principal manufacturers in its primary fields.
Each of the Company's major business segments competes with many companies
that address the same markets. The Company's Scientific Instruments business
competes with Agilent Technologies, Inc.; PerkinElmer, Inc.; Shimadzu
Corporation; Thermo Instrument Systems, Inc. and its affiliated companies;
Waters Corporation; Bruker Analytik GmbH; JEOL, Ltd.; and other smaller
suppliers. The Company's Vacuum Technologies business competes with BOC
Edwards High Vacuum; Leybold-Balzers; Pfeiffer Vacuum Technology AG; Alcatel;
Veeco Instruments, Inc.; and other smaller suppliers. The Company's
Electronics Manufacturing business competes with numerous other high-mix, low-
volume contract manufacturers, including EFTC Corporation; Xetel Corporation;
CMC Industries; PLEXUS; and Sigmatron International.
Manufacturing
The Company's principal manufacturing activities consist of precision
assembly, test, calibration, and certain specialized machining activities. The
Company subcontracts a portion of its assembly and machining. All other
assembly, test and calibration functions are performed by the Company.
The Company believes that the ability to manufacture reliable products in a
cost-effective manner is critical to meeting the "just-in-time" delivery and
other demanding requirements of its original equipment manufacturer ("OEM")
and end-use customers. The Company monitors and analyzes product lead times,
warranty data, process yields, supplier performance, field data on mean time
between failures, inventory turns, repair response time, and other indicators
so that it can continuously improve its manufacturing processes. The Company
has adopted a total quality management process.
The Company operates ten manufacturing facilities located throughout the
world. Scientific Instruments has manufacturing facilities in Palo Alto,
California; Walnut Creek, California; Harbor City, California; Ft. Collins,
Colorado; Woburn, Massachusetts; Melbourne, Australia; and Middelburg,
Netherlands. Vacuum Technologies has manufacturing facilities in Lexington,
Massachusetts; and Torino, Italy. Electronics Manufacturing has a
manufacturing facility in Tempe, Arizona.
In 1993, the member states of the European Union ("EU") began
implementation of their plan for a new unified EU market with reduced trade
barriers and harmonized regulations. The EU adopted a significant
international quality standard, the International Organization for
Standardization Series 9000 Quality Standards
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("ISO 9000"). All of the Company's manufacturing facilities have been
certified as complying with the requirements of ISO 9000.
Raw Materials
There are no specialized raw materials that are particularly essential to
the operation of the Company's business. The Company's manufacturing
operations require a wide variety of raw materials, electronic and mechanical
components, chemical and biochemical materials, and other supplies, some of
which are occasionally found to be in short supply.
Many components used in the Company's products, including proprietary
analog and digital circuitry, are manufactured by the Company. Other
components, including packaging materials, superconducting magnets, integrated
circuits, microprocessors, microcomputers, and certain detector and data
analysis modules, are purchased from other manufacturers. Most of the raw
materials, components, and supplies purchased by the Company are available
from a number of different suppliers; however, a number of items are purchased
from limited or single sources of supply, and disruption of these sources
could have a temporary adverse effect on shipments and the financial results
of the Company. The Company believes alternative sources could ordinarily be
obtained to supply these materials, but a prolonged inability to obtain
certain materials or components could have a material adverse effect on the
Company's financial condition or results of operations and could result in
damage to its relationships with its customers.
Research and Development
The Company is actively engaged in basic and applied research, development,
and engineering programs designed to develop new products and to improve
existing products. During fiscal years 1999, 1998, and 1997, the Company spent
$31.6 million, $29.6 million, and $32.0 million, respectively (net of customer
funding), on company-sponsored research, development, and engineering
activities. Although the Company intends to continue to conduct extensive
research and development activities, there can be no assurance that it will be
able to develop and market new products on a cost-effective and timely basis,
that such products will compete favorably with products developed by others or
that the Company's existing technology will not be superseded by new
discoveries or developments.
Customer Support and Service
The Company believes that its customer service and support are an integral
part of its competitive strategy. As part of its support services, the
Company's technical support staff provides individual assistance in solving
analysis problems, integrating vacuum components, designing circuit boards,
etc., depending on the business. The Company offers training courses and
periodically sends its customers information on applications development. The
Company's products generally include a 90-day to one-year warranty. Service
contracts may be purchased by customers to cover equipment no longer under
warranty. Service work not performed under warranty or service contract is
performed on a time-and-materials basis. The Company installs and services its
products primarily through its own field service organization.
Patent and Other Proprietary Rights
As a leader in the manufacture and sale of scientific instruments and
vacuum technologies, the Company has pursued a policy of seeking patent,
copyright, trademark, and trade secret protection in the United States and
other countries for developments, improvements, and inventions originating
within its organization that are incorporated in the Company's products or
that fall within its fields of interest. As of October 1, 1999, the Company
owned approximately 184 patents in the United States and approximately 271
patents throughout the world, and had numerous patent applications on file
with various patent agencies worldwide. The Company intends to file additional
patent applications as appropriate.
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The Company relies on a combination of copyright, trade secret and other
laws, and contractual restrictions on disclosure, copying, and transferring
title to protect its proprietary rights. The Company has trademarks, both
registered and unregistered, that are maintained and enforced to provide
customer recognition for its products in the marketplace. The Company also has
agreements with third parties that provide for licensing of patented or
proprietary technology. These agreements include royalty-bearing licenses and
technology cross-licenses. While the Company places considerable importance on
its licensed technology, it does not believe that the loss of any license
would have a material adverse effect on the Company's financial condition or
results of operation.
The Company's competitors, like companies in many high-technology
businesses, routinely review the products of others for possible conflict with
their own patent rights. Although the Company has from time to time received
notices of claims from others alleging patent infringement, the Company
believes that there are no pending patent infringement claims that might have
a material adverse effect on the Company's financial condition or results of
operation.
Environmental Matters
For a discussion of environmental matters, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Environmental
Matters."
Employees
At October 1, 1999, the Company had a total of approximately 3,500 full-
time and temporary employees worldwide--2,000 in North America, 800 in Europe,
200 in Asia, 400 in Australia and 100 in Latin America. The Company's
employees based in certain foreign countries may, from time to time, be
subject to collective bargaining agreements. The Company's OSI employees in
Australia conducted a strike in 1997, which was quickly resolved. Those
employees are subject to a collective bargaining agreement that was recently
renewed. The Company currently considers its employee relations to be good.
The Company's success depends to a significant extent upon a limited number
of key employees and other members of senior management of the Company. The
loss of the services of one or more of these key employees could have a
material adverse effect on the Company's financial condition or results of
operation. The success of the Company's future operations depends in large
part on the Company's ability to recruit and retain engineers and technicians,
as well as marketing, sales, service, and other key personnel, who in each
case are in great demand. The Company's inability to attract and retain the
personnel it requires could have a material adverse effect on the Company's
financial condition or results of operations.
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Executive Officers
The following table sets forth the names and ages of the Company's
executive officers, together with positions and offices held within the last
five years by such executive officers.
<TABLE>
<CAPTION>
Name Age Position (Business Experience) Period
---- --- ------------------------------ ------
<C> <C> <S> <C>
Allen J. Lauer (Director).. 62 President and Chief Executive 1999-Present
Officer
Executive Vice President, 1990-1999
Varian Associates, Inc.
G. Edward McClammy......... 50 Vice President and Chief 1999-Present
Financial Officer
Vice President, Special Storage 1998-1999
Products Group, Quantum
Corporation
Vice President, Finance and 1996-1998
Treasurer, Quantum Corporation
Acting Chief Financial Officer, 1996
Quantum Corporation
Director of Finance and 1994-1996
Treasurer, Quantum Corporation
A. W. Homan................ 40 Vice President, General Counsel 1999-Present
and Secretary
Associate General Counsel, 1998-1999
Varian Associates, Inc.
Assistant Secretary, Varian 1993-1999
Associates, Inc.
Senior Corporate Counsel, 1993-1998
Varian Associates, Inc.
Garry R. Rogerson.......... 47 Vice President, Analytical 1999-Present
Instruments
Vice President and General 1994-1999
Manager, Chromatography
Systems, Varian Associates,
Inc.
Raymond J. Shaw............ 50 Vice President, NMR Systems 1999-Present
Vice President and General 1989-1999
Manager, NMR Instruments,
Varian Associates, Inc.
James L. Colbert........... 53 Controller 1999-Present
Controller, NMR Instruments, 1992-1999
Varian Associates, Inc.
</TABLE>
Item 2. Properties
The Company has manufacturing, warehouse, research and development, sales,
service, and administrative facilities which have an aggregate floor space of
approximately 668,000 and 502,000 square feet located in the United States and
abroad, respectively, for a total of approximately 1,170,000 square feet
worldwide. Of these facilities, aggregate floor space of approximately 449,000
square feet is leased, and the remainder is owned by the Company. The Company
does not believe that there is any material long-term excess capacity in its
facilities, although utilization is subject to change based on customer
demand. The Company believes that its facilities and equipment generally are
well maintained, in good operating condition and suitable for the Company's
purposes and adequate for present operations.
The Company owns or leases ten manufacturing facilities located throughout
the world. Scientific Instruments has manufacturing facilities in Palo Alto,
California; Walnut Creek, California; Harbor City, California; Ft. Collins,
Colorado; Woburn, Massachusetts; Melbourne, Australia; and Middelburg,
Netherlands. Vacuum Technologies has manufacturing facilities in Lexington,
Massachusetts; and Torino, Italy. Electronics Manufacturing has a
manufacturing facility in Tempe, Arizona. The Company owns or leases 60 sales
and service facilities located throughout the world, 51 of which are located
outside the United States, including in Argentina, Australia, Austria,
Belgium, Brazil, Canada, England, France, Germany, India, Italy, Japan,
Hong Kong, Korea, Mexico, Netherlands, Spain, Sweden, Switzerland, Taiwan, and
Venezuela.
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Item 3. Legal Proceedings
The Company is involved in certain legal proceedings arising in the
ordinary course of its business. In addition, pursuant to the Distribution
Agreement, the Company agreed to indemnify VSEA and VMS for any costs,
liabilities, or expenses with respect to any legal proceedings relating to
VAI's Instruments Business. In addition, the Company has agreed to pay for
one-third of the costs, liabilities, and expenses of VSEA and VMS with respect
to certain legal proceedings relating to discontinued operations of VAI. While
there can be no assurances as to the ultimate outcome of any litigation
involving the Company, the Company does not believe that any pending legal
proceeding will result in a judgment or settlement that will have a material
adverse effect on the Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
1999 Common Stock
<TABLE>
<CAPTION>
Third Fourth
Common Stock Quarter Quarter
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<S> <C> <C>
High..................................................... $13 1/2 $17 3/4
Low...................................................... $ 8 1/4 $12 13/16
</TABLE>
The Company's common stock is traded on the Nasdaq National Market under
the trading symbol VARI.
The Company has never paid cash dividends on its capital stock. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying any cash dividends in the foreseeable future.
There were 5,076 holders of record of the Company's common stock on
December 1, 1999.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Fiscal Years
----------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In millions, except per share
amounts)
<S> <C> <C> <C> <C> <C>
Earnings Statement Data:
Sales.................................... $598.9 $557.8 $541.9 $504.4 $459.4
Earnings before taxes.................... $ 13.2 $ 39.2 $ 26.8 $ 11.5 $ 2.7
Income tax expense....................... $ 5.9 $ 15.8 $ 12.6 $ 5.3 $ 0.7
Net earnings............................. $ 7.3 $ 23.4 $ 14.2 $ 6.2 $ 2.0
Net earnings per share--basic............ $ 0.24 $ 0.77 $ 0.47 $ 0.20 $ 0.07
Net earnings per share--diluted.......... $ 0.24 $ 0.77 $ 0.46 $ 0.20 $ 0.07
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year End
----------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets.............................. $425.1 $404.1 $357.9 $301.0 $282.0
Long-term debt............................ $ 51.2 $ -- $ -- $ -- $ --
</TABLE>
. Varian, Inc. was established as a separate company on April 2, 1999.
This selected financial data should be read in conjunction with the
related consolidated financial statements and notes thereto, including
Note 1 which describes Varian, Inc.'s separation from Varian Associates,
Inc.
. The earnings statement data for fiscal year 1995 and the balance sheet
data at fiscal year end 1996 and 1995 are unaudited.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Until April 2, 1999, the business of Varian, Inc. (the "Company") was
operated as the Instruments Business ("IB") of Varian Associates, Inc.
("VAI"). IB included the business units that designed, manufactured, sold, and
serviced scientific instruments and vacuum technologies, and a business unit
that provided contract electronics manufacturing. VAI contributed IB to the
Company; then on April 2, 1999, VAI distributed to the holders of record of
VAI common stock on March 24, 1999 one share of common stock of the Company
for each share of VAI common stock outstanding on April 2, 1999 (the
"Distribution"). At the same time, VAI contributed its Semiconductor Equipment
business to Varian Semiconductor Equipment Associates, Inc. ("VSEA") and
distributed to the holders of record of VAI common stock on March 24, 1999 one
share of
9
<PAGE>
common stock of VSEA for each share of VAI common stock outstanding on April
2, 1999. VAI retained its Health Care Systems business and changed its name to
Varian Medical Systems, Inc. ("VMS") effective as of April 3, 1999. These
transactions were accomplished under the terms of an Amended and Restated
Distribution Agreement dated as of January 14, 1999 by and among the Company,
VAI, and VSEA (the "Distribution Agreement"). For purposes of providing an
orderly transition and to define certain ongoing relationships between and
among the Company, VMS, and VSEA after the Distribution, the Company, VMS, and
VSEA also entered into certain other agreements which include an Employee
Benefits Allocation Agreement, an Intellectual Property Agreement, a Tax
Sharing Agreement, and a Transition Services Agreement.
The consolidated financial statements generally reflect IB's results of
operations, financial position, and cash flows through April 2, 1999, the date
of the Distribution, and the Company's results of operations, financial
position, and cash flows from April, 3, 1999 to October 1, 1999. Accordingly,
the financial results for periods prior to April 3, 1999 included in these
consolidated financial statements have been carved out from the interim
financial statements of VAI using the historical results of operations and
historical bases of the assets and liabilities of IB. The consolidated
financial statements include the accounts of IB after elimination of inter-
business balances and transactions. The consolidated financial statements also
include, among other things, allocations of certain VAI corporate assets
(including pension assets), liabilities (including profit-sharing and pension
benefits) and expenses (including legal, accounting, employee benefits,
insurance services, information technology services, treasury, and other
corporate overhead) to IB using the allocation methodology described in Note 1
of the Notes to the Consolidated Financial Statements. The Company's
management believes that the methods used to allocate these amounts are
reasonable. However, these allocations are not necessarily indicative of the
amounts that would have been or will be recorded by the Company on a stand-
alone basis.
The Company's fiscal years reported are the 52- or 53-week periods which
ended on the Friday nearest September 30. Fiscal year 1999 comprises the 52-
week period ended on October 1, 1999. Fiscal year 1998 comprises the 53-week
period ended on October 2, 1998. Fiscal year 1997 comprises the 52-week period
ended on September 26, 1997.
Results of Operations
Fiscal Year 1999 Compared To Fiscal Year 1998
Sales. Sales were $598.9 million in fiscal year 1999, an increase of 7.4%
from sales of $557.8 million in fiscal year 1998. Sales by the Scientific
Instruments and Electronics Manufacturing segments increased 9.1% and 14.8%,
respectively. Sales by the Vacuum Technologies segment decreased by 3.8%.
Geographically, sales in North America of $330.0 million, Europe of $183.0
million and Asia of $67.4 million in fiscal year 1999 represented increases of
6.9%, 12.3%, and 4.0% respectively, as compared to fiscal year 1998.
Orders in fiscal year 1999 were $644.2 million, compared to $560.9 million
in fiscal year 1998. All businesses contributed to the orders growth.
Gross Profit. Gross profit was $224.2 million (representing 37.4% of sales)
in fiscal year 1999, compared to $221.4 million (representing 39.7% of sales)
in fiscal year 1998. The decline in gross profit as a percent of sales
resulted primarily from actions taken as part of an overall reorganization
that included actions to prepare the Company to separate from VAI and become a
stand-alone company, other organizational changes and a comprehensive product
review, which resulted in a decision to accelerate transition from certain
older to newer products necessitating the writedown of certain excess and
obsolete inventories and the lowering of prices to accelerate the liquidation
of older products. The impact on gross profit of these actions was in addition
to the restructuring charges discussed below.
10
<PAGE>
Sales and Marketing. Sales and marketing expenses were $124.6 million
(representing 20.8% of sales) in fiscal year 1999, compared to $113.9 million
(representing 20.4% of sales) in fiscal year 1998. Some of the increase was
due to marketing expenses of Chrompack International B.V. ("Chrompack"), which
was acquired in the fourth quarter of fiscal year 1998. Additionally, the
increase in the marketing expenses resulted from actions taken as part of the
above-described reorganization, including costs to move people and equipment
to new consolidated locations, writedown of field demonstration equipment
following the accelerated transition to newer products, and other higher than
normal costs related to the reorganization. These charges were in addition to
the restructuring charges discussed below.
Research and Development. Research and development expenses were $31.6
million (representing 5.3% of sales) in fiscal year 1999, compared to research
and development expenses of $29.6 million (representing 5.3% of sales) in
fiscal year 1998. The increase was primarily due to the additional research
and development expenses of Chrompack, which was acquired in the fourth
quarter of fiscal year 1998, and to increased spending on nuclear magnetic
resonance spectrometers and imaging spectrometers.
General and Administrative. General and administrative expenses were $41.8
million (representing 7.0% of sales) in fiscal year 1999, compared to $39.5
million (representing 7.1% of sales) in fiscal year 1998. The primary reason
for this increase was the additional general and administrative costs of
Chrompack, acquired in the fourth quarter of fiscal year 1998, and transition
costs related to the Company's spin-off from VAI.
Restructuring Charges. During the second quarter of fiscal year 1999, IB's
management approved a program to consolidate field sales and service
organizations in Europe, Australia, and the United States so as to fall within
the direct responsibility of management at principal factories in those
countries, in order to reduce costs, simplify management structure, and
benefit from the infrastructure existing in those factories. This
restructuring entailed consolidating certain sales, service, and support
operations. The consolidation resulted in exiting of a product line, closing
or downsizing of sales offices, and termination of approximately
100 personnel. The following table sets forth certain details associated with
this restructuring:
<TABLE>
<CAPTION>
Cash
Payments Accrual at
Restructuring and Other October 1,
Charges Reductions 1999
------------- ---------- -----------
(In thousands)
<S> <C> <C> <C>
Lease payments and other facility
expenses............................. $ 2,205 $ 961 $1,244
Severance and other related employee
benefits............................. 7,171 5,450 1,721
Exited product line................... 1,598 1,598 --
------- ------ ------
Total............................... $10,974 $8,009 $2,965
======= ====== ======
</TABLE>
Net Interest Expense. Net interest expense was $2.0 million (representing
0.3% of sales) for fiscal year 1999. Prior to the Distribution on April 2,
1999, no debt had been allocated to the Company. See "Liquidity and Capital
Resources" below.
Taxes on Earnings. The effective income tax rate was 44.5% for fiscal year
1999, compared to 40.2% for fiscal year 1998. The fiscal year 1999 rate is
higher than the fiscal year 1998 rate because the Company realized a larger
proportion of high tax-rate, foreign country income during fiscal year 1999
than it did during fiscal year 1998, due primarily to restructuring and
related charges incurred in lower tax-rate countries.
Net Earnings. The decrease in net earnings to $7.3 million ($0.24 diluted
net earnings per share) in fiscal year 1999, compared to net earnings of $23.4
million ($0.77 diluted net earnings per share) in fiscal year 1998, was
primarily the result of the overall reorganization described above, which
resulted in incremental costs primarily included in cost of sales, sales and
marketing, and restructuring charges.
Segments. Scientific Instruments sales of $396.1 million in fiscal year
1999 increased 9.1% over fiscal year 1998 sales of $363.1 million. The
acquisition of Chrompack in the fourth quarter of fiscal year 1998 had a
11
<PAGE>
significant impact on the overall increase in sales. Earnings from operations
of $12.5 million (3.2% of sales) decreased from $25.4 million (7.0% of sales)
in fiscal year 1998. The reduction in earnings resulted from actions taken as
part of the above-described reorganization which principally affected the
Scientific Instruments segment and included costs to move people and equipment
to new consolidated locations, writedown excess and obsolete inventories and
field demonstration equipment following the accelerated transition to newer
products, and other higher than normal costs related to the reorganization.
Also included in the Scientific Instruments segment earnings were $10.3
million of the restructuring charges discussed above.
Vacuum Technologies sales of $107.2 million in fiscal year 1999 declined
3.8% below fiscal year 1998 sales of $111.4 million primarily due to the slow
down in the Asian markets and the weakness in semiconductor equipment demand.
These impacts resulted in declining sales in the second half of fiscal year
1998 and through the first quarter of fiscal year 1999. In the second quarter
of fiscal year 1999, demand began to strengthen and continued to grow in the
third and fourth quarters of fiscal year 1999. Earnings from operations of
$7.1 million (6.7% of sales) were down 38.2% from the $11.5 million (10.4% of
sales) in fiscal year 1998. The decline in earnings from operations resulted
primarily from the decline in sales volume and costs related to the above-
described reorganization including restructuring charges of $0.7 million.
Electronics Manufacturing sales of $95.6 million increased 14.8% from
fiscal year 1998 sales of $83.2 million. The increase in sales was principally
from the increasing demand from customers in the communications and medical
equipment markets. Earnings from operations of $6.8 million (7.2% of sales)
increased 21.4% from $5.6 million (6.8% of sales) in fiscal year 1998. The
increase in earnings from operations was primarily due to the higher sales
volume.
Fiscal Year 1998 Compared To Fiscal Year 1997
Sales. Sales of $557.8 million in fiscal year 1998 were 2.9% higher than
sales of $541.9 million in fiscal year 1997. Sales by the Scientific
Instruments and Vacuum Technologies segments increased 5.3% and
2.7%, respectively. Sales by the Electronics Manufacturing segment decreased
by 6.2%. The effect of the stronger U.S. dollar and a softening Asian market
slowed sales growth during fiscal year 1998.
Geographically, sales in North America of $311.5 million and Europe of
$163.0 million in fiscal year 1998 represented increases of 3.0% and 15.0%,
respectively, as compared to fiscal year 1997, while sales in Asia of $57.0
million in fiscal year 1998 declined 18.0% as compared to fiscal year 1997.
Gross Profit. Gross profit of $221.4 million in fiscal year 1998 was 39.7%
of sales, compared to $211.1 million, or 39.0% of sales, in fiscal year 1997.
The increase in gross profit as a percentage of sales from fiscal year 1997 to
fiscal year 1998 was primarily attributable to improved operating
efficiencies.
Sales and Marketing. Sales and marketing expenses of $113.9 million in
fiscal year 1998 and $110.0 million in fiscal year 1997, were 20.4% of sales
in fiscal year 1998 and 20.3% of sales in fiscal year 1997, as increases in
expenses in the United States in fiscal year 1998 were offset by lower foreign
marketing expenses due to the strengthening U.S. dollar.
Research and Development. Research and development expenses of $29.6
million in fiscal year 1998 were 5.3% of sales compared to $32.0 million, or
5.9% of sales, in fiscal year 1997. This decrease reflected the shift away
from outside consultants and the former Ginzton Research Center to in-house
employees.
General and Administrative. General and administrative expenses of $39.5
million, or 7.1% of sales, in fiscal year 1998, decreased from $42.3 million,
or 7.8% of sales, in fiscal year 1997. The decrease in general and
administrative expenses in fiscal year 1998 was due primarily to improved
productivity and the effect of the stronger U.S. dollar on expenses outside
the United States.
Taxes on Earnings. The effective income tax rate was 40.2% in fiscal year
1998, compared to 47.0% in fiscal year 1997. These rates were higher than the
U.S. federal statutory rate because IB had significant earnings
12
<PAGE>
in high-tax foreign countries. The fiscal year 1997 rate was greater than the
fiscal year 1998 rate due to the larger portion of high-taxed foreign earnings
in fiscal year 1997.
Net Earnings. Net earnings of $23.4 million ($0.77 diluted net earnings per
share) in fiscal year 1998 increased from the $14.2 million ($0.46 diluted net
earnings per share) earned in fiscal year 1997. The increase in net earnings
was due primarily to revenue growth in excess of marketing and general and
administrative expenses and the other factors described above.
Segments. Scientific Instruments sales of $363.1 million in fiscal year
1998 increased 5.3% over fiscal year 1997 sales of $344.7 million due to the
increased shipments of high-end NMR spectrometers and the acquisition of
Chrompack in the fourth quarter of fiscal year 1998. Earnings from operations
of $25.4 million (7.0% of sales) in fiscal year 1998 increased from $18.9
million (5.5% of sales) in fiscal year 1997. The improvement in earnings
resulted from the sales growth and cost reduction programs.
Vacuum Technologies sales of $111.4 million in fiscal year 1998 increased
2.7% over fiscal year 1997 sales of $108.5 million. The effect of the stronger
U.S. dollar and a softening Asian market slowed sales growth during fiscal
year 1998. Earnings from operations in fiscal year 1998 of $11.5 million
(10.4% of sales) were down from $ 11.7 million (10.8% of sales) in fiscal year
1997. The slight decline in earnings in fiscal year 1998 was principally from
the above-mentioned effect of the stronger U.S. dollar and the softening Asian
market.
Electronics Manufacturing sales of $83.2 million in fiscal year 1998
declined 6.2% from fiscal year 1997 sales of $88.7 million. Electronics
Manufacturing sales declined as a result of the slow down in the semiconductor
market and softening Asian market. Earnings from operations of $5.6 million
(6.8% of sales) increased 7.5% from fiscal year 1997 earnings from operations
of $5.2 million (5.9% of sales). The earnings increase was the result of cost
control measures.
Liquidity and Capital Resources
VAI Cash and Debt Allocations. The Distribution Agreement provided for the
division among the Company, VSEA, and VMS of VAI's cash and debt as of April
2, 1999. Under the Distribution Agreement, the Company was to assume 50% of
VAI's term loans and receive an amount of cash from VAI such that it would
have net debt (defined in the Distribution Agreement as the amount outstanding
under the term loans and notes payable, less cash and cash equivalents) equal
to approximately 50% of the net debt of the Company and VMS, subject to such
adjustment as was necessary to provide VMS with a net worth (as defined in the
Distribution Agreement) of between 40% and 50% of the aggregate net worth of
the Company and VMS, and subject to further adjustment to reflect the
Company's approximately 50% share of the estimated proceeds, if any, to be
received by VMS after the Distribution from the sale of VAI's long-term
leasehold interest at certain of its Palo Alto facilities, together with
certain related buildings and other corporate assets, and the Company's
obligation for approximately 50% of any estimated transaction expenses to be
paid by VMS after the Distribution (in each case reduced for estimated taxes
payable or tax benefits received from all sales and transaction expenses).
Since the amounts transferred immediately prior to the Distribution were based
on estimates, these and other adjustments may be required following the
Distribution. As a result of these adjustments, the Company may be required to
make cash payments to VMS and/or may be entitled to receive cash payments from
VMS. Adjustments through October 1, 1999 resulted in net cash payments from
VMS and an increase in stockholders' equity. The amount of any other required
adjustment cannot be estimated, but management believes that any further
adjustments will not have a material effect on the Company's financial
condition.
As of October 1, 1999, the Company had $71.0 million in uncommitted credit
facilities for working capital purposes. As of October 1, 1999, no amount was
outstanding under these credit facilities. All of these credit facilities
contain certain conditions and events of default customary for such
facilities.
As of October 1, 1999, the Company had $55.5 million in term loans. As of
October 1, 1999, fixed interest rates on the term loans ranged from 6.7% to
7.5%, and the weighted average interest rate on the term loans was
13
<PAGE>
7.0%. The term loans contain certain covenants that limit future borrowings
and the payment of cash dividends and require the maintenance of certain
levels of working capital and operating results. For fiscal year 1999, the
Company was in compliance with all restrictive covenants of the term loan
agreements. As of October 1, 1999, the Company also had other long-term notes
payable of $2.4 million with an interest rate of 2.3%.
Future principal payments on long-term debt outstanding on October 1, 1999
will be $6.7 million, $6.4 million, $6.5 million, $3.0 million, $2.8 million,
and $32.5 million during the fiscal years ended 2000, 2001, 2002, 2003, 2004
and thereafter, respectively.
Based upon rates currently available to the Company for debt with similar
terms and remaining maturities, the carrying amounts of long-term debt and
notes payable approximate estimated fair value.
Cash and Cash Equivalents. The Company generated $22.7 million of cash from
operations in fiscal year 1999, which compares to $37.3 million in fiscal year
1998. The primary reason for this decrease in cash generated was lower net
earnings due to the reorganization expenses and restructuring costs mentioned
above. The company used $14.8 million of cash for investing activities in
fiscal year 1999, which compares to $54.1 million in fiscal year 1998. The
higher investing activity in fiscal 1998 was due to the acquisition of
Chrompack. As of October 1, 1999 the Company has repaid all of the short-term
debt taken on as part of the Distribution.
The cash flow impact of certain actions relating to the above-described
overall reorganization will continue for several more quarters. Management
believes that the cash outflow will be approximately $3.0 million in fiscal
year 2000.
The Company currently has no plans to materially modify or expand its
facilities or to make other material capital expenditures.
The Distribution Agreement provides that the Company is responsible for
certain litigation to which VAI was a party, and further provides that the
Company will indemnify VMS and VSEA for one-third of the costs, expenses, and
other liabilities relating to certain discontinued, former, and corporate
operations of VAI, including certain environmental liabilities (see
"Environmental Matters" below).
The Company's liquidity is affected by many other factors, some based on
the normal ongoing operations of the business and others related to the
uncertainties of the industry and global economies. Although the Company's
cash requirements will fluctuate based on the timing and extent of these
factors, management believes that cash generated from operations, together
with the Company's borrowing capability, will be sufficient to satisfy
commitments for capital expenditures and other cash requirements for fiscal
year 2000.
Environmental Matters
The Company's operations are subject to various foreign, federal, state,
and/or local laws regulating the discharge of materials into the environment
or otherwise relating to the protection of the environment. This includes
discharges into soil, water and air, and the generation, handling, storage,
transportation, and disposal of waste and hazardous substances. In addition,
several countries are reviewing proposed regulations that would require
manufacturers to dispose of their products at the end of their useful life.
These laws could increase costs and potential liabilities associated with the
conduct of the Company's operations.
In addition, under the Distribution Agreement, the Company and VSEA each
agreed to indemnify VMS for one-third of certain environmental investigation
and remediation costs (after adjusting for any insurance proceeds and tax
benefits recognized or realized by VMS for such costs), as further described
below.
VMS has been named by the U.S. Environmental Protection Agency or third
parties as a potentially responsible party under the Comprehensive
Environmental Response Compensation and Liability Act of 1980,
14
<PAGE>
as amended, at nine sites where VAI is alleged to have shipped manufacturing
waste for recycling, treatment, or disposal. VMS is also involved in various
stages of environmental investigation, monitoring and/or remediation under the
direction of, or in consultation with, foreign, federal, state, and/or local
agencies at certain current VMS or former VAI facilities.
For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. As of October 1, 1999, it was nonetheless estimated that the
Company's share of the future exposure for environmental-related investigation
and remediation costs for these sites and facilities ranged in the aggregate
from $4.6 million to $10.5 million (without discounting to present value). The
time frame over which these costs are expected to be incurred varies with each
site and facility, ranging up to approximately 30 years as of October 1, 1999.
No amount in the foregoing range of estimated future costs is believed to be
more probable of being incurred than any other amount in such range, and the
Company therefore accrued $4.6 million as of October 1, 1999.
As to other sites and facilities, sufficient knowledge has been gained to
be able to better estimate the scope and costs of future environmental
activities. As of October 1, 1999, it was estimated that the Company's share
of the future exposure for environmental-related investigation and remediation
costs for these sites and facilities ranged in the aggregate from $8.1 million
to $13.7 million (without discounting to present value). The time frame over
which these costs are expected to be incurred varies with each site and
facility, ranging up to approximately 30 years as of October 1, 1999. As to
each of these sites and facilities, it was determined that a particular amount
within the range of estimated costs was a better estimate of the future
environmental liability than any other amount within the range, and that the
amount and timing of these future costs were reliably determinable. Together,
these amounts totaled $9.4 million at October 1, 1999. The Company therefore
accrued $4.2 million as of October 1, 1999, which represents the best estimate
of its share of these future costs discounted at 4%, net of inflation. This
accrual is in addition to the $4.6 million described in the preceding
paragraph. At October 1, 1999, the Company's reserve for environmental
liabilities, based upon future environmental-related costs estimated by the
Company as of that date, was calculated as follows:
<TABLE>
<CAPTION>
Total
Recurring Non-Recurring Anticipated
Fiscal Year Costs Costs Future Costs
----------- --------- ------------- ------------
(In millions)
<S> <C> <C> <C>
2000.................................. $ 0.4 $1.0 $1.4
2001.................................. 0.6 0.4 1.0
2002.................................. 0.5 0.0 0.5
2003.................................. 0.5 0.0 0.5
2004.................................. 0.5 0.0 0.5
Thereafter............................ 9.6 0.5 10.1
----- ---- ----
Total costs........................... $12.1 $1.9 14.0
===== ====
Less imputed interest................. (5.2)
----
Reserve amount........................ 8.8
Less current portion.................. (1.4)
----
Long term (included in other
liabilities)......................... $7.4
====
</TABLE>
The amounts set forth in the foregoing table are only estimates of
anticipated future environmental-related costs, and the amounts actually spent
in the years indicated may be greater or less than such estimates. The
aggregate range of cost estimates reflects various uncertainties inherent in
many environmental investigation and remediation activities and the large
number of sites where such investigation and remediation activities are being
undertaken.
15
<PAGE>
Claims for recovery of environmental investigation and remediation costs
already incurred, and to be incurred in the future, have been asserted against
various insurance companies and other third parties. VMS is now pursuing such
recovery claims for the benefit of itself, VSEA and the Company. An insurance
company has agreed to pay a portion of VAI's (now VMS') future environmental-
related expenditures for which the Company has an indemnity obligation, and
the Company therefore has a $1.3 million receivable in Other Assets as of
October 1, 1999 for the Company's share of such recovery. The Company has not
reduced any environmental-related liability in anticipation of recovery with
respect to claims made against third parties.
The Company's management believes that its reserves for the foregoing and
certain other environmental-related matters are adequate, but as the scope of
its obligation becomes more clearly defined, these reserves may be modified,
and related charges or credits against earnings may be made. Although any
ultimate liability arising from environmental-related matters described herein
could result in significant expenditures that, if aggregated and assumed to
occur within a single fiscal year, would be material to the Company's
financial statements, the likelihood of such occurrence is considered remote.
Based on information currently available and its best assessment of the
ultimate amount and timing of environmental-related events, the Company's
management believes that the costs of these environmental-related matters are
not reasonably likely to have a material adverse effect on the Company's
financial position or results of operations.
Legal Proceedings
In the Distribution Agreement, the Company agreed to reimburse VMS for one-
third of certain costs and expenses (after adjusting for any insurance
proceeds and tax benefits recognized or realized by VMS for such costs and
expenses) that are paid after April 2, 1999 and arise from actual or potential
claims or legal proceedings relating to discontinued, former, or corporate
operations of VAI. These shared liabilities are generally managed by VMS, and
expenses and losses (adjusted for any insurance proceeds and tax benefits
recognized or realized by VMS for such costs and expenses) are generally borne
one-third each by the Company, VMS, and VSEA. Also, from time to time, the
Company is involved in a number of its own legal actions and could incur an
uninsured liability in one or more of them. While the ultimate outcome of all
of the foregoing legal matters is not determinable, management believes that
these matters are not reasonably likely to have a material adverse effect on
the Company's financial position or results of operations.
Year 2000
General. The "Year 2000" problem refers to computer programs and other
equipment with embedded microprocessors ("non-IT systems") which use only the
last two digits to refer to a year, and which therefore might not properly
recognize a year that begins with "20" instead of the familiar "19." As a
result, those computer programs and non-IT systems might be unable to operate
or process accurately certain date-sensitive data before or after January 1,
2000. Because the Company relies heavily on computer programs and
non-IT systems, and relies on third parties which themselves rely on computer
programs and non-IT systems, the Year 2000 problem, if not addressed, could
adversely affect the Company's business, results of operations, and financial
condition.
State of Readiness. VAI and IB previously initiated a comprehensive
assessment of potential Year 2000 problems with respect to (1) the Company's
internal systems, (2) the Company's products, and (3) significant third
parties with which the Company does business. The Company is continuing that
assessment for its businesses, although under the terms of the Transition
Services Agreement among VMS, VSEA, and the Company, VMS is taking certain
actions and otherwise assisting the Company with respect to certain Year 2000
implications with the Company's internal systems.
The Company has substantially completed its assessment of potential Year
2000 problems in internal systems, which systems have been categorized as
follows, in order of importance: (a) enterprise information systems; (b)
enterprise networking and telecommunications; (c) factory-specific information
systems; (d) non-IT systems; (e) computers and packaged software; and (f)
facilities systems. With respect to enterprise information
16
<PAGE>
systems, VAI initiated in 1994 replacement of its existing systems with a
single company-wide system supplied by SAP America Inc., which system is
designed and tested by SAP for Year 2000 capability. Installation of the SAP
enterprise information system has been staged to replace first those existing
systems that are not Year 2000 capable. Installation of the SAP system for the
Company is approximately 99% complete, and full completion is expected by the
end of December 1999; upgrade of networking and telecommunications systems is
complete; upgrade of factory-specific information systems is complete; and
upgrade of non-IT systems, computers and packaged software, and facilities
systems are approximately 98% complete, with 100% completion expected by the
end of December 1999.
The Company has initiated an assessment of potential Year 2000 problems in
its current and previously sold products. With respect to current products,
that assessment and corrective actions are complete, and the Company believes
that all of its current products are Year 2000 capable; however, that
conclusion is based in substantial part on Year 2000 assurances or warranties
from suppliers of computers, software, and non-IT systems which are integrated
into or sold with the Company's products. With respect to previously sold
products, the Company does not intend to assess Year 2000 preparedness of
every product it has ever sold. Rather it focused its assessments on products
that (1) are still under written warranties or are still relatively early in
their useful life, (2) are more likely to be dependent on non-IT systems that
are not Year 2000 capable, and/or (3) cannot be easily upgraded with readily
available externally utilized computers and packaged software. These
assessments are substantially complete. Where the Company identifies
previously sold products that are not Year 2000 capable, the Company intends
in some cases to develop and offer to sell upgrades or retrofits, identify
corrective measures which the customer could itself undertake, or identify for
the customer other suppliers of upgrades or retrofits. There may be instances
where the Company will be required to repair and/or upgrade such products at
its own expense.
The Company has substantially completed its assessment of its potential
Year 2000 problems of third parties with which the Company has material
relationships, primarily suppliers of products or services. These assessments
have identified and prioritized critical suppliers, reviewed those suppliers'
written assurances on their own assessments and correction of Year 2000
problems, and developed appropriate contingency plans for those suppliers
which might not be adequately prepared for Year 2000 problems.
Costs. The Company estimates that it had incurred approximately $1.2
million as of October 1, 1999 to assess and correct Year 2000 problems.
Although difficult to assess, based on its assessment to date, the Company
estimates that it will incur approximately $300,000 in additional costs to
assess and correct Year 2000 problems, which costs are expected to be incurred
in the first quarter of fiscal year 2000. All of these costs have been and
will continue to be expensed as incurred. This estimate of future costs has
not been reduced by expected recoveries from certain third parties, which are
subject to indemnity, reimbursement, or warranty obligations for Year 2000
problems. In addition, the Company expects that certain costs will be offset
by revenues generated by the sale of upgrades and retrofits and other customer
support services relating to Year 2000 problems. However, there can be no
assurance that the Company's actual costs to assess and correct Year 2000
problems will not be higher than the foregoing estimate.
Risks. Failure by the company or its key suppliers to accurately assess and
correct Year 2000 problems would likely result in interruption of certain of
the Company's normal business operations, which could have a material adverse
effect on the Company's business, results of operations, and financial
condition. If the Company does not adequately identify and correct Year 2000
problems in its information systems, it could experience an interruption in
its operations, including manufacturing, order processing, receivables
collection, cash management, and accounting, such that there would be delays
in product shipments, lost data, and a consequential impact on revenues,
expenditures, cash flow, and financial reporting. If the Company does not
adequately identify and correct Year 2000 problems in its non-IT systems, it
could experience an interruption in its manufacturing and related operations,
such that there would be delays in product shipments and a consequential
impact on results of operations. If the Company does not adequately identify
and correct Year 2000 problems in previously sold products, it could
experience warranty or similar claims by users of products which do not
function correctly and could incur higher warranty and service costs. If the
Company does not adequately
17
<PAGE>
identify and correct Year 2000 problems of the significant third parties with
which it does business, it could experience an interruption in the supply of
key components or services from those parties, such that there would be delays
in product shipments or services and a consequential impact on results of
operations.
Because of uncertainties as to the extent of Year 2000 problems with the
Company's previously sold products and the extent of any legal obligation for
the Company to correct Year 2000 problems in those products, the Company
cannot fully assess the risks to the Company with respect to those products.
The Company also cannot yet conclude that the failure of critical suppliers to
assess and correct Year 2000 problems is not reasonably likely to have a
material adverse effect on the Company's results of operations, and indeed the
failure of certain suppliers to provide essential infrastructure services will
likely have a material adverse effect on the Company's business, results of
operations, and financial condition. The most difficult risks for the Company
to assess and prepare for relate to basic infrastructure services (such as
electricity, water, gas, telecommunications, transportation, distribution, and
banking) provided by third parties, in particular those outside the United
States.
Management believes that the assessments and corrective actions described
above have been or will be accomplished within the cost and time estimates
stated. Although it is not expected that the Company will be 100% Year 2000
prepared by December 31, 1999, management does not currently believe that any
Year 2000 non-compliance in the Company's information systems would have a
material adverse effect on the Company's business, results of operations, or
financial condition. However, given the inherent complexity and implications
of the Year 2000 problem, there can be no assurance that actual costs will not
be higher than currently anticipated or that corrective actions will not take
longer than currently anticipated to complete. Risk factors which might result
in higher costs or delays include the ability to identify and correct in a
timely fashion Year 2000 problems; regulatory or legal obligations to correct
Year 2000 problems in previously sold products; ability to retain and hire
qualified personnel to perform assessments and corrective actions; the
willingness and ability of critical suppliers to assess and correct their own
Year 2000 problems, including the products they supply to the Company; and the
additional complexity which will likely be caused by undertaking during fiscal
year 2000 the separation (as a result of the Distribution) of enterprise
information systems which the Company currently shares with VMS and VSEA.
Contingency Plans. With respect to the Company's enterprise information
systems, the Company has fully installed and tested the SAP system for Year
2000 compliance and therefore does not have a contingency plan for Year 2000.
With respect to products and significant third parties, the Company is, as
part of its near-complete assessment of potential Year 2000 problems,
developing contingency plans for the more critical problems that might not be
corrected before December 31, 1999. The focus of these contingency plans is
the possible interruption of supply of key components or services from third
parties.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting and Standards Board issued Statement
of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires derivatives to be
measured at fair value and to be recorded as assets or liabilities on the
balance sheet. The accounting for gains or losses resulting from changes in
the fair values of those derivatives would be dependent upon the use of the
derivative and whether it qualifies for hedge accounting. SFAS 133 is
effective for fiscal quarters and years beginning after June 15, 2000. The
Company will adopt SFAS 133 in the fourth quarter of fiscal year 2000 and is
in the process of determining the impact that adoption will have on the
consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Foreign Currency Exchange Risk. The Company typically hedges its currency
exposures associated with certain assets and liabilities denominated in non-
functional currencies and with anticipated foreign currency cash flows. As a
result, the effect of an immediate 10% change in exchange rates would not be
material to the Company's financial condition or results of operations. The
Company's forward exchange contracts have
18
<PAGE>
generally ranged from one to 12 months in original maturity, and no forward
exchange contract has had an original maturity greater than one year. Forward
exchange contracts outstanding as of October 1, 1999 that hedge the balance
sheet were effective on October 1, 1999, and accordingly there were no
unrealized gains or losses associated with such contracts and the fair value
of these contracts approximates their notional values.
Forward Exchange Contracts Outstanding as of October 1, 1999
<TABLE>
<CAPTION>
Notional Notional
Value Value
Sold Purchased
-------- ---------
(In thousands)
<S> <C> <C>
British Pound............................................. $ 4,115 $9,862
Japanese Yen.............................................. 8,473 --
Euro...................................................... 7,577 --
Canadian Dollar........................................... 2,250 --
------- ------
Total................................................... $22,415 $9,862
======= ======
</TABLE>
Interest Rate Risk
The Company has no material exposure to market risk for changes in interest
rates. The Company invests primarily in short-term U.S. Treasury securities,
and changes in interest rates would not be material to the Company's financial
condition or results of operations. The Company primarily enters into debt
obligations to support general corporate purposes, including working capital
requirements, capital expenditures, and acquisitions. At October 1, 1999 the
Company's debt obligations had fixed interest rates.
The estimated fair value of the Company's debt obligations approximates the
principal amounts reflected below on rates currently available to the Company
for debt with similar terms and remaining maturities.
Although payments under certain of the Company's operating leases for its
facilities are tied to market indices, the Company is not exposed to material
interest rate risk associated with its operating leases.
Debt Obligations
Principal Amounts and Related Weighted Average Interest Rates By Year of
Maturity
<TABLE>
<CAPTION>
Fiscal Years
----------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total
------ ------ ------ ------ ------ ---------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt
(including current
portion)............... $6,716 $6,437 $6,482 $3,022 $2,781 $32,500 $57,938
Average interest rate... 7.0% 6.9% 6.9% 6.2% 6.6% 6.8% 6.8%
</TABLE>
Item 8. Financial Statements and Supplementary Data
The response to this Item is submitted as a separate section to this
report. See Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
19
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item with respect to the Company's
executive officers is incorporated herein by reference from the information
contained in Item 1 of Part I of this Report under the caption "Executive
Officers." The information required by this Item with respect to the Company's
directors and nominee for director is incorporated herein by reference from
the information provided under the heading "Election of Director" of the
Company's Proxy Statement. The information required by Item 405 of Regulation
S-K is incorporated herein by reference from the information provided under
the heading "Section 16(a) Beneficial Ownership Reporting Compliance" of the
Company's Proxy Statement.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference
from the information provided under the heading "Executive Compensation
Information" of the Company's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated herein by reference
from the information provided under the heading "Stock Ownership of Certain
Beneficial Owners" of the Company's Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated herein by reference
from the information provided under the heading "Certain Relationships and
Related Transactions" of the Company's Proxy Statement.
20
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements: (see index on page F-1 of this
report)
-- Report of Independent Accountants
-- Consolidated Statements of Earnings for fiscal years 1999, 1998, and
1997
-- Consolidated Balance Sheets at fiscal year-end 1999 and 1998
-- Consolidated Statements of Stockholders' Equity for fiscal years
1999, 1998, and 1997
-- Consolidated Statements of Cash Flows for fiscal years 1999, 1998,
and 1997
-- Notes to the Consolidated Financial Statements
(2) Consolidated Financial Statement Schedule: (see index on page F-1 of
this report)
The following financial statement schedule of the registrant and its
subsidiaries for fiscal years 1999, 1998, and 1997 is filed as a part of this
Report and should be read in conjunction with the Consolidated Financial
Statements of the registrant and its subsidiaries.
<TABLE>
<CAPTION>
Schedule
--------
<C> <S>
II Valuation and Qualifying Accounts.
</TABLE>
All other required schedules are omitted because of the absence of
conditions under which they are required or because the required information
is given in the consolidated financial statements or the notes thereto.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2.1 Amended and Restated Distribution Agreement, dated as of January 14,
1999, among Varian Associates, Inc., Varian Semiconductor Equipment
Associates, Inc. and Varian, Inc. (incorporated herein by reference
to Exhibit 2.1 of the registrant's Form 10-Q for the quarter ended
April 2, 1999).**
3.1 Restated Certificate of Incorporation of Varian, Inc. (incorporated
herein by reference to Exhibits 3.1 and 3.2 of the registrant's Form
10-Q for the quarter ended April 2, 1999).
3.2 By-Laws of Varian, Inc. (incorporated herein by reference to Exhibit
3.3 of the registrant's Form 10-Q for the quarter ended April 2, 1999).
4.1 Specimen Common Stock certificate (incorporated herein by reference to
Exhibit 4.1 of the registrant's Form 10/A filed on March 8, 1999).
4.2 Rights Agreement, dated as of February 18, 1999, between Varian, Inc.
and First Chicago Trust Company of New York, as Rights Agent
(incorporated herein by reference to Exhibit 4.2 of the registrant's
Form 10/A filed on March 8, 1999).
10.1 Employee Benefits Allocation Agreement, dated as of April 2, 1999,
among Varian Associates, Inc., Varian Semiconductor Equipment
Associates, Inc. and Varian, Inc. (incorporated herein by reference
to Exhibit 10.1 of the registrant's Form 10-Q for the quarter ended
April 2, 1999).**
10.2 Intellectual Property Agreement, dated as of April 2, 1999, among
Varian Associates, Inc., Varian Semiconductor Equipment Associates,
Inc. and Varian, Inc. (incorporated herein by reference to Exhibit
10.2 of the registrant's Form 10-Q for the quarter ended April 2,
1999).**
10.3 Tax Sharing Agreement, dated as of April 2, 1999, among Varian
Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and
Varian, Inc. (incorporated herein by reference to Exhibit 10.3 of the
registrant's Form 10-Q for the quarter ended April 2, 1999).**
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
10.4 Transition Services Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian
Semiconductor Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to
Exhibit 10.4 of the registrant's Form 10-Q for the quarter ended April 2, 1999).**
10.5 Varian, Inc. Amended and Restated Note Purchase and Private Shelf Agreement and Assumption
dated as of April 2, 1999 (incorporated herein by reference to Exhibit 10.6 of the registrant's
Form 10-Q for the quarter ended April 2, 1999).**
10.6* Varian, Inc. Omnibus Stock Plan (incorporated herein by reference to Exhibit 10.9 of the
registrant's
Form 10 filed on February 12, 1999).
10.7* Varian, Inc. Management Incentive Plan (incorporated herein by reference to Exhibit 10.10 of the
registrant's Form 10/A filed on February 12, 1999).
10.8* Amended and Restated Varian, Inc. Supplemental Retirement Plan.
10.9 Form of Indemnity Agreement between Varian, Inc. and its Directors and Officers
(incorporated herein by reference to Exhibit 10.8 of the registrant's Form 10/A filed on March 8,
1999).
10.10* Amended and Restated Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc.
and Allen J. Lauer.
10.11* Amended and Restated Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc.
and Arthur W. Homan.
10.12* Form of Change in Control Agreement between Varian, Inc. and Certain Executive Officers
(incorporated herein by reference to Exhibit 10.7 of the registrant's Form 10/A filed on March 8,
1999).
10.13* Change in Control Agreement, dated as of April 16, 1999, between Varian, Inc. and G. Edward
McClammy (incorporated herein by reference to Exhibit 10.1 of the registrant's Form 10-Q for the
quarter ended July 2, 1999).
10.14* Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc. and James L. Colbert
(incorporated herein by reference to Exhibit 10.2 of the registrant's Form 10-Q for the quarter
ended
July 2, 1999).
10.15* Description of Certain Compensatory Arrangements Between Registrant and Executive Officers
(incorporated herein by reference to Exhibit 10.3 of the registrant's Form 10-Q for the quarter
ended
July 2, 1999).
10.16* Description of Certain Compensatory Arrangement Between Registrant and G. Edward McClammy.
10.17* Description of Certain Compensatory Arrangements Between Registrant and Non-Employee Directors.
21 Subsidiaries of the registrant.
23 Consent of Independent Accountants.
27.1 Financial Data Schedule for the fiscal year ended October 1, 1999 (EDGAR filing only).
</TABLE>
- --------
* Management contract or compensatory plan or arrangement.
** Certain exhibits and schedules omitted.
(b) Reports on Form 8-K.
None.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
VARIAN, INC.
(Registrant)
Dated: December 21, 1999
/s/ G. Edward McClammy
By: _________________________________
G. Edward McClammy
Vice President and Chief
Financial Officer
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Allen J. Lauer President and Chief December 21, 1999
____________________________________ Executive Officer
Allen J. Lauer (Principal Executive
Officer)
/s/ G. Edward McClammy Vice President and Chief December 21, 1999
____________________________________ Financial Officer
G. Edward McClammy (Principal Financial
Officer)
/s/ James L. Colbert Controller (Principal December 21, 1999
____________________________________ Accounting Officer)
James L. Colbert
/s/ D.E. Mundell Chairman of the Board December 21, 1999
____________________________________
D.E. Mundell
/s/ John G. McDonald Director December 21, 1999
____________________________________
John G. McDonald
/s/ Wayne R. Moon Director December 21, 1999
____________________________________
Wayne R. Moon
/s/ Elizabeth E. Tallett Director December 21, 1999
____________________________________
Elizabeth E. Tallett
</TABLE>
23
<PAGE>
EXHIBIT INDEX
Set forth below is a list of exhibits that are being filed or incorporated
by reference into this Report:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Amended and Restated Distribution Agreement, dated as of January 14,
1999, among Varian Associates, Inc., Varian Semiconductor Equipment
Associates, Inc. and Varian, Inc. (incorporated herein by reference
to Exhibit 2.1 of the registrant's Form 10-Q for the quarter ended
April 2, 1999).**
3.1 Restated Certificate of Incorporation of Varian, Inc. (incorporated
herein by reference to Exhibits 3.1 and 3.2 of the registrant's Form
10-Q for the quarter ended April 2, 1999).
3.2 By-Laws of Varian, Inc. (incorporated herein by reference to Exhibit
3.3 of the registrant's Form 10-Q for the quarter ended April 2,
1999).
4.1 Specimen Common Stock certificate (incorporated herein by reference to
Exhibit 4.1 of the registrant's Form 10/A filed on March 8, 1999).
4.2 Rights Agreement, dated as of February 18, 1999, between Varian, Inc.
and First Chicago Trust Company of New York, as Rights Agent
(incorporated herein by reference to Exhibit 4.2 of the registrant's
Form 10/A filed on March 8, 1999).
10.1 Employee Benefits Allocation Agreement, dated as of April 2, 1999,
among Varian Associates, Inc., Varian Semiconductor Equipment
Associates, Inc. and Varian, Inc. (incorporated herein by reference
to Exhibit 10.1 of the registrant's Form 10-Q for the quarter ended
April 2, 1999).**
10.2 Intellectual Property Agreement, dated as of April 2, 1999, among
Varian Associates, Inc., Varian Semiconductor Equipment Associates,
Inc. and Varian, Inc. (incorporated herein by reference to Exhibit
10.2 of the registrant's Form 10-Q for the quarter ended April 2,
1999).**
10.3 Tax Sharing Agreement, dated as of April 2, 1999, among Varian
Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and
Varian, Inc. (incorporated herein by reference to Exhibit 10.3 of the
registrant's Form 10-Q for the quarter ended April 2, 1999).**
10.4 Transition Services Agreement, dated as of April 2, 1999, among Varian
Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and
Varian, Inc. (incorporated herein by reference to Exhibit 10.4 of the
registrant's Form 10-Q for the quarter ended April 2, 1999).**
10.5 Varian, Inc. Amended and Restated Note Purchase and Private Shelf
Agreement and Assumption dated as of April 2, 1999 (incorporated
herein by reference to Exhibit 10.6 of the registrant's Form 10-Q for
the quarter ended April 2, 1999).**
10.6* Varian, Inc. Omnibus Stock Plan (incorporated herein by reference to
Exhibit 10.9 of the registrant's Form 10 filed on February 12, 1999).
10.7* Varian, Inc. Management Incentive Plan (incorporated herein by
reference to Exhibit 10.10 of the registrant's Form 10/A filed on
February 12, 1999).
10.8* Amended and Restated Varian, Inc. Supplemental Retirement Plan.
10.9 Form of Indemnity Agreement between Varian, Inc. and its Directors and
Officers (incorporated herein by reference to Exhibit 10.8 of the
registrant's Form 10/A filed on March 8, 1999).
10.10* Amended and Restated Change in Control Agreement, dated as of April 2,
1999, between Varian, Inc. and Allen J. Lauer.
10.11* Amended and Restated Change in Control Agreement, dated as of April 2,
1999, between Varian, Inc. and Arthur W. Homan.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.12* Form of Change in Control Agreement between Varian, Inc. and Certain
Executive Officers (incorporated herein by reference to Exhibit 10.7
of the registrant's Form 10/A filed on March 8, 1999).
10.13* Change in Control Agreement, dated as of April 16, 1999, between
Varian, Inc. and G. Edward McClammy (incorporated herein by reference
to Exhibit 10.1 of the registrant's Form 10-Q for the quarter ended
July 2, 1999).
10.14* Change in Control Agreement, dated as of April 2, 1999, between
Varian, Inc. and James L. Colbert (incorporated herein by reference
to Exhibit 10.2 of the registrant's Form 10-Q for the quarter ended
July 2, 1999).
10.15* Description of Certain Compensatory Arrangements Between Registrant
and Executive Officers (incorporated herein by reference to Exhibit
10.3 of the registrant's Form 10-Q for the quarter ended July 2,
1999).
10.16* Description of Certain Compensatory Arrangement Between Registrant and
G. Edward McClammy.
10.17* Description of Certain Compensatory Arrangements Between Registrant
and Non-Employee Directors.
21 Subsidiaries of the registrant.
23 Consent of Independent Accountants.
27.1 Financial Data Schedule for the fiscal year ended October 1, 1999
(EDGAR filing only).
</TABLE>
- --------
* Management contract or compensatory plan or arrangement.
**Certain exhibits and schedules omitted.
25
<PAGE>
VARIAN, INC. AND SUBSIDIARY COMPANIES
FORM 10-K
INDEX OF CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
The following consolidated financial statements of the registrant and its
subsidiaries are required to be included in Item 8:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................ F-2
Consolidated Statements of Earnings for fiscal years 1999, 1998, and
1997.................................................................... F-3
Consolidated Balance Sheets at fiscal year-end 1999 and 1998............. F-4
Consolidated Statements of Stockholders' Equity for fiscal years 1999,
1998, and 1997.......................................................... F-5
Consolidated Statements of Cash Flows for fiscal years 1999, 1998, and
1997.................................................................... F-6
Notes to the Consolidated Financial Statements........................... F-7
</TABLE>
The following consolidated financial statement schedule of the registrant
and its subsidiaries for fiscal years 1999, 1998, and 1997 is filed as a part
of this Report as required to be included in Item 14(a) and should be read in
conjunction with the Consolidated Financial Statements of the registrant and
its subsidiaries:
<TABLE>
<CAPTION>
Schedule Page
-------- ----
<C> <S> <C>
II Valuation and Qualifying Accounts............................... F-22
</TABLE>
All other required schedules are omitted because of the absence of
conditions under which they are required or because the required information
is given in the consolidated financial statements or the notes thereto.
F-1
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Varian, Inc.:
In our opinion, the accompanying consolidated financial statements listed
in the accompanying index present fairly, in all material respects, the
financial position of Varian, Inc. and its subsidiaries at October 1, 1999 and
October 2, 1998, and the results of their operations and their cash flows for
each of the three years in the period ended October 1, 1999, in conformity
with generally accepted accounting principles. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our
audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- -----------------------------------
PricewaterhouseCoopers LLP
San Jose, California
October 28, 1999
F-2
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Fiscal Years
---------------------------
1999 1998 1997
-------- -------- --------
(In thousands, except per
share amounts)
<S> <C> <C> <C>
Sales.............................................. $598,887 $557,770 $541,946
Cost of sales...................................... 374,698 336,387 330,845
-------- -------- --------
Gross profit....................................... 224,189 221,383 211,101
-------- -------- --------
Operating expenses
Sales and marketing.............................. 124,597 113,854 110,009
Research and development......................... 31,554 29,620 31,987
General and administrative....................... 41,843 39,456 42,303
Restructuring charges............................ 10,974 -- --
-------- -------- --------
Total operating expenses......................... 208,968 182,930 184,299
-------- -------- --------
Operating earnings................................. 15,221 38,453 26,802
Interest expense (income), net..................... 2,018 (711) --
-------- -------- --------
Earnings before income taxes....................... 13,203 39,164 26,802
Income tax expense................................. 5,875 15,736 12,597
-------- -------- --------
Net earnings....................................... $ 7,328 $ 23,428 $ 14,205
======== ======== ========
Net earnings per share:
Basic............................................ $ 0.24 $ 0.77 $ 0.47
======== ======== ========
Diluted.......................................... $ 0.24 $ 0.77 $ 0.46
======== ======== ========
Shares used in per share calculations:
Basic............................................ 30,442 30,423 30,423
======== ======== ========
Diluted.......................................... 31,121 30,587 30,587
======== ======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-3
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Fiscal Years
---------------------------
1999 1998
------------- -------------
(In thousands, except share
and par value amounts)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents........................ $ 23,348 $ --
Accounts receivable, net......................... 151,437 143,836
Inventories...................................... 66,634 71,575
Deferred taxes................................... 25,508 19,500
Other current assets............................. 8,405 6,760
------------- -------------
Total current assets............................. 275,332 241,671
Property, plant and equipment, net................. 83,654 94,719
Other assets....................................... 66,090 67,709
------------- -------------
Total assets....................................... $ 425,076 $ 404,099
============= =============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Current portion of long-term debt................ $ 6,717 $ --
Accounts payable................................. 40,442 34,320
Accrued liabilities.............................. 116,128 115,258
------------- -------------
Total current liabilities........................ 163,287 149,578
Long-term debt..................................... 51,221 --
Deferred taxes..................................... 8,453 4,192
Other liabilities.................................. 7,453 6,862
------------- -------------
Total liabilities.................................. 230,414 160,632
------------- -------------
Commitments and contingencies (notes 9 and 14)
Stockholders' equity
Preferred stock--par value $.01, authorized--
1,000,000 shares; issued--none.................. -- --
Common stock--par value $.01, authorized--
99,000,000 shares; issued and outstanding-
30,563,094 shares at October 1, 1999 and none at
October 2, 1998................................. 181,619 --
Retained earnings................................ 13,043 --
Divisional equity................................ -- 243,467
------------- -------------
Total stockholders' equity....................... 194,662 243,467
------------- -------------
Total liabilities and stockholders' equity......... $ 425,076 $ 404,099
============= =============
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-4
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------- Retained Divisional
Shares Amount Earnings Equity Total
------ -------- -------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance, fiscal year-end 1996.. -- $ -- $ -- $ 154,893 $154,893
Net transfers from Varian
Associates, Inc............... -- -- -- 34,198 34,198
Net earnings................... -- -- -- 14,205 14,205
------ -------- ------- --------- --------
Balance, fiscal year-end 1997.. -- -- -- 203,296 203,296
Net transfers from Varian
Associates, Inc............... -- -- -- 16,743 16,743
Net earnings................... -- -- -- 23,428 23,428
------ -------- ------- --------- --------
Balance, fiscal year-end 1998.. -- -- -- 243,467 243,467
Net transfers to Varian
Associates, Inc. ............. -- -- -- (57,293) (57,293)
Distribution of Common Stock to
Varian Associates, Inc.
stockholders.................. 30,423 180,459 -- (180,459) --
Stock options exercised........ 140 1,160 -- -- 1,160
Net earnings................... -- -- 13,043 (5,715) 7,328
------ -------- ------- --------- --------
Balance, fiscal year-end 1999.. 30,563 $181,619 $13,043 $ -- $194,662
====== ======== ======= ========= ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-5
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Years
----------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net earnings.................................... $ 7,328 $ 23,428 $ 14,205
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation and amortization................. 17,699 17,541 19,449
Loss on disposition of property, plant and
equipment.................................... 687 -- --
Deferred taxes................................ (1,747) (2,225) (811)
Changes in assets and liabilities
Accounts receivable, net.................... (7,601) 2,063 (15,201)
Inventories................................. 4,941 (1,269) (6,172)
Other current assets........................ (3,666) 564 851
Accounts payable............................ 6,122 (9,012) 7,531
Accrued liabilities......................... (870) (2,916) 2,087
Other liabilities........................... 591 617 284
Other....................................... (819) 8,531 (4,620)
-------- -------- --------
Net cash provided by operating activities....... 22,665 37,322 17,603
-------- -------- --------
Cash Flows From Investing Activities
Proceeds from sale of property, plant, and
equipment...................................... 245 -- --
Purchase of property, plant, and equipment...... (15,028) (19,358) (20,803)
Purchase of businesses, net of cash acquired.... -- (34,707) (30,998)
-------- -------- --------
Net cash used in investing activities........... (14,783) (54,065) (51,801)
-------- -------- --------
Cash Flows from Financing Activities
Net issuance (payment) of short-term debt....... (12,240) -- --
Repayment of long-term debt..................... (1,296) -- --
Option exercises................................ 1,160 -- --
Net transfers from Varian Associates, Inc. and
Varian Medical Systems, Inc. .................. 27,842 16,743 34,198
-------- -------- --------
Net cash provided by financing activities....... 15,466 16,743 34,198
-------- -------- --------
Net increase in cash and cash equivalents....... 23,348 -- --
Cash and cash equivalents at beginning of
period......................................... -- -- --
-------- -------- --------
Cash and cash equivalents at end of period...... $ 23,348 $ -- $ --
======== ======== ========
Non-Cash Investing and Financing Activities
Debt assumed/transferred from Varian Associates,
Inc............................................ $ 71,465
Transfer of property, plant, and equipment...... $ 9,900
Supplemental Cash Flow Information
Income taxes paid............................... $ 11,210
Interest paid................................... $ 1,881
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-6
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--Description of Business and Basis of Presentation
Varian, Inc., (the "Company") is a major supplier of scientific instruments
and consumables, vacuum technology products and services, and contract
electronics manufacturing services. These businesses primarily serve life
science, health care, semiconductor processing, communications, industrial and
academic customers.
Until April 2, 1999, the business of the Company was operated as the
Instrument Business ("IB") of Varian Associates, Inc. ("VAI"). VAI contributed
IB to the Company; then on April 2, 1999, VAI distributed to the holders of
record of VAI common stock on March 24, 1999 one share of common stock of the
Company for each share of VAI common stock outstanding on April 2, 1999 (the
"Distribution"). At the same time, VAI contributed its Semiconductor Equipment
business to Varian Semiconductor Equipment Associates, Inc. ("VSEA") and
distributed to the holders of record of VAI common stock on March 24, 1999 one
share of common stock of VSEA for each share of VAI common stock outstanding
on April 2, 1999. VAI retained its Health Care Systems business and changed
its name to Varian Medical Systems, Inc. ("VMS") effective as of April 3,
1999. These transactions were accomplished under the terms of an Amended and
Restated Distribution Agreement dated as of January 14, 1999 by and among the
Company, VAI and VSEA (the "Distribution Agreement"). For purposes of
providing an orderly transition and to define certain ongoing relationships
between and among the Company, VMS, and VSEA after the Distribution, the
Company, VMS, and VSEA also entered into certain other agreements which
include an Employee Benefits Allocation Agreement, an Intellectual Property
Agreement, a Tax Sharing Agreement, and a Transition Services Agreement.
The consolidated financial statements generally reflect IB's results of
operations, financial position and cash flows through April 2, 1999, the date
of the Distribution, and the Company's results of operations, financial
position, and cash flows from April 3, 1999 to October 1, 1999. Significant
intercompany balances, transactions, and stock holdings have been eliminated
in consolidation. The financial results for periods prior to April 3, 1999
included in these consolidated financial statements have been carved out from
the financial statements of VAI using the historical results of operations and
historical bases of the assets and liabilities of IB. The consolidated
financial statements include the accounts of IB after elimination of inter-
business balances and transactions. The consolidated financial statements also
include, among other things, allocations of certain VAI corporate assets
(including pension assets), liabilities (including profit sharing and pension
benefits), and expenses (including legal, accounting, employee benefits,
insurance services, information technology services, treasury, and other
corporate overhead) to IB. These amounts have been allocated to IB on the
basis that is considered by management to reflect most fairly or reasonably
the utilization of the services provided to or the benefit obtained by IB.
Typical measures and activity indicators used for allocation purposes include
headcount, sales revenue, and payroll expense. The Company's management
believes that the methods used to allocate these amounts are reasonable.
However, these allocations are not necessarily indicative of the amounts that
would have been or that will be recorded by the Company on a stand-alone
basis.
NOTE 2--Summary of Significant Accounting Policies
Fiscal Year. The Company's fiscal years reported are the 52- or 53-week
periods which ended on the Friday nearest September 30. Fiscal year 1999
comprises the 52-week period ended on October 1, 1999. Fiscal year 1998
comprises the 53-week period ended on October 2, 1998. Fiscal year 1997
comprises the 52-week period ended on September 26, 1997.
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 amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
F-7
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition. Sales and related costs of sales are recognized upon
shipment of products. The Company's products are generally subject to
warranty, and the Company provides for the estimated future costs of repair,
replacement, or customer accommodation in costs of sales. Service revenue,
which is less than 10% of the net sales in fiscal years 1999, 1998, and 1997,
is recognized ratably over the period of the related contract.
Foreign Currency Translation. For non-U.S. operations, the U.S. dollar is
the functional currency. Monetary assets and liabilities of foreign
subsidiaries are translated into U.S. dollars at exchange rates at the end of
the fiscal year. Non-monetary assets such as inventories and property, plant,
and equipment are translated at historical rates. Income and expense items are
translated at effective rates of exchange prevailing during each year, except
that inventories and depreciation charged to operations are translated at
historical rates. The aggregate exchange loss included in general and
administrative expenses for fiscal years 1999, 1998, and 1997 was $2.4
million, $2.0 million, and $2.6 million, respectively.
Concentration of Credit Risk. Financial instruments that potentially
subject the Company to concentrations of credit risk comprise cash and cash
equivalents, trade accounts receivable, and forward exchange contracts. The
Company invests primarily in short-term U.S. Treasury securities. The Company
sells its products and extends trade credit to a large number of customers,
who are dispersed across many different industries and geographies. The
Company performs ongoing credit evaluations of these customers and generally
does not require collateral from them. Trade accounts receivable include
allowances for doubtful accounts for fiscal years 1999 and 1998 of $1.8
million and $0.7 million, respectively. The Company seeks to minimize credit
risk relating to forward exchange contracts by limiting its counter-parties to
major financial institutions.
Cash and Cash Equivalents. The Company considers currency on hand, demand
deposits, and all highly liquid debt securities with an original maturity of
three months or less to be cash and cash equivalents. Fair value of cash, cash
equivalents, and short-term investments approximate cost due to the short
period of time to maturity.
Inventories. Inventories are valued at the lower of cost or market (net
realizable value) using the last-in, first-out (LIFO) cost for certain U.S.
inventories. All other inventories are valued principally at average cost. If
the first-in, first-out (FIFO) method had been used for those operations
valuing inventories on a LIFO basis, inventories would have been higher than
reported for fiscal years ended 1999 and 1998 by $14.4 million and $13.7
million, respectively.
Property, Plant, and Equipment. Property, plant and equipment are stated at
cost. Major improvements are capitalized, while maintenance and repairs are
expensed currently. Plant and equipment are depreciated over their estimated
useful lives using the straight-line method for financial reporting purposes
and accelerated methods for tax purposes. Machinery and equipment lives vary
from three to 10 years, and buildings are depreciated from 20 to 40 years.
Leasehold improvements are amortized using the straight-line method over their
estimated useful lives, or the remaining term of the lease, whichever is less.
When assets are retired or otherwise disposed of, the assets and related
accumulated depreciation are removed from the accounts.
Other Assets. Goodwill, which is the excess of the cost of acquired
businesses over the sum of the amounts assigned to identifiable assets
acquired, less liabilities assumed, is amortized on a straight-line basis over
periods ranging from 10 to 40 years.
Research and Development. Company-sponsored research and development costs
related to both present and future products are expensed currently.
Reclassification. Certain amounts in prior years' financial statements have
been reclassified to conform to the current presentation of the financial
statements.
F-8
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncements. In June 1998, the Financial Accounting
and Standards Board issued Statement of Financial Accounting Standards
("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 requires derivatives to be measured at fair value and to be recorded
as assets or liabilities on the balance sheet. The accounting for gains or
losses resulting from changes in the fair values of those derivatives would be
dependent upon the use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 is effective for fiscal quarters and years beginning
after June 15, 2000. The Company will adopt SFAS 133 in the fourth quarter of
fiscal year 2000 and is in the process of determining the impact that adoption
will have on the consolidated financial statements.
NOTE 3--Balance Sheet Detail
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
INVENTORIES
Raw materials and parts...................................... $ 36,149 $ 32,100
Work in process.............................................. 5,487 6,700
Finished goods............................................... 24,998 32,775
-------- --------
$ 66,634 $ 71,575
======== ========
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements................................... $ 4,942 $ 5,300
Buildings.................................................... 63,202 76,800
Machinery and equipment...................................... 124,620 135,385
Construction in progress..................................... 3,584 1,900
-------- --------
196,348 219,385
Less: accumulated depreciation............................... 112,694 124,666
-------- --------
Property, plant, and equipment, net.......................... $ 83,654 $ 94,719
======== ========
OTHER ASSETS
Net goodwill................................................. $ 59,653 $ 60,078
Other........................................................ 6,437 7,631
-------- --------
$ 66,090 $ 67,709
======== ========
ACCRUED LIABILITIES
Payroll and employee benefits................................ $ 33,394 $ 33,100
Income taxes................................................. 14,254 19,200
Deferred income.............................................. 15,899 14,700
Insurance.................................................... 7,609 7,700
Product warranty............................................. 8,961 7,600
Other........................................................ 36,011 32,958
-------- --------
$116,128 $115,258
======== ========
</TABLE>
NOTE 4--Forward Exchange Contracts
The Company enters into forward exchange contracts to mitigate the effects
of operational (firm sales order and purchase commitments) and monetary asset
and liability exposures to fluctuations in foreign currency exchange rates.
The Company does not enter into forward exchange contracts for trading
purposes. When the Company's forward exchange contracts hedge operational
exposure, the effects of movements in currency exchange rates on these
instruments are recognized in income when the related revenues and expenses
are recognized. All forward exchange contracts hedging operational exposure
are designated and highly effective as
F-9
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
hedges. The critical terms of all forward exchange contracts hedging
operational exposure and of the forecasted transactions being hedged are
substantially identical. Accordingly, the Company expects that changes in the
fair value or cash flows of the hedging instruments and the hedged
transactions (for the risk that is being hedged) will completely offset at the
hedge's inception and on an ongoing basis. Gains and losses related to hedges
of operational exposures are deferred and are recognized in income or as
adjustments of carrying amounts when the hedged transaction occurs. Any
deferred gains or losses are included in accrued expenses in the balance
sheet. If a hedging instrument is sold or terminated prior to maturity, gains
and losses continue to be deferred until the hedged item is recognized in
income. If a hedging instrument ceases to quality as a hedge, any subsequent
gains and losses are recognized currently in income.
When forward exchange contracts hedge monetary asset and liability
exposures to fluctuations in currency exchange rates, fluctuations in the
value of such contracts are recognized in income each period as the underlying
currency exchange rates change.
Because the impact of movements in currency exchange rates on these forward
exchange contracts generally offsets the related gains and losses arising from
translation of the underlying monetary assets and liabilities being hedged,
these instruments do not subject the Company to risk that would otherwise
result from changes in currency exchange rates.
The Company's forward exchange contracts generally range from one to 12
months in original maturity. Forward exchange contracts outstanding as of
October 1, 1999 that hedge the balance sheet were effective October 1, 1999,
and accordingly there were no unrealized gains or losses associated with such
contracts and the fair value of these contracts approximates their notional
values. Forward exchange contracts that were outstanding as of October 1, 1999
are summarized as follows:
<TABLE>
<CAPTION>
Notional Value Notional Value
Sold Purchased
-------------- --------------
(In thousands)
<S> <C> <C>
British Pound.................................. $ 4,115 $9,862
Japanese Yen................................... 8,473 --
Euro........................................... 7,577 --
Canadian Dollar................................ 2,250 --
------- ------
Total........................................ $22,415 $9,862
======= ======
</TABLE>
NOTE 5--Acquisitions
In July 1998, the Company acquired all of the outstanding common stock of
Chrompack International B.V ("Chrompack") for approximately $28.9 million in
cash and the extinguishment of debt. Chrompack is a manufacturer of
chromatography products and analytical instruments used by scientific and
industrial laboratories. This acquisition has been accounted for under the
purchase method; accordingly, the Company's combined operating results include
100% of the operating results of Chrompack subsequent to the acquisition date.
The Company is amortizing acquired goodwill of $20.9 million over 40 years
using the straight line method.
In October 1996, the Company acquired the principal assets and properties
of the high performance liquid chromatography and columns business of Rainin
Instrument Company, Inc. ("Rainin") for approximately $24.0 million. This
acquisition has been accounted for under the purchase method; accordingly, the
Company's combined operating results include 100% of the operating results of
Rainin subsequent to the acquisition date. The Company is amortizing acquired
goodwill of $21.7 million over 40 years using the straight line method.
F-10
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma sales, earnings from operations, net earnings, and net earnings
per share have not been presented because the effects of these acquisitions
were not material on either an individual or an aggregated basis.
NOTE 6--Net Earnings Per Share
Basic earnings per share are calculated based on net earnings and the
weighted-average number of shares outstanding during the reported period.
Diluted earnings per share include dilution from potential common stock shares
issuable pursuant to the exercise of outstanding stock options determined
using the treasury stock method.
For periods prior to April 3, 1999, pro forma earnings per share were
calculated assuming that the weighted-average number of shares outstanding
during the period equaled the number of shares of common stock outstanding as
of the Distribution on April 2, 1999. Also, for computing pro forma diluted
earnings per share, the additional shares issuable upon exercise of stock
options were determined using the treasury stock method based on the number of
replacement stock options issued as of the Distribution on April 2, 1999.
For the fiscal year ended October 1, 1999, options to purchase 1,150,738
potential common stock shares with exercise prices greater than the weighted-
average market value of such common stock were excluded from the calculation
of diluted earnings per share. For the fiscal years ended October 2, 1998 and
September 26, 1997, options to purchase 3,030,355 potential common stock
shares with exercise prices greater than the market value on April 2, 1999 of
such common stock were excluded from the calculation of diluted earnings per
share.
A reconciliation follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(In thousands except
per share amounts)
<S> <C> <C> <C>
Basic
Net earnings........................................ $ 7,328 $23,428 $14,205
Weighted average shares outstanding................. 30,442 30,423 30,423
Net earnings per share.............................. $ 0.24 $ 0.77 $ 0.47
======= ======= =======
Diluted
Net earnings........................................ $ 7,328 $23,428 $14,205
Weighted average shares outstanding................. 30,442 30,423 30,423
Net effect of dilutive stock options................ 679 164 164
------- ------- -------
Total shares........................................ 31,121 30,587 30,587
Net earnings per share.............................. $ 0.24 $ 0.77 $ 0.46
======= ======= =======
</TABLE>
NOTE 7--Debt and Credit Facilities
The Distribution Agreement provided for the division among the company,
VSEA, and VMS of VAI's cash and debt as of April 2, 1999. Under the
Distribution Agreement, the Company was to assume 50% of VAI's term loans and
receive an amount of cash from VAI such that it would have net debt (defined
in the Distribution Agreement as the amount outstanding under the term loans
and notes payable, less cash and cash equivalents) equal to approximately 50%
of the net debt of the Company and VMS, subject to such adjustment as was
necessary to provide VMS with a net worth (as defined in the Distribution
Agreement) of between 40% and 50% of the aggregate net worth of the Company
and VMS, and subject to further adjustment to reflect the Company's
approximately 50% share of the estimated proceeds, if any, to be received by
VMS after the Distribution from the sale of VAI's long-term leasehold interest
at certain of its Palo Alto facilities, together with certain related
buildings and other corporate assets, and the Company's obligation for
approximately 50% of any
F-11
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
estimated transaction expenses to be paid by VMS after the Distribution (in
each case reduced for estimated taxes payable or tax benefits received from
all sales and transaction expenses). Since the amounts transferred immediately
prior to the Distribution were based on estimates, these and other adjustments
may be required following the Distribution. As a result of these adjustments,
the Company may be required to make cash payments to VMS and/or may be
entitled to receive cash payments from VMS. Adjustments through October 1,
1999 resulted in net cash payments from VMS and an increase in stockholders'
equity. The amount of any other required adjustment cannot be estimated, but
management believes that any further adjustments will not have a material
effect on the Company's financial condition.
As of October 1, 1999, the Company has $71.0 million in uncommitted credit
facilities for working capital purposes. As of October 1, 1999, no amount was
outstanding under these credit facilities. All of these credit facilities
contain certain conditions and events of default customary for such
facilities.
As of October 1, 1999, the Company had $55.5 million in term loans. As of
October 1, 1999, fixed interest rates on the term loans ranged from 6.7% to
7.5% and the weighted average interest rate on the term loans was 7.0%. The
term loans contain certain covenants that limit future borrowings and the
payment of cash dividends and require the maintenance of certain levels of
working capital and operating results. For fiscal year 1999, the Company was
in compliance with all restrictive covenants of the term loan agreements. As
of October 1, 1999, the Company also had other long-term notes payable of $2.4
million with an interest rate of 2.3%.
Future principal payments on long-term debt outstanding on October 1, 1999
will be $6.7 million, $6.4 million, $6.5 million, $3.0 million, $2.8 million,
and $32.5 million during the fiscal years ended 2000, 2001, 2002, 2003, 2004
and thereafter, respectively.
Based upon rates currently available to the Company for debt with similar
terms and remaining maturities, the carrying amounts of long-term debt and
notes payable approximate estimated fair value.
NOTE 8--Employee Stock Plans
Effective April 2, 1999, the Company adopted the Omnibus Stock Plan (the
"Plan") under which shares of common stock can be issued to officers,
directors, consultants, and key employees. The maximum number of shares of the
Company common stock available for awards under the Plan is 4,200,000 plus
such number of shares as are granted in substitution for other options in
connection with the Distribution.
The Plan is administered by the Compensation Committee of the Company's
Board of Directors. The exercise price for stock options granted under the
Plan may not be less than 100% of the fair market value at the date of the
grant. Options granted are exercisable at the times and on the terms
established by the Compensation Committee, but not later than 10 years after
the date of grant. Options granted are generally exercisable in cumulative
installments of one-third each year commencing one year following the date of
grant.
In connection with the Distribution, certain holders of options to purchase
shares of VAI common stock received replacement options from the Company to
purchase shares of the Company's common stock. Effective April 2, 1999, the
Company granted such replacement options to purchase 4,299,639 shares of the
Company's common stock with an average exercise price of $11.16 per share. For
the six months ended October 1, 1999, replacement options to purchase an
additional 12,036 shares were granted, which brings the total options granted
in connection with the Distribution to 4,311,675 shares. Such stock options
vest over the same vesting periods as the original VAI stock options,
typically three years, and have the same expiration dates as the original VAI
stock options.
F-12
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At October 1, 1999, Options with respect to 2,672,809 shares were available
for grant.
Option Activity Under the Plan
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ ----------------
(In thousands except
per share amounts)
<S> <C> <C>
Outstanding at April 2, 1999........................ 4,300 $11.16
Granted............................................. 1,571 $ 9.65
Exercised........................................... (140) $ 8.27
Cancelled or expired................................ (44) $13.34
-----
Outstanding at October 1, 1999...................... 5,687 $10.81
=====
Shares exercisable at October 1, 1999............... 3,401 $10.72
===== ======
</TABLE>
Outstanding and Exercisable Options at October 1, 1999
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Average
Remaining Weighted Weighted
Shares Contractual Average Shares Average
Range of Outstanding Life Exercise Outstanding Exercise
Exercise Prices (in thousands) (in years) Price (in thousands) Price
--------------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$3.69-$8.25..... 520 1.7 $ 6.00 485 $ 5.84
$8.77-$9.29..... 650 2.7 $ 8.80 644 $ 8.77
$9.50-$11.71.... 1,547 9.4 $ 9.60 141 $10.30
$11.77-$13.88... 1,883 6.2 $11.94 1,579 $11.83
$14.16-$16.31... 1,087 7.3 $14.26 552 $14.21
----- -----
Total......... 5,687 6.5 $10.81 3,401 $10.72
===== === ====== ===== ======
</TABLE>
The Company has adopted the pro forma disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation." Accordingly, the Company applies
APB Opinion 25 and related Interpretations in accounting for its stock
compensation plans. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at grant date as prescribed by
SFAS 123, net earnings and net earnings per share would have been reduced to
the pro forma amounts shown below:
<TABLE>
<CAPTION>
1999
--------------
(In thousands
except per
share amounts)
<S> <C>
Net earnings.................................................. $6,682
Net earnings per share
Basic....................................................... $ 0.22
Diluted..................................................... $ 0.21
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Expected dividend yield................................................ 0.0%
Risk-free interest rate................................................ 5.8%
Expected volatility.................................................... 30%
Expected life (in years)............................................... 5.9
</TABLE>
F-13
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average estimated fair value of employee stock options granted
during the six-month period ended October 1, 1999 was $3.95 per share.
The presentation of pro forma net earnings and net earnings per share does
not include the effects of options granted prior to April 2, 1999, and
accordingly, is not representative of future pro forma calculations.
NOTE 9--Contingencies
Environmental Matters. In the Distribution Agreement, the Company and VSEA
each agreed to indemnify VMS for one-third of certain environmental
investigation and remediation costs (after adjusting for any insurance
proceeds and tax benefits recognized or realized by VMS for such costs), as
further described below.
VMS has been named by the U.S. Environmental Protection Agency or third
parties as a potentially responsible party under the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended, at
nine sites where VAI is alleged to have shipped manufacturing waste for
recycling, treatment, or disposal. VMS is also involved in various stages of
environmental investigation, monitoring and/or remediation under the direction
of, or in consultation with, foreign, federal, state and/or local agencies at
certain current VMS or former VAI facilities.
For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. As of October 1, 1999, it was nonetheless estimated that the
Company's share of the future exposure for environmental-related investigation
and remediation costs for these sites and facilities ranged in the aggregate
from $4.6 million to $10.5 million (without discounting to present value). The
time frame over which these costs are expected to be incurred varies with each
site and facility, ranging up to approximately 30 years as of October 1, 1999.
No amount in the foregoing range of estimated future costs is believed to be
more probable of being incurred than any other amount in such range, and the
Company therefore accrued $4.6 million as of October 1, 1999.
As to other sites and facilities, sufficient knowledge has been gained to
be able to better estimate the scope and costs of future environmental
activities. As of October 1, 1999, it was estimated that the Company's share
of the future exposure for environmental-related investigation and remediation
costs for these sites and facilities ranged in the aggregate from $8.1 million
to $13.7 million (without discounting to present value). The time frame over
which these costs are expected to be incurred varies with each site and
facility, ranging up to approximately 30 years as of October 1, 1999. As to
each of these sites and facilities, it was determined that a particular amount
within the range of estimated costs was a better estimate of the future
environmental liability than any other amount within the range, and that the
amount and timing of these future costs were reliably determinable. Together,
these amounts totaled $9.4 million at October 1, 1999. The Company therefore
accrued $4.2 million as of October 1, 1999, which represents the best estimate
of its share of these future costs discounted at 4%, net of inflation. This
accrual is in addition to the $4.6 million described in the preceding
paragraph.
F-14
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At October 1, 1999, the Company's reserve for environmental liabilities,
based upon future environmental-related costs estimated by the Company as of
that date, was calculated as follows:
<TABLE>
<CAPTION>
Total
Non- Anticipated
Recurring Recurring Future
Fiscal Year Costs Costs Costs
----------- --------- --------- -----------
(In millions)
<S> <C> <C> <C>
2000........................................ $ 0.4 $1.0 $1.4
2001........................................ 0.6 0.4 1.0
2002........................................ 0.5 0.0 0.5
2003........................................ 0.5 0.0 0.5
2004........................................ 0.5 0.0 0.5
Thereafter.................................. 9.6 0.5 10.1
----- ---- ----
Total costs................................. $12.1 $1.9 14.0
===== ====
Less imputed interest....................... (5.2)
----
Reserve amount.............................. 8.8
Less current portion........................ (1.4)
----
Long term (included in other liabilities)... $7.4
====
</TABLE>
The amounts set forth in the foregoing table are only estimates of
anticipated future environmental-related costs, and the amounts actually spent
in the years indicated may be greater or less than such estimates. The
aggregate range of cost estimates reflects various uncertainties inherent in
many environmental investigation and remediation activities and the large
number of sites where such investigation and remediation activities are being
undertaken.
Claims for recovery of environmental investigation and remediation costs
already incurred, and to be incurred in the future, have been asserted against
various insurance companies and other third parties. VMS is now pursuing such
recovery claims for the benefit of itself, VSEA, and the Company. An insurance
company has agreed to pay a portion of VAI's (now VMS') future environmental-
related expenditures for which the Company has an indemnity obligation, and
the Company therefore has a $1.3 million receivable in Other Assets as of
October 1, 1999 for the Company's share of such recovery. The Company has not
reduced any environmental-related liability in anticipation of recovery with
respect to claims made against third parties.
The Company's management believes that its reserves for the foregoing and
certain other environmental-related matters are adequate, but as the scope of
its obligation becomes more clearly defined, these reserves may be modified
and related charges or credits against earnings may be made. Although any
ultimate liability arising from environmental-related matters described herein
could result in significant expenditures that, if aggregated and assumed to
occur within a single fiscal year, would be material to the Company's
financial statements, the likelihood of such occurrence is considered remote.
Based on information currently available and its best assessment of the
ultimate amount and timing of environmental-related events, the Company's
management believes that the costs of these environmental-related matters are
not reasonably likely to have a material adverse effect on the Company's
financial position or results of operations.
Legal Proceedings. In the Distribution Agreement, the Company agreed to
reimburse VMS for one-third of certain costs and expenses (after adjusting for
any insurance proceeds and tax benefits recognized or realized by VMS for such
costs and expenses) that are paid after April 2, 1999 and arise from actual or
potential claims or legal proceedings relating to discontinued, former or
corporate operations of VAI. These shared liabilities are
F-15
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
generally managed by VMS, and expenses and losses (adjusted for any insurance
proceeds and tax benefits recognized or realized by VMS for such costs and
expenses) are generally borne one-third each by the Company, VMS, and VSEA.
Also, from time to time, the Company is involved in a number of its own legal
actions and could incur an uninsured liability in one or more of them. While
the ultimate outcome of all of the foregoing legal matters is not
determinable, management believes that these matters are not reasonably likely
to have a material adverse effect on the Company's financial position or
results of operations.
NOTE 10--Retirement Plans
Certain employees of the Company in the United States are eligible to
participate in the Varian, Inc. sponsored, defined contribution retirement
plan. The Company's obligation is to match the participant's contribution up
to 6% of their eligible compensation. Participants are entitled, upon
termination or retirement, to their account balances, which are held by a
third party trustee. In addition, a number of the Company's foreign
subsidiaries have retirement plans for regular full-time employees. Total
expenses for all plans amounted to $9.0 million, $5.9 million, and $5.6
million for fiscal years 1999, 1998, and 1997, respectively.
At the Distribution, the Company assumed responsibility for pension and
postretirement benefits for active employees of the Company; the
responsibility for all others, principally retirees of VAI, remained with VMS.
An allocation of assets and liabilities for foreign defined benefit pension,
postemployment, and postretirement benefits, which are not material to the
Company's financial statements, has been included in these consolidated
financial statements.
NOTE 11--Stockholders' Equity
On April 2, 1999, stockholders of record of VAI on March 24, 1999 received
in the Distribution one share of the Company's common stock for each share of
VAI common stock held on April 2, 1999. Immediately following the
Distribution, the Company had 30,422,792 shares of common stock outstanding.
Each stockholder also received one Right for each share of common stock
distributed, entitling the stockholder to purchase one one-thousandth of a
share of Participating Preferred, par value $0.01 per share, for $75.00
(subject to adjustment), in the event of certain changes in the Company's
ownership. The Participating Preferred Stock is designed so that each one one-
thousandth of a share has economic and voting terms similar to those of one
share of common stock. The Rights will expire no later than March 2009. As of
October 1, 1999, no Rights had been exercised.
The Company began accumulating retained earnings on April 3, 1999, the date
immediately after the Distribution.
F-16
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 12--Income Tax
Income tax expense consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Current
U.S. federal...................................... $ (696) $ -- $ 397
Foreign........................................... 8,971 16,736 11,400
State and local................................... (653) 1,500 1,600
------- ------- -------
Total current..................................... 7,622 18,236 13,397
------- ------- -------
Deferred
U.S. federal...................................... (215) (2,700) (1,100)
Foreign........................................... (1,532) 200 300
------- ------- -------
Total deferred.................................... (1,747) (2,500) (800)
------- ------- -------
Income tax expense................................ $ 5,875 $15,736 $12,597
======= ======= =======
</TABLE>
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax basis and reported
amounts of assets and liabilities, tax loss and credit carryforwards, and the
remittance of earnings from foreign subsidiaries. Their significant components
are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Assets
Product warranty............................................ $ 2,619 $ 1,900
Deferred compensation....................................... 3,072 1,300
Inventory valuation......................................... 13,806 8,600
Loss carryforwards.......................................... 2,413 --
Revenue recognition......................................... 1,132 3,700
Other....................................................... 2,466 4,000
------- -------
Total deferred tax assets................................... 25,508 19,500
------- -------
Liabilities
Accelerated depreciation.................................... 5,853 3,092
Unremitted earnings of foreign subsidiaries................. 2,600 --
Other....................................................... -- 1,100
------- -------
Total deferred tax liabilities.............................. 8,453 4,192
------- -------
Net deferred tax assets..................................... $17,055 $15,308
======= =======
</TABLE>
The sources of earnings before income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
United States...................................... $(6,466) $ 4,964 $ 7,902
Foreign............................................ 19,669 34,200 18,900
------- ------- -------
Earnings before income taxes....................... $13,203 $39,164 $26,802
======= ======= =======
</TABLE>
F-17
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's foreign manufacturing subsidiaries have accumulated
approximately $30 million of earnings that are reinvested in their operations.
The Company has not provided U.S. taxes on these earnings.
For the tax year ended October 1, 1999, the Company has federal loss and
tax credit carryforwards of approximately $4.7 million and $0.1 million
respectively, and foreign loss carryforwards of approximately $2.0 million.
These losses have been recognized as deferred tax assets for financial
reporting.
The difference between the reported income tax rate and the federal
statutory income tax rate is attributable to the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate.......................... 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit.......... (3.2) 2.6 3.9
Foreign taxes in excess of federal statutory rate.......... 10.8 5.3 13.9
Foreign sales corporation.................................. (0.8) (1.2) (2.4)
Other...................................................... 2.7 (1.5) (3.4)
---- ---- ----
Reported income tax rate................................... 44.5% 40.2% 47.0%
==== ==== ====
</TABLE>
NOTE 13--Restructuring Charges
During the second quarter of fiscal year 1999, IB's management approved a
program to consolidate field sales and service organizations in Europe,
Australia and the United States so as to fall within the direct responsibility
of management at principal factories in those countries, in order to reduce
costs, simplify management structure, and benefit from the infrastructure
existing in those factories. This restructuring entailed consolidating certain
sales, service, and support operations. The consolidation resulted in exiting
of a product line, closing or downsizing of sales offices, and termination of
approximately 100 personnel. All restructuring activities are expected to be
completed within one year, except for future lease payments. The following
table sets forth certain details associated with this restructuring:
<TABLE>
<CAPTION>
Cash
Payments
Restructuring and Other Accrual at
Charges Reductions October 1, 1999
------------- ---------- ---------------
(In thousands)
<S> <C> <C> <C>
Lease payments and other facility
expenses......................... $ 2,205 $ 961 $1,244
Severance and other related
employee benefits................ 7,171 5,450 1,721
Exited product line............... 1,598 1,598 --
------- ------ ------
Total............................. $10,974 $8,009 $2,965
======= ====== ======
</TABLE>
NOTE 14--Lease Commitments
At fiscal year-end 1999, the Company was committed to minimum rentals for
certain facilities under non-cancellable operating leases for fiscal years
2000 through 2004 and thereafter, as follows, in thousands: $4,492, $3,040,
$2,102, $1,599, $1,591 and $30,580, respectively. Rental expense for fiscal
years 1999, 1998, and 1997, in thousands, was $4,738, $7,600, and $8,600,
respectively.
NOTE 15--Industry and Geographic Segments
Industry Segments. The Company's operations are grouped into three business
segments: Scientific Instruments, Vacuum Technologies, and Electronics
Manufacturing. Scientific Instruments is a supplier of
F-18
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
instruments, consumable laboratory supplies, and after sales support used in
studying the chemical composition and structure of myriad substances and for
imaging. These products are tools for scientists engaged in drug discovery,
life sciences, genetic engineering, health care, environmental analysis,
quality control and academic research. Vacuum Technologies provides products
and solutions to create, maintain, contain, and measure an ultra-clean
environment for complex industrial processes and research. Vacuum Technologies
products are used in semiconductor manufacturing equipment, analytical
instruments, industrial manufacturing and quality control. Electronics
manufacturing provides contract manufacturing services for technology
companies with low-volume and high-mix requirements.
These segments were determined based on how management views and evaluates
the Company's operations. Other factors included in segment determination were
similar economic characteristics, distribution channels, manufacturing
environment, technology, and customers. No single customer represents 10% or
more of the Company's total sales.
Corporate includes shared costs of legal, tax, accounting, human resources,
real estate, information technology, treasury and other Varian, Inc.
management costs. A portion of the indirect and common costs has been
allocated to the segments through the use of estimates. Also, transactions
between segments are accounted for at cost and are not included in sales.
Accordingly, the following information is provided for purposes of achieving
an understanding of operations, but may not be indicative of the financial
results of the reported segments were they independent organizations. In
addition, comparisons of the Company's operations to similar operations of
other companies may not be meaningful.
The Company operates various manufacturing and marketing operations outside
the United States. In fiscal years 1999, 1998, and 1997, no single country
outside the United States accounted for more than 10% of total sales. In
fiscal years 1999, 1998, and 1997, no single country outside the United States
accounted for more than 10% of total assets. Transactions between geographic
areas are accounted for at cost and are not included in sales.
Included in the total of United States sales are export sales in fiscal
years 1999, 1998, and 1997 of $37 million, $30 million, and $36 million,
respectively.
F-19
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Industry Segments
<TABLE>
<CAPTION>
Depreciation
Identifiable Capital and
Sales Pretax Earnings Assets Expenditures Amortization
-------------- ------------------- ------------------- ---------------- --------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Scientific
Instruments........... $396 $363 $345 $ 12 $ 25 $ 19 $ 240 $ 235 $ 184 $ 5 $ 6 $ 8 $ 8 $ 7 $ 7
Vacuum Technologies.... 107 112 108 7 11 12 61 59 60 4 5 5 4 4 3
Electronics
Manufacturing......... 96 83 89 7 6 5 53 46 43 2 6 4 3 2 2
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
Total industry
segments.............. 599 558 542 26 42 36 354 340 287 11 17 17 15 13 12
General corporate...... -- -- -- (11) (4) (9) 71 64 71 4 2 4 3 5 7
Interest, net.......... -- -- -- (2) 1 -- -- -- -- -- -- -- -- -- --
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
Continuing operations.. $599 $558 $542 $ 13 $ 39 $ 27 $ 425 $ 404 $ 358 $ 15 $ 19 $ 21 $ 18 $ 18 $ 19
==== ==== ==== ===== ===== ===== ===== ===== ===== ==== ==== ==== ==== ==== ====
Geographic Segments
<CAPTION>
Sales to Intergeographic
Unaffiliated Sales to Pretax Identifiable
Customers Affiliates Total Sales Earnings Assets
-------------- ------------------- ------------------- ---------------- --------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States.......... $331 $327 $325 $ 126 $ 116 $ 114 $ 457 $ 443 $ 439 $ 13 $ 39 $ 43 $224 $214 $193
International.......... 268 223 216 105 112 97 373 335 313 22 34 23 151 159 130
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
Total geographic
segments.............. 599 550 541 231 228 211 830 778 752 35 73 66 375 373 323
Eliminations, corporate
& other............... -- 8 1 (231) (228) (211) (231) (220) (210) (22) (34) (39) 50 31 35
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
Total company.......... $599 $558 $542 $ -- $ -- $ -- $ 599 $ 558 $ 542 $ 13 $ 39 $ 27 $425 $404 $358
==== ==== ==== ===== ===== ===== ===== ===== ===== ==== ==== ==== ==== ==== ====
</TABLE>
Sales are based on the location of the operation furnishing goods and
services. Sales to unaffiliated customers include sales to VAI, VMS, and VSEA.
No single customer accounted for more than 10% of sales.
F-20
<PAGE>
VARIAN INC. AND SUBSIDIARY COMPANIES
Quarterly Consolidated Financial Data (Unaudited)
<TABLE>
<CAPTION>
1999
----------------------------------------------
First Second Third Fourth
Quarter(2) Quarter(1)(2) Quarter Quarter
---------- ------------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Sales........................... $133.3 $148.9 $149.6 $167.1
Gross profit.................... $ 52.6 $ 47.2 $ 58.4 $ 66.0
Net earnings (loss)............. $ 4.3 $(10.0) $ 5.5 $ 7.5
Net earnings (loss) per share
Basic......................... $ 0.14 $(0.33) $ 0.18 $ 0.25
Diluted....................... $ 0.14 $(0.33) $ 0.18 $ 0.24
<CAPTION>
1998
----------------------------------------------
First Second Third Fourth
Quarter(2) Quarter(2) Quarter(2) Quarter(2)
---------- ------------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Sales........................... $141.0 $141.0 $129.9 $145.9
Gross profit.................... $ 54.5 $ 55.8 $ 53.9 $ 57.2
Net earnings.................... $ 5.8 $ 6.4 $ 5.2 $ 6.0
Net earnings per share
Basic......................... $ 0.19 $ 0.21 $ 0.17 $ 0.20
Diluted....................... $ 0.19 $ 0.21 $ 0.17 $ 0.20
</TABLE>
- --------
(1) The loss resulted from restructuring and reorganization costs associated
with preparing to spin-off from Varian Associates, Inc., streamlining IB's
worldwide sales and service network, and exiting certain product lines.
(2) The results for quarters prior to the third quarter of fiscal year 1999 do
not include an assumed interest expense for long-term debt taken on by the
Company as part of the spin-off from VAI on April 2, 1999.
F-21
<PAGE>
SCHEDULE II
VARIAN, INC. AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
for the fiscal years 1999, 1998, and 1997
(In thousands)
<TABLE>
<CAPTION>
Balance at Charged to Deductions Balance at
Beginning Costs and ------------------------------- End of
Description of Period Expenses Description Amount Period
----------- ---------- ---------- ------------------------ ------ ----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts Receivable:
Fiscal year 1999........ $ 713 $ 1,506 Write-offs & adjustments $ 373 $1,846
====== ======= ====== ======
Fiscal year 1998........ $ 321 $ 295 Write-offs & adjustments $ (97) $ 713
====== ======= ====== ======
Fiscal year 1997........ $ 642 $ 151 Write-offs & adjustments $ 472 $ 321
====== ======= ====== ======
Estimated Liability for
Product Warranty:
Fiscal year 1999........ $7,600 $10,016 Warranty expenditures $8,655 $8,961
====== ======= ====== ======
Fiscal year 1998........ $7,173 $ 9,641 Warranty expenditures $9,214 $7,600
====== ======= ====== ======
Fiscal year 1997........ $5,688 $ 9,764 Warranty expenditures $8,279 $7,173
====== ======= ====== ======
</TABLE>
F-22
<PAGE>
VARIAN, INC. Exhibit 10.8
SUPPLEMENTAL RETIREMENT PLAN
(As Amended and Restated on October 22, 1999, Effective April 2, 1999)
SECTION 1
BACKGROUND, PURPOSE AND DURATION
1.1 Effective Date. The Plan is effective as of the date on which VAI
--------------
distributes shares of the Company's common stock to the stockholders of VAI.
1.2 Purpose of the Plan. The purpose of the Plan is to provide deferred
-------------------
compensation consisting of (a) elective deferrals and (b) allocations of
Matching Contributions and Profit-Sharing Contributions that exceed the amounts
that the Dollar Limitations permit to be allocated under the Retirement Plan,
but that are otherwise calculated by reference to the Retirement Plan.
SECTION 2
DEFINITIONS
The following words and phrases shall have the following meanings unless a
different meaning is plainly required by the context:
2.1 "Code" means the Internal Revenue Code of 1986, as amended. Reference
----
to a specific section of the Code or regulation thereunder shall include such
section or regulation, any valid regulation promulgated thereunder, and any
comparable provision of any future legislation or regulation amending,
supplementing or superseding such section or regulation.
2.2 "Committee" means the Compensation Committee of the Company's Board of
---------
Directors.
2.3 "Company" means Varian, Inc., a Delaware corporation, or any successor
-------
thereto.
2.4 "Compensation Ceiling" means the limitation described in section
--------------------
401(a)(17) of the Code, adjusted as prescribed by the Code. The Compensation
Ceiling for plan years beginning in 1999 is $160,000.
2.5 "Dollar Limitations" means (a) the Compensation Ceiling and (b) the
------------------
limitation on annual additions described in section 415(c)(1) of the Code,
adjusted in each case as prescribed by the Code.
<PAGE>
2.6 "Eligible Earnings" shall have the meaning given to such term in the
-----------------
Retirement Plan, except that Eligible Earnings for purposes of this Plan shall
not be subject to the Compensation Ceiling.
2.7 "ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended. Reference to a specific section of ERISA shall include such section,
any valid regulation promulgated thereunder, and any comparable provision of any
future legislation amending, supplementing or superseding such section.
2.8 "Participant" means an individual who is eligible to participate in
-----------
the Plan pursuant to Section 3 and for whose benefit an amount is credited to a
Reserve Account pursuant to Section 3.
2.9 "Plan" means the Varian, Inc. Supplemental Retirement Plan, as set
----
forth in this instrument and as hereafter amended from time to time.
2.10 "Plan Year" means the calendar year; provided, however, that the
---------
Plan's first Plan Year shall be a short Plan Year beginning on the Plan's
initial effective date.
2.11 "Reserve Account" means the unfunded bookkeeping account described in
---------------
Section 3.2.
2.12 "Retirement Plan" means the Varian, Inc. Retirement Plan, as amended
---------------
from time to time.
2.13 "Unforeseeable Emergency" means a severe financial hardship to the
-----------------------
Participant resulting from a sudden and unexpected illness or accident of the
Eligible Participant or of a dependent of the Participant, from a loss of the
Participant's property due to casualty or from other similar extraordinary and
unforeseeable circumstances arising as a result of events beyond the control of
the Participant. A hardship shall not constitute an Unforeseeable Emergency
under the Plan to the extent that it is or may be relieved:
(a) Through reimbursement or compensation, by insurance or
otherwise;
(b) By liquidation of the Participant's assets, to the extent that
the liquidation of such assets would not itself cause severe financial
hardship; or
(c) By discontinuing deferrals under this Plan or under any other
plan of the Company as soon as permissible.
An Unforeseeable Emergency under the Plan shall in no event include the need to
send a child to college or the desire to purchase a home.
<PAGE>
2.14 "VAI" means Varian Associates, Inc., a Delaware corporation.
---
2.15 "Valuation Date" means the last day of each calendar quarter.
--------------
Any capitalized terms used in the Plan and not defined herein shall have
the meaning provided in the Retirement Plan.
SECTION 3
ELIGIBILITY, PARTICIPATION, RESERVE ACCOUNTS AND CREDITS
3.1 Eligibility and Participation. Participation in the Plan shall be
-----------------------------
limited to:
(a) Officers of the Company (not including any officer holding the
office of only Assistant Secretary or Assistant Treasurer) who are active
Retirement Plan participants;
(b) Participants in the Retirement Plan whose Eligible Earnings under
the Retirement Plan are limited by the Compensation Ceiling; and
(c) Any other participant in the Retirement Plan who is designated by
the Committee.
At the beginning of a particular Plan Year, the Company, in its sole
discretion, may determine that one or more individuals qualify as Participants
for the Plan Year pursuant to Subsection (b) based upon such individual's
current salary rate and target bonus compensation (to the extent includible in
Eligible Earnings). Any such determination shall be valid for that Plan Year,
regardless of whether the individual's Eligible Earnings at the end of the
Retirement Plan's plan year actually exceed the Compensation Ceiling. For
purposes of Subsection (a), an individual shall be deemed to be an active
Retirement Plan participant if he or she first becomes eligible to participate
in the Retirement Plan during the Plan Year and fails to make contributions to
the Retirement Plan during the Plan Year because any contributions to the
Retirement Plan, when added to contributions he or she made to a prior
employer's plan during the Plan Year, would exceed the limitation under section
402(g) of the Code.
3.2 Reserve Account. The Company shall establish on its books a special
---------------
unfunded Reserve Account for each Participant. As of each Valuation Date, the
Company shall credit interest on the balance in each Reserve Account (not
including any amounts credited under Sections 3.3, 3.4 and 3.5 below during the
calendar quarter then ending). The interest credited to the Reserve Account
shall be established from time to time by the Committee.
3.3 Matching Contributions. As of each Valuation Date in a Plan Year
----------------------
following the later of the date when the Participant's contributions to the
Retirement Plan
<PAGE>
(and any previous employer's plan) reach the limitation in effect under Code
section 402(g) (which limitation is $10,000 for 1999), or the date when the
Participant's Eligible Earnings paid during the Plan Year reach the Compensation
Ceiling, the Company shall credit to a Participant's Reserve Account an amount
determined as follows:
(a) First, an initial matching credit shall be calculated by
determining the amount equal to 6% of the Participant's Eligible Earnings
received during the Plan Year to date that are in excess of the
Compensation Ceiling;
(b) Second, the amount calculated under Subsection (a) above shall be
reduced (but not below zero) by the amount of credits determined under this
Section 3.3 for the Participant for prior Valuation Dates during the Plan
Year; and
(c) The remainder (if any) shall be the amount credited to the
Participant's Reserve Account under this Section 3.3.
3.4 Profit-Sharing Contributions. As of the Valuation Date coinciding
----------------------------
with or next following the date when the Company makes a Profit-Sharing
Contribution under the Retirement Plan, the Company shall credit to a
Participant's Reserve Account an amount determined as follows:
(a) First, the hypothetical amount of the Participant's share of the
Profit-Sharing Contribution shall be calculated, based on the assumption
that the Dollar Limitations do not apply;
(b) Second, the amount calculated under Subsection (a) above shall be
reduced (but not below zero) by the actual amount of the Participant's
share of the Profit-Sharing Contribution; and
(c) The remainder (if any) shall be the amount credited to the
Participant's Reserve Account under this Section 3.4.
3.5 Elective Deferrals. An individual who is eligible to participate in
------------------
the Plan pursuant to Section 3.1 may elect to defer a portion of his Eligible
Earnings with respect to a calendar year by filing a written deferral election
with the Company during the Election Period. Any such election shall specify
the percentage of Eligible Earnings to be deferred, which percentage shall be no
higher than the maximum deferral percentage permitted under the Retirement Plan.
A deferral election shall apply only to Eligible Earnings to be paid following
the date when the Participant's Retirement Plan contributions exceed the
limitation in effect under Section 402(g) of the Code ($10,000 for 1999).
Deferral elections may be made and revoked any number of times during the
Election Period, but any deferral election that has been submitted and has not
been revoked at the end of the Election Period then becomes irrevocable.
Normally, the
<PAGE>
Election Period is the month of December and the deferral election applies to
the following calendar year. However, a special Election Period applies with
respect to the calendar year when an individual first becomes eligible to
participate in the Plan. In any such case, the Participant's Election Period is
the 30-day period after the Company's written notice of eligibility is given,
and such a Participant's deferral election applies to the remainder of the then-
current calendar year following the close of the Election Period. There is also
a special Election Period applicable to 1999, the calendar year in which this
Plan was established. That Election Period is the 30-day period after the
Company's written notice of eligibility is given to Participants, and any such
Participant's deferral election applies to the remainder of 1999 following the
close of the Election Period.
Any other provision of the Plan notwithstanding, the Committee, at its sole
discretion, may reduce the level of deferral elections or decline altogether to
accept an individual's deferral election.
SECTION 4
DISTRIBUTIONS
4.1 Right to Receive Payment. Any amount that may become payable under
------------------------
the Plan shall be paid solely from the general assets of the Company. Nothing
in this Plan shall be construed to create a trust or to establish or evidence
any Participant's claim of any right other than as an unsecured creditor with
respect to any payment to which he or she may be entitled.
4.2 Timing of Payment -- In General. Following the termination of a
-------------------------------
Participant's employment with the Company and its subsidiaries, the Company
shall pay to the Participant the balance credited to his or her Reserve Account.
Payment shall be made in cash at such time(s) and in such form (including a lump
sum or installments) as the Committee shall determine, in its sole discretion.
If the Committee determines that payment is to be made in the form of
installments, such installments shall be paid quarterly over a period not to
exceed two years.
4.3 Accelerated In-Service Payment in Case of Emergency. In the event of
---------------------------------------------------
a Participant's Unforeseeable Emergency, upon application by the Participant,
the Committee may determine in its sole discretion that distribution of all or a
portion of the Participant's Reserve Account shall be made on a date prior to
the Participant's termination of employment. Distributions on account of an
Unforeseeable Emergency shall be permitted only to the extent reasonably needed
to satisfy the Participant's need.
4.4 In-Service Distribution With Penalty. Upon application by a
------------------------------------
Participant, the Committee may determine in its sole discretion that
distribution of all or a portion of the Participant's Reserve Account shall be
made prior to the Participant's termination of employment (even in the absence
of an Unforeseeable Emergency). All distributions under this Section 4.4 shall
be reduced by a penalty equal to six percent of the amount otherwise
<PAGE>
distributable, which penalty shall be forfeited to the Company. A Participant
who has received a distribution under this Section 4.4 shall thereafter be
ineligible to make elective deferrals to the Plan.
4.5 Payment in the Event of Death. In the event of a Participant's death
-----------------------------
before the entire Reserve Account has been distributed to him or her, the unpaid
balance remaining in the Participant's Reserve Account shall be paid to his or
her beneficiary or beneficiaries under the Retirement Plan, at such time(s) and
in such form as the Committee shall determine in its sole discretion.
SECTION 5
ADMINISTRATION
5.1 Committee is the Administrator. The Plan shall be administered by the
------------------------------
Committee.
5.2 Committee Authority. It shall be the duty of the Committee to
-------------------
administer the Plan in accordance with the Plan's provisions. The Committee
shall have all powers and discretion necessary or appropriate to administer the
Plan and to control its operation including, but not limited to, the power to
(a) determine which Retirement Plan participants shall be eligible to
participate in this Plan, (b) determine the amounts to be credited to Reserve
Accounts, (c) determine whether to grant applications for accelerated payments
pursuant to Sections 4.3 and 4.4, (d) determine distributions to be made in the
event of death pursuant to Section 4.5, (e) interpret the Plan, (f) adopt such
rules for the administration, interpretation and application of the Plan as are
consistent therewith and (g) interpret, amend or revoke any such rules.
5.3 Decisions Binding. All determinations and decisions made by the
-----------------
Committee, the Board and any delegate of the Committee pursuant to the
provisions of the Plan shall be final, conclusive and binding on all persons,
and shall be given the maximum deference permitted by law.
5.4 Delegation by the Committee. The Committee, in its sole discretion
---------------------------
and on such terms and conditions as it may provide, may delegate all or part of
its authority and powers under the Plan to one or more directors, officers or
employees of the Company.
SECTION 6
CLAIMS AND REVIEW PROCEDURES
6.1 Application for Benefits. Any application for benefits under the Plan
------------------------
shall be submitted to the Committee at the Company's principal office. Such
application shall be in writing and on the prescribed form, if any, and shall be
signed by the applicant.
<PAGE>
6.2 Denial of Applications. In the event that any application for
----------------------
benefits is denied in whole or in part, the Committee shall notify the applicant
in writing of the right to a review of the denial. Such written notice shall
set forth, in a manner calculated to be understood by the applicant, specific
reasons for the denial, specific references to the Plan provisions on which the
denial was based, a description of any information or material necessary to
perfect the application, an explanation of why such material is necessary, and
an explanation of the Plan's review procedure. Such written notice shall be
given to the applicant within 90 days after the Committee receives the
application, unless special circumstances require an extension of time for
processing the application. In no event shall such an extension exceed a period
of 90 days from the end of the initial 90-day period. If such an extension is
required, written notice thereof shall be furnished to the applicant before the
end of the initial 90-day period. Such notice shall indicate the special
circumstances requiring an extension of time and the date by which the Committee
expects to render a decision. If written notice is not given to the applicant
within the period prescribed by this Section 6.2, the application shall be
deemed to have been denied for purposes of Section 6.3 upon the expiration of
such period.
6.3 Request for Review. Any person whose application for benefits is
------------------
denied in whole or in part (or such person's duly authorized representative) may
appeal the denial by submitting to the Committee a request for a review of such
application within 90 days after receiving written notice of denial. The
Committee shall give the applicant or such representative an opportunity to
review pertinent documents (except legally privileged materials) in preparing
such request for review and to submit issues and comments in writing. The
request for review shall be in writing and shall be addressed to the Committee
at the Company's principal office. The request for review shall set forth all
of the ground on which it is based, all facts in support of the request, and any
other matters which the applicant deems pertinent. The Committee may require
the applicant to submit such additional facts, documents, or other material as
it may deem necessary or appropriate in making its review.
6.4 Decision on Review. The Committee shall act upon each request for
------------------
review within 60 days after receipt thereof, unless special circumstances
require an extension of time for processing, but in no event shall the decision
on review be rendered more that 120 days after the Committee receives the
request for review. If such an extension is required, written notice thereof
shall be furnished to the applicant before the end of the initial 60-day period.
The Committee shall give prompt, written notice of its decision to the applicant
and to the Company. In the event that the Committee confirms the denial of the
application for benefits in whole or in part, such notice shall set forth, in a
manner calculated to be understood by the applicant, the specific reasons for
such denial and specific references to the Plan provisions on which the decision
is based. To the extent that the Committee overrules the denial of the
application for benefits, such benefits shall be paid to the applicant.
6.5 Exhaustion of Administrative Remedies. No legal or equitable action
-------------------------------------
for benefits under the Plan shall be brought unless and until the claimant (a)
has submitted a
<PAGE>
written application for benefits in accordance with Section 6.1, (b) has been
notified that the application is denied, (c) has filed a written request for a
review of the application in accordance with Section 6.3, and (d) has been
notified in writing that the Committee has affirmed the denial of the
application; provided, however, that an action may be brought after the
Committee has failed to act on the claim within the time prescribed in Section
6.2 and Section 6.4, respectively.
SECTION 7
GENERAL PROVISIONS
7.1 Tax Withholding. The Company shall withhold all applicable taxes from
---------------
any payment under this Plan, including any federal, state and local taxes
(including the Participant's FICA obligation).
7.2 No Effect on Employment or Service. Nothing in the Plan shall
----------------------------------
interfere with or limit in any way the right of the Company to terminate any
Participant's employment or service at any time, with or without cause.
Employment with the Company and its affiliates is on an at-will basis only. The
Company expressly reserves the right, which may be exercised at any time, to
terminate any individual's employment with or without cause, and to treat him or
her without regard to the effect that such treatment might have upon him or her
as a Participant.
7.3 Participation. No individual shall have the right to be selected to
-------------
participate in the Plan for any particular Plan Year.
7.4 Indemnification. To the extent permitted by ERISA, each person who is
---------------
or shall have been a member of the Committee, or of the Board, shall be
indemnified and held harmless by the Company against and from (a) any loss,
cost, liability, or expense that may be imposed upon or reasonably incurred by
him or her in connection with or resulting from any claim, action, suit, or
proceeding to which he or she may be a party or in which he or she may be
involved by reason of any action taken or failure to act under the Plan and (b)
from any and all amounts paid by him or her in settlement thereof, with the
Company's approval, or paid by him or her in satisfaction of any judgment in any
such claim, action, suit, or proceeding against him or her, provided he or she
shall give the Company an opportunity, at its own expense, to handle and defend
the same before he or she undertakes to handle and defend it on his or her own
behalf. The foregoing right of indemnification shall not be exclusive of any
other rights of indemnification to which such persons may be entitled under the
Company's Certificate of Incorporation or Bylaws, by contract, as a matter of
law, or otherwise, or under any power that the Company may have to indemnify
them or hold them harmless.
7.5 Successors. All obligations of the Company under the Plan shall be
----------
binding on any successor to the Company, whether the existence of such successor
is the result of a direct or indirect purchase, merger, consolidation, or
otherwise, of all or substantially all of the business or assets of the Company.
<PAGE>
7.6 Nontransferability of Awards. No portion of any Participant's Reserve
----------------------------
Account may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, and any act in violation of this Section shall be void. All
rights with respect to a Participant's Reserve Account shall be available during
his or her lifetime only to the Participant.
SECTION 8
AMENDMENT, TERMINATION AND DURATION
8.1 Amendment, Suspension or Termination. The Company, in its sole
------------------------------------
discretion, may amend or terminate the Plan, or any part thereof, at any time
and for any reason. The Company shall also have the authority to distribute all
or a portion of any Participant's Reserve Account at any time, regardless of
whether the Plan is then being terminated. The amendment, suspension or
termination of the Plan shall not, without the consent of the Participant, alter
or impair any rights or obligations under the Plan.
8.2 Duration of the Plan. The Plan shall commence on the date specified
--------------------
herein and, subject to Section 8.1 (regarding the Company's right to amend or
terminate the Plan), shall remain in effect thereafter.
SECTION 9
LEGAL CONSTRUCTION
9.1 Gender and Number. Except where otherwise indicated by the context,
-----------------
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
<PAGE>
9.2 Severability. In the event any provision of the Plan shall be held
------------
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
9.3 Requirements of Law. Benefits provided under the Plan shall be
-------------------
subject to all applicable laws, rules and regulations, and to such approvals by
any governmental agencies as may be required.
9.4 Governing Law. The Plan shall be construed in accordance with
-------------
governed by ERISA and, to the extent not preempted by ERISA, by the laws of the
State of California, but without regard to its conflict of law provisions.
9.5 Captions. Captions are provided herein for convenience only, and
--------
shall not serve as a basis for interpretation or construction of the Plan.
<PAGE>
EXECUTION
IN WITNESS WHEREOF, Varian, Inc. by its duly authorized officer, has
executed the Plan on the date indicated below.
VARIAN, INC.
Dated: October 22, 1999 By: /s/ Robert R. Christofk II
--------------------------
Name: Robert R. Christofk II
Title: Vice President, Human Resources
<PAGE>
Exhibit 10.10
AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT
------------------------------------------------
THIS AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT ("Agreement") is
entered into effective as of April 2, 1999, by and between VARIAN, INC., a
Delaware corporation (the "Company")/1/, and Allen J. Lauer, an employee of the
Company ("Employee").
The Company's Board of Directors (the "Board") has determined that it is in
the best interest of the Company and its stockholders for the Company to agree
to pay Employee termination compensation in the event Employee should leave the
employ of the Company under the circumstances described below. The Board
recognizes that the possibility of a proposal from a third person, whether or
not solicited by the Company, concerning a possible "Change in Control" of the
Company (as such language is defined in Section 3(d)) will be unsettling to
Employee. Therefore, the arrangements set forth in this Agreement are being
made to help assure a continuing dedication by Employee to Employee's duties to
the Company notwithstanding the proposal or occurrence of a Change in Control.
The Board believes it imperative, should the Company receive any proposal from a
third party, that Employee, without being influenced by the uncertainties of
Employee's own situation, be able to assess and advise the Board whether such
proposals are in the best interest of the Company and its stockholders, and to
enable Employee to take action regarding such proposals as the Board might
determine to be appropriate. The Board also wishes to demonstrate to key
personnel that the Company desires to enhance management relations and its
ability to retain and, if needed, to attract new management, and intends to
ensure that loyal and dedicated management personnel are treated fairly.
In view of the foregoing, the Company and Employee agree as follows:
1. EFFECTIVE DATE AND TERM OF AGREEMENT.
------------------------------------
This Agreement is effective and binding on the Company and Employee as of
the date hereof; provided, however, that, subject to Section 2(d), the
provisions of Sections 3 and 4 shall become operative only upon the Change in
Control Date.
- -------------------------
/1/ "Company" shall include the Company, any successor to the Company's
business and/or assets, and any party which executes and delivers the agreement
required by Section 6(e) or which otherwise becomes bound by the terms and
conditions of this Agreement by operation of law or otherwise.
<PAGE>
2. EMPLOYMENT OF EMPLOYEE.
----------------------
(a) Except as provided in Sections 2(b), 2(c) and 2(d), nothing in this
Agreement shall affect any right which Employee may otherwise have to terminate
Employee's employment, nor shall anything in this Agreement affect any right
which the Company may have to terminate Employee's employment at any time in any
lawful manner.
(b) In the event of a Potential Change in Control, to be entitled to
receive the benefits provided by this Agreement, Employee will not voluntarily
leave the employ of the Company, and will continue to perform Employee's regular
duties and the services specified in the recitals of this Agreement until the
Change in Control Date. Should Employee voluntarily terminate employment prior
to the Change in Control Date, this Agreement shall lapse upon such termination
and be of no further force or effect.
(c) If Employee's employment terminates on or after the Change in Control
Date, the Company will provide to Employee the payments and benefits as provided
in Sections 3 and 4.
(d) If Employee's employment is terminated by the Company prior to the
Change in Control Date but on or after a Potential Change in Control Date, then
the Company will provide to Employee the payments and benefits as provided in
Sections 3 and 4 unless the Company reasonably demonstrates that Employee's
termination of employment neither (i) was at the request of a third party who
has taken steps reasonably calculated to effect a Change in Control nor (ii)
arose in connection with or in anticipation of a Change in Control. Solely for
purposes of determining the timing of payments and the provision of benefits in
Sections 3 and 4 under the circumstances described in this Section 2(d),
Employee's date of termination shall be deemed to be the Change in Control Date.
3. TERMINATION FOLLOWING CHANGE IN CONTROL.
---------------------------------------
(a) If a Change in Control shall have occurred, Employee shall be entitled
to the benefits provided in Section 4 upon the subsequent termination of
Employee's employment within the applicable period set forth in Section 4 unless
such termination is due to Employee's death, Retirement or Disability or is for
Cause or is effected by Employee other than for Good Reason (as such terms are
defined in Section 3(d)).
(b) If following a Change in Control, Employee's employment is terminated
by reason of Employee's death or Disability, Employee shall be entitled to death
or long-term disability benefits from the Company no less favorable than the
most favorable benefits to which Employee would have been entitled had the death
or Disability occurred at any time during the period commencing one (1) year
prior to the Change in Control.
2
<PAGE>
(c) If Employee's employment shall be terminated by the Company for Cause
or by Employee other than for Good Reason during the term of this Agreement, the
Company shall pay Employee's Base Salary through the date of termination at the
rate in effect at the time notice of termination is given, and the Company shall
have no further obligations to Employee under this Agreement.
(d) For purposes of this Agreement:
"Base Salary" shall mean the annual base salary paid to Employee
immediately prior to a Change in Control, provided that such amount shall in no
event be less than the annual base salary paid to Employee during the one (1)
year period immediately prior to the Change in Control.
A "Change in Control" shall be deemed to have occurred if:
(i) Any individual or group constituting a "person", as such term is
used in Sections 13(d) and 14(d)(2) of the Exchange Act (other than (A) the
Company or any of its subsidiaries or (B) any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or of any of its
subsidiaries), is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing thirty percent (30%) or more of the
combined voting power of the Company's outstanding securities then entitled
ordinarily (and apart from rights accruing under special circumstances) to vote
for the election of directors; or
(ii) Continuing Directors cease to constitute at least a majority of
the Board; or
(iii) there occurs a reorganization, merger, consolidation or other
corporate transaction involving the Company (a "Transaction"), in each case with
respect to which the stockholders of the Company immediately prior to such
Transaction do not, immediately after the Transaction, own more than 50% of the
combined voting power of the Company or other corporation resulting from such
Transaction; or
(iv) all or substantially all of the assets of the Company are sold,
liquidated or distributed;
provided, however, that a "Change in Control" shall not be deemed to have
occurred under this Agreement if, prior to the occurrence of a specified event
that would otherwise constitute a Change in Control hereunder, the disinterested
Continuing Directors then in office, by a majority vote thereof, determine that
the occurrence of such specified event shall not be deemed to be a Change in
Control with respect to Employee hereunder if the Change in Control results from
actions or events in which Employee is a participant in a capacity other than
solely as an officer, employee or director of the Company.
3
<PAGE>
"Change in Control Date" shall mean the date on which a Change in Control
occurs.
"Cause" shall mean:
(i) The continued willful failure of Employee to perform Employee's
duties to the Company (other than any such failure resulting from Employee's
incapacity due to physical or mental illness) after written notice thereof
(specifying the particulars thereof in reasonable detail) and a reasonable
opportunity to be heard and cure such failure are given to Employee by the Board
or a committee thereof; or
(ii) The willful commission by Employee of a wrongful act that caused
or was reasonably likely to cause substantial damage to the Company, or an act
of fraud in the performance of Employee's duties on behalf of the Company; or
(iii) The conviction of Employee for commission of a felony in
connection with the performance of Employee's duties on behalf of the Company;
or
(iv) The order of a federal or state regulatory authority having
jurisdiction over the Company or its operations or by a court of competent
jurisdiction requiring the termination of Employee's employment by the Company.
"Continuing Directors" shall mean the directors of the Company in office on
the date hereof and any successor to any such director who was nominated or
selected by a majority of the Continuing Directors in office at the time of the
director's nomination or selection and who is not an "affiliate" or "associate"
(as defined in Regulation 12B under the Exchange Act) of any person who is the
beneficial owner, directly or indirectly, of securities representing ten percent
(10%) or more of the combined voting power of the Company's outstanding
securities then entitled ordinarily to vote for the election of directors.
"Disability" shall mean Employee's incapacity due to physical or mental
illness such that Employee shall have become qualified to receive benefits under
the Company's long-term disability plan as in effect on the date of the Change
in Control.
"Dispute" shall mean, in the case of termination of Employee's employment
for Disability or Cause, that Employee challenges the existence of Disability or
Cause, and in the case of termination of Employee's employment for Good Reason,
that the Company challenges the existence of Good Reason for termination of
Employee's employment.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Good Reason" shall mean:
4
<PAGE>
(i) The failure to appoint Employee as Chief Executive Officer of
the combined or acquiring entity, reporting to its Board of Directors; or
(ii) A reduction of Employee's total compensation as the same may
have been increased from time to time after the Change in Control Date other
than (A) a reduction implemented with the consent of Employee or (B) a reduction
that is generally comparable (proportionately) to compensation reductions
imposed on senior executives of the Company generally; or
(iii) The failure to provide to Employee the benefits and perquisites,
including participation on a comparable basis in the Company's stock option,
incentive, and other similar plans in which employees of the Company of
comparable title and salary grade participate, as were provided to Employee
immediately prior to a Change in Control, or with a package of benefits and
perquisites that are substantially comparable in all material respects to such
benefits and perquisites provided prior to the Change in Control; or
(iv) The relocation of the office of the Company where Employee is
employed immediately prior to the Change in Control Date (the "CIC Location") to
a location which is more than 50 miles away from the CIC Location or the
Company's requiring Employee to be based more than 50 miles away from the CIC
Location (except for required travel on the Company's business to an extent
substantially consistent with Employee's customary business travel obligations
in the ordinary course of business prior to the Change in Control Date);
(v) The failure of the Company to obtain promptly upon any Change in
Control the express written assumption of an agreement to perform this Agreement
by any successor as contemplated in Section 6(e); or
(vi) The attempted termination of Employee's employment for Cause on
grounds insufficient to constitute a basis of termination for Cause under this
Agreement; or
(vii) The failure of the Company to promptly make any payment into
escrow when so required by Section 3(f).
"Potential Change in Control" shall mean the earliest to occur of (a) the
execution of an agreement or letter of intent, the consummation of the
transactions described in which would result in a Change in Control, (b) the
approval by the Board of a transaction or series of transactions, the
consummation of which would result in a Change in Control, or (c) the public
announcement of a tender offer for the Company's voting stock, the completion of
which would result in a Change in Control; provided, that no such event shall be
a "Potential Change in Control" unless (i) in the case of any agreement or
letter of intent described in clause (a), the transaction described therein is
subsequently consummated by the Company and the other party or parties to such
agreement or letter
5
<PAGE>
of intent and thereupon constitutes a "Change in Control", (ii) in the case of
any Board-approved transaction described in clause (b), the transaction so
approved is subsequently consummated and thereupon constitutes a "Change in
Control" or (iii) in the case of any tender offer described in clause (c), such
tender offer is subsequently completed and such completion thereupon constitutes
a "Change in Control".
"Potential Change in Control Date" shall mean the date on which a
Potential Change in Control occurs.
"Retirement" shall mean Employee's actual retirement after reaching the
normal or early retirement date provided for in the Company's Retirement and
Profit-Sharing Program as in effect on the date of Employee's termination of
employment.
(e) Any termination of employment by the Company or by Employee shall be
communicated by written notice, specify the date of termination, state the
specific basis for termination and set forth in reasonable detail the facts and
circumstances of the termination in order to provide a basis for determining the
entitlement to any payments under this Agreement.
(f) If within thirty (30) days after notice of termination is given, the
party to whom the notice was given notifies the other party that a Dispute
exists, the parties will promptly pursue resolution of such Dispute with
reasonable diligence; provided, however, that pending resolution of any such
Dispute, the Company shall pay 75% of any amounts which would otherwise be due
Employee pursuant to Section 4 if such Dispute did not exist into escrow pending
resolution of such Dispute and pay 25% of such amounts to Employee. Employee
agrees to return to the Company any such amounts to which it is ultimately
determined that he is not entitled.
4. PAYMENTS AND BENEFITS UPON TERMINATION.
--------------------------------------
(a) If within eighteen (18) months after a Change in Control, the Company
terminates Employee's employment other than by reason of Employee's death,
Disability, Retirement or for Cause, or if Employee terminates Employee's
employment for Good Reason, then the Employee shall be entitled to the following
payments and benefits:
(i) The Company shall pay to Employee as compensation for services
rendered, no later than five (5) business days following the date of
termination, a lump sum severance payment equal to 2.99 multiplied by the sum of
(A) Employee's Base Salary, (B) the highest annual bonus that was paid to
Employee in any of the three fiscal years ending prior to the date of
termination under the Company's Management Incentive Plan (the "MIP") or Varian
Associates, Inc.'s Management Incentive Plan, and (C) the highest cash bonus for
a performance period of more than one fiscal year that was paid to Employee in
any of the three fiscal years ending prior to the date of termination under the
MIP.
6
<PAGE>
(ii) The Company shall pay to Employee as compensation for services
rendered, no later than five (5) business days following the date of
termination, a lump sum payment equal to a pro rata portion (based on the number
of days elapsed during the fiscal year and/or other bonus performance period in
which the termination occurs) of Employee's target bonus under the MIP for the
fiscal year and for any other partially completed bonus performance period in
which the termination occurs.
(iii) All waiting periods for the exercise of any stock options
granted to Employee and all conditions or restrictions of any restricted stock
granted to Employee shall terminate, and all such options shall be exercisable
in full according to their terms, and the restricted stock shall be transferred
to Employee as soon as reasonably practicable thereafter.
(iv) Employee's participation as of the date of termination in the
life, medical/dental/vision and disability insurance plans and financial/tax
counseling plan of the Company shall be continued on the same terms (including
any cost sharing) as if Employee were an employee of the Company (or equivalent
benefits provided) until the earlier of Employee's commencement of substantially
equivalent full-time employment with a new employer or twenty-four (24) months
after the date of termination; provided, however, that after the date of
termination, Employee shall no longer be entitled to receive Company-paid
executive physicals or, upon expiration of the applicable memberships, Company-
paid airline memberships. In the event Employee shall die before the expiration
of the period during which the Company is required to continue Employee's
participation in such insurance plans, the participation of Employee's surviving
spouse and family in the Company's insurance plans shall continue throughout
such period.
(v) Employee may elect upon termination to purchase any automobile
then in the possession of Employee and subject to a lease of which the Company
is the lessor by payment to the Company of the residual value set forth in the
lease, without any increase for remaining lease payments during the term or
other lease breakage costs. Employee may elect to have any such payment deducted
from any payments due the Employee hereunder.
(vi) All payments and benefits provided under this Agreement shall be
subject to applicable tax withholding.
(b) Following Employee's termination of employment for any reason, the
Company shall have the unconditional right to reduce any payments owed to
Employee hereunder by the amount of any due and unpaid principal and interest on
any loans by the Company to Employee and Employee hereby agrees and consents to
such right on the part of the Company.
5. GROSS-UP PAYMENT.
-----------------
7
<PAGE>
(a) Notwithstanding anything herein to the contrary, if it is determined
that any Payment would be subject to the excise tax imposed by Section 4999 of
the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or
penalties with respect to such excise tax (such excise tax, together with any
interest or penalties thereon, is herein referred to as an "Excise Tax"), then
Employee shall be entitled to an additional payment (a "Gross-Up Payment") in an
amount that will place Employee in the same after-tax economic position that
Employee would have enjoyed if the Excise Tax had not applied to the Payment.
The amount of the Gross-Up Payment shall be determined by a nationally-
recognized independent public accounting firm designated by agreement between
Employee and the Company (the "Accounting Firm"). No Gross-Up Payments shall be
payable hereunder if the Accounting Firm determines that the Payments are not
subject to an Excise Tax.
"Payment" means (i) any amount due or paid to Employee under this
Agreement, (ii) any amount that is due or paid to Employee under any plan,
program or arrangement of the Company and its subsidiaries and (iii) any amount
or benefit that is due or payable to Employee under this Agreement or under any
plan, program or arrangement of the Company and its subsidiaries not otherwise
covered under clause (i) or (ii) hereof which must reasonably be taken into
account under Section 280G of the Code in determining the amount the "parachute
payments" received by Employee, including, without limitation, any amounts which
must be taken into account under Section 280G of the Code as a result of (A) the
acceleration of the vesting of any option, restricted stock or other equity
award, (B) the acceleration of the time at which any payment or benefit is
receivable by Employee or (C) any contingent severance or other amounts that are
payable to Employee.
(b) Subject to the provisions of Section 5(c), all determinations required
under this Section 5, including whether a Gross-Up Payment is required, the
amount of the Payments constituting excess parachute payments, and the amount of
the Gross-Up Payment, shall be made by the Accounting Firm, which shall provide
detailed supporting calculations both to Employee and the Company within fifteen
days of the date reasonably requested by Employee or the Company on which a
determination under this Section 5 is necessary or advisable. The Company shall
pay to Employee the initial Gross-Up Payment within 5 days of the receipt by
Employee and the Company of the determination of the Accounting Firm. If the
Accounting Firm determines that no Excise Tax is payable by Employee, the
Company shall cause its accountants to provide Employee with an opinion that the
Accounting Firm has substantial authority under the Code not to report an Excise
Tax on Employee's federal income tax return. Any determination by the
Accounting Firm shall be binding upon Employee and the Company. If the initial
Gross-Up Payment is insufficient to cover the amount of the Excise Tax that is
ultimately determined to be owing by Employee with respect to any Payment
(hereinafter an "Underpayment"), the Company, after exhausting its remedies
under Section 5(c) below, shall promptly pay to Employee an additional Gross-Up
Payment in respect of the Underpayment.
(c) Employee shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of a
8
<PAGE>
Gross-Up Payment. Such notice shall be given as soon as practicable after
Employee knows of such claim and shall apprise the Company of the nature of the
claim and the date on which the claim is requested to be paid. Employee agrees
not to pay the claim until the expiration of the thirty (30) day period
following the date on which Employee notifies the Company, or such shorter
period ending on the date the Taxes with respect to such claim are due (the
"Notice Period"). If the Company notifies Employee in writing prior to the
expiration of the Notice Period that it desires to contest the claim, Employee
shall: (i) give the Company any information reasonably requested by the Company
relating to the claim; (ii) take such action in connection with the claim as the
Company may reasonably request, including, without limitation, accepting legal
representation with respect to such claim by an attorney reasonably selected by
the Company and reasonably acceptable to Employee; (iii) cooperate with the
Company in good faith in contesting the claim; and (iv) permit the Company to
participate in any proceedings relating to the claim. Employee shall permit the
Company to control all proceedings related to the claim and, at its option,
permit the Company to pursue or forgo any and all administrative appeals,
proceedings, hearings, and conferences with the taxing authority in respect of
such claim. If requested by the Company, Employee agrees either to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner and
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts as the
Company shall determine; provided, however, that, if the Company directs
Employee to pay such claim and pursue a refund, the Company shall advance the
amount of such payment to Employee on an after-tax and interest-free basis (an
"Advance"). The Company's control of the contest related to the claim shall be
limited to the issues related to the Gross-Up Payment and Employee shall be
entitled to settle or contest, as the case may be, any other issues raised by
the Internal Revenue Service or other taxing authority. If the Company does not
notify Employee in writing prior to the end of the Notice Period of its desire
to contest the claim, the Company shall pay to Employee an additional Gross-Up
Payment in respect of the excess parachute payments that are the subject of the
claim, and Employee agrees to pay the amount of the Excise Tax that is the
subject of the claim to the applicable taxing authority in accordance with
applicable law.
(d) If, after receipt by Employee of an Advance, Employee becomes entitled
to a refund with respect to the claim to which such Advance relates, Employee
shall pay the Company the amount of the refund (together with any interest paid
or credited thereon after Taxes applicable thereto). If, after receipt by
Employee of an Advance, a determination is made that Employee shall not be
entitled to any refund with respect to the claim and the Company does not
promptly notify Employee of its intent to contest the denial of refund, then the
amount of the Advance shall not be required to be repaid by Employee and the
amount thereof shall offset the amount of the additional Gross-Up Payment then
owing to Employee.
(e) The Company shall indemnify Employee and hold Employee harmless, on an
after-tax basis, from any costs, expenses, penalties, fines, interest or other
liabilities ("Losses") incurred by Employee with respect to the exercise by the
Company of any of
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its rights under this Section 5, including, without limitation, any Losses
related to the Company's decision to contest a claim or any imputed income to
Employee resulting from any Advance or action taken on Employee's behalf by the
Company hereunder. The Company shall pay all legal fees and expenses incurred
under this Section 5, and shall promptly reimburse Employee for the reasonable
expenses incurred by Employee in connection with any actions taken by the
Company or required to be taken by Employee hereunder. The Company shall also
pay all of the fees and expenses of the Accounting Firm, including, without
limitation, the fees and expenses related to the opinion referred to in Section
5(b).
6. GENERAL.
--------
(a) Employee shall retain in confidence under the conditions of the
Company's confidentiality agreement with Employee any proprietary or other
confidential information known to Employee concerning the Company and its
business so long as such information is not publicly disclosed and disclosure is
not required by an order of any governmental body or court. If required,
Employee shall return to the Company any memoranda, documents or other materials
proprietary to the Company.
(b) While employed by the Company and following the termination of such
employment (other than a termination of employment by Employee for Good Reason
or by the Company other than for Cause) for a period of two (2) years, Employee
shall not:
(i) whether for Employee's own account or for the account of any
other individual, partnership, firm, corporation or other business organization,
intentionally solicit, endeavor to entice away from the Company or a subsidiary
of the Company (each, a "Protected Party"), or otherwise interfere with the
relationship of a Protected Party with, any person who is employed by a
Protected Party or any person or entity who is, or was within the then most
recent twelve (12) month period, a customer or client of a Protected Party; or
(ii) without the prior written consent of the Protected Party, in any
geographic area in which the Protected Party is then conducting business,
directly or indirectly own an interest in, manage, operate, join, control, lend
money or render financial or other assistance to or participate in or be
connected with, as an officer, employee, partner, stockholder, consultant or
otherwise, any individual, partnership, firm, corporation or other business
organization or entity that is engaged in any business in which the Protected
Party is actively engaged at the time; provided, however, that the restrictions
in this Section 6(b)(ii) shall not apply to (A) any non-employee directorships
held by Employee as of the date hereof or (B) ownership by Employee for personal
investment purposes only of not in excess of 1% of the voting stock of any
publicly held corporation.
Employee acknowledges that a breach of any of the covenants contained in
this Section 6(b) may result in material irreparable injury to the Company for
which there is no
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<PAGE>
adequate remedy at law, that it may not be possible to measure damages for such
injuries precisely and that, in the event of such a breach, any payments
remaining under the terms of this Agreement shall cease and the Company may be
entitled to obtain a temporary restraining order and/or a preliminary or
permanent injunction restraining Employee from engaging in activities prohibited
by this Section 6(b) or such other relief as may be required to specifically
enforce any of the covenants in this Section 6(b). Employee agrees to and hereby
does submit to in personam jurisdiction before each and every such court in the
State of California, County of Santa Clara, for that purpose. This Section 6(b)
shall survive any termination of this Agreement.
(c) If litigation is brought by Employee to enforce or interpret any
provision contained in this Agreement, the Company shall indemnify Employee for
Employee's reasonable attorney's fees and disbursements incurred in such
litigation and pay prejudgment interest on any money judgment obtained by
Employee calculated at the prime rate of interest in effect from time to time at
the Bank of America, San Francisco, from the date that payment should have been
made under the Agreement, provided that Employee shall not have been found by
the court in which such litigation is pending to have had no cause in bringing
the action, or to have acted in bad faith, which finding must be final with the
time to appeal therefrom having expired and no appeal having been taken.
(d) Except as provided in Section 4, the Company's obligation to pay to
Employee the compensation and to make the arrangements provided in this
Agreement shall be absolute and unconditional and shall not be affected by any
circumstance, including, without limitation, any setoff, counterclaim,
recoupment, defense or other right which the Company may have against Employee
or anyone else. All amounts payable by the Company hereunder shall be paid
without notice or demand. Employee shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other employment.
(e) The Company shall require any successor, 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 written agreement to expressly 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 had taken
place.
(f) This Agreement shall inure to the benefit of and be enforceable by
Employee's heirs, successors and assigns. If Employee should die while any
amounts would still be payable to Employee hereunder if Employee had continued
to live, all such amounts shall be paid in accordance with the terms of this
Agreement to Employee's heirs, successors and assigns.
(g) For the 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, addressed as
follows:
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If to Employee: If to the Company:
151 Erica Way Varian, Inc.
Menlo Park, CA 94025 3120 Hansen Way
Palo Alto, CA 94304-1030
Attn: Vice President, Human Resources
or to such other address as either party furnishes to the other in writing in
accordance herewith, except that notices of change of address shall be effective
only upon receipt.
(h) This Agreement shall constitute the entire agreement between Employee
and the Company concerning the subject matter of this Agreement.
(i) The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of California without
giving effect to the provisions, principles or policies thereof relating to
choice or conflict of laws. The invalidity or unenforceability of any provision
of this Agreement in any circumstance shall not affect the validity or
enforceability of such provision in any other circumstance or the validity or
enforceability of any other provision of this Agreement, and, except to the
extent such provision is invalid or unenforceable, this Agreement shall remain
in full force and effect. Any provision in this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability without
invalidating or affecting the remaining provisions hereof in such jurisdiction,
and any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other jurisdiction.
This Section 6(i) shall survive any termination of this Agreement.
(j) This Agreement may be terminated by the Company pursuant to a
resolution adopted by the Board at any time prior to a Potential Change in
Control Date. After a Change in Control Date or a Potential Change in Control
Date, this Agreement may only be terminated with the consent of Employee.
(k) 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 expressly set forth in this Agreement and this Agreement
shall supersede all prior agreements, negotiations, correspondence, undertakings
and communications of the parties, oral or written, with respect to the subject
matter hereof including, without limitation, the Amended and Restated Change in
Control Agreement between Employee and Varian Associates, Inc.
(l) In the event that the Company becomes party to a transaction that is
intended to qualify for "pooling of interests" accounting treatment and, but for
one or more of the provisions of this Agreement would so qualify, then this
Agreement shall be interpreted so as to preserve such accounting treatment, and
to the extent that any
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<PAGE>
provision of this Agreement would disqualify the transaction from pooling of
interests accounting treatment, then such provision shall be null and void. All
determinations to be made in connection with the preceding sentence shall be
made by the independent accounting firm whose opinion with respect to "pooling
of interests" treatment is required as a condition to the Company's consummation
of such transaction.
IN WITNESS WHEREOF, the parties acknowledge that they have read and
understand the terms of this Agreement and have executed this Agreement to be
effective as of April 2, 1999.
VARIAN, INC. EMPLOYEE
/s/ Arthur W. Homan /s/ Allen J. Lauer
- ---------------------------- --------------------------
By: Arthur W. Homan Allen J. Lauer
Title: Vice President, General Counsel
and Secretary
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Exhibit 10.11
AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT
------------------------------------------------
THIS AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT ("Agreement") is
entered into effective as of April 2, 1999, by and between VARIAN, INC., a
Delaware corporation (the "Company")/1/, and Arthur W. Homan, an employee of the
Company ("Employee").
The Company's Board of Directors (the "Board") has determined that it is in
the best interest of the Company and its stockholders for the Company to agree
to pay Employee termination compensation in the event Employee should leave the
employ of the Company under the circumstances described below. The Board
recognizes that the possibility of a proposal from a third person, whether or
not solicited by the Company, concerning a possible "Change in Control" of the
Company (as such language is defined in Section 3(d)) will be unsettling to
Employee. Therefore, the arrangements set forth in this Agreement are being
made to help assure a continuing dedication by Employee to Employee's duties to
the Company notwithstanding the proposal or occurrence of a Change in Control.
The Board believes it imperative, should the Company receive any proposal from a
third party, that Employee, without being influenced by the uncertainties of
Employee's own situation, be able to assess and advise the Board whether such
proposals are in the best interest of the Company and its stockholders, and to
enable Employee to take action regarding such proposals as the Board might
determine to be appropriate. The Board also wishes to demonstrate to key
personnel that the Company desires to enhance management relations and its
ability to retain and, if needed, to attract new management, and intends to
ensure that loyal and dedicated management personnel are treated fairly.
In view of the foregoing, the Company and Employee agree as follows:
1. EFFECTIVE DATE AND TERM OF AGREEMENT.
------------------------------------
This Agreement is effective and binding on the Company and Employee as of
the date hereof; provided, however, that, subject to Section 2(d), the
provisions of Sections 3 and 4 shall become operative only upon the Change in
Control Date.
- -------------------------
/1/ "Company" shall include the Company, any successor to the Company's
business and/or assets, and any party which executes and delivers the agreement
required by Section 6(e) or which otherwise becomes bound by the terms and
conditions of this Agreement by operation of law or otherwise.
<PAGE>
2. EMPLOYMENT OF EMPLOYEE.
----------------------
(a) Except as provided in Sections 2(b), 2(c) and 2(d), nothing in this
Agreement shall affect any right which Employee may otherwise have to terminate
Employee's employment, nor shall anything in this Agreement affect any right
which the Company may have to terminate Employee's employment at any time in any
lawful manner.
(b) In the event of a Potential Change in Control, to be entitled to
receive the benefits provided by this Agreement, Employee will not voluntarily
leave the employ of the Company, and will continue to perform Employee's regular
duties and the services specified in the recitals of this Agreement until the
Change in Control Date. Should Employee voluntarily terminate employment prior
to the Change in Control Date, this Agreement shall lapse upon such termination
and be of no further force or effect.
(c) If Employee's employment terminates on or after the Change in Control
Date, the Company will provide to Employee the payments and benefits as provided
in Sections 3 and 4.
(d) If Employee's employment is terminated by the Company prior to the
Change in Control Date but on or after a Potential Change in Control Date, then
the Company will provide to Employee the payments and benefits as provided in
Sections 3 and 4 unless the Company reasonably demonstrates that Employee's
termination of employment neither (i) was at the request of a third party who
has taken steps reasonably calculated to effect a Change in Control nor (ii)
arose in connection with or in anticipation of a Change in Control. Solely for
purposes of determining the timing of payments and the provision of benefits in
Sections 3 and 4 under the circumstances described in this Section 2(d),
Employee's date of termination shall be deemed to be the Change in Control Date.
3. TERMINATION FOLLOWING CHANGE IN CONTROL.
---------------------------------------
(a) If a Change in Control shall have occurred, Employee shall be entitled
to the benefits provided in Section 4 upon the subsequent termination of
Employee's employment within the applicable period set forth in Section 4 unless
such termination is due to Employee's death, Retirement or Disability or is for
Cause or is effected by Employee other than for Good Reason (as such terms are
defined in Section 3(d)).
(b) If following a Change in Control, Employee's employment is terminated
by reason of Employee's death or Disability, Employee shall be entitled to death
or long-term disability benefits from the Company no less favorable than the
most favorable benefits to which Employee would have been entitled had the death
or Disability occurred at any time during the period commencing one (1) year
prior to the Change in Control.
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<PAGE>
(c) If Employee's employment shall be terminated by the Company for Cause
or by Employee other than for Good Reason during the term of this Agreement, the
Company shall pay Employee's Base Salary through the date of termination at the
rate in effect at the time notice of termination is given, and the Company shall
have no further obligations to Employee under this Agreement.
(d) For purposes of this Agreement:
"Base Salary" shall mean the annual base salary paid to Employee
immediately prior to a Change in Control, provided that such amount shall in no
event be less than the annual base salary paid to Employee during the one (1)
year period immediately prior to the Change in Control.
A "Change in Control" shall be deemed to have occurred if:
(i) Any individual or group constituting a "person", as such term is
used in Sections 13(d) and 14(d)(2) of the Exchange Act (other than (A) the
Company or any of its subsidiaries or (B) any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or of any of its
subsidiaries), is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing thirty percent (30%) or more of the
combined voting power of the Company's outstanding securities then entitled
ordinarily (and apart from rights accruing under special circumstances) to vote
for the election of directors; or
(ii) Continuing Directors cease to constitute at least a majority of
the Board; or
(iii) there occurs a reorganization, merger, consolidation or other
corporate transaction involving the Company (a "Transaction"), in each case with
respect to which the stockholders of the Company immediately prior to such
Transaction do not, immediately after the Transaction, own more than 50% of the
combined voting power of the Company or other corporation resulting from such
Transaction; or
(iv) all or substantially all of the assets of the Company are sold,
liquidated or distributed;
provided, however, that a "Change in Control" shall not be deemed to have
occurred under this Agreement if, prior to the occurrence of a specified event
that would otherwise constitute a Change in Control hereunder, the disinterested
Continuing Directors then in office, by a majority vote thereof, determine that
the occurrence of such specified event shall not be deemed to be a Change in
Control with respect to Employee hereunder if the Change in Control results from
actions or events in which Employee is a participant in a capacity other than
solely as an officer, employee or director of the Company.
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<PAGE>
"Change in Control Date" shall mean the date on which a Change in Control
occurs.
"Cause" shall mean:
(i) The continued willful failure of Employee to perform Employee's
duties to the Company (other than any such failure resulting from Employee's
incapacity due to physical or mental illness) after written notice thereof
(specifying the particulars thereof in reasonable detail) and a reasonable
opportunity to be heard and cure such failure are given to Employee by the Board
or a committee thereof; or
(ii) The willful commission by Employee of a wrongful act that caused or
was reasonably likely to cause substantial damage to the Company, or an act of
fraud in the performance of Employee's duties on behalf of the Company; or
(iii) The conviction of Employee for commission of a felony in connection
with the performance of Employee's duties on behalf of the Company; or
(iv) The order of a federal or state regulatory authority having
jurisdiction over the Company or its operations or by a court of competent
jurisdiction requiring the termination of Employee's employment by the Company.
"Continuing Directors" shall mean the directors of the Company in office on
the date hereof and any successor to any such director who was nominated or
selected by a majority of the Continuing Directors in office at the time of the
director's nomination or selection and who is not an "affiliate" or "associate"
(as defined in Regulation 12B under the Exchange Act) of any person who is the
beneficial owner, directly or indirectly, of securities representing ten percent
(10%) or more of the combined voting power of the Company's outstanding
securities then entitled ordinarily to vote for the election of directors.
"Disability" shall mean Employee's incapacity due to physical or mental
illness such that Employee shall have become qualified to receive benefits under
the Company's long-term disability plan as in effect on the date of the Change
in Control.
"Dispute" shall mean, in the case of termination of Employee's employment
for Disability or Cause, that Employee challenges the existence of Disability or
Cause, and in the case of termination of Employee's employment for Good Reason,
that the Company challenges the existence of Good Reason for termination of
Employee's employment.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Equivalent Position" shall mean an employment position that:
4
<PAGE>
(i) is in a substantive area of competence (e.g., finance,
accounting, legal, operations management or human resources) that is consistent
with Employee's experience and not materially different from the substantive
area of competence of Employee's position with the Company prior to the Change
in Control;
(ii) requires that Employee serve in a role and perform duties that
are functionally equivalent to the role and duties performed by Employee for the
Company prior to the Change in Control;
(iii) carries a title that does not connote a lesser rank or corporate
role than is connoted by Employee's title with the Company prior to the Change
in Control;
(iv) does not constitute a material, adverse change in Employee's
responsibilities or duties, when compare to Employee's responsibilities or
duties with the Company prior to the Change in Control;
(v) requires that Employee be deemed an executive officer (for
purposes of the rules promulgated under Section 16 of the Securities Exchange
Act of 1934) of a publicly-traded successor entity having net assets or annual
revenues that are no less than those of the Company prior to the Change in
Control; and
(vi) has Employee reporting directly to the Chief Executive Officer
of the combined or acquiring company.
"Good Reason" shall mean:
(i) The assignment to Employee of a position, title,
responsibilities or duties such that he no longer holds an Equivalent Position;
or
(ii) A reduction of Employee's total compensation as the same may
have been increased from time to time after the Change in Control Date other
than (A) a reduction implemented with the consent of Employee or (B) a reduction
that is generally comparable (proportionately) to compensation reductions
imposed on senior executives of the Company generally; or
(iii) The failure to provide to Employee the benefits and perquisites,
including participation on a comparable basis in the Company's stock option,
incentive, and other similar plans in which employees of the Company of
comparable title and salary grade participate, as were provided to Employee
immediately prior to a Change in Control, or with a package of benefits and
perquisites that are substantially comparable in all material respects to such
benefits and perquisites provided prior to the Change in Control; or
(iv) The relocation of the office of the Company where Employee is
employed immediately prior to the Change in Control Date (the "CIC Location") to
a
5
<PAGE>
location which is more than 50 miles away from the CIC Location or the Company's
requiring Employee to be based more than 50 miles away from the CIC Location
(except for required travel on the Company's business to an extent substantially
consistent with Employee's customary business travel obligations in the ordinary
course of business prior to the Change in Control Date);
(v) The failure of the Company to obtain promptly upon any Change in
Control the express written assumption of an agreement to perform this Agreement
by any successor as contemplated in Section 6(e); or
(vi) The attempted termination of Employee's employment for Cause on
grounds insufficient to constitute a basis of termination for Cause under this
Agreement; or
(vii) The failure of the Company to promptly make any payment into
escrow when so required by Section 3(f).
"Potential Change in Control" shall mean the earliest to occur of (a) the
execution of an agreement or letter of intent, the consummation of the
transactions described in which would result in a Change in Control, (b) the
approval by the Board of a transaction or series of transactions, the
consummation of which would result in a Change in Control, or (c) the public
announcement of a tender offer for the Company's voting stock, the completion of
which would result in a Change in Control; provided, that no such event shall be
a "Potential Change in Control" unless (i) in the case of any agreement or
letter of intent described in clause (a), the transaction described therein is
subsequently consummated by the Company and the other party or parties to such
agreement or letter of intent and thereupon constitutes a "Change in Control",
(ii) in the case of any Board-approved transaction described in clause (b), the
transaction so approved is subsequently consummated and thereupon constitutes a
"Change in Control" or (iii) in the case of any tender offer described in clause
(c), such tender offer is subsequently completed and such completion thereupon
constitutes a "Change in Control".
"Potential Change in Control Date" shall mean the date on which a Potential
Change in Control occurs.
"Retirement" shall mean Employee's actual retirement after reaching the
normal or early retirement date provided for in the Company's Retirement and
Profit-Sharing Program as in effect on the date of Employee's termination of
employment.
(e) Any termination of employment by the Company or by Employee shall be
communicated by written notice, specify the date of termination, state the
specific basis for termination and set forth in reasonable detail the facts and
circumstances of the termination in order to provide a basis for determining the
entitlement to any payments under this Agreement.
6
<PAGE>
(f) If within thirty (30) days after notice of termination is given, the
party to whom the notice was given notifies the other party that a Dispute
exists, the parties will promptly pursue resolution of such Dispute with
reasonable diligence; provided, however, that pending resolution of any such
Dispute, the Company shall pay 75% of any amounts which would otherwise be due
Employee pursuant to Section 4 if such Dispute did not exist into escrow pending
resolution of such Dispute and pay 25% of such amounts to Employee. Employee
agrees to return to the Company any such amounts to which it is ultimately
determined that he is not entitled.
4. PAYMENTS AND BENEFITS UPON TERMINATION.
--------------------------------------
(a) If within eighteen (18) months after a Change in Control, the Company
terminates Employee's employment other than by reason of Employee's death,
Disability, Retirement or for Cause, or if Employee terminates Employee's
employment for Good Reason, then the Employee shall be entitled to the following
payments and benefits:
(i) The Company shall pay to Employee as compensation for services
rendered, no later than five (5) business days following the date of
termination, a lump sum severance payment equal to 2.50 multiplied by the sum of
(A) Employee's Base Salary, (B) the highest annual bonus that was paid to
Employee in any of the three fiscal years ending prior to the date of
termination under the Company's Management Incentive Plan (the "MIP") or Varian
Associates, Inc.'s Management Incentive Plan, and (C) the highest cash bonus for
a performance period of more than one fiscal year that was paid to Employee in
any of the three fiscal years ending prior to the date of termination under the
MIP.
(ii) The Company shall pay to Employee as compensation for services
rendered, no later than five (5) business days following the date of
termination, a lump sum payment equal to a pro rata portion (based on the number
of days elapsed during the fiscal year and/or other bonus performance period in
which the termination occurs) of Employee's target bonus under the MIP for the
fiscal year and for any other partially completed bonus performance period in
which the termination occurs.
(iii) All waiting periods for the exercise of any stock options granted
to Employee and all conditions or restrictions of any restricted stock granted
to Employee shall terminate, and all such options shall be exercisable in full
according to their terms, and the restricted stock shall be transferred to
Employee as soon as reasonably practicable thereafter.
(iv) Employee's participation as of the date of termination in the
life, medical/dental/vision and disability insurance plans and financial/tax
counseling plan of the Company shall be continued on the same terms (including
any cost sharing) as if Employee were an employee of the Company (or equivalent
benefits provided) until the earlier of Employee's commencement of substantially
equivalent full-time employment with a new employer or twenty-four (24) months
after the date of termination; provided, however,
7
<PAGE>
that after the date of termination, Employee shall no longer be entitled to
receive Company-paid executive physicals or, upon expiration of the applicable
memberships, Company-paid airline memberships. In the event Employee shall die
before the expiration of the period during which the Company is required to
continue Employee's participation in such insurance plans, the participation of
Employee's surviving spouse and family in the Company's insurance plans shall
continue throughout such period.
(v) Employee may elect upon termination to purchase any automobile
then in the possession of Employee and subject to a lease of which the Company
is the lessor by payment to the Company of the residual value set forth in the
lease, without any increase for remaining lease payments during the term or
other lease breakage costs. Employee may elect to have any such payment deducted
from any payments due the Employee hereunder.
(vi) All payments and benefits provided under this Agreement shall be
subject to applicable tax withholding.
(b) Following Employee's termination of employment for any reason, the
Company shall have the unconditional right to reduce any payments owed to
Employee hereunder by the amount of any due and unpaid principal and interest on
any loans by the Company to Employee and Employee hereby agrees and consents to
such right on the part of the Company.
5. GROSS-UP PAYMENT.
-----------------
(a) Notwithstanding anything herein to the contrary, if it is determined
that any Payment would be subject to the excise tax imposed by Section 4999 of
the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or
penalties with respect to such excise tax (such excise tax, together with any
interest or penalties thereon, is herein referred to as an "Excise Tax"), then
Employee shall be entitled to an additional payment (a "Gross-Up Payment") in an
amount that will place Employee in the same after-tax economic position that
Employee would have enjoyed if the Excise Tax had not applied to the Payment.
The amount of the Gross-Up Payment shall be determined by a nationally-
recognized independent public accounting firm designated by agreement between
Employee and the Company (the "Accounting Firm"). No Gross-Up Payments shall be
payable hereunder if the Accounting Firm determines that the Payments are not
subject to an Excise Tax.
"Payment" means (i) any amount due or paid to Employee under this
Agreement, (ii) any amount that is due or paid to Employee under any plan,
program or arrangement of the Company and its subsidiaries and (iii) any amount
or benefit that is due or payable to Employee under this Agreement or under any
plan, program or arrangement of the Company and its subsidiaries not otherwise
covered under clause (i) or (ii) hereof which must reasonably be taken into
account under Section 280G of the Code in determining the amount the "parachute
payments" received by Employee, including, without limitation,
8
<PAGE>
any amounts which must be taken into account under Section 280G of the Code as a
result of (A) the acceleration of the vesting of any option, restricted stock or
other equity award, (B) the acceleration of the time at which any payment or
benefit is receivable by Employee or (C) any contingent severance or other
amounts that are payable to Employee.
(b) Subject to the provisions of Section 5(c), all determinations required
under this Section 5, including whether a Gross-Up Payment is required, the
amount of the Payments constituting excess parachute payments, and the amount of
the Gross-Up Payment, shall be made by the Accounting Firm, which shall provide
detailed supporting calculations both to Employee and the Company within fifteen
days of the date reasonably requested by Employee or the Company on which a
determination under this Section 5 is necessary or advisable. The Company shall
pay to Employee the initial Gross-Up Payment within 5 days of the receipt by
Employee and the Company of the determination of the Accounting Firm. If the
Accounting Firm determines that no Excise Tax is payable by Employee, the
Company shall cause its accountants to provide Employee with an opinion that the
Accounting Firm has substantial authority under the Code not to report an Excise
Tax on Employee's federal income tax return. Any determination by the
Accounting Firm shall be binding upon Employee and the Company. If the initial
Gross-Up Payment is insufficient to cover the amount of the Excise Tax that is
ultimately determined to be owing by Employee with respect to any Payment
(hereinafter an "Underpayment"), the Company, after exhausting its remedies
under Section 5(c) below, shall promptly pay to Employee an additional Gross-Up
Payment in respect of the Underpayment.
(c) Employee shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of a Gross-Up Payment. Such notice shall be given as soon as
practicable after Employee knows of such claim and shall apprise the Company of
the nature of the claim and the date on which the claim is requested to be paid.
Employee agrees not to pay the claim until the expiration of the thirty (30) day
period following the date on which Employee notifies the Company, or such
shorter period ending on the date the Taxes with respect to such claim are due
(the "Notice Period"). If the Company notifies Employee in writing prior to the
expiration of the Notice Period that it desires to contest the claim, Employee
shall: (i) give the Company any information reasonably requested by the Company
relating to the claim; (ii) take such action in connection with the claim as the
Company may reasonably request, including, without limitation, accepting legal
representation with respect to such claim by an attorney reasonably selected by
the Company and reasonably acceptable to Employee; (iii) cooperate with the
Company in good faith in contesting the claim; and (iv) permit the Company to
participate in any proceedings relating to the claim. Employee shall permit the
Company to control all proceedings related to the claim and, at its option,
permit the Company to pursue or forgo any and all administrative appeals,
proceedings, hearings, and conferences with the taxing authority in respect of
such claim. If requested by the Company, Employee agrees either to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner and
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts as the
Company shall determine; provided, however, that, if the Company
9
<PAGE>
directs Employee to pay such claim and pursue a refund, the Company shall
advance the amount of such payment to Employee on an after-tax and interest-free
basis (an "Advance"). The Company's control of the contest related to the claim
shall be limited to the issues related to the Gross-Up Payment and Employee
shall be entitled to settle or contest, as the case may be, any other issues
raised by the Internal Revenue Service or other taxing authority. If the Company
does not notify Employee in writing prior to the end of the Notice Period of its
desire to contest the claim, the Company shall pay to Employee an additional
Gross-Up Payment in respect of the excess parachute payments that are the
subject of the claim, and Employee agrees to pay the amount of the Excise Tax
that is the subject of the claim to the applicable taxing authority in
accordance with applicable law.
(d) If, after receipt by Employee of an Advance, Employee becomes entitled
to a refund with respect to the claim to which such Advance relates, Employee
shall pay the Company the amount of the refund (together with any interest paid
or credited thereon after Taxes applicable thereto). If, after receipt by
Employee of an Advance, a determination is made that Employee shall not be
entitled to any refund with respect to the claim and the Company does not
promptly notify Employee of its intent to contest the denial of refund, then the
amount of the Advance shall not be required to be repaid by Employee and the
amount thereof shall offset the amount of the additional Gross-Up Payment then
owing to Employee.
(e) The Company shall indemnify Employee and hold Employee harmless, on an
after-tax basis, from any costs, expenses, penalties, fines, interest or other
liabilities ("Losses") incurred by Employee with respect to the exercise by the
Company of any of its rights under this Section 5, including, without
limitation, any Losses related to the Company's decision to contest a claim or
any imputed income to Employee resulting from any Advance or action taken on
Employee's behalf by the Company hereunder. The Company shall pay all legal
fees and expenses incurred under this Section 5, and shall promptly reimburse
Employee for the reasonable expenses incurred by Employee in connection with any
actions taken by the Company or required to be taken by Employee hereunder. The
Company shall also pay all of the fees and expenses of the Accounting Firm,
including, without limitation, the fees and expenses related to the opinion
referred to in Section 5(b).
6. GENERAL.
--------
(a) Employee shall retain in confidence under the conditions of the
Company's confidentiality agreement with Employee any proprietary or other
confidential information known to Employee concerning the Company and its
business so long as such information is not publicly disclosed and disclosure is
not required by an order of any governmental body or court. If required,
Employee shall return to the Company any memoranda, documents or other materials
proprietary to the Company.
10
<PAGE>
(b) While employed by the Company and following the termination of such
employment (other than a termination of employment by Employee for Good Reason
or by the Company other than for Cause) for a period of two (2) years, Employee
shall not, whether for Employee's own account or for the account of any other
individual, partnership, firm, corporation or other business organization,
intentionally solicit, endeavor to entice away from the Company or a subsidiary
of the Company (each, a "Protected Party"), or otherwise interfere with the
relationship of a Protected Party with, any person who is employed by a
Protected Party or any person or entity who is, or was within the then most
recent twelve (12) month period, a customer or client of a Protected Party.
Employee acknowledges that a breach of any of the covenants contained in
this Section 6(b) may result in material irreparable injury to the Company for
which there is no adequate remedy at law, that it may not be possible to measure
damages for such injuries precisely and that, in the event of such a breach, any
payments remaining under the terms of this Agreement shall cease and the Company
may be entitled to obtain a temporary restraining order and/or a preliminary or
permanent injunction restraining Employee from engaging in activities prohibited
by this Section 6(b) or such other relief as may be required to specifically
enforce any of the covenants in this Section 6(b). Employee agrees to and
hereby does submit to in personam jurisdiction before each and every such court
in the State of California, County of Santa Clara, for that purpose. This
Section 6(b) shall survive any termination of this Agreement.
(c) If litigation is brought by Employee to enforce or interpret any
provision contained in this Agreement, the Company shall indemnify Employee for
Employee's reasonable attorney's fees and disbursements incurred in such
litigation and pay prejudgment interest on any money judgment obtained by
Employee calculated at the prime rate of interest in effect from time to time at
the Bank of America, San Francisco, from the date that payment should have been
made under the Agreement, provided that Employee shall not have been found by
the court in which such litigation is pending to have had no cause in bringing
the action, or to have acted in bad faith, which finding must be final with the
time to appeal therefrom having expired and no appeal having been taken.
(d) Except as provided in Section 4, the Company's obligation to pay to
Employee the compensation and to make the arrangements provided in this
Agreement shall be absolute and unconditional and shall not be affected by any
circumstance, including, without limitation, any setoff, counterclaim,
recoupment, defense or other right which the Company may have against Employee
or anyone else. All amounts payable by the Company hereunder shall be paid
without notice or demand. Employee shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other employment.
(e) The Company shall require any successor, 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 written agreement to expressly assume
and agree to
11
<PAGE>
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 had taken place.
(f) This Agreement shall inure to the benefit of and be enforceable by
Employee's heirs, successors and assigns. If Employee should die while any
amounts would still be payable to Employee hereunder if Employee had continued
to live, all such amounts shall be paid in accordance with the terms of this
Agreement to Employee's heirs, successors and assigns.
(g) For the 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, addressed as
follows:
If to Employee: If to the Company:
19 Deer Lake Court Varian, Inc.
San Mateo, CA 94402-3975 3120 Hansen Way
Palo Alto, CA 94304-1030
Attn: Vice President and General Counsel
or to such other address as either party furnishes to the other in writing in
accordance herewith, except that notices of change of address shall be effective
only upon receipt.
(h) This Agreement shall constitute the entire agreement between Employee
and the Company concerning the subject matter of this Agreement.
(i) The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of California without
giving effect to the provisions, principles or policies thereof relating to
choice or conflict of laws. The invalidity or unenforceability of any provision
of this Agreement in any circumstance shall not affect the validity or
enforceability of such provision in any other circumstance or the validity or
enforceability of any other provision of this Agreement, and, except to the
extent such provision is invalid or unenforceable, this Agreement shall remain
in full force and effect. Any provision in this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability without
invalidating or affecting the remaining provisions hereof in such jurisdiction,
and any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other jurisdiction.
This Section 6(i) shall survive any termination of this Agreement.
(j) This Agreement may be terminated by the Company pursuant to a
resolution adopted by the Board at any time prior to a Potential Change in
Control Date. After a Change in Control Date or a Potential Change in Control
Date, this Agreement may only be terminated with the consent of Employee.
12
<PAGE>
(k) 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 expressly set forth in this Agreement and this Agreement
shall supersede all prior agreements, negotiations, correspondence, undertakings
and communications of the parties, oral or written, with respect to the subject
matter hereof including, without limitation, the Amended and Restated Change in
Control Agreement between Employee and Varian Associates, Inc.
(l) In the event that the Company becomes party to a transaction that is
intended to qualify for "pooling of interests" accounting treatment and, but for
one or more of the provisions of this Agreement would so qualify, then this
Agreement shall be interpreted so as to preserve such accounting treatment, and
to the extent that any provision of this Agreement would disqualify the
transaction from pooling of interests accounting treatment, then such provision
shall be null and void. All determinations to be made in connection with the
preceding sentence shall be made by the independent accounting firm whose
opinion with respect to "pooling of interests" treatment is required as a
condition to the Company's consummation of such transaction.
IN WITNESS WHEREOF, the parties acknowledge that they have read and
understand the terms of this Agreement and have executed this Agreement to be
effective as of April 2, 1999.
VARIAN, INC. EMPLOYEE
/s/ Allen J. Lauer /s/ Arthur W. Homan
- ------------------------ ------------------------
By: Allen J. Lauer Arthur W. Homan
Title: President and Chief Executive Officer
13
<PAGE>
Exhibit 10.16
DESCRIPTION OF CERTAIN COMPENSATORY ARRANGEMENT
-----------------------------------------------
BETWEEN REGISTRANT AND G. EDWARD McCLAMMY
-----------------------------------------
G. Edward McClammy was hired by the Registrant as its Vice President and
Chief Financial Officer on April 16, 1999. Under the terms of his retention,
the Registrant agreed in an employment offer letter to pay to Mr. McClammy a
minimun annual cash bonus of $100,000 for fiscal year 2000 under the
Registrant's Management Incentive Plan, which amount is to be paid in April 2000
and credited against any annual cash bonus which otherwise becomes due after the
end of fiscal year 2000 based on achievement of fiscal year 2000 performance
objectives.
<PAGE>
Exhibit 10.17
DESCRIPTION OF CERTAIN COMPENSATORY ARRANGEMENTS
------------------------------------------------
BETWEEN REGISTRANT AND NON-EMPLOYEE DIRECTORS
---------------------------------------------
Each director who is not an employee of the registrant receives an annual
retainer fee of $20,000, plus $1,000 for each Board of Directors and Board
committee meeting attended. The Chairman of the Board receives a retainer fee of
$90,000 (in lieu of any other annual retainer, committee chair or attendance
fees), and directors chairing standing committees of the Board each receive an
additional annual retainer fee of $5,000. Under the registrant's Omnibus Stock
Plan, directors may elect to receive, in lieu of all or a portion of the
foregoing fees, shares of the Company's common stock based on the fair market
value of the stock on the date the fees would have been paid. Each director is
also reimbursed for all reasonable out-of-pocket expenses that such director and
his or her spouse incurs attending Board meetings and functions.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 21
VARIAN, INC.
SUBSIDIARIES OF THE REGISTRANT
Fiscal Year 1999
----------------
State or Other Jurisdiction
Subsidiary of Incorporation or Organization
---------- --------------------------------
<S> <C>
Chrompack, Inc. New Jersey
Chrompack Onroerend Goed B.V. The Netherlands
Intralab Instrumentacao Analitica Limitada Brazil
Varian A.G. Switzerland
Varian AB Sweden
Varian Argentina, Ltd. Delaware
Varian Australia Pty., Ltd. Australia
Varian Australia, LLC Delaware
Varian B.V. The Netherlands
Varian Belgium N.V. Belgium
Varian Canada Inc. Canada
Varian Chrompack International B.V. The Netherlands
Varian Limited United Kingdom
Varian Deutschland GmbH Germany
Varian FSC, Inc. Barbados
Varian Gessellschaft mbH Austria
Varian Holdings (Australia) Pty. Limited Australia
Varian Iberica S.L. Spain
Varian India Pvt. Ltd. Delaware
Varian Instruments of Puerto Rico, Inc. Delaware
Varian Inter-American Corp. California
Varian Industria E. Comercio Limitada Brazil
Varian S.A. France
Varian S.A. Mexico
Varian S.p.A. Italy
Varian Technologies Asia, Ltd. Delaware
Varian Technologies China, Ltd. Delaware
Varian Technologies Japan, Ltd. Delaware
Varian Technologies Korea, Ltd. Korea
Varian Technologies, C.A. Venezuela
</TABLE>
All of the above subsidiaries are included in the Company's consolidated
financial statements. The names of certain consolidated subsidiaries have been
omitted because, considered in the aggregate as a single subsidiary, they would
not constitute a significant subsidiary.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-75527) of Varian, Inc. and its subsidiaries of
our report dated October 28, 1999, relating to the Financial Statements and
Financial Statement Schedule, which appears in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------------
PricewaterhouseCoopers LLP
San Jose, California
December 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VARIAN,
INC.'s OCTOBER 1, 1999 FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-01-1999
<PERIOD-START> OCT-03-1998
<PERIOD-END> OCT-01-1999
<CASH> 23,348
<SECURITIES> 0
<RECEIVABLES> 151,437
<ALLOWANCES> 0
<INVENTORY> 66,634
<CURRENT-ASSETS> 275,332
<PP&E> 196,348
<DEPRECIATION> 112,694
<TOTAL-ASSETS> 425,076
<CURRENT-LIABILITIES> 163,287
<BONDS> 0
0
0
<COMMON> 306
<OTHER-SE> 194,356
<TOTAL-LIABILITY-AND-EQUITY> 425,076
<SALES> 598,887
<TOTAL-REVENUES> 598,887
<CGS> 374,698
<TOTAL-COSTS> 583,666
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,018
<INCOME-PRETAX> 13,203
<INCOME-TAX> 5,875
<INCOME-CONTINUING> 7,328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,328
<EPS-BASIC> 0.24
<EPS-DILUTED> 0.24
</TABLE>
