<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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
------------------------------------
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 NUMBER)
3120 HANSEN WAY, PALO ALTO, CALIFORNIA 94304-1030
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(650) 213-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 |_|
The number of shares of the Registrant's common stock outstanding as of
April 28, 2000 was 32,141,527.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION.......................................................................... 3
Item 1. Financial Statements........................................................................... 3
Consolidated Statements of Earnings............................................................ 3
Consolidated Balance Sheets.................................................................... 4
Consolidated Condensed Statements of Cash Flows................................................ 5
Notes to the Consolidated Financial Statements................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 12
Item 3. Quantitative and Qualitative Disclosure about Market Risk...................................... 18
PART II. OTHER INFORMATION.............................................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders............................................ 20
Item 6. Exhibits and Reports on Form 8-K............................................................... 20
</TABLE>
RISK FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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; and other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission.
2
<PAGE>
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VARIAN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
----------------------- ----------------------
MAR. 31, APR. 2, MAR. 31, APR. 2,
2000 1999 2000 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
SALES....................................................... $ 177,310 $148,936 $337,262 $282,232
Cost of sales............................................... 109,820 101,712 207,919 182,378
---------- --------- --------- ---------
GROSS PROFIT................................................ 67,490 47,224 129,343 99,854
---------- --------- --------- ---------
OPERATING EXPENSES
Sales and marketing.................................... 31,301 34,180 61,106 64,276
Research and development............................... 8,549 9,277 15,531 16,440
General and administrative............................. 10,679 10,889 21,016 18,727
Restructuring.......................................... -- 10,974 -- 10,974
---------- --------- --------- ---------
TOTAL OPERATING EXPENSES............................... 50,529 65,320 97,653 110,417
---------- --------- --------- ---------
OPERATING EARNINGS (LOSS)................................... 16,961 (18,096) 31,690 (10,563)
Interest expense (income), net.............................. 553 (129) 1,244 (265)
---------- --------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES......................... 16,408 (17,967) 30,446 (10,298)
Income tax expense (benefit)................................ 6,259 (7,993) 11,874 (4,583)
---------- --------- --------- ---------
NET EARNINGS (LOSS)......................................... $ 10,149 $ (9,974) $ 18,572 $ (5,715)
========== ========= ========= =========
NET EARNINGS (LOSS) PER SHARE:
Basic.................................................. $ 0.32 $ (0.33) $ 0.60 $ (0.19)
========== ========= ========= =========
Diluted................................................ $ 0.30 $ (0.33) $ 0.56 $ (0.19)
========== ========= ========= =========
SHARES USED IN PER SHARE CALCULATIONS:
Basic.................................................. 31,498 30,423 31,154 30,423
========== ========= ========= =========
Diluted................................................ 33,770 30,587 33,232 30,587
========== ========= ========= =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
3
<PAGE>
VARIAN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
<TABLE>
<CAPTION>
MAR. 31, OCT. 1,
2000 1999
--------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents....................................................... $ 54,528 $ 23,348
Accounts receivable, net........................................................ 152,845 151,437
Inventories..................................................................... 92,401 66,634
Deferred taxes.................................................................. 25,368 25,508
Other current assets............................................................ 8,437 8,405
--------- ----------
TOTAL CURRENT ASSETS............................................................ 333,579 275,332
PROPERTY, PLANT, AND EQUIPMENT, NET.................................................. 77,246 83,654
OTHER ASSETS......................................................................... 66,321 66,090
--------- ----------
TOTAL ASSETS......................................................................... $477,146 $ 425,076
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt............................................... $ 6,493 $ 6,717
Accounts payable................................................................ 56,715 40,442
Accrued liabilities............................................................. 128,753 116,128
--------- ----------
TOTAL CURRENT LIABILITIES....................................................... 191,961 163,287
LONG-TERM DEBT....................................................................... 47,931 51,221
DEFERRED TAXES....................................................................... 8,439 8,453
OTHER LIABILITIES.................................................................... 10,561 7,453
--------- ----------
TOTAL LIABILITIES.................................................................... 258,892 230,414
--------- ----------
CONTINGENCIES (NOTE 9)
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--32,148,879 shares at Mar. 31, 2000 and 30,563,094 at Oct. 1,
1999.......................................................................... 200,852 181,619
Retained earnings............................................................... 31,615 13,043
Other comprehensive income (loss)............................................... (14,213) --
--------- ----------
TOTAL STOCKHOLDERS' EQUITY...................................................... 218,254 194,662
--------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................... $477,146 $ 425,076
========= ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
4
<PAGE>
VARIAN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------- --- --------
MAR. 31, APR. 2,
2000 1999
--------- --------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES........................................... $ 32,513 $ 8,584
--------- --------
INVESTING ACTIVITIES
Purchase of property, plant, and equipment.......................................... (10,558) (10,546)
Proceeds from sale of property, plant, and equipment................................ 286 --
Purchase of businesses.............................................................. (7,095) --
--------- --------
NET CASH USED IN INVESTING ACTIVITIES............................................... (17,367) (10,546)
--------- --------
FINANCING ACTIVITIES
Common stock option exercises....................................................... 21,752 --
Purchase of common stock............................................................ (2,548)
Net issuance/(payment) of debt...................................................... (3,337) --
Net transfers from Varian Associates, Inc./Varian Medical Systems, Inc.............. 1,095 14,792
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES........................................... 16,962 14,792
-------- --------
Effects of exchange rate changes on cash............................................ (928) (737)
-------- --------
Net increase in cash and cash equivalents........................................... 31,180 12,093
Cash and cash equivalents at beginning of period.................................... 23,348 --
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................................... $ 54,528 $12,093
========= ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Debt assumed/transferred from Varian Associates, Inc................................ $ -- $77,100
========= ========
Transfer of property, plant, and equipment.......................................... $ -- $ 9,900
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid................................................................... $ 2,453 $ 510
========= ========
Interest paid....................................................................... $ 1,928 $ 37
========= ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
5
<PAGE>
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
These interim consolidated financial statements of Varian, Inc. and its
subsidiary companies (collectively, the "Company") have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The year ended
October 1, 1999 balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. These interim consolidated financial statements should be
read in conjunction with the financial statements and the notes thereto included
in the Company's Form 10-K for the year ended October 1, 1999, which has been
filed with the Securities and Exchange Commission. In the opinion of the
Company's management, the interim consolidated financial statements include all
normal recurring adjustments necessary to present fairly the information
required to be set forth therein. The results of operations for the second
quarter and six months ended March 31, 2000 are not necessarily indicative of
the results to be expected for a full year or for any other periods.
NOTE 2. 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 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"). The interim
consolidated financial statements generally reflect IB's results of operations
and cash flows for the quarter and six months ended April 2, 1999, and the
Company's results of operations and cash flows for the quarter and six months
ended March 31, 2000. The interim consolidated financial results for the quarter
and six months ended April 2, 1999 were carved out from the interim financial
statements of VAI using the historical results of operations of IB and include
the accounts of IB after elimination of inter-business transactions. These
interim consolidated financial results also include allocations of certain VAI
corporate expenses (including legal, accounting, employee benefits, insurance
services, information technology services, treasury, and other corporate
overhead) to IB.
The Company's fiscal years reported are the 52-week periods ending on the
Friday nearest September 30. Fiscal year 2000 will comprise the 52-week period
ending September 29, 2000, and fiscal year 1999 was comprised of the 52-week
period ended October 1, 1999. The fiscal quarters ended March 31, 2000 and April
2, 1999 each comprise 13 weeks, and the six-month periods ended March 31, 2000
and April 2, 1999 each comprise 26 weeks.
NOTE 3. CHANGE IN FUNCTIONAL CURRENCY
Statement of Financial Accounting Standards ("SFAS") 52 sets forth
guidelines for determining the functional currency to be used for financial
reporting. Subsequent to becoming independent from VAI, the Company made certain
changes in the way it conducts business internationally. A majority of business
transactions are now conducted in the local currencies of the respective
subsidiaries. Accordingly, effective October 2, 1999, the Company changed its
functional currency from the U.S. dollar to the local currencies of the
respective subsidiaries as prescribed by FAS 52. Under FAS 52, when the local
currencies are determined to be the functional currency, assets and liabilities
are translated using current exchange rates at the balance sheet date, and
income and expense accounts are translated at average exchange rates in effect
during the period. Translation of assets and liabilities at a current exchange
rate results in periodic translation gains and losses that are recorded in
stockholders' equity as a component of other comprehensive income. Upon adopting
a local currency functional currency, the Company recorded an initial
translation loss of $6.6 million in the cumulative translation adjustment
component of other comprehensive income (see Note 7). This loss principally
related to translating property, plant, and equipment at current exchange rates
versus the historical exchange rates previously used.
6
<PAGE>
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. BALANCE SHEET DETAIL
MAR. 31, OCT. 1,
2000 1999
---------- ----------
(IN THOUSANDS)
INVENTORIES
Raw materials and parts.......... $ 46,725 $ 36,149
Work in process.................. 13,985 5,487
Finished goods................... 31,691 24,998
---------- ----------
$ 92,401 $ 66,634
========== ==========
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 by $14.8
million at March 31, 2000 and $14.4 million at October 1, 1999.
NOTE 5. FORWARD EXCHANGE CONTRACTS
The Company's forward exchange contracts generally range from one to 12
months in original maturity. Forward exchange contracts outstanding as of March
31, 2000 that hedge the balance sheet and certain purchase commitments were
effective March 31, 2000, 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 March 31, 2000 are summarized as follows:
(IN THOUSANDS) NOTIONAL NOTIONAL
VALUE SOLD PURCHASED
--------- ---------
Australian Dollar............................. $ -- $ 14,817
Japanese Yen.................................. 14,030 --
British Pound................................. 7,054 15,508
Canadian Dollar............................... 3,985 --
Euro.......................................... -- 3,162
--------- ---------
Total...................................... $ 25,069 $ 33,487
========= =========
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 (loss) 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 (loss) 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 quarter and six months ended April 2, 1999, 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.
7
<PAGE>
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation follows:
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
------------ --- ----------- ------------- - -----------
MAR. 31, APR. 2, MAR. 31, APR. 2,
2000 1999 2000 1999
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
BASIC
Net earnings (loss).............................. $ 10,149 $ (9,974) $ 18,572 $ (5,715)
Weighted average shares outstanding.............. 31,498 30,423 31,154 30,423
Net earnings (loss) per share.................... $ 0.32 $ (0.33) $ 0.60 $ (0.19)
============ =========== ============= ===========
DILUTED
Net earnings (loss).............................. $ 10,149 $ (9,974) $ 18,572 $ (5,715)
Weighted average shares outstanding.............. 31,498 30,423 31,154 30,423
Net effect of dilutive stock options............. 2,272 164 2,078 164
------------ ----------- ------------- -----------
Total shares..................................... 33,770 30,587 33,232 30,587
Net earnings (loss) per share.................... $ 0.30 $ (0.33) $ 0.56 $ (0.19)
============ =========== ============= ===========
</TABLE>
NOTE 7. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income and the currency
translation adjustment. Comprehensive income (loss) was $4.7 million and ($10.0)
million for the three months ended March 31, 2000 and April 2, 1999,
respectively and $4.4 million and ($5.7) million for the six months ended March
31, 2000 and April 2, 1999, respectively.
NOTE 8. 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 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 were required following the
Distribution. As a result of these final adjustments, the Company recorded an
increase in stockholders' equity of $1.1 million in the second quarter of fiscal
year 2000. Management believes that no further adjustments are necessary, and
that if any are required, they will not have a material effect on the Company's
financial condition.
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
8
<PAGE>
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 March 31, 2000, 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 $4.5 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 March 31, 2000. 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 $4.5 million as of March 31, 2000.
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 March 31, 2000, 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 March 31, 2000. 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 March 31, 2000. The Company therefore accrued $4.1
million as of March 31, 2000, 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 $4.5 million described in the preceding paragraph.
Claims for recovery of environmental investigation and remediation costs
already incurred, and to be incurred in the future, were asserted by VAI against
various insurance companies and other third parties. VMS is still pursuing
recovery against a final insurance company for the benefit of itself, VSEA, and
the Company. In addition, 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 March 31, 2000 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.
9
<PAGE>
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. 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
ACCRUAL AT PAYMENTS AND ACCRUAL AT
DECEMBER 31, OTHER MARCH 31,
1999 REDUCTIONS 2000
----------- ------------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Lease payments and other facility expenses............................. $ 1,131 $ 89 $ 1,042
Severance and other related employee benefits.......................... 1,576 398 1,178
----------- ------------- -----------
Total.................................................................. $ 2,707 $ 487 $ 2,220
=========== ============= ===========
</TABLE>
NOTE 11. 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 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.
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.
<TABLE>
<CAPTION>
INDUSTRY SEGMENTS
(IN MILLIONS)
QUARTER ENDED QUARTER ENDED
--------------------------- ------------------------------
MARCH 31, 2000 APR. 2, 1999 MAR. 31, 2000 APR. 2, 1999
------------ ----------- ------------- -------------
PRETAX EARNINGS PRETAX EARNINGS
SALES SALES (LOSS) (LOSS)
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Scientific Instruments....................... $ 102.0 $ 97.4 $ 11.2 $ (16.1)
Vacuum Technologies ......................... 34.8 26.6 5.8 (1.5)
Electronics Manufacturing.................... 40.5 24.9 3.0 1.1
------------ ----------- ------------- -------------
Total industry segments...................... 177.3 148.9 20.0 (16.5)
General corporate............................ -- -- (3.1) (1.7)
Interest (exp.)/inc., net ................... -- -- (0.5) 0.2
------------ ----------- ------------- -------------
Total ....................................... $ 177.3 $ 148.9 $ 16.4 $ (18.0)
============ =========== ============= =============
</TABLE>
10
<PAGE>
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INDUSTRY SEGMENTS
(IN MILLIONS)
SIX MONTHS ENDED SIX MONTHS ENDED
---------------------------- --------------------------------
MARCH 31, 2000 APR. 2, 1999 MAR. 31, 2000 APR. 2, 1999
------------ ----------- --------------- ---------------
PRETAX EARNINGS PRETAX EARNINGS
SALES SALES (LOSS) (LOSS)
------------ ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Scientific Instruments........................ $ 196.3 $ 187.1 $ 22.3 $ (9.3)
Vacuum Technologies........................... 66.7 48.7 10.3 (0.4)
Electronics Manufacturing..................... 74.3 46.4 5.7 2.4
------------ ----------- --------------- ---------------
Total industry segments....................... 337.3 282.2 38.3 (7.3)
General corporate............................. -- -- (6.7) (3.3)
Interest (exp.)/inc., net..................... -- -- (1.2) 0.3
------------ ----------- --------------- ---------------
Total......................................... $ 337.3 $ 282.2 $ 30.4 $ (10.3)
=========== ========== =============== ===============
</TABLE>
NOTE 12. STOCK REPURCHASE PROGRAM
The Company repurchases shares of its common stock under a program to
manage the dilution created by shares issued under employee stock plans. During
the second quarter of fiscal year 2000, the Company's Board of Directors
authorized the Company to repurchase up to 1,000,000 shares of its common stock
until September 28, 2001. The stock repurchases are limited by the amount of
cash generated through stock option exercises since October 4, 1999 and sales of
stock under the Company's Employee Stock Purchase Plan.
During the second quarter of fiscal year 2000, the Company repurchased
82,500 shares for an aggregate cost of $3.6 million of which 25,000 shares ($1.1
million) did not settle. As of March 31, 2000, the Company had remaining
authorization for future repurchases of 917,500 shares.
NOTE 13. EMPLOYEE STOCK PURCHASE PLAN
During the second quarter of fiscal year 2000, the Company's Board of
Directors approved an Employee Stock Purchase Plan for which the Company set
aside 1,200,000 shares of common stock for issuance under the Plan. Beginning
with the first enrollment date of April 3, 2000, eligible Company employees may
set aside for purchases under the Plan between 1% and 10% of eligible
compensation through payroll deductions. The participants' purchase price will
be the lower of 85% of the stock's market value on the enrollment date or 85% of
the stock's market value on the purchase date. Enrollment dates occur every six
months and purchase dates occur each quarter.
NOTE 14. 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 first quarter of fiscal year 2001 and is in the process of
determining the impact that adoption will have on the consolidated financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition," which provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. SAB 101 is effective
for the Company's first quarter of fiscal year 2001, beginning September 30,
2000, however earlier adoption is permitted. The Company is in the process of
determining the impact that adoption will have on the consolidated financial
statements.
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ITEM 2. 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 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 interim consolidated financial statements generally reflect IB's
results of operations and cash flows for the quarter and six months ended April
2, 1999, and the Company's results of operations and cash flows for the quarter
and six months ended March 31, 2000. The interim consolidated financial results
for the quarter ended April 2, 1999 were carved out from the interim financial
statements of VAI using the historical results of operations of IB and include
the accounts of IB after elimination of inter-business transactions. These
interim consolidated financial results also include allocations of certain VAI
corporate 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.
The Company's fiscal years reported are the 52-week periods ending on the
Friday nearest September 30. Fiscal year 2000 will comprise the 52-week period
ending September 29, 2000, and fiscal year 1999 was comprised of the 52-week
period ended October 1, 1999. The fiscal quarters ended March 31, 2000 and April
2, 1999 each comprise 13 weeks, and the six-month periods ended March 31, 2000
and April 2, 1999 each comprise 26 weeks.
RESULTS OF OPERATIONS
SECOND QUARTER OF FISCAL YEAR 2000 COMPARED TO SECOND QUARTER OF FISCAL YEAR
1999
SALES. Sales were $177.3 million in the second quarter of fiscal year 2000,
an increase of 19.1% from sales of $148.9 million in the second quarter of
fiscal year 1999. Sales by the Scientific Instruments, Vacuum Technologies, and
Electronics Manufacturing segments increased by 4.8%, 30.7%, and 62.3%,
respectively.
Geographically, sales in North America of $103.0 million, Europe of $48.8
million and the rest of the world of $25.5 million in the second quarter of
fiscal year 2000 represented increases of 28%, 0%, and 33%, respectively, as
compared to the second quarter of fiscal year 1999. The significant increase in
North America was largely due to the strong sales growth of the Electronics
Manufacturing segment, the sales of which are all in North America. The flat
sales in Europe resulted from the strength of the U.S. dollar versus the
European currencies and the timing of NMR product sales to European customers.
The significant increase in the rest of the world was primarily due to the
general economic recovery of the Asian markets.
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Orders in the second quarter of fiscal year 2000 were $187.4 million,
compared to $154.2 million in the second quarter of fiscal year 1999. Both
Vacuum Technologies and Electronics Manufacturing had particularly strong orders
growth, with Scientific Instruments also contributing to the increase.
GROSS PROFIT. Gross profit was $67.5 million (representing 38.1% of sales)
in the second quarter of fiscal year 2000, compared to $47.2 million
(representing 31.7% of sales) in the second quarter of fiscal year 1999. The
lower gross profit percentage in the second quarter of fiscal year 1999 resulted
primarily from actions taken as part of an overall reorganization of IB, which
included actions to prepare IB 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.
SALES AND MARKETING. Sales and marketing expenses were $31.3 million
(representing 17.7% of sales) in the second quarter of fiscal year 2000,
compared to $34.2 million (representing 22.9% of sales) in the second quarter of
fiscal year 1999. The higher costs as a percentage of sales in the second
quarter of fiscal year 1999 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 changes were in addition to the
restructuring charges discussed below. Sales and marketing expenses in the
second quarter of fiscal year 2000 benefited from the cost savings from last
year's restructuring and reorganization activities and the overall leverage of
higher sales.
RESEARCH AND DEVELOPMENT. Research and development expenses were $8.5
million (representing 4.8% of sales) in the second quarter of fiscal year 2000,
compared to research and development expenses of $9.3 million (representing 6.2%
of sales) in the second quarter of fiscal year 1999. The second quarter of
fiscal year 1999 included accelerated development costs to complete a new gas
chromatograph.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $10.7
million (representing 6.0% of sales) in the second quarter of fiscal year 2000,
compared to $10.9 million (representing 7.3% of sales) in the second quarter of
fiscal year 1999. General and administrative expenses for the second quarter of
fiscal year 2000 were actual costs of the Company, whereas general and
administrative costs for the second quarter of fiscal year 1999 were the
Company's allocated share of VAI's costs.
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 IB's 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.
NET INTEREST EXPENSE. Net interest expense was $0.5 million (representing
0.3% of sales) for the second quarter of fiscal year 2000. 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 38.1% for the second
quarter of fiscal year 2000, compared to 44.5% for the second quarter of fiscal
year 1999. The fiscal year 1999 rate is higher because the Company realized a
larger proportion of high tax-rate, foreign country income in fiscal year 1999
(due primarily to restructuring and related charges incurred in lower tax-rate
countries) than it anticipates for fiscal year 2000.
NET EARNINGS. Net earnings were $10.1 million ($0.30 diluted net earnings
per share) in the second quarter of fiscal year 2000, compared to the net loss
of $10.0 million ($0.33 diluted net loss per share) in the second quarter of
fiscal year 1999. The second quarter of fiscal year 1999 included IB's overall
reorganizations, which resulted in incremental costs primarily included in cost
of sales, marketing and restructuring charges.
SEGMENTS. Scientific Instruments sales of $102.0 million in the second
quarter of fiscal year 2000 increased 4.8% over the second quarter of fiscal
year 1999 sales of $97.4 million. Sales of analytical products continued to
grow. However, sales of NMR products declined slightly due to a shift in product
mix in recent quarters toward higher priced, high field systems with longer
manufacturing lead times. As a result, NMR backlog has grown to
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<PAGE>
record levels. Earnings from operations in the second quarter of fiscal year
2000 of $11.2 million (11.0% of sales) increased from a loss of $16.1 million
(16.4% of sales) in the second quarter of fiscal year 1999. The second quarter
of fiscal year 1999 was significantly impacted by IB's overall reorganization
discussed above.
Vacuum Technologies sales of $34.8 million in the second quarter of fiscal
year 2000 increased 30.7% above the second quarter of fiscal year 1999 sales of
$26.6 million. The increase in sales was primarily due to the recovery of the
Asian economies and the improved demand from semiconductor equipment
manufacturers and users. Earnings from operations in the second quarter of
fiscal year 2000 of $5.8 million (16.5% of sales) were up from the $1.5 million
loss (5.7% of sales) in the second quarter of fiscal year 1999. The second
quarter of fiscal year 1999 was negatively impacted by IB's overall
reorganization discussed above and by the lower sales volume.
Electronics Manufacturing sales in the second quarter of fiscal year 2000
of $40.5 million increased 62.3% from the second quarter of fiscal year 1999
sales of $24.9 million. The increase in sales was principally due to higher
demand from the communications and medical equipment industries and the general
movement of small to medium size manufacturing companies to outsource their
electronics manufacturing. In addition, in February 2000 the Company acquired an
electronics manufacturing operation in Poway, California, which added $4 million
to revenues in the quarter. Earnings from operations in the second quarter of
$3.0 million (7.6% of sales) increased from $1.1 million (4.5% of sales) in the
second quarter of fiscal year 1999. The increase in earnings from operations was
primarily the result of increased sales.
FIRST HALF OF FISCAL YEAR 2000 COMPARED TO FIRST HALF OF FISCAL YEAR 1999
SALES. Sales were $337.3 million in the first half of fiscal year 2000, an
increase of 19.5% from sales of $282.2 million in the first half of fiscal year
1999. Sales by the Scientific Instruments, Vacuum Technologies, and Electronics
Manufacturing segments increased by 4.9%, 36.8%, and 60.0%, respectively.
Geographically, sales in North America of $194.0 million, Europe of $93.1
million and the rest of the world of $50.2 million in the first half of fiscal
year 2000 represented increases of 30%, 1%, and 25%, respectively, as compared
to the first half of fiscal year 1999. The significant increase in North America
was largely due to the strong sales growth of the Electronics Manufacturing
segment, the sales of which are all in North America. The flat sales in Europe
resulted from the strength of the U.S. dollar versus the European currencies and
the timing of NMR product sales to European customers. The significant increase
in the rest of the world was primarily due to the general economic recovery of
the Asian markets.
Orders in the first half of fiscal year 2000 were $359.3 million, compared
to $292.7 million in the first half of fiscal year 1999. Both Vacuum
Technologies and Electronics Manufacturing had particularly strong orders
growth, with Scientific Instruments also contributing to the increase.
GROSS PROFIT. Gross profit was $129.3 million (representing 38.4% of sales)
in the first half of fiscal year 2000, compared to $99.9 million (representing
35.4% of sales) in the first half of fiscal year 1999. The lower gross profit
percentage in the first half of fiscal year 1999 resulted primarily from actions
taken as part of an overall reorganization of IB, which included actions to
prepare IB 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.
SALES AND MARKETING. Sales and marketing expenses were $61.1 million
(representing 18.1% of sales) in the first half of fiscal year 2000, compared to
$64.3 million (representing 22.8% of sales) in the first half of fiscal year
1999. The higher costs as a percentage of sales in the first half of fiscal year
1999 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 changes were in addition to the restructuring charges
discussed below. Sales and marketing expenses in the first half of fiscal year
2000 benefited from the cost savings from last year's restructuring and
reorganization activities and the overall leverage of higher sales.
RESEARCH AND DEVELOPMENT. Research and development expenses were $15.5
million (representing 4.6% of sales) in the first half of fiscal year 2000,
compared to research and development expenses of $16.4 million (representing
5.8% of sales) in the first half of fiscal year 1999.
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GENERAL AND ADMINISTRATIVE. General and administrative expenses were $21.0
million (representing 6.2% of sales) in the first half of fiscal year 2000,
compared to $18.7 million (representing 6.6% of sales) in the first half of
fiscal year 1999. General and administrative expenses for the first half of
fiscal year 2000 were actual costs of the Company, whereas general and
administrative costs for the first half of fiscal year 1999 were the Company's
allocated share of VAI's costs.
RESTRUCTURING CHARGES. During the first half 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 IB's 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.
NET INTEREST EXPENSE. Net interest expense was $1.2 million (representing
0.4% of sales) for the first half of fiscal year 2000. 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 39.0% for the first
half of fiscal year 2000, compared to 44.5% for the first half of fiscal year
1999. The fiscal year 1999 rate is higher because the Company realized a larger
proportion of high tax-rate, foreign country income in fiscal year 1999 (due
primarily to restructuring and related charges incurred in lower tax-rate
countries) than it anticipates for fiscal year 2000.
NET EARNINGS. Net earnings were $18.6 million ($0.56 diluted net earnings
per share) in the first half of fiscal year 2000, compared to the net loss of
$5.7 million ($0.19 diluted net loss per share) in the first half of fiscal year
1999. The first half of fiscal year 1999 included IB's overall reorganizations,
which resulted in incremental costs primarily included in cost of sales,
marketing and restructuring charges.
SEGMENTS. Scientific Instruments sales of $196.3 million in the first half
of fiscal year 2000 increased 4.9% over the first half of fiscal year 1999 sales
of $187.1 million. Sales of analytical products continued to grow. However,
sales of NMR products declined slightly due to a shift in product mix in recent
quarters toward higher priced, high field systems with longer manufacturing lead
times. As a result, NMR backlog has grown to record levels. Earnings from
operations in the first half of fiscal year 2000 of $22.3 million (11.4% of
sales) increased from a loss of$9.3 million (4.9% of sales) in the first half of
fiscal year 1999. The first half of fiscal year 1999 was significantly impacted
by IB's overall reorganization discussed above.
Vacuum Technologies sales of $66.7 million in the first half of fiscal year
2000 increased 36.8% above the first half of fiscal year 1999 sales of $48.7
million. The increase in sales was primarily due to the recovery of the Asian
economies and the improved demand from semiconductor equipment manufacturers and
users. Earnings from operations in the first half of fiscal year 2000 of $10.3
million (15.4% of sales) were up from the loss of $0.4 million (0.1% of sales)
in the first half of fiscal year 1999. The first half of fiscal year 1999 was
negatively impacted by IB's overall reorganization discussed above and by the
lower sales volume.
Electronics Manufacturing sales in the first half of fiscal year 2000 of
$74.3 million increased 60.0% from the first half of fiscal year 1999 sales of
$46.4 million. The increase in sales was principally due to higher demand from
the communications and medical equipment industries and the general movement of
small to medium size manufacturing companies to outsource their electronics
manufacturing. In addition, in February 2000 the Company acquired an electronics
manufacturing operation in Poway, California, which added $4 million to revenues
in the second quarter. Earnings from operations in the first half of $5.7
million (7.7% of sales) increased from $2.4 million (5.2% of sales) in the first
half of fiscal year 1999. The increase in earnings from operations was primarily
the result of increased sales.
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
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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 were required following the
Distribution. As a result of these final adjustments, the Company recorded an
increase in stockholders' equity of $1.1 million in the second quarter of fiscal
year 2000. Management believes that no further adjustments are necessary, and
that if any are required, they will not have a material effect on the Company's
financial condition.
CASH AND CASH EQUIVALENTS. The Company generated $32.5 million of cash from
operations in the first half of fiscal year 2000, which compares to $8.6 million
in the first half of fiscal year 1999. The increase in cash from operations
resulted from improved net earnings and a reduction in working capital
requirements. The Company used $17.4 million of cash for the acquisition of
capital equipment and an electronics manufacturing operation in Poway,
California in the first half fiscal year 2000, which compares to $10.5 million
for the acquisition of capital equipment in the first half of fiscal year 1999.
The Company generated $17.0 million of cash from financing activities in the
first half of fiscal year 2000 compared to $14.8 million in the first half of
fiscal year 1999. Proceeds from stock options represented a significant amount
of the financing reduced by a scheduled debt payment and the repurchase of
57,500 shares of the Company's common stock under a recently approved stock
buy-back plan. The Company's current business strategy contemplates possible
acquisitions, further stock buy-backs and/or facility expansions. Any of these
possibilities could utilize cash currently being generated by the Company.
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" and "Legal Proceedings" 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 have adopted or 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, 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 March 31, 2000, 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 $4.5 million to $10.5 million (without discounting to present value). The
time frame over which these costs are
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expected to be incurred varies with each site and facility, ranging up to
approximately 30 years as of March 31, 2000. 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 $4.5 million
as of March 31, 2000.
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 March 31, 2000, 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 March 31, 2000. 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 March 31, 2000. The Company therefore accrued $4.1
million as of March 31, 2000, 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 $4.5 million described in the preceding paragraph.
Claims for recovery of environmental investigation and remediation costs
already incurred, and to be incurred in the future, were asserted by VAI against
various insurance companies and other third parties. VMS is still pursuing
recovery against a final insurance company for the benefit of itself, VSEA, and
the Company. In addition, 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 March 31, 2000 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
The Company completed 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 has not experienced any significant Year 2000 problems in
its internal systems, with previously-sold products or with significant third
parties. However, there can be no assurance that the Company will not incur
costs with respect to Year 2000 problems not yet experienced or reported. If the
Company experiences Year 2000 problems not yet experienced, the Company's
operations could be adversely impacted. However, management does not currently
believe that such risks are reasonably likely to have a material adverse effect
on the Company's business, results of operations, or financial condition.
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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 first quarter of fiscal year 2001 and is in the process of
determining the impact that adoption will have on the consolidated financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition," which provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. SAB 101 is effective
for the Company's first quarter of fiscal year 2001, beginning September 30,
2000, however earlier adoption is permitted. The Company is in the process of
determining the impact that adoption will have on the consolidated financial
statements.
ITEM 3. 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 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
March 31, 2000 that hedge the balance sheet and certain purchase commitments
were effective March 31, 2000, 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 MARCH 31, 2000
NOTIONAL
NOTIONAL VALUE
VALUE SOLD PURCHASED
---------- ---------
(IN THOUSANDS)
Australian Dollar............................... $ -- $ 14,817
Japanese Yen.................................... 14,030 --
British Pound................................... 7,054 15,508
Canadian Dollar................................. 3,985 --
Euro............................................ -- 3,162
---------- ---------
Total...................................... $ 25,069 $ 33,487
========== =========
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 March 31, 2000 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.
18
<PAGE>
DEBT OBLIGATIONS
PRINCIPAL AMOUNTS AND RELATED WEIGHTED AVERAGE INTEREST RATES BY YEAR OF
MATURITY
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED FISCAL YEARS
SEP. 29, --------------------------------------------------
(IN THOUSANDS) 2000 2001 2002 2003 2004 2005 THEREAFTER TOTAL
------- ------ ------- ------ ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt
(including current
portion)........... $3,360 $6,397 $6,438 $2,974 $2,755 $2,500 $ 30,000 $ 54,424
Average interest
rate............ 7.0% 6.9% 6.9% 6.3% 6.7% 7.2% 6.8% 6.8%
</TABLE>
19
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on February 10, 2000,
the Company's stockholders elected Allen J. Lauer as a Class I director for a
three-year term, with 25,617,029 votes for and 1,459,147 votes withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- ----------------
<S> <C>
10.1* Varian, Inc. Employee Stock Purchase Plan.
10.2* Amended and Restated Change in Control Agreement, dated as of February 25, 2000, Between
Registrant and Sergio Piras.
10.3* Amended and Restated Change in Control Agreement, dated as of February 25, 2000, Between
Registrant and C. Wilson Rudd.
27.1 Financial Data Schedule.
</TABLE>
- --------------
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K filed during the quarter ended March 31, 2000:
None.
20
<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)
By /s/ G. EDWARD MCCLAMMY
-----------------------------------------------
G. Edward McClammy
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED OFFICER AND
PRINCIPAL FINANCIAL OFFICER)
Dated: May 10, 2000
21
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- ----------------
<S> <C>
10.1* Varian, Inc. Employee Stock Purchase Plan.
10.2* Amended and Restated Change in Control Agreement, dated as of February 25, 2000, Between
Registrant and Sergio Piras.
10.3* Amended and Restated Change in Control Agreement, dated as of February 25, 2000, Between
Registrant and C. Wilson Rudd.
27.1 Financial Data Schedule.
</TABLE>
- --------------
* Management contract or compensatory plan or arrangement.
22
<PAGE>
EXHIBIT 10.1
VARIAN, INC.
EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
TABLE OF CONTENTS
PAGE
Section 1 PURPOSE.................................................1
Section 2 DEFINITIONS.............................................1
2.1 "1934 Act"..................................................1
2.2 "Board".....................................................1
2.3 "Code"......................................................1
2.4 "Committee".................................................1
2.5 "Common Stock"..............................................1
2.6 "Company"...................................................1
2.7 "Compensation"..............................................1
2.8 "Eligible Employee".........................................1
2.9 "Employee"..................................................2
2.10 "Employer" or "Employers"...................................2
2.11 "Enrollment Date"...........................................2
2.12 "Grant Date"................................................2
2.13 "Participant"...............................................2
2.14 "Plan"......................................................2
2.15 "Purchase Date".............................................2
2.16 "Shares"....................................................2
2.17 "Subsidiary"................................................2
Section 3 ADMINISTRATION..........................................2
3.1 Committee...................................................2
3.2 Authority of the Committee..................................3
3.3 Delegation by the Comittee..................................3
3.4 Decisions Binding...........................................3
3.5 Administrative Expenses.....................................3
Section 4 SHARES SUBJECT TO THE PLAN..............................3
4.1 Number Available............................................3
4.2 Adjustments.................................................4
Section 5 ENROLLMENT..............................................4
5.1 Participation...............................................4
5.2 Payroll Withholding.........................................4
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
Section 6 OPTIONS TO PURCHASE COMMON STOCK........................4
6.1 Grant of Option.............................................4
6.2 Duration of Option..........................................4
6.3 Number of Shares Subject to Option..........................5
6.4 Other Terms and Conditions..................................5
Section 7 PURCHASE OF SHARES......................................5
7.1 Exercise of Option..........................................5
7.2 Delivery of Shares..........................................5
7.3 Exhaustion of Shares........................................6
Section 8 WITHDRAWAL AND CESSATION OF PARTICIPATION...............6
8.1 Withdrawal..................................................6
8.2 Termination of Status as Eligible Employee..................6
Section 9 MISCELLANEOUS...........................................6
9.1 No Effect on Employment.....................................6
9.2 Participation by Subsidiaries...............................6
9.3 Indemnification.............................................7
9.4 Beneficiary Designations....................................7
9.5 Inalienability..............................................7
9.6 Compliance with Rule 16b-3..................................7
9.7 Apportionment of Costs and Duties...........................7
9.8 No Rights as Stockholder....................................7
9.9 Withholding Requirements....................................8
9.10 Withholding Arrangements....................................8
Section 10 AMENDMENT, TERMINATION AND DURATION.....................8
10.1 Amendment, Suspension or Termination........................8
10.2 Duration of the Plan........................................8
Section 11 LEGAL CONSTRUCTION......................................8
11.1 Gender and Number...........................................8
11.2 Severability................................................9
11.3 Requirements of Law.........................................9
11.4 Governing Law...............................................9
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
11.5 Captions....................................................9
EXECUTION ........................................................9
iii
<PAGE>
VARIAN, INC.
EMPLOYEE STOCK PURCHASE PLAN
SECTION 1
PURPOSE
Varian, Inc. hereby establishes the Varian, Inc. Employee Stock Purchase
Plan, effective as of the first Enrollment Date, in order to provide eligible
employees of the Company and its participating Subsidiaries with the opportunity
to purchase Common Stock through payroll deductions.
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 "1934 Act" means the Securities Exchange Act of 1934, as amended.
Reference to a specific section of the 1934 Act or regulation thereunder shall
include such section or regulation, any valid regulation promulgated under such
section, and any comparable provision of any future legislation or regulation
amending, supplementing or superseding such section or regulation.
2.2 "BOARD" means the Board of Directors of the Company.
2.3 "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 under such section, and
any comparable provision of any future legislation or regulation amending,
supplementing or superseding such section or regulation.
2.4 "COMMITTEE" means the committee appointed by the Board to administer
the Plan. As of the effective date of the Plan, the Plan shall be administered
by the Stock Committee of the Board.
2.5 "COMMON STOCK" means the common stock of the Company.
2.6 "COMPANY" means Varian, Inc., a Delaware corporation, or any successor
thereto.
2.7 "COMPENSATION" means a Participant's regular wages. The Board, in its
discretion, may (on a uniform and nondiscriminatory basis) establish a different
definition of Compensation prior to an Enrollment Date for all options to be
granted on such Enrollment Date.
2.8 "ELIGIBLE EMPLOYEE" means every Employee of an Employer, except (a) any
Employee who immediately after the grant of an option under the Plan, would own
stock and/or hold outstanding options to purchase stock possessing five percent
(5%) or more of the total combined voting power or value of all classes of stock
of the Company or of any Subsidiary
<PAGE>
of the Company (including stock attributed to such Employee pursuant to Section
424(d) of the Code), or (b) as provided in the following sentence. The Board, in
its discretion, from time to time may, prior to an Enrollment Date for all
options to be granted on such Enrollment Date, determine (on a uniform and
nondiscriminatory basis) that an Employee shall not be an Eligible Employee if
he or she: (1) has not completed a minimum period of service since his or her
last hire date, (2) customarily works less than a minimum number of hours per
week, (3) customarily works less than a minimum number of months per calendar
year, or (4) is an officer or other manager of the Company.
2.9 "EMPLOYEE" means an active employee of an Employer, whether such
employee is so employed at the time the Plan is adopted or becomes so employed
subsequent to the adoption of the Plan.
2.10 "EMPLOYER" or "EMPLOYERS" means any one or all of the Company, and
those Subsidiaries whose employees the Board has designated as eligible to
participate in the Plan.
2.11 "ENROLLMENT DATE" means such dates as may be determined by the
Committee (in its discretion and on a uniform and nondiscriminatory basis) from
time to time.
2.12 "GRANT DATE" means any date on which a Participant is granted an
option under the Plan.
2.13 "PARTICIPANT" means an Eligible Employee who (a) has become a
Participant in the Plan pursuant to Section 4.1 and (b) has not ceased to be a
Participant pursuant to Section 8 or Section 9.
2.14 "PLAN" means the Varian, Inc. Employee Stock Purchase Plan, as set
forth in this instrument and as hereafter amended from time to time.
2.15 "PURCHASE DATE" means such dates as may be determined by the Committee
(in its discretion and on a uniform and nondiscriminatory basis) from time to
time prior to an Enrollment Date for all options to be granted on such
Enrollment Date.
2.16 "SHARES" means shares of Common Stock.
2.17 "SUBSIDIARY" means any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
SECTION 3.
ADMINISTRATION
3.1 THE COMMITTEE. The Plan shall be administered by the Committee. The
Committee shall have the authority to control and manage the operation and
administration of the Plan. The member(s) of the Committee shall be appointed
from time to time by, and serve at the pleasure of, the Board.
2
<PAGE>
3.2 AUTHORITY OF THE COMMITTEE. 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 supervise the
administration of the Plan and to control its operation, including, but not
limited to, the power to (a) interpret and determine the meaning and validity of
the provisions of the Plan and the options and to determine any question arising
under, or in connection with, the administration, operation or validity of the
Plan or the options, (b) determine any and all considerations affecting the
eligibility of any employee to become a Participant or to remain a Participant
in the Plan, (c) cause an account or accounts to be maintained for each
Participant, (d) determine the time or times when, and the number of Shares for
which, options shall be granted, (e) establish and revise an accounting method
or formula for the Plan, (f) designate a custodian or broker to receive Shares
purchased under the Plan and to determine the manner and form in which Shares
are to be delivered to the designated custodian or broker, (g) determine the
status and rights of Participants and their Beneficiaries or estates, (h) employ
such brokers, counsel, agents and advisers, and to obtain such broker, legal,
clerical and other services, as it may deem necessary or appropriate in carrying
out the provisions of the Plan, (i) establish, from time to time, rules for the
performance of its powers and duties and for the administration of the Plan, and
(j) adopt such procedures and subplans as are necessary or appropriate to permit
participation in the Plan by Employees who are foreign nationals or employed
outside of the United States.
3.3 DELEGATION BY THE COMMITTEE. The Committee, in its sole discretion and
on such terms and conditions as it may provide, may delegate all or any part of
its authority and powers under the Plan to one or more directors and/or officers
of the Company; provided, however, that the Committee may not delegate its
authority and powers in any way which would jeopardize the Plan's qualification
under Rule 16b-3.
3.4 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 possible deference permitted by law.
3.5 ADMINISTRATIVE EXPENSES. All expenses incurred in the administration of
the Plan by the Committee, or otherwise, including legal fees and expenses,
shall be paid and borne by the Employers, except any stamp duties or transfer
taxes applicable to the purchase of Shares may be charged to the account of each
Participant. Any brokerage fees for the purchase of Shares by a Participant
shall be paid by the Company, but fees and taxes (including brokerage fees) for
the transfer, sale or resale of Shares by a Participant shall be borne solely by
the Participant.
SECTION 4
SHARES SUBJECT TO THE PLAN
4.1 NUMBER AVAILABLE. Subject to adjustment as provided in Section 4.2, the
total number of Shares available for issuance under the Plan shall not exceed
1,200,000. Shares sold under the Plan may be either newly issued Shares or
treasury Shares.
3
<PAGE>
4.2 ADJUSTMENTS. In the event of any merger, reorganization, consolidation,
recapitalization, separation, liquidation, stock dividend, split-up, Share
combination, or other change in the corporate structure of the Company affecting
the Shares, the Board shall adjust the number, class and purchase price of the
Shares available for purchase under the Plan and in the maximum number of Shares
subject to any option under the Plan in such manner as the Board (in its sole
discretion) shall determine to be appropriate to prevent the dilution or
diminution of such options.
SECTION 5
ENROLLMENT
5.1 PARTICIPATION. Each Eligible Employee may elect to become a Participant
by enrolling or re-enrolling in the Plan effective as of any Enrollment Date. In
order to enroll, an Eligible Employee must complete, sign and submit to the
Company an enrollment form in such form, manner and by such deadline as may be
specified by the Committee from time to time (in its discretion and on a
nondiscriminatory basis). Any Participant whose option expires and who has not
withdrawn from the Plan automatically will be re-enrolled in the Plan on the
Enrollment Date immediately following the Purchase Date on which his or her
option expires. Any Participant whose option has not expired and who has not
withdrawn from the Plan automatically will be deemed to be un-enrolled from the
Participant's current option and be enrolled as of a subsequent Enrollment Date
if the price per Share on such subsequent Enrollment Date is lower than the
price per Share on the Enrollment Date relating to the Participant's current
option.
5.2 PAYROLL WITHHOLDING. On his or her enrollment form, each Participant
must elect to make Plan contributions via payroll withholding from his or her
Compensation. Pursuant to such procedures as the Committee may specify from time
to time, a Participant may elect to have withholding equal to a whole percentage
from 1% to 10% (or such lesser percentage that the Board may establish from time
to time for all options to be granted on any Enrollment Date). A Participant may
elect to increase or decrease his or her rate of payroll withholding by
submitting a new enrollment form in accordance with such procedures as may be
established by the Committee from time to time. A Participant may stop his or
her payroll withholding by submitting a new enrollment form in accordance with
such procedures as may be established by the Committee from time to time. In
order to be effective as of a specific date, an enrollment form must be received
by the Company no later than the deadline specified by the Committee, in its
discretion and on a nondiscriminatory basis, from time to time. Any Participant
who is automatically re-enrolled in the Plan will be deemed to have elected to
continue his or her contributions at the percentage last elected by the
Participant.
SECTION 6
OPTIONS TO PURCHASE COMMON STOCK
6.1 GRANT OF OPTION. On each Enrollment Date on which the Participant
enrolls or re-enrolls in the Plan, he or she shall be granted an option to
purchase Shares.
6.2 DURATION OF OPTION. Each option granted under the Plan shall expire on
the earliest to occur of (a) the completion of the purchase of Shares on the
last Purchase Date occurring within 27 months of the Grant Date of such option,
(b) such shorter option period as
4
<PAGE>
may be established by the Board from time to time prior to an Enrollment
Date for all options to be granted on such Enrollment Date, or (c) the date on
which the Participant ceases to be such for any reason. Until otherwise
determined by the Committee for all options to be granted on an Enrollment Date,
the period referred to in clause (b) in the preceding sentence shall mean the
period from the applicable Enrollment Date through the last business day prior
to the immediately following Enrollment Date.
6.3 NUMBER OF SHARES SUBJECT TO OPTION. The number of Shares available for
purchase by each Participant under the option may be limited by the Board from
time to time prior to an Enrollment Date for all options to be granted on such
Enrollment Date.
6.4 OTHER TERMS AND CONDITIONS. Each option shall be subject to the
following additional terms and conditions:
(a) payment for Shares purchased under the option shall be made only
through payroll withholding under Section 5.2;
(b) purchase of Shares upon exercise of the option will be
accomplished only in accordance with Section 7.1;
(c) the price per Share under the option will be determined as
provided in Section 7.1; and
(d) the option in all respects shall be subject to such other terms
and conditions (applied on a uniform and nondiscriminatory basis), as the
Committee shall determine from time to time in its discretion.
SECTION 7
PURCHASE OF SHARES
7.1 EXERCISE OF OPTION. Subject to Section 7.2, on each Purchase Date, the
funds then credited to each Participant's account shall be used to purchase
whole Shares. Any cash remaining after whole Shares have been purchased shall be
carried forward in the Participant's account for the purchase of Shares on the
next Purchase Date. The price per Share of the Shares purchased under any option
granted under the Plan shall be eighty-five percent (85%) of the lower of:
(a) the closing price per Share on the Grant Date for such option on
the NASDAQ National Market System; or
(b) the closing price per Share on the Purchase Date on the NASDAQ
National Market System.
7.2 DELIVERY OF SHARES. As directed by the Committee in its sole
discretion, Shares purchased on any Purchase Date shall be delivered directly to
the Participant or to a custodian or broker (if any) designated by the Committee
to hold Shares for the benefit of the Participants. As determined by the
Committee from time to time, such Shares shall be delivered as physical
certificates or by means of a book entry system.
5
<PAGE>
7.3 EXHAUSTION OF SHARES. If at any time the Shares available under the
Plan are over-enrolled, enrollments shall be reduced proportionately to
eliminate the over-enrollment. Such reduction method shall be "bottom up", with
the result that all option exercises for one Share shall be satisfied first,
followed by all exercises for two Shares, and so on, until all available Shares
have been exhausted. Any funds that, due to over-enrollment, cannot be applied
to the purchase of whole Shares shall be refunded to the Participants (without
interest thereon). SECTION 8 WITHDRAWAL AND CESSATION OF PARTICIPATION
8.1 WITHDRAWAL. A Participant may withdraw from the Plan by submitting a
completed enrollment form to the Company. A withdrawal will be effective only if
it is received by the Company by the deadline specified by the Committee (in its
discretion and on a uniform and nondiscriminatory basis) from time to time. When
a withdrawal becomes effective, the Participant's payroll contributions shall
cease and all amounts then credited to the Participant's account shall be
distributed to him or her (without interest thereon).
8.2 TERMINATION OF STATUS AS ELIGIBLE EMPLOYEE. A Participant shall cease
to be a Participant immediately upon the cessation of his or her status as an
Eligible Employee (for example, because of his or her termination of employment
from an Employer for any reason). As soon as practicable after such cessation,
the Participant's payroll contributions shall cease and all amounts then
credited to the Participant's account shall be distributed to him or her
(without interest thereon). If a Participant is on a Company-approved leave of
absence, in the Committee's discretion his or her participation in the Plan
shall continue for so long as he or she remains an Eligible Employee and has not
withdrawn from the Plan pursuant to Section 8.1.
SECTION 9
MISCELLANEOUS
9.1 NO EFFECT ON EMPLOYMENT. Neither the establishment or maintenance of
the Plan, the granting of options, the purchase of Shares, nor any action of any
Employer or the Committee, shall be held or construed to confer upon any
individual any right to be continued as an employee of the Employer nor, upon
dismissal, any right or interest in any specific assets of the Employers other
than as provided in the Plan. Each Employer expressly reserves the right to
discharge any employee at any time, with or without cause.
9.2 PARTICIPATION BY SUBSIDIARIES. One or more Subsidiaries of the Company
may become participating Employers with approval for such participation from the
Board. A Subsidiary that becomes a participating employer shall be deemed to
agree to all of the Plan's terms, including (but not limited to) the provisions
granting exclusive authority (a) to the Board to amend the Plan, and (b) to the
Committee to administer and interpret the Plan. An Employer may terminate its
participation in the Plan at any time. The liabilities incurred under the Plan
to the Participants employed by each Employer shall be solely the liabilities of
that Employer, and no other Employer shall be liable for benefits accrued by a
Participant during any period when he or she was not employed by such Employer.
6
<PAGE>
9.3 INDEMNIFICATION. 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.
9.4 BENEFICIARY DESIGNATIONS. If permitted by the Committee (or a uniform
and nondiscriminatory basis), a Participant under the Plan may name a
beneficiary or beneficiaries to whom any amounts credited to the Participant's
account shall be paid in the event of the Participant's death. Each such
designation shall revoke all prior designations by the Participant and shall be
effective only if given in a form and manner acceptable to the Committee. In the
absence of any such designation, any amounts remaining unpaid at the
Participant's death shall be paid to the Participant's estate.
9.5 INALIENABILITY. In no event may either a Participant, a former
Participant or his or her beneficiary, spouse or estate sell, transfer,
anticipate, assign, hypothecate, or otherwise dispose of any right or interest
under the Plan; and such rights and interests shall not at any time be subject
to the claims of creditors nor be liable to attachment, execution or other legal
process. Accordingly, for example, a Participant's interest in the Plan is not
transferable pursuant to a domestic relations order.
9.6 COMPLIANCE WITH RULE 16B-3. Any transactions under this Plan with
respect to officers (as defined in Rule 16a-1 promulgated under the 1934 Act)
are intended to comply with all applicable conditions of Rule 16b-3. To the
extent any provision of the Plan or action by the Committee fails to so comply,
it shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Committee. Notwithstanding any contrary provision of the Plan,
if the Board specifically determines that compliance with Rule 16b-3 no longer
is required, all references in the Plan to Rule 16b-3 shall be null and void.
9.7 APPORTIONMENT OF COSTS AND DUTIES. All acts required of the Employers
under the Plan may be performed by the Company for itself and its Subsidiaries,
and the costs of the Plan may be equitably apportioned by the Committee among
the Company and the other Employers. Whenever an Employer is permitted or
required under the terms of the Plan to do or perform any act, matter or thing,
it shall be done and performed by any officer or employee of the Employers who
is thereunto duly authorized by the Employers.
9.8 NO RIGHTS AS STOCKHOLDER. No Participant (nor any beneficiary) shall
have any of the rights or privileges of a stockholder of the Company with
respect to any Shares
7
<PAGE>
issuable upon exercise of an option, unless and until certificates representing
such Shares shall have been issued, recorded on the records of the Company or
its transfer agents or registrars, and delivered to the Participant (or
beneficiary).
9.9 WITHHOLDING REQUIREMENTS. Prior to the delivery of any Shares pursuant
to exercise of an option, Company shall have the power and the right to deduct
or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy federal, state, local and foreign taxes (including the
Participant's FICA obligation) required to be withheld with respect to the
exercise of such option.
9.10 WITHHOLDING ARRANGEMENTS. The Committee, in its sole discretion and
pursuant to such procedures as it may specify from time to time, may permit or
require a Participant to satisfy all or part of the tax withholding obligations
in connection with an option by (a) having the Company withhold otherwise
deliverable Shares, or (b) delivering to the Company already-owned Shares having
a Fair Market Value equal to the amount required to be withheld. The amount of
the withholding requirement shall be deemed to include any amount which the
Committee determines, not to exceed the amount determined by using the maximum
federal, state, local and foreign jurisdiction marginal income tax rates
applicable to the Participant with respect to the option on the date that the
amount of tax to be withheld is to be determined. The Fair Market Value of the
Shares to be withheld or delivered shall be determined as of the date that the
taxes are required to be withheld.
SECTION 10
AMENDMENT, TERMINATION AND DURATION
10.1 AMENDMENT, SUSPENSION OR TERMINATION. The Board, in its sole
discretion, may amend or terminate the Plan, or any part thereof, at any time
and for any reason. If the Plan is terminated, the Board, in its discretion, may
elect to terminate all outstanding options either immediately or upon completion
of the purchase of Shares on the next Purchase Date, or may elect to permit
options to expire in accordance with their terms (and participation to continue
through such expiration dates). If the options are terminated prior to
expiration, all amounts then credited to Participants' accounts which have not
been used to purchase Shares shall be returned to the Participants (without
interest thereon) as soon as administratively practicable.
10.2 DURATION OF THE PLAN. The Plan shall commence on the date specified
herein, and subject to Section 10.1 (regarding the Board's right to amend or
terminate the Plan), shall remain in effect thereafter.
SECTION 11
LEGAL CONSTRUCTION
11.1 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.
8
<PAGE>
11.2 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.
11.3 REQUIREMENTS OF LAW. The granting of options and the issuance of
Shares under the Plan shall be subject to all applicable laws, rules and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
11.4 GOVERNING LAW. The Plan shall be construed in accordance with and
governed by the laws of the State of California, but without regard to its
conflict of law provisions.
11.5 CAPTIONS. Captions are provided herein for convenience only, and shall
not serve as a basis for interpretation or construction of the Plan.
EXECUTION
IN WITNESS WHEREOF, Varian, Inc., by its duly authorized officer, has
executed this Plan on the date indicated below.
VARIAN, INC.
Dated: February 11, 2000 By: /S/ A. W. HOMAN
--------------------
Name: A. W. Homan
Title: Vice President, General Counsel
and Secretary
9
<PAGE>
EXHIBIT 10.2
AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT
THIS AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT ("Agreement") is
entered into effective as of February 25, 2000, by and between VARIAN, INC., a
Delaware corporation (the "Company")1, and Sergio Piras, an officer 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.
2. EMPLOYMENT OF EMPLOYEE.
- --------
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>
(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.
(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
<PAGE>
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.
"Change in Control Date" shall mean the date on which a Change in
Control occurs.
"Cause" shall mean:
<PAGE>
(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:
(i) The assignment of Employee to duties which are materially
different from Employee's duties immediately prior to the Change in Control and
which result in a material reduction in Employee's authority and responsibility
when compared to the highest level of authority and responsibility assigned to
Employee at any time during the six (6) month period prior to the Change in
Control Date; or
<PAGE>
(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 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
<PAGE>
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 2.50 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
<PAGE>
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.
(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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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, 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
<PAGE>
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:
If to Employee: If to Company:
Via dei Castagni 14 Varian, Inc.
10025 Pino Torinese 3120 Hansen Way
Torino, Italy 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
<PAGE>
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 the Company dated as of April 2, 1999.
(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 February 25, 2000.
VARIAN, INC. EMPLOYEE
/S/ ARTHUR W. HOMAN /S/ SERGIO PIRAS
--------------------------------- --------------------------
By: Arthur W. Homan Sergio Piras
Title: Vice President, General Counsel
and Secretary
<PAGE>
EXHIBIT 10.3
AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT
THIS AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT ("Agreement") is
entered into effective as of February 25, 2000, by and between VARIAN, INC., a
Delaware corporation (the "Company")1, and C. Wilson Rudd, 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.
2. EMPLOYMENT OF EMPLOYEE.
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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>
(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.
(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
<PAGE>
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.
"Change in Control Date" shall mean the date on which a Change in
Control occurs.
"Cause" shall mean:
<PAGE>
(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:
(i) The assignment of Employee to duties which are
materially different from Employee's duties immediately prior to the Change in
Control and which result in a material reduction in Employee's authority and
responsibility when compared to the highest level of authority and
responsibility assigned to Employee at any time during the six (6) month period
prior to the Change in Control Date; or
<PAGE>
(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 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
<PAGE>
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 2.50 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
<PAGE>
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.
(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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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, 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
<PAGE>
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:
If to Employee: If to Company:
1281 West Marina Drive Varian, Inc.
Chandler, AZ 85248 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
<PAGE>
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 the Company dated as of April 2, 1999.
(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 February 25, 2000.
VARIAN, INC. EMPLOYEE
/S/ ARTHUR W. HOMAN /S/ C. WILSON RUDD
--------------------------------- ---------------------------
By: Arthur W. Homan C. Wilson Rudd
Title: Vice President, General Counsel
and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VARIAN,
INC.'S MARCH 31, 2000 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-29-2000
<PERIOD-START> OCT-02-1999
<PERIOD-END> MAR-31-2000
<CASH> 54,528
<SECURITIES> 0
<RECEIVABLES> 152,845
<ALLOWANCES> 0
<INVENTORY> 92,401
<CURRENT-ASSETS> 333,579
<PP&E> 196,925
<DEPRECIATION> 119,679
<TOTAL-ASSETS> 477,146
<CURRENT-LIABILITIES> 191,961
<BONDS> 0
0
0
<COMMON> 321
<OTHER-SE> 217,933
<TOTAL-LIABILITY-AND-EQUITY> 477,146
<SALES> 337,262
<TOTAL-REVENUES> 337,262
<CGS> 207,919
<TOTAL-COSTS> 305,572
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,244
<INCOME-PRETAX> 30,446
<INCOME-TAX> 11,874
<INCOME-CONTINUING> 18,572
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,572
<EPS-BASIC> 0.60
<EPS-DILUTED> 0.56
</TABLE>
