<PAGE>
As filed with the Securities and Exchange Commission on October 13, 1999
Registration No. 333-85249
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
--------------
AGILENT TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
--------------
Delaware 3825 77-0518772
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
3000 Hanover Street
Palo Alto, California 94304
(650) 857-1501
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
Edward W. Barnholt
President and Chief Executive Officer
Agilent Technologies, Inc.
3000 Hanover Street
Palo Alto, California 94304
(650) 857-1501
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
Larry W. Sonsini, Esq. D. Craig Nordlund, Esq. William H. Hinman, Jr.,
Donna M. Petkanics, Marie Oh Huber, Esq. Esq.
Esq. Agilent Technologies, Inc. Shearman & Sterling
Wilson Sonsini Goodrich 3000 Hanover Street 1550 El Camino Real
& Rosati Palo Alto, California 94304 Menlo Park, California
Professional (650) 857-1501 94025
Corporation (650) 330-2200
650 Page Mill Road
Palo Alto, California
94304
(650) 493-9300
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
--------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effectiveness until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
EXPLANATORY NOTE
This registration statement contains two separate prospectuses. The first
prospectus relates to a public offering in the United States and Canada of an
aggregate of shares of common stock. The second prospectus relates to a
concurrent offering outside the United States and Canada of an aggregate of
shares of common stock. The two prospectuses for inside and outside the
United States and Canada will be identical with the exception of an alternate
front cover page for the offering outside the United States and Canada. The
alternate page appears in this registration statement immediately following
the complete prospectus for the offering in the United States and Canada.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued October 13, 1999
Shares
[LOGO OF AGILENT TECHNOLOGIES]
COMMON STOCK
----------
Agilent Technologies, Inc. is offering shares of its common stock. This is our
initial public offering and no public market currently exists for our shares.
We anticipate that the initial public offering price will be between $ and $
per share.
----------
After the offering, Hewlett-Packard will own approximately % of our common
stock, assuming no exercise of the underwriters' over-allotment option.
Hewlett-Packard has announced that it plans to complete its divestiture of
Agilent Technologies by the middle of calendar year 2000 by distributing all of
the shares of our common stock owned by Hewlett-Packard to holders of Hewlett-
Packard's common stock. See "Arrangements Between Agilent Technologies and
Hewlett-Packard."
----------
We have applied for listing of our common stock on the New York Stock Exchange
under the trading symbol "A."
----------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 9.
----------
PRICE $ A SHARE
----------
<TABLE>
<CAPTION>
Underwriting
Discounts and Proceeds to Agilent
Price to Public Commissions Technologies
--------------- ------------- -------------------
<S> <C> <C> <C>
Per Share..................... $ $ $
Total......................... $ $ $
</TABLE>
Agilent Technologies, Inc. has granted the U.S. underwriters the right to
purchase up to an additional shares of common stock to cover over-
allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 1999.
----------
MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
BEAR, STEARNS & CO. INC.
J.P. MORGAN & CO.
LEHMAN BROTHERS
, 1999 SG COWEN
<PAGE>
Inside Front Cover
The following captions appear in the inside front cover:
"Agilent Technologies
Foundation. . . leadership. . . growth
Yesterday
A 60-year heritage of
innovation, contribution and
success at Hewlett-Packard
Today
Broad market leadership; rich technology
portfolio; global reach
Tomorrow
Focus, speed and agility;
opportunities in communications and
life sciences"
Three photographs, each one corresponds to descriptive material for Yesterday,
Today and Tomorrow: First photograph (Yesterday) depicts two male scientists
working in a laboratory setting, circa 1950; Second photograph shows a female
laboratory technician performing analysis using Agilent Technologies test
equipment and recording her findings in a notebook, circa 1999; Third
photograph (Tomorrow) is a montage print showing a satellite antenna and a
cardiac ultrasound display.
Foldout, Page One
One banner-type photograph atop narrative material below. The photograph is
rectangular in shape and is a montage. From left to right, the montage
comprises a communications satellite and various communications components.
The following captions appear on the foldout, page one:
"Agilent Technologies
Powerful technologies, new opportunities
ENABLING NEXT-GENERATION COMMUNICATIONS
<TABLE>
<CAPTION>
Test and Semiconductor
Measurement Products
Our Business
<S> <C>
We help our customers design and We are a leading supplier of components,
deploy new technologies with our modules and assemblies to leaders in high-
advanced test, measurement and speed communications and computing.
monitoring solutions.
Market Leadership
Number one position in 25 product Leading provider of fiber optic transceiver
categories in the test and modules; Fibre Channel protocol integrated
measurement market circuits; infrared components;
optoelectronic components and displays
Opportunities
Next generation communications High speed communications networks and
networks and devices wireless communications"
</TABLE>
<PAGE>
Foldout, Page Two
The following captions appear on the foldout, page two:
"ADVANCING THE LIFE SCIENCES
<TABLE>
<S> <C>
Healthcare Chemical
Solutions Analysis
</TABLE>
Our Business
<TABLE>
<S> <C>
We are a worldwide leader in We enable customers to identify, quantify,
clinical measurement and analyze and test the chemical and
diagnostic solutions for the biological properties of thousands of
healthcare marketplace. substances and products.
Market Leadership
We are a leading supplier of We are a leading supplier of gas and liquid
patient monitoring systems; chromotography and mass spectroscopy
cardiovascular ultrasound imaging instruments and systems.
systems; automatic external
defibrillators
Opportunities
Healthcare beyond the hospital, Drug development based on genetic origins
including in small clinics, of disease, microfluidics and other
doctors' offices and in patients' advanced pharmaceutical technologies"
homes
</TABLE>
One banner-type photograph atop narrative material. The photograph is
rectangular in shape and is a montage. From left to right, the montage
comprises a scientist reviewing a patient monitoring device, a photograph of a
Lab Chip system and a (different) scientist analyzing a test tube sample.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................... 4
Risk Factors................................................................. 9
You Should Not Rely on Forward-looking Statements............................ 20
Our Separation From Hewlett-Packard.......................................... 21
Use of Proceeds.............................................................. 23
Dividend Policy.............................................................. 23
Capitalization............................................................... 24
Selected Financial Data...................................................... 25
Unaudited Pro Forma Condensed Financial Statements........................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................... 29
Business..................................................................... 50
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management.................................................................... 86
Arrangements Between Agilent Technologies and Hewlett-Packard................. 100
Principal Stockholder......................................................... 112
Description of Capital Stock.................................................. 112
Shares Eligible for Future Sale............................................... 115
Material United States Federal Tax Consequences to Non-United States Holders.. 116
Underwriters.................................................................. 119
Legal Matters................................................................. 122
Experts....................................................................... 122
Where You Can Find More Information........................................... 122
Index to Financial Statements................................................. F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. In this prospectus, "Agilent
Technologies," "we," "us" and "our" each refers to Agilent Technologies, Inc.
and its subsidiaries, and not the underwriters or Hewlett-Packard Company, and
"Hewlett-Packard" refers to Hewlett-Packard Company and its subsidiaries.
Until , 1999 (25 days after the date of this prospectus), all dealers
that buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our historical consolidated financial statements and notes thereto
included elsewhere in this prospectus.
AGILENT TECHNOLOGIES, INC.
Agilent Technologies is a diversified technology company that provides
enabling solutions to high growth markets within the communications,
electronics, life sciences and healthcare industries. Our broad technology
portfolio and our experience in working with market-leading customers around
the world have allowed us to establish and continue to expand our leadership
across multiple markets.
We are a global leader in designing and manufacturing test, measurement and
monitoring instruments, systems and solutions and semiconductors and optical
components. Agilent Technologies includes the following businesses:
. test and measurement, which had fiscal 1998 revenue of $4.1 billion,
provides test instruments, standard and customized test, measurement and
monitoring systems for the design, manufacture and support of electronic
and communication devices, and software for the design of high-frequency
electronic and communication devices;
. semiconductor products, which had fiscal 1998 revenue of $1.6 billion,
provides fiber optic communications devices and assemblies, integrated
circuits for wireless applications, integrated circuits that are
designed for specific applications (ASICs), optoelectronic devices,
which translate electrical signals from and into equivalent light-based
signals, and image sensors;
. healthcare solutions, which had fiscal 1998 revenue of $1.3 billion,
provides patient monitoring, ultrasound imaging and cardiology products
and systems; and
. chemical analysis, which had fiscal 1998 revenue of $938 million,
provides analytical instruments, systems and services for
chromatography, mass spectroscopy and bio-instrumentation.
Chromatography is the separation of mixed samples in gas or liquid form
into component compounds for the purpose of analyzing these components.
Mass spectroscopy is the measurement of masses of atoms for the purpose
of identifying and quantifying molecules and elements within a sample.
Agilent Technologies' ability to succeed is based on two fundamental
attributes. First, we have a broad and deep portfolio of technology expertise
in electronics, communications, medical and chemical measurement,
biotechnology, photonics, solid-state materials and components and measurement
systems and solutions. This expertise is driven by the research and development
efforts within our businesses and by the activities of Agilent Technologies
Laboratories, one of the world's leading industrial research and development
organizations. Each of our businesses takes advantage of the technology
advances developed by our central laboratories, often using common technology
in different applications within their specific business.
Our second core attribute is our close relationships with our customers.
These relationships provide us with comprehensive insight into the worldwide
markets in which we sell our products and services. Our businesses have
developed these relationships and insights over our 60 year history. During
this time, our businesses have worked with thousands of customers worldwide as
technologies, business needs and global economic conditions have undergone
dramatic changes.
4
<PAGE>
Our businesses share important characteristics and resources that we believe
contribute significantly to our competitive success. Our test and measurement,
healthcare solutions and chemical analysis businesses are built around our
excellence in applying measurement technologies to the development of products
that sense, analyze and display data required by the end-user. Our test and
measurement and semiconductor businesses share focus on growth opportunities in
the communications sector, while our healthcare and chemical analysis
businesses share focus on growth opportunities in healthcare and life sciences.
Our global infrastructure enables our businesses to move our products from
initial commercialization to worldwide availability rapidly and efficiently and
to provide localized service and support.
We provide the world's broadest range of test and measurement solutions to
customers in the communications, electronics and semiconductor industries. We
are also a leading supplier of:
. semiconductor and fiber optic components to the communications and
computer industries;
. modules and assemblies to the communications and electronics industries;
. patient monitoring and ultrasound imaging equipment and automatic
external defibrillators to the healthcare industry; and
. chemical measurement instruments and systems to the hydrocarbon
processing, environmental and pharmaceutical industries.
We serve customers in more than 110 countries, and we have major research
and development and manufacturing facilities around the world.
STRATEGY
To maintain and grow our market leadership, we have designed a business
strategy that takes advantage of our competitive strengths and capitalizes on
emerging trends in the communications, electronics, healthcare and life
sciences industries. The key elements of our strategy are to:
. Focus on High Growth Market Opportunities. We work closely with our
customers' research and development teams to understand emerging
markets, technologies and standards, and we invest accordingly in our
own development of enabling solutions in those areas. We will continue
to establish strategic partnerships and make tactical acquisitions to
develop advanced systems that complement our existing technologies and
products to accelerate our entry into high-growth markets.
. Continue to Innovate Technologically. We will continue to invest in and
build research and development expertise, both in the centralized
facilities of Agilent Technologies Laboratories and in the research and
development facilities of our four main businesses.
. Maximize the Benefits of our Scale and Global Presence. Our global
direct sales force gathers insights into important industry trends and
provides us an effective means of bringing new products to market
rapidly. We believe our customers value our ability to provide more
complete solutions with our global training, systems integration, and
project management programs. We will continue to focus on enhancing
overall customer satisfaction, providing effective localized service and
support to our customers around the world.
5
<PAGE>
BENEFITS OF OUR SEPARATION FROM HEWLETT-PACKARD
Agilent Technologies comprises businesses that will be separated from
Hewlett-Packard's other operations prior to this offering. We believe that we
will realize benefits from our complete separation from Hewlett-Packard,
including:
. Greater Strategic Focus. As a result of having our own board of
directors and separate management team, we expect to have a sharper
focus on the Agilent Technologies business and strategic opportunities.
. Increased Speed and Responsiveness. As a significantly smaller company,
we expect to be able to make decisions more quickly, deploy resources
more rapidly and efficiently and operate with more agility than when we
were a part of Hewlett-Packard.
. Better Incentives for Employees and Greater Accountability. We will seek
to motivate our employees and strengthen the focus of our management
through the implementation of incentive compensation programs tied to
the market performance of our common stock.
. Direct Access to Capital Markets. As an independent company, we will
have direct access to the capital markets to issue debt or equity
securities and to grow through acquisitions.
OUR RELATIONSHIP WITH HEWLETT-PACKARD
We are currently a wholly owned subsidiary of Hewlett-Packard. After the
completion of this offering, Hewlett-Packard will own approximately % of the
outstanding shares of our common stock, or approximately % if the U.S.
underwriters exercise their over-allotment option in full. Hewlett-Packard has
announced that it currently plans to complete its divestiture of Agilent
Technologies by the middle of calendar year 2000 by distributing all of the
shares of Agilent Technologies common stock owned by Hewlett-Packard to the
holders of Hewlett-Packard's common stock. However, Hewlett-Packard is not
obligated to complete the distribution, and the distribution may not occur by
the contemplated time or at all.
Hewlett-Packard will determine the timing, structure and all terms of its
distribution of our common stock in its sole discretion. Hewlett-Packard has
received a private letter ruling from the Internal Revenue Service that the
distribution of its shares of Agilent Technologies common stock to the holders
of Hewlett-Packard common stock will be tax-free to Hewlett-Packard and its
stockholders for United States federal income tax purposes. For a discussion of
the risks associated with Hewlett-Packard not completing the distribution, see
"Risk Factors--Risks Related To Our Separation From Hewlett-Packard--Our
business may suffer if Hewlett-Packard does not complete its distribution of
our common stock."
We have entered into agreements with Hewlett-Packard that provide for the
separation of our business operations from Hewlett-Packard. These agreements
are not conditioned on the distribution. They provide for, among other things,
the transfer from Hewlett-Packard to us of assets and the assumption by us of
liabilities relating to our business. For more information regarding the assets
and liabilities to be transferred to us, see our consolidated financial
statements and notes thereto that are included elsewhere in this prospectus. In
November 1999, Hewlett-Packard will make a $ cash payment to us in
connection with our planned initial funding. We have also entered into
agreements with Hewlett-Packard regarding the transfer and licensing to us of
intellectual property related to the business of Agilent Technologies.
Substantially all of these transfers will be completed prior to the closing of
this offering.
The agreements between Hewlett-Packard and us also govern our various
interim and ongoing relationships. All of the agreements providing for our
separation from Hewlett-Packard were made in the context of a parent-subsidiary
relationship and were negotiated in the overall context of our separation from
Hewlett-Packard. The terms of these agreements may be more or less favorable to
us than if they had been negotiated with unaffiliated third parties. See "Risk
Factors--Risks Related To Our Separation From Hewlett-Packard" and
"Arrangements between Agilent Technologies and Hewlett-Packard."
6
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered:
In the United States and Canada........ shares
Outside the United States and Canada... shares
Total.............................. shares
Common stock to be outstanding immediately
after this offering...................... shares
Common stock to be held by Hewlett-Packard
immediately after this offering.......... shares
Use of proceeds........................... We estimate that our net proceeds
from this offering will be $ ,
based on an assumed initial public
offering price of $ per share.
The net proceeds of this offering
(including proceeds received from
any exercise of the U.S.
underwriters' over-allotment
option) will be paid to Hewlett-
Packard as a dividend.
Proposed New York Stock Exchange
symbol................................... A
</TABLE>
This information is based on shares outstanding as of , 1999, all
of which are owned by Hewlett-Packard. We have declared a -for-one stock
split to increase the amount of outstanding shares of our common stock to
shares prior to this offering. Unless we specifically state otherwise, the
information in this prospectus does not take into account the issuance of up to
shares of common stock that the U.S. underwriters have the option to
purchase solely to cover over-allotments. If the U.S. underwriters exercise
their over-allotment option in full, shares of common stock will be
outstanding after this offering.
The number of shares of our common stock to be outstanding immediately after
this offering listed above does not take into account approximately shares
of our common stock reserved for issuance under our stock plans, of which
options to purchase shares have been granted.
----------------
We were incorporated in Delaware in May 1999 as a wholly owned subsidiary of
Hewlett-Packard. Our principal executive offices are located at 3000 Hanover
Street, Palo Alto, California 94304, and our telephone number is (650) 857-
1501. We expect to move our executive offices to 395 Page Mill Road, Palo Alto,
California 94306 in the middle of calendar year 2000. Our website is
http://www.agilent.com. The information on the website is not a part of this
prospectus.
7
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents summary consolidated financial data for Agilent
Technologies. The data presented in this table are derived from "Selected
Financial Data," "Unaudited Pro Forma Condensed Financial Statements" and the
historical consolidated financial statements and notes thereto that are
included elsewhere in this prospectus. You should read those sections for a
further explanation of the financial data summarized here.
The historical financial information may not be indicative of our future
performance and does not reflect what our financial position and results of
operations would have been had we operated as a separate, stand-alone entity
during the periods presented. The year ended October 31, 1998 includes the
effect of pre-tax restructuring charges that reduced our earnings from
operations by approximately $163 million.
The Pro Forma Consolidated Balance Sheet Data reflects the planned initial
funding of our operations by Hewlett-Packard and our pending purchase of
Yokogawa Electric Corporation's 25% interest in Hewlett-Packard Japan. The Pro
Forma As Adjusted Consolidated Balance Sheet Data also reflects the receipt and
subsequent payment to Hewlett-Packard of the net proceeds from the sale of the
shares of our common stock in this offering. The pro forma financial position
shown in this table is not indicative of what our financial position would have
been had the separation of our business from Hewlett-Packard been completed on
July 31, 1999. See Notes to Unaudited Pro Forma Condensed Financial Statements
for an explanation of the calculation of unaudited pro forma net earnings per
share.
<TABLE>
<CAPTION>
Nine Months
Ended July
Years Ended October 31, 31,
---------------------------------- -------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------ ------ ------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Earnings Data:
Net revenue.................. $5,546 $6,595 $7,379 $7,785 $7,952 $5,965 $5,883
Earnings from operations..... 521 841 875 870 442 489 536
Net earnings................. 282 499 542 543 257 308 366
Unaudited pro forma net
earnings per share:
Basic....................... $ $
Diluted..................... $ $
Average shares used in
computing unaudited
pro forma net earnings per
share:
Basic.......................
Diluted.....................
</TABLE>
<TABLE>
<CAPTION>
July 31, 1999
----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------ --------- -----------
(in millions)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents......................... $ -- $ 983 $ 983
Working capital................................... 1,789 2,373 2,373
Total assets...................................... 5,050 5,498 5,498
Stockholders' equity.............................. 3,220 4,171 4,171
</TABLE>
8
<PAGE>
RISK FACTORS
You should carefully consider the risks described below and the other
information in this prospectus before investing in our common stock. Our
business could be seriously harmed by any of these risks. The trading price of
our common stock could decline due to any of these risks, and you may lose all
or part of your investment.
Risks Related to Our Business
If we do not introduce new products and services in a timely manner, our
products and services will become obsolete, and our operating results will
suffer.
We sell our products in several industries that are characterized by rapid
technological changes, frequent new product and service introductions and
evolving industry standards. Without the timely introduction of new products,
services and enhancements, our products and services will likely become
technologically obsolete over time, in which case our revenue and operating
results would suffer. The success of our new product and service offerings
will depend on several factors, including our ability to:
. properly identify customer needs;
. price our products competitively;
. innovate and develop new technologies and applications;
. successfully commercialize new technologies in a timely manner;
. manufacture and deliver our products in sufficient volumes on time; and
. differentiate our offerings from our competitors' offerings.
Many of our products are used by our customers to develop, test and
manufacture their new products. We therefore must anticipate industry trends
and develop products in advance of the commercialization of our customers'
products. Development of new products generally requires a substantial
investment before we can determine the commercial viability of these
innovations. If we fail to adequately predict our customers' needs and future
activities, we may invest heavily in research and development of products and
services that do not lead to significant revenue. For example, the cellular
phone industry, which is served by our test and measurement and semiconductor
products businesses, currently has several competing communications standards.
We may suffer competitive harm if we dedicate resources to developing products
and technologies to support a standard that does not achieve broad market
acceptance. Our other businesses will encounter similar challenges. In our
healthcare business, new technologies that we develop may not be quickly
accepted because of industry-specific factors such as the need for regulatory
clearance, entrenched patterns of clinical practice, uncertainty over third-
party reimbursement and clinicians' fears of malpractice suits. We would
suffer competitive harm if we dedicate a significant amount of resources to
the development of products and technologies that do not achieve broad market
acceptance.
Economic, political and other risks associated with international sales and
operations, particularly in Korea and Japan, could adversely affect our
sales.
Since we sell our products worldwide, our business is subject to risks
associated with doing business internationally. Our net revenue originating
outside the United States, as a percentage of our total net revenue, was 54.4%
in fiscal year 1998 and 54.9% for the nine months ended July 31, 1999. We
anticipate that revenue from international operations will continue to
represent a substantial portion of our total revenue. In addition, many of our
manufacturing facilities and suppliers are located outside the United States.
Accordingly, our future results could be harmed by a variety of factors,
including:
. changes in foreign currency exchange rates;
. changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
9
<PAGE>
. trade protection measures and import or export licensing requirements;
. potentially negative consequences from changes in tax laws;
. difficulty in staffing and managing widespread operations;
. differing labor regulations;
. differing protection of intellectual property; and
. unexpected changes in regulatory requirements.
We do a substantial portion of our business in Korea and Japan, which have
been subject to increased economic instability in recent years. Our business
declined in 1998 when Korea and Japan experienced economic difficulties. The
recurrence of weakness in these economies or weakness in other international
economies could have a significant negative effect on our future operating
results.
Fluctuations in our quarterly operating results may cause our stock price
to decline.
Given the nature of the markets in which we participate, we cannot reliably
predict future revenue and profitability, and unexpected changes may cause us
to adjust our operations. A high proportion of our costs are fixed, due in
part to our significant sales, research and development and manufacturing
costs. Thus, small declines in revenue could disproportionately affect our
operating results in a quarter. For example, when our revenue declined in 1998
as a result of the financial crisis in Asia, it caused significant negative
fluctuations in our operating results. Other factors that could affect our
quarterly operating results include:
. demand for and market acceptance of our products;
. competitive pressures resulting in lower selling prices;
. adverse changes in the level of economic activity in the United States
and other major regions in which we do business;
. adverse changes in industries, such as semiconductors and electronics,
on which we are particularly dependent;
. changes in the relative portion of our revenue represented by our
various products and customers;
. unanticipated delays or problems in the introduction of new products;
. our competitors' announcements of new products, services or
technological innovations;
. increased costs of raw materials or supplies;
. changes in the timing of product orders; and
. our inability to forecast revenue in a given quarter from large system
sales.
The current technology labor market is very competitive, and our business
will suffer if we are not able to hire and retain sufficient personnel.
Our future success depends partly on the continued service of our key
research, engineering, sales, marketing, manufacturing, executive and
administrative personnel. If we fail to retain and hire a sufficient number of
these personnel, we will not be able to maintain and expand our business.
Competition for qualified personnel in the technology area is intense, and we
operate in several geographic locations where labor markets are particularly
competitive, including the Silicon Valley region of Northern California where
our headquarters and central research and development laboratories are
located. Although we believe we offer competitive salaries and benefits,
certain of our businesses have had to increase spending in order to retain
personnel. We also believe we have benefited from Hewlett-Packard's name and
reputation as an employer in the past. To the extent we do not obtain similar
popular recognition, our ability to attract and retain personnel could be
harmed. In addition, some employees of Hewlett-Packard who worked in our
businesses in the past may have chosen, or may choose, to remain with Hewlett-
Packard in other positions. Until 30 days prior to Hewlett-Packard's
distribution of our
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stock, our employees are generally eligible to apply for and move to positions
at Hewlett-Packard without losing their Hewlett-Packard tenure.
Our operating results could be harmed if the industries into which we sell
our products are in downward cycles.
Many of the industries and markets into which we sell our products are
cyclical. For example, in 1998 the operating results of our test and
measurement and semiconductor products businesses were harmed by downturns in
the semiconductor market. From time to time, the electronics industry has also
experienced significant downturns, often in connection with, or in
anticipation of, maturing product cycles and declines in general economic
conditions. In addition, the computer industry is subject to seasonal and
cyclical fluctuations in demand for its products. These industry downturns
have been characterized by diminished product demand, excess manufacturing
capacity and subsequent accelerated erosion of average selling prices. In
addition, the healthcare industry has experienced a significant increase in
cost pressures resulting from hospital consolidation and the trend by
insurance companies to reduce payments to healthcare providers. Any
significant downturn in our customers' markets or in general economic
conditions would likely result in a reduction in demand for our products and
services and could harm our business.
After our separation from Hewlett-Packard, we may experience increased
costs resulting from decreased purchasing power which could decrease our
profitability.
Prior to our separation from Hewlett-Packard, our businesses were able to
take advantage of Hewlett-Packard's size and purchasing power in procuring
goods, services and technology, such as computer software licenses. As a
separate, stand-alone entity, we may be unable to obtain goods, services and
technology at prices and on terms as favorable as those we obtained prior to
the separation. In addition, our patent cross-license agreement with Hewlett-
Packard gives us the right to sublicense only a portion of Hewlett-Packard's
intellectual property portfolio. As a result, in negotiating patent cross-
license agreements with third parties, we may be unable to obtain agreements
on terms as favorable as we may have been able to obtain if we had access to
Hewlett-Packard's entire intellectual property portfolio.
Our semiconductor technology licensing and supply arrangements with
Hewlett-Packard limit our ability to sell to other companies and could
restrict our ability to expand our businesses.
We do not have a license under Hewlett-Packard's patents, patent
applications and invention disclosures for printing devices, printer supplies,
components and accessories, document scanners and some computing devices. In
addition, our ICBD Technology Ownership and License Agreement, which generally
covers integrated circuit technology that is used in integrated circuits for
Hewlett Packard's printers, scanners and computers, provides that for a period
of three years in some cases and 10 years in other cases we are prohibited
from using this integrated circuit technology for the development and sale of
integrated circuits for use in printing devices, printer supplies, components
and accessories, document scanners and some computing devices to third parties
other than Hewlett-Packard.
Although we have entered into a supply agreement for the sale to
Hewlett-Packard of these kinds of integrated circuits, the supply agreement
does not require Hewlett-Packard to purchase a minimum amount of product from
us. In the event that Hewlett-Packard reduces its purchase of our integrated
circuits, we would be unable to address this reduction through sales of these
kinds of integrated circuits for these types of products to other customers.
If demand for Hewlett-Packard's printer, workstation and server products
declines, or if Hewlett-Packard chooses a different supplier, our
semiconductor products business revenue will decline significantly.
Historically, some of our businesses have sold products to Hewlett-Packard
and have engaged in product development efforts with divisions of Hewlett-
Packard. For the nine months ended July 31, 1999, Hewlett-Packard accounted
for 10% of total net revenue. In the nine months ended July 31, 1999, our
semiconductor products business received approximately 37% of its revenue from
sales to Hewlett-Packard's printer,
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workstation and server businesses. These Hewlett-Packard businesses were not,
and will not be, required to purchase products from us. A reduction in sales
to any of these Hewlett-Packard customers would harm our business.
Our ability to compete for Hewlett-Packard's business may suffer following
our separation due to decreased access to Hewlett-Packard's research and
development strategy, technology plans, future product features and product
supply needs.
In the past, we have benefited from our access to Hewlett-Packard's
research and development strategy, technology plans, future product features
and product supply needs in competing for Hewlett-Packard's business. If our
competitors were to gain better access to Hewlett-Packard as a result of our
separation, our competitors may be able to develop products that better meet
the future needs of Hewlett-Packard, decreasing the competitiveness of our
products. In addition, we have taken advantage of collaborative relationships
with some of Hewlett-Packard's businesses. We may not continue to enjoy all of
the benefits of these collaborative relationships, particularly if our patent
cross-license is not renewed.
We face aggressive competition in all areas of our business, and if we do
not compete effectively, our business will be harmed.
We encounter aggressive competition in all areas of our business. Our
competitors are numerous, ranging from some of the world's largest
corporations, such as General Electric Company, International Business
Machines Corporation, Lucent Technologies, Inc. and Siemens AG, to many highly
specialized firms, such as Anritsu Corporation, PE Biosystems, Teradyne, Inc.
and Waters Corporation, as well as many smaller technology startups. We may
not be able to compete effectively with all of these competitors. To remain
competitive, we will need to develop new products and periodically enhance our
existing products in a timely manner. We anticipate that we may have to adjust
prices of many of our products to stay competitive, and we will have to manage
financial returns effectively. In addition, new competitors may emerge, and
entire product lines may be threatened by new technologies or market trends
which reduce the value of these product lines.
We may face significant costs in order to comply with laws and regulations
in the manufacture, processing and distribution of chemicals, and, if we
fail to comply, we could be subject to civil or criminal penalties or be
prohibited from distributing our products.
Some of our chemical analysis business' products are used in conjunction
with chemicals whose manufacture, processing and distribution are regulated by
the United States Environmental Protection Agency under the Toxic Substances
Control Act, and by regulatory bodies in other countries with laws similar to
the Toxic Substances Control Act. We must conform the manufacture, processing
and distribution of these chemicals to these laws, and adapt to regulatory
requirements in all countries as these requirements change. If we fail to
comply with these requirements in the manufacture or distribution of our
products, then we could be made to pay civil penalties, face criminal
prosecution and, in some cases, be prohibited from distributing our products
in commerce until the products or component substances are brought into
compliance.
If we fail to maintain satisfactory compliance with the Food and Drug
Administration's regulations, we may be forced to recall products and cease
their manufacture and distribution, and we could be subject to civil or
criminal penalties.
The medical device products produced by our healthcare solutions business
are subject to regulation by the United States Food and Drug Administration
(FDA) and similar international agencies. Their regulations govern a wide
variety of product activities from design and development to labeling,
manufacturing, promotion, sales and distribution. For example, we received a
warning letter from the FDA in 1996 alleging non-compliance with the FDA's
quality system regulations at one of our facilities. The FDA's quality systems
regulation includes elaborate design, testing, control, documentation and
other quality assurance requirements. We had to apply considerable resources
to address the FDA's concerns. We believe we have resolved the issues
identified in the
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FDA's letter and the FDA has concurred with our assessment, but we cannot
assure you that the FDA will not identify other areas of noncompliance. If we
fail to maintain satisfactory compliance with the FDA's quality system and
other regulations, we may have to recall products and cease their manufacture
and distribution. In addition, we could be subject to fines or criminal
prosecution.
In addition, our chemical analysis products are used in the drug design and
production processes to test compliance with the Toxic Substances Control Act,
the Federal Food, Drug and Cosmetic Act and similar regulations. Therefore, we
must continually adapt our chemical analysis products to changing regulations.
Cost containment measures in the healthcare industry and the effect of any
healthcare reform could harm our profitability.
Our healthcare customers rely on third-party payors, such as government
programs and private health insurance plans, to reimburse some or all of the
cost of the procedures in which our products are used. The continuing efforts
of government, insurance companies and other payors of healthcare costs to
contain or reduce those costs could lead our customers to reduce or eliminate
purchases of our products. Likewise, legislative proposals to reform
healthcare or reduce government programs could result in lower prices for or
rejection of our products. The cost containment measures that healthcare
providers are instituting and the effect of any healthcare reform, both in the
United States and internationally, could harm our ability to operate
profitably.
Environmental contamination from past operations could subject us to
unreimbursed costs and could harm on-site operations and the future use and
value of the properties involved.
Some of our properties are undergoing remediation by Hewlett-Packard for
known subsurface contamination. Hewlett-Packard has agreed to retain the
liability for all known subsurface contamination, perform the required
remediation and indemnify us with respect to claims arising out of that
contamination. The determination of the existence and cost of any additional
contamination caused by us could involve costly and time-consuming
negotiations and litigation. In addition, Hewlett-Packard will have access to
our properties to perform remediation. While Hewlett-Packard has agreed to
minimize interference with on-site operations at those properties, remediation
activities and subsurface contamination may require us to incur unreimbursed
costs and could harm on-site operations and the future use and value of the
properties. We cannot assure you that Hewlett-Packard will fulfill its
indemnification or remediation obligations.
We are indemnifying Hewlett-Packard for any liability associated with
contamination from past operations at all other properties to be transferred
from Hewlett-Packard to us other than those properties currently undergoing
remediation by Hewlett-Packard. While we are not aware of any material
liabilities associated with existing subsurface contamination at any of those
properties, subsurface contamination may exist, and we may be exposed to
material liability as a result of the existence of that contamination.
Environmental contamination caused by ongoing operations could subject us
to substantial liabilities in the future.
We will be responsible for any contamination to our properties arising out
of our operations following the separation. Our semiconductor and other
manufacturing processes involve the use of substances regulated under various
international, federal, state and local laws governing the environment. We may
be subject to liabilities for environmental contamination, and these
liabilities may be substantial. Although our policy is to apply strict
standards for environmental protection at our sites inside and outside the
United States, even if not subject to regulations imposed by foreign
governments, we may not be aware of all conditions that could subject us to
liability.
We are subject to laws and regulations governing government contracts, and
our failure to address these laws and regulations or comply with government
contracts could harm our business.
We have agreements relating to the sale of our products to government
entities and as a result we are subject to various statutes and regulations
that apply to companies doing business with the government. The laws
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governing government contracts differ from the laws governing private
contracts. For example, many government contracts contain pricing terms and
conditions that are not applicable to private contracts. We are also subject
to investigation for compliance with the terms of government contracts. We
have received and are complying with formal requests for information by the
government regarding our sales of products to some of the government agencies
with which we have contracted. Based on our review to date, we have not found
that there are any violations of the pertinent laws or regulations relating to
these contracts. However, these requests may result in legal proceedings
against us or liability.
We and our customers are subject to various other governmental regulations,
and we may incur significant expenses to comply with these regulations and
develop our products to be compatible with these regulations.
Several of our product lines are subject to other significant
international, federal, state and local, health and safety, packaging, product
content and labor regulations. These regulations are complex, change
frequently and have tended to become more stringent over time. We may be
required to incur significant expenses to comply with these regulations or
remedy past violations of these regulations. Any failure by us to comply with
applicable government regulations could also result in cessation of portions
or all of our operations, impositions of fines and restrictions on our ability
to carry on or expand our operations. In addition, because many of our
products are regulated or sold into regulated industries, we must comply with
additional regulations in marketing our products.
Our products and operations are also often subject to the rules of
industrial standards bodies, like the International Standards Organization, as
well as regulation of other agencies such as the United States Federal
Communications Commission. We also must comply with work safety rules. If we
fail to adequately address any of these regulations, our business will be
harmed.
Third parties may claim we are infringing their intellectual property, and
we could suffer significant litigation or licensing expenses or be
prevented from selling products.
Third parties may claim that we are infringing their intellectual property
rights, and we may be found to infringe those intellectual property rights.
While we do not believe that any of our products infringe the valid
intellectual property rights of third parties, we may be unaware of
intellectual property rights of others that may cover some of our technology,
products and services. Moreover, in connection with future intellectual
property infringement claims, we will only have the benefit of asserting
counterclaims based on Hewlett-Packard's intellectual property portfolio in
limited circumstances, and we will only be able to offer licenses to Hewlett-
Packard's intellectual property in order to resolve claims in limited
circumstances.
Any litigation regarding patents or other intellectual property could be
costly and time-consuming, and divert our management and key personnel from
our business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims
of intellectual property infringement might also require us to enter into
costly royalty or license agreements. However, we may not be able to obtain
royalty or license agreements on terms acceptable to us, or at all. We also
may be subject to significant damages or injunctions against development and
sale of certain of our products.
We often rely on licenses of intellectual property useful for our business.
We cannot assure you that these licenses will be available in the future on
favorable terms or at all. In addition, our position with respect to the
negotiation of licenses may change after our separation from Hewlett-Packard.
Third parties may infringe our intellectual property, and we may expend
significant resources enforcing our rights or suffer competitive injury.
Our success depends in large part on our proprietary technology. We rely on
a combination of patents, copyrights, trademarks and trade secrets,
confidentiality provisions and licensing arrangements to establish and protect
our proprietary rights. If we fail to successfully enforce our intellectual
property rights, our competitive position could suffer, which could harm our
operating results.
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Our pending patent and trademark registration applications may not be
allowed or competitors may challenge the validity or scope of these patent
applications or trademark registrations. In addition, our patents may not
provide us a significant competitive advantage.
We may be required to spend significant resources to monitor and police our
intellectual property rights. We may not be able to detect infringement and
may lose competitive position in the market before we do so. In addition,
competitors may design around our technology or develop competing
technologies. Intellectual property rights may also be unavailable or limited
in some foreign countries, which could make it easier for competitors to
capture market share.
Potential year 2000 problems associated with our products, our internal
systems or the products of our suppliers and customers could harm our
business.
We are working to implement the systems and programming changes necessary
to address year 2000 internal information technology and non-information
technology readiness issues, product and service readiness issues and material
third party relationships. However, we may encounter a delay in, or increased
costs associated with, the implementation of necessary systems and programming
changes. In addition, if we fail to achieve year 2000 readiness for our
internal systems and processes, it could delay our ability to manufacture and
ship products and deliver services, disrupt our customer service and technical
support facilities and interrupt customer access to our online products and
services. Although we are dedicating substantial resources to attaining year
2000 readiness, we cannot assure you that we will be successful in our efforts
to identify and address all year 2000 issues. Even if we act in a timely
manner to complete all of our assessments; identify, develop and implement
remediation plans believed to be adequate; and develop contingency plans
believed to be adequate; some problems may not be identified or corrected in
time to prevent serious harm to us. In addition, we have relied on assurances
from third parties that they and the products they supply are year 2000
compliant. We have not independently verified these assurances in many cases,
and any failure of these third party products and services to be year 2000
compliant could harm us. Although our newly introduced products are year 2000
compliant, some of our products that are currently installed at customer sites
will require upgrades or other remediation. Some of these products are used in
critical applications in which the impact of non-performance to these
customers and other parties could be significant. There is a risk that our
customers could initiate litigation against us for damages arising from our
products that are not year 2000 compliant. Year 2000 issues could harm our
future results of operations, cash flows or financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
If our factories or facilities were to experience catastrophic loss due to
earthquake, our operations would be seriously harmed.
Several of our facilities could be subject to a catastrophic loss caused by
earthquake due to their location. We have significant facilities in areas with
above average seismic activity, such as our production facilities,
headquarters and Agilent Technologies Laboratories in California and our
production facilities in Washington and Japan. If any of these facilities were
to experience a catastrophic loss, it could disrupt our operations, delay
production, shipments and revenue, and result in large expenses to repair or
replace the facility. Hewlett-Packard does not carry catastrophic insurance
policies which cover potential losses caused by earthquakes. After the
distribution, we do not expect to obtain insurance to cover potential losses
resulting from earthquakes.
Risks Related to Our Separation from Hewlett-Packard
Our new name is not yet recognized as a brand in the marketplace, and as a
result our product sales could suffer.
The loss of the "Hewlett-Packard" brand name may hinder our ability to
establish new relationships. In addition, our current customers, suppliers and
partners may react negatively to the separation. In connection with
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our separation from Hewlett-Packard, we will change the brand name and most of
the trademarks and trade names under which we conduct our business. This
transition to our new name will occur rapidly in the case of some products and
over specified periods of time in the case of other products. We believe that
sales of our products have benefited from the use of the "Hewlett-Packard"
brand name. In addition, although we believe we have all necessary rights to
use the new brand name, our rights to use it may be challenged by others.
We currently use Hewlett-Packard's information systems, and we must develop
our own information systems cost-effectively.
We currently use Hewlett-Packard's systems to support our operations,
including systems to manage inventory, order processing, human resources,
shipping and accounting. We have an agreement with Hewlett-Packard for
Hewlett-Packard to continue to provide information services to us for up to
the next two years. During this time period, while we are developing our own
systems, we will be dependent on Hewlett-Packard for the provision of these
information technology services that are critical to running our business.
Many of the systems we currently use are proprietary to Hewlett-Packard and
are very complex. These systems have been modified, and are in the process of
being further modified, to enable Hewlett-Packard to separately track items
related to our business. These modifications, however, may result in
unexpected system failures or the loss or corruption of data.
We are in the process of creating our own information systems to eventually
replace Hewlett-Packard's systems. We may not be successful in implementing
these systems and transitioning data from Hewlett-Packard's systems to ours.
We are currently in the process of implementing new enterprise resource
planning software applications to manage some of our information systems. Our
chemical analysis and healthcare solutions businesses have each migrated to
new enterprise resource planning software, and each experienced disruptions
during the transition process that negatively affected their operating results
for the period in which the transition occurred.
Any failure or significant downtime in Hewlett-Packard's or our own
information systems could prevent us from taking customer orders, shipping
products or billing customers and could harm our business. In addition,
Hewlett-Packard's and our information systems require the services of
employees with extensive knowledge of these information systems and the
business environment in which we operate. In order to successfully implement
and operate our systems, we must be able to attract and retain a significant
number of current Hewlett-Packard employees to our company. If we fail to
attract and retain the highly skilled personnel required to implement,
maintain, and operate our information systems, our business could suffer.
The transitional services being provided to us by Hewlett-Packard may not
be sufficient to meet our needs, and we may pay increased costs to replace
these services after our agreements with Hewlett-Packard expire.
Hewlett-Packard has agreed to provide certain transitional services to us,
including services related to:
. information technology systems;
. buildings and facilities; and
. finance and accounting.
These services may not be provided at the same level as when we were part
of Hewlett-Packard, and we may not be able to obtain the same benefits. We
will also lease and sublease certain office and manufacturing facilities from
Hewlett-Packard. These transitional service and leasing arrangements generally
have a term of less than two years following the separation. After the
expiration of these various arrangements, we may not be able to replace the
transitional services or enter into appropriate leases in a timely manner or
on terms and conditions, including cost, as favorable as those we will receive
from Hewlett-Packard.
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These agreements were made in the context of a parent-subsidiary
relationship and were negotiated in the overall context of our separation from
Hewlett-Packard. As a result, some of these agreements may have terms and
conditions that are less specific than some agreements that are negotiated at
arms-length. The prices charged to us under these agreements may be different
from the prices that we may be required to pay third parties for similar
services or the costs of similar services if we undertake them ourselves. For
more information about these arrangements, see "Arrangements Between Agilent
Technologies and Hewlett-Packard."
Substantial sales of common stock may occur in connection with the
distribution, which could cause our stock price to decline.
Hewlett-Packard has announced that it intends to distribute the
approximately shares of common stock it owns to Hewlett-Packard stockholders
by the middle of calender year 2000. Substantially all of these shares would be
eligible for immediate resale in the public market. We are unable to predict
whether significant amounts of common stock will be sold in the open market in
anticipation of, or following, this distribution. We are also unable to predict
whether a sufficient number of buyers would be in the market at that time.
A portion of Hewlett-Packard's common stock is held by index funds tied to
the Standard & Poor's 500 Index, the Dow Jones Industrial Average or other
stock indices. If we are not in these indices at the time of Hewlett-Packard's
distribution of our common stock, these index funds will be required to sell
our stock. Similarly, other institutional stockholders are not allowed by their
charters to hold the stock of companies that do not pay dividends. Since we
currently do not intend to pay dividends, we expect that these stockholders
will sell the shares of our common stock distributed to them. Any sales of
substantial amounts of common stock in the public market, or the perception
that such sales might occur, whether as a result of this distribution or
otherwise, could harm the market price of our common stock. See "Shares
Eligible for Future Sale."
Our business may suffer if Hewlett-Packard does not complete its
distribution of our common stock.
Hewlett-Packard has announced that it intends to distribute to its
stockholders all of our common stock that it owns by the middle of calendar
year 2000, although it is not obligated to do so. This distribution may not
occur by that time or at all. We may not obtain the benefits we expect as a
result of this distribution, including greater strategic focus, increased
agility and speed, greater access to capital markets, better incentives for
employees, more accountable management and the other benefits described in "Our
Separation From Hewlett-Packard." In addition, until this distribution occurs,
the risks discussed below relating to Hewlett-Packard's control of us and the
potential business conflicts of interest between Hewlett-Packard and us will
continue to be relevant to our stockholders.
We will be controlled by Hewlett-Packard as long as it owns a majority of
our common stock, and our other stockholders will be unable to affect the
outcome of stockholder voting during such time.
After the completion of this offering, Hewlett-Packard will own
approximately % of our outstanding common stock, or approximately % if the
U.S. underwriters exercise their over-allotment option in full. As long as
Hewlett-Packard owns a majority of our outstanding common stock, Hewlett-
Packard will continue to be able to elect our entire board of directors and to
remove any director, with or without cause, without calling a special meeting.
Investors in this offering will not be able to affect the outcome of any
stockholder vote prior to the planned distribution of our stock to the Hewlett-
Packard stockholders. As a result, Hewlett-Packard will control all matters
affecting Agilent Technologies, including:
. the composition of our board of directors and, through it, any
determination with respect to our business direction and policies,
including the appointment and removal of officers;
. the allocation of business opportunities that may be suitable for us and
Hewlett-Packard;
. any determinations with respect to mergers or other business
combinations;
. our acquisition or disposition of assets;
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. our financing;
. changes to the agreements providing for our separation from Hewlett-
Packard;
. the payment of dividends on our common stock; and
. determinations with respect to our tax returns.
Hewlett-Packard is not prohibited from selling a controlling interest in us
to a third party.
Our historical financial information may not be representative of our
results as a separate company.
The historical financial information we have included in this prospectus
has been carved out from Hewlett-Packard's consolidated financial statements
and does not reflect what our financial position, results of operations and
cash flows would have been, had we been a separate, stand-alone entity during
the periods presented. Hewlett-Packard did not account for us as, and we were
not operated as, a single stand-alone entity for the periods presented.
In addition, the historical information is not necessarily indicative of what
our results of operations, financial position and cash flows will be in the
future. We have not made adjustments to reflect many significant changes that
will occur in our cost structure, funding and operations as a result of our
separation from Hewlett-Packard, including changes in our employee base,
changes in our tax structure, increased costs associated with reduced
economies of scale, increased marketing expenses related to establishing a new
brand identity and increased costs associated with being a public, stand-alone
company.
For additional information, see "Unaudited Pro Forma Condensed Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our historical consolidated financial statements
and notes thereto.
We may have potential business conflicts of interest with Hewlett-Packard
with respect to our past and ongoing relationships that could harm our
business operations.
Conflicts of interest may arise between Hewlett-Packard and us in a number
of areas relating to our past and ongoing relationships, including:
. labor, tax, employee benefit, indemnification and other matters arising
from our separation from Hewlett-Packard;
. intellectual property matters;
. employee retention and recruiting;
. major business combinations involving us;
. sales or distributions by Hewlett-Packard of all or any portion of its
ownership interest in us;
. the nature, quality and pricing of transitional services Hewlett-Packard
has agreed to provide us; and
. business opportunities that may be attractive to both Hewlett-Packard
and us.
Nothing restricts Hewlett-Packard from competing with us other than some
restrictions on the use of patents licensed to Hewlett-Packard by us.
We may not be able to resolve any potential conflicts, and even if we do,
the resolution may be less favorable than if we were dealing with an
unaffiliated party. The agreements we have entered into with Hewlett-Packard
may be amended upon agreement between the parties. While we are controlled by
Hewlett-Packard, Hewlett-Packard may be able to require us to agree to
amendments to these agreements that may be less favorable to us than the
current terms of the agreement.
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Our directors and executive officers may have conflicts of interest because
of their ownership of Hewlett-Packard common stock.
Many of our directors and executive officers have a substantial amount of
their personal financial portfolios in Hewlett-Packard common stock and
options to purchase Hewlett-Packard common stock. Ownership of Hewlett-Packard
common stock by our directors and officers after our separation from Hewlett-
Packard could create, or appear to create, potential conflicts of interest
when directors and officers are faced with decisions that could have different
implications for Hewlett-Packard and us. For information regarding directors'
and officers' ownership of Hewlett-Packard common stock, see "Management--
Stock Ownership of Directors and Executive Officers."
Risks Related to the Securities Markets and Ownership of Our Common Stock
Our securities have no prior market, and we cannot assure you that our
stock price will not decline after the offering.
Before this offering, there has not been a public market for our common
stock, and an active public market for our common stock may not develop or be
sustained after this offering. The market price of our common stock could be
subject to significant fluctuations after the offering. Among the factors that
could affect our stock price are:
. quarterly variations in our operating results;
. changes in revenue or earnings estimates or publication of research
reports by analysts;
. speculation in the press or investment community;
. strategic moves by us or our competitors, such as acquisitions or
restructurings;
. actions by institutional stockholders or by Hewlett-Packard prior to its
distribution of our stock;
. general market conditions; and
. domestic and international economic factors unrelated to our
performance.
The stock markets in general, and the markets for high technology stocks in
particular, have experienced extreme volatility that has often been unrelated
to the operating performance of particular companies. These broad market
fluctuations may adversely affect the trading price of our common stock. In
particular, we cannot assure you that you will be able to resell your shares
at or above the initial public offering price, which will be determined by
negotiations between the representatives of the underwriters and us. See the
section entitled "Underwriters" for a discussion of the factors to be
considered in determining the initial public offering price.
Provisions in our charter documents and Delaware law may delay or prevent
acquisition of our company, which could decrease the value of your shares.
Our certificate of incorporation and bylaws and Delaware law contain
provisions that could make it harder for a third party to acquire us without
the consent of our board of directors, although these provisions have little
significance while we are controlled by Hewlett-Packard. These provisions
include a classified board of directors and limitations on actions by our
stockholders by written consent. In addition, our board of directors has the
right to issue preferred stock without stockholder approval, which could be
used to dilute the stock ownership of a potential hostile acquiror. Delaware
law also imposes some restrictions on mergers and other business combinations
between us and any holder of 15% or more of our outstanding common stock.
Although we believe these provisions provide for an opportunity to receive a
higher bid by requiring potential acquirors to negotiate with our board of
directors, these provisions apply even if the offer may be considered
beneficial by some stockholders.
19
<PAGE>
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS
You should not rely on forward-looking statements in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" "may," "will," "should," "estimates,"
"predicts," "potential," "continue" and similar expressions to identify such
forward-looking statements. This prospectus also contains forward-looking
statements attributed to third parties relating to their estimates regarding
the growth of our markets. Forward-looking statements are subject to known and
unknown risks, uncertainties and other factors that may cause our actual
results, as well as those of the test and measurement, semiconductor,
healthcare, chemical analysis and related markets we serve, levels of
activity, performance, achievements and prospects to be materially different
from those expressed or implied by such forward-looking statements. These
risks, uncertainties and other factors include, among others, those identified
here in the "Risk Factors" section and elsewhere in this prospectus.
20
<PAGE>
OUR SEPARATION FROM HEWLETT-PACKARD
Our Separation from Hewlett-Packard
On March 2, 1999, Hewlett-Packard announced a plan to create a separate
company that comprises Hewlett-Packard's test and measurement, semiconductor
products, healthcare solutions and chemical analysis businesses, related
portions of Hewlett-Packard Laboratories and associated infrastructure. We
were incorporated in Delaware in May 1999 in preparation for our separation
from Hewlett-Packard, and we are currently a wholly owned subsidiary of
Hewlett-Packard. Prior to the separation, Hewlett-Packard has conducted and
will conduct our business through various divisions and subsidiaries. We
expect that the separation of our businesses from those of Hewlett-Packard,
including the transfer of related assets, liabilities and intellectual
property rights, will be substantially completed by the closing of this
offering.
Benefits of the Separation
We believe that we will realize certain benefits from our complete
separation from Hewlett-Packard, including the following:
. Greater Strategic Focus. We expect to have a sharper focus on the
Agilent Technologies business and strategic opportunities as a result of
our board of directors and management team focusing only on our
businesses. We will also have greater ability to modify business
processes to better fit the needs of our customers, business units and
employees.
. Increased Speed and Responsiveness. Since our company will be
significantly smaller than Hewlett-Packard, we believe we will be able
to make decisions more quickly, deploy resources more rapidly and
efficiently and operate with more agility than when we were a part of a
larger organization. In addition, we expect to enhance our
responsiveness to customers and partners.
. Better Incentives for Employees and Greater Accountability. We expect
the motivation of our employees and the focus of our management will be
strengthened by incentive compensation programs tied to the market
performance of our common stock. The separation will enable us to offer
our employees compensation directly linked to the performance of the
Agilent Technologies business, which we expect to enhance our ability to
attract and retain qualified personnel.
. Direct Access to Capital Markets. As a separate company, we will be able
to directly access the capital markets to issue debt or equity
securities, and we will be able to more readily grow through
acquisitions.
Separation and Transitional Arrangements
We and Hewlett-Packard, and, in some cases, our respective subsidiaries,
have entered into or will enter into agreements providing for the separation
of our business from Hewlett-Packard, including a master separation and
distribution agreement to which we and Hewlett-Packard are parties. These
agreements generally provide for, among other things, the transfer from
Hewlett-Packard to us of assets and the assumption by us of liabilities
relating to our business, in each case to the extent agreed to by Hewlett-
Packard and us. We have entered into agreements with Hewlett-Packard regarding
the transfer and licensing to us of intellectual property relating to our
businesses. We have also entered into agreements governing various interim and
ongoing relationships between the parties including transitional services
Hewlett-Packard will provide to us.
The agreements relating to our separation from Hewlett-Packard were made in
the context of a parent-subsidiary relationship and were negotiated in the
overall context of our separation from Hewlett-Packard. The
terms of these agreements may be more or less favorable than those we could
have negotiated with unaffiliated third parties. For more information
regarding the separation arrangements, see "Arrangements Between Agilent
Technologies and Hewlett-Packard."
21
<PAGE>
The Distribution by Hewlett-Packard of Our Common Stock
After completion of this offering, Hewlett-Packard will own approximately
% of the outstanding shares of our common stock, or approximately % if the
U.S. underwriters exercise their over-allotment option in full. Hewlett-
Packard has announced that it currently plans to complete its divestiture of
our company by the middle of calendar year 2000 by distributing all of its
shares of our common stock to the holders of Hewlett-Packard's common stock.
However, Hewlett-Packard is not obligated to complete the distribution, and we
cannot assure you as to whether or when it will occur. See "Risk Factors--
Risks Related To Our Separation From Hewlett-Packard--Our business may suffer
if Hewlett-Packard does not complete its distribution of our common stock."
Hewlett-Packard has advised us that it would not complete the distribution
if its board of directors determines that the distribution is no longer in the
best interest of Hewlett-Packard and its stockholders. Hewlett-Packard has
further advised us that it currently expects that the principal factors that
it would consider in determining whether and when to complete the distribution
include:
. the relative market prices of our common stock and Hewlett-Packard's
common stock;
. the absence of any court orders or regulations prohibiting or
restricting the completion of the distribution; and
. other conditions affecting the businesses of Agilent Technologies or
Hewlett-Packard.
22
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from this offering will be about $ ,
based on an assumed initial public offering price of $ per share. The net
proceeds of this offering, including net proceeds received from any exercise
of the U.S. underwriters' over-allotment option, will be paid to Hewlett-
Packard as a dividend. In November 1999, Hewlett-Packard will make a $ cash
payment to us under the terms of the master separation and distribution
agreement in connection with our initial funding. See "Arrangements between
Agilent Technologies and Hewlett-Packard--Master Separation and Distribution
Agreement."
DIVIDEND POLICY
We currently intend to retain any future earnings to fund the development
and growth of our business. Therefore, other than the dividend of the net
proceeds of this offering to Hewlett-Packard, we do not anticipate paying any
cash dividends in the foreseeable future.
23
<PAGE>
CAPITALIZATION
Set forth below is our actual capitalization at July 31, 1999, our
unaudited pro forma capitalization that gives effect to the pro forma
adjustments described in "Unaudited Pro Forma Condensed Financial Statements,"
and our unaudited pro forma as adjusted capitalization that gives further
effect to the receipt and application of the net proceeds of this offering.
You should read the information set forth below together with "Selected
Financial Data," "Unaudited Pro Forma Condensed Financial Statements," our
historical consolidated financial statements and the notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
July 31, 1999
-------------------------
Pro Pro Forma
Actual Forma As Adjusted
------ ------ -----------
(in millions)
<S> <C> <C> <C>
Stockholders' equity:
Preferred stock..................................... $ -- $ -- $ --
Common stock........................................ -- --
Additional paid-in capital.......................... 3,220 4,171
------ ------ ------
Total stockholders' equity........................ 3,220 4,171 4,171
------ ------ ------
Total capitalization.............................. $3,220 $4,171 $4,171
====== ====== ======
</TABLE>
24
<PAGE>
SELECTED FINANCIAL DATA
The following table presents our selected historical financial data. The
information set forth below should be read in conjunction with "Unaudited Pro
Forma Condensed Financial Statements," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our historical
consolidated financial statements and notes thereto included elsewhere in this
prospectus. The consolidated statement of earnings data set forth below for
the years ended October 31, 1996, 1997 and 1998 and the nine month period
ended July 31, 1999 and the consolidated balance sheet data as of October 31,
1997 and 1998 and July 31, 1999 are derived from, and are qualified by
reference to, our audited consolidated financial statements included elsewhere
in this prospectus. The consolidated statement of earnings data for the years
ended October 31, 1994 and 1995 and the consolidated balance sheet data as of
October 31, 1994, 1995 and 1996 are derived from our unaudited consolidated
financial data that is not included in this prospectus. The consolidated
statement of earnings data for the nine month period ended July 31, 1998 are
derived from unaudited consolidated financial statements included elsewhere in
this prospectus and, in the opinion of management, include all adjustments,
consisting only of normal and recurring accruals, that are necessary for a
fair presentation of our consolidated financial position and results of
operations for these periods.
The historical financial information may not be indicative of our future
performance and does not reflect what our financial position and results of
operations would have been had we operated as a separate, stand-alone entity
during the periods presented. Statement of earnings data for the year ended
October 31, 1998 include pre-tax restructuring charges of approximately $163
million. Of this amount, cost of products and services includes $138 million,
research and development includes $7 million and selling, general and
administrative includes $18 million. See Note 8 of notes to consolidated
financial statements.
Our net revenue presented below differs from the net revenue associated
with our businesses previously reported by Hewlett-Packard primarily because
intercompany sales to Hewlett-Packard are accounted for as third-party
transactions in the financial data below, but have been eliminated in
information previously reported by Hewlett-Packard.
<TABLE>
<CAPTION>
Nine Months
Ended July
Years Ended October 31, 31,
-------------------------------------- --------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------ ------ ------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Earnings Data:
Net revenue............. $5,546 $6,595 $7,379 $7,785 $7,952 $5,965 $5,883
Costs and expenses:
Cost of products and
services.............. 2,860 3,335 3,901 4,126 4,512 3,245 3,096
Research and
development........... 692 765 805 880 948 699 705
Selling, general and
administrative........ 1,473 1,654 1,798 1,909 2,050 1,532 1,546
------ ------ ------ ------ ------ ------ ------
Total costs and
expenses............. 5,025 5,754 6,504 6,915 7,510 5,476 5,347
------ ------ ------ ------ ------ ------ ------
Earnings from
operations............. 521 841 875 870 442 489 536
Other income (expense),
net.................... (87) (62) (21) (47) (46) (14) 27
------ ------ ------ ------ ------ ------ ------
Earnings before taxes... 434 779 854 823 396 475 563
Provision for taxes..... 152 280 312 280 139 167 197
------ ------ ------ ------ ------ ------ ------
Net earnings............ $ 282 $ 499 $ 542 $ 543 $ 257 $ 308 $ 366
====== ====== ====== ====== ====== ====== ======
Basic and diluted net
earnings per share..... $ $ $ $ $ $ $
====== ====== ====== ====== ====== ====== ======
Average shares used in
computing basic and
diluted net earnings
per share..............
====== ====== ====== ====== ====== ====== ======
Unaudited pro forma net
earnings per share:
Basic.................. $ $
====== ======
Diluted................ $ $
====== ======
Average shares used in
computing unaudited pro
forma net earnings per
share:
Basic..................
====== ======
Diluted................
====== ======
</TABLE>
<TABLE>
<CAPTION>
October 31,
---------------------------------- July 31,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ --------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital.................... $1,331 $1,388 $1,449 $1,408 $1,476 $1,789
Total assets....................... 3,925 4,454 4,720 5,006 4,987 5,050
Stockholder's equity............... 2,666 2,829 2,998 3,110 3,022 3,220
</TABLE>
25
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma condensed financial statements set forth below
consist of an unaudited pro forma condensed balance sheet as of July 31, 1999
and an unaudited pro forma condensed statement of earnings for the year ended
October 31, 1998 and the nine months ended July 31, 1999. The unaudited pro
forma condensed balance sheet has been prepared assuming that Hewlett-Packard
provided our planned initial funding and that the pending purchase of Yokogawa
Electric Corporation's 25% interest in Hewlett-Packard Japan was completed on
July 31, 1999. See Note 12 to our historical consolidated financial statements
included elsewhere in this prospectus. The "Pro Forma As Adjusted" amounts
also assume that the proceeds from the offering had been received and the
related dividend to Hewlett-Packard had been paid on July 31, 1999.
The unaudited pro forma condensed statement of earnings has been prepared
assuming that the pending purchase of Yokogawa's 25% interest and the offering
occurred on November 1, 1997. The unaudited pro forma condensed balance sheet
is not intended to represent what our financial position would actually have
been had these events occurred on July 31, 1999 or to project our financial
position for any future date. Similarly, the unaudited pro forma condensed
statement of earnings is not intended to represent what our operating results
would actually have been for the periods indicated or to project our operating
results for any future period. We do not expect that the incremental costs
related to our transitional services agreements with Hewlett-Packard will be
material to our consolidated financial statements. Other changes to our cost
structure resulting from our separation from Hewlett-Packard are not
determinable. The pro forma adjustments are based upon currently available
information and certain assumptions that management believes are reasonable.
These unaudited pro forma condensed financial statements should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes thereto included elsewhere in this prospectus.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
July 31, 1999
------------------------------------------------------------------
Adjustments Adjustments
for Initial Adjustments for the Pro Forma
Actual Funding for Purchase Pro Forma Offering As Adjusted
------ ----------- ------------ --------- ----------- -----------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents........... $ -- $ 983 (A) $ -- $ 983 $ (C) $ 983
(C)
Accounts receivable.... 1,297 (894)(A) -- 403 -- 403
Inventory.............. 1,597 -- -- 1,597 -- 1,597
Other current assets... 362 1 (A) -- 363 -- 363
------ ----- ---- ------ --- ------
Total current assets... 3,256 90 -- 3,346 -- 3,346
Property, plant and
equipment, net......... 1,378 -- 56 (B) 1,434 -- 1,434
Other assets............ 416 -- 302 (B) 718 -- 718
------ ----- ---- ------ --- ------
Total assets........... $5,050 $ 90 $358 $5,498 $-- $5,498
====== ===== ==== ====== === ======
Liabilities and
stockholders' equity
Current liabilities:
Accounts payable....... $ 426 $(293)(A) $ -- $ 133 $-- $ 133
Employee compensation
and benefits.......... 484 (171)(A) -- 313 -- 313
Deferred revenue....... 244 -- -- 244 -- 244
Other accrued
liabilities........... 313 (30)(A) -- 283 -- 283
------ ----- ---- ------ --- ------
Total current
liabilities........... 1,467 (494) -- 973 -- 973
Other liabilities....... 363 8 (17)(B) 354 -- 354
Stockholders' equity:
Preferred stock........ -- -- -- -- -- --
Common stock........... -- -- -- -- (C)
Additional paid-in
capital............... 3,220 576 (A) 375 (B) 4,171 (C)
(C)
------ ----- ---- ------ --- ------
Total stockholders'
equity................ 3,220 576 375 4,171 -- 4,171
------ ----- ---- ------ --- ------
Total liabilities and
stockholders' equity.. $5,050 $ 90 $358 $5,498 $-- $5,498
====== ===== ==== ====== === ======
</TABLE>
26
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
Nine Months Ended July 31,
Year Ended October 31, 1998 1999
------------------------------ -----------------------------
Adjustments Adjustments
for for
Actual Purchase Pro Forma Actual Purchase Pro Forma
------ ----------- --------- ------ ----------- ---------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
Products............... $6,794 $ -- $6,794 $4,944 $ -- $4,944
Services............... 1,158 -- 1,158 939 -- 939
------ ---- ------ ------ ---- ------
Total net revenue...... 7,952 -- 7,952 5,883 -- 5,883
------ ---- ------ ------ ---- ------
Costs and expenses:
Cost of products....... 3,807 -- 3,807 2,525 -- 2,525
Cost of services....... 705 -- 705 571 -- 571
Research and
development........... 948 -- 948 705 -- 705
Selling, general and
administrative........ 2,050 30 (D) 2,080 1,546 23 (D) 1,569
------ ---- ------ ------ ---- ------
Total costs and
expenses.............. 7,510 30 7,540 5,347 23 5,370
------ ---- ------ ------ ---- ------
Earnings from
operations............. 442 (30) 412 536 (23) 513
Other income (expense),
net.................... (46) 5 (E) (41) 27 2 (E) 29
------ ---- ------ ------ ---- ------
Earnings before taxes... 396 (25) 371 563 (21) 542
Provision for taxes..... 139 -- 139 197 -- 197
------ ---- ------ ------ ---- ------
Net earnings............ $ 257 $(25) $ 232 $ 366 $(21) $ 345
====== ==== ====== ====== ==== ======
Net earnings per share:
Basic.................. $ $ (F) $ $ (F)
====== ====== ====== ======
Diluted................ $ $ (F) $ $ (F)
====== ====== ====== ======
Average shares used in
computing net earnings
per share:
Basic.................. (F) (F)
====== ====== ====== ======
Diluted................ (F) (F)
====== ====== ====== ======
</TABLE>
27
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
(A) Reflects our initial funding from Hewlett-Packard that will occur on or
about November 1, 1999. If the initial funding had occurred on July 31,
1999, we would have received $983 million from Hewlett-Packard. Hewlett-
Packard will retain some of our assets and liabilities, including most of
our accounts receivable and accounts payable, accrued payroll and related
items and taxes payable, except deferred taxes. In addition, Hewlett
Packard will transfer to us some of the assets and liabilities related to
its business, including some of the accounts receivable, accounts payable
and other liabilities of Hewlett-Packard Japan. The actual amount received
from Hewlett-Packard will differ based on Hewlett-Packard's and our assets
and liabilities as of October 31, 1999.
(B) Reflects our pending purchase of Yokogawa's 25% interest in Hewlett-
Packard Japan, which will be funded by Hewlett-Packard. For purposes of
this pro forma presentation, management has allocated $375 million of the
Hewlett-Packard Japan purchase price to our business and we have allocated
this amount as follows: minority interest--$17 million, land--$56 million
and goodwill--$302 million.
(C) Reflects the net proceeds from the offering and the subsequent payment of
the dividend to Hewlett-Packard, assuming no exercise of the U.S.
underwriters' over-allotment option.
(D) Reflects amortization of the goodwill created from the pending purchase of
Yokogawa's 25% interest in Hewlett-Packard Japan over 10 years.
(E) Reflects the elimination of Yokogawa's share of earnings in Hewlett-
Packard Japan.
(F) Pro forma basic net earnings per share is calculated based on common stock
outstanding of shares upon completion of the offering, as the proceeds
of this offering will be distributed to Hewlett-Packard. Pro forma diluted
net earnings per share assumes that % of the outstanding Hewlett-Packard
options held by Agilent Technologies' employees are assumed by Agilent
Technologies. The actual number of Hewlett-Packard options assumed by
Agilent Technologies will not be determined until individual employees
make an election to amend their Hewlett-Packard options in January 2000.
See "Arrangements Between Agilent Technologies and Hewlett-Packard--
Employee Matters Agreement." In 1998, unaudited pro forma diluted net
earnings per share would be $ if % of the outstanding Hewlett-Packard
options are assumed and $ if % of the outstanding Hewlett-Packard
options are assumed. In the nine months ended July 31, 1999, unaudited pro
forma diluted net earnings per share would be $ if % of the outstanding
Hewlett-Packard options are assumed and $ if % of the outstanding
Hewlett-Packard options are assumed.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
prospectus. The following discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from the results contemplated by these forward-looking statements due to
certain factors, including those discussed below and elsewhere in this
prospectus.
Overview
Separation from Hewlett-Packard
On March 2, 1999, Hewlett-Packard announced a plan to create a separate
company, subsequently named Agilent Technologies, that comprises Hewlett-
Packard's test and measurement, semiconductor products, healthcare solutions
and chemical analysis businesses, related portions of Hewlett-Packard
Laboratories, and associated infrastructure. After the completion of this
offering, Hewlett-Packard will own approximately % of our outstanding common
stock, assuming no exercise of the U.S. underwriters' over-allotment option.
Hewlett-Packard has also announced its intention to distribute to its
stockholders all of its remaining interest in us by the middle of calendar
year 2000. Hewlett-Packard and we have entered into various agreements related
to certain interim and ongoing relationships between the two companies. For a
description of these agreements, see "Arrangements Between Hewlett-Packard and
Agilent Technologies."
Agilent Technologies' Businesses
We were incorporated in Delaware in May 1999 as a wholly owned subsidiary
of Hewlett-Packard. Our businesses historically have been operated as internal
units of Hewlett-Packard. Hewlett-Packard has agreed to transfer to us prior
to the completion of this offering, substantially all of the assets and
liabilities relating to our businesses. We expect that the transfer of these
assets and liabilities will be substantially complete by the closing date of
this offering. In connection with our initial funding, Hewlett-Packard will
retain a portion of our assets and will transfer to us some of the assets and
liabilities related to its businesses. For a description of these retained
amounts, see "Unaudited Pro Forma Condensed Financial Statements."
We have entered into agreements with Hewlett-Packard under which Hewlett-
Packard will provide services to us during a transition period after the
separation. The agreements relate primarily to building services, information
technology services and accounting and finance services. Under these
agreements, we will reimburse Hewlett-Packard for its cost of the service plus
5%. The transition period varies depending on the agreement but is generally
less than two years. Some of the agreements, including those for building
services and information technology services, may be extended beyond the
initial transition period. If these agreements are extended, we would
reimburse Hewlett-Packard at its cost plus 10% for information technology
services and most other services and at negotiated market rates for building
services. The agreements do not necessarily reflect the costs of obtaining the
services from unrelated third parties or of our providing the applicable
services ourselves. However, we believe that purchasing these services from
Hewlett-Packard provides us with an efficient means of obtaining these
services during the transition period. In addition, we will provide some
transition services to Hewlett-Packard, for which we will be reimbursed at our
cost plus 5%.
We must also negotiate new agreements with various third parties as a
separate, stand-alone entity. There can be no assurance that the terms we will
be able to negotiate for these agreements will be as favorable as those we
enjoyed as part of Hewlett-Packard. In addition, as part of Hewlett-Packard,
we benefited from various economies of scale including shared global
administrative functions, facilities and volume purchase discounts. We expect
that our costs and expenses will increase significantly as a result of the
loss of these economies of scale, although the amount is not determinable at
this time.
29
<PAGE>
Hewlett-Packard has been and is expected to continue to be a significant
customer. In 1998, sales to Hewlett-Packard represented approximately 9% of
our total net revenue and approximately 35% of the net revenue of our
semiconductor products business. In the first nine months of 1999, sales to
Hewlett-Packard represented approximately 10% of our total net revenue and
approximately 37% of the net revenue of our semiconductor products business.
Basis of Presentation
Our fiscal year end is October 31 and our fiscal quarters end on January
31, April 30 and July 31. Unless otherwise stated, all years and dates refer
to our fiscal year and fiscal periods.
Our consolidated financial statements have been carved out from the
consolidated financial statements of Hewlett-Packard using the historical
results of operations and historical bases of the assets and liabilities of
the Hewlett-Packard businesses that our company comprises. The consolidated
financial statements also include allocations to us of certain Hewlett-Packard
corporate assets, including pension assets; liabilities, including profit
sharing, pension and non-qualified deferred compensation obligations; and
expenses, including centralized research and development, legal, accounting,
employee benefits, real estate, insurance services, information technology
services, treasury and other Hewlett-Packard corporate and infrastructure
costs. The expense allocations have been determined on bases that Hewlett-
Packard and we considered to be a reasonable reflection of the utilization of
the services provided to us or the benefit received by us. The expense
allocation methods included relative sales, headcount, square footage,
transaction processing costs, adjusted operating expenses and others.
The financial information presented in this prospectus is not indicative of
our financial position, results of operations or cash flows in the future nor
is it necessarily indicative of what our financial position, results of
operations or cash flows would have been had we been a separate, stand-alone
entity for the periods presented. The financial information presented in this
prospectus does not reflect the many significant changes that will occur in
our funding and operations as a result of our becoming a stand-alone entity,
the offering and the distribution.
1998 Restructuring
During 1998, we committed to transfer the production of eight-inch
semiconductor wafers to a third party contractor. A major factor in our
decision to transfer this production was our desire to avoid significant and
escalating future investments required to remain state-of-the-art in
semiconductor manufacturing. We also undertook employee reductions through
voluntary severance programs related to this transfer as well as consolidation
of some operations and general employee reductions in each of our four
business segments. Approximately 1,650 employees accepted the voluntary
severance incentive packages by the October 31, 1998 deadline. Of these
employees, approximately 80% were in manufacturing or other positions included
in cost of products and services. We recorded pre-tax charges of approximately
$163 million related to these restructuring actions. Of this amount, $138
million was included in cost of products, $7 million was included in research
and development expense and $18 million was included in selling, general and
administrative expense in the 1998 consolidated statement of earnings. The
restructuring costs included approximately $78 million related to employee
severance under the voluntary severance incentive plans and $85 million
related to non-cash asset impairments, primarily machinery and equipment,
resulting from the restructuring actions. In the nine months ended July 31,
1999, we paid approximately $67 million of employee severance costs. Future
benefits from the restructuring will be reflected primarily in cost of
products and, to a lesser extent, in operating expenses. We believe that any
benefits from the restructuring will be more than offset by additional costs
that we will incur as we begin to operate as a separate, stand-alone entity.
Cyclical Business
Many of the industries and markets into which we sell our products and
services are cyclical, causing a corresponding impact on our financial
results. Shifts in the semiconductor market, electronics industry and
30
<PAGE>
computer industry, as well as rapidly shifting global economic conditions,
have had significant impacts on our business. Additionally, as a capital
equipment provider, our revenue is driven by the capital expenditure budgets
and spending patterns of our customers who often delay or accelerate purchases
in reaction to variations in their business. We expect our business to remain
cyclical when we operate as a separate, stand-alone entity. Given that a high
proportion of our costs are fixed, variability in revenue as a result of these
business cycles could disproportionately affect our quarterly and annual
results.
Economic Conditions in Asia
Beginning in the second half of 1998 and continuing into the first half of
1999, our revenue and operating results declined as a result of the downturn
in Asian economies, particularly Korea and Japan. Many of our major customers,
particularly those in the semiconductor and electronics industries, delayed or
canceled purchases of our products. This had a significant impact on us,
particularly our test and measurement business.
Impact of Foreign Currencies
We sell our products in many countries and a substantial portion of our
sales and a portion of our costs and expenses are denominated in foreign
currencies, especially in the Japanese yen and the German mark. In 1997
compared to 1996 and in 1998 compared to 1997, the U.S. dollar strengthened
significantly against the Japanese yen and the German mark. This had an
adverse affect on our net revenue growth and a favorable impact on our
operating expense growth in these periods. In the first nine months of 1999
compared to the first nine months of 1998, the U.S. dollar weakened against
these currencies, which had a favorable impact on our net revenue growth and
an adverse effect on our operating expense growth. Our currency exposures
historically have been hedged as part of Hewlett-Packard's global hedging
program, which is designed to minimize exposure to foreign currency
fluctuations. We expect to implement a similar hedging program upon our
separation from Hewlett-Packard.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments and
requires recognition of all derivatives as assets or liabilities in our
balance sheet and measurement of those instruments at fair value. The
statement is effective for fiscal years beginning after June 15, 2000. We will
adopt the standard no later than the first quarter of fiscal year 2001 and we
are in the process of determining the impact that adoption will have on our
consolidated financial statements.
31
<PAGE>
Results of Operations
Nine months ended July 31, 1998 and 1999
Our results of operations for the nine months ended July 31, 1998 and 1999
in dollars and as a percentage of total net revenue follow.
<TABLE>
<CAPTION>
Nine Months Ended July
31,
---------------------------
As a
Percentage
of Total
Dollars Net Revenue
-------------- ------------
1998 1999 1998 1999
------ ------ ----- -----
(in millions)
<S> <C> <C> <C> <C>
Net revenue:
Products....................................... $5,115 $4,944 85.8% 84.0%
Services....................................... 850 939 14.2 16.0
------ ------ ----- -----
Total net revenue................................ 5,965 5,883 100.0 100.0
------ ------ ----- -----
Costs and expenses:
Cost of products............................... 2,716 2,525 45.5 42.9
Cost of services............................... 529 571 8.9 9.7
Research and development....................... 699 705 11.7 12.0
Selling, general and administrative............ 1,532 1,546 25.7 26.3
------ ------ ----- -----
Total costs and expenses..................... 5,476 5,347 91.8 90.9
------ ------ ----- -----
Earnings from operations......................... 489 536 8.2 9.1
Other income (expense), net...................... (14) 27 (.2) .5
------ ------ ----- -----
Earnings before taxes............................ 475 563 8.0 9.6
Provision for taxes.............................. 167 197 2.8 3.4
------ ------ ----- -----
Net earnings..................................... $ 308 $ 366 5.2% 6.2%
====== ====== ===== =====
Cost of products as a percentage of products
revenue......................................... 53.1% 51.1%
Cost of services as a percentage of services
revenue......................................... 62.2 60.8
</TABLE>
Net revenue
Net revenue consists of revenue from sales of products and services net of
trade discounts and allowances and includes revenue from sales to Hewlett-
Packard. We recognize revenue from product sales at the time we ship the
product to the customer or on installation and customer acceptance, if the
acceptance criteria are substantive. Services include hardware and software
support and maintenance, operating leases, consulting and education. We
recognize revenue from services over the contractual period or as services are
rendered and accepted by the customer.
Our total net revenue decreased 1.4% in the first nine months of 1999
compared to the first nine months of 1998. Total net revenue in the third
quarter of 1999 increased 3.8% over the second quarter of 1999 and 16.9% over
the first quarter of 1999, reflecting improvement in economic conditions in
Asia and strengthening in the semiconductor industry in general.
In the first nine months of 1999, net revenue from products decreased 3.3%
while net revenue from services increased 10.5% compared to the first nine
months of 1998. Although services revenue increased while product revenue
decreased in the first nine months of 1999, we do not anticipate that this
dynamic will continue in future periods, as we expect improving economic
conditions and a strengthening semiconductor industry to result in product
revenue growth. In 1999, U.S. revenue decreased 2.1% to $2.7 billion while
international revenue decreased .8% to $3.2 billion. International revenue was
negatively affected by the ongoing weakness in economic conditions throughout
Asia, particularly in Korea and Japan, and particularly in the first quarter
of 1999. Many of our United States customers were also negatively affected by
conditions in Asia. General weakness in the semiconductor industry also
negatively affected our revenue. These effects were particularly significant
in our test and measurement business.
32
<PAGE>
Earnings from operations
Earnings from operations increased 9.6% in the first nine months of 1999
compared to the first nine months of 1998. In 1999, first quarter earnings
from operations decreased 62.0% while second quarter earnings from operations
increased 75.2% and third quarter earnings from operations increased 126.7%
compared to the same periods in 1998. The increase in earnings from operations
in the first nine months of 1999 was due to lower costs resulting from the
1998 restructuring partially offset by lower net revenue.
Cost of products and services consists of costs of manufacturing products
and providing services. These include materials, costs of third party contract
manufacturers, salaries and related expenses for manufacturing and service
personnel, distribution costs, warranty costs, depreciation of manufacturing
equipment and overhead allocations for facilities expenses and information
technology services.
Cost of products and services as a percentage of net revenue decreased 1.8
percentage points in the first nine months of 1999 from the first nine months
of 1998. All four of our business segments recorded improvement in cost of
products and services as a percentage of net revenue with semiconductor
products accounting for the most significant improvement due primarily to cost
improvements resulting from the 1998 restructuring.
Operating expenses include research and development and selling, general
and administrative expenses. Research and development includes salaries and
related expenses of engineers and related engineering support personnel,
initial tooling, project materials, depreciation on equipment used in research
and development and an allocation of facilities expenses and information
technology services. Selling, general and administrative expenses include
salaries and related expenses for sales, account management, marketing,
administrative, finance, legal, human resources and executive personnel,
commissions, costs and expenses for marketing programs and trade shows, fees
for professional services, costs of accounting and internal control systems,
costs of patents, goodwill amortization and allocations for facilities
expenses and information technology services.
As a percentage of net revenue, operating expenses increased by .9
percentage points in the first nine months of 1999 compared to the first nine
months of 1998 as a result of lower net revenue combined with slightly higher
expenses. Research and development expenses and selling, general and
administrative expenses each increased less than 1% in the first nine months
of 1999 compared to the same period of 1998. Operating expense reductions
resulting from the 1998 restructuring enabled us to keep selling, general and
administrative expense growth at less than 1% even though we began to incur
transition costs related to our becoming a separate, stand-alone entity. These
transition costs are expected to more than offset future benefits of the 1998
restructuring and will continue over the next twelve to eighteen months,
including significant expenditures related to advertising and product
branding. In addition, we expect operating expenses, primarily infrastructure
costs, to increase as a result of our operating as a separate, stand-alone
entity, and this increase is expected to be significant in 2000.
Other income (expense), net, includes foreign currency exchange gains and
losses, gains and losses on divestitures and other non-operating gains and
losses.
Other income (expense), net, increased $41 million to income of $27 million
in the first nine months of 1999 from expense of $14 million in the first nine
months of 1998. Included in the first nine months of 1999 is a gain of $18
million related to the divestiture of our photomask operations in November
1998.
Our effective tax rate, calculated on a separate return basis, for the
first nine months of 1999 was 35.0%. The rate is based on estimates of our
earnings before taxes in the various tax jurisdictions in which we operate
throughout the world. While changes in our mix of earnings before taxes in
these tax jurisdictions can cause our effective tax rate to fluctuate, we
currently expect our effective tax rate to remain at 35% for the remainder of
1999 and in 2000.
33
<PAGE>
Test and Measurement
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
------------------
1998 1999
-------- --------
(dollars in
millions)
<S> <C> <C>
Net revenue.............................................. $ 3,098 $ 2,856
Earnings from operations................................. 332 273
As a percentage of net revenue........................... 10.7% 9.6%
</TABLE>
Net revenue
Net revenue from our test and measurement business decreased 7.8% in the
first nine months of 1999 compared to the first nine months of 1998 primarily
due to the impact on our customers of the economic conditions in Asia and the
broad downturn in the semiconductor industry. Revenue from sales of products
to our customers in Asia was approximately 30% of our test and measurement
business' net revenue in both the first nine months of 1999 and the first nine
months of 1998. The net revenue decrease was partially offset by increased
sales of communications test products as a result of the rapidly growing
demand for greater bandwidth and new services.
Earnings from operations
Earnings from operations decreased 17.8% in the first nine months of 1999
from the first nine months of 1998 as a result of lower net revenue partially
offset by lower costs and expenses.
Cost of products and services as a percentage of net revenue decreased .7
percentage points in the first nine months of 1999 compared to the same period
of 1998. The decrease was due to cost savings resulting from the 1998
restructuring. This decrease was partially offset by the effect of lower
volumes of products sold, primarily wireless communication test equipment and
automated test equipment, and higher services revenue and the associated
higher cost of this revenue.
Operating expenses as a percentage of net revenue increased 2.0 percentage
points in the first nine months of 1999 compared to the first nine months of
1998 as a result of lower net revenue despite lower levels of expense.
Continued savings from cost reduction programs initiated in the second half of
1998 resulted in significant decreases in some components of both research and
development and selling, general and administrative expenses. Research and
development expenses decreased 3.9% in the first nine months of 1999 from the
first nine months of 1998. Selling, general and administrative expense
decreased 3.7% in the first nine months of 1999 compared to the same period of
1998.
Semiconductor Products
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
------------------
1998 1999
-------- --------
(dollars in
millions)
<S> <C> <C>
Net revenue.............................................. $ 1,195 $ 1,230
Earnings from operations................................. 16 81
As a percentage of net revenue........................... 1.3% 6.6%
</TABLE>
Net revenue
Net revenue from our semiconductor products business increased 2.9% in the
first nine months of 1999 compared to the first nine months of 1998. This
increase was achieved despite the sale of the power amplifier business in late
1998. If net revenue in the first nine months of 1998 were adjusted to exclude
revenue of the power amplifier business, net revenue would have increased by
8.8% over the comparable prior period. Net revenue growth primarily reflects
increased shipments of fiber optic products, motion control products, high-
speed networking products and ASICs. Sales to Hewlett-Packard, consisting
primarily of ASICs and motion control products, accounted for 34.9% of net
revenue in the first nine months of 1998 and 37.4% of net revenue in the first
nine months of 1999.
34
<PAGE>
We expect projected annual net revenue from sales of precision
architecture-reduced instruction set computing (PA-RISC) microprocessors to
Hewlett-Packard to decline by approximately $50 million from 1999 to 2000 as
Hewlett-Packard purchases these products from an alternate supplier. We
currently do not expect to incur any incremental costs related to winding down
the microprocessor business. Although we expect that the loss of the revenue
associated with the microprocessor business will have a negative impact on our
net revenue growth rates in the short term, we believe this negative impact
will not have a material effect on our consolidated results of operations.
We have entered into a memorandum of understanding to expand our existing
joint venture relationship with Royal Philips Electronics, N.V. If this
transaction is completed, we expect to transfer a portion of our light-
emitting diode (LED) business into the joint venture. LEDs are used for
various lighting and display purposes. Since we will not have a majority
ownership interest in the joint venture, the revenue, costs and expenses of
the business to be transferred to the joint venture will no longer be
consolidated in our results. Instead, we will record our proportion of the
joint venture's net earnings or loss in other income (expense), net. Revenue
and results of operations of this portion of our LED business were not
material for the nine months ended July 31, 1999.
Earnings from operations
Earnings from operations from our semiconductor products business increased
406.3% in the first nine months of 1999 from the first nine months of 1998
primarily due to the cost savings resulting from the 1998 restructuring.
As a percentage of net revenue, cost of products decreased 4.4 percentage
points in the 1999 period compared to the 1998 period. A substantial portion
of this improvement was the result of the 1998 restructuring. Decreases in
cost of products also resulted from increased volumes in the ASIC business and
a more profitable product mix, specifically higher volumes of fiber optic
communications products, motion control devices and microprocessors. These
improvements were partially offset by a $51 million charge in the third
quarter of 1999 related to the writedown of a building that was under
construction for the intended purpose of housing manufacturing operations for
eight-inch semiconductor wafers. We committed to outsource eight-inch
semiconductor wafer production to a third-party contractor in October 1998. We
sought a manufacturing partner to utilize the building for its initial
intended use. However, no partner was found and, therefore, we recently
decided to convert the building to a non-manufacturing facility. As a result,
the carrying value of the building was written down to its fair value for that
use.
Operating expenses as a percentage of net revenue decreased .8 percentage
points in the first nine months of 1999 compared to the same period of 1998.
Research and development expenses increased 4.3% in the first nine months of
1999 from the first nine months of 1998 reflecting increased investments in
the fast growing fiber optics and high-speed networking businesses. Lower
marketing expenses largely accounted for the 4.5% decrease in selling, general
and administrative expense
Healthcare Solutions
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
------------------
1998 1999
-------- ---------
(dollars in
millions)
<S> <C> <C>
Net revenue.............................................. $ 988 $ 1,043
Earnings from operations................................. 54 86
As a percentage of net revenue......................... 5.5% 8.2%
</TABLE>
Net revenue
Net revenue from our healthcare solutions business increased 5.6% in the
first nine months of 1999 from the comparable period in 1998, primarily as a
result of strong sales in the third quarter of 1999. In the first nine
35
<PAGE>
months of 1999, growth in net revenue from cardiology products was moderated
by essentially unchanged net revenue from patient monitoring products and
supplies and a decline in net revenue from ultrasound imaging products.
Internal production constraints resulting from our transition to a new
enterprise resource planning system in November 1998 at our Andover,
Massachusetts facility contributed to the decline in revenue from the
ultrasound imaging products and the low growth rate in patient monitoring
revenue. The implementation of the new enterprise resource planning system is
now complete, and we do not anticipate further problems.
Earnings from operations
Earnings from operations from our healthcare solutions business increased
59.3% in the first nine months of 1999 compared to the first nine months of
1998 as a result of increased net revenue combined with decreased cost of
products and services, despite higher expenses.
As a percentage of net revenue, cost of products and services decreased 2.3
percentage points in the first nine months of 1999 compared to the 1998
period. The improvement was primarily due to lower overhead, lower product
installation costs and a more profitable product mix.
Operating expenses as a percentage of net revenue decreased .6 percentage
points in the first nine months of 1999 compared to the same period of 1998.
Research and development expenses increased 8.5% in the first nine months of
1999 from the first nine months of 1998 largely as a result of our efforts to
develop new automatic external defibrillator products. Selling, general and
administrative expense increased by 2.7% due to amortization of goodwill
associated with the Heartstream acquisition partially offset by lower selling
costs.
Chemical Analysis
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
------------------
1998 1999
-------- --------
(dollars in
millions)
<S> <C> <C>
Net revenue.............................................. $ 684 $ 754
Earnings from operations................................. 57 99
As a percentage of net revenue......................... 8.3% 13.1%
</TABLE>
Net revenue
Net revenue from our chemical analysis business increased 10.2% in the
first nine months of 1999 over the first nine months of 1998. The net revenue
increase was generated by growth across all product lines and included a 15.8%
increase in services revenue. Demand within the pharmaceutical industry was
especially strong, leading to increased sales of our liquid chromatography
products. In addition, sales to our customers in Asia increased as economic
conditions in the region continue to improve.
Earnings from operations
Earnings from operations from our chemical analysis business increased
73.7% in the first nine months of 1999 compared to the same period of 1998
largely due to higher net revenue, partially offset by higher expenses.
Cost of products and services as a percentage of net revenue decreased 3.1
percentage points in the first nine months of 1999 compared to the first nine
months of 1998. Almost half of the improvement was due to greater efficiency
within the services business. The remainder of the improvement was driven
almost equally by higher volumes, greater manufacturing efficiencies in our
mass spectrometer and liquid chromatography product lines and lower warranty
costs as a result of improved product reliability.
Operating expenses as a percentage of net revenue decreased 1.7 percentage
points in the first nine months of 1999 compared to the same period of 1998
primarily as a result of higher net revenue. Research and
36
<PAGE>
development expense increased 14.0% in the first nine months of 1999 from the
first nine months of 1998 because of increased investment in our microfluidics
program. Microfluidics is the manipulation of minute quantities of fluids for
research purposes. Selling, general and administrative expense increased 3.1%
in the first nine months of 1999 compared to the same period of 1998. These
expenses grew at a much slower rate than net revenue due to continuing efforts
to control expenses.
Years ended October 31, 1996, 1997 and 1998
Our results of operations for the years ended October 31, 1996, 1997 and
1998 in dollars and as a percentage of total net revenue follow.
<TABLE>
<CAPTION>
Years Ended October 31,
-------------------------------------------
As a Percentage
of
Dollars Total Net Revenue
---------------------- -------------------
1996 1997 1998 1996 1997 1998
------ ------ ------ ----- ----- -----
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
Products........................ $6,440 $6,754 $6,794 87.3% 86.8% 85.4%
Services........................ 939 1,031 1,158 12.7 13.2 14.6
------ ------ ------ ----- ----- -----
Total net revenue.............. 7,379 7,785 7,952 100.0 100.0 100.0
------ ------ ------ ----- ----- -----
Costs and expenses:
Cost of products................ 3,327 3,455 3,807 45.1 44.4 47.9
Cost of services................ 574 671 705 7.8 8.6 8.8
Research and development........ 805 880 948 10.9 11.3 11.9
Selling, general and
administrative................. 1,798 1,909 2,050 24.3 24.5 25.8
------ ------ ------ ----- ----- -----
Total costs and expenses....... 6,504 6,915 7,510 88.1 88.8 94.4
------ ------ ------ ----- ----- -----
Earnings from operations......... 875 870 442 11.9 11.2 5.6
Other income (expense), net...... (21) (47) (46) (.4) (.6) (.6)
------ ------ ------ ----- ----- -----
Earnings before taxes............ 854 823 396 11.5 10.6 5.0
Provision for taxes.............. 312 280 139 4.2 3.6 1.8
------ ------ ------ ----- ----- -----
Net earnings..................... $ 542 $ 543 $ 257 7.3% 7.0% 3.2%
====== ====== ====== ===== ===== =====
Cost of products as a percentage
of products revenue............. 51.7% 51.2% 56.0%
Cost of services as a percentage
of services revenue............. 61.1 65.1 60.9
</TABLE>
Net revenue
Our total net revenue increased 5.5% in 1997 from 1996 and 2.1% in 1998
from 1997. The increase in 1997 from 1996 was driven primarily by our test and
measurement business, which contributed over half of our total net revenue.
The increase in 1998 from 1997 reflects improvements from our other three
businesses, substantially offset by decreased revenue in our test and
measurement business. United States revenue increased 2.1% to $3.4 billion in
1997 and increased 6.6% in 1998 to $3.6 billion. International revenue
increased 8.3% to $4.4 billion in 1997 and decreased 1.3% to $4.3 billion in
1998. Economic conditions in Asia adversely affected revenue from sales of our
products and services to customers in Japan and Korea, particularly in the
last three quarters of 1998, and also reduced revenue from other parts of the
world. Our product revenue was also affected by the global weakness in the
semiconductor industry. Product revenue increased 4.9% in 1997 from 1996 and
was essentially unchanged in 1998 from 1997. Revenue from services grew 9.8%
in 1997 from 1996 and 12.3% in 1998 from 1997 as a result of increases in our
installed base, primarily in test and measurement.
Earnings from operations
Earnings from operations was essentially unchanged in 1997 from 1996 and
decreased 49.2% in 1998 from 1997. Slightly higher net revenue in 1998 as
compared to 1997 was offset by significantly higher costs and expenses,
including the charges related to the 1998 restructuring.
37
<PAGE>
As a percentage of net revenue, cost of products and services was
essentially unchanged in 1997 from 1996 and increased 3.7 percentage points in
1998 from 1997. The increase in 1998 was a result of lower volumes and less
profitable product mix in the test and measurement business and costs
associated with the 1998 restructuring.
Operating expenses as a percentage of net revenue increased .6 percentage
points in 1997 from 1996 and 1.9 percentage points in 1998 from 1997. The
increase in 1997 and 1998 reflects higher expenses offset by higher net
revenue.
Research and development expenses increased 9.3% in 1997 compared to 1996
and 7.7% in 1998 compared to 1997. The increases in 1997 and 1998 reflect
ongoing investments in new products and new technologies, primarily in test
and measurement and semiconductor products. Selling, general and
administrative expenses grew 6.2% in 1997 and 7.4% in 1998. The 1998 increase
reflects the acquisition of Heartstream. For both years, the expense growth
reflects increased selling costs related to revenue growth and increased
marketing program costs associated with our continued introduction of new
products and the expansion of our support capabilities. The growth rate in
operating expenses, exclusive of the 1998 restructuring costs, decreased
significantly in the second half of 1998 due to our cost reduction programs
that reduced certain variable costs such as travel and discretionary marketing
programs.
In 1998, other income (expense), net, included a charge of $37 million
related to the write-down of an investment in convertible preferred stock of a
medical products company to its fair value because we concluded its impairment
was not temporary. This conclusion was based on the company's continuing poor
financial performance and recent equity transactions by the company with a
third party.
Our effective tax rate was 36.5% in 1996, 34.0% in 1997 and 35.0% in 1998.
The primary reason for the fluctuation in our tax rate is the change in the
mix of our earnings in various tax jurisdictions throughout the world.
Test and Measurement
<TABLE>
<CAPTION>
Years Ended October 31,
-------------------------
1996 1997 1998
------- ------- -------
(dollars in millions)
<S> <C> <C> <C>
Net revenue....................................... $ 3,823 $ 4,203 $ 4,100
Earnings from operations.......................... 606 674 348
As a percentage of net revenue................... 15.9% 16.0% 8.5%
</TABLE>
Net revenue
Net revenue from our test and measurement business grew 9.9% in 1997 from
1996 and declined 2.5% in 1998 from 1997. The increase in 1997 from 1996
primarily reflected significant growth in sales to global wireless
communications customers. Additional revenue growth resulted from investments
in increased capacity and capability by contract manufacturers, which resulted
in increased sales of our automated semiconductor test and automated
manufacturing test products. Sales of our communications test systems and
instruments also increased.
Results in 1998 reflected weak economic conditions in Asia, which
represented approximately 31% of test and measurement's total net revenue in
1998 compared to approximately 36% in 1997 and approximately 36% in 1996. A
slowdown in the semiconductor industry in mid-1998, which was partially caused
by the economic conditions in Asia, also reduced our revenue growth.
Competitive pressure increased because of these conditions and in some cases,
we granted higher than normal pricing discounts and allowances. These revenue
trends were partially offset by increased sales of products for development
and deployment of higher bandwidth and optical networks. In addition, services
revenue increased 18.6% in 1998 from 1997.
Earnings from operations
Earnings from operations from our test and measurement business increased
11.2% in 1997 from 1996 and decreased 48.4% in 1998 from 1997. The increase in
1997 from 1996 primarily reflects higher net revenue. The
38
<PAGE>
decrease in 1998 from 1997 reflects a combination of lower net revenue and
higher costs and expenses, including the costs of the 1998 restructuring.
Cost of products and services as a percentage of net revenue decreased .6
percentage points in 1997 from 1996. Most of this improvement was caused by
higher volumes in 1997, primarily in communications products and electronic
instruments. Cost of products and services as a percentage of net revenue
increased 3.3 percentage points from 1997 to 1998. The increase was
substantially attributable to lower volumes and less profitable product mix,
primarily in wireless communications products and automated test equipment.
Cost of products in 1998 included restructuring charges for employee severance
and higher excess inventory write-offs across all product lines, as a result
of the weak economic conditions in Asia and the timing of new product
introductions. These charges increased cost of products and services by 1.1
percentage points.
Operating expenses as a percentage of net revenue increased .4 percentage
points in 1997 from 1996 and 4.3 percentage points in 1998 from 1997. The
increase in 1997 from 1996 was due to higher expenses only partially offset by
higher net revenue. The increase in 1998 from 1997 was due to a combination of
lower net revenue and higher expenses.
Research and development expense increased 15.2% in 1997 from 1996 and
10.0% in 1998 from 1997. The expense growth in 1997 from 1996 resulted from
the accelerated development of products for the wireless communications
market. The increase in 1998 from 1997 reflects our ongoing investment in new
products. Selling, general and administrative expense increased 9.3% in 1997
from 1996 and 7.4% in 1998 from 1997. The increase in 1997 from 1996 was
driven by marketing investments in the wireless communications market, as well
as new marketing efforts focused on Internet service providers. In 1998, our
cost reduction programs slowed overall expense growth and significantly
decreased some variable operating costs. However, this was partially offset by
1998 restructuring charges for employee severance costs.
Semiconductor Products
<TABLE>
<CAPTION>
Years Ended October 31,
-------------------------
1996 1997 1998
------- ------- -------
(dollars in millions)
<S> <C> <C> <C>
Net revenue...................................... $ 1,470 $ 1,479 $ 1,574
Earnings (loss) from operations.................. 125 57 (106)
As a percentage of net revenue.................. 8.5% 3.9% (6.7)%
</TABLE>
Net revenue
Net revenue from our semiconductor products business was essentially
unchanged in 1997 from 1996 and increased 6.4% in 1998 from 1997. Our sales of
ASICs and microprocessors in 1997 were lower as compared to 1996 because
Hewlett-Packard shipped fewer workstations using these components in the first
half of 1997. This decrease was offset by strong growth in shipments of fiber
optics and high-speed networking products. The strong revenue growth in these
two areas continued into 1998. In addition, shipments in 1998 of integrated
circuits increased significantly over 1997 due to increased sales to Hewlett-
Packard. In the second half of 1998, revenue growth slowed due to customer
anticipation of the divestiture of the power amplifier business and the
decline in the wireless communications semiconductor business in Asia. Revenue
from sales to Hewlett-Packard was 32.8% of net revenue in 1996, 34.2% of net
revenue in 1997 and 34.5% of net revenue in 1998.
Earnings from operations
Earnings from operations from our semiconductor products business decreased
54.4% in 1997 from 1996 and 286.0% in 1998 from 1997. The decrease in 1997
from 1996 reflects significant growth in operating expenses while net revenue
remained essentially unchanged. The decrease in 1998 from 1997 occurred
despite growth in net revenue and was primarily a result of costs incurred for
the 1998 restructuring.
39
<PAGE>
Cost of products as a percentage of net revenue increased 2.2 percentage
points in 1997 from 1996 and 9.7 percentage points in 1998 from 1997. The
increase in 1997 from 1996 was the result of lower volumes of ASIC sales to
Hewlett-Packard as well as write-offs of obsolete semiconductor inventory
related to wireless communications devices. Costs in 1998 include $116 million
of restructuring charges. Without these charges, cost of products as a
percentage of net revenue would have increased primarily as a result of lower
ASIC volumes in the second half of 1998.
Operating expenses as a percentage of net revenue increased 2.4 percentage
points in 1997 from 1996 and 1.0 percentage point in 1998 from 1997. The
increase in 1997 from 1996 was due primarily to higher expenses. The increase
in 1998 from 1997 was due to higher expenses, including amounts related to the
1998 restructuring, partially offset by the growth in net revenue.
Research and development expense increased 19.1% in 1997 from 1996 and
13.7% in 1998 from 1997. The increase in 1997 included increased research and
development spending on semiconductor process technologies, packaging
technologies and development tools. Research and development expense increased
in 1998 primarily as a result of our efforts to develop high-speed networking
products and advanced technology ASICs. Selling, general and administrative
expense increased 4.7% in 1997 from 1996, due primarily to higher marketing
costs. Selling, general and administrative expense increased 8.5% in 1998 from
1997, 1.5 percentage points of which reflects the restructuring charge. The
remainder of the increase was primarily related to higher sales and marketing
expenses.
We expect future research and development efforts to focus on the areas of
fiber optic and high-speed networking devices. Although we have had
significant research and development expenses related to semiconductor process
technologies in recent years, we expect to conduct future efforts through
joint venture partnering arrangements and through third-party agreements,
thereby reducing our research and development expenses in this area.
Healthcare Solutions
<TABLE>
<CAPTION>
Years Ended October 31,
-------------------------
1996 1997 1998
------- ------- -------
(dollars in millions)
<S> <C> <C> <C>
Net revenue....................................... $ 1,244 $ 1,208 $ 1,340
Earnings from operations.......................... 106 30 62
As a percentage of net revenue................... 8.5% 2.5% 4.6%
</TABLE>
Net revenue
Net revenue from our healthcare solutions business decreased 2.9% in 1997
compared to 1996 and increased 10.9% in 1998 from 1997. The decrease in 1997
from 1996 was primarily attributable to internal product transition issues in
the second half of 1997 that resulted in delays in shipments of patient
monitoring and ultrasound imaging products. The increase in 1998 from 1997 was
driven by strong sales of new patient monitoring systems and cardiology
ultrasound imaging products, which were introduced in the second half of 1997.
The net revenue growth in 1998 from 1997 was achieved despite the negative
impact from international revenue resulting from economic weakness in certain
markets in Asia as well as lower healthcare system spending in parts of
Europe.
Earnings from operations
Earnings from operations from our healthcare solutions business decreased
71.7% in 1997 from 1996 and increased 106.7% in 1998 from 1997. The decrease
in 1997 from 1996 resulted from lower net revenue combined with higher costs
and expenses. The increase in 1998 from 1997 was primarily due to higher net
revenue, partially offset by higher costs and expenses.
40
<PAGE>
Cost of products and services as a percentage of net revenue increased by
3.6 percentage points in 1997 from 1996 and decreased by .9 percentage points
in 1998 from 1997. The increase in 1997 from 1996 was driven by product
transition issues in the second half of 1997 as well as manufacturing quality
control issues in the second half of 1997. These factors resulted in delays in
shipments of ultrasound imaging and patient monitoring products, as well as a
shift in product mix to less profitable services and supplies. The decrease in
1998 from 1997 was primarily a result of higher volumes, as product transition
issues and manufacturing quality control issues encountered in 1997 were
resolved. The effect of higher volumes was partially offset by increased
spending related to the implementation of a new worldwide quality system and
the development of a new enterprise resource planning system.
Operating expenses as a percentage of net revenue increased 2.4 percentage
points in 1997 from 1996 and decreased 1.2 percentage points in 1998 from
1997. The increase in 1997 from 1996 was due to lower revenue combined with
higher expenses. The decrease in 1998 from 1997 resulted primarily from higher
revenue, partially offset by increased expenses from the inclusion of
Heartstream's operations. Without the acquisition of Heartstream, operating
expenses as a percentage of net revenue would have decreased 2.9 percentage
points in 1998 from 1997.
Research and development expense decreased 7.0% in 1997 from 1996 and 3.0%
in 1998 from 1997. The decrease in 1997 was attributable to lower initial
tooling costs than in 1996 and a headcount reduction related to the closure of
some product line operations. In 1998, research and development expense
exclusive of Heartstream decreased significantly due to the lower spending
levels required to complete customer commitments after our divestiture of the
healthcare information management business. This decrease was partially offset
by investments in the development of Heartstream's automatic external
defibrillators. Selling, general and administrative expense increased 8.1% in
1997 from 1996 and 11.1% in 1998 from 1997. The increase in 1997 from 1996 was
due primarily to higher sales and marketing costs associated with new product
introductions in patient monitoring and ultrasound imaging. Approximately half
of the increase in 1998 from 1997 was due to the acquisition of Heartstream,
which resulted in increased headcount in the sales organization and higher
goodwill amortization. The remainder was due to increased selling and
marketing expenses.
Chemical Analysis
<TABLE>
<CAPTION>
Years Ended October 31,
-------------------------
1996 1997 1998
------- ------- -------
(dollars in millions)
<S> <C> <C> <C>
Net revenue....................................... $ 842 $ 895 $ 938
Earnings from operations.......................... 38 77 75
As a percentage of net revenue................... 4.5% 8.6% 8.0%
</TABLE>
Net revenue
Net revenue from our chemical analysis business increased 6.3% in 1997 from
1996 and 4.8% in 1998 from 1997. The increases resulted from strong growth in
mass spectroscopy, liquid chromatography and consumables, such as columns and
supplies. The increase in 1998 was achieved despite decreased revenue from
products and services sold to customers in Asia as a whole and Japan in
particular as a result of the economic conditions in that region. In 1998,
pricing pressures increased as some competitors cut prices worldwide.
Earnings from operations
Earnings from operations from our chemical analysis business increased
102.6% in 1997 from 1996 and decreased 2.6% in 1998 from 1997. The increase in
1997 from 1996 resulted from higher net revenue while costs and expenses
remained relatively unchanged. The decrease in 1998 from 1997 reflects higher
operating expenses partially offset by higher revenue.
As a percentage of net revenue, cost of products and services decreased by
1.4 percentage points in 1997 from 1996 and .7 percentage points in 1998 from
1997. The improvements in 1997 and 1998 were driven by
41
<PAGE>
revenue growth and higher volumes. In addition, cost structure improvements
were achieved as we moved some production processes to contract manufacturers.
Operating expenses as a percentage of net revenue decreased 2.7 percentage
points in 1997 from 1996 and increased 1.3 percentage points in 1998 from
1997. The decrease in 1997 was due to higher net revenue and essentially
unchanged expenses. The increase in 1998 from 1997 resulted from greater
growth in expenses than in net revenue.
Research and development expense decreased 5.3% in 1997 from 1996 and
increased 9.7% in 1998 from 1997. The decrease in 1997 from 1996 resulted from
the completion in late 1996 of major development projects that were not
immediately replaced. In 1998, research and development investments increased
primarily due to joint development efforts in the bio-instrumentation and
microfluidics areas. Selling, general and administrative expense was unchanged
in 1997 from 1996 and increased 8.2% in 1998 from 1997. The increase in 1998
was primarily due to higher marketing and field selling costs.
42
<PAGE>
Quarterly Financial Results
The following tables present our operating results for each of the eleven
quarters in the period ended July 31, 1999, in dollars and as a percentage of
net revenue. The information for each of these quarters is unaudited and has
been prepared on the same basis as the audited consolidated financial
statements included elsewhere in this prospectus. In the opinion of
management, all necessary adjustments, which consist only of normal and
recurring accruals, have been included to present fairly the unaudited
quarterly results. This data should be read in conjunction with the
consolidated financial statements and the notes thereto included elsewhere in
this prospectus. These operating results are not indicative of the results of
any future period.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------------
1997 1998 1999
----------------------------- ----------------------------- --------------------
Jan 31 Apr 30 Jul 31 Oct 31 Jan 31 Apr 30 Jul 31 Oct 31 Jan 31 Apr 30 Jul 31
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue:
Products............... $1,541 $1,656 $1,619 $1,938 $1,743 $1,789 $1,583 $1,679 $1,488 $1,697 $1,759
Services............... 252 251 253 275 269 289 292 308 298 313 328
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total net revenue...... 1,793 1,907 1,872 2,213 2,012 2,078 1,875 1,987 1,786 2,010 2,087
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Costs and expenses:
Cost of products....... 790 835 856 974 854 975 887 1,091 792 831 902
Cost of services....... 160 167 165 179 170 183 176 176 182 188 201
Research and
development........... 205 222 223 230 226 243 230 249 222 241 242
Selling, general and
administrative........ 448 469 486 506 496 540 496 518 489 510 547
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total costs and
expenses.............. 1,603 1,693 1,730 1,889 1,746 1,941 1,789 2,034 1,685 1,770 1,892
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Earnings (loss) from
operations............. 190 214 142 324 266 137 86 (47) 101 240 195
Other income (expense),
net.................... (19) (14) -- (14) (18) 5 (1) (32) 13 2 12
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Earnings (loss) before
taxes.................. 171 200 142 310 248 142 85 (79) 114 242 207
Provision (benefit) for
taxes.................. 58 68 48 106 87 49 31 (28) 40 85 72
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net earnings (loss)..... $ 113 $ 132 $ 94 $ 204 $ 161 $ 93 $ 54 $ (51) $ 74 $ 157 $ 135
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------------
1997 1998 1999
------------------------------ ------------------------------ ----------------------
Jan 31 Apr 30 Jul 31 Oct 31 Jan 31 Apr 30 Jul 31 Oct 31 Jan 31 Apr 30 Jul 31
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(% of total net revenue)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue:
Products............... 85.9% 86.8% 86.5% 87.6% 86.6% 86.1% 84.4% 84.5% 83.3% 84.4% 84.3%
Services............... 14.1 13.2 13.5 12.4 13.4 13.9 15.6 15.5 16.7 15.6 15.7
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total net revenue...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Costs and expenses:
Cost of products....... 44.1 43.8 45.7 44.0 42.5 46.9 47.3 54.9 44.3 41.3 43.2
Cost of services....... 8.9 8.8 8.8 8.1 8.4 8.8 9.4 8.9 10.2 9.4 9.7
Research and
development........... 11.4 11.6 11.9 10.4 11.2 11.7 12.3 12.5 12.4 12.0 11.6
Selling, general and
administrative........ 25.0 24.6 26.0 22.9 24.7 26.0 26.4 26.1 27.4 25.4 26.2
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total costs and
expenses.............. 89.4 88.8 92.4 85.4 86.8 93.4 95.4 102.4 94.3 88.1 90.7
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Earnings (loss) from
operations............. 10.6 11.2 7.6 14.6 13.2 6.6 4.6 (2.4) 5.7 11.9 9.3
Other income (expense),
net.................... (1.1) (.7) -- (.6) (.9) .2 (.1) (1.6) .7 .1 .6
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Earnings (loss) before
taxes.................. 9.5 10.5 7.6 14.0 12.3 6.8 4.5 (4.0) 6.4 12.0 9.9
Provision (benefit) for
taxes.................. 3.2 3.6 2.6 4.8 4.3 2.3 1.6 (1.4) 2.3 4.2 3.4
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net earnings (loss)..... 6.3% 6.9% 5.0% 9.2% 8.0% 4.5% 2.9% (2.6)% 4.1% 7.8% 6.5%
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Costs of products as a
percentage of products
revenue................ 51.3% 50.4% 52.9% 50.3% 49.0% 54.5% 56.0% 65.0% 53.2% 49.0% 51.3%
Costs of services as a
percentage of services
revenue................ 63.5% 66.5% 65.2% 65.1% 63.2% 63.3% 60.3% 57.1% 61.1% 60.1% 61.3%
</TABLE>
43
<PAGE>
In the third quarter of 1997, our net earnings declined significantly
compared to the prior and subsequent quarters. During the quarter, the
healthcare solutions business received a letter from the FDA citing their
concerns regarding quality system regulations. As a result, the business
delayed shipping some of its products until the FDA's concerns were resolved,
which caused the quarter's net revenue to decrease. In addition, sales and
marketing programs in the test and measurement business related to new product
releases caused selling, general and administration expenses to increase.
Beginning in the third quarter of 1998 and through the first half of 1999,
our revenue was significantly affected by the economic conditions in Asia and
the slowdown in the semiconductor industry. Since a substantial portion of our
cost of products and services, as well as some of our operating expenses, are
relatively fixed in the short term, the sharp decline in revenue caused our
operating margins to decline. There are indications that conditions in Asia
are beginning to improve. Charges from the restructuring that occurred in the
quarter ended October 31, 1998 adversely affected operating results in that
quarter. The 1999 quarterly results reflect the benefit of the 1998
restructuring as well as other cost containment measures that we implemented
in the second half of 1998. The third quarter of 1999 includes a $51 million
charge related to the write-down of a building that was under construction for
the intended purpose of housing manufacturing operations for eight-inch
semiconductor wafers.
Our quarterly net revenue, earnings from operations and net earnings have
varied significantly in the past and we expect that they are likely to vary in
the future. In addition, upon our separation from Hewlett-Packard, we expect
to incur substantial additional costs in future periods resulting from being a
separate, stand-alone entity.
Liquidity and Capital Resources
Historically, Hewlett-Packard has managed cash on a centralized basis. Cash
receipts associated with our business have been transferred to Hewlett-Packard
on a daily basis and Hewlett-Packard has provided funds to cover our
disbursements. Accordingly, we have reported no cash or cash equivalents at
October 31, 1997 and 1998 and July 31, 1999.
In November 1999, Hewlett-Packard will make an initial cash payment to us
to fund our working capital and other needs for the first few months of our
operations as a separate, stand-alone entity. Our separation agreement with
Hewlett-Packard provides that Hewlett-Packard will retain some of our assets
and liabilities and Hewlett-Packard will transfer to us some of the assets and
liabilities related to its business. We expect that our cash balance will
initially decline until we begin to collect newly generated accounts
receivable. The net proceeds of the offering, including proceeds received from
any exercise of the U.S. underwriters' over-allotment option, will be paid to
Hewlett-Packard as a dividend. See "Arrangements between Agilent Technologies
and Hewlett-Packard--Master Separation and Distribution Agreement."
We generated cash from operations of $881 million in 1996 compared to $965
million in 1997 and $751 million in 1998. For the nine months ended July 31,
we generated cash from operations of $385 million in 1998 and $426 million in
1999. In all periods, cash from operations is primarily a result of net
earnings adjusted for non-cash charges for depreciation and amortization.
Capital expenditures for property, plant and equipment constituted
substantially all of our cash used in investing activities in 1996, 1997, 1998
and the nine months ended July 31, 1998 and 1999. The amounts expended were
partially offset by proceeds from the disposal of excess, unused or retired
assets. The high level of capital expenditures in 1996 and 1997 reflected our
investment in our semiconductor products business integrated circuit
fabrication capability, which was subsequently replaced with a joint venture
arrangement. In addition, we used small amounts of cash in each period to
acquire several small companies. We expect to continue to acquire
complementary products or businesses in the future.
On July 6, 1999, Hewlett-Packard entered into an agreement with Yokogawa to
acquire Yokogawa's 25% minority equity ownership of Hewlett-Packard Japan for
approximately $521 million. Under the terms of the agreement, Hewlett-Packard
will acquire Yokogawa's shares through a series of purchase transactions
beginning
44
<PAGE>
in January 2000. Under the terms of the master separation and distribution
agreement, we will assume these Hewlett-Packard obligations under the
agreement with Yokogawa. In the initial step, which will occur on or before
January 31, 2000, we will purchase 10.4% of Hewlett-Packard Japan's shares
from Yokogawa. In the second step, which will occur on or before April 30,
2000, we will purchase 10.4% of Hewlett-Packard Japan's shares from Yokogawa.
We will purchase the remaining 4.2% of Hewlett-Packard Japan's shares owned by
Yokogawa prior to March 31, 2003. Hewlett-Packard will provide the funding for
this transaction.
An independent valuation has been performed, which we used to determine the
portion of the transaction's purchase price attributable to our business and
the remaining Hewlett-Packard business and to allocate the purchase price to
identifiable assets and liabilities. Of the total purchase price, $375 million
is attributable to us, with the remainder attributable to Hewlett-Packard's
remaining business. We expect that $302 million of the purchase price will be
recorded as goodwill, which will be amortized over 10 years.
Our commitments consist primarily of future minimum lease payments under
noncancelable lease agreements, our obligations under the transaction with
Yokogawa described above and cash capital contributions required under the
terms of a joint venture agreement. In addition, we have entered into
agreements with Hewlett-Packard under which Hewlett-Packard will provide
services to us during a transition period after the separation.
Our liquidity is affected by many factors, some of which are based on the
normal ongoing operations of our businesses and some of which arise from
uncertainties related to global economies. We believe that the initial cash
funding we receive from Hewlett-Packard together with cash generated from
operations will be sufficient to satisfy our working capital, capital
expenditure and research and development requirements for the foreseeable
future. However, we may require or choose to obtain additional debt or equity
financing in the future. We cannot assure you that financing, if needed, will
be available on favorable terms.
Factors That May Affect Future Results
Since we sell our products worldwide, our business is subject to risks
associated with doing business internationally. We do a substantial portion of
our business in Korea and Japan, which have been subject to increased economic
instability in recent years. We experienced a decline in our business in 1998
when Korea and Japan experienced economic difficulties. The recurrence of
weakness in these economies or weakness in other international economies could
have a significant negative effect on our future operating results. For a
detailed discussion of these risks, see "Risk Factors--Risks Related To Our
Business--Economic, political and other risks associated with international
sales and operations, particularly in Korea or Japan, could adversely affect
our sales."
Given the nature of the markets in which we participate, we cannot reliably
predict future revenue and profitability, and unexpected changes may cause us
to adjust our operations. Small declines in revenue could disproportionately
affect our operating results in a quarter. Factors that could effect quarterly
operating results include the demand for and market acceptance of our products
and competitive pressures resulting in lower selling prices. For a detailed
discussion of these risks, see "Risk Factors--Risks Related To Our Business--
Fluctuations in our quarterly operating results may cause our stock price to
decline."
Many of the industries and markets into which we sell our products are
cyclical. Any significant downturn in our customers' markets or in general
economic conditions would likely result in a reduction in demand for our
products and services and could harm our business. For a detailed discussion
of these risks, see "Risk Factors--Risks Related To Our Business--Our
operating results could be harmed if the industries into which we sell our
products are in downward cycles."
Year 2000
The year 2000 problem arises from the use of a two-digit field to identify
years in computer programs, e.g., 85=1985, and the assumption of a single
century, the 1900s. Any program so created may read, or attempt to read, "00"
as the year 1900. There are two other related issues that could also lead to
incorrect calculations or
45
<PAGE>
failure: some systems' programming assigns special meaning to certain dates
and the year 2000 is a leap year. Accordingly, some computer hardware and
software, including programs embedded within machinery and parts, will need to
be modified prior to the year 2000 to remain functional. Our year 2000
initiatives are focusing primarily on four areas of potential impact: internal
information technology (IT) systems; internal non-IT systems and processes,
including services and embedded chips (controllers); our products and
services; and the readiness of significant third parties with whom we have
material business relationships. In 1997, Hewlett-Packard established a Year
2000 Program Office to coordinate these programs for all of its businesses,
including Agilent Technologies, across the enterprise and to provide a single
point of contact for information about year 2000 programs. The year 2000
efforts in these areas are led by the year 2000 general manager who reports
directly to Hewlett-Packard's senior management, including Agilent
Technologies' chief executive officer.
The costs associated with our IT internal readiness actions are a
combination of incremental external spending and use of existing internal
resources. We estimate that over the life of our IT internal readiness effort,
we will have spent a total of approximately $90 million over a multi-year
period. We expect to implement successfully the systems and programming
changes necessary to address year 2000 internal IT and non-IT readiness issues
and material third party relationships. Based on current estimates, we do not
believe that the costs associated with these actions will have a material
effect on our results of operations, cash flows or financial condition.
However, the costs of these actions may vary from quarter to quarter. There
can be no assurance, however, that there will not be a delay in, or increased
costs associated with the implementation of these changes. In addition,
failure to achieve year 2000 readiness for our internal systems and processes
could delay our ability to manufacture and ship products and deliver services,
disrupt our customer service and technical support facilities and interrupt
customer access to our online products and services. Our inability to perform
these functions could have an adverse effect on our future results of
operations, cash flows or financial condition.
Internal IT Systems
Hewlett-Packard has established a dedicated Year 2000 IT Internal Readiness
Program Organization to oversee the worldwide year 2000 internal IT
application and infrastructure readiness activities, for all its businesses,
including Agilent Technologies. The Internal Readiness IT Program Organization
provides monthly progress reports to Hewlett-Packard's senior management,
including Agilent Technologies' chief executive officer. The Internal
Readiness IT Program Organization is charged with raising awareness throughout
Hewlett-Packard and Agilent Technologies, developing tools and methodologies
for addressing the year 2000 issue, monitoring the development and
implementation of business and infrastructure plans to bring non-compliant
applications into compliance on a timely basis and identifying and assisting
in resolving high-risk issues.
We, in conjunction with the Hewlett-Packard program, are approaching our
year 2000 IT internal readiness program in four phases: (1) assessment, (2)
planning, (3) preparation and (4) implementation. The assessment phase
involves taking an inventory of our internal IT applications to prioritize
risk, identifying failure dates, defining a solution strategy, estimating
repair costs and communicating across and within business units regarding the
magnitude of the problem and the need to address year 2000 issues. The
planning phase consists of identifying the tasks necessary to ensure
readiness, scheduling remediation plans for applications and infrastructure
and determining resource requirements and allocations. The third phase,
preparation, involves readying the development and testing environments and
piloting the remediation process. Implementation, the last phase, consists of
executing the plans to fix, test and implement critical applications and
associated infrastructure, and putting in place contingency plans for
processes that have a high impact on our businesses.
We set July 31, 1999 as the target date by which our critical IT
applications would be year 2000 compliant. The assessment, planning and
preparation phases have been completed. As of August 31, 1999, the
implementation phase is substantially complete. For a few remaining
applications, the work is pending a third-party patch or upgrade to complete
year 2000 readiness. In each of these cases, target completion dates are in
the near future and there are backup plans to ensure year 2000 readiness.
46
<PAGE>
Internal Non-IT Systems and Processes
Non-IT systems include, but are not limited to, those systems that are not
commonly thought of as IT systems, such as telephone/PBX systems; fax
machines; facilities systems regulating alarms, building access and
sprinklers; manufacturing, assembly and distribution equipment; and other
miscellaneous systems and processes. Year 2000 readiness for these internal
non-IT systems is the responsibility of our worldwide operating units and
their respective functions and operations, e.g., facilities, research and
development, manufacturing, distribution, logistics, sales and customer
support.
The year 2000 Program Office has developed a comprehensive process to
ensure all operations and global business units use a structured and
standardized methodology to organize, plan and implement their year 2000
readiness.
Hewlett-Packard has also established a Year 2000 Council to coordinate its
overall internal readiness and its business continuity planning efforts,
including those of Agilent Technologies. The Council is composed of
representatives from the major business units within Hewlett-Packard and
Agilent Technologies and the critical corporate and infrastructure functions
that support them. The Council is chaired by the year 2000 general manager and
has initiated a comprehensive program to ensure timely and consistent business
continuity planning by all of Hewlett-Packard's and Agilent Technologies'
business units. As of July 31, 1999, substantially all year 2000 testing,
internal mitigation and remediation activities, and business contingency plans
have been finalized. From July 31, 1999, until November 30, 1999, all year
2000 internal readiness solutions, contingency plans, crisis management and
recovery mechanisms will be further stress-tested to ensure full preparation.
Product and Customer Readiness
Our newly introduced products are year 2000 compliant. However, some
hardware and software products currently installed at customer sites will
require upgrade or other remediation. Some of these products are used in
critical applications in which the impact of non-performance to these
customers and other parties could be significant. While we believe our
customers are responsible for the year 2000 readiness of their IT and business
environments, we are taking significant steps to enable customers to achieve
their readiness goals, thereby preserving our customers' satisfaction and our
brand reputation. In 1997, Hewlett-Packard established a dedicated Year 2000
Product Compliance Program Office to coordinate worldwide year 2000 product
compliance activities for all its businesses, including Agilent Technologies.
The Product Compliance Program Office is charged with developing and
overseeing implementation of plans to identify all standard products delivered
since January 1, 1995; to test those products for compliance; to identify an
appropriate path to compliance for non-compliant standard products; and to
communicate the status and necessary customer action for non-compliant
standard products.
Hewlett-Packard has an Internet website dedicated to communicating year
2000 issues to a broad customer base. Most of our key business groups have
complementary Internet websites dedicated to similar communication to their
specific customers. These websites include product compliance search pages
that allow customers to look up the status of our products they have
installed. We are taking additional steps to identify affected customers,
raise customer awareness related to non-compliance of some products and help
customers to assess their risks. We are in the process of implementing plans
to accommodate increased levels of customer assistance in the first half of
2000 and currently anticipate that a significant portion of the costs related
to these actions will occur in the fourth quarter of 1999 and the first half
of 2000.
All of these efforts are coordinated by representatives from all of
Hewlett-Packard's and Agilent Technologies' product and service business
units, who work in conjunction with the Product Compliance Program Office to
develop and implement Hewlett-Packard's and Agilent Technologies' year 2000
policies for products and services. The year 2000 general manager chairs this
group of representatives.
The costs of the readiness program for products are primarily costs of
existing internal resources largely absorbed within existing engineering
spending levels. These costs were incurred primarily in 1998 and earlier
47
<PAGE>
years and were not broken out from other product engineering costs. Historical
year 2000 customer satisfaction costs were not material. Future product
readiness costs, including those for customer satisfaction, are not
anticipated to be material. We are aware of the potential for legal claims
against us and other companies for damages arising from products that are not
year 2000 compliant. We believe that reasonable communication and customer
satisfaction steps are under way so that any claims would not result in
material liability for us.
It is unknown how year 2000 issues may affect customer spending patterns.
As customers focus their attention and capital budgets in the near term on
preparing their own businesses for the year 2000, they may either delay or
accelerate purchases of new applications, services and systems from us. Many
of our products run custom software or connect to other systems or peripheral
products that may be adversely affected by operating system or hardware
upgrades. Although it is possible that these factors may increase or change
the timing of demand for certain of our products and services, the increase
may be offset by the softening in demand for other offerings. As a result,
these events may affect our future revenue and revenue patterns.
Material Third-Party Relationships
We have developed a year 2000 process for dealing with our key suppliers,
contract manufacturers, distributors, vendors and partners. The process
generally involves the following steps: (1) initial supplier survey; (2) risk
assessment and contingency planning; (3) follow-up supplier reviews and
escalation, if necessary; and where relevant, (4) testing. To date, we have
received formal responses from substantially all of our critical suppliers.
Most of them have responded that they expect to address all their significant
year 2000 issues on a timely basis. We regularly review and monitor the
suppliers' year 2000 readiness plans and performance. Based on our risk
assessment, selective on-site reviews have been performed. Risk analysis has
been completed with our base of suppliers and contingency plans are now being
developed and tested. All critical surveys and testing efforts were completed
by June 1, 1999. In some cases, to meet year 2000 readiness, we have replaced
suppliers or eliminated suppliers from consideration for new business. Where
efforts to work with critical suppliers have not been successful, contingency
planning generally emphasizes the identification of substitute and second-
source suppliers, or in certain situations includes a planned increase in the
level of inventory held (e.g., in the case of sole sources). We have also
contracted with multiple transportation companies to provide product delivery
alternatives. We have also completed substantially all Electronic Data
Interchange (EDI) migration and testing with our supply base. EDI is a set of
standard protocols for the electronic interchange of business data.
We are working to identify and analyze the most reasonably likely worst-
case scenarios for third-party relationships affected by year 2000. These
scenarios could include possible infrastructure collapse, the failure of power
and water supplies, major transportation disruptions, unforeseen product
shortages due to hoarding of products and sub-assemblies and failures of
communications and financial systems. Any one of these scenarios could have a
major and material effect on our ability to build our products and deliver
services to our customers. While we have contingency plans in place to address
most issues under our control, an infrastructure problem outside of our
control or some combination of several of these problems could result in a
delay in product shipments depending on the nature and severity of the
problems. We would expect that most utilities and service providers would be
able to restore service within days although more pervasive system problems
involving multiple providers could last two to four weeks or more depending on
the complexity of the systems and the effectiveness of their contingency
plans.
Although we are dedicating substantial resources towards attaining year
2000 readiness, we cannot assure you that we can identify and address
successfully all year 2000 issues. Even if we act in a timely manner to
complete all of our assessments; identify, develop and implement remediation
plans believed to be adequate; and develop contingency plans believed to be
adequate, some problems may not be identified or corrected in time to prevent
material adverse consequences to us.
The discussion above regarding estimated completion dates, costs, risks and
other forward-looking statements regarding year 2000 is based on our best
estimates given information that is currently available and is
48
<PAGE>
subject to change. As we continue to progress with our year 2000 initiatives,
we may discover that actual results will differ materially from these
estimates.
Adoption of the Euro
Hewlett-Packard has established a dedicated task force to address the
issues raised for all of its businesses, including Agilent Technologies, by
the introduction of a European single currency, the Euro. The Euro's initial
implementation was effective as of January 1, 1999 and the transition period
will continue through January 1, 2002. Beginning January 1, 1999, product
prices in local currencies are being converted to Euros as required. At an
appropriate point during the transition period, product prices in
participating countries will be established and stored in Euros, and converted
to local denominations. We implemented system changes to give multi-currency
capability to the few internal applications that did not yet have this
capability, or to ensure that external partners' systems processing Euro
conversions are compliant with the European council regulations.
We do not presently expect that introduction and use of the Euro will
materially affect Hewlett-Packard's foreign exchange and hedging activities or
our use of derivative instruments. We do not expect that the introduction of
the Euro will result in any material increase in our costs and all costs
associated with the introduction of the Euro will be expensed to operations as
incurred. While we will continue to evaluate the impact of the Euro
introduction over time, based on currently available information, we do not
believe that the introduction of the Euro currency will have a material
adverse impact on our consolidated financial condition, cash flows or results
of operations.
Market Risk
We are exposed to foreign currency exchange rate risk inherent in our sales
commitments, anticipated sales, and assets and liabilities denominated in
currencies other than the United States dollar. Historically, our exposure to
exchange rate risk has been managed on an enterprise-wide basis as part of
Hewlett-Packard's risk management strategy. This strategy has utilized
derivative financial instruments, including forwards, swaps and purchased
options, to hedge certain foreign currency exposures, with the intent of
offsetting gains and losses that occur on the underlying exposures with gains
and losses on the derivative contracts hedging them. We are currently
evaluating our exchange rate risk management strategy. We do not currently and
do not intend in the future to utilize derivative financial instruments for
trading purposes.
Hewlett-Packard has performed a sensitivity analysis assuming a
hypothetical 10% adverse movement in foreign exchange rates to the hedging
contracts and the underlying exposures described above. As of October 31, 1997
and 1998 and July 31, 1999, the analysis indicated that these hypothetical
market movements would not have a material effect on Hewlett-Packard's
consolidated financial position, results of operations or cash flows. Because
the exposure to exchange rate risk has been managed on an enterprise-wide
basis, it is not practicable to perform a similar analysis on only our
exposures. However, it is unlikely that the results of such an analysis on our
exposures would indicate a material impact on our consolidated financial
position, results of operations or cash flows.
All debt will be retained by Hewlett-Packard. Therefore, no debt has been
directly attributed to us. Accordingly, we have not been exposed to interest
rate risk.
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BUSINESS
Agilent Technologies is a global diversified technology company that
provides enabling solutions to high growth markets within the communications,
electronics, healthcare and life sciences industries. Our broad technology
portfolio and our experience in working with market-leading customers in more
than 110 countries have allowed us to establish and advance our leadership
across multiple markets.
Agilent Technologies includes the following four primary businesses:
. test and measurement, which provides standard and customized test,
measurement and monitoring instruments and systems as well as software
for the design, manufacture and support of high frequency electronics
and communications devices;
. semiconductor products, which provides fiber optic communications
devices and assemblies, wireless integrated circuits for wireless
applications, application-specific integrated circuits, optoelectronic
devices and image sensors;
. healthcare solutions, which provides patient monitoring, ultrasound
imaging and cardiology products and systems; and
. chemical analysis, which provides analytical instruments, systems and
services for chromatography, spectroscopy and bio-instrumentation.
Our test and measurement and semiconductor businesses share focus on growth
opportunities in the communications sector, while our healthcare and chemical
analysis businesses share focus on growth opportunities in healthcare and life
sciences. All of our businesses are supported by the technical expertise of
Agilent Technologies Laboratories, one of the world's foremost industrial
research and development organizations. Agilent Technologies Laboratories is
thoroughly integrated with our businesses in design, development and
manufacturing engineering, and substantially all of its development engineers
are aligned with the research and development teams in our individual
businesses.
Over our 60-year history, our businesses have developed close relationships
with market-leading customers, working with thousands of customers around the
world as technologies, business needs and global economic conditions have
undergone dramatic changes. These close relationships have provided us
invaluable strategic market insights and have been central to our success.
We have established leadership positions across multiple markets and are a
leading supplier of:
. semiconductor and fiber optic components;
. communications and electronic modules and assemblies;
. patient monitoring and ultrasound imaging equipment and automatic
external defibrillators; and
. chemical measurement instruments and systems.
We sell our products primarily through our direct sales force, but we also
utilize distributors, resellers, telesales and electronic commerce. Of our
total net revenue of $8.0 billion in the fiscal year ended October 31, 1998,
we generated 45.6% in the United States and 54.4% internationally. As of July
31, 1999, we employed approximately 42,000 people worldwide. We have major
research and development and manufacturing sites in California, Colorado,
Delaware, Massachusetts, and Washington in the United States and in China,
Germany, Japan, Korea, Malaysia, Singapore and the United Kingdom.
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Our net revenue by business segment for each of the years ending October
31, 1996, 1997 and 1998 and for the nine months ended July 31, 1998 and 1999
was:
<TABLE>
<CAPTION>
Nine Months
Years Ended October Ended
31, July 31,
-------------------- -------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
(in millions)
<S> <C> <C> <C> <C> <C>
Test and measurement......................... $3,823 $4,203 $4,100 $3,098 $2,856
Semiconductor products....................... 1,470 1,479 1,574 1,195 1,230
Healthcare solutions......................... 1,244 1,208 1,340 988 1,043
Chemical analysis............................ 842 895 938 684 754
------ ------ ------ ------ ------
Total net revenue.......................... $7,379 $7,785 $7,952 $5,965 $5,883
====== ====== ====== ====== ======
</TABLE>
In the nine months ended July 31, 1999, Hewlett-Packard accounted for 10%
of our total net revenue.
Industry Overview
Many of the markets we serve are undergoing rapid change and experiencing
significant growth. We believe that these trends will provide us with major
growth opportunities.
Communications Industry
The communications industry is undergoing fundamental change and growth
resulting principally from explosive demand for Internet access and data
transmission services. Traditional voice telecommunications have been carried
as an electrical signal over copper wire. Since this technology was designed
for low-capacity voice transmission, it is unable to meet the high-volume
transmission requirements of Internet access and other forms of high-speed,
digital data communications. Increased bandwidth is critically important to
the transmission of high-volume data and is the driving force behind the
deployment of the high-speed, high-capacity, digital network infrastructure.
Fiber optic networks are increasingly replacing copper-based technologies
in local area and wide area networks. Fiber optics enable digital information,
such as coded data, voice or video, to be transmitted as pulses of light. The
light being transmitted along each fiber-optic cable can be divided up into
multiple frequencies, and each frequency can be used as a separate
transmission path. Thus each fiber optic cable can simultaneously carry
multiple transmissions. Other new communications technologies, such as Gigabit
Ethernet, Digital Subscriber Line and Asynchronous Transfer Mode, are being
deployed to expand the capabilities of existing networks or build new
broadband data networks. Cable service providers are in the early stages of
introducing broadband interactive data services and Internet access to their
customers by redesigning their networks and deploying cable modem
technologies.
The usage levels of wireless communications around the world are increasing
dramatically, as penetration increases in developed countries, and lesser-
developed countries deploy wireless networks as a means to quickly address the
surging demand for communications. As an alternative to wireline access, some
carriers and service providers are utilizing wireless technologies to provide
voice, data and Internet services to their customers. While broadband wireless
data services are still in the early stages, the development and deployment of
next generation cellular technologies and services is likely to lead to their
rapid growth.
We believe that these emerging trends in the communications industry
provide us with a number of significant business opportunities. The widespread
deployment of fiber optic networks generates increasing demand for high-speed
optoelectronic components to connect the electronic systems controlling the
network to the transmission fiber. The manufacture, physical installation and
maintenance of network switches, routers and other high-speed devices rely on
increasingly sophisticated testing, calibration and measurement instruments
and systems. Additionally, these systems typically require physical layer
integrated circuits to prepare data for transmission across high-speed
networks, such as Gigabit Ethernet, Digital Subscriber Line, Asynchronous
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Transfer Mode and next-generation cable networks. Service providers face
increased competition as a result of these emerging technologies and
deregulation of the industry. Traditional communications service providers and
emerging Internet service providers, competing aggressively for subscribers,
require advanced test and monitoring solutions to optimize quality of service
to their customers. Similarly, the manufacturers of cellular handsets, base
stations and other wireless network equipment require advanced design software
and test and measurement instruments and systems to develop, manufacture and
deploy advanced wireless communications products and capture the high growth
market opportunity.
Semiconductor and Electronics Industries
The semiconductor and electronics industries are still largely driven by
rapid technological advancement, a phenomenon commonly known as Moore's Law,
which states that the functionality and performance of a digital integrated
circuit doubles roughly every 18-24 months. Decreased size and greater density
of the individual electronic components on the integrated circuit drive
improvements in the performance and functionality of the device and decrease
price to the end user. This continuous cycle of increased performance at lower
cost drives the pervasiveness of semiconductor devices in multiple
applications, from communications networks to consumer products. At the same
time, the cycle places increasing demands on companies that develop and use
electronic components, products and systems to keep up with the fast pace of
technological advances.
The effect of Moore's Law creates major business opportunities for us. Each
new integrated circuit design presents new challenges for test and measurement
systems: smaller, more densely-packed elements; faster operating speeds; and
greater complexity. Semiconductor devices and electronic components and
assemblies comprise an increasing proportion of the overall value of end-
products, increasing the importance of testing within the electronic component
and systems design and manufacturing process. The increasing pervasiveness of
semiconductor devices creates strong growth opportunities for many of our
products, including our electronic and optical components, our high frequency
and digital design solutions, as well as our automated test equipment used in
high volume manufacturing settings.
Pharmaceutical, Bioscience and Healthcare Industries
The time and expense required to discover and develop new drugs demand that
pharmaceutical companies continually find ways to improve the efficiency of
the drug-discovery process, often relying on analytical instruments to improve
productivity while remaining compliant with laws and regulations. At the same
time, the healthcare industry is seeking ways to reduce costs and improve the
quality of health care. We believe this trend will require healthcare
solutions that can be deployed in non-hospital settings, such as in smaller
clinics and in patients' homes. Healthcare research and development
institutions are also focusing increased resources on disease diagnosis and
prevention. Greater understanding of the genetic basis of disease is
considered critical to learning how to prevent, diagnose and manage diseases
and requires advanced instrumentation for DNA and related analysis.
Strategy
Focus on High Growth Market Opportunities
Our strategy is to use our strengths as a diversified technology company to
enter new markets through internal development, strategic partnerships and
acquisitions. To achieve this objective, we work closely with our customers'
research and development teams to understand emerging markets, technologies
and standards and we invest accordingly in our own development of enabling
solutions in those areas. We intend to use strategic partnerships and make
tactical acquisitions to develop advanced systems that complement our existing
technologies and products to accelerate our entry into strategic, high-growth
markets.
Within the communications markets, we are focused on providing test,
measurement and monitoring technologies and solutions for the development and
deployment of next-generation fiber optic, broadband,
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Internet and cellular networks, as well as leading edge fiber optic and
semiconductor components. We work closely with cellular component and device
manufacturers at the research and development stage to understand emerging
industry standards. We have also continued to invest in our market-leading
high-frequency design solutions. We were able to take advantage of our product
diversity by applying the technologies we developed for the defense industries
in the 1980s to the higher growth communications industry when growth of the
defense market slowed. In life sciences, we have focused our efforts on the
high-growth segments of the pharmaceutical industry. In healthcare, we
recently made an acquisition that accelerated our entry and gave us leading
market share in the fast-growing automatic external defibrillator market.
Continue to Innovate Technologically
Agilent Technologies and Agilent Technologies Laboratories have a long
legacy of technological innovation and product generation as part of Hewlett-
Packard. We will continue to invest in and build research and development
expertise, focusing our centralized laboratories on fundamental technology and
process developments and utilizing innovations from our businesses to develop
products to address high growth market segments. Our scientists have provided
significant contributions and technological advances across multiple markets
and industries. Our reputation for technological innovation allows us to work
closely with both established and emerging leaders in the communications,
electronics, life sciences and healthcare industries, and to provide advanced
solutions to meet emerging market requirements. The experience and knowledge
of our engineers, combined with our close customer relationships, enable us to
anticipate customer needs for next-generation products and solutions. In
healthcare, we market our equipment and establish strong relationships with
influential medical research and development centers around the world, to gain
valuable insights into new discoveries and strategic initiatives in the
healthcare and life sciences industries. Similarly, in semiconductor test, we
have worked closely with Rambus to develop a high-speed test solution for
advanced memory chips, which has been used in selected niche products such as
video games, but is now being developed as main memory for high-performance
personal computers.
Maximize the Benefits of our Scale and Global Presence
We believe our scale and global presence provide us with a competitive
advantage across multiple industries. In many of our targeted markets and in
many of the countries in which we operate, we are the largest industry
participant and possess greater resources for research and development and
service and support than any competitor. Our global direct sales force gathers
valuable insights into emerging industry trends around the world and provides
us an effective means of bringing new products to market rapidly. In addition,
we believe our customers value our global ability to provide more complete
solutions with our training, systems integration, and project management
programs. Our regional support centers enable us to provide localized service
and support, and our telesales and electronic commerce systems allow remote
customers to order products, obtain product information and utilize remote
support services. We intend to continually enhance overall customer
satisfaction by remaining focused on providing effective service and support.
AGILENT TECHNOLOGIES LABORATORIES
We are supported by the technological expertise of Agilent Technologies
Laboratories, one of the world's foremost industrial research and development
organizations. Agilent Technologies Laboratories consists of those operations
of Hewlett-Packard Laboratories that historically conducted basic research in
our focus areas. Agilent Technologies Laboratories works with our businesses
in design, development and manufacturing engineering, and substantially all of
its development staff are aligned with the research and development staff in
our specific businesses.
Agilent Technologies Laboratories conducts applied research in electronics,
medical and analytical measurements, biotechnology, photonics, solid-state
materials and components, and measurement systems and solutions. The
scientists in Agilent Technologies Laboratories have made significant
contributions and advances
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in many of these areas, including LEDs, gallium-arsenide integrated circuits,
lightwave and LAN-based instruments, mass spectrometry, ultra-violet and
visible spectrophotometry, cardiac ultrasound imaging, electrocardiogram
algorithms and the wireless mouse.
Agilent Technologies Laboratories is located primarily in Palo Alto,
California and employs approximately 500 people. Approximately half of the 300
technical professionals in Agilent Technologies Laboratories have doctoral
degrees and over 75% have some form of advanced degree. In recent years, an
average of 80 patents are issued to Agilent Technologies Laboratories
annually.
TEST AND MEASUREMENT
Our test and measurement business is a leader in providing test and
measurement solutions to companies in the communications, electronics,
semiconductor and related industries. We provide standard and customized
solutions that are used in the design, development, manufacture, installation,
deployment and operation of electronic equipment and systems. These solutions
are used by our customers to improve time-to-market, lower cost of
manufacturing and improve the quality of their products. These solutions
include test and measurement instruments and systems, automated test
equipment, communications network monitoring and management tools and software
design tools and associated services. Our solutions are employed by a wide
range of customers, including:
. communications and network equipment manufacturers, including providers
of fiber optic, wireless and wireline components, products and systems;
. providers of communications services, including telecommunications,
Internet and cellular service providers;
. designers and manufacturers of semiconductor products, including
microprocessors, memory devices, ASICs, radio frequency and microwave
integrated circuits and other types of integrated circuits; and
. designers and manufacturers of electronic equipment, including printed
circuit board assemblies and electronic equipment, such as cellular
handsets, personal computers and avionics equipment.
We believe that we are the leading provider in over 25 product categories
of the test and measurement market, including:
. network and spectrum analyzers;
. communications test equipment;
. wireless test equipment;
. in-circuit test and x-ray inspection systems for printed circuit board
assemblies;
. lightwave test equipment;
. logic analyzers and logic-signal sources; and
. high-frequency computer-aided engineering and simulation software.
Our test and measurement business employed approximately 18,300 people as
of July 31, 1999. We serve customers in more than 110 countries and sell our
products primarily through our direct sales force, as well as through
resellers, distributors, telesales and electronic commerce. Our products are
complemented by service and support offerings such as consulting, training,
local solutions integration, and instrument calibration and repair. We have
manufacturing and research and development facilities in Australia, Canada,
China, Germany, Japan, Korea, Malaysia, Singapore, the United Kingdom and the
United States. Our test and measurement business generated $4.1 billion in
revenue in fiscal year 1998 and $2.9 billion in revenue in the first nine
months of fiscal year 1999.
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Markets
The market for our test and measurement products comprises three major
customer groups:
. communications network equipment manufacturers and service providers;
. electronic component and equipment manufacturers; and
. semiconductor manufacturers and purchasers of semiconductors.
Communications Network Equipment Manufacturers and Service Providers
Network equipment manufacturers provide products to facilitate the
transmission of voice and data traffic. This transmission may be in various
forms, such as electronic signals over copper wire, optical signals over fiber
cables, and radio frequency or microwave signals. The customers of the network
equipment manufacturers are the communications service providers that deploy
and operate the networks. The communication service providers are facing
increasing competitive pressures as a result of deregulation in the
telecommunications industry and the rapid advances in transmission technology,
including communications switching and routing. Communications service
providers must provide high-quality, highly reliable service to remain
competitive, maintain customer loyalty and meet the rapidly growing demand for
data transmission and related services. As a result, these service providers
require network equipment that enables their networks to operate at
increasingly faster speeds while providing rapidly expanding capacity and
superior reliability. To meet these demands, network component and equipment
manufacturers require test and measurement instruments, systems and solutions
for the development, production, installation and operation of each new
network technology. These solutions include:
. test instruments and systems for developing and manufacturing
communications modules, assemblies and products; and
. test instruments and systems to support the installation and deployment
of network equipment and to validate the operational performance of the
equipment in the network.
Communications and Internet service providers also require a range of
sophisticated test instruments and systems to evaluate network performance and
to identify any sources of communications failure. Additionally, these
customers require advanced software and systems to monitor and manage the
network infrastructure on a continuous, proactive basis to achieve either
regulated or customer-specified service levels. Real-time monitoring of the
network infrastructure also enables the implementation of additional services,
such as fraud detection, which customers increasingly require of service
providers. Many corporations manage their own internal voice and data
communications networks. As enterprises increasingly rely on these networks
for critical applications, they also require advanced test and monitoring
equipment, systems and software to optimize network performance.
The market for cellular telephony has increased dramatically in recent
years, as the levels of wireless penetration in developed countries have grown
rapidly. Many lesser-developed countries have decided to build wireless
communications infrastructure to meet their nations' needs for telephony,
rather than invest in expensive wire-based infrastructure. To develop cellular
telephone equipment, manufacturers require electronic design software and test
instruments and systems for the development of high-frequency communications
circuits, devices and systems. Cellular equipment manufacturers also require
advanced, high-frequency test instruments and systems to develop, manufacture
and deploy cellular base stations for these wireless networks. In addition,
the rapid growth of the cellular handset market has created a new market
segment for automated test equipment to test cellular handsets on the factory
floor. Further, as new standards evolve in the wireless industry, new test and
measurement equipment and systems have to be developed to enable testing of
the new standards in the research and development and later in the
manufacturing and deployment phases.
In the last several years, producers of networking communications equipment
have increased their use of contract manufacturers to reduce cost, retain
business flexibility and access high end or high volume
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manufacturing capabilities. Contract manufacturers require test solutions that
are particularly well-suited for faster production and flexible for use in
different applications. Recently, cellular phone producers have also begun to
increasingly use contract manufacturers, including for functional test. This
requires specialized test products and services to address the particular
needs of these high-frequency products.
Electronic Equipment Manufacturers
The electronics industry designs, develops, manufactures and distributes a
wide range of products, including products produced in high volumes, such as
computers, computer peripherals and consumer electronics. In addition,
electronic components and printed circuit assemblies are incorporated into
other products, such as aircraft, satellites and automobiles. These components
and printed circuit assemblies may be designed, developed and manufactured by
electronic components companies, by original equipment manufacturers or by
third-party contract manufacturers. For the development and timely
commercialization of new technologies, original equipment manufacturers
require state-of-the-art test instruments, systems and software design tools
in order to design the products for efficient and cost-effective manufacturing
and validate product performance in a variety of configurations and
environments. These demands have resulted in an increasing trend toward the
use of contract manufacturers by electronics equipment manufacturers.
Designers and developers of electronic devices and products require state-
of-the-art digital design tools and instruments in order to build electronic
circuits, components and products, to validate their performance and
functionality and to improve the efficiency of the overall design and
development process.
High volume manufacturers of electronics products, such as printed circuit
board assemblies, require sophisticated automated test equipment to operate
and perform highly accurate tests at speeds and volumes matching those of the
production line. This equipment includes in-circuit testing systems, automated
x-ray inspection systems and automated optical inspection systems, all of
which examine the printed circuit assemblies for manufacturing defects.
Manufacturers are also beginning to demand automated functional test systems,
which test an electronic device as if it were in its final environment.
Functional test equipment must have a wide range of capabilities in order to
simulate the functions of a wide variety of electronic devices such as
personal computers, personal computer peripherals or automotive electronics.
Electronics manufacturing also requires standardized test instruments,
system components and complete solutions. These offerings are used for testing
electronic devices in a broad range of applications, such as radar systems,
electronics used in the operation of household appliances and industrial
automation. Aerospace and defense are important markets for standardized
electronic equipment because of the high electronic content of advanced
defense systems and defense-related communications and surveillance equipment.
Following recent reductions in defense spending, defense purchasers are
shifting from specialized test equipment to off-the-shelf test products and
systems.
Semiconductor Manufacturers
Semiconductor test systems are used by semiconductor designers,
semiconductor manufacturers and electronic component manufacturers in the
design, manufacture and testing of a wide variety of semiconductor products,
including logic, memory, mixed analog and digital signal, and system-on-a-chip
integrated circuits. Semiconductor test systems are sold to semiconductor
manufacturers and assembly and test subcontractors to the semiconductor
industry. Semiconductor manufacturers use our semiconductor test systems to
measure product performance, to confirm functionality, to improve product and
production process quality, to shorten time to market, to enhance
manufacturability, to reduce labor costs and to increase production yields.
According to VLSI Research, the market for automatic test equipment for
semiconductor manufacturing was approximately $3.3 billion in 1998 and is
expected to grow at a compound annual rate of 17% over the next five years.
Demand for this test equipment is driven primarily by the increased volume of
semiconductor devices
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produced. The use of semiconductors has proliferated across many industries,
including communications, computing, and consumer electronics, driving up the
overall production volume of semiconductor devices. Advances in semiconductor
technology are also increasing demand for semiconductor test equipment. The
development of increasingly faster and more complex semiconductor devices
stimulates demand for testers capable of evaluating these high-speed devices.
In addition, the continuing integration of functions, such as microprocessor,
logic and memory, on a single integrated circuit has created a new category of
device called system-on-a-chip. These devices require a new category of
sophisticated and flexible automatic test equipment.
Strategy
Our test and measurement business pursues the following strategies to
maintain and extend our global leadership position and to be the preferred
supplier of enabling solutions for our customers:
Address the Needs of High Growth Markets
Our test and measurement business is focused on addressing the needs of the
communications and electronics industries. We believe these markets will
provide significant growth opportunities as end-users' demands are driven by
the rapid adoption of new technologies providing increased performance at
lower cost. In communications markets, we address the needs of both network
component and equipment manufacturers and network service providers, including
fiber optic, Internet Protocol-based and cellular networks. As demand for
greater communications capacity increases, network manufacturers must develop
higher speed and higher capacity equipment. Similarly, network service
providers must be able to expand and operate existing networks, as well as
create and operate new networks, at high service levels. In the electronics
industry, designers must develop next generation electronic devices and
equipment rapidly and in a cost-effective manner. To keep pace with the speed
of innovation in this market, manufacturers need to bring product to market
faster and achieve high quality at high volume production levels. We have
targeted our test and measurement business products and services to enable our
customers in these high growth markets to achieve these goals.
Utilize Our Investments in New Technology Across Multiple Customer
Applications
We design our products to be used in many phases of our customers'
business--from design and development through installation and deployment. We
invest heavily in the development of new test and measurement instruments,
systems and design tools to meet the requirements of our most innovative
customers. Our work with these customers in developing tools and test
instruments targeted for the research and development labs provides us with
valuable insight into emerging technologies and standards. Once we have
developed a testing solution for what we anticipate will become a sizable
market, we invest in further product development to market the solution to a
broader customer base. Our initial solutions often combine several general
purpose instruments with customized software applications. This approach
enables us to move our solutions more easily from our customers' research and
development laboratories to their manufacturing lines, allowing us to meet
their manufacturing test needs in a timely manner. By working closely with our
customers to understand the final application of their products, we are able
to modify the software and hardware design of our solutions for use in the
installation and deployment phase of their products. We believe that this
strategy allows us to utilize fully our investments in these new technologies.
Maintain Strong Customer Relationships to Anticipate Important Industry
Trends
A central component of our strategy is to work closely with our customers
in their product design stage to understand emerging technologies and
applications and develop advanced test and measurement instruments, systems
and solutions. We gather information from our customers so that we may design
and create new instruments to test emerging technologies as they develop them.
For example, as communications networks have been overwhelmed by demand for
increased speed and capacity, we have focused our product development on the
technologies to enable next-generation, high-speed networks. We provide
advanced fiber optic network test
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instruments and solutions to service providers to maximize the performance and
minimize the total cost of ownership of high-speed fiber optic networks. In
the cellular communications industry, we are working closely with industry
leaders such as Telefonaktiebolaget LM Ericsson, Motorola, Inc. and Nokia Oy
to develop testing solutions to support next-generation high-capacity wireless
cellular standards. We have also worked closely with Rambus in developing
advanced test solutions for high-speed memory devices.
Expand Our Services and Consulting Business Globally
We believe that the rapid pace of technology innovation and our customers'
focus on more efficient uses of their resources have created an opportunity
for us to differentiate ourselves from our competitors with our global support
and service capabilities. We provide basic support services, such as repair
and calibration; systems integration services; training and customer
education; and advanced business services, such as design services and
consulting. For some of our more complex products, such as our automated test
equipment, we provide proactive maintenance and support to ensure maximum
reliability and continuous operation. In addition, we believe we provide
customers with more flexibility and lower the total cost of ownership with our
asset management, financing and pay-per-use programs.
Products
Our test and measurement business designs, develops and manufactures test
and design products that range from single-unit electronic measurement devices
priced under $1,000 to large scale integrated test solutions priced at $1
million and higher.
Communications Equipment Test Solutions
We provide test solutions for fiber optic, broadband wire-based, radio
frequency and microwave communications networks and products.
Fiber Optics. We make products that enable the development, production,
installation, verification and maintenance of fiber optic networks. Our
products include optical signal and spectrum analysis instruments used by the
industry's leading equipment manufacturers to develop and manufacture reliable
optical components. We also make products that test dense wavelength division
multiplexing systems, a new technology that is used to increase the
transmission capacity of optical fibers. Our products also include network
analyzers and high-speed bit-error rate testers that measure key transmission
properties of high-speed optical and electrical signals. These products are
used by network component and equipment manufacturers as well as service
providers to test the proper functioning of fiber optic components and
networks.
Broadband and Data Networks. Our network test equipment is used by service
providers to install and maintain connections to the Internet, high-speed data
networks, telephone systems and cable television lines. This equipment is also
used by network equipment manufacturers to develop and manufacture high- speed
network equipment. We market test solutions for high-speed network equipment
based on broadband data transmission technologies such as Digital Subscriber
Line, Asynchronous Transfer Mode and Integrated Services Digital Network. Our
suite of solutions for network equipment based on the Internet Protocol tests
quality and service performance of voice and data traffic transmitted over
Internet Protocol-based networks. Enterprise network managers, network
equipment designers and third-party field network maintenance service
providers rely on our Internet Advisor product line for comprehensive
diagnostic and problem solving solutions for troubleshooting high-speed local
area networks, wide area networks and asynchronous transfer mode networks. Our
cable television test equipment ensures maximum radio frequency and video
performance and troubleshooting of components in the cable infrastructure and
the connection to the cable subscriber.
Wireless Communications and Microwave. In wireless communications, we
market our test solutions to manufacturers of cellular handsets and wireless
telephone infrastructure. Our radio frequency and microwave test
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instruments assist in the design and production of cellular handsets and base
stations, as well as satellite and aerospace defense systems. Examples of our
radio frequency and microwave products include network analyzers, spectrum
analyzers and signal sources. These products generate and measure electronic
communications signals. We have combined several of our instruments into
integrated test solutions, such as our single-box testers for cellular
handsets that determine the ability of a handset to send and receive signals
accurately as well as successfully switch between cellular base stations while
traveling. Another example is our integrated solution for testing
communication satellite electronics.
Communications Service Test and Monitoring Solutions
Our acceSS7 product allows communications service providers, such as AT&T
Corporation and Sprint Corporation, that use the communications network
protocol Signaling System 7 (SS7) to monitor and analyze their signaling
network traffic for network performance and management, fraud management and
billing of interconnecting service providers. Similarly, our AccessFiber
products and solutions perform fault detection and monitor fiber optic
communications networks. Our acceSS7 and AccessFiber products are typically
sold as a combination of hardware, software and services. Our Firehunter
network management software solution provides performance monitoring, analysis
and reporting capabilities for Internet service providers. Firehunter allows
Internet service providers to monitor and analyze network occurrences and
helps improve the availability and responsiveness of the network, while
reducing the time required to isolate problems. It gives Internet service
providers the capability to monitor and measure important service level
parameters and thus to offer and meet customer service level agreements. Our
NetMetrix local area network probes and software provide local area network
management solutions for the enterprise.
We also market benchtop and handheld measurement devices such as lightwave
multimeters, power meters and optical sources. We also market portable test
instruments for installation and field service testing and monitoring for many
types of communications networks. For example, our portable bit error rate
test instruments are used by service providers for transmission performance
analysis during installation and for ongoing maintenance.
Electronics Design and Manufacturing Solutions
General Purpose Instruments. General purpose instruments are used by a wide
variety of customers across all electronics-related industries. They are used
principally by engineers in research and development laboratories,
manufacturing, calibration and service for measuring voltage, current,
frequency, signal pulse width and other standard electronics measurements.
These products are often the core of an electrical engineer's benchtop
equipment. Examples of general purpose instruments include:
. digitizing oscilloscopes;
. voltmeters and multimeters;
. frequency counters;
. bench and system power supplies; and
. function generators and waveform synthesizers.
Our general purpose instruments have been the basic building blocks for
many of our more advanced products and solutions.
Modular Instruments and Test Software. Our modular instruments and test
software, including instruments incorporating the VXI bus, a standard
interface for building test systems using modular components, and modular
measurement system software is used to dynamically configure and reconfigure
test systems for designers and manufacturers of electronic devices.
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Data Acquisition Devices. Our data acquisition and control products measure
physical phenomena, acquire data from sensors and perform digital-to-analog
conversion, signal processing and control functions. Data acquisition and
control products include digital-to-analog converters that are attached to
sensors to measure a wide range of physical data such as temperature, airplane
wing strain and vibrations in cars, jet engines and power generation
equipment.
Digital Design Products. Our digital design and test products are used
primarily by research and development engineers to design, test and remove
design defects from digital electronic systems, including microprocessors,
computers and computer peripherals. These systems range from simple digital
control circuits to complex, high-speed servers incorporating the latest
microprocessor technology. Our digital design products include logic
analyzers, logic-signal sources and data generators.
Automated In-Circuit Testing. We offer the leading family of in-circuit
test products, which test printed circuit board assemblies to find defects
caused by the manufacturing process. In-circuit testers use a probe fixture
which makes electrical contact with the circuit board and provides electrical
measurements. These products are used with a suite of proprietary tools for
testing printed circuit assemblies where probing may be able to access as
little as 50% of the contacts due to very densely packed or very small
components. These tools enable our current systems to test up to twice as fast
as previous in-circuit test systems.
Automated X-ray Inspection. Our leading x-ray inspection products provide a
three-dimensional scan of printed circuit board assemblies to identify and
isolate quality defects caused by the manufacturing process. Using patented
techniques, our products can look through a device to identify structural
defects in soldering that are not identified by visual inspection and that may
not be detected with in-circuit testing. This technique also eliminates the
need for expensive physical probe fixtures.
Automated Optical Inspection. Our automated optical inspection line of
products enables automated visual inspection of printed circuit assemblies.
These systems are able to locate, with a high degree of repeatability and
reliability, misplaced and misaligned parts, gross solder defects and other
process faults without the need for a human inspector.
Intelligent Test. In products that demand the highest reliability, like
those used in networking and communications, customers will often require that
their printed circuit assemblies be tested using a combination of automated
test processes. Our AwareTest Software enables customers to design test
processes that avoid unnecessary test duplication. For example, an in-circuit
test device will receive information about the faults that have already been
detected by an x-ray inspection system and not repeat the test of that
circuit. AwareTest allows customers to obtain maximum test coverage while
decreasing total test time and cost.
Semiconductor Automated Test Equipment
Our automated test equipment supports the development and manufacture of
semiconductor devices. We produce semiconductor test equipment to perform
electrical and functional testing of the operation of memory, logic, mixed
signal, systems-on-a chip, and radio frequency integrated circuits. Our
parametric test instruments and systems are used to examine semiconductor
wafers during the semiconductor manufacturing process. Our semiconductor
parametric test systems combine hardware technology with system software. The
software can be customized to meet specific application needs to allow faster
verification of the accuracy of the manufacturing process of a silicon wafer
and wafer quality through its first electrical test. Our product development
efforts are targeted at leading edge technologies, such as systems-on-a-chip
and high-speed memory products.
Our semiconductor test products test a variety of different circuit types.
These devices are usually tested after final assembly, but the testing of some
devices is most effective immediately after the production of the silicon
wafer, when the wafers are sorted. We believe we are the industry leader in
wafer-sort test solutions for
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flash memory devices, which retain data even when the power is turned off and
that are critical for use in digital cameras, cellular phones, personal
digital assistants and storage of portable digital audio files. Our flash
memory test products can test as many as 16 devices in parallel, greatly
improving test throughput for our customers.
In the final test area, we are exploiting our successful logic and mixed
signal semiconductor test offerings into two market areas. Based on our high
performance logic technology, we have recently developed and begun shipping an
accurate, high-speed test system, initially focused on Direct Rambus dynamic
random access memory chip testing. The Rambus architecture addresses
performance limitations in other random access memory chips by moving data
quickly in and out of memory. Rambus-designed memory has been used in products
such as video games for several years. Our Rambus memory testers will
initially test 16 devices in parallel. In the year 2000, we expect to offer
the ability to test 32 devices in parallel, which we believe will result in an
extremely competitive cost of test.
Our test equipment for the system-on-a-chip market is based on our newest
generation logic and mixed signal product platform. This platform is designed
to span the wide range of price, performance and functionality that the
system-on-a-chip market will require. We also produce a radio frequency
integrated circuit test system that has established a leadership position in
the wireless device market.
High-Frequency Electronic Design Tools
Our high-frequency electronic design automation software tools are used by
radio frequency integrated circuit design engineers to model, simulate and
analyze communications product designs at the circuit and system levels. Our
technology is the first in the industry to allow the simulation of complete
communication product design in a single environment. According to Dataquest,
we are the leader in the market for high-frequency computer aided engineering
software.
Customers
We market our test and measurement solutions to more than 3,000 customers
across a broad array of industries. Several of our customers purchase products
across several of our major product lines for their different business units.
A representative list of the customers of our test and measurement business
follows:
Alcatel Alsthom Intel Corporation Qualcomm, Inc.
AT&T LG Group Samsung Electronics
Bell Canada Lockheed Martin Co., Ltd.
Enterprises, Inc. Corporation Siemens
(Nortel Networks Lucent Solectron Corporation
Corporation) Matsushita Electric Sprint
The Boeing Company Industrial Co., Ltd. THOMSON Multimedia,
Ericsson Mitsubishi Electronics S.A.
Fujitsu Limited America, Inc. Toshiba Corporation
General Electric Motorola Tyco International
General Motors NEC Corporation Ltd.
Corporation Nippon Telephone & United States Air
Hitachi, Ltd. Telegraph Corporation Force
IBM Nokia U S WEST, Inc.
Sales, Marketing and Support
We have a focused sales strategy to strengthen customer satisfaction. Our
worldwide sales and support teams are key elements of this strategy. Our
direct sales force is focused on identifying customer needs and recommending
solutions involving the effective use and deployment of our equipment and
systems. Some members of our direct sales force focus on global accounts,
providing uniform services on a worldwide basis. Others focus on our more
complex products such as our communications monitoring systems and our
automated test equipment, where customers require intensive strategic
consultation. Our sales force also specifically targets
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the contract manufacturer market by collaborating with original equipment
manufacturers to specify that our test equipment be used by contract
manufacturers, as well as marketing to contract manufacturers directly.
Our direct sales force consists of field engineers and systems engineers
who often hold advanced degrees and who have in-depth knowledge of the
customers' business and technology needs. Some of our field engineers are
account managers for our large accounts, and enhance our understanding of the
future needs of these customers. Our systems engineers provide a combination
of consulting, systems integration and application and software engineering
services, and are instrumental in all stages of the sale, implementation and
support of our complex systems and solutions. We have more than 3,000 sales,
service and support engineers located throughout the world. In support of our
selling efforts, we have regional sales and customer support centers in Hong
Kong, the Netherlands and the United States. We believe that the scale and
global presence of our direct sales force are an important competitive
advantage. We also use value-added resellers to address specific market
segments.
We sell our less complex products through a combination of our direct sales
force, distributors, mail order, telephone and electronic commerce, utilizing
our extensive catalogs. In many cases, initial sales of our products may be
made by our direct sales force, with follow-up sales of the products through
one of our alternative sales channels.
We have a support organization dedicated to delivering a full range of
services to our customers, including:
. instrument repair and calibration;
. proactive support to ensure continuous productivity of our semiconductor
and electronics manufacturing test equipment;
. application and process consulting;
. solution development and product integration;
. customer education;
. system integration; and
. software support.
We offer these services worldwide through an integrated team of support
engineers. We also provide support services over the Internet and through call
centers.
Manufacturing
We concentrate our test and measurement manufacturing efforts primarily on
final assembly and test of our products. To maximize our productivity and our
ability to respond to market conditions, we use contract manufacturers for the
production of printed circuit boards, sheetmetal fabrication, metal die
casting, plastic molding and standard electronic components. We also
manufacture proprietary devices and assemblies, such as x-ray tubes and high-
frequency integrated circuits and devices, in our own foundries for
competitive advantage.
We have approximately 2.5 million square feet of manufacturing space
worldwide dedicated to our test and measurement business.
Competition
The market for test and measurement equipment is highly competitive, and we
expect this competition to increase. We believe that the principal factors of
competition are:
. speed, accuracy and cost of test;
. breadth of product offerings;
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. scalability and flexibility of products;
. ease of product use;
. ability to upgrade product platform;
. time to market of new technologies;
. adherence to industry standards;
. ability to support emerging industry protocols; and
. ability to provide localized service and support on a worldwide basis.
We believe we compete favorably with respect to each of these factors and
have gained significant market share in many of our targeted markets as a
result. We believe our success has been driven by technology leadership, our
ability to generate customer loyalty and our track record at anticipating
market trends.
Our test and measurement business competes with a number of significant
competitors in all our major product categories and across our targeted
industries. In communications test, our primary competitors are Anritsu, IFR
Systems, Inc./Marconi Communications Ltd., Network Associates, Inc., Rhode &
Schwartz, Tektronix, Inc. and Wandel & Goltermann Technologies, Inc./Wavetek
Corporation, as well as INET Technologies, Inc. and Micromuse Inc. in the
communications network monitoring market. In the semiconductor test market, we
compete primarily against Advantest Corporation, Schlumberger Limited and
Teradyne. In the printed circuit board test market, a segment of the
electronics manufacturing market, we compete against GenRad, Inc. and
Teradyne. In the general purpose electronic test market, we compete against
companies such as Fluke Corporation (a subsidiary of Danaher Corporation),
Keithley Instruments, Inc., LeCroy Corporation, National Instruments
Corporation and Tektronix. Some of our competitors may have a strategic
advantage based on geographic location that could make it difficult for us to
compete in those markets. In addition to our larger competitors, we also face
competition from start-up companies with newer technologies or products based
on next-generation industry protocols, particularly in communications test.
Any of these start-up or other emerging competitors, as well as our existing
competitors, may develop technologies that more effectively address our
targeted markets at a lower cost. In addition, these small competitors may
enter into strategic alliances or business combinations that increase their
ability to innovate and address our markets.
SEMICONDUCTOR PRODUCTS
Our semiconductor products business is a leading supplier of semiconductor
components, modules and assemblies for high performance communications
infrastructure, computing devices and mobile information appliances. We
design, develop and manufacture:
. fiber-optic communication devices, components and assemblies;
. integrated circuits for high-speed local area networks;
. integrated circuits and board-level solutions for storage area networks;
. discrete devices and integrated circuits for microwave and radio
frequency mobile wireless devices and infrastructure;
. infrared components used for short-range communication between portable
and stationary devices;
. ASICs for workstations, servers and laser and inkjet printers;
. LEDs for electronic image and information display; and
. semiconductors for image capture and display.
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We believe we are the leading provider of:
. fiber optic communications transceiver (transmitter/receiver) modules
used for high speed data transmission;
. integrated circuits for storage area networks based on the Fibre Channel
protocol, a protocol for communications among storage area networks;
. infrared components;
. optoelectronic components and displays; and
. ASICs to Hewlett-Packard for its workstations, servers and printers.
In total, we produce more than 9,000 products for high-speed networking,
mobile communications and computing devices worldwide. As of July 31, 1999,
our semiconductor products business had approximately 10,900 employees
worldwide. We have eleven major design centers and eight manufacturing sites
around the world. Our semiconductor products business generated revenue of
$1.6 billion in fiscal year 1998 and $1.2 billion in the first nine months of
fiscal year 1999.
Markets
Our semiconductor products business serves two primary markets:
communications and computing.
Communications
High-Speed Networking. The advent of the Internet as a communications
medium has dramatically increased business and consumer demand for high-speed,
reliable access to data and, as a result, has placed considerable stress on
existing communications networks. In data communications, speed is measured in
the number of bits of data per second that can be transmitted across the
network.
As the volume of data transferred over networks grows, users are becoming
increasingly frustrated with the low performance of the existing
communications infrastructure, which was originally designed for lower speed
analog transmission rather than high-speed digital transmission. This
infrastructure consists primarily of copper wiring, which was originally
intended for analog voice transmission. Copper wiring is highly susceptible to
noise and interference, making accurate transmission of data at high speeds
difficult.
Fiber optic cables, which carry information in the form of pulses of light
produced by light-emitting diodes or lasers, can carry very large amounts of
data in a small space and are immune to electrical and magnetic interference.
Because fiber optic cables are not susceptible to interference, they can
minimize error in data transmission and prevent the crossing of telephone
conversations between lines. Fiber optic cables can also provide enhanced
security compared to copper wiring, since intercepting communications on a
fiber optic line without detection is difficult. Because of these benefits,
telecommunications service providers have historically used fiber-optic cables
for their ultra-long-distance, typically undersea, communications
infrastructure. For a number of years, fiber-optic cables have also been the
method of choice for long-distance, high-volume voice and data, and have more
recently been increasingly used in local area networks, in place of
traditional copper wires, for higher-speed and more reliable data
communication.
We are a major supplier of fiber optic transceivers, which convert digital
data into light signals for transmission, and convert light signals back into
digital form on the receiving end of the communication. We market fiber optic
transceivers for both short-range, local area network applications and long-
range, wide area network applications to major telecommunications and data
networking equipment vendors such as Alcatel, Cisco Systems, Inc., Lucent and
Nortel. In addition, we supply high reliability solid-state lasers to major
telecommunications companies for high-reliability, ultra-long-distance
applications. We are also a major supplier of physical layer integrated
circuits for high-speed networking applications, which prepare data for
transmission across fiber networks.
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Storage Area Networking. As the volume of data that is being transmitted,
processed and stored in networked environments has increased, the market for
storage area network equipment, which connects computers and storage devices,
has grown dramatically. The increase in data transmission speeds across
networks has created a demand for high-speed and high-performance storage-to-
server and server-to-server connectivity. The Fibre Channel interconnect
protocol, a standard for the transfer of information between computers and
storage devices defined by the American National Standards Institute, was
developed to meet this growing demand. Fibre Channel supports the transfer of
large amounts of data within storage area networks at speeds of one gigabit
per second and greater and provides high transmission reliability. We supply a
broad range of integrated circuits, fiber optic components and systems to
manufacturers of storage area network systems utilizing the Fibre Channel
protocol, such as Data General Corporation, EMC Corporation, Hitachi and NEC.
Wireless Communications. Worldwide subscriber growth for wireless
communications has been increasing rapidly in recent years. The Strategis
Group anticipates that the worldwide market for cellular services will
increase to approximately 650 million subscribers by 2002 from approximately
300 million subscribers in 1998. We supply a wide range of radio frequency and
microwave integrated circuits and devices to mobile telephone manufacturers
and vendors of equipment for the mobile telephone infrastructure to meet this
increasing demand. We supply infrared and radio frequency devices and modules
for short-range, point-to-point wireless communications to manufacturers of
computers, printers and consumer electronics products, such as mobile
telephones, digital cameras, personal digital assistants and pagers.
Computing
We are the largest supplier to Hewlett-Packard of ASICs for printers,
workstations and servers. ASICs are semiconductors that are designed for a
unique, customer-specified application and typically replace a number of
discrete components resulting in improved performance, lower cost and high
reliability.
Strategy
To service the needs of our customers in the communications and computer
industries, the semiconductor products business pursues the following
strategies:
Apply our Broad Technology Base to Capture Demand for Higher-speed and
Mobile Data Transmission
We have established leadership positions in the design and development of
semiconductors used in fiber optic communications, radio frequency and
infrared technology. Building on this leadership and our broad technology
base, we continue to invest in designing and marketing semiconductor products
to address the growing demand for higher-speed, higher-capacity connections
and mobile communications. In particular, we are focused on developing devices
that enable data transmission speeds of one gigabit per second or greater to
address the increasing demand for high speed networking. We currently produce
integrated circuits for the most prevalent mobile communications standards,
and we believe we are well positioned to benefit from the increased demand for
these products.
Continue to be Hewlett-Packard's leading supplier of ASICs
Key elements of our remaining a leading supplier of ASICs to Hewlett-
Packard for use in its printers, workstations and servers have been:
. our development, external sourcing and application of intellectual
property;
. our ability to meet competitive pricing and performance requirements;
and
. our dedicated sales force and co-location of design personnel with major
Hewlett-Packard businesses.
To maintain this position, we will continue to pursue our intellectual
property strategy through both internal development and acquisitions, and
apply this intellectual property strategically to our products. In addition,
to
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remain competitive, we are focused on reducing the costs and improving the
performance of the ASICs we provide to Hewlett-Packard by pursuing higher
levels of device integration and employing advanced process technology. We
also intend to increase sales of ASICs to purchasers other than Hewlett-
Packard, in areas other than workstations, servers and printers, particularly
in the networking area.
Take Advantage of Technology Partnerships
To maintain technology leadership in a cost-effective manner, we have
formed several strategic technology partnerships. We intend to continue to
enter into strategic technology partnerships to gain access to intellectual
property and advanced semiconductor manufacturing process technology. For
example, through our joint venture with Chartered Semiconductor Manufacturing,
Ltd. and the joint venture's technology sharing arrangements with Motorola, we
obtain access to advanced semiconductor process technology and volume
production capacity while reducing capital outlays and design process costs.
Our alliance with Displaytech, Ltd. provides us with access to its expertise
in liquid crystal materials development, microdisplay design and display
systems integration for use in our near-eye microdisplay products.
Products
Our major product areas include:
Fiber Optics
Our fiber optic transceiver products address all segments of the market for
high-speed optical communications, including local area networking, wide area
networking, long-distance networks and custom-built, proprietary network
solutions. We market optical transceivers, transmitters and receivers for
high-speed local area network applications from 10 megabits per second to one
gigabit per second and higher, and wide area network applications at up to 2.5
gigabits per second. We are also the leading producer of solid-state lasers,
which are used for high-reliability undersea transmission, such as
intercontinental communications.
High-Speed Network Input-Output Circuits
We market integrated circuits and solutions for high-speed input-output
devices, focusing on the high-speed networking and storage area networking
markets. We produce physical layer integrated circuits for high speed network
switches and routers, devices that direct network traffic. We are also the
industry leader in Fibre Channel protocol-based integrated circuits and
subsystems for storage area networks.
Radio Frequency and Microwave Communications Devices
We produce a broad family of radio frequency and microwave communications
products, primarily integrated circuits for wireless communications products
and infrastructure. Our products include integrated circuits, individual
transistors and diodes and amplifiers used in higher speed and higher
frequency applications. These products are focused on applications in a broad
variety of wireless communications standards, including Cellular and Personal
Communications Systems based on Code Division Multiple Access and Global
Systems for Mobile Communications. We offer products for both cellular base
stations and handsets.
Infrared Emitters, Detectors and Transceiver Modules
We produce a full line of infrared products that enable short range, point-
to-point wireless communication between portable and stationary devices.
Examples of these portable devices include notebook personal computers,
cellular phones, personal digital assistants and digital cameras. Our infrared
products utilize our strength in high-speed communication design and our
expertise in optics and are used in a substantial portion of the notebook
computers and laser printers produced today.
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ASICs
Through a competitive process, we have been the primary supplier to
Hewlett-Packard of ASICs for Hewlett-Packard's printers. In addition, we
provide graphics chips, core electronics chipsets that surround central
processing units and microprocessors for Hewlett-Packard's workstations and
servers. However, we expect shipments of microprocessors to Hewlett-Packard to
be substantially reduced before the end of 2000. The terms of our license
limit our use of Hewlett-Packard's intellectual property for the sale of
integrated circuits in printing devices, printer supplies, components and
accessories, document scanners and some computing devices for a period of
three years in some cases and 10 years in other cases.
Optical Image Sensors, Optical Position Sensors and Reflective Microdisplay
Components
We have recently begun applying our capabilities in optoelectronics and
integrated circuit design to image and position sensors and microdisplays. Our
sensor products include color and monochrome still and video camera image
capture solutions and intelligent optical sensors. Our focus in this area is
to enable pervasive imaging through low-cost digital image sensors for use on
a stand-alone basis or embedded within personal computers, laptops,
peripherals, cellular telephones and affordable digital cameras.
We also produce optical position motion control products used primarily for
motion control in printers and small motors that require precise control.
These optical position sensors are used to locate the printing device in an
inkjet printer. In addition, our optical image sensors are being used as the
sensing system in a new generation of computer mice.
Our microdisplay products deliver high quality, low power, low cost images
on a single silicon chip with television or computer monitor image capability.
These image subsystems can be used as display panels on electronic devices
such as portable telephones and, when coupled with optics, can be used for
viewfinders in cameras and camcorders. Through an alliance with Displaytech,
we are jointly developing advanced microdisplay components and subsystems for
sale to original equipment manufacturers.
LEDs and Optocouplers
We manufacture and sell a broad range of LEDs, alphanumeric displays and
optocouplers. LEDs are semiconductor devices that emit light when an
electrical signal is applied. LEDs and alphanumeric displays are primarily
used as status indicators, back-lighting for panels or switches and
information in consumer, home office and industrial applications. Typical
applications include status indicators on computers, fax and other office
equipment, display panels and indicators for audio and video equipment, and as
indicators and displays on industrial grade electronic equipment. Optocoupler
products are devices that provide both electrical insulation, for protection,
and signal isolation, to prevent distortion of data, between differing
electrical environments. Typical applications for these products include
industrial automation, electrical motor control and data communications
interface isolation.
Lighting Joint Venture
We recently announced a memorandum of understanding with Philips to extend
our existing joint venture relating to the design and production of LEDs. The
joint venture will be expanded to take advantage of our technology and
manufacturing strength in high-brightness color LEDs, and Philips' strength in
developing, manufacturing and selling innovative lighting products and
systems. Under the terms of the new agreement, the global joint venture will
develop, manufacture and sell LEDs, modules, products and systems for a broad
spectrum of lighting applications, including automotive lighting, high-
brightness traffic signals, contour lighting and signs, outdoor illumination,
and white LEDs for both indoor and outdoor applications. We will equally own
the joint venture with Philips, which we currently anticipate will involve
1,000 employees located in California, Malaysia and the Netherlands. We are
negotiating a definitive agreement with Philips based on the memorandum of
understanding, and we therefore cannot guarantee that our relationship with
Philips will be extended on these terms or at all.
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Competition
The markets for our semiconductor products are intensely competitive, and
we expect competition to increase. Our ability to compete effectively depends
upon a number of factors, including:
. product reliability and performance in operation;
. price;
. power consumption;
. compliance with standards;
. product size and integration; and
. time to market.
We believe that we compete favorably on the basis of these factors. In the
fiber-optic products market, our principal competitors are Tyco, Lucent and
Siemens. In the market for high-speed network components, our principal
competitors are Emulex Corporation, LSI Logic Corporation, QLogic Corporation
and Vitesse Semiconductor Corporation. Our principal competitors in wireless
communications are Motorola, NEC and Siemens. In the market for infrared
products, our principal competitors are Vishay Intertechnology, Inc. and IBM.
We compete with companies including LSI, IBM, Mitsubishi, Motorola and NEC in
the production of integrated circuits. Principal competitors in our LED
businesses include Lite-on, Inc., Stanley Electronic Co., Ltd., Siemens and
Toshiba.
Customers
We sell to a broad array of customers in the communications and computing
industries. We sell to original equipment manufacturers directly, as well as
contract manufacturers including Celestica, Inc., Jabil Circuit, Inc., SCI
Systems, Inc. and Solectron. Our top customers by product line, including
customers purchasing through contract manufacturers and distributors, include
the following:
<TABLE>
<CAPTION>
High-Speed
Fiber Optics Networking Components Wireless
------------ --------------------------- --------
<S> <C> <C>
Alcatel Cisco Alcatel
Cabletron Systems, Inc. Compaq Computer Corporation Ericsson
Cisco Data General Lucent
FORE Systems, Inc. EMC Motorola
Hwawei Hewlett-Packard Nokia
IBM Hitachi Qualcomm
Lucent IBM Samsung
Nortel NEC Siemens
Siemens 3Com Corporation
Tellabs, Inc. Veritas Software Corp.
Tyco
</TABLE>
In addition, through sales of ASICs, storage area networking components,
motion-control products and microprocessors, Hewlett-Packard accounted for
approximately 37% of our semiconductor products revenue in the nine months
ended July 31, 1999, and approximately 34% in fiscal years 1997 and 1998. We
have begun marketing our imaging products to companies such as Microsoft
Corporation and Logitech International S.A.
Sales, Marketing and Support
Our sales organization consists of 375 professionals. Our sales
organization is divided into four groups, with responsibilities for large,
global accounts and three regional areas: the Americas, Europe and Asia
Pacific. We also have a direct sales team that has several years of experience
in servicing our customer relationship with Hewlett-Packard. Our sales force
has specialized product and service knowledge that enables it to sell specific
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offerings at key levels throughout a customer's organization. In addition to
our direct sales force, we generate approximately 25% of our revenue through
our relationships with key electronic distributors, such as Arrow Electronics,
Inc. and Avnet, Inc. on a worldwide basis, EBV Electronik GmbH/Wyle
Electronics in Europe and North America, Future Electronics, Inc. in Europe
and North America, and Ryoyo Electro Singapore PTE, Ltd. and Tokyo Electric
Power Company in Japan. We have also recently focused a sales effort to major
contract manufacturers such as Celestica, Jabil, SCI and Solectron. Our total
sales effort reaches 45 countries through 200 distribution locations.
In support of our selling effort, we also have regional sales and customer
support centers in Germany, Hong Kong, Japan, Singapore, the United Kingdom
and the United States. These regional centers are responsible for sales
support, product presentations, developing new services and business
opportunities, and meeting the demands of our customers for localized
aftermarket support. We also provide a broad range of products and
applications-related information to customers and channel partners via the
Internet.
Manufacturing
Our semiconductor products business has a total of eight manufacturing
sites located in California, Colorado in the United States, Malaysia,
Singapore and the United Kingdom. The sites together have usable manufacturing
space of over 897,000 square feet and, as of July 31, 1999 approximately 7,900
employees devoted strictly to manufacturing. The majority of our silicon and
gallium arsenide wafer fabrication is done in the United States and Singapore,
while our assembly and test operations are in Malaysia, Singapore and the
United Kingdom. In addition to these facilities, we utilize a network of
contract manufacturers throughout Asia for semiconductor fabrication and test.
Our manufacturing strategy has been to outsource more mature technologies
while using our in-house manufacturing fabrication, assembly and test
capabilities to develop new, leading edge-products. In addition, through our
joint venture with Chartered Semiconductor Manufacturing, we have access to a
guaranteed source of silicon wafers for our integrated circuit designs at
favorable prices. The joint venture provides us with access to Motorola's
fabrication process developments through the joint venture's licensing
arrangements with Motorola.
Our production facilities have developed several quality-management
processes designed to increase productivity. We have developed proprietary
automated test systems, particularly in optical, light-emitting diode and
microwave.
HEALTHCARE SOLUTIONS
Our healthcare solutions business is a worldwide leader in clinical
measurement and diagnostic solutions. Our products and systems enable medical
professionals to gather and analyze information in hospital intensive care
units and emergency rooms, outpatient clinics, doctors' offices, patients'
homes and other settings. Our products and services include patient monitoring
systems, imaging systems, external defibrillators, cardiology products and
related professional services and support, each aimed at helping our customers
improve the quality of patient care while decreasing their costs. We hold
leading market share with our patient monitoring and associated clinical
information-management systems for critical care and cardiovascular ultrasound
imaging systems.
We market our products to professionals and institutions in more than 100
countries. We have sales offices in 33 countries and manufacturing sites in
Massachusetts and Washington in the United States, China and Germany. As of
July 31, 1999, the healthcare solutions business had approximately 5,000
employees worldwide. Our healthcare solutions business generated revenue of
$1.3 billion in fiscal year 1998 and $1.0 billion in the first nine months of
fiscal year 1999.
Markets
The principal markets in which we participate are patient monitoring,
ultrasound imaging and external defibrillator and cardiology products.
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Patient Monitoring
Patient monitoring systems continuously assess a patient's vital signs,
such as heart rate, blood pressure and respiration rates, to enable very rapid
decision making in emergency and critical care environments. Our patient
monitoring systems are used in three major market segments: critical care,
anesthesia care and neonatal care. According to Frost & Sullivan, the
worldwide market for multi-functional patient monitoring equipment totaled
$5.3 billion in 1997, growing at a compound annual rate of 8.7% from 1994 to
1997. This market is forecasted to grow at a compound annual rate of 11.5%
from 1998 to 2003.
Patient monitoring equipment and services are also used in non-critical
care environments. As providers seek to reduce costs, patient care is often
being delivered in non-critical care environments. Many patients who
previously would have remained in the intensive-care unit are being moved to
non-critical care areas, where portable monitors and remote measurement
systems are used. These non-critical care areas, which include non-intensive-
care areas of hospitals, outpatient care facilities and patients' homes, are
expected to provide significant growth opportunities for patient monitoring
markets in the future. Frost & Sullivan expects the market for lower cost and
portable monitoring equipment to grow from $675 million in 1998 to $1.3
billion by the year 2004, a 11.3% compound annual growth rate.
Ultrasound Imaging
Ultrasound imaging systems enable medical professionals to view multiple
parts of the human anatomy with high-resolution images that are produced non-
invasively from sound waves. The ultrasound imaging equipment market includes
cardiovascular, radiology, obstetrical and general imaging equipment. Frost &
Sullivan estimates that the worldwide market for ultrasound imaging equipment
was $2.5 billion in 1998 and grew at a compound annual rate of 5.1% from 1996
to 1998. Frost & Sullivan forecasts the overall market to grow at a compound
annual rate of 6.7% over the next five years. Within ultrasound imaging, our
principal targeted market is cardiology ultrasound imaging. Frost & Sullivan
estimates that the global market for cardiology ultrasound imaging equipment
was approximately $768 million in 1998 and grew at a compound annual rate of
5.5% from 1996 to 1998. In line with the overall ultrasound market, Frost &
Sullivan forecasts the cardiovascular imaging segment to grow at an annual
rate of approximately 6.8% over the next five years.
Cardiology Products
Our cardiology products business includes external defibrillators,
electrocardiographs and related information systems. External defibrillators
are devices that deliver an electrical shock designed to restart the heart of
victims of sudden cardiac arrest. Theta Corporation estimates the worldwide
external defibrillator market was approximately $425 million for 1998 and
forecasts a compound annual growth of 8% for the years 1998 through 2000. The
fastest-growing segment of the defibrillator market is the out-of-hospital
segment, which is expected to grow, on average, more than 35% annually for the
next three years, according to Frost & Sullivan. Each year in the United
States, sudden cardiac arrest strikes approximately 350,000 people, of whom
less than 5% survive, largely because defibrillators do not reach victims in
time. In 1997, the American Heart Association called for the broad deployment
of automatic external defibrillators in public places where large groups of
people gather and estimated that broader public access to defibrillators could
save an additional 20,000 lives each year in the United States.
We also sell electrocardiography equipment, which measures and displays
information about the electrical activity of the heart. Frost & Sullivan
estimates that the total worldwide electrocardiography equipment market was
approximately $200 million in 1998 and grew at a compound annual growth rate
of approximately 2.3% from 1991 to 1998. This market is expected to grow at an
annual rate of 3.0% over the next three years.
Strategy
Our healthcare solutions business focuses on creating and delivering new
products and services for the healthcare market, establishing and maintaining
a strong reputation with our customers and developing effective strategic
partnerships by pursuing the following strategies:
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Bring New Technologies and Applications to Targeted Markets
We have established leadership positions in the patient monitoring,
ultrasound and cardiology markets. We believe we can expand our market
opportunity by moving into new areas of these markets, increasing the market
penetration of our existing products and services and delivering new products
that offer higher performance at lower prices. In particular, we aim to bring
new technologies to the patient monitoring and imaging markets and expand our
coverage in developed countries by delivering cost-effective diagnostic and
therapeutic tools. We are also focused on developing new, low-cost
applications of our existing products to expand our presence in smaller
hospitals and less-developed countries.
Target Medical Care Beyond the Hospital
We believe that an increasing proportion of healthcare is being delivered
outside of the hospital in clinics, surgical centers and doctors' offices, as
well as in the workplace and homes. According to data from the American
Hospital Association, the average length of stay at hospitals has declined
17.6% from 1990 to 1996. By contrast, outpatient visits increased 37% between
1990 and 1996. This growth in outpatient services has increased demand for
products that can enable nurses, other clinicians and nonmedical professionals
to provide care outside of the hospital. In 1998, we acquired Heartstream, a
market leader in automatic external defibrillators which enable nonmedical
professionals to deliver defibrillation in settings outside the hospital.
Through internal development efforts, we are also delivering cost-effective
diagnostic and therapeutic tools, which can decrease the cost of diagnosing
and monitoring patients. These tools are targeted at smaller hospitals, mobile
clinics and private offices.
Increase Presence in Emerging Systems Worldwide
We believe an opportunity exists in emerging countries with underdeveloped
healthcare systems and infrastructure. We believe the large and growing
populations of these countries will fuel demand for cost-efficient medical
products and services. In order to capitalize on this opportunity, we plan to
expand our global presence by continuing to invest in the development of low-
cost, reliable, high-utility, diagnostic, monitoring and therapy instruments
designed to be easily supported in rural areas. We also work with
international financial organizations, such as the World Bank, to arrange
secured financing services for our customers in these regions.
Take Advantage of the Rapid Adoption of Information Technology, the
Internet and Industry Standards
The rapid growth of the Internet is fueling the adoption of Internet-based
healthcare services, medical care by telephone and online self-care. According
to Cyber Dialogue, by the year 2000 an estimated 30 million Americans will use
the Internet to learn about options for treatment, self-care and prevention.
To take advantage of this accelerating trend, we are working with medical
professionals to deploy Internet-based communication systems that link medical
professionals and patients. For example, our CodeRunner Web product allows
healthcare professionals to review a summary of cardiac resuscitation efforts
to ensure that approved procedures were followed in an emergency situation.
Increasingly, our customers are demanding clinical diagnostic information
systems based on open standards for easier and more cost-effective access to
medical data. To proactively participate in the definition of new industry
standards and ensure compliance of our products and technologies, we are
currently leading several industry-wide efforts to create and promulgate
standards for communication and interoperability among disparate healthcare
systems.
Develop Point-of-Care Technologies
Point-of-care diagnostic products consist of blood-and-tissue analysis
systems that provide immediate or continuous diagnostic results at the
patient's bedside. These systems include portable, microprocessor-based
analyzers that employ single-use, disposable cartridges to perform
simultaneously several of the most frequently ordered blood tests in a simple
90-second procedure. These biochemistry-based devices provide accurate and
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reliable blood test results more quickly, cost-effectively and simply than
most advanced clinical laboratory equipment. We believe market acceptance of
point-of-care diagnostics is increasing. In 1995, we entered into an agreement
with i-STAT Corporation to enter the point-of-care testing marketplace with
critical blood parameters. In 1999, we entered into a worldwide agreement with
Diametrics Medical Incorporated in order to provide both continuous and
intermittent blood monitoring capabilities. These companies' biochemical
sensors, when integrated into our monitoring platforms, enable time-sensitive
measurements to be made quickly and accurately at a patient's bedside for
faster diagnosis and therapeutic intervention. We intend to continue to
enhance our patient monitoring capabilities by developing alliances with other
companies.
Focus on the Management and Treatment of Chronic Illnesses
Our products and solutions primarily address the need for the diagnosis and
treatment of non-critical illnesses in a clinical setting. We believe
healthcare expenditures are shifting from acute care in the hospital to
ongoing care or treatment of long-standing conditions, as a result of the
dramatic growth in the elderly population and advances in life-extending
medical therapies and technologies. Therefore, we have recently begun to
pursue opportunities focused on the ongoing management and treatment of
chronic illnesses. We plan to introduce our first product to address the
chronic care market, our remote measurement solution, in late 1999. It is our
intention that this solution will assist clinicians in successfully managing
congestive heart failure patients at home. Studies show that this type of
disease management program increases patient comfort while avoiding costly
hospital emergency visits.
Products
Our products and services include patient monitoring, imaging systems,
cardiology products and related professional services.
Patient Monitoring
According to a 1998 study by Frost & Sullivan, we maintain a leadership
position in the market for patient monitoring and related information
management systems. Our products range from critical-care bedside monitors,
fetal monitoring and remote-measurement systems to central station monitors,
associated clinical decision support systems and critical-care information-
management systems. Our clinical decision support and critical-care
information-management systems are scalable based on department protocols,
severity of patient condition and workflow requirements. Our solutions range
from basic surveillance and centralized alarms to very large system
configurations that provide comprehensive patient information-management
support.
We have supplied over 170,000 units worldwide of our modular Viridia
Component Monitoring System family of patient monitors. The Viridia CMS
monitors support more than 20 different kinds of clinical measurements in
critical care, anesthesia and perinatal care. Our Viridia Information Center
is one of the industry's most advanced real-time, patient data analysis and
surveillance solutions offering data at a central station. It enables
clinicians to provide more effective care through the analysis, integration
and management of patient information. The Viridia Information Center
integrates the data management and review capabilities of a clinical
workstation with the features of a central monitor for increased productivity
and improved quality of care. Our CareVue clinical information system,
deployed at the point of care, captures, stores and makes available data that
can be configured for comprehensive reports. CareVue enables multiple
caregivers to analyze patient data in order to improve outcomes, analyze care
protocols and perform research and continuous quality improvements.
We have established a number of strategic relationships to provide us with
certain clinical applications to be used with our existing products and
products under development, including our agreements with Diametrics Medical
and i-STAT Corporation in point-of-care blood chemistry. Continuous and
intermittent monitoring sensors provided by these partners, when integrated
into our monitoring platforms, enable these time-sensitive measurements to be
made quickly and accurately at a patient's bedside for faster diagnosis and
therapeutic intervention.
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Ultrasound Imaging
We have a broad range of ultrasound imaging products, which are used by
doctors and technicians in cardiology, radiology, obstetrics, vascular,
emergency and operating departments to diagnose non-invasively a range of
diseases and abnormalities throughout the body. Our U.S. cardiac-ultrasound
business was ranked number one in the industry for overall quality of service
and support by International Marketing Ventures in 1998 for the fifth year in
a row. We offer three major ultrasound platforms: SONOS 5500, SONOS 4500 and
ImagePoint Hx. SONOS 5500 is a premium performance cardiovascular ultrasound
system used for both research and clinical applications, while SONOS 4500 is a
high-performance cardiovascular ultrasound system used primarily in the
clinical environment. ImagePoint Hx is a multispecialty product used in a
broad range of ultrasound applications to address the broad needs of
physicians working in smaller hospitals, mobile clinics and offices.
Our technology differentiates our ultrasound products from competitive
products. A key component of ultrasound products is the transducer, a complex
electro-mechanical device that transmits sound waves into the body and
converts the returning echoes into electrical signals, providing for the
display of high quality images of human anatomy. We believe our proprietary
transducers provide the widest bandwidth, or range of soundwave frequencies,
in the industry, enabling the ultrasound system to optimize image detail and
penetration without making the operator switch transducers. Another key
technology in ultrasound products, signal processing, takes the electrical
signals from the transducers and converts them into a high quality image. An
example is our proprietary Acoustic Quantification, which automatically
measures critical characteristics of the beating heart, eliminating time-
consuming manual measurements. Our expertise in signal processing has also led
to the development of proprietary ASICs, which have enabled us to provide
ultrasound imaging equipment with enhanced performance for the same or lower
cost.
To address the information-management needs of our ultrasound customers, we
have developed EnConcert, which consists of a series of software applications
running on personal computer hardware. EnConcert allows clinicians to review,
measure, manage and archive images, reports and patient data related to their
ultrasound exams. These tools improve doctors' efficiency and allow them to
communicate exam results more rapidly to their colleagues.
Cardiology Products
We develop and manufacture external defibrillators, electrocardiographs and
electrocardiogram information management systems. An external defibrillator is
a device that delivers an electrical charge that can restart a person's heart
in sudden cardiac arrest or restore a heart's correct rhythm in cases of
irregular heartbeat. An electrocardiograph is a diagnostic tool that measures
and displays the characteristics of the heart's electrical activity. An
electrocardiogram management system allows for the digital storage, review and
retrieval of electrocardiograms.
We produce both manual and automatic external defibrillators. Manual
defibrillators are used by highly trained medical personnel, primarily in
hospitals and paramedic units. We believe our CodeMaster manual defibrillator
product line is one of the most extensive in the industry. Our products are
designed for both hospital and out-of-hospital use and are recognized as
having the fastest charge time in the industry. In addition to their
reliability and ease of use, our defibrillation products record the patient
data monitored, and action taken by the caregiver, for review by an emergency
medical director or other responsible parties, to enable monitoring of
caregiver performance and product effectiveness. We also have the industry's
first pre-hospital product with predictive software that provides information
used to accelerate assessment and triage of patients with chest pains so that
appropriate therapy can begin promptly.
Automatic external defibrillators are portable defibrillators that are used
by nonmedical professionals to deliver on-site defibrillation following a
cardiac event. Given the relatively low cost and ease of use, these systems
are well suited for deployment in places where people congregate. Purchasers
of our ForeRunner automatic external defibrillators include American Airlines,
Inc., Delta Air Lines, Inc., United Air Lines, Inc.,
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Chicago O'Hare International Airport, Hilton Gaming Corporation and Sundance
Ski Resort. The ForeRunner's competitive advantage is based upon its unique,
proprietary, low-energy biphasic waveform. A biphasic waveform is a form of
energy where the electrical current is reversed midway through the pulse. We
believe this technology enables the ForeRunner to be lighter, less costly,
safer, more reliable and the smallest external defibrillator in the market.
Our electrocardiographs monitor the characteristics of the heart's
electrical activity to enable cardiology professionals to provide accurate
diagnoses and deliver care for cardiac patients. Our electrocardiogram
information management systems allow cardiologists in institutions where large
numbers of electrocardiograms are taken each day to automate the flow of
information efficiently and generate accurate diagnostic reports for referring
physicians. This system is based on industry standard computing platforms and
also provides for remote connectivity and information access using standard
Internet software.
We have also established strategic alliances for our cardiology products
business. For example, we have an agreement with Dr. Harry P. Selker, Chief of
the Division of Clinical Research at the New England Medical Center, to jointly
develop predictive instruments to help accelerate the assessment and triage of
patients who may be having a cardiac event. Dr. Selker provides us with
clinical and technical input and product evaluation by clinical trial, while we
provide software and hardware engineering and development. We also have an
agreement with Zymed, Inc. in electrocardiograms. Zymed's "EASI 12-lead"
technology, when integrated into our monitoring platforms, provides the ability
to more quickly and easily acquire, process and transmit a derived 12-lead
electrocardiogram using five electrodes instead of the customary 10 used today
in the critical care setting.
Customers
We provide products and services to a broad range of customers in the
industry. Within the last 12 months, 91% of the largest 2,000 hospitals in the
United States purchased our equipment and/or services. Outpatient clinics,
doctors' offices and public facilities, travel companies and entertainment
providers are also a growing part of our customer base.
A representative list of customers of our healthcare solutions business
follows:
<TABLE>
<S> <C> <C>
Adventist Health Kaiser Foundation Scripps Memorial
System--Sunbelt Hospitals Health System
Advocate Health Care Lahey Hitchcock Sisters of
Baptist Health System Clinic Providence (WA)
of South Florida Mayo Foundation St. John's Health
Boston Medical Center Memorial Healthcare System
Catholic Healthcare Systems St. Joseph Health
West Nebraska Methodist System (CA)
Columbia/HCA Healthcare Health System Stanford Healthcare
Corporation The Methodist Services
Intermountain Health Hospitals, Inc. Sutter Health
Care Mount Sinai Health California
International Military System Healthcare Systems
Medical Center, Cairo, New York Health Tenet Healthcare
Egypt Hospital Corporation
Promedica Health Tri-State Health
System Initiative
Quorum Health United States
Group, Inc. Government
</TABLE>
Sales, Marketing and Support
Our products and services are sold through both direct and indirect
channels. We have sales offices in 33 countries and more than 2,400 direct
sales and service personnel. Our sales strategy is to sell to and service our
largest accounts (hospital and corporate business) directly while employing
third-party distributors and manufacturer's representatives for smaller or more
geographically dispersed countries. Electronic commerce is also an integral and
growing element of our sales and distribution strategy. Today, customers can
access product and service information for all our products, and they can
purchase medical supplies and replacement parts on our website.
In select instances we have also established distribution alliances with
complementary medical equipment manufacturers in order to leverage market
strength or bring a broader array of solutions to our customers.
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Specifically, Quinton Instruments Company is the United States distributor for
our electrocardiographs and electrocardiogram information-management systems.
We have an agreement with Laerdal Medical Corporation in the area of worldwide
distribution and complementary training products in the emergency medical
services segment. Laerdal sells our CodeMaster and ForeRunner defibrillators
in the pre-hospital market for paramedics and other specifically-trained
emergency medical teams.
We believe that medical equipment sales are heavily influenced by personal
references among clinicians with large medical research facilities serving as
key installations. For this reason, we have sold equipment into what we
believe to be some of the most influential facilities worldwide, including
Allgemeines Krankenhaus (Vienna), Cedars Sinai Medical Center, Cleveland
Clinic Foundation, Duke University Medical Center, Johns Hopkins Hospital,
Mayo Foundation, Royal Brisbane Hospital, Stanford University Hospital and
Tokyo General Hospital.
To support our sales efforts we have marketing centers in Hong Kong and
Japan covering Asia; in Germany covering Europe; and in Massachusetts covering
North and Latin America. These centers are responsible for outbound marketing
programs, tradeshows, telesales, call-center operations and distribution
support.
Our professional services offerings include multivendor systems
integration, training and consulting to hospitals, outpatient facilities and
doctors' offices. Our professional services enhance our clients' ability to
access and utilize their data, enabling enhanced clinical decision support and
improved workflow for lower healthcare costs and improved delivery of patient
care. We combine our knowledge of clinical processes and technology with
complementary applications and tools from partners to create information
management solutions required by our customers. For example, our Report Review
software product integrates a patient's clinical reports from multiple
information sources to provide one access point for care planning and
treatment.
Our technical specialists and clinical application specialists provide
installation, repair and training services to preserve and maximize customer
investments in our solutions. In addition, geographic response centers and
remote on-line support supplement on-site services. Finally, we provide
consulting, project management and technical implementation services to meet
customer needs for networking and integrating our solutions.
Manufacturing
The healthcare solutions business has four manufacturing locations:
Massachusetts and Washington in the United States, China and Germany. We
selectively use suppliers to provide manufacturing capabilities outside our
core competencies, such as the manufacture of printed circuit assemblies by
Celestica. We typically complete the final assembly and test of our medical
products and systems internally.
Competition
The markets we address are highly competitive. Our competitors are diverse
and offer a variety of solutions directed at various segments of our medical
products and services markets. Our ability to compete effectively depends upon
a number of factors, including our ability to:
. provide a complete set of high quality products for our customers;
. offer competitive prices;
. provide financing services;
. provide support and training; and
. innovate technologically.
Our competitors with broad product portfolios include GE Marquette Medical
Systems and Siemens Medical Systems, Inc. We also compete with other vendors
in specific markets. Our major competitors in patient
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monitoring include GE Marquette Medical, Siemens Medical, Spacelabs Medical,
Inc. and the Datex-Ohmeda division of Instrumentarium Corporation. In the
imaging systems business, we compete with Acuson Corporation, Toshiba Medical
Systems, Inc., GE Marquette Medical, Siemens Medical and the ATL Ultrasound,
Inc. division of Philips Medical Systems International. Our competition in the
external defibrillator market comes primarily from Physio Control Corporation
(a subsidiary of Medtronic Inc.) and Zoll Medical Corporation.
Government Regulation
The products developed and marketed by our healthcare solutions business
are subject to extensive regulation by the FDA and other regulatory bodies.
FDA regulations govern, among other things, the following product activities:
. design and development;
. testing, including animal and human studies;
. labeling;
. premarket clearance or approval;
. manufacturing;
. storage;
. advertising and promotion; and
. sales and distribution.
In the United States, medical devices are classified on the basis of
controls deemed necessary to ensure their safety and effectiveness. Class I
devices are subject to general controls, such as labeling, premarket
notification, and adherence to the FDA's Quality System Regulations, which
incorporate current good manufacturing practices that are applicable to
medical devices. Class II devices are subject to general and special controls.
Special controls include performance standards, postmarket surveillance,
patient registries and FDA guidelines. Most class III devices are controlled
through the premarket approval process to ensure their safety and
effectiveness.
Prior to commercialization, premarket notification clearance generally must
be obtained for class I and II devices as well as class III devices for which
the FDA has not called for premarket approval. For most class III devices, a
premarket approval application is required and must be supported by valid
scientific evidence to demonstrate their safety and effectiveness. The
notification or application typically includes:
. results of bench and laboratory tests;
. when appropriate, results of animal tests and clinical studies;
. a detailed description of the methods, facilities and controls used to
manufacture the device; and
. proposed labeling and advertising literature.
Most medical devices marketed by the healthcare solutions business are
class II or "Pre-Amendment" class III devices, which currently require only
premarket clearance. The healthcare solutions business does not market any
class III device requiring premarket approval in the United States, but it may
do so in the future or the FDA may require by regulation that premarket
approval applications be submitted for our existing "Pre-Amendment" class III
devices.
Once clearance or approval is obtained, FDA oversight continues. We are
required to demonstrate and maintain compliance with the Quality System
Regulations for all our products. The FDA enforces the Quality System
Regulations through periodic inspections of our manufacturing operations and
those of our contract manufacturers. The Quality System Regulations relate to
product testing and quality assurance, as well as to the maintenance of
records and documentation. We are required to provide information to the FDA
on deaths or
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serious injuries alleged to have been associated with the use of our medical
devices, as well as on product malfunctions that could contribute to death or
serious injury. The FDA also restricts the promotion of products for
unapproved or off-label uses.
If the FDA believes we are not in compliance with the Federal Food, Drug
and Cosmetic Act or its regulations it can:
. detain or seize our products;
. order or request a recall;
. seek an injunction against future violations;
. assess civil penalties against us; and
. initiate criminal proceedings against us.
Compliance with other regulatory requirements is necessary to market our
medical devices outside the United States. These regulations vary from country
to country.
CHEMICAL ANALYSIS
Our chemical analysis business is a leading provider of analytical
instrument systems that enable customers to identify, quantify, analyze and
test the atomic, molecular, physical and biological properties of substances
and products. Our chemical analysis products and services are used by
scientists, engineers and technicians working in research and development,
quality assurance, quality control and manufacturing.
Our four main product lines are chromatography, spectroscopy, bio-
instrumentation and related consumables. We also provide service and customer
support for our products. Chromatographs separate a mixed sample in gas or
liquid form into its component compounds so that these components can be
analyzed individually. Mass spectrometers identify and quantify molecules and
elements within a sample by measuring the mass of atoms. Bio-instrumentation
is used in the analysis of complex compounds, such as DNA.
Our chemical analysis business offers a wide range of products and services
that are sold primarily into the hydrocarbon-processing, environmental,
pharmaceutical and bioscience markets. We are a leading provider of
chromatography and mass spectrometry systems used by research and development
and quality assurance laboratories for the measurement and analysis of
chemical compounds. We are also the market leader in the sale of benchtop
inductively coupled plasma mass spectrometers (ICP-MS), which are generally
acknowledged as the most powerful tools for the detection of minute quantities
of metals.
Some of the uses of our instrument systems are:
. determining octane levels in gasoline;
. analyzing pesticide levels in drinking water;
. ascertaining the quality of compounds in the manufacture of
pharmaceuticals;
. identifying impurities in the manufacture of semiconductors; and
. analyzing DNA for various life science applications.
We employed approximately 3,700 people as of July 31, 1999 in our chemical
analysis business. This business operates in more than 50 countries, with
manufacturing and product development centers in China, Germany, Japan and the
United States and marketing centers in Germany, the United States, and
Singapore. Our chemical analysis business generated revenue of $938 million in
fiscal year 1998 and $754 million in the first nine months of fiscal year
1999.
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Markets
Strategic Directions International estimates that in 1998, worldwide
revenue in the analytical instrumentation market totaled approximately $15.9
billion. According to Strategic Directions International, growth of the
overall analytical instrumentation market between 1998 to 2001 is expected to
be approximately 8% annually. The primary markets served by our chemical
analysis business are the hydrocarbon processing, environmental,
pharmaceutical and biopharmaceutical industries. We estimate that our market
represents approximately 30% of the total available analytical instrumentation
market.
Hydrocarbon Processing
The hydrocarbon processing industry encompasses the natural gas, petroleum
refining, petrochemical and chemical markets. This industry spends
approximately $2.2 billion annually on analytical instrumentation. We sell
primarily gas chromatographs and gas chromatography-mass spectrometry products
and systems into these markets. Petroleum refiners use our measurement
solutions to analyze crude oil composition and perform other raw material
analysis, verify and improve refining processes, and ensure the overall
quality of gasoline, fuels, lubricants and other products. Our gas
chromatographs are used to monitor consistent quality in the natural gas
delivered to consumers and industry. Petrochemical and chemical producers use
our products to measure and control the quality of their finished products and
to verify the environmental safety of their operations. We expect growth in
these markets to be driven by: (A) migration of measurement and analysis
activities out of the centralized labs and closer to the process, (B)
standardization of measurement processes across companies' worldwide
operations, and (C) technologies that improve analysts' productivity.
Environmental
We develop and market analytical instrumentation for the environmental
market for applications such as laboratory and field analysis and
characterization of chemical pollutants in air, water, soils, solid waste,
agriculture and food products. Environmental industry customers include all
levels of government, the industrial and manufacturing sectors, engineering
and consulting companies, commercial testing laboratories, colleges and
universities. We are a market and technology leader in the worldwide
environmental instruments market. Strategic Directions International estimates
that the market for our environmental products and services was $1 billion in
1998. We expect growth in this market to be driven by: (A) government
legislation, enforcement, site assessment and monitoring, (B) multi-national
trade agreements, (C) concerns about public health and food safety and (D)
technologies that identify new environmental risks. We believe these factors
will lead to more demand for environmental instrumentation in the Asia-
Pacific, Latin America and Eastern Europe regions, as these regions implement
new and stricter environmental regulations.
Pharmaceutical and Biopharmaceutical
Our analytical-instrument solutions are used by pharmaceutical and
biopharmaceutical companies in every phase of the drug development process.
This includes research into the basic causes of disease, identification and
development of new drugs, obtaining regulatory approval, manufacturing and
distribution. Strategic Directions International estimates that these
companies will spend approximately $3.8 billion on analytical instrumentation
in 2002.
Drug discovery is extremely costly and involves high risk. The
Pharmaceutical Research Manufacturers' Association indicates that it costs an
average of $500 million to discover and develop a new drug. Therefore,
investment in productivity-enhancing technology, such as analytical instrument
solutions, is critical to reducing the time and cost it takes to bring new
drugs to the consumer.
Strategy
In order to maintain our leading position in the analytical instrumentation
market, our strategy is as follows:
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Target high-growth opportunities in the pharmaceutical and
biopharmaceutical markets
We believe the pharmaceutical and biopharmaceutical markets represent a
high-growth opportunity for us, as participants in these markets continue to
invest significant resources in research and development. Companies in this
industry are constantly in search of ways to discover and develop new drugs
faster and at lower cost. We continue to invest in developing new instruments
and technologies to address these requirements. For example, through our
strategic relationship with Caliper Technologies Corporation, we have
developed instrumentation that enables chemical analysis procedures to be
performed on the surface of the Caliper LabChip device. We have recently begun
marketing the LabChip device, which uses a technology called microfluidics to
manipulate minute quantities of various fluids. The LabChip device is designed
to enable researchers to conduct analysis at a fraction of the time and cost
it would take using conventional techniques.
Pharmaceutical and biopharmaceutical companies are also investing in bio-
instrumentation that increases understanding of the genetic cause of diseases
in order to speed the development and increase the efficacy of new drugs. We
will continue to focus resources on the development of technologies to address
this market segment. For example, working with Affymetrix, Inc., we have
developed an instrument that scans a large number of DNA molecules synthesized
on the surface of an Affymetrix GeneChip, enabling identification of important
genetic information.
Focus on growth opportunities in current markets
We will continue to focus resources on growth opportunities in markets we
currently address. We believe that emerging markets, particularly in the Asia
Pacific, Latin America and Eastern Europe regions, represent a growth
opportunity for analytical instrumentation, as investments in basic
industries, infrastructure and environmental protection increase over the
coming years. To address these emerging markets, we are broadening our
worldwide distribution capabilities and developing less complex
instrumentation with lower prices. Additionally, in order to differentiate our
product offerings and increase our market share in developed markets, we
intend to continue to grow our portfolio of services and consumable products,
enabling us to offer our customers more complete solutions. Finally, we
continue to develop gas chromatography and mass spectroscopy products that are
smaller and more portable to meet increasing demand for use of these
instruments outside of centralized laboratories.
Bring new products and technologies to market faster
We seek to bring new products and technologies to market both through
internal development and the strategic acquisition of technologies from third
parties. Internal development of new technology is accomplished through a
combination of discoveries at Agilent Technologies Laboratories and research
and development efforts within our chemical analysis business. Agilent
Technologies Laboratories is primarily focused on basic long-term research,
while our chemical analysis business emphasizes research and development of
technology for more immediate commercialization. We also focus considerable
effort on developing solutions that meet the current and anticipated needs of
customers. For example, we are expanding our programs to offer customers early
access to products under development to ensure that these products are meeting
customer needs. In addition, our development of modular hardware and software
platforms allows us to bring new generations of products to market faster.
In addition to our internal efforts, we consider acquisitions to complement
our current products, solutions and technologies and to accelerate our entry
into strategic markets.
Leverage strategic relationships and alliances
We intend to build strategic relationships to enable us to develop products
and services that complement existing technologies and products in our target
markets. For example, through our relationship with Caliper Technologies
Corp., we are conducting joint research and development in microfluidics. This
has resulted in the commercialization of the LabChip technology, which is
designed to increase the speed and accuracy of traditional analytical methods.
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In addition, through our strategic alliances, we develop instruments that
work with our partners' products, enabling us to offer our customers a broader
range of products and solutions. These alliances also help our customers to
reduce the time and resources needed to integrate disparate products from
separate vendors.
Products
A key factor in our target markets is the need for new products that
increase productivity of the end customer. Our chemical analysis products,
systems and services enable our customers to analyze water, air and soil for
monitoring and remediation; to understand the properties of natural and man-
made gases, liquids and chemically-based products; and to advance knowledge of
the genetic basis of disease and enable the development, testing and use of
new drugs. Our four main product lines, chromatography, spectroscopy, bio-
instrumentation and related consumables, are described below.
Gas Chromatography
Gas chromatographs are used to separate molecules of a gaseous mixture to
determine the quantity and identity of the molecules present. A gas
chromatograph can analyze gas samples as well as solids and liquids that can
be converted to a gaseous state. Most gas chromatographs have the approximate
size and appearance of a large microwave oven.
We are the worldwide market leader in the $1 billion gas chromatograph
industry, according to Strategic Directions International. Our gas
chromatography systems are used in many industries, including pharmaceutical,
hydrocarbon processing, environmental, foods and flavors, forensics and
consumer products. Our instruments are used in laboratories involved in
research and development, quality assurance, quality control and routine
testing. We also produce portable chromatography systems used in the field for
performing on-site, real-time measurements. Our products are used to test the
quality and safety of food, air and water; to develop cleaner-burning fuels
and more effective pharmaceuticals; and to test for alcohol in blood, drugs in
urine or explosive residues in crime scene evidence.
Liquid Chromatography
Liquid chromatographs are used to separate molecules of a liquid mixture to
determine the quantity and identity of the molecules present. These
instruments are modular in construction and can be configured to form
instruments that perform specific analyses. Each module is about the size of a
home videocassette recorder.
According to Strategic Directions International, the high-performance
liquid chromatography market is larger than any other analytical instrument
market, exceeding $1.8 billion in 1998 with an estimated annual growth rate of
8% over the next five years. High-performance liquid chromatographs are an
essential tool in the pharmaceutical industry for basic research, drug
development and clinical trials of new drugs. Other industry groups that
utilize high-performance liquid chromatographs include chemical development
and manufacturing, industry and government testing laboratories for safety,
quality and nutritional content of foods and beverages, athlete monitoring for
illegal drug use and environmental monitoring.
Mass Spectroscopy
Mass spectroscopy systems break molecules into their component parts and
analyze these parts. Our mass spectrometers range in size from that of a small
microwave oven to that of a medium-sized refrigerator.
We are a leader in the worldwide mass spectroscopy market, which Strategic
Directions International estimates to have been about $518 million in 1998.
Mass spectroscopy systems are typically used in combination with gas or liquid
chromatographs in the pharmaceutical, semiconductor and environmental
industries. The combined instruments are used to study and refine the chemical
structure of new drugs, to determine the presence of impurities in
semiconductors as they are manufactured, or to research the presence of heavy
metals and other unwanted substances in soil and water.
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Bio-Instrumentation
We have developed relationships with Affymetrix and Caliper Technologies to
address opportunities in the pharmaceutical and biopharmaceutical industries.
Our GeneArray system allows a researcher to use GeneChips designed by
Affymetrix to analyze many different samples more quickly than other DNA
analysis techniques. The procedure consists of extracting DNA from the sample
to be analyzed, tagging it with a fluorescent molecule and fragmenting it into
relatively small pieces. This fluorescent DNA sample is then placed on
Affymetrix's GeneChip. During this process, the DNA on the chip binds to
complementary DNA in the sample. Our GeneArray system then scans the GeneChip
with a laser and the results are analyzed by our software. For example, these
results are useful in identifying defects in genes that cause disease. The
GeneChip and GeneArray Scanner enable high-speed detection and
characterization of large amounts of genetic information.
In addition to our gene analysis system, we are also developing faster ways
to conduct chemical analysis for the pharmaceutical and biopharmaceutical
industries. The new instrument systems that we have developed through our
relationship with Caliper Technologies integrate a large number of chemical-
analysis procedures onto a single chip. We develop and distribute
instrumentation that extracts and analyzes data from the microchip developed
by Caliper Technologies, using advanced microfluidics technology. Using
miniature, integrated chemical-processing systems etched into glass, silicon,
quartz or plastic, the microchip allows the steps customarily performed in
conventional instruments to be done using minute quantities of costly liquids
in a fraction of the usual time. We believe these new systems will speed up
chemical analysis significantly while reducing costs.
Consumables
We also offer consumable products, including chromatograph columns,
analytical reagents and other accessories and supplies used by our customers
during the analytical experimentation process. Columns are metal or glass
tubes containing various substances that are inserted into chromatographs to
assist in the process of separating compounds into their constituent parts.
Reagents are chemicals used to perform analysis on the resulting constituent
parts. Other accessories and supplies we provide range from rubber rings to
syringes to safety glasses.
Our offerings include both generic consumables, where we seek to
distinguish our products on price, selection and customer loyalty, and
proprietary consumables developed by us, where we offer exclusive technology,
performance and functionality.
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Customers
We sell our products and services to a broad array of customers in each of
the markets we serve. Our top customers by market segment are the following:
<TABLE>
<CAPTION>
Hydrocarbon Processing Environmental Pharmaceutical
---------------------- ------------- --------------
<S> <C> <C>
Bayer AG Browning-Ferris AstraZeneca PLC
Boehringer Ingelheim Industries, Inc. Chiyoda
International GmbH Government of Korea Glaxo Wellcome PLC
E. I. du Pont de Government of Johnson & Johnson
Nemours and Company Switzerland Merck & Co., Inc.
Elf Group Quanterra, Inc. Novartis AG
Exxon Corporation Savannah Laboratories Pfizer, Inc.
Hoechst AG & Environmental Pharmacia & Upjohn, Inc.
Monsanto Company Services, Inc. Roche Holdings, Inc.
Petroleos de Venezuela State of California SmithKline Beecham
S.A. State of Georgia Clinical Laboratories,
Rhone-Poulenc S.A. State of Texas Inc.
Royal Dutch Shell United States Army
U.S. Federal Government
</TABLE>
Sales, Marketing and Support
Our sales and support delivery channels are aligned by our key markets to
maximize market coverage and to optimize selling and support delivery
efficiency. We market our products to our customers through our direct sales
force, value-added resellers, manufacturers' representatives and distributors.
We use our direct sales force to market our products to all our
pharmaceutical and biopharmaceutical accounts, large and medium size
hydrocarbon processing customers and all environmental accounts. We supplement
our direct sales force with sales agents to provide broader geographic
coverage and to cover smaller accounts. We also have an active value-added
reseller program to augment our ability to provide more complete solutions to
our customers. We sell our consumable products through distributors, telesales
and electronic commerce.
We offer a wide range of startup, operational, educational and compliance
support services for our chemical analysis measurement and data handling
systems. We deliver our support services to customers in a variety of ways,
including on-site assistance, return to us for repair or exchange, telephone
support and self diagnostic services provided over the Internet. Our support
services limit the amount of time an instrument is out of service, provide
increased system productivity, extend the instrument life and offer fast
problem resolution. We also offer special industry-focused service bundles
that are designed to meet the specific needs of hydrocarbon processing,
environmental, pharmaceutical and biopharmaceutical customers to keep
instruments fully operational and compliant with the respective industry
requirements.
Competition
The markets for analytical instruments in which we compete are
characterized by evolving industry standards and intense competition. Our
principal competitors include EG&G, Inc., PE Biosystems, Shimadzu Corporation,
Thermo Instrument Systems, Inc. and Waters.
Our ability to compete effectively depends upon a number of factors
including our ability to:
. produce high-quality and reliable products;
. introduce new technologies and products in a timely manner;
. provide favorable overall cost of ownership; and
. provide product and service solutions that complement and support our
main product lines.
We believe our analytical instrument solutions compete favorably with
respect to each of the above listed factors.
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Manufacturing
Our manufacturing strategy supports our diverse product range and customer-
centric focus. We assemble highly configurable products to individual customer
orders and make standard products to stock. We employ advanced manufacturing
techniques and supply chain management systems to reduce costs and
manufacturing cycle times. We selectively use partners to provide
manufacturing capabilities outside our core competencies, such as the
manufacture of printed circuit assemblies and the delivery of shipment
logistics. We have manufacturing facilities in California and Delaware in the
United States, China, Germany and Japan.
Government Regulation
The chemical analysis product and related consumables marketed by our
chemical analysis business are subject to regulation in the United States by
the Environmental Protection Agency under the Toxic Substances Control Act,
and by government agencies in other countries under similar laws. The Toxic
Substances Control Act regulations govern, among other things, the testing,
manufacture, processing and distribution of chemicals, the testing of
regulated chemicals for their effects on human health and safety and import
and export of chemicals. The act prohibits persons from manufacturing any
chemical in the United States that has not been reviewed by Environmental
Protection Agency for its effect on health and safety, and placed on an
Environmental Protection Agency inventory of chemical substances. If we fail
to comply with the notification, record-keeping and other requirements in the
manufacture or distribution of our products, then the Environmental Protection
Agency can obtain an order from a court that would prohibit the further
distribution or marketing of a product that contains a chemical that is out of
compliance or can impose fines and penalties.
---------------------
Research and Development
The process of developing new high-technology products and solutions is
inherently complex and uncertain. It requires, among other things, innovation
and accurate anticipation of customers' changing needs and emerging
technological trends. Without the introduction of new products, services and
enhancements, our products and services are likely to become technologically
obsolete over time, in which case revenue would be materially and adversely
affected. There can be no assurance that such new products and services, if
and when introduced, will achieve market acceptance. After the products and
services are developed, we must quickly manufacture and deliver such products
and services in sufficient volumes at acceptable costs to meet demand.
Research and development expenditures were $805 million in fiscal year
1996, $880 million in fiscal year 1997, $948 million in fiscal year 1998 and
$705 million for the nine months ended July 31, 1999. We anticipate that we
will continue to have significant research and development expenditures in
order to maintain our competitive position with a continuing flow of
innovative, high-quality products and services.
Intellectual Property
Our general policy has been to seek patent and other intellectual property
protection for those inventions and improvements likely to be incorporated
into our products and services or to give us a competitive advantage. While we
believe that our patents and applications have value, in general no single
patent is in itself essential. In addition, we cannot assure you that any of
our proprietary rights will not be challenged, invalidated or circumvented, or
that our rights will provide significant competitive advantages.
International Operations
Our net revenue originating outside the United States, as a percentage of
our total net revenue, was approximately 54.9% in fiscal year 1996, 56.3% in
fiscal year 1997, 54.4% in fiscal year 1998 and 54.9% for the nine months
ended July 31, 1999, the majority of which was from customers other than
foreign governments. Approximately 20% of our international revenue in the
last three years was derived from Japan.
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Most of our sales in international markets are made by foreign sales
subsidiaries. In countries with low sales volumes, sales are made through
various representatives and distributors. However, we make certain sales in
international markets directly from the United States.
Our international business is subject to risks customarily encountered in
foreign operations, including changes in a specific country's or region's
political or economic conditions, trade protection measures, import or export
licensing requirements, the overlap of different tax structures, unexpected
changes in regulatory requirements and natural disasters. We are also exposed
to foreign currency exchange rate risk inherent in our sales commitments,
anticipated sales and assets and liabilities denominated in currencies other
than the United States dollar and may also become subject to interest rate
risk inherent in any debt, investment and finance receivable portfolios we
incur.
We believe that our international diversification provides stability to our
worldwide operations and reduces the impact on us of adverse economic changes
in any single country.
Properties
Our principal executive offices are located in Palo Alto, California. We
plan to move our headquarters to another location in Palo Alto, California in
May 2000. As of September 1999, we operated 35 manufacturing sites, occupying
in excess of 10.5 million square feet, of which approximately 500,000 square
feet were leased. These sites are located in eight countries, including 10 in
the United States.
As of September 1999, we operated three research and development sites, of
which one was located in the United States, occupying in excess of 1.3 million
square feet, none of which were leased. These sites were located in two
countries. We operated five warehouse sites, of which two were located in the
United States, occupying in excess of 300,000 square feet, all of which were
leased. These sites were located in two countries. We operated 92 office sites
(administration, sales, field service), of which 29 were located in the United
States, occupying in excess of five million square feet, of which one million
square feet were leased. These sites were located in 21 countries.
Materials
Our manufacturing operations employ a wide variety of semiconductors,
electromechanical components and assemblies, and raw materials such as plastic
resins and sheet metal. We believe that the materials and supplies necessary
for our manufacturing operations are presently available in the quantities
required. We purchase materials, supplies and product subassemblies from a
substantial number of vendors. For many of our products, we have existing
alternate sources of supply, or such sources are readily available. In certain
instances, however, we enter into non-cancelable purchase commitments with, or
make advance payments to, certain suppliers to ensure supply. Portions of our
manufacturing operations are dependent on the ability of suppliers to deliver
quality components, subassemblies and completed products in time to meet
critical manufacturing and distribution schedules. The failure of suppliers to
deliver these components, subassemblies and products in a timely manner may
adversely affect our operating results until alternate sources could be
developed. In addition, we periodically experience constrained supply of
certain component parts in some product lines as a result of strong demand in
the industry for those parts. Such constraints, if persistent, may adversely
affect our operating results. However, we believe that alternate suppliers or
design solutions could be arranged within a reasonable time so that material
long-term adverse impacts would be minimized.
Environmental
Our research and development and manufacturing operations involve the use
of hazardous substances and are regulated under international, federal, state
and local laws governing health and safety and the environment. We apply
strict standards for protection of the environment and worker health and
safety to sites inside and outside the United States, even if not subject to
regulation imposed by foreign governments. We believe that our
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properties and operations at our facilities comply in all material respects
with applicable environmental laws; however, the risk of environmental
liabilities cannot be completely eliminated and there can be no assurance that
the application of environmental and health and safety laws to our company may
not require our company to incur substantial expenditures. We are also
regulated under a number of international, federal, state and local laws
regarding recycling, product packaging and product content requirements. These
laws are gradually becoming more stringent and may in the future cause us to
incur substantial expenditures.
Some of our operations are located on properties that are known to have
subsurface contamination that is undergoing remediation by Hewlett-Packard.
Hewlett-Packard has agreed to retain the liability for the contamination,
perform the required remediation and indemnify us with respect to claims
arising out of the contamination. While we expect that Hewlett-Packard will
meet its remediation and indemnification obligations in this regard, there can
be no guarantee that it will do so. Under our agreement with Hewlett-Packard,
Hewlett-Packard will have access to these properties to perform the
remediation. Hewlett-Packard has agreed to minimize interference with on-site
operations at those properties during the course of the remediation, but there
can be no guarantee that our operations will not be interrupted or that we
will not be required to incur unexpected expenses associated with the
remediation.
In addition, some of these properties are undergoing remediation by
Hewlett-Packard under an order of an agency of the state in which the property
is located. Although Hewlett-Packard has agreed to indemnify us with respect
to that subsurface contamination, it is possible that one or more of the
governmental agencies will require us to be named on any of these orders. The
naming of our company will not affect Hewlett-Packard's obligation to
indemnify us with regard to these matters.
We are liable and are indemnifying Hewlett-Packard for any contamination
found at all facilities being transferred to us excluding the properties
undergoing remediation. In addition, we are indemnifying Hewlett-Packard for
any liability associated with past non-compliance with environmental laws
regulating ongoing operations at all properties to be transferred by Hewlett-
Packard to us, as well as at sold or discontinued businesses that related to
our businesses. While we are not aware of any material liabilities associated
with such indemnified matters, there is no guarantee that such contamination
or regulatory non-compliance does not exist, and will not expose us to
material liability in the future.
We are being indemnified by Hewlett-Packard with respect to all
environmental liabilities for which Hewlett-Packard accrued a reserve and we
are not aware of any material and probable environmental liabilities being
assumed by us which are not subject to the indemnity.
Legal Proceedings
The Environmental Protection Agency initiated a civil penalty proceeding
against Hewlett-Packard in 1998 that alleged four violations of the Toxic
Substances Control Act, two of which were directed at operations of our
chemical analysis business. Under this proceeding, the Environmental
Protection Agency is seeking a total of $112,750 in civil penalties. As a
result of this enforcement action, Hewlett-Packard offered in 1999 to conduct
a post-enforcement audit of some of its operations for compliance with the
Toxic Substances Control Act. The audit will include some facilities operated
by our chemical analysis business. If violations of the law are discovered in
the audit, we would pay civil penalties for those violations in stipulated
amounts.
We are involved in lawsuits, claims, investigations and proceedings,
including patent, commercial and environmental matters, which arise in the
ordinary course of business. There are no matters pending that we expect to be
material in relation to our business, consolidated financial condition,
results of operations or cash flows.
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MANAGEMENT
Directors and Executive Officers
Set forth below is information concerning our directors and executive
officers and their ages as of September 30, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Edward W. Barnholt...... 56 President, Chief Executive Officer and Director
Gerald Grinstein........ 67 Chairman of the Board of Directors
Thomas E. Everhart...... 67 Director
Walter B. Hewlett....... 55 Director
David M. Lawrence,
M.D. .................. 59 Director
Randall L. Tobias....... 57 Director
Byron Anderson.......... 56 Senior Vice President, Electronic Products and Solutions
William R. Hahn......... 48 Senior Vice President, Strategic Programs
Jean M. Halloran........ 46 Senior Vice President, Human Resources
Richard D. Kniss........ 59 Senior Vice President, Chemical Analysis
D. Craig Nordlund....... 50 Senior Vice President, General Counsel and Secretary
Steven Rusckowski....... 41 Senior Vice President, Healthcare Solutions
Thomas A. Saponas....... 50 Senior Vice President and Chief Technology Officer
John E. Scruggs......... 57 Senior Vice President, Automated Test
William P. Sullivan..... 49 Senior Vice President, Semiconductor Products
Robert R. Walker........ 49 Senior Vice President and Chief Financial Officer
Thomas White............ 42 Senior Vice President, Communications Solutions
Dorothy D. Hayes........ 48 Vice President and Controller
</TABLE>
Edward W. Barnholt has served as our President and Chief Executive Officer
and as a director since May 1999. Before being named our Chief Executive
Officer, Mr. Barnholt served as General Manager of Hewlett-Packard's
Measurement Organization from 1998 to 1999, which included Hewlett-Packard's
Electronic Instruments Group, the Microwave and Communications Group, the
Communications Test Solutions Group, the Automated Test Group, the Chemical
Analysis Group, the Components Group and the Medical Products Group. From 1990
to 1998, he served as General Manager of Hewlett-Packard's Test and
Measurement Organization. He was elected a Senior Vice President of Hewlett-
Packard in 1993 and an Executive Vice President in 1996. He is a director of
KLA-Tencor Corporation.
Gerald Grinstein has served as Chairman of our board of directors since
August 1999. From 1985 to 1995, he held a number of positions at Burlington
Northern, Inc. He was named its Chairman and Chief Executive Officer in July
1991 and retired from his position as chairman of Burlington Northern Santa Fe
Corporation (the successor to Burlington Northern, Inc.) in September 1995.
Mr. Grinstein has served as Chairman of the Board of Delta Air Lines, Inc.
since August 1997 and has served as a principal of Madrona Investment Group,
L.L.C., a Seattle based investment company, since October 1996. He is a
director of Browning-Ferris Industries, Inc., PACCAR Inc., Vans, Inc., the
Pittston Company and Imperial Sugar Corporation.
Thomas E. Everhart has served as a director since July 1999. From February
to July 1998, Dr. Everhart acted as the Pro-Vice Chancellor of the University
of Cambridge. Since October 1998, he has served as a trustee of the California
Institute of Technology. Prior to assuming that position, Dr. Everhart served
as President of the California Institute of Technology from September 1987
until his retirement in October 1997, when he became President Emeritus. Since
December 1997, Dr. Everhart has acted as the Senior Scientific Advisor to the
W. M. Keck Foundation. He is a director of General Motors Corporation,
Raytheon Company, Hughes Electronics Corporation, Reveo, Inc. and Saint-Gobain
Company. He is also a director of the Corporation for National Research
Initiatives, the Electric Power Research Institute and a member of the Board
of Trustees of the California Institute of Technology and of the Board of
Overseers of Harvard University. He has served as a director of Hewlett-
Packard since June 1991.
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Walter B. Hewlett has served as a director since July 1999. Mr. Hewlett is
an independent software developer involved with computer applications in the
humanities. In 1997, Mr. Hewlett was elected to the Board of Overseers of
Harvard University. In 1994, Mr. Hewlett participated in the formation of
Vermont Telephone Company of Springfield, Vermont and currently serves as its
Chairman. Mr. Hewlett founded the Center for Computer Assisted Research in the
Humanities in 1994, for which he serves as a director. Mr. Hewlett has been a
trustee of The William and Flora Hewlett Foundation since its founding in 1966
and currently serves as its Chairman. Mr. Hewlett has served as a director of
Hewlett-Packard since 1987. He is the son of Hewlett-Packard co-founder
William R. Hewlett.
David M. Lawrence, M.D. has served as a director since July 1999.
Dr. Lawrence has served as Chairman of the Board since 1992 and Chief
Executive Officer since 1991 of Kaiser Foundation Health Plan, Inc. and Kaiser
Foundation Hospitals. He held a number of management positions with those
organizations prior to assuming his current positions, including Vice Chairman
of the Board and Chief Operating Officer. Dr. Lawrence is a director of
Pacific Gas and Electric Company and Raffles Medical Group, Inc. He has served
as a director of Hewlett-Packard since May 1995.
Randall L. Tobias has served as a director since October 1999. Prior to
assuming this position, from 1993 to 1998, Mr. Tobias served as Chairman of
the Board of Directors and Chief Executive Officer of Eli Lilly and Company
and has served as its Chairman Emeritus since January 1999. Prior to joining
Eli Lilly, Mr. Tobias served as Vice Chairman of the Board of AT&T from 1986
to 1993 and as Chairman and Chief Executive Officer of AT&T International (an
AT&T subsidiary) from 1991 to 1993. Mr. Tobias is a director of Kimberly-Clark
Corporation, Knight-Ridder, Inc. and Phillips Petroleum Company.
Byron Anderson has served as our Senior Vice President, Electronic Products
and Solutions since August 1999. Prior to assuming that position, Mr. Anderson
served as a vice president of Hewlett-Packard since November 1995 and General
Manager of the Microwave and Communications Group since September 1997. In
January 1991, Mr. Anderson was named General Manager of Hewlett-Packard's
Communications Test Business Unit, which became the Test Solutions Group in
1994.
William R. Hahn has served as our Senior Vice President, Strategic Programs
since August 1999. Since October 1997, Mr. Hahn served as the Sector
Controller of Hewlett-Packard's Measurement Organization. From September 1995
to October 1997, he served as Operations Manager for Hewlett-Packard's
interactive broadband program. From May 1993 to September 1995, Mr. Hahn
served as Vice President of Finance and Manufacturing and Chief Financial
Officer at Aspect Communications.
Jean M. Halloran has served as our Senior Vice President, Human Resources
since August 1999. Since 1997, Ms. Halloran served as Director of Corporate
Education and Development for Hewlett-Packard. Prior to assuming this
position, from 1993 to 1997, Ms. Halloran acted as personnel manager for
Hewlett-Packard's Measurement Systems Organization. From 1990 to 1993, she
acted as group personnel manager for Hewlett-Packard's Medical Products Group.
Ms. Halloran joined Hewlett-Packard in 1980 in the Medical Products Group,
where she held a variety of positions in human resources, manufacturing and
strategic planning.
Richard D. Kniss has served as our Senior Vice President, Chemical Analysis
Group since August 1999. Prior to assuming that position, since May 1995, Mr.
Kniss was General Manager of Hewlett-Packard's Chemical Analysis Group and was
named a vice president of Hewlett-Packard in June 1997. He served as general
manager of the Optical Communication Division from 1984 to 1995.
D. Craig Nordlund was named our Senior Vice President, General Counsel and
Secretary in May 1999. Mr. Nordlund has served as Associate General Counsel
and Secretary of Hewlett-Packard since 1987. He has served as an officer or
director for a variety of Hewlett-Packard's subsidiaries and affiliates. He
currently serves as Chairman of the National American Society of Corporate
Secretaries organization.
Steven Rusckowski has served as our Senior Vice President, Healthcare
Solutions since October 1999. Prior to assuming that position, since 1989, Mr.
Rusckowski managed the Medical Supplies, Customer Services,
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Clinical Information Systems, Healthcare Information Management and Cardiology
Products Divisions within Hewlett-Packard's Healthcare Solutions Group. Mr.
Rusckowski joined Hewlett-Packard in 1984.
Thomas A. Saponas has served as our Senior Vice President and Chief
Technology Officer since August 1999. Prior to being named Chief Technology
Officer, from June 1998 to April 1999, Mr. Saponas was Vice President and
General Manager of Hewlett-Packard's Electronic Instruments Group. Mr. Saponas
has held a number of positions since the time he joined Hewlett-Packard. Mr.
Saponas served as General Manager of the Lake Stevens Division from August
1997 to June 1998 and General Manager of the Colorado Springs Division from
August 1989 to August 1997. In 1986 he was a White House Fellow in Washington.
D.C.
John E. Scruggs has served as our Senior Vice President, Automated Test
since August 1999. Prior to assuming that position, since January 1992,
Mr. Scruggs was General Manager of the Automated Test Group of Hewlett-Packard
within the Test and Measurement Organization. He was elected a vice president
of Hewlett-Packard in November 1996.
William P. Sullivan has served as our Senior Vice President, Semiconductor
Products since August 1999. Prior to assuming that position, since February
1998, he served as Vice President and General Manager of Hewlett-Packard's
Components Group. In 1997, Mr. Sullivan became General Manager of the
Communication Semiconductor Solutions Division. From 1995 to 1997, he was
General Manager of the Optical Communication Division. From April 1991 to
February 1995, Mr. Sullivan served as research and development manager for the
Optical Communication Division.
Robert R. Walker has served as our Senior Vice President and Chief
Financial Officer since May 1999. During 1997 and 1998 Mr. Walker served as
Vice President and General Manager of Hewlett-Packard's Professional Services
Business Unit. From 1993 to 1997 he led Hewlett-Packard's information systems
function. He became Chief Information Officer in 1995 and served in that
position until 1997. Mr. Walker was named a vice president of Hewlett-Packard
in 1995. From 1975 to 1993 Mr. Walker held a variety of financial positions in
Hewlett-Packard.
Thomas White has served as our Senior Vice President, Communications
Solutions since August 1999. From 1997 to August 1999, Mr. White served as
Vice President and General Manager of the Communications Solutions Group of
Hewlett-Packard. From 1996 to 1997, he served as General Manager of the
Computer Peripherals Bristol Division and, in 1994, he served as General
Manager for the Telecommunications Systems Division, South Queensferry,
Scotland.
Dorothy D. Hayes has served as our Vice President and Controller since
August 1999. Prior to assuming that position, since October 1989, Ms. Hayes
held a number of positions at Hewlett-Packard. She served as Transition
General Manager from March to July 1999, Director of Internal Audit from July
1997 to June 1999, Measurement Systems Organization Controller from February
1994 to July 1997, Components Group Controller from September 1993 to February
1996 and Corporate Financial Reporting Manager from October 1989 to September
1993.
Board Structure and Compensation
Our board of directors is divided into three classes serving staggered
three-year terms. Mr. Barnholt's and Mr. Grinstein's initial terms will expire
in 2000. Mr. Hewlett's and Mr. Tobias' initial terms will expire in 2001. Dr.
Everhart's and Dr. Lawrence's initial terms will expire in 2002. Prior to
Hewlett-Packard's distribution of our shares to its stockholders, our
nominating committee expects to identify a number of additional candidates not
affiliated with Agilent Technologies or Hewlett-Packard for election to our
board of directors.
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<PAGE>
Our board of directors has four directors and the following four
committees: (1) audit, (2) compensation, (3) nominating, and (4) executive.
The membership and the function of each committee are described below.
<TABLE>
<CAPTION>
Audit Compensation Nominating Executive
----- ------------ ---------- ---------
<S> <C> <C> <C>
Thomas E. Everhart Thomas E. Everhart Edward W. Barnholt Edward W. Barnholt
Walter B. Hewlett Gerald Grinstein Thomas E. Everhart Gerald Grinstein
David M. Lawrence, M.D. David M. Lawrence, M.D. Gerald Grinstein
Walter B. Hewlett
David M. Lawrence, M.D.*
</TABLE>
- --------
* Committee Chair
Audit Committee
Our audit committee reviews our auditing, accounting, financial reporting
and internal control functions and makes recommendations to the board of
directors for the selection of independent accountants. In addition, the
committee monitors the quality of our accounting principles and financial
reporting, our compliance with foreign trade regulations as well as the
independence of and the non-audit services provided by our independent
accountants. In discharging its duties, the audit committee:
. reviews and approves the scope of the annual audit and the independent
accountant's fees;
. meets independently with our internal auditing staff, our independent
accountants and our senior management; and
. reviews the general scope of our accounting, financial reporting, annual
audit and internal audit program, matters relating to internal control
systems as well as the results of the annual audit.
Compensation Committee
Our compensation committee determines, approves and reports to the board on
all elements of compensation for our elected officers including targeted total
cash compensation and long-term equity based incentives.
Nominating Committee
Our nominating committee proposes a slate of directors for appointment by
our stockholders at each annual meeting and candidates to fill any vacancies
on the board of directors. It is also responsible for approving management
succession plans and addressing board of directors organizational and
governance issues.
Executive Committee
Our executive committee meets or takes written action when the board is not
otherwise meeting and has the level of authority delegated to it from time to
time by the board of directors, except that it cannot amend our bylaws,
recommend any action that requires the approval of the stockholders or to take
any other action not permitted under Delaware law to be delegated to a
committee.
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Stock Ownership of Directors and Executive Officers
All of our common stock is currently owned by Hewlett-Packard, and thus
none of our officers, directors or director nominees own any of our common
stock. To the extent our directors and officers own shares of Hewlett-Packard
common stock at the time of the distribution, they will participate in the
distribution on the same terms as other holders of Hewlett-Packard common
stock.
The following table sets forth the number of shares of Hewlett-Packard
common stock beneficially owned on September 30, 1999 by each director, each
of the executive officers named in the Summary Compensation Table in the "--
Executive Compensation" section below, and all of our directors, director
nominees and executive officers as a group. Except as otherwise noted, the
individual director or executive officer or their family members had sole
voting and investment power with respect to such securities. The total number
of shares of Hewlett-Packard common stock outstanding as of September 30, 1999
was 1,013,663,657.
<TABLE>
<CAPTION>
Shares of
Hewlett-Packard
Beneficially Owned
--------------------
Name of Beneficial Owner Number Percentage
- ------------------------ --------- ----------
<S> <C> <C>
Edward W. Barnholt(1)...................................... 381,646 *
Gerald Grinstein(2)........................................ 4,500 *
Thomas E. Everhart(3)...................................... 10,780 *
Walter B. Hewlett(4)....................................... 171,134 *
David M. Lawrence, M.D.(5)................................. 6,012 *
Randall L. Tobias(6)....................................... 1,000 *
Byron Anderson(7).......................................... 76,883 *
Richard D. Kniss(8)........................................ 47,896 *
John E. Scruggs(9)......................................... 58,733 *
Robert R. Walker(10)....................................... 75,802 *
All directors and executive officers as a group............ 1,054,747 *
</TABLE>
- --------
*Represents holdings of less than one percent.
(1) Includes 226,000 shares issuable upon the exercise of options exercisable
within 60 days of September 30, 1999 and 4,872 of the shares are held by
Mr. Barnholt as a custodian for his children.
(2) These shares are beneficially owned by Mr. Grinstein and his spouse.
(3) Includes 6,956 shares issuable upon the exercise of options exercisable
within 60 days of September 30, 1999.
(4) Includes 3,224 shares issuable upon the exercise of options exercisable
within 60 days of September 30, 1999. Also includes 14,580 shares held by
Mr. Hewlett as a custodian for his children, 1,100 shares held by
Mr. Hewlett for the benefit of his son, 250 shares held by Mr. Hewlett
for the benefit of his daughter and 1,280 shares held by Mr. Hewlett for
the benefit of his spouse. Excludes 60,042,696 shares held by the William
R. Hewlett Revocable Trust, of which Mr. Hewlett is a co-trustee,
1,083,000 shares held by the Flora L. Hewlett Trust, of which Mr. Hewlett
is a co-trustee, and 2,143,500 shares held by the William and Flora
Hewlett Foundation, of which Mr. Hewlett is a director. Mr. Hewlett
shares voting and investment power over the shares held by the William R.
Hewlett Revocable Trust, the Flora L. Hewlett Trust and the William and
Flora Hewlett Foundation. Mr. Hewlett disclaims any beneficial interest
in the excluded shares because he has no economic interest in any of
these shares.
(5) Includes 4,560 shares issuable upon the exercise of options exercisable
within 60 days of September 30, 1999.
(6) Excludes 1,000 shares held by the Mariane W. Tobias Revocable Trust, a
trust in the name of Mr. Tobias' spouse, 400 shares held by the JK
Foundation, a family foundation of which Mr. Tobias' spouse is chairman
and director, 400 shares held by the Trust for the Benefit of James R.
Ullyot, a trust in which Mr. Tobias' spouse has voting and investment
power, and 350 shares held by the Mariane W. Tobias Individual Retirement
Account. Mr. Tobias disclaims any beneficial interest in the excluded
shares because he has no voting or investment power in any of these
shares.
(7) Includes 27,000 shares issuable upon the exercise of options exercisable
within 60 days of September 30, 1999.
(8) Includes 24,200 shares issuable upon the exercise of options exercisable
within 60 days of September 30, 1999. Includes 570 shares held for the
benefit of his daughters.
(9) Includes 31,000 shares issuable upon the exercise of options exercisable
within 60 days of September 30, 1999.
(10) Includes 37,265 shares issuable upon the exercise of options exercisable
within 60 days of September 30, 1999.
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Executive Compensation
The following table sets forth certain compensation information for the
chief executive officer and the four other executive officers of Agilent
Technologies who, based on salary and bonus compensation from Hewlett-Packard
and its subsidiaries, were the most highly compensated for the year ended
October 31, 1998. All information set forth in this table reflects
compensation earned by these individuals for services with Hewlett-Packard and
its subsidiaries for the year ended October 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
---------------------
Annual Compensation Awards Payouts
------------------------------- ----------- ---------
Restricted Long Term
Stock Securities Incentive All Other
Name and Principal Bonus Award(s) Underlying Payouts Compensation
Position Salary ($) ($)(1)(4) ($)(2) Options (#) ($)(3)(4) ($)(5)
- ------------------ ---------- --------- ---------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Edward W. Barnholt...... $759,488 $115,754 $967,581 60,000 $(531,000) $6,499
President and Chief
Executive
Officer
Byron Anderson.......... 452,344 24,964 204,498 15,000 0 6,499
Senior Vice President,
Electronic
Products and Solutions
Richard D. Kniss........ 391,063 21,629 77,924 8,000 0 6,499
Senior Vice President,
Chemical
Analysis
John E. Scruggs......... 413,094 22,780 201,849 15,000 0 5,966
Senior Vice President,
Automated Test
Robert R. Walker........ 408,438 22,516 104,012 12,000 0 6,499
Senior Vice President
and Chief
Financial Officer
</TABLE>
FOOTNOTES TO SUMMARY COMPENSATION TABLE
(1) The amounts shown in this column reflect payments under Hewlett-Packard's
1998 Variable Pay Plan established November 1, 1998 and Hewlett-Packard's
Cash Profit-Sharing Plan. Hewlett-Packard's 1998 Variable Pay Plan is
available to designated key employees of Hewlett-Packard. The Cash Profit-
Sharing Plan is available to all employees of Hewlett-Packard.
Under the cash profit-sharing plan, a portion of Hewlett-Packard's earnings
generated during each half of Hewlett-Packard's fiscal year is paid to
employees. The amount paid is based upon the performance of Hewlett-Packard
as measured by return on assets and revenue growth.
Hewlett-Packard's 1998 Variable Pay Plan permits Hewlett-Packard to
designate a portion of the annual cash compensation planned for certain key
employees as variable pay. Under Hewlett-Packard's 1998 Variable Pay Plan,
the percentage of the targeted variable amount to be paid is dependent upon
the degree to which performance metrics defined on an annual basis are met.
In November 1998, the Compensation Committee of the Board of Directors of
Hewlett-Packard established the performance metrics for fiscal 1998, which
metrics were based on the performance of Hewlett-Packard's common stock
relative to the S&P High Technology Composite Index. In November 1998, the
Compensation Committee determined that 80% of the targeted variable
compensation for Mr. Barnholt in the amount of $86,000 had been earned. The
amounts attributable to the Variable Pay Plan for fiscal 1998 are disclosed
in the table above as "Bonus."
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<PAGE>
(2) The amounts disclosed in this column reflect, for fiscal 1998, the dollar
values of Hewlett-Packard's common stock which Hewlett-Packard contributed
under its Stock Purchase Plan, as a match for every two shares purchased
by the named executive officer and for Mr. Barnholt performance-based
restricted shares of Hewlett-Packard's common stock which Hewlett-Packard
granted.
The Stock Purchase Plan is a broad-based plan which is available to all
employees of Hewlett-Packard. The matching shares vest two years after the
date of Hewlett-Packard's contributions, which occur on a rolling fiscal
quarter basis, and are subject to forfeiture during the two-year period in
the event of termination or certain other events. The named executive
officers receive non-preferential dividends on these restricted shares. In
fiscal 1998, Hewlett-Packard, under its Stock Purchase Plan, granted 664
shares of restricted stock
to Mr. Barnholt worth $41,331; 308 shares of restricted stock to Mr.
Anderson worth $19,248; 295 shares of restricted stock to Mr. Kniss worth
$16,174; 263 shares of restricted stock to Mr. Scruggs worth $16,599; and
258 shares of restricted stock to Mr. Walker worth $17,562.
In fiscal 1998, Hewlett-Packard granted 15,000 shares of performance-based
restricted stock to Mr. Barnholt valued at $926,250 based upon the grant
date closing price of $61.75 per share. The performance-based restricted
stock will vest only to the extent that Hewlett-Packard achieves stated
performance goals with respect to earnings per share and return on assets
over a three-year period ending October 31, 2000 for the performance-based
restricted stock granted in fiscal 1998. Because the stated performance
goals for the three year period ended October 31, 1998 were not met, 75% of
the performance-based restricted stock granted in fiscal 1996 was forfeited
as further described in footnote 3 below.
At October 31, 1998 each of the named executive officers held the following
number of shares of restricted stock with a value based on the October 30,
1998 closing price of $60.25 per share: Mr. Barnholt held 51,000 shares of
restricted stock valued at $3,072,750, Mr. Anderson held 35,800 shares of
restricted stock valued at $2,156,950, Mr. Kniss held 22,000 shares of
restricted stock valued at $1,325,500, Mr. Scruggs held 28,300 shares of
restricted stock valued at $1,705,075 and Mr. Walker held 34,000 shares of
restricted stock valued at $2,048,500.
(3) In November 1998, the Compensation Committee reviewed the results for the
three year performance period ended October 31, 1998 to determine to what
extent the performance objectives associated with performance-based
restricted stock granted in fiscal 1996 had been met. The Compensation
Committee determined that under the terms of each grant Mr. Barnholt was
required to forfeit 75% of the performance-based restricted stock granted
in 1996. The amount forfeited is reflected in the table above as a
negative LTIP pay-out in fiscal 1998 based upon the original grant date
closing price of $44.25 per share.
(4) As noted above, Hewlett-Packard provides performance-based compensation
under its 1998 Variable Pay Plan, its cash profit-sharing plan and
pursuant to the agreement under which the Compensation Committee granted
shares of restricted stock in fiscal 1998. The subsequent payment or
forfeiture described above as "Bonus" or "LTIP Payout" is reflected as
compensation in the fiscal year for which the relevant performance period
is completed.
(5) The amounts disclosed in this column include payment by Hewlett-Packard of
$99 in fiscal 1998 for term life insurance on behalf of each of the named
executive officers and Hewlett-Packard's contributions under its Tax
Saving Capital Accumulation Plan, a tax-qualified defined contribution
401(k) plan, in fiscal 1998 of $6,400 on behalf of Mr. Barnholt $6,400 on
behalf of Mr. Anderson, $6,400 on behalf of Mr. Kniss, $5,867 on behalf of
Mr. Scruggs and $6,400 on behalf of Mr. Walker.
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Grants of Stock Options
The following table shows all grants of options to acquire shares of
Hewlett-Packard common stock granted to the executive officers named in the
Summary Compensation Table in the "--Executive Compensation" section in the
year ended October 31, 1998.
<TABLE>
<CAPTION>
% of Total
Number of Options Granted
Securities to
Underlying Hewlett-Packard Exercise or Grant Date
Options Employees in Base Price Present Value
Name Granted (#)(1) Fiscal Year(2) ($/Sh.)(3) Expiration Date ($)(4)
- ---- -------------- --------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Edward W. Barnholt...... 60,000 .6% $61.75 Nov. 2007 $1,315,200
Byron Anderson.......... 15,000 .1% 61.75 Nov. 2007 328,800
Richard D. Kniss........ 8,000 .1% 61.75 Nov. 2007 175,360
John E. Scruggs......... 15,000 .1% 61.75 Nov. 2007 328,800
Robert R. Walker........ 12,000 .1% 61.75 Nov. 2007 263,040
</TABLE>
- --------
(1) The options granted in fiscal 1998 are exercisable 25% after the first
year, 50% after the second year, 75% after the third year, and 100% after
the fourth year.
(2) Hewlett-Packard granted options representing 10,648,000 shares to
employees in fiscal 1998.
(3) The exercise price may be paid by delivery of already-owned shares and tax
withholding obligations related to exercise may be paid by offset of the
underlying shares, subject to certain conditions.
(4) Hewlett-Packard used a modified Black-Scholes model of option valuation to
determine grant date present value. Hewlett-Packard does not advocate or
necessarily agree that the Black-Scholes model can properly determine the
value of an option. Calculations for the named officers are based on a
seven-year option term, which reflects Hewlett-Packard's experience that
its options, on average, are exercised within seven years of grant. Other
assumptions used for the valuations are: an annual interest rate of 5.39%;
annual dividend yield of 1.0%; and volatility of 30%. The resulting values
are reduced by 9% to reflect Hewlett-Packard's experience with
forfeitures.
Exercises of Stock Options
The following table shows aggregate exercises of options to purchase
Hewlett-Packard common stock in the year ended October 31, 1998 by the
executive officers named in the Summary Compensation Table in the "--Executive
Compensation" section above.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at Fiscal The- Money Options at
Shares Value Year-End (#) Fiscal Year-End ($) (1)
Acquired on Realized ------------------------- -------------------------
Name Exercise ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward W. Barnholt...... 20,000 $1,035,600 218,288 110,000 $9,113,541 $824,450
Byron Anderson.......... 0 0 42,400 26,000 1,907,603 107,865
Richard Kniss........... 27,200 1,298,160 6,600 18,600 83,544 113,184
John Scruggs............ 0 0 20,950 30,550 702,652 231,142
Robert R. Walker........ 5,000 249,750 46,600 25,000 2,085,330 126,450
</TABLE>
- --------
(1) The value of unexercised options is based upon the difference between the
exercise price and the average of the high and low market prices on
October 30, 1998 of $59.91.
Treatment of Hewlett-Packard Options
Under the existing terms of Hewlett-Packard's stock option plans, the
separation will result in accelerated vesting of the unvested portion of
substantially all Hewlett-Packard options held by our employees on the
distribution date. All Hewlett-Packard options held by our employees on the
distribution date that are not
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<PAGE>
exercised will expire three months following the distribution date.
Alternatively, in most countries our employees may elect in January 2000 to
amend their Hewlett-Packard options to waive the vesting acceleration. We will
assume the vested and unvested portions of these amended options, as well as
selected options held by our non-employee directors, which will convert at the
distribution into options to purchase our common stock. The number of shares
and the exercise price of Hewlett-Packard options that convert into Agilent
Technologies options will be adjusted using a conversion formula. The
conversion formula will be based on the opening per share price of our common
stock on the first trading day after the distribution relative to the closing
per share price of Hewlett-Packard common stock on the last trading day before
the distribution. The resulting Agilent Technologies options will maintain the
original vesting provisions and option periods. We do not currently know how
many Hewlett-Packard options held by our employees will be converted into
Agilent Technologies options.
Treatment of Hewlett-Packard Restricted Stock
Under the Hewlett-Packard 1985 Incentive Compensation Plan and the 1990 and
1995 Incentive Stock Plans, certain key employees of Hewlett-Packard were
granted restricted stock awards. The majority of the shares of restricted
stock outstanding at October 31, 1998 are subject to forfeiture if employment
terminates prior to three years from the date of grant. Restricted shares held
by our employees are expected to be forfeited on or before the distribution.
Our employees who forfeit Hewlett-Packard restricted shares may elect to
receive either replacement options to purchase our common stock granted on the
effective date of this offering at an exercise price equal to the initial
public offering price or replacement Agilent Technologies restricted shares
granted on or before the distribution, in either case with the same vesting as
before. We intend to provide replacement options and replacement Agilent
Technologies restricted shares with a value that is comparable to the value of
the forfeited Hewlett-Packard restricted shares. Our employees will be
required to make their election in October 1999.
Treatment of Unvested Stock Purchase Plan Shares
Under the Hewlett-Packard Stock Purchase Plan, employees who purchase
shares under the plan receive, as a matching contribution from Hewlett-
Packard, one share of Hewlett-Packard common stock for every two shares
purchased. The matching shares vest two years after the date on which Hewlett-
Packard makes a contribution and are subject to forfeiture during that two-
year period in the event of termination of employment, sale of the employee-
purchased shares or certain other events. On the distribution date, our
employees with unvested matching shares will forfeit the unvested shares
together with shares of Agilent Technologies issued with respect to such
unvested shares in connection with the distribution. We intend to provide
replacement Agilent Technologies unvested shares with a value that is
comparable to the value of the forfeited Hewlett-Packard unvested matching
shares (and associated Agilent Technologies shares issued in connection with
the distribution). The replacement shares will maintain the original vesting
term based on the employee's continued employment with Agilent Technologies.
Incentive Plans
1999 Stock Plan
We have adopted the 1999 Stock Plan to provide grants of incentive stock
options to our employees, including officers and employee directors, and
grants of nonstatutory stock options, stock appreciation rights, stock awards
and cash awards to our employees, directors and consultants. A total of
shares of common stock will be reserved for issuance under the stock plan.
Administration of the 1999 Stock Plan
The administrator, which is either the board of directors or a committee of
the board of directors, will administer the stock plan. In the case of awards
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, the committee will consist of two or more "outside
directors" within
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the meaning of Section 162(m) of the Code. The administrator has the power to
determine the terms of the options, stock awards, stock appreciation rights
and cash awards granted, including the exercise price, the number of shares
subject to each option, stock appreciation right or stock award, the
exercisability of the options and stock appreciation rights and the form of
consideration payable upon exercise of the options.
Options
The exercise price of nonstatutory stock options granted under the stock
plan is determined by the administrator, but the per share exercise price will
be no less than 75% of the fair market value of our common stock on the date
of grant. With respect to nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Internal Revenue Code and incentive stock options, the exercise price will be
at least equal to the fair market value of our common stock on the date of
grant. The term of options granted under the stock plan generally is
determined by the administrator, however, the term of incentive stock options
may not exceed 10 years.
Unless otherwise provided in the employee's option agreement, options
granted under the stock plan terminate immediately upon the termination of the
optionee's status as an employee of Agilent Technologies, within three years
after an employee's termination by disability or retirement (three months in
the case of incentive stock options), within one year after the employee's
termination by death, or within three months after termination as a result of
participation in a voluntary severance program but in any event, no later than
the expiration of the option's term. If an optionee's status as an employee
ends due to death, disability, retirement or through certain voluntary
severance programs, the participant's option will fully vest and the
participant will have the right to exercise the option within the time limits
described above.
During any fiscal year each participant may be granted options to purchase
a maximum of 1,000,000 shares of our common stock. However, in connection with
initial service, a participant may be granted options to purchase up to an
additional 1,000,000 shares.
Stock Appreciation Rights
Stock appreciation rights may be granted under the stock plan to
participants. The administrator determines the terms and conditions of each
stock appreciation right. The number of shares covered by each stock
appreciation right will be determined by the administrator, but during any
fiscal year of the Company, no participant may be granted stock appreciation
rights for more than 1,000,000 shares. However, in connection with initial
service, a participant may be granted stock appreciation rights for up to an
additional 1,000,000 shares. Upon exercise of a stock appreciation right, the
participant will receive a cash payment determined by multiplying (1) the
difference between the fair market value of a share of our common stock on the
date of exercise and the exercise price, times (2) the number of shares with
respect to which the stock appreciation right is exercised. The stock
appreciation right generally will terminate at the same time and pursuant to
the same terms as options granted under the stock plan.
Stock Awards
The administrator determines the terms and conditions, including vesting,
of stock awards granted under the stock plan. Unless the administrator
determines otherwise, stock awards shall be forfeited upon the voluntary or
involuntary termination of the participant's employment with us for any
reason, although full or partial vesting may occur in the event of termination
by reason of death, disability or retirement, or in connection with a
voluntary severance program.
Cash Awards
Cash awards may be granted alone, in addition to, or in tandem with other
awards granted under the stock plan. The terms of a cash award will be
determined by the administrator.
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<PAGE>
Non-Transferability of Awards
Unless the administrator provides otherwise, awards granted under the stock
plan are generally not transferable by the participant, and awards are
exercisable during the lifetime of the participant only by such participant.
Adjustments upon Merger or Change in Control
The stock plan provides that in the event we are merged into or acquired by
another entity, we may provide for the assumption or substitution of, or
adjustment to, awards under the stock plan. In addition, we may accelerate the
vesting of options and stock appreciation rights and terminate any
restrictions on cash awards or stock awards, and we may provide for the
cancellation of awards under the stock plan with a cash payment to the
participant.
Amendment and Termination of the 1999 Stock Plan
Unless terminated sooner, the stock plan will terminate automatically 10
years from the date of its adoption by the board of directors. In addition,
the board has the authority to amend, suspend or terminate the stock plan, so
long as no such action impairs any award previously granted under the stock
plan unless agreed to in writing by the participant.
Employee Stock Purchase Plan
We have adopted the Employee Stock Purchase Plan to encourage employee
stock ownership.
Administration of the Employee Stock Purchase Plan
Our officers or other selected employees of us will administer the employee
stock purchase plan and determine employee eligibility to participate in the
employee stock purchase plan.
Eligibility to Participate
Regular full-time or regular part-time employees who regularly work at
least 20 hours per week are eligible to participate in the employee stock
purchase plan on their hire date and may enroll before their first day of work
or at the beginning of any fiscal quarter. The employee stock purchase plan
permits participants to purchase our common stock through payroll deductions
of up to 10% of the participant's pay. Pay means base earnings but excludes:
. bonuses;
. pay for overtime work; and
. other extra compensation.
An employee may participate in both the 401(k) plan and the stock purchase
plan. A participant may always contribute up to 5% of pay to the employee
stock purchase plan, even if the participant contributes the maximum
percentage permitted under the 401(k) plan. If a participant contributes more
than 5% of pay to the employee stock purchase plan, the participant's combined
401(k) plan and employee stock purchase plan contributions cannot exceed 10%
of eligible pay.
Purchases
Participant contributions are used to purchase shares of our common stock
on the last business day of each fiscal quarter. Our fiscal quarters end in
January, April, July, and October. The price of stock purchased under the
employee stock purchase plan will be the lowest of the following:
. the average of the daily closing prices of the stock on the New York
Stock Exchange for the full quarter;
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<PAGE>
. the average of the daily closing prices of the stock on the New York
Stock Exchange for the last five trading days of the quarter; or
. the closing price of the stock on the last trading day of the quarter.
All prices will be based on prices as reported in The Wall Street Journal
or another source as we determine. For every two shares purchased through
employee contributions, we will contribute one share.
Restrictions
A participant cannot sell or transfer shares purchased with contributions
from us for the two-year period after purchase unless the participant leaves
us due to retirement, permanent and total disability or death. If a
participant leaves us within two years of purchase for any reason other than
retirement, permanent and total disability or death, the participant will
forfeit all our contributions. If a participant sells or transfers shares
purchased through employee contributions in a quarter prior to the lapse of
the two-year period, the participant will forfeit our contributions for that
quarter.
Replacement Shares
On the distribution date, our employees with unvested Hewlett-Packard
matching shares under the Hewlett-Packard Stock Purchase Plan will forfeit the
unvested shares, together with shares of Agilent Technologies common stock
issued with respect to the unvested shares in connection with the
distribution. We intend to provide replacement Agilent Technologies unvested
shares out of the Employee Stock Purchase Plan with a value comparable to the
value of the forfeited Hewlett-Packard unvested matching shares (and
associated Agilent Technologies shares issued in connection with the
distribution). The replacement shares will maintain the original vesting term
based on the employee's continued employment with Agilent Technologies.
End of Participation
Participation in the employee stock purchase plan will end when an employee
voluntarily elects to withdraw from the employee stock purchase plan or is no
longer eligible to participate. If an employee's participation in the employee
stock purchase plan ends, we will promptly distribute all accrued employee
contributions without interest and the employee will not be able to
participate in the employee stock purchase plan until the next quarter.
Transferability of Rights
A participant may not transfer rights granted under the employee stock
purchase plan other than by will or the laws of descent and distribution.
Amendment and Termination of the Employee Stock Purchase Plan
Our board of directors has the authority to amend or terminate the employee
stock purchase plan at any time.
1999 Non-Employee Director Stock Plan
We have adopted the 1999 Non-Employee Director Stock Plan to help attract
and retain non-employee directors. The total number of shares of our common
stock that we will reserve for issuance under the non-employee director stock
plan equals shares.
Administration
Our board of directors or a committee of the board of directors will
administer the non-employee director stock plan.
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Stock Options
The non-employee director stock plan will permit stock option grants. Each
non-employee director shall receive a minimum of 75% of the value of his or
her annual retainer in the form of a stock option grant and the balance in a
cash payment.
We will issue the non-employee director an option grant on the date of the
offering and for subsequent plan years on or about March 1 of each year based
on the non-employee director's election. If the non-employee director fails to
make a timely election, a non-employee director will receive an option grant
that has a value equal to 75% of the value of his or her annual retainer. We
will use a modified Black-Scholes option valuation model to determine the
number of shares necessary so that the value of each stock option equals that
portion of the annual retainer that a non-employee director receives in the
form of a stock option.
Each stock option will vest 12 months after the grant date. The exercise
price of each stock option will equal the fair market value of our common
stock on the date of grant.
Transferability of Options
Unless the administrator provides otherwise, a non-employee director may
not transfer stock a option granted under the non-employee director stock plan
other than by will or by the laws of descent and distribution.
Cash Payments
All cash payments will be paid in equal quarterly installments beginning in
March of each year.
Special Compensation
Common stock or stock options may be granted to non-employee directors at
the administrator's discretion. The administrator determines the terms and
conditions of each grant.
Adjustments upon Merger or Asset Sale
At the time of any merger, consolidation, reorganization, recapitalization,
stock dividend, stock split, or other change in the corporate structure or
capitalization affecting our common stock, our board of directors or the
committee will make appropriate adjustments to the number and kind of shares
to be issued under the non-employee director stock plan and the price of any
stock option.
Amendment and Termination of the 1999 Non-Employee Director Stock Plan
The non-employee director stock plan will terminate 10 years from its
adoption, unless our board of directors or the committee terminates the non-
employee director stock plan earlier. No stock options will be granted after
the non-employee director stock plan terminates. Our board of directors has
the authority to amend, modify, suspend or terminate the non-employee director
stock plan at any time.
1999 Variable Pay Plan
We intend to adopt a 1999 variable pay plan that will be designed to link
annual cash compensation for designated employees to business performance.
Under the variable pay plan, the plan participant's bonus compensation will
only be paid if certain pre-determined business performance goals are
achieved.
The variable pay plan will be administered in six-month performance periods
which coincide with each half of our fiscal year. Awards will be distributed
after each performance period if the pre-determined business performance goals
are achieved.
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Pension Plans
The following table shows the estimated annual benefits payable upon
retirement to Hewlett-Packard eligible employees in the United States under
Hewlett-Packard's Deferred Profit-Sharing Plan or the Deferred Plan, Hewlett-
Packard's Retirement Plan, or the Retirement Plan, and Hewlett-Packard's
Excess Benefit Retirement Plan or the Excess Benefit Plan. To calculate the
number of years of an eligible employee's service, the pension plans will
bridge each eligible employee's service with Hewlett-Packard to that eligible
employee's service with Agilent Technologies.
ESTIMATED ANNUAL RETIREMENT BENEFITS(1)(2)
<TABLE>
<CAPTION>
Highest 20 Years 25 Years
Five-Year Average 15 Years of of 30 Years
Compensation of Service Service Service of Service
- ----------------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C>
$ 400,000 $ 87,207 $116,276 $145,345 $ 174,414
600,000 132,207 176,276 220,345 264,414
800,000 177,207 236,276 295,345 354,414
1,000,000 222,207 296,276 370,345 444,414
1,200,000 267,207 356,276 445,345 534,414
1,400,000 312,207 416,276 520,345 624,414
1,600,000 357,207 476,276 595,345 714,414
1,800,000 402,207 536,276 670,345 804,414
2,000,000 447,207 596,276 745,345 894,414
2,200,000 492,207 656,276 820,345 984,414
2,400,000 537,207 716,276 895,345 1,074,414
</TABLE>
- --------
(1) Amounts exceeding $130,000 would be paid pursuant to the Excess Benefit
Plan.
(2) No more than $160,000 (as adjusted from time to time by the IRS) of
eligible compensation may be taken into account in calculating benefits
payable under the Retirement Plan.
The compensation covered by the pension plans whose benefits are summarized
in the table above equals base pay. The covered compensation for each of the
executive officers named in the Summary Compensation Table is the highest
five-year average of the amounts shown in the "Salary" column of that table.
The compensation covered by the pension plans for any Hewlett-Packard officer
who participates in Hewlett-Packard's 1999 Variable Pay Plan shall be the
"total targeted cash compensation" as defined under each of such variable pay
plans.
Agilent Technologies employees will receive credit under Agilent
Technologies' new defined benefit plans for their years of service with
Hewlett-Packard. Officers named in the Summary Compensation Table have been
credited with the following years of service: Mr. Barnholt, 30 years, Mr.
Anderson, 28 years, Mr. Kniss, 30 years, Mr. Scruggs, 25 years and Mr. Walker,
23 years. Retirement benefits shown are payable at age 65 in the form of a
qualified joint and survivor annuity or single life annuity, as applicable to
the employee and reflect the maximum offset allowance currently in effect
under Section 401(1) of the Internal Revenue Code of 1986, as amended, to
compute the offset for such benefits under the pension plans. For purposes of
calculating the benefit, an employee cannot be credited with more than 30
years of service.
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ARRANGEMENTS BETWEEN AGILENT TECHNOLOGIES AND HEWLETT-PACKARD
We have provided below a summary description of the master separation and
distribution agreement, effective as of August 12, 1999, or the separation
agreement, and the key related agreements. This description, which summarizes
the material terms of such agreements, is not complete. You should read the
full text of these agreements, which have been filed with the Securities and
Exchange Commission as exhibits to the registration statement of which this
prospectus is a part.
Master Separation and Distribution Agreement
The master separation and distribution agreement contains the key
provisions relating to the separation, this offering and the distribution.
The Separation. The separation is scheduled to occur on or around November
1, 1999. On or before the separation date, Hewlett-Packard and we will sign
the general assignment and assumption agreement which provides for the
transfer to us of assets and liabilities from Hewlett-Packard, effective on
the separation date. Hewlett-Packard will also transfer to us ownership of
specified subsidiaries. Hewlett-Packard will deliver additional agreements
governing various interim and ongoing relationships between Hewlett-Packard
and us following the separation date. The ancillary agreements include:
. a general assignment and assumption agreement;
. master technology, patent, and trademark ownership agreements;
. an employee matters agreement;
. a tax sharing agreement;
. a master information technology service level agreement;
. a real estate matters agreement;
. an environmental matters agreement;
. a master confidential disclosure agreement; and
. an indemnification and insurance matters agreement.
To the extent that the terms of any of these ancillary agreements conflict
with the separation agreement, the terms of these agreements govern. These
agreements are described more fully below.
Cash to be Transferred to Agilent Technologies. Hewlett-Packard has agreed
to provide us sufficient cash to satisfy the following obligations or
requirements (as adjusted with mutual agreement):
. the obligations of Hewlett-Packard, which will be assumed by Agilent
Technologies, and the obligations of our Japanese subsidiary under
Hewlett-Packard's agreement with Yokogawa to buy out Yokogawa's interest
in this subsidiary;
. taxes specified in the tax sharing agreement incurred in connection with
Hewlett-Packard's restructuring of its operations in Japan;
. working capital and acquisition requirements of $250 million; and
. an amount equal to the difference between our assets and liabilities
retained by Hewlett-Packard and Hewlett-Packard's assets and liabilities
transferred to us, as of October 31, 1999.
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Hewlett-Packard and its subsidiaries will make interim cash payments to us
on or around the separation. On December 15, 1999, Hewlett-Packard and we will
recalculate these cash payments based on our October 31, 1999 balance sheet,
and Hewlett-Packard and its subsidiaries will pay, or we will repay, any
difference. Additional cash will be held by some of our subsidiaries on the
separation date.
The Initial Public Offering. Under the terms of the separation agreement we
are offering approximately % of our outstanding common stock in this
offering. We estimate that the net proceeds from this offering will be about
$ , based on an assumed initial public offering price of $ per share. All
of the proceeds of this offering (including any proceeds from the sale of
shares pursuant to the exercise of the U.S. underwriters' over-allotment
option), less underwriters' discounts and commissions, will be paid to
Hewlett-Packard as a dividend to be declared prior to the offering. We are
obligated to use our reasonable best efforts to satisfy the following
conditions to the consummation of this offering (any of which may be waived by
Hewlett-Packard):
. the registration statement containing this prospectus must be effective;
. U.S. securities laws must be satisfied;
. our common stock must be listed on the New York Stock Exchange or the
Nasdaq Stock Market;
. all our obligations under the underwriting agreement must be met or
waived by the underwriters;
. Hewlett-Packard must own at least 80.1% of our stock and must be
satisfied that the distribution will be tax free to its U.S.
stockholders;
. no legal restraints must exist preventing the separation or this
offering;
. the separation must have occurred; and
. the separation agreement must not have been terminated.
The Distribution. By the middle of calendar year 2000, Hewlett-Packard
intends to distribute the remaining shares of our common stock Hewlett-Packard
holds to Hewlett-Packard stockholders on a pro rata basis. We will prepare an
information statement with Hewlett-Packard and send it to Hewlett-Packard
stockholders before the distribution becomes effective. The information
statement will inform the stockholders of the distribution and its specifics.
Hewlett-Packard may, in its sole discretion, change the distribution date.
Hewlett-Packard intends to consummate the distribution only if the following
conditions are met (any of which may be waived by Hewlett-Packard):
. the Internal Revenue Service must issue a favorable tax ruling on the
tax-free status of the transaction and the transaction qualifies as a
tax-free reorganization under Sections 368(a)(1)(D) and 355 of the
Internal Revenue Code of 1986;
. all required government approvals must be in effect;
. no legal restraints must exist preventing this distribution; and
. nothing must have happened in the intervening time between the initial
public offering and the distribution that makes the distribution harmful
to Hewlett-Packard or its stockholders.
Covenants Between Hewlett-Packard and Agilent Technologies. In addition to
signing documents that transfer control and ownership of various assets and
liabilities of Hewlett-Packard relating to our business, we have agreed with
Hewlett-Packard to enter into additional service level agreements, exchange
information, engage in certain auditing practices and resolve disputes in
particular ways.
Additional Service Level Agreements. Hewlett-Packard and we will enter into
interim service level agreements covering the provision of various interim
services, including financial, accounting, building services, legal and other
services by Hewlett-Packard to us or, in certain circumstances, vice versa.
These services will generally be provided for a fee equal to the actual direct
and indirect costs of providing the services plus 5%.
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The interim service level agreements will generally have a term of two years
or less from the date of separation. However, some interim service level
agreements, including those for building services and information technology
services, may be extended beyond the initial two-year period. If these
agreements are extended, their terms will change so that the lessor will
receive fair market rental value for the rental component of the building
services and the costs plus 10% for information technology and other services
and non-rental components of building services.
Information Exchange. Both Hewlett-Packard and we have agreed to share
information with each other, at no cost to the requesting party, for the
following purposes, unless the sharing would be commercially detrimental:
. Each party has agreed to maintain adequate internal accounting to allow
the other party to satisfy its own reporting obligations and prepare its
own financial statements.
. Each party will retain records that may be beneficial to the other party
for a specified period of time. If the records are going to be
destroyed, the destroying party will give the other party an opportunity
to retrieve all relevant information from the records.
. Each party will do its best to provide the other party with personnel,
directors, officers or agents who may be used as witnesses in legal
proceedings.
Auditing Practices. So long as Hewlett-Packard is required to consolidate
our results of operations and financial position, we have agreed to:
. not change independent accounting firms without Hewlett-Packard's
consent;
. use reasonable commercial efforts to cause our auditors to date their
opinion on our audited annual financial statements on the same date as
Hewlett-Packard's auditors' date their opinion on Hewlett-Packard's
financial statements;
. provide Hewlett-Packard all relevant information to enable Hewlett-
Packard to prepare their financial statements (and Hewlett-Packard has
agreed to provide us all relevant information to enable us to prepare
our financial statements);
. grant each other's internal auditors access to our records; and
. notify each other of any change in our accounting principles.
Dispute Resolution. If problems arise between us and Hewlett-Packard, we
have agreed to the following procedures:
. The parties will make a good faith effort to first resolve the dispute
through negotiation.
. If negotiations fail, the parties agree to attempt to resolve the
dispute through non-binding mediation.
. If mediation fails, the parties can resort to litigation. In addition,
nothing prevents either party acting in good faith from initiating
litigation at any time if failure to do so would substantially
disadvantage the party.
No Representations and Warranties. Neither party is making any promises to
the other regarding:
. the value of any asset that Hewlett-Packard is transferring;
. whether there is a lien or encumbrance on the asset Hewlett-Packard is
transferring; or
. the legal sufficiency of any conveyance of title to any asset Hewlett-
Packard is transferring.
No Solicitation. Both parties have agreed not to directly recruit employees
of the other party for two years after the distribution date if the recruiting
would be damaging to the other party. However, general advertising and
employee-initiated solicitations are permissible.
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Expenses. Hewlett-Packard will pay all of our costs and expenses related to
this offering and the distribution and a portion of our costs and expenses
related to the separation.
Termination of the Agreement. Hewlett-Packard in its sole discretion can
terminate the separation agreement and all ancillary agreements and abandon
the distribution at any time prior to the closing of this offering. Both
Hewlett-Packard and Agilent Technologies must agree to terminate the
separation agreement and all ancillary agreements at any time between the
closing of this offering and the distribution.
General Assignment and Assumption Agreement
The general assignment and assumption agreement identifies the assets
Hewlett-Packard will transfer to us and the liabilities we will assume from
Hewlett-Packard in the separation. The agreement also describes when and how
these transfers and assumptions will occur.
Asset Transfer. Effective on the separation date, Hewlett-Packard will
transfer the following assets to us, except as provided in an ancillary
agreement or other agreement:
. all assets reflected on our balance sheet as of July 31, 1999, minus any
assets disposed of after July 31, 1999;
. all written off, expensed or fully depreciated assets that would have
appeared on our balance sheet as of July 31, 1999 if we had not written
off, expensed or fully depreciated them;
. all assets that Hewlett-Packard acquired after July 31, 1999 that would
have appeared in our financial statements as of the separation date if
we prepared such financial statements using the same principles we used
in preparing our balance sheet dated July 31, 1999;
. all assets that our business primarily uses as of the separation date
but are not reflected in our balance sheet as of July 31, 1999 due to
mistake or omission;
. all contingent gains related primarily to our business;
. all supply, vendor, capital, equipment lease or other contracts that
relate primarily to our business, including contracts representing
obligations reflected on our balance sheet as of July 31, 1999;
. all outstanding stock, investments or similar interests of specified
Hewlett-Packard subsidiaries;
. all computers, desks, equipment and other assets used primarily by
employees of Hewlett-Packard who will become our employees due to the
separation;
. specified rights under existing insurance policies; and
. other specified assets.
Excluded Assets. The general assignment and assumption agreement also
provides that Hewlett-Packard will not transfer certain assets to us,
including most accounts receivable.
Assumption of Liabilities. Effective on the separation date, we will assume
the following liabilities from Hewlett-Packard, except as provided in an
ancillary agreement or other agreement:
. all liabilities reflected as liabilities on our balance sheet as of July
31, 1999, minus any liabilities that were discharged after such date of
the balance sheet;
. all liabilities of Hewlett-Packard that arise after July 31, 1999, that
would have appeared in our financial statements as of the separation
date if we prepared such financial statements using the same principles
we used in preparing our balance sheet of Agilent Technologies as of
July 31, 1999;
. all liabilities that are primarily related to or primarily arise out of
our business at the separation date but are not reflected in our balance
sheet as of July 31, 1999 due to mistake or omission;
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. all contingent liabilities primarily related to our business;
. all liabilities (other than taxes) primarily resulting from the
operation of our business, or resulting from any asset that Hewlett-
Packard transferred to us;
. all liabilities arising out of specified terminated, divested or
discontinued businesses and operations; and
. other specified liabilities.
Excluded Liabilities. The general assignment and assumption agreement
provides that we will not assume specified liabilities, including:
. most accounts payable;
. any liabilities that would otherwise be allocated to us but which are
covered by Hewlett-Packard's insurance policies, unless we are a named
insured under such policies; and
. specified third party environmental actions.
The Non-United States Plan. The transfer of international assets and
assumption of international liabilities will be accomplished through
agreements entered into between international subsidiaries. According to the
general assignment and assumption agreement, Hewlett-Packard will transfer its
ownership of all outstanding capital stock of the holding company that owns
all of the subsidiaries holding the international assets and liabilities
related to our business. The agreement acknowledges that circumstances in
jurisdictions outside of the United States may require the timing of the
international separation to be delayed past the separation date.
Delayed Transfers. If it is not practicable to transfer specified assets
and liabilities on the separation date, the agreement provides that these
assets and liabilities will be transferred after the separation date.
Terms of Other Ancillary Agreements Govern. To the extent that another
ancillary agreement expressly provides for the transfer of an asset or an
assumption of a liability, the terms of such other ancillary agreement will
determine the manner of the transfer and assumption.
Obtaining Approvals and Consents. The parties agree to use all reasonable
efforts to obtain any required consents, substitutions or amendments required
to novate or assign all rights and obligations under any contracts that will
be transferred in the separation.
Nonrecurring Costs and Expenses. Any nonrecurring costs and expenses that
are not allocated in the separation agreement or any other ancillary agreement
shall be the responsibility of the party that incurs the costs and expenses.
Indemnification and Insurance Matters Agreement
General Release of Pre-Separation Claims. Effective as of the separation
date, we will release Hewlett-Packard and its affiliates, agents, successors
and assigns, and Hewlett-Packard will release us, and our affiliates, agents,
successors and assigns, from any liabilities arising from events occurring on
or before the separation date, including events occurring in connection with
the activities to implement the separation, the initial public offering and
the distribution. This provision will not impair a party from enforcing the
separation agreement, any ancillary agreement or any arrangement specified in
any of these agreements.
Indemnification. The indemnification and insurance matters agreement also
contains provisions governing indemnification. In general, we have agreed to
indemnify Hewlett-Packard and its affiliates, agents, successors and assigns
from all liabilities arising from:
. our business, any of our liabilities or any of our contracts; and
. any breach by us of the separation agreement or any ancillary agreement.
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Hewlett-Packard has agreed to indemnify us and our affiliates, agents,
successors and assigns from all liabilities arising from:
. Hewlett-Packard's business other than the businesses transferred to us
pursuant to the separation; and
. any breach by Hewlett-Packard of the separation agreement or any
ancillary agreement.
The indemnifying party will make all indemnification payments net of
insurance proceeds that the indemnified party receives. The agreement also
contains provisions governing notice and indemnification procedures.
Liability Arising From This Prospectus. We and Hewlett-Packard have agreed
to share any liability arising from any untrue statement of a material fact or
any omission of a material fact in this prospectus. Hewlett-Packard will bear
82% of any such liability, and we will bear 18% of any such liability.
Agilent Technologies Contingent Liabilities in Excess of $50 Million. To
the extent we incur any contingent liability or group of related contingent
liabilities with a value of more than $50 million, after deducting related
insurance proceeds and amounts recovered from third parties, Hewlett-Packard
has agreed to share the liability relating to this excess portion. Hewlett-
Packard will bear 82% of any such liability, and we will bear 18% of any such
liability. This provision only applies to Agilent Technologies contingent
liabilities arising from written demands made or suits or similar proceedings
filed within four years following the separation date that seek or demand
monetary damages, services or non-monetary relief. An Agilent Technologies
contingent liability is a liability that primarily relates to our business
that arises out of events, acts or omission occurring prior to the separation
date, where the existence or scope of the obligation of Hewlett-Packard or
Agilent Technologies as of the separation date with respect to such liability
was not acknowledged, fixed or determined in any material respect. We may not
assign our rights under this provision, and this provision terminates upon a
change of control of Agilent Technologies (other than as a result of the
distribution).
Insurance Matters. The agreement also contains provisions governing our
insurance coverage from the separation date until the distribution date. In
general, we agree to reimburse Hewlett-Packard for premium expenses related to
insurance coverage during this period. Prior to the distribution, Hewlett-
Packard will maintain insurance policies on our behalf that are generally
comparable to those maintained at Hewlett-Packard.
Environmental Matters. Under the general assignment and assumption
agreement, we have generally assumed environmental liabilities associated with
the historic operations of the businesses transferred to us. This would
include, for example, liabilities associated with non-compliance with
environmental laws prior to separation. However, under the indemnification and
insurance matters agreement and general assignment and assumption agreement,
there are exceptions to our assumption of liabilities for environmental
contamination associated with the historic operations of those businesses.
They include the following:
. Hewlett-Packard will generally retain and indemnify us for all
liabilities for environmental contamination, whether or not arising out
of the businesses transferred to us, on any property (including third
party disposal sites) other than the properties that are to be
transferred to us upon separation.
. Hewlett-Packard will also retain and indemnify us for liabilities
associated with any contamination existing prior to the separation date
on those properties to be transferred to us which are currently
undergoing investigation and remediation by Hewlett-Packard and for
which Hewlett-Packard has accrued a reserve.
We will indemnify Hewlett-Packard for liabilities associated with
environmental contamination at those sites that are to be transferred to us
(other than specifically listed properties which are undergoing investigation
and remediation by Hewlett-Packard) regardless of whether the contamination
was caused by historic operations of the business transferred to us or a
business retained by Hewlett-Packard. We will have limited access to Hewlett-
Packard's historic insurance policies for coverage of liabilities associated
with pre-separation contamination assumed by us. Each party will be
responsible for all liabilities associated with any environmental
contamination caused by that party post-separation.
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Certain Losses and liabilities Not Covered by Hewlett-Packard's Insurance
Policies. Hewlett-Packard has agreed to reimburse us for any losses or
liabilities aggregating in excess of $20 million, exclusive of amounts covered
by insurance policies, that we incur between the separation date and the
distribution date of the following nature:
. specified categories of losses resulting from an earthquake;
. property losses of a type that is covered by Hewlett-Packard's insurance
policies or that is covered by standard form insurance policies; or
. events, acts or omissions occur that give rise to one or more third
party claims that result in a liability to Agilent Technologies of a
type that is covered by Hewlett-Packard's insurance policies or that is
covered by standard form insurance policies, but only to the extent that
suits or similar proceedings are filed or written demands are made in
connection with such claims within four years following the distribution
date that seek or demand monetary damages, services or non-monetary
relief.
. releases occur that give rise to one or more environmental actions that
result in a liability to Agilent Technologies, but only to the extent
that suits or similar proceedings are filed, orders or decrees are
issued, written notice that the environmental action will be commenced
is received by us or Hewlett-Packard, or written demands are made in
connection with the environmental action within four years following the
distribution date that seek or demand monetary damages, services or non-
monetary relief.
Assignment. The indemnification and insurance matters agreement is not
assignable by either party without prior written consent.
Master Patent Ownership and License Agreement
The master patent ownership and license agreement, or the master patent
agreement, allocates rights relating to patents, patent applications and
invention disclosures. Under the master patent agreement, Hewlett-Packard will
assign to us ownership of listed patents, patent applications and invention
disclosures and joint ownership of a small number of listed patents and patent
applications. Hewlett-Packard will not restrict our right to practice the
assigned patents, and neither party will restrict the other's right to
practice the joint patents except for a small number of joint patents that
will be subject to field-of-use limitations.
In addition, each party will grant the other a non-exclusive, royalty-free
patent cross-license to make, have made, use, lease, sell, offer for sale, and
import any and all products and services of the businesses in which the
licensed company and its subsidiaries, including specified affiliated
companies are, as of or after the separation date, engaged, except in specific
excluded fields-of-use. The fields that are excluded from the license granted
by us to Hewlett-Packard are some areas of biological and chemical deposition
and some areas of health care. The fields that are excluded from the license
granted by Hewlett-Packard to us are printing devices, printer supplies,
components and accessories, document scanners and some computing devices. The
cross-licenses between Hewlett-Packard and us will cover all of each company's
patents issued on patent applications with first effective filing dates before
the separation date or within five years after, and will include rights to
sublicense to subsidiaries and specified affiliated companies as well as
certain rights to sublicense a small number of patents to third parties. The
licenses continue for the life of the patent.
The master patent agreement also will provide that Hewlett-Packard and we
will assist each other in specified ways for a period of five years after the
separation date in the event either party is subject to patent litigation.
Under the master patent agreement, Hewlett-Packard and we will have the
right to require, subject to some restrictions, that the other party license
its patents, subject to the same field-of-use restrictions, to (A) a
subsidiary or one of the specified affiliated companies valued at $10 million
or more that has been spun-off or sold and (B) a third party that acquires a
business from it valued at $10 million or more. These licenses will be limited
to the products, services and processes that are in the subsidiary, affiliated
company or business at the time of transfer
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and minor extensions to those products, services and processes and will be
limited to patents issued on patent applications with first effective filing
dates on or before the effective date of the spin-off or acquisition. As a
condition of these licenses, the transferee of the subsidiary, affiliated
company or business must grant a patent license back to the non-transferring
party.
In the event of an acquisition of all or substantially all of the assets of
either party, the party whose assets are acquired may assign the master patent
agreement to the person who acquires the assets. In that event, the license
granted to the acquired party will be limited to the products, services and
processes of the acquired party as of the date of the acquisition and minor
extensions to those products, services and processes. The license granted to
the acquired party will not include patents issued on patent applications with
first effective filing dates after the date of acquisition.
Master Technology Ownership and License Agreement
The master technology ownership and license agreement, or the master
technology agreement, allocates rights in technology other than the integrated
circuit technology covered by the ICBD technology ownership and license
agreement (discussed below) and other than patents, patent applications and
invention disclosures. In the master technology agreement, Hewlett-Packard
will assign to us technology related to our products and developments.
Hewlett-Packard will not restrict our right to use the assigned technology. In
addition, each party will license its technology to the other party for
unrestricted use (except for commercially released software, which is subject
to narrower rights), to the extent that its technology has been disclosed to
or is in the possession of the other party as of the separation date, with the
right to sublicense to subsidiaries and specified affiliated companies. The
licenses are perpetual.
Under the master technology agreement, subject to some restrictions, each
party may also sublicense the technology that it licenses from the other party
to (A) a subsidiary or one of the specified affiliated companies valued at $10
million or more that has been spun-off or sold and (B) a third party that
acquires a business from it valued at $10 million or more.
The master technology agreement will not obligate either party to provide
to the other party improvements that it makes, whether to its own technology
or to the other party's technology licensed to it under the agreement.
In the event of an acquisition of all or substantially all of the assets of
either party, the party whose assets are acquired may assign the master
technology agreement to the person who acquires the assets.
ICBD Technology Ownership and License Agreement
The ICBD technology ownership and license agreement, or the ICBD technology
agreement, assigns to us listed technology relating to the design, development
and manufacture of integrated circuits that is used by the Integrated Circuits
Business Division (ICBD), or integrated circuit technology, (other than
patents, patent applications and invention disclosures). The ICBD technology
agreement also provides that Hewlett-Packard will retain ownership of other
integrated circuit technology. In the ICBD technology agreement, Hewlett-
Packard will assign to us joint ownership of other listed integrated circuit
technology and both parties will have unrestricted rights to use the jointly
owned integrated circuit technology. The integrated circuit technology that is
covered by the ICBD technology agreement encompasses the majority of the
integrated circuit technology within Hewlett-Packard. The covered integrated
circuit technology generally includes the integrated circuit technology that
was developed jointly with or for the benefit of the imaging and computing
businesses of Hewlett-Packard.
In addition, under the ICBD technology agreement, each party will license
the listed integrated circuit technology to the other party, with the right to
sublicense to subsidiaries and specified affiliated companies. The licenses
are perpetual. We will be restricted from using both the integrated circuit
technology that Hewlett-Packard will assign to us and that Hewlett-Packard
will license to us within the fields of printing devices, printer supplies,
components and accessories, document scanners and some computing devices,
other than to supply
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Hewlett-Packard. This restriction expires ten years after the separation date
for certain printing, scanning and computing technology considered fundamental
or of long term value and three years after the separation date for the rest
of the technology.
Under the ICBD technology agreement, subject to some restrictions, each
party may sublicense the integrated circuit technology that it licenses from
the other party to (A) a subsidiary or one of the specified affiliated
companies valued at $10 million or more that has been spun-off or sold and (B)
a third party that acquires a business from it valued at $10 million or more.
The ICBD technology agreement will not obligate either party to provide to
the other party improvements that it makes, whether to its own technology or
to the other party's technology licensed to it under the agreement. Each
party, upon request, will notify the other party of improvements that it may
have made in a particular defined technical area and will negotiate in good
faith disclosing and licensing those improvements to the other party.
In the event of an acquisition of all or substantially all of the assets of
either party, the party whose assets are acquired may assign the ICBD
technology agreement to the person who acquires the assets.
Master Trademark Ownership and License Agreement
The master trademark ownership and license agreement, or the master
trademark agreement, will allocate rights relating to trademarks, service
marks and trade names. Under the master trademark agreement, Hewlett-Packard
will assign to us its rights in listed trademarks, service marks and trade
names that it uses in connection with the businesses transferred to us. In
addition, Hewlett-Packard will grant us a perpetual license to mark our
products shipping as of the distribution date with, and advertise and promote
these products using, listed Hewlett-Packard trademarks and service marks.
After five years, our use will be subject to royalty payments. We may
sublicense these rights to subsidiaries and specified affiliated companies,
and we and our subsidiaries and the specified affiliated companies may allow
authorized dealers to use the trademarks and service marks in the
advertisement and promotion of these products.
During the first three years from the separation date, Hewlett-Packard will
agree not to license the trademarks and service marks it licenses to us to
third parties for use in connection with products or services that compete
with our products shipping as of the distribution date (other than in
connection with co-branding activities and other than any licenses that may
have previously been granted).
Hewlett-Packard may terminate the license under the master trademark
agreement only with regard to products that fail to meet required quality
standards, subject to a notice and cure period.
In the event of an acquisition of all or substantially all of the assets of
either party, the party whose assets are acquired may assign the master
trademark agreement to the person who acquires the assets.
Master Confidential Disclosure Agreement
The master confidential disclosure agreement provides that both parties
agree not to disclose confidential information of the other party except in
specific circumstances. Hewlett-Packard and we also agree not to use this
information in violation of any use restrictions in one of the other written
agreements between us.
Master IT Service Level Agreement
The master IT service level agreement governs the provision of information
technology services by Hewlett-Packard and us to each other, on an interim
basis, until November 1, 2001, unless extended for specific services or
otherwise indicated in the agreement. The services include data processing and
telecommunications services, such as voice telecommunications and data
transmission, and information technology support services, for functions
including accounting, financial management, tax, payroll, stockholder and
public relations, legal,
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human resources administration, procurement, real estate management and other
administrative functions. Specified charges for such services are generally
intended to allow the providing company to recover the direct and indirect
costs of providing the services, plus 5% until November 1, 2001 and such costs
plus 10% thereafter. The master IT service level agreement also will cover the
provision of certain additional information technology services identified
from time to time after the separation date that were inadvertently or
unintentionally omitted from the specified services, or that are essential to
effectuate an orderly transition under the separation agreement, so long as
the provision of such services would not significantly disrupt the providing
company's operations or significantly increase the scope of the agreement.
In addition, the master IT service level agreement will provide for the
replication of some computer systems, including hardware, software, data
storage or maintenance and support components. Generally, the party needing
the replicated system will bear the costs and expenses of replication.
Generally, the party purchasing new hardware or licensing new software will
bear the costs and expenses of purchasing the new hardware or obtaining the
new software licenses.
Employee Matters Agreement
We will enter into an employee matters agreement with Hewlett-Packard to
allocate assets, liabilities, and responsibilities relating to current and
former United States employees of Agilent Technologies and their participation
in the benefit plans, including stock plans, that Hewlett-Packard currently
sponsors and maintains.
In general, separate agreements will address similar issues relating to
foreign employment and benefit matters.
All eligible United States Agilent Technologies employees will continue to
participate in the Hewlett-Packard benefit plans on comparable terms and
conditions to those for Hewlett-Packard employees until we establish
comparable benefit plans for our current and former employees. We intend to
establish these plans no later than the time of the distribution.
Around November 1, 1999, all United States Agilent Technologies employees
will be transferred to Agilent Technologies' United States payroll. At that
time, we will adopt specified plans associated with our United States payroll
system, such as the Agilent Technologies stock plans, the Agilent Technologies
executive deferred compensation plan and the Agilent Technologies leave of
absence programs. After that time, we will adopt benefit plans that reflect
our more permanent separation from Hewlett-Packard, such as the Agilent
Technologies health and welfare plans, the Agilent Technologies pension plans,
the Agilent Technologies Excess Benefit Plan and the Agilent Technologies
fringe benefit plans. Each Agilent Technologies benefit plan will be
comparable to the corresponding Hewlett-Packard benefit plan.
Once we establish our own corresponding benefit plan, we may modify or
terminate that plan in accordance with the terms of that plan and our
policies. No Agilent Technologies benefit plan will provide benefits that
overlap benefits under the corresponding Hewlett-Packard benefit plan at the
time of the distribution. Each Agilent Technologies benefit plan will provide
that all service, compensation and other benefit determinations that, as of
the distribution, were recognized under the corresponding Hewlett-Packard
benefit plan will be taken into account under that Agilent Technologies
benefit plan.
Each Agilent Technologies benefit plan will assume any liabilities under
the corresponding Hewlett-Packard benefit plan for Agilent Technologies
employees. Assets relating to the employee liabilities will also be
transferred to Agilent Technologies or the related Agilent Technologies plans
and trusts from trusts and other funding vehicles associated with Hewlett-
Packard's benefit plans.
Options and Stock Appreciation Rights. Under the existing terms of the
Hewlett-Packard stock option plans, the separation will result in accelerated
vesting of substantially all of the unvested portion of Hewlett-Packard
options held by our employees on the distribution date. All Hewlett-Packard
options held by our employees on the distribution date that are not exercised
will expire three months after the distribution date. Alternatively, in most
countries our employees may elect in January 2000 to amend their Hewlett-
Packard options to waive the vesting
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acceleration. We will assume the amended options, as well as certain options
held by our non-employee directors, which will convert at the distribution
into options to purchase our common stock. The number of shares and the
exercise price of Hewlett-Packard options that convert into Agilent
Technologies options will be adjusted using a conversion formula. The
conversion formula will be based on the opening per-share price of our common
stock on the first trading day after the distribution relative to the closing
per-share price of Hewlett-Packard common stock on the last trading day before
the distribution. The resulting Agilent Technologies options will maintain the
original vesting provisions and option period. At the distribution, Agilent
Technologies will assume each Hewlett-Packard stock appreciation right held by
Agilent Technologies employees.
Restricted Stock. On or before the distribution, Hewlett-Packard restricted
stock granted under incentive stock plans and held by Agilent Technologies
employees is expected to be forfeited. Each Agilent Technologies employee who
forfeits Hewlett-Packard restricted stock has elected to receive as
replacement either Agilent Technologies options or Agilent Technologies
restricted shares.
Stock Purchase Plan. We anticipate that Agilent Technologies employees will
continue to participate in the Hewlett-Packard stock purchase plan through
January 31, 2000. Beginning February 1, 2000, we will sponsor a stock purchase
plan for the benefit of Agilent Technologies employees that is comparable to
the Hewlett-Packard stock purchase plan. The Agilent Technologies stock
purchase plan will provide for the replacement of unvested Hewlett-Packard
shares and Agilent Technologies shares that are forfeited by our employees at
the distribution date.
Tax Sharing Agreement
Hewlett-Packard and we will enter into a tax sharing agreement providing
for each of the party's obligations concerning various tax liabilities. The
tax sharing agreement provides that Hewlett-Packard generally will pay, and
indemnify us if necessary, with respect to all federal, state, local and
foreign taxes relating to our business for any taxable period ending prior to
this offering. In addition, the tax sharing agreement provides that Hewlett-
Packard and we will make payments between us so that, with respect to tax
returns for any taxable period in which we or any of our subsidiaries are
included in Hewlett-Packard's consolidated group for U.S. federal income tax
purposes, or in any consolidated, combined or unitary group which includes
Hewlett-Packard or any of its subsidiaries for state, local or foreign income
tax purposes the amount of taxes to be paid by us will be determined, subject
to specified adjustments, as if we and each of our subsidiaries filed our own
consolidated, combined or unitary tax return. Each member of a consolidated
group for U.S. federal income tax purposes is jointly and severally liable for
the federal income tax liability of each other member of the consolidated
group. Accordingly, although the tax sharing agreement allocates tax
liabilities between Hewlett-Packard and us, for any period in which we were
included in Hewlett-Packard's consolidated group we could be liable in the
event that any federal tax liability was incurred, but not discharged, by any
other member of the group.
The tax sharing agreement allocates responsibility for various taxes
arising from restructurings related to the spinoff between Hewlett-Packard and
Agilent Technologies. In addition, Agilent Technologies will bear 18% of
unanticipated taxes related to the spinoff where neither party is at fault.
In addition, the tax sharing agreement provides that we shall indemnify
Hewlett-Packard for any taxes arising out of the failure of the spin-off or
some of the transactions related to it to qualify as tax free as a result of
actions taken, or the failure to take required actions, by us or any of our
subsidiaries. Specifically, we are required under the tax sharing agreement to
comply with the representations made to the Internal Revenue Service in
connection with the private letter ruling that has been issued to Hewlett-
Packard by the Internal Revenue Service regarding the tax-free nature of the
spin-off of our stock by Hewlett-Packard to Hewlett-Packard's stockholders.
The tax sharing agreement further provides for cooperation with respect to
tax matters, the exchange of information and the retention of records which
may affect the income tax liability of either party. Disputes arising between
Hewlett-Packard and us relating to matters covered by the tax sharing
agreement are subject to resolution through specific dispute resolution
provisions.
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Real Estate Matters Agreement
The real estate matters agreement addresses real estate matters relating to
the Hewlett-Packard leased and owned properties that Hewlett-Packard will
transfer to or share with us. The agreement describes the manner in which
Hewlett-Packard will transfer to or share with us various leased and owned
properties, including the following types of transactions:
. conveyances to us of specified properties that Hewlett-Packard owns;
. leases back to Hewlett-Packard of specified owned properties that
Hewlett-Packard will convey to us;
. leases to us of portions of specified properties that Hewlett-Packard
owns;
. assignments to us of Hewlett-Packard's leases for specified leased
properties;
. subleases back to Hewlett-Packard of specified leased properties to be
assigned to us; and
. subleases to us of portions of specified leased properties.
The real estate matters agreement includes a description of each material
property to be transferred to or shared with us for each type of transaction.
The standard forms of the proposed transfer documents (e.g., lease and
sublease) are contained in schedules.
The real estate matters agreement also requires both parties to use
reasonable efforts to obtain any landlord consents required for the proposed
transfers of leased sites, including Hewlett-Packard paying commercially
reasonable consent fees and negotiating other commercially reasonable
amendments to the leases, if required by the landlords, and us agreeing to
provide the security required under the applicable leases.
The real estate matters agreement further provides that we will be required
to accept the transfer of all sites allocated to us, even if a site has been
damaged by a casualty before the separation date. Transfers with respect to
leased sites where the underlying lease is terminated due to casualty or
action by the landlord prior to the separation date will not be made, and
neither party will have any liability related thereto.
The real estate matters agreement also gives the parties the right to
change the allocation and terms of specified sites by mutual agreement based
on changes in the requirements of the parties.
The real estate matters agreement provides that all reasonable costs
required to effect the transfers (including landlord consent fees, landlord
attorneys' fees, title insurance fees and transfer taxes) will be paid by
Hewlett-Packard.
Environmental Matters Agreement
Hewlett-Packard has agreed to retain and indemnify us for liabilities
associated with properties transferred to us which are undergoing
environmental investigation and remediation and for which Hewlett-Packard has
accrued a reserve. The purpose of the environmental matters agreement is to
address, in a general way, Hewlett-Packard's rights and obligations with
respect to remediation of contamination at those properties. The agreement
also sets forth our rights and obligations with respect to that remediation.
Among other things, we are required to cooperate with Hewlett-Packard in
providing access to and use of the property for the performance of the
remedial activities by Hewlett-Packard and make reasonable efforts to avoid
interference with the remedial activities. Hewlett-Packard agrees to minimize,
to the extent feasible, the impact of remedial activities on the use and
operation on or at the relevant properties.
Hewlett-Packard and Agilent Technologies will designate liaisons for each
property who will work together and attend regular meetings with respect to
the remedial activities.
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PRINCIPAL STOCKHOLDER
Prior to this offering, all of the outstanding shares of our common stock
will be owned by Hewlett-Packard. After this offering, Hewlett-Packard will
own about %, or about % if the U.S. underwriters exercise their over-
allotment option in full, of our outstanding common stock. Except for Hewlett-
Packard, we are not aware of any person or group that will beneficially own
more than 5% of the outstanding shares of our common stock following this
offering.
DESCRIPTION OF CAPITAL STOCK
General
Upon the completion of this offering, we will be authorized to issue
2,000,000,000 shares of common stock, $0.01 par value, and 125,000,000 shares
of undesignated preferred stock, $0.01 par value. The following description of
our capital stock is subject to and qualified in its entirety by our
certificate of incorporation and bylaws, which are included as exhibits to the
registration statement of which this prospectus forms a part, and by the
provisions of applicable Delaware law.
Common Stock
Prior to this offering, there were shares of common stock outstanding,
all of which were held of record by Hewlett-Packard.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the board of directors out of funds legally available for
that purpose. See "Dividend Policy." In the event of our liquidation,
dissolution or winding up, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The holders
of common stock have no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock.
Preferred Stock
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may
be greater than the rights of the common stock. It is not possible to state
the actual effect of the issuance of any shares of preferred stock upon the
rights of holders of the common stock until the board of directors determines
the specific rights of the holders of such preferred stock. However, the
effects might include, among other things:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; or
. delaying or preventing a change in control of us without further action
by the stockholders.
At the closing, no shares of preferred stock will be outstanding, and we
have no present plans to issue any shares of preferred stock.
Anti-Takeover Effects of Our Certificate and Bylaws and Delaware Law
Some provisions of Delaware law and our certificate of incorporation and
bylaws could make the following more difficult:
. acquisition of us by means of a tender offer;
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. acquisition of us by means of a proxy contest or otherwise; or
. removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage coercive
takeover practices and inadequate takeover bids. These provisions are also
designed to encourage persons seeking to acquire control of us to first
negotiate with our board. We believe that the benefits of increased protection
give us the potential ability to negotiate with the proponent of an unfriendly
or unsolicited proposal to acquire or restructure us and outweigh the
disadvantages of discouraging such proposals because negotiation of such
proposals could result in an improvement of their terms.
Election and Removal of Directors. Our board of directors is divided into
three classes. The directors in each class will serve for a three-year term,
one class being elected each year by our stockholders. See "Management--
Directors and Executive Officers." This system of electing and removing
directors may discourage a third party from making a tender offer or otherwise
attempting to obtain control of us because it generally makes it more
difficult for stockholders to replace a majority of the directors.
Stockholder Meetings. Under our bylaws, only the board of directors, the
chairman of the board, and until Hewlett-Packard owns less than 50% of our
common stock, Hewlett-Packard, may call special meetings of stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board of directors.
Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless the
"business combination" or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is a person who, together with
affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Elimination of Stockholder Action By Written Consent. Our certificate of
incorporation eliminates the right of stockholders other than Hewlett-Packard
to act by written consent without a meeting. Hewlett-Packard will lose this
right once it owns less than 50% of our common stock.
Elimination of Cumulative Voting. Our certificate of incorporation and
bylaws do not provide for cumulative voting in the election of directors.
Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock
with voting or other rights or preferences that could impede the success of
any attempt to change control of us. These and other provisions may have the
effect of deferring hostile takeovers or delaying changes in control or
management of us.
Amendment of Charter Provisions. The amendment of any of the above
provisions would require approval by holders of at least 80% of the
outstanding common stock.
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Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Harris Trust and
Savings Bank.
New York Stock Exchange Listing
We have applied for listing of our common stock on the New York Stock
Exchange under the symbol "A."
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SHARES ELIGIBLE FOR FUTURE SALE
All of the shares of our common stock sold in this offering (
shares if the U.S. underwriters exercise their over-allotment option in full),
will be freely tradeable without restriction under the Securities Act, except
for any shares which be may acquired by an affiliate of Agilent Technologies,
as that term is defined in Rule 144 under the Securities Act. Persons who may
be deemed to be affiliates generally include individuals or entities that
control, are controlled by, or are under common control with, Agilent
Technologies and may include directors and officers of Agilent Technologies as
well as significant stockholders of Agilent Technologies, if any.
Hewlett-Packard has announced that, subject to specified conditions, it
intends to distribute to its stockholders by the middle of calendar year 2000
all of the shares of our common stock owned by Hewlett-Packard by means
of the distribution. Shares of our common stock distributed to Hewlett-Packard
shareholders in the distribution generally will be freely transferable, except
for shares of common stock received by persons who may be deemed to be
affiliates. Persons who are affiliates will be permitted to sell the shares of
common stock that are issued in this offering or that they receive in the
distribution only through registration under the Securities Act, or under an
exemption from registration, such as the one provided by Rule 144.
The shares of our common stock held by Hewlett-Packard before distribution
are deemed "restricted securities" as defined in Rule 144, and may not be sold
other than through registration under the Securities Act or under an exemption
from registration, such as the one provided by Rule 144. Hewlett-Packard, our
directors and officers and we have agreed not to offer or sell any shares of
our common stock, subject to exceptions (including the distribution), for a
period of 180 days after the date of this prospectus, without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters. See "Underwriters."
We will grant shares of our common stock and non-stock awards pursuant to
the 1999 Stock Plan subject to restrictions. We have reserved shares of
our common stock for issuance under the 1999 Stock Plan. In addition, under
our employee matters agreement with Hewlett-Packard, we will assume options to
purchase shares of Hewlett-Packard common stock held by our employees and we
will replace restricted shares of Hewlett-Packard common stock held by our
employees with options to purchase our shares or with restricted shares of our
common stock. The number of options we will assume, and the number of
replacement options or shares of restricted stock we will issue, will be
determined based on elections to be made by each affected employee. See
"Management--Incentive Plans--1999 Stock Plan." We currently expect to file a
registration statement under the Securities Act to register shares reserved
for issuance under the 1999 Stock Plan. Shares issued pursuant to awards after
the effective date of such registration statement (other than shares issued to
affiliates) generally will be freely tradable without further registration
under the Securities Act. Any vested and exercisable options of Hewlett-
Packard will also be freely tradeable without registration under the
Securities Act after the effective date of such registration statement. See
"Management--Treatment of Hewlett-Packard Options."
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MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
General
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of common
stock that may be relevant to you if you are a non-United States Holder. In
general, a "non-United States Holder" is any person or entity that is, for
United States federal income tax purposes, a foreign corporation, a
nonresident alien individual, a foreign partnership or a foreign estate or
trust. This discussion is based on current law, which is subject to change,
possibly with retroactive effect, or different interpretations. This
discussion is limited to non-United States Holders who hold shares of common
stock as capital assets. Moreover, this discussion is for general information
only and does not address all of the tax consequences that may be relevant to
you in light of your personal circumstances, nor does it discuss special tax
provisions which may apply to you if you relinquished United States
citizenship or residence.
If you are an individual, you may, in many cases, be deemed to be a
resident alien, as opposed to a nonresident alien, by virtue of being present
in the United States for at least 31 days in the calendar year and for an
aggregate of at least 183 days during a three-year period ending in the
current calendar year (counting for such purposes all of the days present in
the current year, one-third of the days present in the immediately preceding
year, and one-sixth of the days present in the second preceding year).
Resident aliens are subject to United States federal income tax as if they
were United States citizens.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT A TAX
ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF
PURCHASING, OWNING AND DISPOSING OF OUR COMMON STOCK AS WELL AS ANY TAX
CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY UNITED STATES STATE,
MUNICIPALITY OR OTHER TAXING JURISDICTION.
Dividends
If dividends are paid, as a non-United States Holder, you will be subject
to withholding of United States federal income tax at a 30% rate or a lower
rate as may be specified by an applicable income tax treaty. To claim the
benefit of a lower rate under an income tax treaty, you must properly file
with the payor an IRS Form 1001, or successor form, claiming an exemption from
or reduction in withholding under the applicable tax treaty.
If dividends are considered effectively connected with the conduct of a
trade or business by you within the United States and, where a tax treaty
applies, are attributable to a United States permanent establishment of yours,
those dividends will not be subject to withholding tax, but instead will be
subject to United States federal income tax on a net basis at applicable
graduated individual or corporate rates, provided an IRS Form 4224, or
successor form, is filed with the payor. If you are a foreign corporation, any
effectively connected dividends may, under certain circumstances, be subject
to an additional "branch profits tax" at a rate of 30% or a lower rate as may
be specified by an applicable income tax treaty.
Unless the payor has knowledge to the contrary, dividends paid prior to
January 1, 2001 to an address outside the United States are presumed to be
paid to a resident of such country for purposes of the withholding discussed
above and for purposes of determining the applicability of a tax treaty rate.
However, recently finalized Treasury Regulations pertaining to United States
federal withholding tax provide that you must comply with certification
procedures, or, in the case of payments made outside the United States with
respect to an offshore account, certain documentary evidence procedures,
directly or under certain circumstances through an
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intermediary, to obtain the benefits of a reduced rate under an income tax
treaty with respect to dividends paid after December 31, 2000. In addition,
these regulations will require you, if you provide an IRS Form 4224 or
successor form, as discussed above, to also provide your identification
number.
If you are eligible for a reduced rate of United States withholding tax
pursuant to an income tax treaty, you may obtain a refund of any excess
amounts withheld by filing an appropriate claim for refund with the IRS.
Gain on Disposition of Common Stock
As a non-United States Holder, you generally will not be subject to United
States federal income tax on any gain recognized on the sale or other
disposition of common stock unless:
(1) the gain is considered effectively connected with the conduct of a
trade or business by you within the United States and, where a tax
treaty applies, is attributable to a United States permanent
establishment of yours (and, in which case, if you are a foreign
corporation, you may be subject to an additional branch profits tax
equal to 30% or a lower rate as may be specified by an applicable
income tax treaty).
(2) you are an individual who holds the common stock as a capital asset and
are present in the United States for 183 or more days in the taxable
year of the sale or other disposition and other conditions are met; or
(3) we are or have been a "United States real property holding
corporation", or a USRPHC, for United States federal income tax
purposes. We believe that we are not currently, and are likely not to
become, a USRPHC. If we were to become a USRPHC, then gain on the sale
or other disposition of common stock by you generally would not be
subject to United States federal income tax provided:
. the common stock was "regularly traded" on an established securities
market; and
. you do not actually or constructively own more than 5% of the common
stock during the shorter of the five-year period preceding the
disposition or your holding period.
Federal Estate Tax
If you are an individual, common stock held at the time of your death will
be included in your gross estate for United States federal estate tax
purposes, and may be subject to United States federal estate tax, unless an
applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding Tax
We must report annually to the IRS and to each of you the amount of
dividends paid to you and the tax withheld with respect to those dividends,
regardless of whether withholding was required. Copies of the information
returns reporting those dividends and withholding may also be made available
to the tax authorities in the country in which you reside under the provisions
of an applicable income tax treaty or other applicable agreements.
Backup withholding is generally imposed at the rate of 31% on certain
payments to persons that fail to furnish the necessary identifying information
to the payer. Backup withholding generally will not apply to dividends paid
prior to January 1, 2001 to a Non-United States Holder at an address outside
the United States, unless the payor has knowledge that the payee is a United
States person. In the case of dividends paid after December 31, 2000, the
recently finalized Treasury Regulations provide that you generally will be
subject to withholding tax at a 31% rate unless you certify your non-United
States status.
117
<PAGE>
The payment of proceeds of a sale of common stock effected by or through a
United States office of a broker is subject to both backup withholding and
information reporting unless you provide the payor with your name and address
and you certify your non-United States status or you otherwise establish an
exemption. In general, backup withholding and information reporting will not
apply to the payment of the proceeds of a sale of common stock by or through a
foreign office of a broker. If, however, such broker is, for United States
federal income tax purposes, a United States person, a controlled foreign
corporation, or a foreign person that derives 50% or more of its gross income
for certain periods from the conduct of a trade or business in the United
States, or, in addition, for periods after December 31, 2000, a foreign
partnership that at any time during its tax year either is engaged in the
conduct of a trade or business in the United States or has as partners one or
more United States persons that, in the aggregate, hold more than 50% of the
income or capital interest in the partnership, such payments will be subject
to information reporting, but not backup withholding, unless such broker has
documentary evidence in its records that you are a non-United States Holder
and certain other conditions are met or you otherwise establish an exemption.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against your United States federal income tax
liability provided the required information is furnished in a timely manner to
the IRS.
118
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date hereof the U.S. underwriters named below, for whom
Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., Credit Suisse First
Boston Corporation, Merrill Lynch, Pierce, Fenner & Smith, Incorporated,
Salomon Smith Barney Inc., Bear, Stearns & Co. Inc., J.P. Morgan & Co. Inc.,
Lehman Brothers Inc. and SG Cowen Securities Corporation are acting as U.S.
representatives, and the international underwriters named below for whom
Morgan Stanley & Co. International Limited, Goldman Sachs International,
Credit Suisse First Boston Limited, Merrill Lynch International, Salomon Smith
Barney Inc., Bear, Stearns International Limited, J.P. Morgan Securities Ltd.,
Lehman Brothers International (Europe) and Societe Generale are acting as
international representatives, have severally agreed to purchase, and Agilent
Technologies has agreed to sell to them, severally, the number of shares of
our common stock indicated below:
<TABLE>
<CAPTION>
Name Number of Shares
- ---- ----------------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated............................
Goldman, Sachs & Co..........................................
Credit Suisse First Boston Corporation.......................
Merrill Lynch, Pierce, Fenner & Smith,
Incorporated.........................................
Salomon Smith Barney Inc. ...................................
Bear, Stearns & Co. Inc......................................
J.P. Morgan Securities Inc. .................................
Lehman Brothers Inc. ........................................
SG Cowen Securities Corporation..............................
Subtotal...................................................
---
International Underwriters:
Morgan Stanley & Co. International Limited...................
Goldman Sachs International..................................
Credit Suisse First Boston Limited...........................
Merrill Lynch International .................................
Salomon Smith Barney Inc. ...................................
Bear, Stearns International Limited..........................
J.P. Morgan Securities Ltd...................................
Lehman Brothers International (Europe).......................
Societe Generale.............................................
Subtotal...................................................
---
Total....................................................
===
</TABLE>
The U.S. underwriters and the international underwriters, and the U.S.
representatives and the international representatives, are collectively
referred to as the "underwriters" and the "representatives," respectively. The
119
<PAGE>
underwriters are offering the shares of common stock subject to their
acceptance of the shares from Agilent Technologies and subject to prior sale.
The underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of our common stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The underwriters are obligated to
take and pay for all of the shares of our common stock offered hereby, if any
such shares are taken, other than those covered by the U.S. underwriters'
over-allotment option described below.
In the agreement between the U.S. and international underwriters, sales may
be made between the U.S. underwriters and international underwriters of any
number of shares as may be mutually agreed. The per share price of any shares
sold by the underwriters shall be the public offering price set forth on the
cover page of this prospectus, in United States dollars, less an amount not
greater than the per share amount of the concession to dealers described
below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $ a share under the public
offering price. Any underwriter may allow, and such dealers may reallow, a
concession not in excess of $ a share to other underwriters or to certain
dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives.
Agilent Technologies has granted to the U.S. underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase up to an
aggregate of additional shares of common stock at the public offering price
set forth on the cover page of this prospectus, less underwriting discounts
and commissions. The U.S. underwriters may exercise this option solely for the
purpose of covering over-allotments, if any, made in connection with this
offering of the shares of common stock offered by this prospectus. To the
extent the option is exercised, each U.S. underwriter will become obligated,
subject to certain conditions, to purchase about the same percentage of the
additional shares of common stock as the number listed next to the U.S.
underwriter's name in the preceding table bears to the total number of shares
of common stock set forth next to the names of all U.S. underwriters in the
preceding table. If the U.S. underwriters' option is exercised in full, the
total price to the public would be $ , the total underwriters' discounts and
commissions would be $ and total proceeds to Agilent Technologies would be
$ .
The underwriters have informed Agilent Technologies that each principal
underwriter in this offering may, subject to the approval of Morgan Stanley &
Co. Incorporated, sell to discretionary accounts over which such principal
underwriter exercises discretionary authority. The underwriters have further
informed Agilent Technologies that they estimate that such sales will not
exceed in the aggregate five percent of the total number of shares of common
stock offered by them.
Agilent Technologies has applied for listing of its common stock on the New
York Stock Exchange under the symbol "A."
Each of Agilent Technologies, Hewlett-Packard and the directors and
executive officers of Agilent Technologies has agreed that, without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, it will not, during the period ending 180 days after the date of
this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock;
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
120
<PAGE>
The restrictions described in the previous paragraph do not apply to:
. the sale of the shares to the underwriters;
. the issuance by Agilent Technologies of shares of common stock upon the
exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the underwriters
have been advised in writing;
. the granting of stock options and/or restricted stock units pursuant to
existing Agilent Technologies employee benefit plans, provided that such
options do not become exercisable and such units do not vest during such
180-day period;
. transactions by any person other than Agilent Technologies relating to
shares of common stock or other securities acquired in open market or
other transactions after the completion of this offering;
. transactions in shares of Hewlett-Packard common stock;
. the distribution; or
. the substitution of Hewlett-Packard Awards with replacement awards under
Agilent Technologies' incentive plans and other transactions under
Agilent Technologies' incentive plans.
In order to facilitate this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over-allot in connection with
this offering, creating a short position in the common stock for their own
account. In addition, to cover any over-allotments or to stabilize the price
of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in this offering, if the syndicate repurchases
previously distributed common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in
these activities, and may end any of these activities at any time.
From time to time, certain of the underwriters have provided, and may
continue to provide, investment banking services to each of Agilent
Technologies and Hewlett-Packard.
Hewlett-Packard has generally agreed to pay the costs and expenses relating
to this offering. The underwriters have agreed to reimburse Hewlett-Packard
for certain of its expenses incurred in connection with this offering.
Agilent Technologies and the underwriters have agreed to indemnify each
other against certain liabilities, including liabilities under the Securities
Act.
Pricing of this Offering
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between Agilent Technologies and the U.S. representatives. Among the factors
to be considered in determining the initial public offering price will be the
future prospects of Agilent Technologies and its industry in general, sales,
earnings and certain other financial and operating information of Agilent
Technologies in recent periods, and the price-earnings ratios, price-sales
ratios, market prices of securities and certain financial and operating
information of companies engaged in activities similar to those of Agilent
Technologies. The estimated initial public offering price range set forth on
the cover page of this preliminary prospectus is subject to change as a result
of market conditions and other factors.
121
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby and certain other legal
matters will be passed upon for us by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. As of August 31, 1999,
attorneys of Wilson Sonsini Goodrich & Rosati who participated in matters
relating to this offering beneficially held approximately 3,388 shares of
Hewlett-Packard common stock. The value of such shares as of September 30,
1999, according to the closing price reported on the New York Stock Exchange
on September 30, 1999, was $307,461.Certain legal matters will be passed upon
for the underwriters by Shearman & Sterling, Menlo Park, California.
EXPERTS
The consolidated financial statements as of October 31, 1997 and 1998 and
for each of the three years in the period ended October 31, 1998 and as of
July 31, 1999 and for the nine month period then ended included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby. This prospectus does not contain
all of the information set forth in the registration statement and the
exhibits and schedules thereto. Certain items are omitted in accordance with
the rules and regulations of the SEC. For further information with respect to
Agilent Technologies and its common stock, reference is made to the
registration statement and the exhibits and any schedules filed therewith.
Statements contained in this prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance,
if such contract or document is filed as an exhibit, reference is made to the
copy of such contract or other documents filed as an exhibit to the
registration statement, each statement being qualified in all respects by such
reference. A copy of the registration statement, including the exhibits and
schedules thereto, may be read and copied at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains an Internet site at
http://www.sec.gov, from which interested persons can electronically access
the registration statement, including the exhibits and any schedules thereto.
As a result of this offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to such requirements by filing
periodic reports and other information with the SEC. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm. We also maintain an
Internet site at http://www.agilent-tech.com. Our website and the information
contained therein or connected thereto shall not be deemed to be incorporated
into this prospectus or the registration statement of which it forms a part.
122
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheet................................................. F-3
Consolidated Statement of Earnings......................................... F-4
Consolidated Statement of Stockholder's Equity............................. F-5
Consolidated Statement of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of Agilent Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings, stockholder's equity and cash flows
present fairly, in all material respects, the financial position of Agilent
Technologies, Inc. and its subsidiaries at October 31, 1997 and 1998 and July
31, 1999, and the results of their operations and their cash flows for each of
the three years in the period ended October 31, 1998 and for the nine months
ended July 31, 1999 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
October 11, 1999
F-2
<PAGE>
AGILENT TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
(in millions)
<TABLE>
<CAPTION>
October 31,
-------------
July
31,
1997 1998 1999
------ ------ ------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................ $ -- $ -- $ --
Accounts receivable...................................... 1,234 1,215 1,297
Inventory................................................ 1,432 1,485 1,597
Other current assets..................................... 265 375 362
------ ------ ------
Total current assets.................................... 2,931 3,075 3,256
Property, plant and equipment, net........................ 1,623 1,481 1,378
Other assets.............................................. 452 431 416
------ ------ ------
Total assets.............................................. $5,006 $4,987 $5,050
====== ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable......................................... $ 495 $ 435 $ 426
Employee compensation and benefits....................... 604 574 484
Deferred revenue......................................... 157 205 244
Other accrued liabilities................................ 267 385 313
------ ------ ------
Total current liabilities............................... 1,523 1,599 1,467
Other liabilities......................................... 373 366 363
Commitments and contingencies
Stockholder's equity:
Preferred stock; $.01 par value; 125,000,000 shares
authorized, none issued and outstanding................ -- -- --
Common stock; $.01 par value; 2,000,000,000 shares
authorized, 10,000,000 shares issued and outstanding... -- -- --
Additional paid-in capital.............................. -- -- 3,220
Stockholder's net investment............................ 3,110 3,022 --
------ ------ ------
Total stockholder's equity.............................. 3,110 3,022 3,220
------ ------ ------
Total liabilities and stockholder's equity................ $5,006 $4,987 $5,050
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
AGILENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
October 31, July 31,
---------------------- ------------------
1996 1997 1998 1998 1999
------ ------ ------ ----------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue:
Products.......................... $5,756 $6,114 $6,098 $4,583 $4,354
Products to Hewlett-Packard....... 684 640 696 532 590
Services.......................... 939 1,031 1,158 850 939
------ ------ ------ ------ ------
Total net revenue................ 7,379 7,785 7,952 5,965 5,883
------ ------ ------ ------ ------
Costs and expenses:
Cost of products.................. 3,327 3,455 3,807 2,716 2,525
Cost of services.................. 574 671 705 529 571
Research and development.......... 805 880 948 699 705
Selling, general and
administrative................... 1,798 1,909 2,050 1,532 1,546
------ ------ ------ ------ ------
Total costs and expenses......... 6,504 6,915 7,510 5,476 5,347
------ ------ ------ ------ ------
Earnings from operations........... 875 870 442 489 536
Other income (expense), net........ (21) (47) (46) (14) 27
------ ------ ------ ------ ------
Earnings before taxes.............. 854 823 396 475 563
Provision for taxes................ 312 280 139 167 197
------ ------ ------ ------ ------
Net earnings....................... $ 542 $ 543 $ 257 $ 308 $ 366
====== ====== ====== ====== ======
Basic and diluted net earnings per
share............................. $ $ $ $ $
====== ====== ====== ====== ======
Average shares used in computing
basic and diluted net earnings per
share.............................
====== ====== ====== ====== ======
Unaudited pro forma net earnings
per share:
Basic............................ $ $
====== ======
Diluted.......................... $ $
====== ======
Average shares used in computing
unaudited pro forma net earnings
per share:
Basic............................
====== ======
Diluted..........................
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
AGILENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in millions)
<TABLE>
<CAPTION>
Stock-
Additional holder's Total Stock-
Common Paid-In Net holder's
Stock Capital Investment Equity
------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Balance, October 31, 1995............ $ -- $ -- $ 2,829 $2,829
Net earnings......................... -- -- 542 542
Net cash transfers to Hewlett-Packard
Company............................. -- -- (373) (373)
---- ------ ------- ------
Balance, October 31, 1996............ -- -- 2,998 2,998
Net earnings......................... -- -- 543 543
Transfer of net assets from Hewlett-
Packard Company related to an
immaterial acquisition.............. -- -- 19 19
Net cash transfers to Hewlett-Packard
Company............................. -- -- (450) (450)
---- ------ ------- ------
Balance, October 31, 1997............ -- -- 3,110 3,110
Net earnings......................... -- -- 257 257
Transfer of net assets from Hewlett-
Packard Company related to the
Heartstream acquisition............. -- -- 134 134
Net cash transfers to Hewlett-Packard
Company............................. -- -- (479) (479)
---- ------ ------- ------
Balance, October 31, 1998............ -- -- 3,022 3,022
Net earnings ........................ -- -- 366 366
Net cash transfers to Hewlett-Packard
Company ............................ -- -- (168) (168)
Transfer to common stock and
additional paid-in capital.......... -- 3,220 (3,220) --
---- ------ ------- ------
Balance, July 31, 1999............... $ -- $3,220 $ -- $3,220
==== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
AGILENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
October 31, July 31,
------------------- -----------------
1996 1997 1998 1998 1999
----- ----- ----- ----------- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings.......................... $ 542 $ 543 $ 257 $ 308 $ 366
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization....... 401 409 477 332 365
Deferred taxes on earnings.......... (1) (26) (140) (105) 49
Non-cash restructuring and asset
impairment charges................. -- -- 85 17 51
Write-down of investments........... -- -- 37 -- --
Changes in assets and liabilities:
Accounts receivable................ 67 (20) 18 141 (84)
Inventory.......................... (181) (57) (67) (178) (113)
Accounts payable................... (11) 72 (60) (114) (9)
Other current assets and
liabilities....................... 84 57 130 16 (147)
Other, net......................... (20) (13) 14 (32) (52)
----- ----- ----- ----- -----
Net cash provided by operating
activities............................ 881 965 751 385 426
----- ----- ----- ----- -----
Cash flows from investing activities:
Investment in property, plant and
equipment............................ (559) (582) (410) (320) (336)
Disposition of property, plant and
equipment............................ 64 81 78 56 71
Acquisitions, net of cash acquired.... (6) (9) (2) 14 (28)
Cash proceeds of divestitures......... -- -- 57 -- 39
Other, net............................ (7) (5) 5 2 (4)
----- ----- ----- ----- -----
Net cash used in investing activities.. (508) (515) (272) (248) (258)
----- ----- ----- ----- -----
Net cash transfers to Hewlett-Packard
Company............................... (373) (450) (479) (137) (168)
----- ----- ----- ----- -----
Change in cash and cash equivalents.... -- -- -- -- --
Cash and cash equivalents at beginning
of period............................. -- -- -- -- --
----- ----- ----- ----- -----
Cash and cash equivalent at end of
period................................ $ -- $ -- $ -- $ -- $ --
===== ===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Overview and Basis of Presentation
On March 2, 1999, Hewlett-Packard Company (HP) announced a plan to create a
separate company, subsequently named Agilent Technologies, Inc. (Agilent
Technologies), comprised of HP's test and measurement, semiconductor products,
healthcare solutions and chemical analysis businesses, related portions of
Hewlett-Packard Laboratories and associated infrastructure. After completion
of Agilent Technologies' initial public offering, HP will own at least 80.1%
of Agilent Technologies' outstanding common stock. HP also announced its
intention to distribute all of the shares of Agilent Technologies' common
stock that HP owns to HP's stockholders by the middle of calendar year 2000
(the distribution date).
Agilent Technologies was incorporated in Delaware in May 1999 as a wholly
owned subsidiary of HP. In July 1999, Agilent Technologies authorized
125,000,000 shares of $.01 par value preferred stock and 2,000,000,000 shares
of $.01 par value common stock, and issued 10,000,000 shares of common stock
to HP. There are no shares of preferred stock issued and outstanding.
HP and Agilent Technologies have entered into a Master Separation and
Distribution Agreement (the separation agreement) under which HP will make an
initial cash payment to Agilent Technologies on or about November 1, 1999 (the
separation date), to fund working capital and other needs for the first few
months of operation as a separate, stand-alone entity. Additionally, HP will
transfer to Agilent Technologies, on or about the separation date,
substantially all of the assets and liabilities associated with Agilent
Technologies' businesses, except that HP will retain some of Agilent
Technologies' assets and liabilities and will transfer to Agilent Technologies
some of its assets and liabilities.
The consolidated financial statements include the assets, liabilities,
operating results and cash flows of Agilent Technologies and have been
prepared using HP's historical bases in the assets and liabilities and the
historical results of operations of Agilent Technologies. Changes in
stockholder's equity represent HP's transfer of its net investment in Agilent
Technologies, after giving effect to the net earnings of Agilent Technologies
plus net cash transfers to HP and other transfers from HP. Agilent
Technologies will begin accumulating retained earnings on November 1, 1999.
The consolidated financial statements include allocations of certain HP
corporate expenses, including centralized research and development, legal,
accounting, employee benefits, real estate, insurance services, information
technology services, treasury and other HP corporate and infrastructure costs.
The expense allocations have been determined on bases that HP and Agilent
Technologies considered to be a reasonable reflection of the utilization of
services provided or the benefit received by Agilent Technologies. However,
the financial information included herein may not reflect the consolidated
financial position, operating results, changes in stockholder's equity and
cash flows of Agilent Technologies in the future or what they would have been
had Agilent Technologies been a separate, stand-alone entity during the
periods presented.
2. Summary of Significant Accounting Policies
Principles of consolidation. The consolidated financial statements include
the accounts of Agilent Technologies and its wholly- and majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Use of estimates. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in Agilent
Technologies' consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
F-7
<PAGE>
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interim financial information. The financial information for the nine
months ended July 31, 1998 is unaudited but includes all adjustments,
consisting only of normal and recurring accruals, that management considers
necessary for a fair presentation of its consolidated financial position,
operating results and cash flows. Results for the nine months ended July 31,
1999 are not necessarily indicative of results to be expected for the full
fiscal year 1999 or for any future period.
Revenue recognition. Revenue from product sales, net of trade discounts and
allowances, is recognized at the time the product is shipped or upon
installation and customer acceptance, if the acceptance criteria are
substantive. Provisions are established for estimated costs that may be
incurred for product warranties and post-sales support. Revenue from services,
including operating leases, is recognized over the contractual period or as
services are rendered and accepted by the customer.
Advertising. Advertising costs are expensed as incurred and amounted to $87
million in 1996, $98 million in 1997, $94 million in 1998 and $70 million for
the nine months ended July 31, 1999.
Taxes on earnings. Agilent Technologies' operating results historically
have been included in HP's consolidated U.S. and state income tax returns and
in tax returns of certain HP foreign subsidiaries. The provision for income
taxes in Agilent Technologies' consolidated financial statements has been
determined on a separate-return basis. Deferred tax assets and liabilities are
recognized for the expected tax consequences of temporary differences between
the tax bases of assets and liabilities and their reported amounts.
Net earnings per share. In July 1999, Agilent Technologies issued
10,000,000 shares of common stock, all of which is owned by HP. Prior to the
offering, Agilent Technologies will effect a stock split or other issuance of
shares resulting in common shares outstanding. Basic and diluted net
earnings per share have been computed by dividing the net earnings for each
period presented by the common shares.
Unaudited pro forma net earnings per share. Unaudited pro forma basic net
earnings per share has been computed by dividing net earnings for each period
by the sum of the common shares outstanding plus the estimated shares
to be issued in this offering, as the proceeds of the offering will be
distributed to HP. Unaudited pro forma diluted net earnings per share has been
computed by dividing the net earnings for each period by the sum of the
common shares plus the estimated shares to be issued in this offering plus
the estimated effect of dilutive stock options and other employee stock plans.
The effect of dilutive stock options was computed using the treasury stock
method and assumes an initial public offering price of $ per share.
It is currently unknown how many HP options held by Agilent Technologies
employees will be assumed by Agilent Technologies. The estimated effect of
dilutive stock options assumes that % of the outstanding HP options held by
Agilent Technologies employees are assumed by Agilent Technologies. The actual
number of HP options assumed by Agilent Technologies will not be determined
until individual employees make an election to amend their HP options in
January 2000. See Note 9, "Employee Stock Plans," for a description of the
election to be made by employees. In 1998, unaudited pro forma diluted net
earnings per share would be $ if % of the outstanding HP options were
assumed and $ if % of the outstanding HP options were assumed. In the
nine months ended July 31, 1999, unaudited pro forma diluted net earnings per
share would be $ if % of the outstanding HP options were assumed and $
if % of the outstanding HP options were assumed.
Cash and cash equivalents. Historically, HP has managed cash and cash
equivalents on a centralized basis. Cash receipts associated with Agilent
Technologies' business have been transferred to HP on a daily basis and HP has
funded Agilent Technologies' disbursements.
Inventory. Inventory is valued at standard cost that approximates actual
cost computed on a first-in, first-out basis, not in excess of market value.
F-8
<PAGE>
AGILENT TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property, plant and equipment. Property, plant and equipment are stated at
cost. Additions, improvements and major renewals are capitalized. Maintenance,
repairs and minor renewals are expensed as incurred. Depreciation is provided
using accelerated methods, principally over 15 to 40 years for buildings and
improvements and 3 to 10 years for machinery and equipment, including
equipment leased to customers under operating leases. Depreciation of
leasehold improvements is provided using the straight-line method over the
life of the lease or the asset, whichever is shorter.
Impairment of long-lived assets. Agilent Technologies continually monitors
events and changes in circumstances that could indicate carrying amounts of
long-lived assets, including intangible assets, may not be recoverable. When
such events or changes in circumstances are present, Agilent Technologies
assesses the recoverability of long-lived assets by determining whether the
carrying value of such assets will be recovered through undiscounted expected
future cash flows. If the total of the future cash flows is less than the
carrying amount of those assets, Agilent Technologies recognizes an impairment
loss based on the excess of the carrying amount over the fair value of the
assets.
Foreign currency translation. Agilent Technologies uses the U.S. dollar as
its functional currency. Foreign currency assets and liabilities are
remeasured into U.S. dollars at end-of-period exchange rates except for
inventory, property, plant and equipment, other assets and deferred revenue,
which are remeasured at historical exchange rates.
Revenue and expenses are remeasured at average exchange rates in effect
during each period, except for those expenses related to balance sheet amounts
that are remeasured at historical exchange rates. Gains or losses from foreign
currency remeasurement are included in net earnings. Because Agilent
Technologies' consolidated balance sheet includes no cash or cash equivalents,
foreign currency exchange rate fluctuations have had no material effect on
Agilent Technologies' cash flows.
Comprehensive earnings. Agilent Technologies has no material components of
other comprehensive earnings and, accordingly, comprehensive earnings are the
same as net earnings for all periods presented.
Recent pronouncements. In June 1998, the Financial Accounting Standards
Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position
and measurement of those instruments at fair value. The statement is effective
for fiscal years beginning after June 15, 2000. Agilent Technologies will
adopt the standard no later than the first quarter of fiscal year 2001 and is
in the process of determining the impact that adoption will have on its
consolidated financial statements.
3. Acquisitions and Divestitures
In March 1998, Agilent Technologies acquired all of the outstanding stock
of Heartstream, Inc. for approximately 2.1 million shares of HP stock with a
fair market value of approximately $134 million. Heartstream develops and
markets automatic external defibrillators. During 1996, 1997, 1998 and the
nine months ended July 31, 1999, Agilent Technologies acquired several
additional companies that were not significant to its consolidated financial
position, results of operations or cash flows. All of these acquisitions were
accounted for under the purchase method. Under the purchase method, the
results of operations of the acquired companies were included prospectively
from the date of acquisition and the acquisition cost was allocated to the
acquired tangible and identifiable intangible assets and liabilities based on
fair values at the date of acquisition. Residual amounts were recorded as
goodwill. In-process research and development write-offs have not been
significant. Goodwill is amortized on a straight-line basis over its estimated
economic life, generally three to five
F-9
<PAGE>
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
years. The net book value of goodwill associated with acquisitions was $56
million at October 31, 1997, $126 million at October 31, 1998 and $123 million
at July 31, 1999.
In 1998 and the nine months ended July 31, 1999, Agilent Technologies sold
assets related to portions of its business to third parties. Gross proceeds
from these divestitures were $57 million in 1998 and $39 million in the nine
months ended July 31, 1999. Gains from the divestitures are included in other
income (expense), net, in the consolidated statement of earnings and totaled
$21 million in 1998 and $18 million in the nine months ended July 31, 1999.
Unaudited pro forma statement of earnings information has not been presented
because the effects of these acquisitions and divestitures were not material on
either an individual or aggregated basis.
4. Financial Instruments
Off-balance-sheet foreign exchange risk. HP enters into foreign exchange
contracts, primarily forwards and purchased options, to hedge against exposures
to changes in foreign currency exchange rates. At July 31, 1999, HP had entered
into foreign exchange contracts in approximately 35 foreign currencies. These
contracts are designated at inception to the related foreign currency exposures
being hedged, which include committed and anticipated sales by subsidiaries and
assets and liabilities that are denominated in currencies other than the U.S.
dollar. To achieve hedge accounting, contracts must reduce the foreign currency
exchange rate risk otherwise inherent in the amount and duration of the hedged
exposures and comply with established HP risk management policies. Hedging
contracts generally mature within six months.
When hedging sales-related exposure, HP sets foreign exchange contract
expirations so as to occur in the same month the hedged shipments occur,
allowing realized gains and losses on the contracts to be recognized in net
revenue in the same periods in which the related revenue is recognized. When
hedging balance sheet exposure, HP recognizes realized gains and losses on
foreign exchange contracts in other income (expense), net, in the same period
as the realized gains and losses on remeasurement of the foreign currency
denominated assets and liabilities occur.
Agilent Technologies' exposures to foreign currency exchange rate
fluctuations have been netted with those of other HP businesses and hedged as
described above on a combined basis. As of October 31, 1997 and 1998 and July
31, 1999, there were no specific contracts for Agilent Technologies' foreign
exchange exposures. A portion of the gains and losses related to foreign
exchange contracts has been allocated to Agilent Technologies based on the
proportion of its foreign currency exposures to HP's total foreign currency
exposures. The gains and losses, which have not been material, are included in
cash flows from operating activities in the consolidated statement of cash
flows.
Concentrations of credit risk. Agilent Technologies sells the majority of
its products through its direct sales force. No single customer accounted for
10% or more of accounts receivable at October 31, 1997 and 1998 and July 31,
1999. Credit risk with respect to accounts receivable is generally diversified
due to the large number of entities comprising Agilent Technologies' customer
base and their dispersion across many different industries and geographies.
Agilent Technologies performs ongoing credit evaluations of its customers'
financial condition, and requires collateral, such as letters of credit and
bank guarantees, in certain circumstances.
Fair value of financial instruments. The carrying values of Agilent
Technologies' financial instruments, including accounts receivable, accounts
payable and other accrued liabilities, approximate their fair values due to
their short maturities. The estimated fair values may not be representative of
actual values of the financial instruments that could have been realized as of
the period end or that will be realized in the future.
F-10
<PAGE>
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Inventory
<TABLE>
<CAPTION>
October 31, July
------------- 31,
1997 1998 1999
------ ------ ------
(in millions)
<S> <C> <C> <C>
Finished goods......................................... $ 477 $ 617 $ 745
Purchased parts and fabricated assemblies.............. 955 868 852
------ ------ ------
$1,432 $1,485 $1,597
====== ====== ======
</TABLE>
6. Property, Plant and Equipment
<TABLE>
<CAPTION>
October 31, July
---------------- 31,
1997 1998 1999
------- ------- -------
(in millions)
<S> <C> <C> <C>
Land.............................................. $ 96 $ 93 $ 95
Buildings and leasehold improvements.............. 1,410 1,442 1,522
Machinery and equipment........................... 1,950 1,997 2,031
------- ------- -------
3,456 3,532 3,648
Accumulated depreciation.......................... (1,833) (2,051) (2,270)
------- ------- -------
$ 1,623 $ 1,481 $ 1,378
======= ======= =======
</TABLE>
Agilent Technologies leases certain of its products to customers under
operating leases. Equipment on operating leases was $173 million at October
31, 1997, $193 million at October 31, 1998 and $215 at July 31, 1999 and is
included in machinery and equipment. Accumulated depreciation on equipment on
operating leases was $58 million at October 31, 1997, $68 million at October
31, 1998 and $79 million at July 31, 1999. At July 31, 1999, minimum future
rentals on noncancelable operating leases with original terms of one year or
longer are $33 million for the remainder of 1999, $90 million in 2000, $35
million in 2001, $11 million in 2002, $4 million in 2003 and $2 million
thereafter.
7. Taxes on Earnings
The provision for income taxes is comprised of:
<TABLE>
<CAPTION>
Years Ended Nine Months
October 31, Ended
----------------- July 31,
1996 1997 1998 1999
---- ---- ----- -----------
(in millions)
<S> <C> <C> <C> <C>
U.S. federal taxes:
Current..................................... $181 $236 $ 213 $ 6
Deferred.................................... (17) (42) (133) 57
Non-U.S. taxes:
Current..................................... 128 65 63 134
Deferred.................................... 11 17 (8) (6)
State taxes................................... 9 4 4 6
---- ---- ----- ----
$312 $280 $ 139 $197
==== ==== ===== ====
</TABLE>
F-11
<PAGE>
AGILENT TECHNOLOGIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The significant components of deferred tax assets, which required no
valuation allowance, and deferred tax liabilities included on the balance
sheet are:
<TABLE>
<CAPTION>
October 31,
-----------------------------------------
1997 1998 July 31, 1999
-------------------- -------------------- --------------------
Deferred Deferred Deferred Deferred Deferred Deferred
Tax Tax Tax Tax Tax Tax
Assets Liabilities Assets Liabilities Assets Liabilities
-------- ----------- -------- ----------- -------- -----------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Inventory............... $ 89 $ 4 $ 96 $ 3 $126 $--
Property, plant and
equipment.............. 22 18 13 15 52 7
Warranty................ 18 -- 29 -- 22 --
Retiree medical
benefits............... 90 -- 89 -- 91 --
Other retirement
benefits............... -- 42 -- 40 -- 40
Employee benefits, other
than retirement........ 92 4 126 16 124 23
Intracompany sales...... -- -- 77 -- 4 --
Unremitted earnings of
foreign subsidiaries... -- 68 -- 89 -- 107
Other................... 76 78 65 19 62 40
---- ---- ---- ---- ---- ----
$387 $214 $495 $182 $481 $217
==== ==== ==== ==== ==== ====
</TABLE>
The current portion of the deferred tax asset is $134 million at October
31, 1997, $260 million at October 31, 1998 and $207 million at July 31, 1999
and is included in other current assets.
The differences between the U.S. federal statutory income tax rate and
Agilent Technologies' effective tax rate are:
<TABLE>
<CAPTION>
Years Ended
October 31, Nine Months
---------------- Ended July 31,
1996 1997 1998 1999
---- ---- ---- --------------
<S> <C> <C> <C> <C>
U.S. federal statutory income tax rate.... 35.0% 35.0% 35.0% 35.0%
State income taxes, net of federal tax
benefit.................................. 1.0 0.5 0.9 1.0
Lower rates in other jurisdictions, net... (1.4) (2.2) (1.4) (1.0)
Other, net................................ 1.9 0.7 0.5 --
---- ---- ---- ----
36.5% 34.0% 35.0% 35.0%
==== ==== ==== ====
</TABLE>
The domestic and foreign components of earnings before taxes are:
<TABLE>
<CAPTION>
Years Ended
October 31, Nine Months
-------------- Ended July 31,
1996 1997 1998 1999
---- ---- ---- --------------
(in millions)
<S> <C> <C> <C> <C>
U.S. operations................................ $443 $543 $224 $179
Non-U.S operations............................. 411 280 172 384
---- ---- ---- ----
$854 $823 $396 $563
==== ==== ==== ====
</TABLE>
As a result of certain employment and capital investment actions undertaken
by Agilent Technologies, income from manufacturing activities in certain
countries is subject to reduced tax rates, and in some cases is
F-12
<PAGE>
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
wholly exempt from taxes, for years through 2007. The income tax benefits
attributable to the tax status of these subsidiaries are estimated to be $21
million in 1996, $23 million in 1997, $21 million in 1998 and $18 million for
the nine months ended July 31, 1999.
Agilent Technologies has not provided for U.S. federal income and foreign
withholding taxes on $597 million of non-U.S. subsidiaries' undistributed
earnings as of July 31, 1999 because these earnings are intended to be
reinvested indefinitely. Where excess cash has accumulated in Agilent
Technologies' non-U.S. subsidiaries and it is advantageous for tax or foreign
exchange reasons, subsidiary earnings are remitted.
See Note 11, "Transactions with Hewlett-Packard," for a description of the
Tax Sharing Agreement between Agilent Technologies and HP.
8. Restructuring and Asset Impairments
During 1998, management committed to transfer the production of eight-inch
semiconductor wafers to a third-party contractor. Management also undertook
employee reductions through voluntary severance programs related to this
transfer, as well as consolidation of some operations and general employee
reductions in each of the four business segments. Approximately 1,650
employees accepted the voluntary severance incentive packages by the October
31, 1998 deadline. Of these employees, approximately 80% were in manufacturing
or other positions included in cost of products and services. Agilent
Technologies recorded pre-tax charges of approximately $163 million related to
these restructuring actions. Of this amount, $138 million was included in cost
of products, $7 million was included in research and development expense and
$18 million was included in selling, general and administrative expense in the
1998 consolidated statement of earnings. The restructuring costs included
approximately $78 million related to employee severance under the voluntary
severance incentive plans and $85 million related to non-cash asset
impairments, primarily machinery and equipment, resulting from the
restructuring actions. In the nine months ended July 31, 1999, approximately
$67 million of employee severance costs were paid.
In the nine months ended July 31, 1999, Agilent Technologies recognized an
impairment loss of $51 million related to a building that was under
construction for the intended purpose of housing manufacturing operations for
eight-inch semiconductor wafers. Management sought a manufacturing partner to
utilize the building for its initial intended use. Management decided to
convert the building to a non-manufacturing facility when no partner was
found. As a result, the carrying amount of the building was written down to
its fair value for that use.
9. Employee Stock Plans
Employee Stock Purchase Plan. Eligible Agilent Technologies employees have
generally been able to contribute up to 10 percent of their base compensation
to the quarterly purchase of shares of HP's common stock under the HP Stock
Purchase Plan. Under this plan, employee contributions to purchase shares are
partially matched with shares contributed by HP. These matching shares
generally vest over two years. Compensation expense, measured using the fair
market value of HP shares on the date of purchase by HP, is recognized over
the two-year vesting period. The allocated portion of compensation expense
attributable to Agilent Technologies employees was $24 million in 1996, $32
million in 1997, $33 million in 1998 and $32 million for the nine months ended
July 31, 1999. On the distribution date, all unvested shares of HP stock held
by Agilent Technologies employees under the HP Stock Purchase Plan, together
with any shares of Agilent Technologies common stock issued with respect to
the HP shares in connection with the distribution, will be forfeited. Agilent
Technologies intends to provide replacement Agilent Technologies unvested
shares with a value comparable to the value of the forfeited HP unvested
matching shares and associated Agilent Technologies shares issued in
F-13
<PAGE>
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
connection with the distribution. The replacement shares will maintain the
original vesting terms based on the employee's continued employment with
Agilent Technologies.
Incentive compensation plans. Eligible Agilent Technologies employees
participate in HP's four principal stock option plans, which were adopted in
1979, 1985, 1990 and 1995. Options are generally granted as non-qualified
options although all plans permit the granting of options that qualify as
"Incentive Stock Options" under the Internal Revenue Code. The exercise price
of a stock option is generally equal to the fair market value of HP's common
stock on the date the option is granted and its term is generally ten years.
Under the 1990 and 1995 Incentive Stock Plans, HP's Compensation Committee, in
certain cases, may choose to establish a discounted exercise price at no less
than 75 percent of fair market value on the grant date. The allocated portion
of stock compensation expense related to Agilent Technologies employees'
discounted options was not material in 1996, 1997, 1998 and the nine months
ended July 31, 1999. Options, other than discounted options, generally vest at
a rate of 25 percent per year over a period of four years from the date of
grant. Discounted options generally vest fully on the third or fifth
anniversary of the date of grant.
Under the existing terms of the stock option plans, substantially all HP
options held by Agilent Technologies employees on the distribution date will
be fully vested, and if not exercised, will expire in three months.
Alternatively, Agilent Technologies employees may elect to amend their HP
options to waive the vesting acceleration and have the resulting options
assumed by Agilent Technologies. This election will be made in January 2000.
The conversion of HP options into Agilent Technologies options will be done in
such a manner that (1) the aggregate intrinsic value of the options
immediately before and after the exchange are the same, (2) the ratio of the
exercise price per option to the market value per option is not reduced, and
(3) the vesting provisions and option period of the replacement Agilent
Technologies options are the same as the original vesting terms and option
period of the HP options. It is currently unknown how many HP options held by
Agilent Technologies employees will be converted into Agilent Technologies
options.
Under the HP 1985 Incentive Compensation Plan and the 1990 and 1995
Incentive Stock Plans, certain key employees may be granted cash or restricted
stock awards. The majority of the shares of restricted stock outstanding at
July 31, 1999 are subject to forfeiture if employment terminates prior to
three years from the date of grant. During the restricted period, ownership of
the shares cannot be transferred. Restricted stock has the same cash dividend
and voting rights as other common stock and is considered to be currently
issued and outstanding. The cost of the awards, determined to be the fair
market value of the shares at the date of grant, is expensed ratably over the
period the restrictions lapse. This expense was not material in 1996, 1997,
1998 and the nine months ended July 31, 1999. Restricted shares held by
Agilent Technologies employees will be forfeited on or before the distribution
date. Agilent Technologies employees who forfeit HP restricted shares may
elect to receive either replacement options to purchase Agilent Technologies
stock granted on the effective date of the initial public offering at an
exercise price equal to the initial public offering price or replacement
Agilent Technologies restricted shares granted on or before the distribution
date, in either case with the same vesting as before. Agilent Technologies
employees will be required to make their election in October 1999.
Pro forma information. Agilent Technologies applies the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for stock options granted to
Agilent Technologies employees. Accordingly, compensation expense is
recognized only when options are granted with a discounted exercise price. Any
compensation expense is recognized ratably over the associated service period,
which is generally the option vesting term.
Pro forma net earnings and earning per share information, as required by
SFAS No. 123, "Accounting for Stock-Based Compensation," has been determined
as if HP had accounted for employee stock options granted to Agilent
Technologies employees under SFAS No. 123's fair value method. The fair value
of these options was
F-14
<PAGE>
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
estimated at grant date using a Black-Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rates of 6.29
percent in 1996, 6.21 percent in 1997, 5.38 percent in 1998 and 5.33 percent
in the nine months ended July 31, 1999; dividend yield of 1.0 percent in 1996,
1997 and 1998 and 0.5 percent in the nine months ended July 31, 1999; expected
option life of 6 years for 1996 and 1997 and 7 years for 1998 and the nine
months ended July 31, 1999; and volatility of 30 percent in all periods.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the four-year average vesting period of
the options. The pro forma effect of recognizing compensation expense in
accordance with SFAS No. 123 would have been to reduce Agilent Technologies'
reported net earnings by $5 million in 1996, $11 million in 1997, $20 million
in 1998 and $32 million in the nine months ended July 31, 1999. Had
compensation expense been recorded by Agilent Technologies in accordance with
SFAS No. 123, the effect would be to reduce unaudited pro forma diluted net
earnings per share to $ in 1998 and $ in the nine months ended July 31,
1999. These pro forma amounts include amortized fair values attributable to
options granted after October 31, 1995 only, and therefore are not
representative of future pro forma amounts.
10. Retirement Plans and Retiree Medical Benefits
At the date of distribution by HP of its investment in Agilent Technologies
to the stockholders of HP, Agilent Technologies will assume responsibility for
pension, deferred profit sharing and other post-employment benefits for
current and former employees whose last work assignment prior to the
distribution was with Agilent Technologies. These current and former employees
are collectively referred to as "Agilent Technologies Employees." Until the
distribution date, the expense for these programs associated with Agilent
Technologies Employees will be allocated to Agilent Technologies.
Pension and deferred profit-sharing plans. Substantially all Agilent
Technologies Employees are covered under various HP retirement plans.
Worldwide retirement costs were $100 million in 1996, $115 million in 1997,
$123 million in 1998 and $112 million in the nine months ended July 31, 1999.
U.S. employees who meet eligibility criteria are provided benefits under
HP's Retirement Plan. Defined benefits are generally based on an employee's
average pay and length of service. For eligible service through October 31,
1993, the benefit payable under the defined benefit plan is reduced by any
amounts due to the eligible employee under HP's fixed and frozen deferred
profit-sharing plan (DPSP), which has been closed to new participants.
The combined status of the Retirement Plan and DPSP for U.S. employees
allocated to Agilent Technologies follows.
<TABLE>
<CAPTION>
October 31,
------------- July 31,
1997 1998 1999
------ ------ --------
(in millions)
<S> <C> <C> <C>
Fair value of plan assets............................. $1,215 $1,356 $1,457
Retirement benefit obligation......................... $1,231 $1,423 $1,528
</TABLE>
Eligible employees outside the U.S. generally receive retirement benefits
under various retirement plans based upon factors such as years of service and
compensation levels. Eligibility is generally determined in accordance with
local statutory requirements.
Retiree medical plan. In addition to receiving pension benefits, Agilent
Technologies Employees may participate in HP's medical plan which provides
medical benefits to U.S. retired employees. Substantially all of Agilent
Technologies' current U.S. employees could become eligible for these benefits,
and the existing benefit obligation relates primarily to those employees. Once
participating in the plan, retirees may choose from managed-care and indemnity
options, with their contributions dependent on options chosen and length of
service.
F-15
<PAGE>
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
401(k) Plan. Agilent Technologies' U.S. eligible employees may participate
in HP's 401(k) plan, the Tax Savings Capital Accumulation Plan (TAXCAP), which
was established as a supplemental retirement program. Beginning February 1,
1998, enrollment in the TAXCAP became automatic for employees who met
eligibility requirements unless they declined participation. Under the TAXCAP
program, HP matches contributions by employees up to a maximum of 4 percent of
an eligible employee's annual compensation. The maximum combined contribution
to the Employee Stock Purchase Plan and TAXCAP is 25 percent of an employee's
annual eligible compensation subject to certain regulatory and plan
limitations. Agilent Technologies' expense related to TAXCAP was $36 million
in 1996, $40 million in 1997, $47 million in 1998 and $38 million in the nine
months ended July 31, 1999.
Upon the distribution, Agilent Technologies will establish separate defined
benefit pension, deferred profit-sharing, retiree medical and 401(k) plans for
its current and former employees. An allocable share of the defined benefit
plan assets will be transferred from the HP pension trust in each country to a
newly established Agilent Technologies pension trust. In addition, an
allocable share of the U.S. retiree medical plan trust will be transferred to
a newly established Agilent Technologies retiree medical plan trust. Subject
to local law, it is anticipated that the share of assets allocated to Agilent
Technologies will be in the same proportion as the projected benefit
obligation of Agilent Technologies Employees to the total projected benefit
obligation of HP. The deferred profit sharing plan assets attributable to
Agilent Technologies will also be transferred to Agilent Technologies.
Included in the consolidated balance sheet as of October 31, 1997 and 1998 and
July 31, 1999 are estimates of the assets and pension obligations to be
transferred to Agilent Technologies. Actual amounts to be transferred will be
measured at the distribution, using the same methodology, and will likely be
different from these estimates.
The tables below set forth the estimated net periodic cost and funded
status of the HP pension and retiree medical plans allocable to Agilent
Technologies based on the allocation methodology described above, as well as
the actuarial assumptions on which those amounts are based.
Net periodic cost. For the years ended October 31, 1996, 1997 and 1998 and
the nine months ended July 31, 1999, net pension and retiree medical costs
allocated to Agilent Technologies are comprised of:
<TABLE>
<CAPTION>
Pensions
---------------------------------------------- U.S. Retiree
U.S. Plan Non-U.S. Plans Medical Plan
---------------------- ---------------------- ----------------------
1996 1997 1998 1999 1996 1997 1998 1999 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost--benefits
earned during the
period................. $ 50 $ 58 $ 69 $ 54 $ 30 $ 36 $ 40 $ 39 $ 8 $ 9 $ 10 $ 8
Interest cost on benefit
obligation............. 10 15 20 19 28 30 33 29 12 13 13 10
Expected return on plan
assets................. (12) (17) (25) (23) (30) (35) (41) (42) (10) (13) (15) (12)
Amortization and
deferrals:
Actuarial (gains)
losses................ -- -- -- 2 (2) (5) (11) (3) (2) (3) (4) (8)
Transition
obligation (asset).... (3) (3) (3) (2) -- -- -- -- -- -- -- --
Prior service cost..... 2 2 2 1 1 2 1 -- (4) (4) (4) (3)
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net plan costs.......... $ 47 $ 55 $ 63 $ 51 $ 27 $ 28 $ 22 $ 23 $ 4 $ 2 $ -- $ (5)
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
F-16
<PAGE>
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Funded status. As of October 31, 1997 and 1998 and July 31, 1999, the
estimated funded status of the defined benefit and retiree medical plans
allocated to Agilent Technologies is:
<TABLE>
<CAPTION>
Non-U.S.
U.S. Defined Defined U.S. Retiree
Benefit Plan Benefit Plans Medical Plan
---------------- ---------------- -------------------
1997 1998 1999 1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ---- ----- ----- -----
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Change in fair value of
plan assets:
Fair value--beginning
of period............. $180 $269 $343 $483 $578 $705 $137 $168 $189
Actual return on plan
assets................ 38 33 23 121 89 42 31 21 12
Employer
contributions......... 57 50 60 22 22 48 3 3 1
Participants'
contributions......... -- -- -- 8 8 5 3 3 3
Change in population
estimate.............. -- -- (33) -- -- -- -- -- --
Benefits paid.......... (6) (9) (15) (12) (11) (7) (6) (6) (5)
Currency impact........ -- -- -- (44) 19 (47) -- -- --
---- ---- ---- ---- ---- ---- ----- ----- -----
Fair value--end of
period................ 269 343 378 578 705 746 168 189 200
---- ---- ---- ---- ---- ---- ----- ----- -----
Change in benefit
obligation:
Benefit obligation--
beginning of period... 200 292 420 489 545 750 161 179 204
Service cost........... 58 69 54 36 40 39 9 10 8
Interest cost.......... 15 20 19 30 33 29 13 13 10
Participants'
contributions......... -- -- -- 8 8 5 3 3 3
Change in population
estimate.............. -- -- (28) -- -- -- -- -- --
Actuarial (gain) loss.. 25 48 -- (56) 98 -- (1) 5 --
Benefits paid.......... (6) (9) (15) (12) (11) (7) (6) (6) (5)
Currency impact........ -- -- -- 50 37 (43) -- -- --
---- ---- ---- ---- ---- ---- ----- ----- -----
Benefit obligation--end
of period............. 292 420 450 545 750 773 179 204 220
---- ---- ---- ---- ---- ---- ----- ----- -----
Plan assets in excess of
(less than) benefit
obligation............. (23) (77) (72) 33 (45) (27) (11) (15) (20)
Unrecognized net
experience (gain)
loss................... (9) 28 32 (29) 50 49 (101) (96) (88)
Unrecognized prior
service cost (benefit)
related to plan
changes................ 16 14 13 14 13 11 (57) (54) (51)
Unrecognized net
transition asset*...... (9) (5) (3) (1) (1) (1) -- -- --
---- ---- ---- ---- ---- ---- ----- ----- -----
Net prepaid (accrued)
costs.................. $(25) $(40) $(30) $ 17 $ 17 $ 32 $(169) $(165) $(159)
==== ==== ==== ==== ==== ==== ===== ===== =====
</TABLE>
- --------
*Amortized over 15 years for the U.S. plan and over periods ranging from 12 to
20 years for the foreign plans.
Plan assets consist primarily of listed stocks and bonds. These costs are
generally funded to the extent they are tax-deductible.
Non-U.S. defined benefit plans whose benefit obligations are in excess of
the fair value of the plan assets are:
<TABLE>
<CAPTION>
October 31,
------------ July 31,
1997 1998 1999
----- ----- --------
(in millions)
<S> <C> <C> <C>
Aggregate benefit obligation........................ $(135) $(423) $(458)
Aggregate fair value of plan assets................. $ 99 $ 327 $ 387
</TABLE>
The non-current portion of the liability for retirement plans and the
retiree medical plan is included in other liabilities and totaled $208 million
at October 31, 1997, $206 million at October 31, 1998 and $190 million at July
31, 1999.
F-17
<PAGE>
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Assumptions. The assumptions used to measure the benefit obligations and to
compute the expected long-term return on assets for Agilent Technologies'
defined benefit and retiree medical plans are:
<TABLE>
<CAPTION>
Years Ended Nine Months
October 31, Ended
--------------------------- July 31,
1996 1997 1998 1999
-------- ------- -------- -----------
<S> <C> <C> <C> <C>
U.S. defined benefit plan:
Discount rate....................... 7.5% 7.0% 6.5% 6.5%
Average increase in compensation
levels............................. 5.5% 5.5% 5.0% 5.0%
Expected long-term return on
assets............................. 9.0% 9.0% 9.0% 9.0%
Non-U.S. defined benefit plans:
Discount rate....................... 4.0-8.5% 3.5-8.0% 3.0-6.5% 3.0-6.5%
Average increase in compensation
levels............................. 3.5-6.5% 3.5-5.5% 3.75-5.0% 3.75-5.0%
Expected long-term return on
assets............................. 5.8-10.0% 6.0-9.0% 6.5-8.5% 6.5-8.5%
U.S. retiree medical plan:
Discount rate....................... 7.5% 7.0% 6.5% 6.5%
Expected long-term return on
assets............................. 9.0% 9.0% 9.0% 9.0%
Current medical cost trend rate..... 10.0% 9.6% 8.65% 8.2%
Ultimate medical cost trend rate.... 6.0% 6.0% 5.5% 5.5%
Medical cost trend rate decreases to
ultimate rate in year.............. 2007 2007 2007 2007
</TABLE>
Assumed health care trend rates could have a significant effect on the
amounts reported for the U.S. retiree medical plan. A one-percentage point
change in the assumed health care cost trend rates for the nine months ended
July 31, 1999 would have the following effects:
<TABLE>
<CAPTION>
1 Percentage 1 Percentage
Point Increase Point Decrease
-------------- --------------
(in millions)
<S> <C> <C>
Effect on total service and interest cost
components..................................... $ 5 $ (4)
Effect on U.S. retiree medical benefit
obligations.................................... 44 (33)
</TABLE>
11. Transactions with Hewlett-Packard
Agilent Technologies' revenue from sales of products to HP was $684 million
in 1996, $640 million in 1997, $696 million in 1998, $532 million (unaudited)
for the nine months ended July 31, 1998 and $590 million for the nine months
ended July 31, 1999.
Agilent Technologies has purchased products from HP, at a price that
management believes approximates the price an unrelated third party would pay,
for inclusion in its products sold to third parties. These purchases from HP
totaled $91 million in 1996, $99 million in 1997, $86 million in 1998, $64
million (unaudited) for the nine months ended July 31, 1998 and $45 million
for the nine months ended July 31, 1999. Agilent Technologies also purchases
products from HP at cost for internal use. Purchases at cost were $59 million
in 1996, $63 million in 1997, $65 million in 1998, $48 million (unaudited) for
the nine months ended July 31, 1998 and $63 million for the nine months ended
July 31, 1999.
Agilent Technologies' costs and expenses include allocations from HP for
centralized research and development, legal, accounting, employee benefits,
real estate, insurance services, information technology services, treasury and
other HP corporate and infrastructure costs. These allocations have been
determined on bases that HP and Agilent Technologies considered to be a
reasonable reflection of the utilization of services
F-18
<PAGE>
AGILENT TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
provided or the benefit received by Agilent Technologies. The allocation
methods include relative sales, headcount, square footage, transaction
processing costs, adjusted operating expenses and others. Allocated costs
included in the accompanying consolidated statement of earnings follow.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended October 31, July 31,
----------------------- ---------------------
1996 1997 1998 1998 1999
------- ------- ------- ------------ --------
(unaudited)
(in millions)
<S> <C> <C> <C> <C> <C>
Costs of products and
services.................... $ 139 $ 152 $ 197 $ 155 $ 147
Research and development..... 128 140 143 109 108
Selling, general and
administrative.............. 391 430 440 336 324
</TABLE>
For purposes of governing certain of the ongoing relationships between
Agilent Technologies and HP at and after the separation and to provide for an
orderly transition, Agilent Technologies and HP have entered or will enter
into various agreements. A brief description of each of the agreements
follows.
Master Separation and Distribution Agreement. The separation agreement
contains the key provisions relating to the separation, Agilent Technologies'
initial funding, initial public offering and the distribution. The agreement
lists the documents and items that the parties must deliver in order to
accomplish the transfer of assets and liabilities from HP to Agilent
Technologies, effective on the separation date. The agreement also contains
conditions that must occur prior to the initial public offering and the
distribution. The parties also entered into ongoing covenants that survive the
transactions, including covenants to establish interim service level
agreements, exchange information, notify each other of changes in their
accounting principles and resolve disputes in particular ways.
General Assignment and Assumption Agreement. The General Assignment and
Assumption Agreement identifies the assets that HP will transfer to Agilent
Technologies and the liabilities that Agilent Technologies will assume from HP
in the separation. In general, the assets that will be transferred and the
liabilities that will be assumed are those that appear on the consolidated
balance sheet, after adjustment for certain assets and liabilities that will
be retained by HP and for activity that occurs between the balance sheet date
and the separation date.
HP will retain most of Agilent Technologies' accounts receivable and
accounts payable, accrued payroll and related items and tax-related amounts,
except deferred taxes. In addition, HP will transfer to Agilent Technologies
some of the assets and liabilities related to HP's business including its
liability related to the purchase of Yokogawa Electric Corporation's
(Yokogawa) 25% interest in Hewlett-Packard Japan (see Note 12, "Commitments")
and some of the accounts receivable, accounts payable and other liabilities of
Hewlett-Packard Japan.
Indemnification and Insurance Matters Agreement. Effective as of the
separation date, Agilent Technologies and HP will each release the other from
any liabilities arising from events occurring on or before the separation
date. The agreement also contains provisions governing indemnification. In
general, Agilent Technologies and HP will each indemnify the other from all
liabilities arising from its business, any of its liabilities, any of its
contracts or a breach of the separation agreement. In addition, HP and Agilent
Technologies will each indemnify the other against liability for specified
environmental matters. Agilent Technologies will reimburse HP for the cost of
any insurance coverage from the separation date to the distribution date.
Employee Matters Agreement. The Employee Matters Agreement outlines how HP
and Agilent Technologies plan to allocate responsibility for, and liability
related to the employment of those employees of HP who will become Agilent
Technologies employees. The agreement also contains provisions describing
Agilent Technologies' benefit and equity plans. On or before the distribution
date, Agilent Technologies expects
F-19
<PAGE>
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to establish employee benefit plans comparable to those of HP for its active,
inactive and former employees. However, in certain cases, certain of its
employees will continue to participate in the HP benefit plans. The transfer to
Agilent Technologies of employees at certain of HP's international operations,
and of certain pension and employee benefit plans, may not take place until
Agilent Technologies receives consents or approvals or has satisfied other
applicable requirements.
Tax Sharing Agreement. The tax sharing agreement provides for HP's and
Agilent Technologies' obligations concerning various tax liabilities. The tax
sharing agreement provides that HP generally will pay, and indemnify Agilent
Technologies if necessary, with respect to all federal, state, local and
foreign taxes relating to Agilent Technologies' business for any taxable period
ending prior to this offering. In addition, the tax sharing agreement provides
that HP and Agilent Technologies will make payments between them such that the
amount of taxes to be paid by HP and Agilent Technologies will be determined,
subject to specified adjustments, as if HP and Agilent Technologies and each of
their subsidiaries included in HP's consolidated tax returns had filed their
own consolidated, combined or unitary tax return.
The tax sharing agreement allocates responsibility for various taxes arising
from restructurings related to the spinoff between HP and Agilent Technologies.
In addition, Agilent Technologies will bear 18% of unanticipated taxes related
to the distribution where neither party is at fault.
In addition, the tax sharing agreement provides that Agilent Technologies
will indemnify HP for any taxes arising out of the failure of the distribution
or certain of the transactions related to it to qualify as tax free as a result
of actions taken, or the failure to take required actions, by Agilent
Technologies. Specifically, Agilent Technologies is required under the tax
sharing agreement to comply with the representations made to the Internal
Revenue Service, or the IRS, in connection with the private letter ruling that
has been issued to HP from the IRS regarding the tax-free nature of the
distribution of Agilent Technologies' stock by HP to HP's stockholders.
The tax sharing agreement further provides for cooperation with respect to
certain tax matters, the exchange of information and the retention of records
which may affect the income tax liability of either party. Disputes arising
between HP and Agilent Technologies relating to matters covered by the tax
sharing agreement are subject to resolution through specific dispute resolution
provisions.
Real Estate Matters Agreement. The Real Estate Matters Agreement addresses
real estate matters relating to the HP leased and owned properties that HP will
transfer to or share with Agilent Technologies. The agreement describes the
manner in which HP will transfer to or share with Agilent Technologies various
leased and owned properties. The Real Estate Matters Agreement provides that
Agilent Technologies will be required to accept the transfer of all sites
allocated to Agilent Technologies, even if a site has been damaged by a
casualty before the separation date. The Real Estate Matters Agreement also
provides that all costs required to effect the transfers, including landlord
consent fees, landlord attorneys' fees, title insurance fees and transfer
taxes, will be paid by HP.
Master IT Service Level Agreement. The Master IT Service Level Agreement
governs the provision of information technology services by HP and Agilent
Technologies to each other, on an interim basis, until November 1, 2001, unless
extended for specific services or otherwise indicated in the agreement. The
services include data processing and telecommunications services, such as voice
telecommunications and data transmission, and corporate support services,
including accounting, financial management, tax, payroll, stockholder and
public relations, legal, human resources administration, procurement, real
estate management and other administrative functions. Specified charges for
such services are generally intended to allow the providing company to recover
the direct and indirect costs of providing the services, plus 5% until November
1, 2001 and such costs plus 10% thereafter. The Master IT Service Level
Agreement also will cover the provision of certain additional information
technology services identified from time to time after the separation date that
F-20
<PAGE>
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
were inadvertently or unintentionally omitted from the specified services, or
that are essential to effectuate an orderly transition under the separation
agreement, so long as the provision of such services would not significantly
disrupt the providing company's operations or significantly increase the scope
of the agreement.
In addition, the Master IT Service Level Agreement will provide for the
replication of some computer systems, including hardware, software, data
storage or maintenance and support components. Generally, the party needing
the replicated system will bear the costs and expenses of replication.
Generally, the party purchasing new hardware or licensing new software will
bear the costs and expenses of purchasing the new hardware or obtaining the
new software licenses.
Intellectual Property Agreements. The Master Technology Ownership and
License Agreement, the Master Patent Ownership and License Agreement, the
Master Trademark Ownership and License Agreement and the ICBD Technology
Ownership and License Agreement together are referred to as the Intellectual
Property Agreements. Under the Intellectual Property Agreements, HP will
transfer to Agilent Technologies its rights in specified patents, specified
trademarks and other intellectual property related to Agilent Technologies'
current business and research and development efforts. HP and Agilent
Technologies will each be licensed under the other's patents issued on patent
applications with effective filing dates before November 1, 2004, subject to
field restrictions. HP and Agilent Technologies will also be licensed to use
technology that has been disclosed to such licensed company or that is in the
licensed company's possession as of the separation date, with certain
limitations. The agreements include certain rights to sublicense for both
parties. Agilent Technologies will be licensed to use some Hewlett-Packard
trademarks, and this license is royalty-bearing after five years.
Environmental Matters Agreement. HP has agreed to retain and indemnify
Agilent Technologies for liabilities associated with properties transferred to
Agilent Technologies which are undergoing environmental investigation and
remediation and for which HP has accrued a reserve. The purpose of the
Environmental Matters Agreement is to address, in a general way, HP's and
Agilent Technologies' rights and obligations with respect to that
investigation and remediation.
12. Commitments
Operating leases. Agilent Technologies leases certain real and personal
property from unrelated third parties under noncancelable operating leases.
Future minimum lease payments under these leases at July 31, 1999 were $9
million for the remainder of 1999, $31 million for 2000, $22 million for 2001,
$15 million for 2002, $7 million for 2003 and $74 million thereafter. Certain
leases require Agilent Technologies to pay property taxes, insurance and
routine maintenance, and include escalation clauses. Rent expense was $87
million in 1996, $92 million in 1997, $111 million in 1998 and $83 million in
the nine months ended July 31, 1999.
Transition service agreements. Beginning in November 1999, Agilent
Technologies will obtain various services from HP. See Note 11, "Transactions
with Hewlett-Packard."
Hewlett-Packard Japan. On July 6, 1999, HP entered into an agreement with
Yokogawa to acquire Yokogawa's 25% equity interest in Hewlett-Packard Japan
(HPJ) for approximately $521 million. Under the terms of the agreement, HP
will acquire Yokogawa's shares through a series of purchase transactions
beginning in January 2000. Under the terms of the separation agreement,
Agilent Technologies will assume HP's obligations under the terms of the
agreement. In the initial step, which will occur on or before January 31,
2000, Agilent Technologies will purchase approximately 10.4% of HPJ shares
from Yokogawa. In the second step, which will occur on or before April 30,
2000, Agilent Technologies will purchase approximately 10.4% of HPJ shares
from Yokogawa. Agilent Technologies will purchase the remaining 4.2% of HPJ
shares owned by Yokagawa prior to March 31, 2003. HP will provide the funding
for these transactions.
F-21
<PAGE>
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
An independent valuation has been performed to determine the portion of the
purchase price attributable to Agilent Technologies' business and the
remaining HP business and to allocate the purchase price to identifiable
assets and liabilities. Of the total purchase price, $375 million is
attributable to Agilent Technologies' business, of which approximately $302
million will be recorded as goodwill and amortized over 10 years.
Joint venture funding. Under the terms of the agreement with one of its
joint venture partners, Agilent Technologies is required to make cash capital
contributions of $98 million to the joint venture at various times through the
first quarter of fiscal 2001. These amounts are expected to total $4 million
for the remainder of 1999, $82 million in 2000 and $12 million in 2001.
13. Contingencies
Agilent Technologies is involved in lawsuits, claims, investigations and
proceedings, including patent, commercial and environmental matters, which
arise in the ordinary course of business. There are no such matters pending
that Agilent Technologies expects to be material in relation to its business,
consolidated financial condition, results of operations or cash flows. See
Note 11, "Transactions with Hewlett-Packard," for a discussion of Agilent
Technologies' indemnification agreement with HP.
14. Segment Information
Description of segments. Agilent Technologies is a diversified technology
company that provides enabling solutions to high growth markets within the
communications, electronics, life sciences and healthcare industries. Agilent
Technologies designs and manufactures test, measurement and monitoring
instruments, systems and solutions and semiconductors and optical components.
Agilent Technologies' organizes its business operations into four major
groups--test and measurement, semiconductor products, healthcare solutions and
chemical analysis, each of which comprises a reportable segment. The segments
were determined based primarily on how management views and evaluates Agilent
Technologies' operations. Other factors, including customer base, homogeneity
of products, technology and delivery channels, were also considered in
determining Agilent Technologies' reportable segments. Agilent Technologies
measures segment performance based on earnings from operations.
Agilent Technologies includes the following businesses:
. test and measurement, which provides standard and customized test,
measurement and monitoring instruments and systems as well as software
for the design, manufacture and support of high-frequency electronics
and communications devices. The test and measurement business includes
operating segments that have been aggregated based on the similarity of
the nature of their products and services, their production processes,
their class of customers, their distribution methods and their economic
characteristics;
. semiconductor products, which provides fiber optic communications
devices and assemblies, wireless integrated circuits, application-
specific integrated circuits, optoelectronics and image sensors;
. healthcare solutions, which provides patient monitoring, ultrasound
imaging and cardiology products and systems; and
. chemical analysis, which provides analytical instruments, systems and
services for chromatography, spectroscopy and bio-instrumentation.
Segment revenue and profit. The accounting policies used to derive
reportable segment results are generally the same as those described in Note
2, "Summary of Significant Accounting Policies." Internal revenue
F-22
<PAGE>
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and earnings from operations include transactions between segments that are
intended to reflect an arm's length transfer at the best price available for
comparable external customers.
A significant portion of the segments' expenses arise from shared services
and infrastructure that HP has historically provided to the segments in order
to realize economies of scale and to efficiently use resources. These expenses
include costs of centralized research and development, legal, accounting,
employee benefits, real estate, insurance services, information technology
services, treasury and other HP corporate and infrastructure costs. These
allocations have been determined on bases that HP and Agilent Technologies
considered to be a reasonable reflection of the utilization of services
provided to or benefits received by the segments. A different result could be
arrived at for any segment if costs were specifically identified to each
segment.
The following tables reflect the results of Agilent Technologies' reportable
segments under Agilent Technologies management system. These results are not
necessarily a depiction that is in conformity with generally accepted
accounting principles. The performance of each segment is measured based on
several metrics, including earnings from operations. These results are used, in
part, by management, in evaluating the performance of, and in allocating
resources to, each of the segments.
F-23
<PAGE>
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Test and Semiconductor Healthcare Chemical Total
Measurement Products Solutions Analysis Segments
----------- ------------- ---------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Year ended October 31,
1996:
External revenue........ $3,823 $1,470 $1,244 $842 $7,379
Internal revenue........ -- 30 -- -- 30
------ ------ ------ ---- ------
Total net revenue....... $3,823 $1,500 $1,244 $842 $7,409
====== ====== ====== ==== ======
Depreciation and amorti-
zation expense......... $ 110 $ 181 $ 21 $ 13 $ 325
====== ====== ====== ==== ======
Earnings from opera-
tions.................. $ 606 $ 125 $ 106 $ 38 $ 875
====== ====== ====== ==== ======
Year ended October 31,
1997:
External revenue........ $4,203 $1,479 $1,208 $895 $7,785
Internal revenue........ -- 27 -- 1 28
------ ------ ------ ---- ------
Total net revenue....... $4,203 $1,506 $1,208 $896 $7,813
====== ====== ====== ==== ======
Depreciation and amorti-
zation expense......... $ 107 $ 177 $ 16 $ 13 $ 313
====== ====== ====== ==== ======
Earnings from opera-
tions.................. $ 674 $ 57 $ 30 $ 77 $ 838
====== ====== ====== ==== ======
Year ended October 31,
1998:
External revenue........ $4,100 $1,574 $1,340 $938 $7,952
Internal revenue........ -- 39 -- -- 39
------ ------ ------ ---- ------
Total net revenue....... $4,100 $1,613 $1,340 $938 $7,991
====== ====== ====== ==== ======
Depreciation and amorti-
zation expense......... $ 133 $ 205 $ 28 $ 15 $ 381
====== ====== ====== ==== ======
Earnings (loss) from op-
erations............... $ 348 $ (106) $ 62 $ 75 $ 379
====== ====== ====== ==== ======
Nine months ended July
31, 1998 (unaudited):
External revenue........ $3,098 $1,195 $ 988 $684 $5,965
Internal revenue........ 1 29 -- -- 30
------ ------ ------ ---- ------
Total net revenue....... $3,099 $1,224 $ 988 $684 $5,995
====== ====== ====== ==== ======
Depreciation and amorti-
zation expense......... $ 95 $ 137 $ 19 $ 11 $ 262
====== ====== ====== ==== ======
Earnings from opera-
tions.................. $ 332 $ 16 $ 54 $ 57 $ 459
====== ====== ====== ==== ======
Nine months ended July
31, 1999:
External revenue........ $2,856 $1,230 $1,043 $754 $5,883
Internal revenue........ 4 26 1 -- 31
------ ------ ------ ---- ------
Total net revenue....... $2,860 $1,256 $1,044 $754 $5,914
====== ====== ====== ==== ======
Depreciation and amorti-
zation expense......... $ 123 $ 119 $ 27 $ 13 $ 282
====== ====== ====== ==== ======
Earnings from opera-
tions.................. $ 273 $ 81 $ 86 $ 99 $ 539
====== ====== ====== ==== ======
</TABLE>
F-24
<PAGE>
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reconciliations to Agilent Technologies, as reported.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended October 31, July 30,
------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- ------
(unaudited)
(in millions)
<S> <C> <C> <C> <C> <C>
Net revenue:
Total reportable
segments................. $ 7,409 $ 7,813 $ 7,991 $5,995 $5,914
Elimination of internal
revenue.................. (30) (28) (39) (30) (31)
------- ------- ------- ------ ------
Total net revenue, as
reported............... $ 7,379 $ 7,785 $ 7,952 $5,965 $5,883
======= ======= ======= ====== ======
Earnings before taxes:
Total reportable segments'
earnings from
operations............... $ 875 $ 838 $ 379 $ 459 $ 539
Corporate and
unallocated.............. -- 32 63 30 (3)
Other income (expense),
net...................... (21) (47) (46) (14) 27
------- ------- ------- ------ ------
Total earnings before
taxes, as reported..... $ 854 $ 823 $ 396 $ 475 $ 563
======= ======= ======= ====== ======
Depreciation and
amortization expense:
Total reportable
segments................. $ 325 $ 313 $ 381 $ 262 $ 282
Corporate and
unallocated.............. 76 96 96 70 83
------- ------- ------- ------ ------
Total depreciation and
amortization expense,
as reported............ $ 401 $ 409 $ 477 $ 332 $ 365
======= ======= ======= ====== ======
</TABLE>
Corporate and unallocated earnings before taxes primarily relates to
employee related benefit programs. The expenses for these programs are
recorded by the segments at a pre-determined rate and are adjusted at the
corporate level to reflect the actual rate. This adjustment is not allocated
to the segments. Corporate and unallocated also includes certain unallocated
depreciation and goodwill amortization.
Major Customers. For the nine months ended July 31,1999, Hewlett-Packard
accounted for 10% of Agilent Technologies' total net revenue. See Note 11,
"Transactions with Hewlett-Packard." No other customer represented 10% or more
of Agilent Technologies' total net revenue in any period presented.
Segment assets and other items. Segment assets directly managed by the
segment primarily consist of accounts receivable, inventory, property, plant
and equipment and certain other current and non-current assets. In some cases,
several segments may occupy the same location and therefore will share a
common building and certain machinery and equipment. In these cases, there
will not be a precise correlation between a segment's earnings from operations
and the segment's assets. Capital expenditures for each segment also reflect
the asset assignment by segment.
Corporate-held assets not allocated to the segments include property, plant
and equipment assigned to corporate functions, equity investments managed at
the corporate level, deferred tax assets and other current and non-current
assets managed at the corporate level.
The investment in equity method investees totals disclosed for each segment
represent equity investments directly managed by the segment.
F-25
<PAGE>
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Test and Semiconductor Healthcare Chemical Total
Measurement Products Solutions Analysis Segments
----------- ------------- ---------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
As of October 31, 1996:
Assets.................. $2,214 $1,173 $763 $455 $4,605
Capital expenditures,
year-to-date........... 146 326 17 13 502
Investment in equity-
method investees....... 15 -- -- -- 15
As of October 31, 1997:
Assets.................. $2,305 $1,273 $793 $469 $4,840
Capital expenditures,
year-to-date........... 147 316 13 17 493
Investment in equity-
method investees....... 14 4 -- -- 18
As of October 31, 1998:
Assets.................. $2,188 $1,134 $847 $517 $4,686
Capital expenditures,
year-to-date........... 155 162 22 8 347
Investment in equity-
method investees....... 11 19 -- -- 30
As of July 31, 1999:
Assets.................. $2,352 $ 924 $937 $512 $4,725
Capital expenditures,
year-to-date........... 135 68 11 5 219
Investment in equity-
method investees....... 13 19 -- -- 32
</TABLE>
Reconciliations to Agilent Technologies, as reported.
<TABLE>
<CAPTION>
October 31,
-------------------- July 31,
1996 1997 1998 1999
------ ------ ------ --------
(in millions)
<S> <C> <C> <C> <C>
Assets:
Total reportable segments........................ $4,605 $4,840 $4,686 $4,725
Unallocated corporate assets..................... 115 166 301 325
------ ------ ------ ------
Total assets, as reported........................ $4,720 $5,006 $4,987 $5,050
====== ====== ====== ======
</TABLE>
Geographic information.
<TABLE>
<CAPTION>
United Rest of the
States Japan World Total
------ ----- ----------- ------
(in millions)
<S> <C> <C> <C> <C>
Revenue (based on location of customer):
Year ended October 31, 1996.................... $3,328 $918 $3,133 $7,379
Year ended October 31, 1997.................... 3,399 972 3,414 7,785
Year ended October 31, 1998.................... 3,623 880 3,449 7,952
Nine months ended July 31, 1998 (unaudited).... 2,709 662 2,594 5,965
Nine months ended July 31, 1999................ 2,652 597 2,634 5,883
Long-lived assets (all non-current assets):
October 31, 1996............................... $1,127 $267 $ 491 $1,885
October 31, 1997............................... 1,223 261 591 2,075
October 31, 1998............................... 1,180 242 490 1,912
July 31, 1999.................................. 1,152 254 388 1,794
</TABLE>
F-26
<PAGE>
[LOGO OF AGILENT TECHNOLOGIES]
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued October 13, 1999
Shares
[LOGO OF AGILENT TECHNOLOGIES]
COMMON STOCK
----------
Agilent Technologies, Inc. is offering shares of its common stock. This is our
initial public offering and no public market currently exists for our shares.
We anticipate that the initial public offering price will be between $ and $
per share.
----------
After the offering, Hewlett-Packard will own approximately % of our common
stock, assuming no exercise of the underwriters' over-allotment option.
Hewlett-Packard has announced that it plans to complete its divestiture of
Agilent Technologies by the middle of calendar year 2000 by distributing all of
the shares of our common stock owned by Hewlett-Packard to holders of Hewlett-
Packard's common stock. See "Arrangements Between Agilent Technologies and
Hewlett-Packard."
----------
We have applied for listing of our common stock on the New York Stock Exchange
under the trading symbol "A."
----------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 9.
----------
PRICE $ A SHARE
----------
<TABLE>
<CAPTION>
Underwriting
Discounts and Proceeds to Agilent
Price to Public Commissions Technologies
--------------- ------------- -------------------
<S> <C> <C> <C>
Per Share..................... $ $ $
Total......................... $ $ $
</TABLE>
Agilent Technologies has granted the U.S. underwriters the right to purchase up
to an additional shares of common stock to cover over-allotments.
The United States Securities and Exchange Commission and state securities
regulators have not approved or disapproved these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 1999.
----------
GOLDMAN SACHS INTERNATIONAL
MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH INTERNATIONAL
SALOMON SMITH BARNEY
BEAR, STEARNS INTERNATIONAL LIMITED
J.P. MORGAN SECURITIES LTD.
LEHMAN BROTHERS
SG COWEN
, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale
and distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission registration fee and the New
York Stock Exchange registration fee. Hewlett-Packard has generally agreed to
pay these costs and expenses.
<TABLE>
<CAPTION>
Item Amount
---- ------
<S> <C>
Securities and Exchange Commission registration fee................. $
NASD registration fee...............................................
NYSE original and continued listing fees............................
Blue Sky qualification fees and expenses............................
Legal fees and expenses.............................................
Accounting fees and expenses........................................
Transfer agent and registrar fees...................................
Printing and engraving expenses.....................................
Miscellaneous expenses..............................................
----
Total............................................................. $
====
</TABLE>
Item 14. Indemnification of Directors and Officers
Agilent Technologies is incorporated under the laws of the State of
Delaware. Section 145 ("Section 145") of the General Corporation Law of the
State of Delaware, as the same exists or may hereafter be amended (the
"General Corporation Law"), inter alia, provides that a Delaware corporation
may indemnify any persons who were, are or are threatened to be made, parties
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or
in the right of such corporation), by reason of the fact that such person is
or was an officer, director, employee or agent of such corporation, or is or
was serving at the request of such corporation as a director, officer,
employee or agent of another corporation or enterprise. The indemnity may
include expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such person acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the corporation's best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was illegal.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or enterprise, against any liability asserted against him and incurred by him
in any such capacity, arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
Agilent Technologies' Certificate of Incorporation and Bylaws provide for
the indemnification of officers and directors to the fullest extent permitted
by the General Corporation Law.
All of Agilent Technologies' directors and officers will be covered by
insurance policies maintained by Agilent Technologies against certain
liabilities for actions taken in their capacities as such, including
liabilities under the Securities Act of 1933, as amended. In addition, the
Company has entered into indemnity agreements with its directors and executive
officers (a form of which is filed as Exhibit 10.9 to this Registration
Statement) that obligate the Company to indemnify such directors and executive
officers to the fullest extent permitted by the General Corporation Law.
Item 15. Recent Sales of Unregistered Securities
In connection with its incorporation and organization, on July 30, 1999,
Agilent Technologies issued 10,000,000 shares of common stock to Hewlett-
Packard for an aggregate of $10,000,000. Agilent Technologies
II-1
<PAGE>
believes that this issuance was exempt from registration under Section 4(2) of
the Securities Act as a transaction not involving any public offering.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1** Form of Underwriting Agreement.
2.1* Master Separation and Distribution Agreement between Hewlett-Packard
and the registrant effective as of August 12, 1999.
2.2* Form of General Assignment and Assumption Agreement between Hewlett-
Packard and the registrant.
2.3* Form of Master Technology Ownership and License Agreement between
Hewlett-Packard and the registrant.
2.4* Form of Master Patent Ownership and License Agreement between Hewlett-
Packard and the registrant.
2.5* Form of Master Trademark Ownership and License Agreement between
Hewlett-Packard and the registrant.
2.6* Form of ICBD Technology Ownership and License Agreement between
Hewlett-Packard and the registrant.
2.7* Form of Employee Matters Agreement between Hewlett-Packard and the
registrant.
2.8** Form of Tax Sharing Agreement between Hewlett-Packard and the
registrant.
2.9* Form of Master IT Service Level Agreement between Hewlett-Packard and
the registrant.
2.10* Form of Real Estate Matters Agreement between Hewlett-Packard and the
registrant.
2.11* Form of Environmental Matters Agreement between Hewlett-Packard and
the registrant.
2.12* Form of Master Confidential Disclosure Agreement between Hewlett-
Packard and the registrant.
2.13* Form of Indemnification and Insurance Matters Agreement between
Hewlett-Packard and the registrant.
3.1* Amended and Restated Certificate of Incorporation.
3.2* Bylaws.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1** 1999 Employee Stock Purchase Plan.
10.2** 1999 Employee Stock Purchase Plan Agreements.
10.3** 1999 Stock Plan.
10.4** 1999 Stock Plan Agreements.
10.5** 1999 Non-Employee Director Stock Plan.
10.6** 1999 Non-Employee Director Stock Plan Agreements.
10.7 Intentionally left blank.
10.8* Yokogawa Electric Corporation and Hewlett-Packard Company Agreement
for the Redemption and Sale of Shares and Termination of Joint Venture
Relationship.
10.9* Form of Indemnification Agreement entered into by the registrant with
each of its directors and executive officers.
21.1** Subsidiaries of Agilent Technologies.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2** Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
24.1* Power of Attorney.
24.2 Power of Attorney of Randall L. Tobias
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
II-2
<PAGE>
(b) Financial Statement Schedules.
Schedules have been omitted because the information required to be set
forth therein is not applicable or is immaterial.
Item 17. Undertakings
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as the indemnification for liabilities arising under the Securities
Act of 1933 may be permitted as to directors, officers and controlling persons
of the Registrant pursuant to the provisions described in Item 14, or
otherwise, the Registrant has been advised that in the opinion of the SEC,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payments by the Registrant of
expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(2) for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and this offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the Registrant
has duly caused this Amendment to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Palo
Alto, State of California on October 13, 1999.
*
_________________________________
Edward W. Barnholt
President, Chief Executive Officer
and
Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the registration statement has been signed by the following persons on
October 13, 1999 in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
* President, Chief Executive Officer and Director
______________________________________ (Principal Executive Officer)
Edward W. Barnholt
* Chairman of the Board of Directors
______________________________________
Gerald Grinstein
* Senior Vice President and Chief Financial
______________________________________ Officer
Robert R. Walker (Principal Financial Officer)
* Vice President, Controller and
______________________________________ Chief Accounting Officer
Dorothy D. Hayes (Principal Accounting Officer)
* Director
______________________________________
Thomas E. Everhart
* Director
______________________________________
Walter B. Hewlett
* Director
______________________________________
David M. Lawrence, M.D.
* Director
______________________________________
Randall L. Tobias
/s/ D. CRAIG NORDLUND
*By: _________________________________
D. Craig Nordlund
Attorney-in-fact
</TABLE>
II-4
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1** Form of Underwriting Agreement.
2.1* Master Separation and Distribution Agreement between Hewlett-Packard
and the registrant effective as of August 12, 1999.
2.2* Form of General Assignment and Assumption Agreement between Hewlett-
Packard and the registrant.
2.3* Form of Master Technology Ownership and License Agreement between
Hewlett-Packard and the registrant.
2.4* Form of Master Patent Ownership and License Agreement between Hewlett-
Packard and the registrant.
2.5* Form of Master Trademark Ownership and License Agreement between
Hewlett-Packard and the registrant.
2.6* Form of ICBD Technology Ownership and License Agreement between
Hewlett-Packard and the registrant.
2.7* Form of Employee Matters Agreement between Hewlett-Packard and the
registrant.
2.8** Form of Tax Sharing Agreement between Hewlett-Packard and the
registrant.
2.9* Form of Master IT Service Level Agreement between Hewlett-Packard and
the registrant.
2.10* Form of Real Estate Matters Agreement between Hewlett-Packard and the
registrant.
2.11* Form of Environmental Matters Agreement between Hewlett-Packard and
the registrant.
2.12* Form of Master Confidential Disclosure Agreement between Hewlett-
Packard and the registrant.
2.13* Form of Indemnification and Insurance Matters Agreement between
Hewlett-Packard and the registrant.
3.1* Amended and Restated Certificate of Incorporation.
3.2* Bylaws.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1** 1999 Employee Stock Purchase Plan.
10.2** 1999 Employee Stock Purchase Plan Agreements.
10.3** 1999 Stock Plan.
10.4** 1999 Stock Plan Agreements.
10.5** 1999 Non-Employee Director Stock Plan.
10.6** 1999 Non-Employee Director Stock Plan Agreements.
10.7 Intentionally left blank.
10.8* Yokogawa Electric Corporation and Hewlett-Packard Company Agreement
for the Redemption and Sale of Shares and Termination of Joint Venture
Relationship.
10.9* Form of Indemnification Agreement entered into by the registrant with
each of its directors and executive officers.
21.1** Subsidiaries of Agilent Technologies.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2** Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
24.1* Power of Attorney.
24.2 Power of Attorney of Randall L. Tobias
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
**To be filed by amendment.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated October 11, 1999, relating to the consolidated financial
statements of Agilent Technologies, Inc., which appears in such Registration
Statement. We also consent to the reference to us under the heading "Experts"
in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
October 11, 1999
<PAGE>
Exhibit 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Randall L. Tobias constitutes and
appoints Robert R. Walker and D. Craig Nordlund, and each of them, his
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any and all amendments to Agilent Technologies, Inc.'s
Registration Statement on Form S-1 filed by Agilent Technologies, Inc. on
August 16, 1999 (including post-effective amendments), and to sign any
registration statement for the same offering covered by this registration
statement that is to be effective upon filing pursuant to Rule 462(b)
promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes, as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
This Power of Attorney has been signed by Randall L. Tobias on October 13,
1999.
Signature Title
--------- -----
/s/ Randall L. Tobias Director
- ---------------------------
Randall L. Tobias
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1999
<PERIOD-START> NOV-01-1997 NOV-01-1998
<PERIOD-END> OCT-31-1998 JUL-31-1999
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 1,154 1,297
<ALLOWANCES> 0 0
<INVENTORY> 1,485 1,597
<CURRENT-ASSETS> 3,075 3,256
<PP&E> 3,456 3,648
<DEPRECIATION> 1,833 2,270
<TOTAL-ASSETS> 4,987 5,050
<CURRENT-LIABILITIES> 1,599 1,467
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 3,022 3,220
<TOTAL-LIABILITY-AND-EQUITY> 4,987 5,050
<SALES> 6,794 4,944
<TOTAL-REVENUES> 7,952 5,883
<CGS> 3,807 2,525
<TOTAL-COSTS> 4,512 3,096
<OTHER-EXPENSES> 2,998 2,251
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 396 563
<INCOME-TAX> 139 197
<INCOME-CONTINUING> 257 366
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 257 366
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
