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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 2, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-7598
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER:
VARIAN ASSOCIATES, INC.
STATE OR OTHER JURISDICTION OF IRS EMPLOYER
INCORPORATION OR ORGANIZATION: IDENTIFICATION NO.:
DELAWARE 94-2359345
ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES:
3050 HANSEN WAY, PALO ALTO, CALIFORNIA 94304-1000
(650) 493-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B)OF THE ACT:
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TITLE OF EACH
CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, NEW YORK STOCK EXCHANGE
$1 PAR VALUE PACIFIC EXCHANGE
PREFERRED STOCK NEW YORK STOCK EXCHANGE
PURCHASE RIGHTS PACIFIC EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G)OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incoporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's common stock held by non-
affiliates as of December 15, 1998 was $1,060,660,000.
The number of shares of the registrants's common stock outstanding as of
December 15, 1998 was 29,909,061 shares of $1 par value common stock.
An index of exhibits filed with this Form 10-K is located on page 38.
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DOCUMENTS INCORPORATED BY REFERENCE:
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DOCUMENT DESCRIPTION 10-K PART
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Certain sections, identified by caption, of the Definitive Proxy
Statement for the Registrant's 1999 Annual Meeting of Stockholders
(the "Proxy Statement")............................................ III
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VARIAN ASSOCIATES, INC
FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 2, 1998
TABLE OF CONTENTS
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PART I
Item 1. Business ............................................................................... 1
Item 2. Properties.............................................................................. 24
Item 3. Legal Proceedings ...................................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders .................................... 24
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters .............. 25
Item 6. Selected Financial Data ................................................................ 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .. 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.............................. 34
Item 8. Financial Statements and Supplementary Data ............................................ 36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ... 36
PART III
Item 10. Directors and Executive Officers of the Registrant ..................................... 37
Item 11. Executive Compensation ................................................................. 37
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 37
Item 13. Certain Relationships and Related Transactions ......................................... 37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 37
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PART I
ITEM 1. BUSINESS
GENERAL
OVERVIEW
Varian Associates, Inc. together with its subsidiaries (hereinafter referred
to as "Varian," the "Company" or the "Registrant") is a high-technology
enterprise that was incorporated in 1948. It is engaged in the research,
development, manufacture, and marketing of products and services for health
care, scientific and industrial research, environmental monitoring and
semiconductor fabrication. The Company's principal business segments are health
care systems, instruments, and semiconductor equipment. Its foreign
subsidiaries engage in one or more of the aforementioned businesses and market
the Company's products outside the United States.
The Company sells its products throughout the world and has 30 field sales
offices in the United States and 68 sales offices in other countries. In
general, its markets are quite competitive, characterized by the application of
advanced technology and by the development of new products and applications.
Many of the Company's competitors are large, well-known manufacturers, but
there is no competitor that competes across all of the Company's segments.
Additional information regarding the Company's competitors is set forth under
the headings "The Instruments Business," "The Semiconductor Equipment
Business," and "The Health Care Systems Business" in this Part I.
There were no material changes in the kinds of products produced or in the
methods of distribution since the beginning of the fiscal year. The Company
anticipates adequate availability of raw materials. Additional information
regarding the Company's products, methods of distribution and availability of
raw materials is set forth under the headings "The Instruments Business," "The
Semiconductor Equipment Business," and "The Health Care Systems Business" in
this Part I.
The Company's operations are subject to various federal, state and/or local
laws regulating the discharge of materials into the environment or otherwise
relating to the protection of the environment. The Company is also involved in
various stages of environmental investigation and/or remediation under the
direction of or in consultation with federal, state, and/or local agencies at
certain current or former Company facilities (see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Environmental Matters" herein and "Contingencies," in the Notes to the
Consolidated Financial Statements for additional information).
The Company's operations are grouped into three segments, the Instruments
business ("IB"), the Semiconductor Equipment business ("SEB"), and the Health
Care Systems business ("HCS"). These segments, their products, and the markets
they serve are described under the headings "The Instruments Business," "The
Semiconductor Equipment Business," and "The Health Care Systems Business" in
this Part I.
INTERNATIONAL SALES
The Company's sales to customers outside of the United States were $767
million for fiscal year 1998, 54% of total Company sales. International sales
were $720 million for fiscal year 1997, 50% of total sales and $918 million for
fiscal year 1996, 57% of total Company sales. Additional information regarding
the Company's sales to customers outside of the United States is set forth
under the headings "The Instruments Business," "The Semiconductor Equipment
Business," and "The Health Care Systems Business" in this Part I. The
profitability of such sales is subject to greater fluctuation than U.S. sales
because of generally higher marketing costs and changes in the relative value
of currencies. Additional information concerning the method of accounting for
Varian's foreign currency translation is set forth under the headings "Foreign
Currency Translation" and "Forward Exchange Contracts," in the Notes to the
Consolidated Financial Statements. No single customer accounted for 10% or more
of the Company's sales in fiscal year 1998.
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RESEARCH AND DEVELOPMENT
The Company is actively engaged in basic and applied research, development
and engineering programs designed to develop new products and to improve
existing products. During fiscal years 1998, 1997 and 1996, the Company spent
$107 million, $111 million and $110 million, respectively (net of customer
funding), on company-sponsored research, development and engineering
activities. Although the Company intends to continue extensive research and
development activities, there can be no assurance that it will be able to
develop and market new products on a cost-effective and timely basis, that such
products will compete favorably with products developed by others or that
Varian's existing technology will not be superceded by new discoveries or
developments. Information regarding Varian's research and development costs is
provided under the heading "Research and Development," in the Notes to the
Consolidated Financial Statements.
PATENT AND OTHER PROPRIETARY RIGHTS
The Company employs in-house patent attorneys, holds numerous patents in the
United States and in other countries, and has many patent applications pending
in the United States and in other countries. The Company considers the
development of patents through creative research and the maintenance of an
active patent program to be advantageous in the conduct of its business, but
does not regard the holding of any particular patent as essential to its
operations. The Company grants licenses to reliable manufacturers on various
terms and enters into cross-licensing arrangements with other parties.
Information regarding the Company's patents is provided under the headings "The
Instruments Business," "The Semiconductor Equipment Business," and "The Health
Care Systems Business" in this Part I.
EMPLOYEES
At October 2, 1998, Varian had approximately 6,900 employees worldwide
located in North America, Western Europe, Asia, Australia and Latin America.
None of the Company's employees based in the United States is subject to
collective bargaining agreements. The Company's employees based in certain
foreign countries may, from time to time, be subject to collective bargaining
agreements. Varian employees based in Australia conducted a strike in 1997,
which was quickly resolved. Those employees are subject to a collective
bargaining agreement that is scheduled for renewal in early 1999. Varian
currently considers its employee relations to be good.
Varian's success depends to a significant extent upon a limited number of key
employees and other members of senior management of the Company. The loss of
the service of one or more of these key employees could have a material adverse
effect on the Company. The success of Varian's future operations depends in
large part on the Company's ability to recruit and retain engineers and
technicians, as well as marketing, sales, service and other key personnel, who
in each case are in great demand. The Company's inability to attract and retain
the personnel it requires could have a material adverse effect on the Company's
results of operations.
SALE OF BUSINESS
Effective in June 1997, SEB completed the sale of its Thin Film Systems
("TFS") business. Total proceeds received from the sale were $145.5 million in
cash. A $51.5 million reserve was recorded to cover, among other items,
purchase price disputes, retained liabilities, transaction costs, employee
terminations, facilities separation costs, indemnification obligations,
litigation expense and other contingencies. The gain on the sale was $33.2
million (net of income taxes of $17.8 million).
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RECENT DEVELOPMENTS
On August 21, 1998, the Company's Board of Directors approved the development
of a detailed plan to reorganize the Company's core businesses into three
separate companies by spinning off IB and SEB to stockholders through a tax-
free distribution (the "Distribution"). The final plan is subject to
stockholder approval as well as a favorable ruling from the U.S. Internal
Revenue Service confirming the tax-free nature of the proposed spin-offs for
the Company and its stockholders. The Company expects to complete the
reorganization by the end of fiscal year 1999. Management estimates that one-
time net cash outlays of approximately $50 million will be required to complete
this reorganization.
While the capital structures of the three separate companies have not been
determined, it is expected that, upon consummation of the spin-off, each of HCS
and IB will have between $50 and $100 million of outstanding indebtedness under
the Company's term loans and notes payable, and that the Company will
contribute cash to SEB so that SEB will have approximately $100 million in cash
and cash equivalents and consolidated debt not exceeding $5 million.
This Annual Report on Form 10-K presents information with respect to the
business of the Company as a whole. In connection with the Distribution, a
Proxy Statement is being mailed to the stockholders of the Company, which
contains detailed information with respect to each of IB, SEB, and HCS under
the headings "Business of IB," "Business of SEB," and "Business of HCS."
Information regarding the Company's lines of business and international
operations is provided under the headings "The Instruments Business," "The
Semiconductor Equipment Business," and "The Health Care Systems Business" in
this Part I, and under the headings "Industry Segments," and "Geographic
Segments," in the Notes to the Consolidated Financial Statements.
THE INSTRUMENTS BUSINESS
OVERVIEW
IB develops, manufactures, sells and services a variety of scientific
instruments and equipment. IB is a major supplier of analytical and research
instruments and related equipment for studying the chemical composition of
myriad substances, including metals, inorganic materials, organic compounds,
polymers, natural substances and biochemicals. IB also develops, manufactures,
sells and services nuclear magnetic resonance spectrometers for probing the
structural properties of molecules and for producing non-invasive three-
dimensional images of biomedical materials. IB also develops, manufactures,
sells and services high vacuum products that serve a wide range of industrial
and scientific applications, such as high-energy physics, surface analysis,
scientific and industrial coating processes, analytical instrumentation and
semiconductor manufacturing. IB is also a state-of-the-art contract
manufacturer of advanced electronic assemblies and subsystems such as printed
circuit boards.
PRODUCTS
IB's products can be broadly classified into the following categories:
analytical instruments, nuclear magnetic resonance instruments, vacuum products
and electronic components assembly.
Analytical Instruments
Analytical Instruments includes Chromatography Systems and Optical
Spectroscopy Instruments operations, which manufacture liquid and gas
chromatographs, gas chromatograph/mass spectrometers, ultraviolet/visible/near-
infrared spectrometers, atomic absorption spectrometers, inductively coupled
plasma spectrometers, inductively coupled plasma/mass spectrometers, data
management systems and small disposable tools used to prepare chemical samples
for analysis. These products are used in environmental monitoring and analysis,
biological and biochemical research, and quality control and research in such
industries as
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pharmaceuticals, foods, metals, chemicals, petroleum and in independent test
laboratories. They are employed in analyzing chemical substances including
metals, inorganic materials, organic compounds, polymers, natural substances
and biochemicals.
The Chromatography Systems operation ("CS") is a major international supplier
of gas and liquid chromatographs, data management systems and gas
chromatograph/mass spectrometer systems, as well as sample preparation products
and other consumable supplies. Chromatography is a technique that separates a
mixture of substances by taking advantage of the characteristics specific to
each component. CS's systems are used for chemical analysis, industrial
hygiene, pollution monitoring, pharmaceutical analysis and drug discovery and
monitoring applications. CS supplies a complete line of products to provide all
analytical and preparative requirements. CS's manufacturing facilities are
located in Walnut Creek, California, Woburn, Massachusetts, Middelburg, The
Netherlands and Harbor City, California.
The Optical Spectroscopy Instruments operation of Analytical Instruments
("OSI") is a leading worldwide supplier of atomic absorption, inductively
coupled plasma, and inductively coupled plasma/mass spectrometers and
ultraviolet/ visible/near infrared spectrophotometers--instruments that are
used to measure compounds and some 66 different metals in various substances.
Optical spectroscopy is a method of chemical analysis based on the absorption,
or emission, by matter of electromagnetic radiation of a specific wavelength or
frequency. OSI's manufacturing facility is located in Melbourne, Australia.
Nuclear Magnetic Resonance Instruments
Nuclear Magnetic Resonance Instruments ("NMRI") is a leading worldwide
supplier of nuclear magnetic resonance ("NMR") spectrometers for advanced
biomolecular, chemical and material science research, as well as for the more
routine analytical work typically performed in industrial and academic
environments. NMRI's manufacturing facilities are located in Palo Alto,
California, and Fort Collins, Colorado.
NMR spectroscopy gives researchers the ability to determine the structure of
many biomolecules including proteins, nucleic acids (DNA and RNA) and
carbohydrates. NMRI's systems are used in a variety of laboratories, including
those conducting basic research and larger facilities that are creating new
pharmaceuticals. NMRI's systems can be found in all major pharmaceutical
companies worldwide where they are key tools in developing new drugs to fight
disease.
Approximately 80% of NMRI's systems are used for analysis on liquids, 15% on
solids and 5% on imaging (producing pictures). The imaging capability of NMR
allows researchers to non-invasively capture a cross-sectional view of an
object, for example the brain, to map and understand its various parts. Solid
sample NMR research allows researchers to determine the microstructure of
crystals, plastics, rubbers, ceramics, polymers and other solids.
Vacuum Products
Vacuum Products is a worldwide supplier of products used to create, maintain
and contain a vacuum environment. These include vacuum pumps, helium leak
detectors and related instruments and gauges, which are used in many commercial
and scientific applications, including industrial processes, semiconductor
manufacturing, high-energy physics, surface analysis and space research. Vacuum
Products' manufacturing facilities are located in Lexington, Massachusetts and
Torino, Italy.
Vacuum Products offers four types of vacuum pumps: primary, diffusion, turbo-
molecular and ion. Primary pumps include rotary vane and dry diaphragm
mechanical pumps, sorption pumps and dry scroll pumps. Diffusion pumps include
the VHS-Series products. Turbo-molecular pumps provide a high speed/compression
ratio in a compact package. Ion pumps, used to achieve ultra-high vacuum
environments, are used primarily to create ultra-high vacuum in a variety of
applications, from electron microscopes to linear accelerators.
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Vacuum Products is also a worldwide leader in helium mass spectrometer leak
detectors since the 1960s. These products are used in many commercial and
scientific applications, including industrial processes, analytical instruments
and high-energy physics.
Vacuum Products also produces an extensive line of vacuum instruments and
gauges. Its gauge controllers and gauge tubes are designed for industrial use,
where simplicity of operation and rugged design are important, as well as for
research applications.
Electronic Components Assembly
Tempe Electronics Center ("TEC") is a contract electronic manufacturer of
printed wiring assemblies. It supplies components to each of the Company's
businesses; however, 80% of its sales are to customers other than the Company.
Services range from design layout to total system integration, shipping to end
customers and repair depot facilities. TEC has expertise in high-mix
manufacturing, producing up to 1,800 different products each month. In addition
to printed wiring assemblies, TEC performs electronic subassembly contract
manufacturing and integrates complete systems. TEC serves a wide range of
industries, including telecommunications, medical, network products, gaming,
industrial controls, avionics and satellite communications. TEC manufactures in
Tempe, Arizona.
MARKETING AND SALES
In the United States, IB markets the largest portion of its products directly
through its own sales and distribution organizations, although certain products
are marketed through independent distributors and sales representatives. Sales
to major markets outside the United States are generally made by IB's foreign
based sales and service staff, although some sales are made directly from the
United States to foreign customers. In certain foreign countries, sales are
made through various representative and distributorship arrangements. IB owns
or leases sales and service offices in strategic regional locations in the
United States and in foreign countries through its foreign sales subsidiaries
and distribution operations. None of IB's products are distributed through
retail outlets.
The markets in which IB competes are globalized. In addition to the United
States, IB has manufacturing operations in Australia, Italy and The Netherlands
as well as sales and service offices located throughout Europe, Asia and Latin
America. IB has invested substantial financial and management resources to
develop an international infrastructure to meet the needs of its customers
worldwide. IB intends to continue to expand its presence in international
markets.
Demand for IB's products is dependent upon the size of the markets for its
products, the level of capital expenditures of IB's customers, the rate of
economic growth in IB's major markets and competitive considerations. IB
believes that demand for its products does not exhibit any significant seasonal
pattern.
Virtually all new analytical methods and tests originate in academic research
in universities and medical schools. If the utility of a new method or test is
demonstrated by fundamental research, it often will then be used by
pharmaceutical investigators, biotechnology companies, teaching hospitals or
specialized clinical laboratories in an investigatory mode. In some cases,
these new techniques eventually emerge in routine, high volume clinical testing
at hospitals and reference labs. Generally, devices used at each stage from
research to routine clinical applications employ the same fundamental processes
but may differ in operating features such as number of tests performed per hour
and degree of automation. By serving several customer groups with differing
needs related through common science and technology, IB has the opportunity to
broadly apply and leverage its expertise. IB's customers are continually
searching for processes and systems that can perform tests faster, more
efficiently and at lower costs. IB believes that its focus on automated and
high throughput systems position it to capitalize on this need.
BACKLOG
IB's recorded backlog was $125 million at October 2, 1998 and $132 million at
September 26, 1997. It is IB's general policy to include in backlog only
purchase orders or production releases that have firm delivery
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dates within one year. Recorded backlog may not result in sales because of
cancellation or other factors. It is anticipated that all orders included in
the current backlog will be delivered before the close of fiscal year 1999.
COMPETITION
Competition in IB's markets is based upon the performance capabilities of
IB's products, technical support and after-market service, the manufacturer's
reputation as a technological leader and the selling price. Management believes
that performance capabilities are the most important of these criteria. The
markets in which IB competes are highly competitive and are characterized by
the application of mature but advanced technology. There are numerous companies
that specialize in, and a number of larger companies that devote a significant
portion of their resources to, the development, manufacture, and sale of
products that compete with those manufactured or sold by IB. Many of IB's
competitors are well-known manufacturers with a high degree of technical
proficiency. In addition, competition is intensified by the ever-changing
nature of the technologies in the industries in which IB is engaged. The
markets for IB's products are characterized by specialized manufacturers that
often have strength in narrow segments of these markets. While the absence of
reliable statistics makes it difficult to determine IB's relative market
position in its industry segments, IB is confident it is one of the principal
manufacturers in its primary fields.
Each of IB's major businesses competes with many companies that address the
same markets. In Analytical Instruments, IB competes with Hewlett-Packard,
Waters Corporation, Perkin-Elmer, Thermo Electron, Shimadzu Corporation and
numerous local suppliers. NMRI has two major competitors: Bruker and JEOL. In
Vacuum Products, the primary competitors are Edwards High Vacuum, Pfeiffer,
Leybold-Balzers and Alcatel. High-mix contract manufacturers that compete with
the Tempe Electronics Center include EFTCX Corporation, Xetel Corporation, CMC
Industries, Sigmatron International and Smartflex Systems.
MANUFACTURING
IB's principal manufacturing activities consist of precision assembly, test,
calibration and machining activities. IB subcontracts a portion of its
assembly, machining and printed circuit board assembly and testing. All other
assembly, test and calibration functions are performed by IB. Some critical
assembly activities are performed in clean-room environments at IB's
facilities.
IB believes that the ability to manufacture reliable products in a cost-
effective manner is critical to meeting the "just-in-time" delivery and other
demanding requirements of its original equipment manufacturer ("OEM") and end-
use customers. IB monitors and analyzes product lead times, warranty data,
process yields, supplier performance, field data on mean time between failures,
inventory turns, repair response time and other indicators so that it can
continuously improve its manufacturing processes. IB has adopted a total
quality management process.
IB has ten manufacturing facilities located throughout the world. Analytical
Instruments has manufacturing facilities in Walnut Creek, California, Woburn,
Massachusetts, Middelburg, The Netherlands, Harbor City, California, and
Melbourne, Australia. NMRI has manufacturing facilities in Palo Alto,
California, and Fort Collins, Colorado. Vacuum Products has manufacturing
facilities in Lexington, Massachusetts, and Torino, Italy. Tempe Electronics
Center has manufacturing facilities in Tempe, Arizona.
In 1993, the member states of the European Union ("EU") began implementation
of their plan for a new unified EU market with reduced trade barriers and
harmonized regulations. The EU adopted a significant international quality
standard, the International Organization for Standardization Series 9000
Quality Standards ("ISO 9000"). All of IB's manufacturing facilities have been
certified as complying with the requirements of IS 9001.
RAW MATERIALS
There are no specialized raw materials that are particularly essential to the
operation of IB's business. IB's manufacturing operations require a wide
variety of raw materials, electronic and mechanical components, chemical and
biochemical materials and other supplies, some of which are occasionally found
to be in short supply.
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Many components used in IB's products, including proprietary analog and
digital circuitry, are manufactured by IB. Other components, including
packaging materials, superconducting magnets, integrated circuits,
microprocessors, microcomputers and certain detector and data analysis modules,
are acquired from other manufacturers. Most of the raw materials, components
and supplies purchased by IB are available from a number of different
suppliers; however, a number of items are purchased from limited or single
sources of supply, and disruption of these sources could have a temporary
adverse effect on shipments and the financial results of IB. IB believes
alternative sources could ordinarily be obtained to supply these materials, but
a prolonged inability to obtain certain materials or components could have an
adverse effect on IB's financial condition or results of operations and could
result in damage to its relationship with its customers.
CUSTOMER SUPPORT AND SERVICE
IB believes that its customer service and support are an integral part of its
competitive strategy. As part of its support services, IB's technical support
staff provides, typically at no additional cost, individual assistance in
solving analysis problems, integrating vacuum components, designing circuit
boards, etc., depending on the business. IB offers training courses and
periodically sends its customers information on applications development. IB's
products generally include a 90-day to one-year warranty, installation and
certain user training, all at no additional cost. Service contracts may be
purchased by customers to cover equipment no longer under warranty. Service
work not performed under warranty or service contracts is performed on a time
and materials basis. IB installs and services its products primarily through
its own field service organization.
PATENT AND OTHER PROPRIETARY RIGHTS
As a leader in the manufacture and sale of analytical and research
instruments and vacuum products, IB has pursued a policy of seeking patent,
copyright, trademark and trade secret protection in the United States and other
countries for developments, improvements and inventions originating within its
organization that are incorporated in IB's products or that fall within its
fields of interest. As of October 2, 1998, IB owned approximately 205 patents
in the United States and approximately 260 patents throughout the world, and
had approximately 272 patent applications on file with various patent agencies
worldwide. IB intends to file additional patent applications as appropriate.
IB relies on a combination of copyright, trade secret and other laws, and
contractual restrictions on disclosure, copying and transferring title to
protect its proprietary rights. IB has trademarks, both registered and
unregistered, that are maintained and enforced to provide customer recognition
for its products in the marketplace. IB also has agreements with third parties
that provide for licensing of patented or proprietary technology. These
agreements include royalty-bearing licenses and technology cross-licenses.
While IB places considerable importance on its licensed technology, IB does not
believe that the loss of any license would have a material adverse effect on
IB's business.
IB's competitors, like companies in many high-technology businesses,
routinely review the products of others for possible conflict with their own
patent rights. Although IB has from time to time received notices of claims
from others alleging patent infringement, IB believes that there are no pending
patent infringement claims that might have a material adverse effect on the
business of IB.
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THE SEMICONDUCTOR EQUIPMENT BUSINESS
OVERVIEW
SEB designs, manufactures, markets and services semiconductor processing
equipment used in the fabrication of integrated circuits. SEB is a leading
supplier of ion implantation systems, key pieces of capital equipment used to
manufacture semiconductor chips. SEB has shipped more than 2,500 systems
worldwide, and more SEB ion implanters are at work than those from all other
manufacturers combined.
SEB provides customers with world-class products and support. SEB achieved
the number one ranking for the second consecutive year in VLSI Research Inc.'s
1998 customer satisfaction survey. The annual study surveys semiconductor
manufacturing customers worldwide. SEB was ranked as the industry's top large
supplier of wafer processing capital equipment and received the highest overall
point total ever achieved by a large equipment supplier.
SEB equipment is used by virtually every major semiconductor manufacturer in
the U.S., Europe, Japan, Korea and throughout the Asia Pacific region. Its
award-winning support network offers chip producers round-the-clock, worldwide
service, training and process support. SEB has become an industry leader in
providing after-market products and services which reduce operating costs and
extend the cost-effective life of its products.
SEB's business depends upon the capital expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market
demand for integrated circuits and products utilizing integrated circuits. The
semiconductor industry has been experiencing a slowdown resulting from
depressed DRAM pricing, manufacturing over-capacity and the economic
difficulties affecting many Asian countries. This has caused semiconductor
manufacturers to reduce their capital equipment investments, and in certain
cases customers have either rescheduled or canceled capital equipment
purchases.
BACKGROUND
SEB
SEB's role in the semiconductor fabrication market can be traced to the
Company's pioneering work in ultra-high vacuum technology. In the 1960s, this
ability to create ultra-high vacuum environments was applied to physics and
space research projects. Since chip fabrication must also be performed in
ultra-clean environments, the Company's vacuum expertise proved critical to the
development of many of today's sophisticated systems. As the needs of the
burgeoning semiconductor industry grew, SEB developed methods for controlling
electron beams and ions in ultra-clean environments. It also conducted research
into methods of manipulating and depositing new materials onto silicon wafers.
SEB entered the ion implantation business in 1975 through the acquisition of
Extrion Corporation, in Gloucester, Massachusetts. Since then, SEB has produced
a complete line of medium and high current implanters. These systems introduce
precise quantities of dopant materials into the wafers, creating desired
electrical characteristics. In June 1997, SEB sold its TFS business, which
makes physical vapor deposition equipment, also known as sputtering systems, to
Novellus. In July 1998, SEB acquired the high-energy ion implantation equipment
product line of Genus, Inc. ("Genus").
The Industry
The semiconductor industry has experienced significant growth in recent years
due to the continued increase of the personal computer market, the expansion of
the telecommunications industry, the emergence of new applications such as
consumer electronics products, wireless communications devices and portable
computers and the increased semiconductor content in these electronics systems.
Significant performance advantages and lower prices for integrated circuits
have contributed to the growth and expansion of the
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semiconductor industry. In response to the growth in demand for integrated
circuits, the semiconductor industry has significantly increased its
manufacturing capacity through the expansion of existing facilities and
construction of new facilities.
The fabrication of integrated circuits requires a number of complex and
repetitive processing steps, including deposition, photolithography, etch and
ion implantation. Deposition is a process in which a film of either
electrically insulating, or electrically conductive, material is deposited on
the surface of a wafer. Photolithography is used to transfer a device or
circuit pattern into a light-sensitive, resist layer which, after development,
can be used in turn to transfer the pattern onto the silicon surface. The etch
process completes the transfer of the pattern into the various thin films used
to make the integrated circuit. Finally, ion implantation provides a means for
introducing dopant material into the silicon surface, typically into selected
areas defined by the photolithographic process. These selectively doped areas
become the electrical components of the integrated circuits.
Semiconductor manufacturers generally measure the cost performance of their
production equipment in terms of "cost per wafer," which is determined by
factoring in the fixed costs for acquisition and installation of the system,
its variable operating costs and its net throughput rate. A system with higher
throughput allows the semiconductor manufacturer to recover the purchase price
of the system over a greater number of wafers and thereby reduce the cost of
ownership of the system on a per wafer basis. Throughput is most accurately
measured on a net or overall basis, which takes into account the processing
speed of the system and any non-operational downtime for cleaning, maintenance
or other repairs. The increased costs of larger and more complex semiconductor
wafers have made high yields extremely important in selecting processing
equipment. To achieve higher yields and better film quality, implant systems
must be capable of repeating the original process on a consistent basis without
a disqualifying level of defects. This characteristic, known in the industry as
"repeatability," is extremely important in achieving commercially acceptable
yields. Repeatability is more easily achieved in those systems that can operate
at desired throughput rates without requiring the system to approach its
critical tolerance limits.
The continuing evolution of semiconductor devices to smaller geometries and
more complex multi-level circuitry has significantly increased the cost and
performance requirements of the capital equipment used to manufacture these
devices. Many of the advanced 200mm fabrication lines that are currently
planned, or in construction, will cost over $1 billion each, representing a
substantial increase over the costs of prior generation fabrication facilities.
Increased capital depreciation costs will continue to become a much larger
percentage of the aggregate production costs for semiconductor manufacturers
relative to labor, materials and other variable manufacturing costs. As a
result, there has been an increasing focus by the semiconductor industry on
obtaining increased productivity and higher returns from its semiconductor
manufacturing equipment, thereby reducing the effective cost of ownership of
such systems.
PRODUCTS
SEB designs and manufactures a broad range of implant tools, using data-
driven quality processes to produce reliable systems and provide total support
to its customers. SEB's products are used for ion implantation in semiconductor
manufacturing. During ion implantation, silicon wafers are bombarded by a high-
velocity beam of electrically charged ions. These ions penetrate film materials
at selected sites, changing their electrical properties.
SEB entered the medium current portion of the implantation market in 1971.
Its medium current ion implanters include the VIISta 810 (a 300mm-compatible
product), the EHP-220, and the EHP-500. The EHP-220 and EHP-500 are the third
evolutionary generations of the E-series, the world's most widely accepted
medium current machines.
SEB entered the high-current portion of the implant market in 1981. Its high
current ion implanters include the VIISta 80 and the SHC-80 (both 300mm-
compatible products), the VIISion 80 LE and the VIISion 200 LE. VIISion LE is
acknowledged as the most economical batch system available today. It offers
tripled
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low-energy boron beam currents, increased mechanical throughput, and an
improved particle specification. The SHC-80 is the world's first, serial-
process, high current implanter. It is compatible with both 200mm wafers and
300mm wafers for advanced processes. The SHC-80 promises throughput
improvements up to 30 percent greater than the same process on batch machines.
The VIISta 80 extends the SHC-80's performance to sub-KeV energy levels.
SEB's high-energy (MeV) ion implantation equipment product line, purchased
from Genus in fiscal year 1998, represents an excellent fit with SEB's existing
medium and high current product lines, and offers a rapid entry to the fast
growing, high-energy sector of the industry.
Over 85 percent of the SEB implanters shipped since 1975 are still in use
through a comprehensive upgrade and refurbishment program and world-class
support network that continually improves the capability of older systems.
CUSTOMER SUPPORT AND SERVICES
SEB provides a range of innovative customer support products designed to
improve the productivity of its worldwide customers as well as to provide a
direct link to SEB factories and research centers.
Remote Assist is a completely new semiconductor equipment service capability
that quickly puts product experts virtually' into customer fabrication
facilities. This offering uses advanced video conferencing capabilities and a
new video helmet for linking on-site engineers with SEB support offices and
factories.
The Introduction Support Teams and Productivity Transfer Teams assist the
customer in bringing SEB implanters up, and in making them productive as
quickly as possible. These teams speed process qualification and smooth
integration into the production environment, often reducing installation time
by anywhere from two to more than five weeks.
FAB Care Plus is a unique program which encourages customers to tailor an
overall support program that meets a company's specific needs--whether it be
for a research facility or an offshore production facility. FAB Care Plus
solutions can be implemented around the world to provide consistent and
reliable support.
For parts management, SEB has strategically placed Parts Banks throughout the
world to provide carefully regulated inventory, and global delivery and
logistics services. SEB also offers a comprehensive consumable parts program
that can be tailored to the individual fabrication facility.
Through VEDoc, an electronic documentation system, customers can easily
access information about its implanters. All assembly drawings, schematics,
parts lists, maintenance and operation manuals, and video-illustrated
maintenance procedures are available in this easy-to-follow CD-ROM format.
SEB's commitment to customer service extends to training and support. It
operates applications laboratories on three continents that contain not only
the latest equipment, but the latest technology. For instance, SEB's Ion
Implant Systems VIP facility, with a class 1/10 clean room, a post-implant
process laboratory, process training and applications support is available to
handle customer wafers for process evaluation and to assist with new process
requirements.
MARKETING AND SALES
SEB has sold one or more ion implantation product to each of the 20 largest
semiconductor manufacturers in the world. Sales for this class of products and
services were $338 million, $345 million, and $474 million for fiscal 1998,
1997, and 1996, respectively. SEB's sales objective is to work closely with
customers to secure purchase orders for multiple systems as such customers
expand existing facilities and build next-generation, wafer facilities. SEB
seeks to build customer loyalty and achieve a high level of repeat business by
offering highly reliable products, comprehensive field support and a responsive
parts replacement and service program.
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None of SEB's customers has entered into a long-term agreement requiring it
to purchase SEB's products. SEB believes that sales to certain of its customers
will decrease in the near future as those customers complete current purchasing
requirements for new or expanded fabrication facilities. Although the
composition of the group comprising SEB's largest customers has varied from
year to year, the loss of a significant customer or any reduction in orders
from any significant customer, including reductions due to customer departures
from recent buying patterns, market, economic or competitive conditions in the
semiconductor industry or in the industries that manufacture products utilizing
integrated circuits, could adversely affect SEB's business, financial condition
and results of operations. In addition, sales of SEB's systems depend, in
significant part, upon the decision of a prospective customer to increase
manufacturing capacity in an existing fabrication facility or to transfer a
manufacturing process to a new fabrication facility, both of which typically
involve a significant capital commitment. In addition, SEB has from time to
time experienced delays in finalizing system sales following initial system's
qualification. Due to these and other factors, SEB's systems typically have a
lengthy sales cycle during which SEB may expend substantial funds and
management effort.
The ability to provide prompt and effective field support is critical to
SEB's sales efforts, due to the substantial operational and financial
commitments made by customers which purchase ion implantation systems. SEB's
strategy of supporting its installed base through both its customer support and
research and development groups has served to encourage use of SEB's systems in
production applications and has accelerated penetration of certain key
accounts. SEB believes that its marketing efforts are enhanced by the technical
expertise of its research and development personnel who provide customer
process support and participate in a number of industry forums such as
conferences and technical publications.
SEB has sales and service offices located in the United States, Western
Europe and Asia. SEB has a global infrastructure of sales, marketing and
service engineers linked through SEB's Knowledge Network, Lotus Notes and SAP
operating systems, allowing SEB to globally review bookings and sales forecasts
against detailed account management plans. SEB's spare parts distribution
capability has been benchmarked by Intel as the best in the industry. Through
modeling of parts usage by equipment type, installed based distribution,
freight, routes and specific customs regulations, SEB has developed an
infrastructure of parts distribution and warehousing through partnering with
Federal Express.
SEB has a long and direct presence in Europe. From 1978 to 1996, the
Company's semiconductor equipment was sold and serviced in Japan by Tokyo
Electron Ltd. ("TEL"). During much of the 18-year relationship, a joint
venture, TEL-Varian Ltd., manufactured or customized equipment in Japan for
SEB. In December 1996, the Company and TEL revised their relationship to enable
Japanese customers to have more direct access to SEB's product, engineering and
support organizations worldwide. Shortly thereafter, the Company formed a
wholly-owned subsidiary, Varian Japan, K.K., that today provides direct support
of SEB's growing Japanese customer base.
Using the original TEL joint venture relationship as a model, the Company
formed Varian Korea Ltd. ("VKL") in 1985 with its distributor there. What
started as a venture for handling sales and service of semiconductor equipment
and vacuum products in Korea was expanded to include manufacturing in 1989. Its
63,000-square-foot factory in Songtan City includes a Class 10,000
manufacturing area. In January, 1998, the Company purchased the remaining 39%
of the VKL joint venture held by the original joint venture partner.
Managing global operations and sites located throughout the world presents
challenges associated with cultural diversities and organizational alignment.
Moreover, each region in the global semiconductor equipment market exhibits
unique characteristics that can cause capital equipment investment patterns to
vary significantly from period to period. Although international markets
provide SEB with significant growth opportunities, periodic economic downturns,
trade balance issues, political instability and fluctuations in interest and
foreign currency exchange rates are all risks that could affect global product
and service demand. Many Pacific Rim countries are currently experiencing a
significant economic downturn and are continuing to experience further banking
and currency difficulties that could lead to a deepening of the economic
recession in those countries. Specifically, the decline in value of the Korean
currency, together with difficulties obtaining credit, have
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resulted in a decline in the purchasing power of SEB's Korean customers. This
in turn has resulted in the cancellation or delay of orders for SEB's products
from Korean customers, thus adversely affecting SEB's results of operations. In
addition, if Japan's economy weakens further, investments by Japanese customers
may be negatively affected, and it is possible that economic recovery in other
Pacific Rim countries could be delayed. SEB actively manages its exposure to
changes in foreign currency exchange rates, but there can be no assurance that
future changes in foreign currency exchange rates will not have a material
adverse effect on its results of operations or financial condition.
SEB's business is not seasonal in nature, but it is cyclical based on the
capital equipment investment expenditures of major semiconductor manufacturers.
These expenditure patterns are based on many factors, including anticipated
market demand for integrated circuits, the development of new technologies and
global economic conditions. The cyclicality in the semiconductor equipment
market over the last several years has resulted in a decline in sales since
1996, with orders and backlog under continuous pressure. This situation is the
combined result of an oversupply in memory chips, a decline in PC demand and
the rippling of the Asian financial crises through the Korean, Taiwanese and
Japanese markets.
BACKLOG
As of October 2, 1998, SEB's backlog was $80 million, as compared to a
backlog of $151 million at September 26, 1997. SEB includes in its backlog only
those orders for which it has accepted purchase orders and assigned shipment
dates within twelve months. All orders are subject to cancellation or
rescheduling by customers with limited or no penalties. Due to possible changes
in system delivery schedules, cancellations of orders and delays in systems
shipments, SEB's backlog at any particular date is not necessarily indicative
of actual sales for any succeeding period.
MANUFACTURING
SEB manufactures its products at its production facilities in Gloucester,
Massachusetts; Newburyport, Massachusetts (recently acquired); Songtan, Korea;
and Yamanashi, Japan. SEB's Gloucester facility has become the low-cost
manufacturer of ion implanters through the use of advanced manufacturing
methods and technologies, including, just-in-time, demand flow technology,
statistical process control and solids modeling. Despite operating in a
cyclical and competitive market, SEB has strengthened its profitability by
steadily increasing efficiency and reducing operating expenses. SEB has also
significantly reduced its costs through a reduction in rework, scrap, warranty
and testing costs.
SEB's manufacturing activities consist primarily of assembling and testing
components and subassemblies, which are acquired from third-party suppliers and
then integrated into a finished system by SEB. SEB utilizes an outsourcing
strategy for the manufacture of major subassemblies and performs system design,
assembly and testing in-house. SEB believes that outsourcing enables it to
minimize its fixed costs and capital expenditures while also providing the
flexibility to increase production capacity. This strategy also allows SEB to
focus on product differentiation through system design and quality control.
Through the use of manufacturing specialists, SEB believes that its subsystems
incorporate advanced technologies in robotics, vacuum and microcomputers. SEB
works closely with its suppliers on achieving mutual cost reduction through
joint design efforts.
SEB manufactures its systems in clean-room environments which are similar to
the clean rooms used by semiconductor manufacturers for wafer fabrication. This
procedure is intended to reduce installation and production qualification times
and the amount of particulates and other contaminants in the assembled system,
which in turn improves yield and reduces downtime for the customer. Following
disassembly, the tested system is packaged in multiple layers of plastic
shrink-wrap to maintain cleanroom standards during shipment.
SEB uses outsourcing to take advantage of economies of scale at outside
manufacturing facilities and to alleviate manufacturing bottlenecks. SEB
purchases material and components from various suppliers that are either
standard products or built to SEB specifications. Some of the components and
subassemblies included in
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SEB's products are obtained from a limited group of suppliers. Although SEB
seeks to reduce its dependence on these limited sources, disruption or
termination of certain of these sources could occur and such disruptions could
have at least a temporary adverse effect on SEB's operations. Moreover, a
prolonged inability to obtain certain components could have a material adverse
effect on SEB's business, financial condition and results of operations and
could result in damage to customer relationships.
Quality efforts at SEB begin with product development. SEB uses 3D, computer-
aided design, finite element analysis and other computer-based modeling methods
to prove new designs. A SEB implanter design is thoroughly tested and proven
throughout all stages of development before the first production system is
built. Concurrent engineering programs ensure that new designs are quickly and
successfully integrated into manufacturing.
COMPETITION
The semiconductor manufacturing equipment market is highly competitive and is
characterized by a small number of large players and over 250 small domestic
and foreign participants. The larger companies include Applied Materials, Lam
Research, Eaton, Novellus Systems, Tokyo Electron, Nikon, Canon and ASML. SEB
faces significant competitive factors in the ion implantation market. Within
this segment, as reported for calendar 1997 by Dataquest, SEB, Eaton, Applied
Materials, Nissin and Ulvac had 35%, 45%, 13%, 4% and 3%, respectively, of the
market share for ion implantation equipment.
Significant competitive factors in the ion implantation market include
relationships, price/cost of ownership, technological performance, distribution
and financial viability. Other significant competitive factors in the
semiconductor equipment market include system performance and flexibility,
cost, the size of each manufacturer, its installed customer base, capability
for customer support and breadth of product line. SEB believes it competes
favorably in each of these categories. For example, its gradual transition from
joint ventures and distributor agreements to direct selling and service has
given SEB the ability to serve customers on a global basis through the
management of information critical to consistent, timely delivery of services
and products. Management believes that to remain competitive it will require
significant financial resources to offer a broad range of products, to maintain
customer service and support centers worldwide and to invest in product and
process research and development.
Certain of SEB's existing and potential competitors have substantially
greater financial resources and more extensive engineering, manufacturing,
marketing and customer service and support organizations. SEB expects its
competitors to continue to improve the design and performance of their current
products and processes and to introduce new products and processes with
enhanced price and performance characteristics. If SEB's competitors enter into
strategic relationships with leading semiconductor manufacturers covering ion
implantation products similar to those sold by SEB, its ability to sell its
products to those manufacturers could be adversely affected.
In addition, a substantial investment is required by customers to install and
integrate capital equipment into a semiconductor production line. As a result,
once a semiconductor manufacturer has selected a particular vendor's capital
equipment, SEB believes that the manufacturer will be generally reliant upon
that equipment for the specific production line application. Accordingly, SEB
may experience difficulty in selling a product line to a particular customer
for a significant period of time if that customer selects a competitor's
product. Increased competitive pressure could lead to lower prices for SEB's
products, thereby materially and adversely affecting SEB's business, financial
condition and results of operations. There can be no assurance that SEB will be
able to compete successfully in the future.
PATENT AND OTHER PROPRIETARY RIGHTS
As a leader in the manufacture and sale of ion implantation equipment, SEB
has pursued a policy of seeking patent, copyright, trademark and trade secret
protection in the United States and other countries for
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developments, improvements and inventions originating within its organization
that are incorporated in SEB's products or that fall within its fields of
interest. As of October 2, 1998, SEB owned approximately 119 patents in the
United States and approximately 219 patents throughout the world, and had
approximately 84 patent applications on file with various patent agencies
worldwide. SEB intends to file additional patent applications as appropriate.
SEB relies on a combination of copyright, trade secret and other laws, and
contractual restrictions on disclosure, copying and transferring title to
protect its rights. SEB has trademarks, both registered and unregistered, that
are maintained and enforced to provide customer recognition for its products in
the marketplace. SEB also has agreements with third parties that provide for
licensing of patented or proprietary technology. These agreements include
royalty-bearing licenses and technology cross-licenses. The loss of certain of
such licenses could have a material adverse effect on SEB's business. In
particular, the current royalty bearing license agreements with Applied
Materials and TEL for gas-assisted wafer heat transfer patents have produced
approximately $5.9 million in royalties in fiscal year 1998 and over $40
million in royalties since 1992. The principal patent covered by these licenses
will expire on July 14, 2004.
SEB's competitors, like companies in many high-technology businesses,
routinely review the products of others for possible conflict with their own
patent rights. There has also been substantial litigation regarding patent and
other intellectual property rights in semiconductor related industries. SEB is
currently involved in such litigation and there can be no assurances as to the
results of such litigation. There can be no assurance that SEB or its licensers
or suppliers will not be subject to additional claims of patent infringement or
that any claim will not require that SEB pay substantial damages or delete
certain features from its products or both.
THE HEALTH CARE SYSTEMS BUSINESS
OVERVIEW
HCS is a world leader in the design and production of equipment for treating
cancer with radiation, as well as high-quality, cost-effective x-ray tubes for
both equipment manufacturers and replacement tube and imaging subsystems
suppliers.
In serving the market for advanced medical systems (primarily for cancer
care), HCS continues to broaden its offerings to address the unrelenting demand
for cost containment and enhanced efficacy which are driving this sector. Its
oncology systems line encompasses a fully integrated system of products
embracing not only linear accelerators but sophisticated ancillary products and
services to extend its capabilities and efficiency. These ancillary offerings
now account for more than half of all oncology systems sales.
In addition to developing leading-edge medical hardware, HCS also develops
clinical software products and devices that enhance productivity and quality.
These developments, while particularly valuable in helping U.S. hospitals and
clinics cope with the challenges of managed care, are finding use in markets
around the world as health care providers search for new ways to reduce costs,
improve efficiency and bring improved levels of care to more patients.
In the x-ray tube sector, HCS provides a broad selection of diagnostic tubes
capable of delivering more scans with excellent resolution and imaging more
patients than its competitors. HCS is also developing a solid state system for
digital imaging in collaboration with imaging system manufacturers in several
related markets.
CANCER-CARE MARKET
Approximately 50% of all cancer patients in the U.S. receive radiation
therapy at some point during the course of their disease. An important
advantage of radiation therapy is that the radiation acts with some selectivity
on cancer cells. The absorption of radiation by a cell affects its genetic
structure and inhibits the replication of the cell, leading to its gradual
death. Cancerous cells are fast replicating and thereby are disproportionately
damaged by the radiation absorbed.
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Currently, the most common type of radiotherapy uses x-rays delivered by
external beams and is administered using linear accelerators ("LINACS"). LINACS
are conventionally used for multiple, or "fractionated," treatments of a tumor
in up to 30 radiation sessions, or, as used more recently in the brain, to
deliver a single high dose of radiation in a procedure referred to as
stereotactic radiosurgery ("SRS"). In addition to external radiation therapy,
radioactive seeds, wires or ribbons are sometimes inserted into a tumor
("interstitially") or into a body cavity ("intracavitary"). These modalities,
known as "brachytherapy," do not require the radiation to pass through
surrounding healthy tissue.
PRODUCTS
HCS's products can be broadly classified into two principal categories:
oncology systems, and x-ray tubes and imaging subsystems.
Oncology Systems
HCS oncology systems designs, manufactures, sells and services hardware and
software products for radiation treatment of cancer, including linear
accelerators, simulators and computer systems for planning cancer treatments,
high dose rate brachytherapy systems and data management systems for radiation
oncology centers. HCS oncology systems offers an integrated system of products
embracing both linear accelerators and sophisticated ancillary products and
services to extend its capabilities and efficiency.
Linear accelerators are primarily used in cancer therapy. HCS's CLINAC series
of medical linear accelerators, marketed to hospitals and clinics worldwide,
generates therapeutic x-rays and radiation beams for cancer treatment.
VariSource, HCS's high dose rate brachytherapy system, treats tumors internally
by delivering radiation to the tumor by means of a radioactive source on the
end of a wire in a catheter. It is a cost-effective and efficacious adjunct to
linear accelerator-based therapy.
Linear accelerators are also used for industrial radiographic applications.
HCS's Linatron linear accelerators are used for nondestructive examination of
objects, such as cargo or luggage and to x-ray heavy metallic structures for
quality control.
HCS also manufactures and markets related radiotherapy products such as
imaging systems, information management systems, multi-leaf collimators,
simulators and radiosurgery products. HCS has received United States Food and
Drug Administration ("FDA") approval of new oncology products including a
three-dimensional cancer treatment planning system, and an advanced multileaf
collimator used to more precisely direct electron beams for cancer treatment.
HCS continually works with physicians and technicians to develop the latest
technology and treatments.
In addition to pursuing growth opportunities in existing markets, HCS is
pursuing the vast potential in combining advances in focused energy with the
latest breakthroughs in biotechnology. HCS is also evaluating the application
of radiation to treat diseases other than cancer. Such efforts are designed to
yield a whole new range of products and technologies that allow HCS to take
full advantage of its reputation for technology innovation leadership in the
health care field.
X-Ray Tubes and Imaging Subsystems
HCS is a world leader in the design and manufacture of subsystems for
diagnostic radiology, including x-ray-generating tubes and imaging subsystems,
for the estimated worldwide $7 billion diagnostic imaging market. Its tubes are
a key component of x-ray imaging subsystems, including both new system
configurations and replacement tubes for the installed base. HCS conducts an
active research and development program to address new technology and
applications in both the medical and industrial x-ray tube markets. HCS's
extensive scientific and engineering expertise in glass and metal center
section tubes is considered to be state-of-the-art.
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HCS manufactures tubes for four primary medical x-ray imaging applications:
CT scanner; radiographic/fluoroscopic; special procedures; and mammography. HCS
x-ray tube products have over time substantially increased the heat storage
capacity of CT tubes. These high heat unit tubes were developed in response to
customers who needed rapid, continuous scanning to accommodate continuous CT
scanning techniques over large regions of the patient, and to reduce
examination times. Innovative design and process improvements have increased
tube life such that HCS's current tubes last twice as long as tubes did 5 years
ago, resulting in significant savings for customers.
HCS mammography tubes produce high quality images at low doses. Today, almost
half the mammography systems and nearly a quarter of the CT scanner systems
worldwide employ HCS tubes. HCS also offers a complete line of industrial x-ray
tubes. The industrial product line consists of analytical x-ray tubes used for
x-ray fluorescence and diffraction as well as tubes used for non-destructive
imaging and gauging.
HCS also designs, manufactures and markets imaging products. A new imaging
product line was launched in September 1996. Amorphous silicon imaging
technologies developed by HCS can be broadly applied as an alternative to image
intensifiers or film, representing over $1 billion of industry sales. The new
products are expected to increase the efficiency of diagnostic x-ray imaging
while decreasing costs. An amorphous silicon imaging subsystems is compact and
weighs only about 10 pounds, replacing a 100-lb. image intensifier used in
fluoroscopic imaging and the TV camera connected to it. It is expected that
imaging equipment based on amorphous silicon semiconductors may be more stable
and reliable, have far fewer adjustments, and suffer less degradation over
time.
MARKETING AND SALES
HCS sells its products throughout the world through a direct sales force in
North America, Asia, Europe and Latin America.
HCS sells its oncology system products primarily to hospitals, clinics,
private and governmental institutions and health care agencies and doctors'
offices. Total sales for oncology systems and services were $408 million, $343
million and $324 million for fiscal years 1998, 1997 and 1996, respectively.
HCS sells approximately 80% of its x-ray tube products to original equipment
manufacturers and 20% to replacement tube distributors. HCS has supplied tubes
to such industry leaders as Toshiba, Elscint, Hitachi and Shimadzu.
HCS believes that in the foreseeable future there will be a continuous world-
wide growth in the markets for oncology systems and related services because of
the improvement of health care services in developing countries and Eastern
Europe and the necessity to meet increasingly stricter regulations with respect
to radiation dosage and other safety features and environmental hazards in many
jurisdictions. With the transition from conventional to digital x-ray systems,
the demand for products and services related to networking, archiving and
electronic distribution of digital x-ray images will grow in industrialized
countries. HCS also believes there will be continuous growth in the markets for
information technology.
HCS's marketing strategy is to offer to its customers a complete package of
products and services in the fields of cancer-care and radiotherapy, including
equipment, accessories and related services such as consulting and after-sales
services. HCS's marketing efforts include the development of relationships with
current and prospective customers, participation in annual professional
meetings for clinicians and hospitals, advertisement in trade journals, direct
mail and telephone marketing. HCS's growth strategy is to add products in its
existing markets and expand its international market share.
CUSTOMER SUPPORT AND SERVICES
HCS maintains service support centers in Milpitas, California; Buc, France;
and Tokyo, Japan; as well as field service forces throughout the world for its
oncology systems. HCS's network of service engineers and
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customer support specialists provide installation, warranty, repair, training
and support services. HCS generates service revenue by providing service to
customers on a time and materials basis and through comprehensive service
contracts and sale of parts.
HCS warrants most of its oncology systems for hardware parts and labor for 12
months. Under the terms of the warranty, the customer is assured of service and
parts so that the equipment will operate in accordance with specifications. HCS
warrants that software will perform in accordance with specifications at the
delivery date and up to 3 months thereafter if the customer gives notice of any
nonconformance. HCS offers a variety of post-warranty service agreements that
permit customers to contract for the level of equipment maintenance they
require. In addition, HCS has begun to offer specific software support
agreements, reflecting the growing use in HCS's products of software that can
be updated. Service is provided at rates competitive with those offered by
HCS's competitors.
Systems under warranty or service contract receive periodic maintenance by
HCS service engineers, who also install new system capabilities or software
upgrades and respond to customer service requests. These services may be
purchased from HCS's service organization by customers who do not have a
service contract with HCS.
Oncology system customers receive installation, technical training, clinical
in-service and documentation support appropriate for the product type.
Customers receive both emergency and routine maintenance from a worldwide
network of field engineers. These individuals are generally home-based
engineers who are available to handle service requests 24-hours a day to
satisfy HCS's customer requirements. Most of these engineers are employees of
HCS, but many are also employees of dealers and/or agents of HCS. Customers can
access HCS's extensive service network by calling any of HCS's service centers
located throughout North America, Europe, Asia and Latin America.
HCS believes that its customer service and support are an integral part of
its competitive strategy. Service capability, availability and responsiveness
play an important role in marketing and selling medical equipment and systems,
particularly as the technological complexity of the products increases.
Nevertheless, many hospitals use their own biomedical engineering departments
and/or independent service organizations to service equipment after the
warranty period expires. Therefore, HCS cannot depend on conversion of all
maintenance to service contracts after the warranty period. However, after-
warranty service does provide an on-going source of revenue for HCS.
HCS provides technical advice and consultation for x-ray tube products to
major OEM customers from offices in Tokyo, Japan, Houten, The Netherlands and
Salt Lake City, Utah. HCS applications specialists and engineers make
recommendations to meet the customer's technical requirements within the
customer's budgetary constraints. HCS often develops specifications for a
unique product, which will be designed and manufactured to meet a specific
customer's requirements. HCS also maintains a technical customer support group
in Charleston, South Carolina to meet the technical support requirements of
independent tube installers using HCS's x-ray tube products.
COMPETITION
The health care equipment markets are characterized by rapidly evolving
technology, intense competition and pricing pressure. HCS competes with
companies worldwide, some of which have greater financial, marketing and
management resources than HCS. These competitors could develop technologies and
products that are more effective than those currently used or produced by HCS
or that could render HCS's products obsolete or noncompetitive. Smaller
competitors of HCS could be acquired by companies with greater financial
strength enabling them to compete more aggressively. Certain distributors of
HCS could also be acquired by competitors thereby disrupting certain
distribution arrangements of HCS. Management believes, however, HCS competes
favorably with its competitors on the basis of its continued commitment to
global distribution and customer service, value-added manufacturing,
technological leadership and new product innovation. HCS
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believes that the key to success in its markets is to provide technologically
superior products that deliver cost-effective, high quality clinical diagnosis
and that meet or exceed customer quality and service expectations. HCS's
ability to compete successfully depends on its ability to commercialize new
products ahead of its competitors. In its sales of oncology systems, HCS
competes with Siemens, Nucletron, Elekta, Mitsubishi, and certain government
facilities. In addition, HCS competes with independent service organizations in
its service and maintenance business and with a variety of companies in its
software systems and accessories business.
The market place for x-ray tube products is extremely competitive. All of the
major diagnostic imaging systems companies, which are the primary customers of
HCS's x-ray tube business, manufacture x-ray tubes for use in their own
products. HCS must compete with these in-house x-ray tube manufacturing
operations that are naturally favored by their parent company. As a result, HCS
must have a competitive advantage in one or more significant areas which may
include lower product cost, better product quality, or technological
superiority. HCS sells a significant volume of its x-ray tube products to
companies such as Toshiba Medical Systems, Hitachi Medical Systems, Shimadzu
Medical Systems, Philips Medical Systems and General Electric Medical Systems,
all of which have in-house x-ray tube production capability. In addition, HCS
competes against other stand-alone x-ray tube manufacturers such as Comet,
located in Switzerland and IAE, located in Italy. These companies compete with
HCS for both the OEM business of major diagnostic imaging equipment
manufacturers as well as independent servicers of x-ray tube equipment.
MANUFACTURING AND SUPPLIES
Oncology systems manufactures its accelerator systems in Palo Alto,
California, and its treatment simulator systems, accelerator subsystems and
brachytherapy systems in Crawley, England. In addition, oncology systems
manufactures certain of its ancillary products in Baden, Switzerland and
Helsinki, Finland. X-ray tube products are manufactured at HCS's manufacturing
facilities in Salt Lake City, Utah, Arlington Heights, Illinois, and
Charleston, South Carolina. These facilities employ state-of-the-art
manufacturing techniques, and several have been honored by the press,
governments, and trade organizations for their commitment to quality
improvement. They are registered to ISO 9001 (or ISO 9002, in the case of the
Charleston facility), the most rigorous of the international quality standards.
Production processes at HCS facilities include machining, fabrication,
subassembly, system assembly and final testing. HCS has invested in various
automated and semi-automated equipment for the fabrication and machining of
parts and assemblies incorporated in its products. HCS may from time to time
further invest in such equipment when cost justified. HCS's quality assurance
program includes various quality control measures from inspection of raw
material, purchased parts and assemblies through on-line inspection.
HCS's manufacturing activities consist primarily of assembling and testing
components and subassemblies, which are acquired from third-party suppliers and
then integrated into a finished system by HCS. HCS utilizes an outsourcing
strategy for the manufacture of major subassemblies and performs system design,
assembly and testing in-house. HCS believes outsourcing enables it to minimize
its fixed costs and capital expenditures while also providing it with the
flexibility to increase production capacity. HCS purchases material and
components from various suppliers that are either standard products or built to
HCS specifications. Certain components used in existing products of HCS, as
well as products under development, are frequently purchased from single
sources.
BACKLOG
Backlog for the Health Care Systems business amounted to $352 million at the
end of fiscal 1998 of which $237 million is expected to be filled within fiscal
year 1999. Backlog for fiscal year 1997 amounted to $344 million of which $179
million was filled in fiscal year 1998. HCS includes in backlog only orders for
products scheduled to be shipped within two years. Orders may be revised or
canceled, either pursuant to their terms or as a result of negotiations;
consequently, it is impossible to predict accurately the amount of backlog
orders that will result in sales.
18
<PAGE>
PRODUCT LIABILITY
HCS's business exposes it to potential product liability claims which are
inherent in the manufacture and sale of medical devices, and as such HCS may
face substantial liability to patients for damages resulting from the faulty
design or manufacture of products. Because these products involve the delivery
of radiation to the human body or are involved in diagnostic imaging of the
human body, the possibility for significant injury and/or death exists with any
of HCS's products. Therefore, the design, manufacture, sale or service of the
medical products manufactured by HCS involve the risk of product liability
claims and expose HCS to substantial liability to patients for damages
resulting from the faulty design, manufacture or servicing of such products.
Although HCS maintains limited product liability insurance coverage in an
amount that it deems sufficient for its business, there can be no assurance
that such coverage will ultimately prove to be adequate or that such coverage
will continue to remain available on acceptable terms, if at all.
On December 5, 1997, HCS purchased General Electric's Radiotherapy Service
Business (the "RS Business"). In connection with that transaction, HCS agreed
to assume liability for certain product defects and personal injury matters
which might arise with respect to RS Business products, and obtained insurance
for these matters. The insurance provides that in each annual period HCS is
responsible for the first $5,000,000 of expenses or liabilities related to any
such claims. HCS has been notified of three potential claims related to these
RS Business products for which HCS may have an indemnity obligation.
GOVERNMENT REGULATION
Domestic Regulation
HCS's products are regulated by the FDA. The FDA regulates the design,
development, testing, manufacturing, packaging, labeling, distribution and
marketing of medical devices under the U.S. Food, Drug and Cosmetic Act (the
"FDC Act") and regulations promulgated by the FDA. The State of California
(through its Department of Health Services), where HCS maintains one of its
manufacturing facilities, as well as other states, also regulates the
manufacture of medical devices.
In general, these laws require that manufacturers adhere to certain standards
designed to ensure the safety and effectiveness of medical devices. Under the
FDC Act, each medical device manufacturer must comply with requirements
applicable to manufacturing practices, clinical investigations involving
humans, sale and marketing of medical devices, post-market surveillance,
repairs, replacements and refunds, recalls and other matters. The FDA is
authorized to obtain and inspect devices and their labeling and advertising,
and to inspect the facilities in which they are manufactured.
The FDC Act also requires compliance with specific manufacturing and quality
assurance standards, including regulations promulgated by the FDA with respect
to good manufacturing practices. FDA regulations require that each manufacturer
establish a quality assurance program by which the manufacturer monitors the
manufacturing process and maintains records that show compliance with FDA
regulations and the manufacturer's written specifications and procedures
relating to the devices. Compliance is necessary to receive FDA clearance to
market new products and is necessary for a manufacturer to be able to continue
to market cleared product offerings. Recently, the FDA promulgated new design
process regulations that revise the good manufacturing practices applicable to
medical device manufacturers. Among other things, these new regulations require
that manufacturers establish performance requirements before production, insure
that device components are compatible, select adequate packing materials, and,
if appropriate, do risk analyses. The regulations took effect on June 1, 1997,
but include a twelve-month transition period during which enforcement action
with respect to design control requirements was not taken.
The FDA makes announced and unannounced inspections of medical device
manufacturers and may issue reports of observations where the manufacturer has
failed to comply with applicable regulations and/or procedures. Failure to
comply with applicable regulatory requirements can, among other things, result
in
19
<PAGE>
warning letters, civil penalties, injunctions, suspensions or losses of
regulatory clearances, product recalls, seizure or administrative detention of
products, operating restrictions through consent decrees or otherwise, and
criminal prosecution.
There has been a trend in recent years, both in the United States and abroad,
toward more stringent regulation and enforcement of requirements applicable to
medical device manufacturers. The continuing trend of more stringent regulatory
oversight in product clearance and enforcement activities may cause medical
device manufacturers to experience longer approval cycles, more uncertainty,
greater risk and higher expenses.
The FDA requires that a new medical device or a new indication for use of or
other significant change in an existing medical device obtain either 510(k)
premarket notification clearance or an approved Pre-Market Approval Application
("PMAA") before orders can be obtained and the product distributed in the
United States. The 510(k) clearance process is applicable when the new product
being submitted is substantially equivalent to an existing commercially
available product. The process of obtaining 510(k) clearance may take at least
three months from the date of filing of the application and generally requires
the submission of supporting data, which can be extensive and extend the
process for a considerable period of time. Under the PMAA process, the
applicant must generally conduct at least one clinical investigation and submit
extensive supporting data and clinical information in the PMAA, which typically
takes from one to two years, but sometimes longer for the FDA to review.
Generally, HCS has not been required to resort to the PMAA process for approval
of its products.
Software deemed to be a medical device, such as HCS's treatment planning
software, is reviewed by the FDA in connection with the agency's clearance of
the pre-market notification for the related device. Computer health information
system or stand-alone software may also be subject to FDA regulations. A draft
policy issued by the FDA in 1989 has been the applicable guidance for the
regulation of computer products intended to affect the diagnosis or treatment
of patients. The 1989 draft policy exempts certain software from regulation on
the basis of "competent human intervention" occurring with the use of the
software before any impact on human health would occur. The FDA is considering
a revised policy, which is expected to eliminate this exemption and to base the
level of regulation on the level of risk imposed by the product. It is not
clear what impact such regulatory policies, if adopted, will have on clinical
information systems or other medical software offered by HCS.
HCS believes that it is in material compliance with all applicable federal,
state and most foreign regulations regarding the manufacture and sale of its
products. Such regulations and their enforcement are, however, constantly
undergoing change, and HCS cannot predict what effect, if any, such change may
have on its business. Approvals may be withdrawn for failure to comply with
regulatory standards or due to the occurrence of unforeseen problems. Failure
to comply with FDA regulations could result in warning letters, product
approval delays or other sanctions being imposed, including restrictions on the
marketing or the recall of HCS's products, injunction or civil penalties.
Delays in the receipt of or failure to receive necessary regulatory approvals
or the loss of existing approvals could have a material adverse effect on HCS.
HCS believes that its products substantially comply with all applicable
electrical safety and environmental standards, such as those of Underwriters
Laboratories and IEC 601.
HCS is also subject to FDA and FTC restrictions on advertising and numerous
foreign, federal, state and local laws relating to such matters as safe working
conditions and manufacturing practices. Changes in existing requirements,
adoption of new requirements or failure to comply with applicable requirements
could have a material adverse effect on HCS.
The manufacture and sale of medical products manufactured by HCS involve the
risk of product liability claims and exposes HCS to substantial liability to
patients for damages resulting from the faulty design or manufacture of
products. Because these products involve the delivery of radiation to the human
body or are involved in diagnostic imaging of the human body, the possibility
for significant injury and/or death exists with any of HCS's products.
Therefore, the design, manufacture, sale or service of the medical products
20
<PAGE>
manufactured by HCS involve the risk of product liability claims and exposes
HCS to substantial liability to patients for damages resulting from the faulty
design, manufacture or servicing of such products.
Medicare and Medicaid Reimbursement
The Federal government regulates reimbursement for diagnostic examinations
furnished to Medicare beneficiaries, including related physician services and
capital equipment acquisition costs. For example, Medicare reimbursement for
operating costs for radiation treatment performed on hospital inpatients
generally is set under the Medicare prospective payment system ("PPS")
diagnosis-related group ("DRG") regulations. Under PPS, Medicare pays hospitals
a fixed amount for services provided to an inpatient based on his or her DRG,
rather than reimbursing for the actual costs incurred by the hospital. Patients
are assigned to a DRG based on their principal and secondary diagnoses,
procedures performed during the hospital stay, age, gender and discharge
status.
For capital costs for inpatient services, prior to October 1, 1991, Medicare
reimbursed hospitals an amount based on 85 percent of the actual reasonable
costs they had incurred. On October 1, 1991, Medicare began to phase in over a
ten-year period a prospective payment system for capital costs which
incorporates an add-on to the DRG-based payment to cover capital costs and
which replaces the reasonable cost-based methodology. The Balanced Budget Act
of 1997 ("BBA"), enacted in law August 5, 1997, further reduces capital
payments to hospitals by 2.1 percent between October 1, 1997 and September 30,
2002.
For certain hospital outpatient services, including radiation treatment
reimbursement, currently is based on the lesser of the hospital's costs or
charges, or a blended amount, 42 percent of which is based on the hospital's
reasonable costs and 58 percent of which is based on the fee schedule amount
that Medicare reimburses for such services when furnished in a physician's
office. The BBA requires capital outpatient reimbursement to shift from a cost
basis to a prospective payment system by 1999. Because the Health Care
Financing Administration ("HCFA") has not yet proposed regulations to implement
the outpatient PPS, it is unclear what impact such a change will have on
payment for radiation treatment. Until January 2000, capital acquisition costs
for services furnished to hospital outpatients will be reimbursed on the basis
of 90 percent of the reasonable costs actually incurred by the hospital.
Until January 1, 1992, Medicare generally reimbursed physicians on the basis
of their reasonable charges or, for certain physicians, including radiologists,
on the basis of a "charge-based" fee schedule. On January 1, 1992, Medicare
began to phase in over a five-year period a new system that reimburses all
physicians, based on the lower of their actual charges or a fee schedule amount
based on a "resource-based relative value scale." Relative value units
representing practice expenses, such as equipment costs, currently account for
approximately 42 percent of a physician's Medicare fee schedule payment for a
particular service. Under the BBA, HCFA is required to implement by January 1,
1999, a revised methodology for calculating practice expense relative value
units from the current historical basis to a resource basis. HCFA already has
proposed to establish two separate practice expense values for each physician
service--one for when a service is furnished in a facility setting and another
for when the service is performed in a physician's office. Typically, for a
service that could be provided in either setting, the practice expense value
would be higher when the service is performed in a physician's office as it
would cover a physician's costs such as for equipment, supplies, and overhead.
At this time, HCFA has yet to issue regulations setting new practice expense
values. Certain revisions that HCFA might make in these values could have a
positive or negative effect on physician reimbursement for oncology system
services provided in a facility and a positive or negative effect on physician
reimbursement for oncology system services provided in a physician's office.
Reimbursement for services rendered to Medicaid beneficiaries is determined
pursuant to each state's Medicaid plan which is established by state law and
regulations, subject to requirements of federal law and regulations. The BBA
has revised the Medicaid program to allow states even more control over
coverage and payment issues. In addition, the HCFA already has granted many
states waivers to allow for greater control of the Medicaid program at the
state level. The impact on HCS of this greater state control on Medicaid
payment for diagnostic services is uncertain.
21
<PAGE>
The sale of medical devices, the referral of patients for diagnostic
examinations utilizing such devices, and the submission of claims to third
party payers (including Medicare and Medicaid) seeking reimbursement for such
services, are subject to various federal and state laws pertaining to health
care "fraud and abuse," including physician self-referral prohibitions, anti-
kickback laws, and false claims laws. Subject to certain enumerated exceptions,
the federal physician self-referral law, also known as Stark II, prohibits a
physician from referring Medicare or Medicaid patients to an entity in which
the physician (or a family member) has an ownership interest or compensation
relationship if the referral is for a "designated health service," which is
defined explicitly to include radiology services. Although final regulations
implementing Stark II have not yet been issued by the United States Department
of Health and Human Services, proposed regulations were issued in January 1998.
Under the proposed regulations, the definition of radiology services subject to
the Stark II restriction would expressly exclude screening mammography services
(i.e., mammography services furnished to asymptomatic patients), but not
diagnostic mammography (i.e., mammography services furnished to symptomatic
patients). The Stark II law, as well as physician self-referral restrictions
that exist in a number of states and which apply regardless of whether Medicare
or Medicaid patients are involved, may result in lower utilization of certain
diagnostic procedures, which may affect the demand for HCS's products. Anti-
kickback laws make it illegal to solicit, offer, receive, or pay any
remuneration in exchange for, or to induce, the referral of business, including
the purchase of medical devices from a particular manufacturer or the referral
of patients to a particular supplier of diagnostic services utilizing such
devices. False claims laws prohibit anyone from knowingly and willfully
presenting, or causing to be presented, claims for payment to third party
payers (including Medicare and Medicaid) that are false or fraudulent, for
services not provided as claimed, or for medically unnecessary services.
Violations of fraud and abuse laws are prosecuted by the Office of the
Inspector General and are punishable by criminal and/or civil sanctions
including, in some instances, imprisonment and exclusion from participation in
federal health care programs such as Medicare and Medicaid.
The current administration and the Congress from time to time consider
various Medicare and other health care reform proposals that could
significantly affect both private and public reimbursement for health care
services. Some of these proposals, if enacted into law, could reduce
reimbursement for or the incentive to use diagnostic devices and procedures and
thus could adversely affect the demand for diagnostic devices, including HCS's
products.
Foreign Regulation
Sales of medical devices outside the United States are subject to regulatory
requirements that vary from country to country. Specifically, certain foreign
regulatory bodies have adopted various regulations governing product standards,
packaging requirements, labeling requirements, import restrictions, tariff
regulations, duties and tax requirements. The European Union has adopted a new
Medical Device Directive, which was implemented in all countries of the
European Union in July 1998. HCS is required to obtain ISO 9001 certification
necessary to enable it to affix the required CE mark to its products. The CE
mark is an international symbol of adherence to certain quality assurance
standards and compliance with applicable European medical device directives
which, once affixed, enables a product to be sold in member countries of the
European Union. Several Asian countries are reviewing the possibility of
adopting similar regulatory schemes. In addition, several countries are
reviewing proposed regulations that would require manufacturers to dispose of
their products at the end of their useful life. There can be no assurance that
HCS will not be required to incur significant costs in obtaining or maintaining
its non-U.S. regulatory approvals. Delays in receipt of or failure to receive
such approvals, the loss of previously obtained approvals, or failure to comply
with existing or future regulatory requirements would have a material adverse
effect on HCS's business, financial condition and results of operation.
PATENT AND OTHER PROPRIETARY RIGHTS
As a leader in the manufacture and sale of oncology systems and x-ray tubes,
HCS has pursued a policy of seeking patent, copyright, trademark and trade
secret protection in the United States and other countries for developments,
improvements, and inventions originating within its organization that are
incorporated in HCS's
22
<PAGE>
products or that fall within its fields of interest. As of October 2, 1998, HCS
owned approximately 58 patents in the United States and approximately 77
patents throughout the world, and had approximately 101 patent applications on
file with various patent agencies worldwide. HCS intends to file additional
patent applications as appropriate.
HCS relies on a combination of copyright, trade secret and other laws, and
contractual restrictions on disclosure, copying and transferring title to
protect its proprietary rights. HCS has trademarks, both registered and
unregistered, that are maintained and enforced to provide customer recognition
for its products in the marketplace. HCS also has agreements with third parties
that provide for licensing of patented or proprietary technology. These
agreements include royalty-bearing licenses and technology cross-licenses.
While HCS places considerable importance on its licensed technology, HCS does
not believe that the loss of any license would have a material adverse effect
on HCS's business.
HCS's competitors, like companies in many high technology businesses,
routinely review the products of others for possible conflict with their own
patent rights. Although HCS has from time to time received notices of claims
from others alleging patent infringement, HCS believes that there are no
pending patent infringement claims that might have a material adverse effect on
the business of HCS.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of the Registrant's
executive officers, together with positions and offices held within the last
five years by such executive officers. Officers are appointed to serve until
the meeting of the Board of Directors following the next Annual Meeting of
Stockholders and until their successors have been elected and have qualified.
Ages are as of December 15, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION (BUSINESS EXPERIENCE) TERM
---- --- ------------------------------ ----
<S> <C> <C> <C>
J. Tracy
O'Rourke
(Director) 63 Chairman of the Board and Chief Executive Officer 1990-Present
Richard A.
Aurelio 54 Executive Vice President 1992-Present
Allen J.
Lauer 61 Executive Vice President 1990-Present
Richard M.
Levy 60 Executive Vice President 1990-Present
Elisha W.
Finney 37 Treasurer 1998-Present
Assistant Treasurer 1995-1998
Risk Manager 1988-1998
Timothy E.
Guertin 49 Corporate Vice President 1992-Present
President, Oncology Systems 1990-Present
Robert A.
Lemos 57 Vice President, Finance and Chief Financial Officer 1986-Present
Treasurer 1995-1998
Joseph B.
Phair 51 Secretary 1991-Present
Vice President and General Counsel 1990-Present
Wayne P.
Somrak 53 Vice President 1991-Present
Controller 1995-Present,
1985-1994
Treasurer 1995
</TABLE>
There is no family relationship between any of the executive officers.
23
<PAGE>
ITEM 2. PROPERTIES
The Company's executive offices and principal research and manufacturing
facilities are located in Palo Alto, California, on 45 acres of land held under
leaseholds which expire in the years 2012 through 2058. These facilities are
owned by the Company, and provide floor space totaling 641,316 square feet. The
following is a summary of the Company's properties at October 2, 1998:
<TABLE>
<CAPTION>
NUMBER OF
LAND (ACRES) BUILDINGS (000'S SQ. FT.) BUILDINGS
------------ --------------------------- ------------
OWNED LEASED OWNED LEASED OWNED LEASED
----- ------ ------------- ------------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
United States............. 100 50 1,594 513 19 45
International............. 34 10 411 391 8 84
--- --- ------------- ----------- --- ---
134 60 2,005 904 27 129
=== === ============= =========== === ===
</TABLE>
Utilization of facilities by segment is shown in the following table:
<TABLE>
<CAPTION>
BUILDINGS (000'S SQ. FT.)
-------------------------------------------
MANUFACTURING,
ADMINISTRATIVE AND
RESEARCH & DEVELOPMENT
-------------------------
NON- MARKETING
U.S. U.S. TOTAL AND SERVICE TOTAL
-------- ------- -------- ----------- -----
<S> <C> <C> <C> <C> <C>
Health Care Systems.................. 560 43 603 223 826
Instruments.......................... 543 188 731 436 1,167
Semiconductor Equipment.............. 373 72 445 116 561
-------- ------ -------- --- -----
Total Operations................... 1,476 303 1,779 775 2,554
======== ====== ======== === =====
Other Operations..................... 355
-----
Total.............................. 2,909
=====
</TABLE>
Other Operations includes manufacturing support.
The capacity of these facilities is sufficient to meet current demand. The
Company owns substantially all of the machinery and equipment in use in its
plants. It is the Company's policy to maintain its plants and equipment in
excellent condition and at a high level of efficiency.
Manufacturing sites by geographical location are as follows:
<TABLE>
<S> <C>
Health Care Systems.. California, Illinois, South Carolina, Utah,
England, Finland, France, Switzerland
Instruments..... California, Colorado, Massachusetts, Arizona,
Australia, Italy, The Netherlands
Semiconductor
Equipment...... Massachusetts, Japan, Korea
</TABLE>
Company-owned and staffed sales offices throughout the world are located in
North and South America: Argentina, Brazil, Venezuela, Canada, Mexico, United
States; Europe: Austria, Belgium, Denmark, France, Italy, the Netherlands,
Spain, Sweden, Switzerland, Finland, England, Scotland, Germany, Israel, India,
Russia; and Pacific Basin: Australia, People's Republic of China, Hong Kong,
Japan, Korea, Singapore, Taiwan and Thailand.
ITEM 3. LEGAL PROCEEDINGS
Information required by this Item is provided under the heading
"Contingencies" of the Notes to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
24
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is provided in the quarterly financial
table, "Common Stock Prices (Unaudited)," located on page F-23 of this
document and under the heading "Long-Term Debt," in the Notes to the
Consolidated Financial Statements.
The Company's common stock is listed on the New York Stock Exchange and the
Pacific Exchange under the trading symbol VAR.
There were 5,992 holders of record of the Company's common stock on December
15, 1998.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------------------
1998 1997* 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN MILLION EXCEPT PER SHARE
AMOUNTS)
SUMMARY OF OPERATIONS:
<S> <C> <C> <C> <C> <C>
Sales.............................. $1,422.1 $1,425.8 $1,599.4 $1,575.7 $1,313.4
-------- -------- -------- -------- --------
Earnings from Continuing Operations
before Taxes...................... $ 112.7 $ 177.8 $ 189.2 $ 165.3 $ 109.1
Taxes on earnings................ 38.9 62.2 67.1 59.5 41.5
-------- -------- -------- -------- --------
Earnings from Continuing
Operations........................ $ 73.8 $ 115.6 $ 122.1 $ 105.8 $ 67.6
Earnings from Discontinued
Operations,
Net of Taxes.................... -- -- -- 33.5 11.8
-------- -------- -------- -------- --------
Net Earnings....................... 73.8 115.6 122.1 139.3 79.4
======== ======== ======== ======== ========
Net Earnings Per Share--Basic
Net Earnings Continuing
Operations........................ $ 2.47 $ 3.79 $ 3.93 $ 3.14 $ 1.97
Net Earnings Discontinued
Operations........................ -- -- -- 1.00 0.34
-------- -------- -------- -------- --------
Net Earnings Per Share--Basic...... $ 2.47 $ 3.79 $ 3.93 $ 4.14 $ 2.31
======== ======== ======== ======== ========
Net Earnings Per Share--Diluted
Net Earnings Continuing
Operations........................ $ 2.43 $ 3.67 $ 3.81 $ 3.02 $ 1.90
Net Earnings Discontinued
Operations........................ -- -- -- 0.95 0.33
-------- -------- -------- -------- --------
Net Earnings Per Share--Diluted.... $ 2.43 $ 3.67 $ 3.81 $ 3.97 $ 2.23
======== ======== ======== ======== ========
Dividends Declared Per Share....... $ 0.390 $ 0.350 $ 0.310 $ 0.270 $ 0.230
======== ======== ======== ======== ========
<CAPTION>
FINANCIAL POSITION AT YEAR END:
<S> <C> <C> <C> <C> <C>
Total assets....................... $1,218.3 $1,104.3 $1,018.9 $1,003.8 $ 962.4
Long-term debt (excluding current
portion).......................... $ 111.1 $ 73.2 $ 60.3 $ 60.3 $ 60.4
</TABLE>
* Fiscal year 1997 results include a $51.0 million pre-tax gain ($33.2 million
after-tax or $1.06 per diluted share) on the sale of the Thin Film Systems
business.
This selected financial data should be read in conjunction with the related
consolidated financial statements and notes thereto included in Item 14.
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal Year
The Company's fiscal years reported are the 52- or 53-week periods which
ended on the Friday nearest September 30. Fiscal year 1998 comprises the 53-
week period ended on October 2, 1998. Fiscal years 1997 and 1996 comprise the
52-week periods ended on September 26, 1997 and September 27, 1996,
respectively.
Fiscal Year 1998 Compared to Fiscal Year 1997
Sales. The Company's sales of $1.422 billion in fiscal year 1998 were flat
with fiscal year 1997 sales of $1.426 billion, but increased 6% over fiscal
year 1997 after adjusting for the sale of the Company's former Thin Film
Systems (TFS) business in June 1997. Fourth quarter fiscal year 1998 sales
declined 10% to $364 million from the fourth quarter of fiscal year 1997, but
were 7% higher than sales in the third quarter of fiscal year 1998.
The Company's Health Care Systems business (HCS) sales of $540 million in
fiscal year 1998 were 14% higher than its sales of $472 million in fiscal year
1997. Fourth fiscal quarter sales were significant in both years, accounting
for $179 million of HCS's sales in fiscal year 1998 and $158 million of its
sales in fiscal year 1997, amounting to 33% of total sales in each fiscal year.
Oncology systems sales were $408 million, or 76% of HCS's sales in fiscal year
1998, compared to $343 million, or 73% of its sales, in fiscal year 1997. X-ray
tubes and imaging subsystems sales were $131 million, or 24% of HCS's sales, in
fiscal year 1998, compared to $130 million, or 28% of its sales, in fiscal year
1997. Oncology systems sales accounted for almost all of the increase in HCS's
sales in fiscal year 1998. The 19% increase in sales of oncology systems
between fiscal year 1997 and fiscal year 1998 reflects both an increase in
volume of products and services sold and the acquisition from General Electric
Company of its radiotherapy service business in December 1997. X-ray tubes and
imaging subsystem sales also increased 2% between fiscal year 1997 and fiscal
year 1998. International sales were $267 million, or 49% of HCS's total sales,
in fiscal year 1998, compared to $236 million, or 50% of its total sales in
fiscal year 1997. Geographically, fiscal year 1998 sales to customers in
Europe, the Far East and the rest of the world were $156 million, $69 million
and $42 million, respectively. In fiscal 1997, sales to customers in Europe,
the Far East and the rest of the world were $102 million, $98 million and $36
million.
The Company's Instruments business (IB) sales of $543 million in fiscal year
1998 were 3% greater than its sales of $527 million in fiscal year 1997. Fiscal
year 1998 sales were driven largely by IB's analytical instruments and NMR
instruments lines. The effect of the stronger U.S. dollar and a softening Asian
market slowed sales growth during fiscal year 1998. International sales were
$261million in fiscal year 1998, compared to $253 million in fiscal year 1997,
both 48% of total sales in each year. Geographically, fiscal year 1998 sales to
customers in Europe, the Far East and the rest of the world were $161 million,
$58 million and $42 million, respectively. In fiscal 1997, sales to customers
in Europe, the Far East and the rest of the world were $140 million, $70
million and $43 million.
The Company's Semiconductor Equipment business (SEB) sales of $338 million in
fiscal year 1998 were 20% lower than its sales of $424 million in fiscal year
1997. Adjusted for sales attributable to the TFS business, SEB's sales were 2%
lower in fiscal year 1998 than in fiscal year 1997. Fourth quarter sales of $42
million in fiscal year 1998 were 61% lower than the $107 million of fourth
quarter sales in fiscal year 1997. International sales were $239 million, or
71% of SEB's total sales, in fiscal year 1998, compared to $231 million, or 54%
of its total sales, in fiscal year 1997. Geographically, SEB sales to customers
in the Far East were $165 million in fiscal 1998 as compared to $174 million in
fiscal 1997. Sales to customers in Europe were $74 million and $57 million in
fiscal year 1998 and fiscal year 1997, respectively. Starting in the first half
of fiscal year 1998, the semiconductor industry began to experience a
significant worldwide slowdown in equipment demand, brought about by depressed
device pricing, excess capacity and the Asian financial crisis.
26
<PAGE>
The slowdown in product demand and extreme volatility in product pricing has
caused the semiconductor industry to reduce significantly or delay purchases of
semiconductor manufacturing equipment and construction of new fabrication
facilities. This slowdown and volatility is expected to continue throughout
fiscal year 1999. These conditions have adversely affected and will continue to
adversely affect SEB's results of operations.
Gross Profit. Total Company gross profit of $526 million for fiscal year 1998
remained essentially unchanged from fiscal year 1997 gross profit of $523
million and represented 37% of its sales in both fiscal years. HCS's gross
profit of $191 million in fiscal year 1998 was 35% of its sales, compared to
$161 million, or 34% of its sales, in fiscal year 1997. The increase in HCS's
gross profit as a percentage of its sales from fiscal year 1997 to fiscal year
1998 was primarily attributable to the increase in oncology systems sales
relative to the fixed components of overhead and, to a lesser extent, a shift
in oncology systems sales to a higher mix of ancillary products that earn a
higher margin. IB's gross profit of $216 million in fiscal year 1998 was 40% of
its sales, compared to $207 million, or 39% of its sales, in fiscal year 1997.
The increase in IB's gross profit as a percentage of its sales from fiscal year
1997 to fiscal year 1998 was primarily attributable to improved operating
efficiencies. SEB's gross profit of $115 million in fiscal year 1998 was 34% of
its sales, compared to $157 million, or 37% of its sales, in fiscal year 1997.
The decrease in SEB's gross profit as a percentage of its sales from fiscal
year 1997 to fiscal year 1998 was primarily attributable to competitive pricing
pressures encountered during the industry slowdown in the second half of fiscal
year 1998, and costs associated with excess capacity.
Research and Development. For the Company overall, research and development
expenses declined $4 million in fiscal year 1998 to $107 million, or 8% of its
sales, compared to 7% of its sales in fiscal year 1997. HCS's research and
development expenses increased primarily due to investments in new digital
radiographic imaging products, new oncology administrative and imaging
software, improvements in oncology systems multileaf collimator products and
new x-ray tube platforms. IB's research and development decreased reflecting
the shift away from outside consultants and the Ginzton Research Center to in-
house employees. SEB's research and development expenses also decreased;
however, after adjusting for research and development expenses attributable to
the TFS business in fiscal year 1997 of $13 million, SEB's research and
development expenses increased over fiscal year 1997.
Sale of Business. In June 1997, the Company completed the sale of its TFS
business. Total proceeds received from the sale of the TFS business were $146
million in cash. The gain on the sale was $33 million, net of income taxes of
$18 million. A $52 million reserve was recorded to cover, among other items,
purchase price disputes, retained liabilities, transaction costs, employee
terminations, facilities separation costs, indemnification obligations,
litigation expenses and other contingencies.
Earnings before Taxes. The Company's fiscal year 1998 pretax earnings were
$113 million, compared to $178 million in fiscal year 1997, which included the
$51 million gain on sale of the TFS business.
Net Earnings. In fiscal year 1998, the Company earned $73.8 million compared
to $115.6 million in fiscal year 1997. Diluted earnings per share of $2.43
declined from the diluted earnings per share of $3.67 in fiscal year 1997.
Fiscal year 1997 earnings included a $33 million after-tax gain ($1.06 per
diluted share) on the sale of the TFS business, as well as a $4.0 million
($0.14 per diluted share) operating loss from that business. Diluted earnings
per share for fiscal year 1997 were $2.75 after adjusting for the sale of the
TFS business.
Fiscal Year 1997 Compared to Fiscal Year 1996
Sales. The Company's sales of $1.426 billion in fiscal year 1997 were 11%
lower than fiscal year 1996 (5% lower on a TFS-adjusted basis).
HCS's sales of $472 million in fiscal year 1997 were 2% higher than its sales
of $464 million in fiscal year 1996. Oncology systems sales were $343 million,
or 73% of HCS's sales, in fiscal year 1997, compared to $324 million, or 70% of
its sales, in fiscal year 1996. X-ray tubes and imaging subsystems sales were
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$129 million, or 27% of HCS's sales, in fiscal year 1997, compared to $140
million, or 30% of its sales, in fiscal year 1996. International sales were
$236 million, or 50% of HCS's total sales, in fiscal year 1997, compared to
$238 million, or 51% of its total sales in fiscal year 1996. Geographically,
fiscal year 1997 sales to customers in Europe, the Far East and the rest of the
world were $102 million, $98 million and $36 million, respectively. In fiscal
1996, sales to customers in Europe, the Far East and the rest of the world were
$99 million, $104 million and $35 million.
IB's sales of $527 million in fiscal year 1997 were 10% higher than its sales
of $481 million in fiscal year 1996. All of IB's product lines contributed to
the higher sales in fiscal year 1997. International sales were $253 million, or
48% of IB's total sales, in fiscal year 1997, compared to $250 million, or 52%
of its total sales in fiscal year 1997. Geographically, fiscal year 1997 sales
to customers in Europe, the Far East and the rest of the world were $140
million, $70 million and $43 million, respectively. In fiscal 1996, sales to
customers in Europe, the Far East and the rest of the world were $142 million,
$62 million and $46 million.
SEB's sales of $424 million in fiscal year 1997 were 35% lower than its sales
of $650 million in fiscal year 1996. Adjusted for sales attributable to the TFS
business, SEB's sales were 27% lower in fiscal year 1997 than in fiscal year
1996. Beginning in the latter half of fiscal year 1996, the semiconductor
equipment industry began to experience a slowdown. The slowdown was a product
of excess capacity and sharply decreasing device prices within the DRAM market
segment. This slowdown lasted through the first half of fiscal year 1997, when
industry conditions began to improve slightly as a result of strengthening
demand from logic and microprocessor device manufacturers, primarily located in
Taiwan. International sales by SEB were $231 million, or 54% of SEB's sales, in
fiscal year 1997, compared to $430 million, or 66% of its sales, in fiscal year
1996. Geographically, SEB sales to customers in the Far East were $174 million
in fiscal 1997 as compared to $349 million in fiscal 1996. Sales to customers
in Europe were $57 million and $81 million in fiscal year 1997 and fiscal year
1996, respectively.
Gross Profit. Total Company gross profit of $523 million in fiscal year 1997
declined 13% from the $604 million recorded in fiscal year 1996 due to the
lower sales. HCS's gross profit of $161 million in fiscal year 1997 was 34% of
its sales, compared to $162 million, or 35% of HCS's sales, in fiscal year
1996. The decrease in gross profit as a percentage of its sales from fiscal
year 1996 to fiscal year 1997 was primarily attributable to the strengthening
of the U.S. dollar relative to other international currencies. IB's gross
profit of $207 million in fiscal year 1997 was 39% of its sales, compared to
$192 million, or 40% of its sales, in fiscal year 1996. The increase in gross
profit was attributable primarily to improved sales volume and relatively
constant fixed costs. SEB's gross profit of $157 million in fiscal year 1997
and $252 million in fiscal year 1996 represented 37% and 39% of its sales in
fiscal year 1997 and fiscal year 1996, respectively.
Research and Development. For the Company overall, research and development
expenses in fiscal year 1997 remained level with fiscal year 1996 at $111
million, or 8% of its sales, compared to 7% of its sales in fiscal year 1996.
HCS's research and development expenses increased in fiscal year 1997 due to
increased spending on new software products, particularly its imaging products
and increased spending on new x-ray tube developments. The imaging business
continued to address technical and manufacturing issues for amorphous silicon
solid state detectors. IB's research and development expenses increased
slightly due to consulting costs. SEB's research and development expenses
decreased primarily due to the sale of the TFS business.
Earnings Before Taxes. The Company's pre-tax earnings in fiscal year 1997
were $178 million, compared to $189 million in fiscal year 1996. Fiscal year
1997 pretax earnings included the $51 million gain on the sale of the TFS
business.
Net Earnings. In fiscal year 1997, the Company earned $116 million compared
to $122 million in fiscal year 1996. Included in 1997 net earnings is the $33
million after tax gain ($1.06 per diluted share) on the sale of the TFS
business. Diluted earnings per share of $3.67 in fiscal year 1997 were down
from $3.81 in fiscal year 1996.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting and Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." SFAS No.130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. It is effective for the Company's 1999 fiscal
year. The Company has not yet determined the impact of its implementation on
the Company's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No.131 changes current practice under
SFAS No.14 by establishing a new framework on which to base segment reporting
(referred to as the "management" approach) and also requires interim reporting
of segment information. It is effective for the Company's 1999 fiscal year. The
impact of implementation of SFAS No. 131 on the reporting of the Company's
segment information has not yet been determined.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No.133 requires derivatives to be
measured at fair value and to be recorded as assets or liabilities on the
balance sheet. The accounting for gains or losses resulting from changes in the
fair values of those derivatives would be dependent upon the use of the
derivative and whether it qualifies for hedge accounting. SFAS No. 133 is
effective for the Company's 2000 fiscal year. The impact of implementation of
SFAS No. 133 on the Company's consolidated financial statements has not yet
been determined.
During 1997, the Company adopted the AICPA's SOP 96-1, "Environmental
Remediation Liabilities." As a result of the adoption of SOP 96-1, the Company
increased the reserve for environmental liabilities by $8.8 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained strong during fiscal year 1998.
Cash and cash equivalents were $149.7 million at fiscal year-end 1998, compared
to $142.3 million at fiscal year-end 1997. Operating activities provided cash
of $127.8 million in fiscal year 1998, primarily due to a $33.8 million
decrease in accounts receivable, non-cash depreciation charges of $42.7
million, a $10.7 million increase in current and long-term accrued expenses and
net earnings of $73.8 million. Operating activities in fiscal year 1997
provided cash of $44.9 million and in fiscal year 1996, provided cash of $87.4
million. Investing activities in fiscal year 1998 used $143.1 million of cash,
including $105.5 million for the purchase of businesses and $47.0 million for
the purchase of property, plant and equipment. Investing activities in fiscal
year 1997 provided $49.7 million of cash, including $145.5 million in proceeds
from the sale of the TFS business, partially offset by $34.3 million used to
purchase various businesses and $55.1 million used to purchase property and
equipment. Investing activities in fiscal year 1996 used $73.4 million of cash,
primarily for the purchase of property and equipment.
Financing activities in fiscal year 1998 provided $19.3 million of cash.
Additional long-term borrowings of $38.0 million and net borrowings of $27.6
million on short-term obligations were offset by $34.5 million used to
repurchase shares of the Company's stock (net of $19.7 million of proceeds
received from employees to purchase common stock) and $14.3 million used to pay
dividends. Financing activities in fiscal year 1997, in which the Company
increased long-term borrowings by $25.0 million, used $40.0 million of cash. In
fiscal year 1997, the Company used $56.5 million to repurchase shares of the
Company's stock (net of $38.2 million of proceeds received from employees to
purchase common stock) and $10.4 million to pay dividends. Financing activities
in fiscal year 1996 used $56.6 million in cash, with $49.5 million used for net
share repurchases and $9.3 million to pay dividends.
Total debt as a percent of total capital increased to 22.1% at fiscal year
end 1998 from 14.9% at fiscal year end 1997 and 12.1% at fiscal year end 1996.
Cash and cash equivalents amounted to $149.7 million at fiscal year end 1998
compared to long- and short-term debt on that date of $157.9 million. The
ratios of current
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assets to current liabilities at fiscal year end 1998, 1997 and 1996 were 1.66,
1.75 and 1.65, respectively. Quarterly dividends were increased from $0.08 per
share to $0.09 in the second fiscal quarter of 1997 and to $0.10 per share in
the second quarter of fiscal 1998. The Company has $50 million available in
unused committed lines of credit.
The Company's liquidity is affected by many factors, some based on the normal
operations of the business and others related to the uncertainties of the
industry and global economics. Although the Company's cash requirements will
fluctuate based on the timing and extent of these factors, management believes
that cash generated from operations, together with the Company's borrowing
capability, will be sufficient to satisfy commitments for capital expenditures
and other cash requirements for the current fiscal year and fiscal year 2000.
On August 21, 1998, the Company's Board of Directors approved the development
of a detailed plan to reorganize the Company's core businesses into three
separate public companies by spinning off IB and SEB to stockholders through a
tax-free distribution. The final plan is subject to stockholder approval as
well as a favorable ruling from the U.S. Internal Revenue Service confirming
the tax-free nature of the proposed spin-offs for the Company and its
stockholders. The Company expects to complete the reorganization by the end of
fiscal 1999. Management estimates that one-time net cash outlays of
approximately $50 million will be required to complete this reorganization.
While the capital structures of the three separate companies have not been
determined, it is expected that, upon consummation of the spin-off, each of HCS
and IB will have between $50 and $100 million of outstanding indebtedness under
the Company's term loans and notes payable, and that the Company will
contribute cash to SEB so that SEB will have approximately $100 million in cash
and cash equivalents and consolidated debt not exceeding $5 million.
ENVIRONMENTAL MATTERS
The Company's operations are subject to various foreign, federal, state
and/or local laws regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment. This includes
discharges into soil, water and air, and the generation, handling, storage,
transportation and disposal of waste and hazardous substances. In addition,
several countries are reviewing proposed regulations that would require
manufacturers to dispose of their products at the end of the useful lives.
These laws have the effect of increasing costs and potential liabilities
associated with the conduct of such operations.
The Company has been named by the U.S. Environmental Protection Agency or
third parties as a potentially responsible party under the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended, at
eight sites where the Company is alleged to have shipped manufacturing waste
for recycling or disposal. The Company is also involved in various stages of
environmental investigation and/or remediation under the direction of, or in
consultation with, foreign, federal, state and/or local agencies at certain
current or former Company facilities (including facilities disposed of in
connection with the Company's sale of its Electron Devices business during
fiscal year 1995 and the sale of its TFS business during fiscal year 1997).
Expenditures by the Company for environmental investigation and remediation
amounted to $5 million in fiscal year 1998, compared with $2 million in fiscal
year 1997 and $5 million in fiscal year 1996.
For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. As of October 2, 1998, the Company nonetheless estimated that the
future exposure for environmental related investigation and remediation costs
for these sites and facilities ranged in the aggregate from $22 million to $49
million. The time frame over which these costs are expected to be incurred
varies with each site and facility, ranging up to approximately 30 years as of
October 2, 1998. Management believes that no amount in the foregoing range of
estimated future costs is more probable of being incurred than any other
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amount in such range and therefore the Company has accrued $22 million in
estimated environmental costs as of October 2, 1998. The amount accrued has not
been discounted to present value.
As to other sites and facilities, the Company has gained sufficient knowledge
to be able to better estimate the scope and costs of future environmental
activities. As of October 2, 1998, the Company estimated that the future
exposure for environmental related investigation and remediation costs for
these sites and facilities ranged in the aggregate from $40 million to $74
million. The time frame over which these costs are expected to be incurred
varies with each site and facility, ranging up to approximately 30 years as of
October 2, 1998. As to each of these sites and facilities, management
determined that a particular amount within the range of estimated costs was a
better estimate of the future environmental liability than any other amount
within the range, and that the amount and timing of these future costs were
reliably determinable. Together, these amounts totaled $51 million at October
2, 1998. Accordingly, the Company has accrued $22 million as of October 2,
1998, which represents its best estimate of the future costs discounted at 4%,
net of inflation. This accrual is in addition to the $22 million described in
the preceding paragraph.
At October 2, 1998, the Company's reserve for environmental liabilities,
based upon future environmental related costs estimated by the Company as of
that date, was calculated as follows:
<TABLE>
<CAPTION>
NON- TOTAL
RECURRING RECURRING ANTICIPATED
YEAR COSTS COSTS FUTURE COSTS
---- --------- --------------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
1999............................ $ 2.3 $3.5 $ 5.8
2000............................ 2.6 1.0 3.6
2001............................ 2.6 0.2 2.8
2002............................ 2.5 0.0 2.5
2003............................ 2.4 0.0 2.4
Thereafter...................... 52.0 3.6 55.6
----- ---- ------
Total costs..................... $64.4 $8.3 72.7
Less imputed interest........... (28.8)
------
Reserve amount.................. $ 43.9
======
</TABLE>
The amounts set forth in the foregoing table are only estimates of
anticipated future environmental related costs, and the amounts actually spent
in the years indicated may be greater or less than such estimates. The
aggregate range of cost estimates reflects various uncertainties inherent in
many environmental investigation and remediation activities and the large
number of sites and facilities involved. The Company believes that most of
these cost ranges will narrow as investigation and remediation activities
progress.
The Company believes that its reserves are adequate, but as the scope of its
obligations becomes more clearly defined, these reserves may be modified and
related charges against earnings may be made. Although any ultimate liability
arising from environmental related matters described herein could result in
significant expenditures that, if aggregated and assumed to occur within a
single fiscal year, would be material to the Company's financial statements the
likelihood of such occurrence is considered remote. Based on information
currently available to management and its best assessment of the ultimate
amount and timing of environmental related events, management believes that the
costs of these environmental related matters are not reasonably likely to have
a material adverse effect on the consolidated financial statements of the
Company.
The Company evaluates its liability for environmental related investigation
and remediation in light of the liability and financial wherewithal of
potentially responsible parties and insurance companies with respect to which
the Company believes that it has rights to contribution, indemnity and/or
reimbursement. Claims for recovery of environmental investigation and
remediation costs already incurred, and to be incurred in the future, have been
asserted against various insurance companies and other third parties. In 1992,
the Company filed a lawsuit against 36 insurance companies with respect to most
of the above-referenced sites and facilities.
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The Company received certain cash settlements during fiscal years 1995, 1996,
1997 and 1998 from defendants in that lawsuit, and has a $0.5 million
receivable in Other Current Assets at October 2, 1998. The Company has also
reached an agreement with another insurance company under which the insurance
company has agreed to pay a portion of the Company's past and future
environmental related expenditures, and the Company therefore has a $5.5
million receivable in Other Assets at October 2, 1998. Although the Company
intends to aggressively pursue additional insurance recoveries, the Company has
not reduced any liability in anticipation of recovery with respect to claims
made against third parties.
YEAR 2000
General. The "Year 2000" problem refers to computer programs and other
equipment with embedded microprocessors ("non-IT systems") which use only the
last two digits to refer to a year, and which therefore might not properly
recognize a year that begins with "20" instead of the familiar "19." As a
result, those computer programs and non-IT systems might be unable to operate
or process accurately certain date-sensitive data before or after January 1,
2000. Because the Company relies heavily on computer programs and non-IT
systems, and relies on third parties which themselves rely on computer programs
and non-IT systems, the Year 2000 problem if not addressed could adversely
effect the Company's business, results of operations or financial condition.
State of Readiness. The Company has initiated a comprehensive assessment of
potential Year 2000 problems with respect to (1) internal systems, (2)
products, and (3) significant third parties with which the Company does
business.
The Company has substantially completed its assessment of potential Year 2000
problems in internal systems, which systems have been categorized as follows,
in order of importance: (a) enterprise information systems; (b) enterprise
networking and telecommunications; (c) factory-specific information systems;
(d) non-IT systems; (e) computers and packaged software; and (f) facilities
systems. With respect to enterprise information systems, the Company in 1994
initiated replacement of its existing systems with a single Company-wide system
supplied by SAP America, Inc., which system is designed and tested by SAP for
Year 2000 capability. Installation of that system has been staged to replace
first those existing systems that are not Year 2000 capable. Installation of
the new SAP system is approximately 70% complete, with 90% completion expected
by July 1999 and full completion expected by the end of 1999. Upgrade of
enterprise information systems is approximately 70% complete, with 90%
completion expected by July 1999 and 100% completion expected by December 1999;
upgrade of enterprise networking and telecommunications systems is
approximately 95% complete, with 100% completion expected by December 1998;
upgrade of factory-specific information systems is approximately 60% complete,
with 86% completion expected by July 1999 and 91% completion expected by
December 1999; upgrade of non-IT systems, computers and packaged software, and
facilities systems are well underway and the Company expects these to be
substantially completed by July 1999 (except in the case of some computers and
packaged software, which might not be completed until December 1999).
The Company has initiated an assessment of potential Year 2000 problems in
its current and previously-sold products. With respect to current products,
that assessment and corrective actions are substantially complete, and the
Company believes that all of its current products are Year 2000 capable;
however, that conclusion is based in part on Year 2000 assurances or warranties
from suppliers of computer programs and non-IT systems which are integrated
into or sold with the Company's current products.
With respect to previously-sold products, the Company does not intend to
assess Year 2000 preparedness of every product it has ever sold, but rather is
focusing its assessments on products which are subject to regulatory
requirements with respect to Year 2000, including FDA requirements for medical
devices. The Company is also focusing its assessments on products that will be
under written warranties or still relatively early in their useful life, are
more likely to be dependent on non-IT systems that are not Year 2000 capable,
cannot be easily upgraded with readily available externally-utilized computers
and packaged software, and/or
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<PAGE>
could pose a safety hazard. These assessments are expected to be substantially
completed by July 1999. Where the Company identifies previously-sold products
that are not Year 2000 capable, the Company intends in some cases to develop
and offer to sell upgrades or retrofits, identify corrective measures which the
customer could itself undertake or identify for the customer other suppliers of
upgrades or retrofits. There may be instances where the Company may be required
to repair and/or upgrade such products at its own expense. Schedules for
completing those corrective actions vary considerably among the Company's
businesses and products, but are generally expected to be substantially
completed by July 1999.
The Company is still assessing potential Year 2000 problems of third parties
with which the Company has material relationships, which are primarily
suppliers of products or services. These assessments will identify and
prioritize critical suppliers, review those suppliers' written assurances on
their own assessments and correction of Year 2000 problems, and develop
appropriate contingency plans for those suppliers which might not be adequately
prepared for Year 2000 problems. These assessments are expected to be
substantially completed by August 1999.
Costs. As of October 2, 1998, the Company estimates that it had incurred
approximately $2.2 million to assess and correct Year 2000 problems. Although
difficult to assess, based on its assessment to date, the Company estimates
that it will incur approximately $5 million in additional costs to assess and
correct Year 2000 problems, which costs are expected to be incurred throughout
fiscal year 1999 and the first half of fiscal year 2000. All of these costs
have been and will continue to be expensed as incurred.
This estimate of future costs has not been reduced by expected recoveries
from certain third parties which are subject to indemnity, reimbursement or
warranty obligations for Year 2000 problems. In addition, the Company expects
that certain costs will be offset by revenues generated by the sale of upgrades
and retrofits and other customer support services relating to Year 2000
problems. However, there can be no assurance that the Company's actual costs to
assess and correct Year 2000 problems will not be higher than the foregoing
estimate.
Risks. Failure by the Company or its key suppliers to accurately assess and
correct Year 2000 problems would likely result in interruption of certain of
the Company's normal business operations, which could have a material adverse
effect on the Company's business, results of operations or financial condition.
If the Company does not adequately identify and correct Year 2000 problems in
its information systems it could experience an interruption in its operations,
including manufacturing, order processing, receivables collection and
accounting, such that there would be delays in product shipments, lost data and
a consequential impact on revenues, expenditures and financial reporting. If
the Company does not adequately identify and correct Year 2000 problems in its
non-IT systems it could experience an interruption in its manufacturing and
related operations, such that there would be delays in product shipments and a
consequential impact on revenues. If the Company does not adequately identify
and correct Year 2000 problems in its previously-sold products it could
experience warranty or product liability claims by users of products which do
not function correctly. If the Company does not adequately identify and correct
Year 2000 problems of the significant third parties with which it does business
it could experience an interruption in the supply of key components or services
from those parties, such that there would be delays in product shipments or
service and a consequential impact on revenues.
Management believes that appropriate corrective actions have been or will be
accomplished within the cost and time estimates stated above. Although the
Company does not expect to be 100% Year 2000 compliant by the end of 1999, the
Company does not currently believe that any Year 2000 non-compliance in the
Company's information systems would have a material adverse effect on the
Company's business, results of operations or financial condition. However,
given the inherent complexity of the Year 2000 problem, there can be no
assurance that actual costs will not be higher than currently anticipated or
that corrective actions will not take longer than currently anticipated to
complete. Risk factors which might result in higher costs or delays include the
ability to identify and correct in a timely fashion Year 2000 problems;
regulatory or legal obligations to correct Year 2000 problems in previously-
sold products; possible liability for personal injury if a safety hazard
relating to Year 2000 is not identified and corrected; ability to retain and
hire qualified personnel to perform
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<PAGE>
assessments and corrective actions; the willingness and ability of critical
suppliers to assess and correct their own Year 2000 problems, including in
products they supply to the Company; and the additional complexity which will
likely be caused by undertaking during fiscal year 1999 and fiscal year 2000
the separation of currently shared enterprise information systems as a result
of the planned separation of the Company's businesses into three public
companies.
Because of uncertainties as to the extent of Year 2000 problems with the
Company's previously-sold products and the extent of any legal obligation of
the Company to correct Year 2000 problems in those products, the Company cannot
yet assess risks to the Company with respect to those products. Because its
assessments are not yet complete, the Company also cannot yet conclude that the
failure of critical suppliers to assess and correct Year 2000 problems is not
reasonably likely to have a material adverse effect on the Company's results of
operations.
Contingency Plans. With respect to the Company's enterprise information
systems, the Company has a contingency plan if the SAP system is not fully
installed by December 31, 1999. That plan primarily involves installation where
necessary of a Year 2000 capable upgrade of existing information systems
pending complete installation of the SAP system. That upgrade is currently in
acceptance testing, and if functional will be held for contingency purposes.
With respect to products and significant third parties, the Company intends,
as part of its on-going assessment of potential Year 2000 problems, to develop
contingency plans for the more critical problems that might not have been
corrected by December 31, 1999. It is currently anticipated that the focus of
these contingency plans will be the possible interruption of supply of key
components or services from third parties.
RISK FACTORS RELATING TO FORWARD-LOOKING INFORMATION
This Management's Discussion and Analysis contains certain forward-looking
statements that involve risks and uncertainties that could cause actual results
to differ materially from those projected. Such risks and uncertainties
include: product demand and market acceptance risks; the effect of general
economic conditions and foreign currency fluctuations; the impact of
competitive products and pricing; new product development and
commercialization; the ability to increase operating margins on higher sales;
the continued improvement of the various instruments markets the Company
serves; the impact of economic conditions in Korea and other Asian markets on
sales in those areas, particularly semiconductor equipment sales; the impact of
managed care initiatives in the U.S. on capital expenditures and resulting
pricing pressures on medical equipment; the timing of renewed growth in
worldwide semiconductor equipment demand; successful implementation by the
Company and certain third parties of corrective actions to address the impact
of the Year 2000; completion of the planned reorganization on the current
schedule within current budgets; the ability to sell certain surplus assets in
connection with the reorganization; the ability of the three post-
reorganization companies to realize anticipated costs savings resulting from
the reorganization; and other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE
As a global concern, the Company faces exposure to adverse movements in
foreign currency exchange rates. These exposures may change over time as
business practices evolve and could have a material adverse impact on the
Company's financial results. Historically, the Company's primary exposures have
related to non-U.S. dollar denominated sales and purchases throughout Europe,
Asia, and Australia. The Euro will be adopted as a common currency for members
of the European Monetary Union on January 1, 1999. The Company is evaluating,
among other issues, the impact of the Euro conversion on its foreign currency
exposure. Based on
34
<PAGE>
its evaluation to date, the Company does not expect the Euro conversion to
create any change in its currency exposure due to the Company's existing
hedging practices.
At the present time, the Company hedges those currency exposures associated
with certain assets and liabilities denominated in non-functional currencies
and with anticipated foreign currency cash flows. The Company does not enter
into forward exchange contracts for trading purposes. The hedging activity
undertaken by the Company is intended to offset the impact of currency
fluctuations on certain anticipated foreign currency cash flows and certain
non-functional currency assets and liabilities. The success of this activity
depends upon estimation of balance sheets denominated in various currencies. To
the extent that these forecasts are over- or understated during periods of
currency volatility, the Company could experience unanticipated currency gains
or losses.
The Company's forward exchange contracts generally range from one to three
months in original maturity, and no forward exchange contract has an original
maturity greater than one year. Forward exchange contracts outstanding and
their unrealized loss as of the fiscal year-end 1998 are summarized as follows:
<TABLE>
<CAPTION>
FISCAL YEAR-END 1998
----------------------------------------
NOTIONAL NOTIONAL UNREALIZED
VALUE VALUE GAIN
SOLD PURCHASED (LOSS) FAIR VALUE
-------- --------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Italian lira........................ $ 23.5 $ 1.0 $(0.4) $(1.1)
French franc........................ 21.5 2.0 (0.6) (1.2)
Canadian dollar..................... 15.6 0.2 0.6 0.7
British pound....................... 8.3 14.0 0.3 0.3
German mark......................... 13.5 1.0 (0.2) (0.7)
Spanish peseta...................... 10.5 0.8 (0.6) (0.7)
Australian dollar................... 2.1 7.7 -- --
Korean won.......................... 7.5 -- -- --
Swiss franc......................... 1.3 6.0 (0.1) 0.2
Belgian franc....................... 4.5 2.2 (0.1) (0.1)
Japanese yen........................ 4.0 -- 0.1 0.1
Portuguese escudo................... 3.7 0.4 (0.3) (0.3)
Swedish krona....................... 0.2 3.1 -- --
Irish punt.......................... 2.3 0.2 (0.2) (0.2)
Finnish mark........................ 2.1 -- (0.1) (0.1)
Dutch guilder....................... 1.7 0.9 (0.1) (0.1)
Brazilian real...................... -- 1.2 -- --
Taiwan dollar....................... 0.9 -- -- --
------ ----- ----- -----
Totals.............................. $123.2 $40.7 $(1.7) $(3.2)
====== ===== ===== =====
</TABLE>
The fair value of forward exchange contracts generally reflects the estimated
amounts that the Company would receive or pay to terminate the contracts at the
reporting date, thereby taking into account and approximating the current
unrealized and realized gains or losses of open contracts. The notional amounts
of forward exchange contracts are not a measure of the Company's exposure.
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio, notes payable, and long-term
debt obligations. The Company does not use derivative financial instruments in
its investment portfolio, and the Company's investment portfolio only includes
highly liquid instruments with an original maturity to the Company of three
months or less. The Company primarily
35
<PAGE>
enters into debt obligations to support general corporate purposes, including
working capital requirements, capital expenditures, and acquisitions.
The Company is subject to fluctuating interest rates that may impact,
adversely or otherwise, its results of operations or cash flows for its
variable rate notes payable and cash and cash equivalents. Fluctuations in
interest rates may also impact, adversely or otherwise, the estimated fair
value of the Company's fixed rate long-term debt obligations. The Company has
no cash flow exposure due to rate changes for long-term debt obligations.
The table below presents principal amounts and related weighted average
interest rates by year of maturity for the Company's investment portfolio and
debt obligations.
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL
------ ----- ----- ----- ---- ---------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash and cash
equivalents........... $149.7 -- -- -- -- -- $149.7
Average interest
rate................ 5.2% -- -- -- -- -- 5.2%
Liabilities
Notes payable.......... $ 34.7 -- -- -- -- -- $ 34.7
Average interest
rate................ 2.0% -- -- -- -- -- 2.0%
Long-term debt
(including current
portion).............. $ 12.1 $12.1 $12.0 $12.0 $5.0 $70.0 $123.2
Average interest
rate................ 7.3% 7.3% 7.3% 7.3% 7.2% 6.8% 7.0%
</TABLE>
The estimated fair value of the Company's cash and cash equivalents
approximates the principal amounts reflected above based on the short
maturities of these financial instruments. The estimated fair value of the
Company's debt obligations approximates the principal amounts reflected above
based on rates currently available to the Company for debt with similar terms
and remaining maturities.
Although payments under certain of the Company's operating leases for its
facilities are tied to market indices, the Company is not exposed to material
interest rate risk associated with its operating leases.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section to this report.
See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
36
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the Company's executive
officers is incorporated herein by reference from the information under Item 1
of Part I of this Report. The information required by this Item with respect to
the Company's directors is incorporated herein by reference from the
information provided under the heading "Proposal Ten: Election of Directors" of
the Proxy Statement. The information required by Item 405 of Regulation S-K is
incorporated herein by reference from the information provided under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance" of the Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
from the information provided under the heading "Certain Executive Officer
Compensation and Other Information" of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
from the information provided under the heading "Stock Ownership" of the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
from the information provided under the headings "Management Indebtedness and
Certain Transactions" and "Change in Control and Other Agreements" of the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1)Consolidated Financial Statements: (see index on page F-1 of this
report)
-- Report of Independent Accountants
-- Consolidated Statements of Earnings for fiscal years 1998, 1997, and
1996
-- Consolidated Balance Sheets at fiscal year-end 1998 and 1997
-- Consolidated Statements of Stockholders' Equity for fiscal years
1998, 1997, and 1996
-- Consolidated Statements of Cash Flows for fiscal years 1998, 1997,
and 1996
-- Notes to the Consolidated Financial Statements
(2) Consolidated Financial Statement Schedule: (see index on page F-1 of
this report)
The following financial statement schedule of the Registrant and its
subsidiaries for fiscal years 1998, 1997, and 1996, and the related
Report of Independent Accountants are filed as a part of this Report
and should be read in conjunction with the Consolidated Financial
Statements of the Registrant and its subsidiaries.
<TABLE>
<CAPTION>
SCHEDULE
--------
<C> <S>
-- Report of Independent Accountants on Financial Statement Schedule
II Valuation and Qualifying Accounts
</TABLE>
All other required schedules are omitted because of the absence of conditions
under which they are required or because the required information is given in
the financial statements or the notes thereto.
37
<PAGE>
(3) Exhibits:
<TABLE>
<CAPTION>
<S> <C>
3-A Registrant's Restated Certificate of Incorporation (incorporated herein by
reference to the Registrant's Form 10-K for the year ended September 27, 1996).
3-B Registrant's Bylaws.
4.1 Specimen Common Stock Certificate.
4.2 Rights Agreement dated as of November 20, 1998 between Registrant and First
Chicago Trust Company of New York, as Rights Agent, including the Form of Rights
Certificate (together with Election to Exercise) attached thereto as Exhibit A,
and the form of Certificate of Designation of Registrant attached thereto as
Exhibit B (incorporated herein by reference to Registrant's Registration
Statement on Form 8-A filed on November 23, 1998 with respect to the NYSE).
10.1* Registrant's Omnibus Stock Plan, (incorporated herein by reference to the
Registrant's Form 10-K for the year ended September 26, 1997).
10.2* Registrant's 1982 Non-Qualified Stock Option Plan (incorporated herein by
reference to Exhibit 4.6 to the Registration Statement on Form S-8; File No. 33-
33660).
10.4* Registrant's Management Incentive Plan (incorporated herein by reference to
Registrant's Form 10-Q for the quarter ended March 31, 1995).
10.5* Registrant's Supplemental Retirement Plan (incorporated herein by reference to
Registrant's Form 10-Q for the quarter ended June 30, 1995).
10.6* Registrant's form of Indemnity Agreement with Directors and Executive Officer
(incorporated herein by reference to Registrant's Form 10-K for the year ended
October 1, 1993).
10.7* Registrant's form of Change in Control Agreement with certain Executive Officers
other than the Chief Executive Officer (incorporated herein by reference to
Registrant's Form 10-K for the year ended October 1, 1993).
10.8* Registrant's Change in Control Agreement with J. Tracy O'Rourke (incorporated
herein by reference to Registrant's Form 10-K for the year ended October 1,
1993).
10.9* Description of Certain Compensatory Arrangements between Registrant and
Directors (incorporated herein by reference to Registrant's Form 10-Q for the
quarter ended December 31, 1993).
10.10* Description of Certain Compensatory Arrangements between Registrant and
Executive Officers (incorporated herein by reference to Registrant's Form 10-K
for the year ended September 30, 1994).
10.11* Description of Certain Relocation Arrangements between Registrant and Executive
Officers (incorporated herein by reference to Registrant's Form 10-Q for the
quarter ended December 30, 1994).
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
24 Power of Attorney by directors of the Company authorizing certain persons to
sign this Annual Report on Form 10-K on their behalf.
27 Financial Data Schedule for the fiscal year ended October 2, 1998 (EDGAR filing
only).
</TABLE>
- --------
*Management contract or compensatory agreement.
(b)Reports on Form 8-K:
A report on Form 8-K was filed on August 21, 1998, regarding the
Registrant's plan to reorganize the Company's three core businesses in
health care systems, semiconductor equipment and instruments into three
separate public companies.
A report on Form 8-K was filed on November 24, 1998 regarding the
Registrant's stockholder rights plan approved by the Board of Directors on
November 20, 1998.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Varian Associates, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VARIAN ASSOCIATES, INC.
(Registrant)
Dated: December 30, 1998 /s/ Robert A. Lemos
By __________________________________
Robert A. Lemos
Vice President, Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ J. Tracy O'Rourke Chairman of the Board and December 30, 1998
______________________________________ Chief Executive Officer
J. Tracy O'Rourke (Principal Executive Officer)
/s/ Robert A. Lemos Vice President, Finance and December 30, 1998
______________________________________ Chief Financial Officer
Robert A. Lemos (Principal Financial
Officer)
/s/ Wayne P. Somrak Vice President and December 30, 1998
______________________________________ Controller (Principal
Wayne P. Somrak Accounting Officer)
John Seely Brown* Director
Ruth M. Davis* Director
Robert W. Dutton* Director
Samuel Hellman* Director
Terry R. Lautenbach* Director
Angus A. MacNaughton* Director
David W. Martin, Jr.* Director
John G. McDonald* Director
Wayne R. Moon* Director
David E. Mundell* Director
Burton Richter* Director
Elizabeth E. Tallett* Director
Jon D. Tompkins* Director
Richard W. Vieser* Director
</TABLE>
/s/ Robert A. Lemos
*By _________________________________ December 30, 1998
Robert A. Lemos,
Attorney-in-Fact**
- --------
**By authority of powers of attorney filed herewith.
39
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
FORM 10-K
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
The following financial statements of the registrant and its subsidiaries are
required to be included in Item 8:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants .................................... F-2
Consolidated Statements of Earnings for fiscal years 1998, 1997, and
1996 ................................................................ F-3
Consolidated Balance Sheets at fiscal year-end 1998 and 1997 ......... F-4
Consolidated Statements of Stockholders' Equity for fiscal years 1998,
1997, and 1996 ...................................................... F-5
Consolidated Statements of Cash Flows for fiscal years 1998, 1997, and
1996................................................................. F-6
Notes to the Consolidated Financial Statements........................ F-7
</TABLE>
The following financial statement schedule of the Registrant and its
subsidiaries for fiscal years 1998, 1997, and 1996, and the related Report of
Independent Accountants are filed as a part of this Report as required to be
included in Item 14(a) and should be read in conjunction with the Consolidated
Financial Statements of the Registrant and its subsidiaries:
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- ----
<C> <S> <C>
-- Report of Independent Accountants on Financial Statement
Schedule................................................... F-24
II Valuation and Qualifying Accounts........................... F-25
</TABLE>
All other required schedules are omitted because of the absence of conditions
under which they are required or because the required information is given in
the financial statements or the notes thereto.
F-1
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Varian Associates, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Varian
Associates, Inc. and its subsidiaries at October 2, 1998 and September 26,
1997, and the results of their operations and their cash flows for each of the
three years in the period ended October 2, 1998, 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.
/s/ PricewaterhouseCoopers LLP
---------------------------------
PricewaterhouseCoopers LLP
San Jose, California
October 21, 1998
F-2
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FISCAL YEARS
----------------------------------
(Amounts in thousands except per share
amounts) 1998 1997 1996
- -------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
SALES...................................... $1,422,125 $1,425,824 $1,599,361
---------- ---------- ----------
OPERATING COSTS AND EXPENSES...............
Cost of sales............................. 896,285 902,733 995,668
Research and development.................. 107,035 110,750 110,140
Marketing................................. 199,132 199,167 200,333
General and administrative................ 104,516 83,249 103,128
---------- ---------- ----------
Total operating costs and expenses........ 1,306,968 1,295,899 1,409,269
---------- ---------- ----------
OPERATING EARNINGS......................... 115,157 129,925 190,092
Interest expense.......................... (8,835) (7,783) (6,375)
Interest income........................... 6,418 4,604 5,526
Gain on Sale of Thin Film Systems......... -- 51,039 --
---------- ---------- ----------
EARNINGS BEFORE TAXES...................... 112,740 177,785 189,243
Taxes on earnings......................... 38,900 62,225 67,180
---------- ---------- ----------
NET EARNINGS............................... $ 73,840 $ 115,560 $ 122,063
========== ========== ==========
AVERAGE SHARES OUTSTANDING--BASIC.......... 29,910 30,451 31,024
========== ========== ==========
AVERAGE SHARES OUTSTANDING--DILUTED........ 30,419 31,446 32,075
========== ========== ==========
NET EARNINGS PER SHARE--BASIC.............. $ 2.47 $ 3.79 $ 3.93
========== ========== ==========
NET EARNINGS PER SHARE--DILUTED............ $ 2.43 $ 3.67 $ 3.81
========== ========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-3
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FISCAL YEAR-END
----------------------
(Dollars in thousands except par values) 1998 1997
- ---------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................. $ 149,667 $ 142,298
Accounts receivable................................... 392,596 418,978
Inventories........................................... 204,464 159,598
Other current assets.................................. 93,054 92,596
---------- ----------
Total Current Assets................................. 839,781 813,470
---------- ----------
Property, Plant, and Equipment......................... 509,089 460,251
Accumulated depreciation and amortization............. (294,867) (264,612)
---------- ----------
Net Property, Plant, and Equipment................... 214,222 195,639
---------- ----------
Other Assets........................................... 164,292 95,224
---------- ----------
TOTAL ASSETS......................................... $1,218,295 $1,104,333
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable......................................... $ 46,842 $ 18,668
Accounts payable--trade............................... 76,166 83,771
Accrued expenses...................................... 282,647 269,067
Product warranty...................................... 44,153 37,620
Advance payments from customers....................... 55,081 55,184
---------- ----------
Total Current Liabilities............................ 504,889 464,310
Long-Term Accrued Expenses............................. 44,771 35,752
Long-Term Debt......................................... 111,090 73,186
Deferred Taxes......................................... -- 6,508
---------- ----------
Total Liabilities.................................... 660,750 579,756
---------- ----------
Commitments and Contingencies
Stockholders' Equity
Preferred stock
Authorized 1,000,000 shares, par value $1, issued
none................................................ -- --
Common stock
Authorized 99,000,000 shares, par value $1, issued
and outstanding 29,743,000 shares (1998), 30,108,000
shares (1997)........................................ 29,743 30,108
Retained earnings..................................... 527,802 494,469
---------- ----------
Total Stockholders' Equity........................... 557,545 524,577
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $1,218,295 $1,104,333
========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-4
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL IN TREASURY
(Dollars in thousands except COMMON EXCESS OF RETAINED STOCK
per share amounts) STOCK PAR VALUE EARNINGS AT COST TOTAL
- ---------------------------- ------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCES, FISCAL YEAR-END,
1995........................ $31,052 $ -- $363,877 $ -- $394,929
Net earnings for the year... -- -- 122,063 -- 122,063
Issuance of stock under om-
nibus stock, stock option,
and employee stock purchase
plans (including tax benefit
of $10,084)................. 1,213 38,623 -- -- 39,836
Purchase of common stock.... -- -- -- (79,296) (79,296)
Retirement of treasury
stock....................... (1,619) (38,623) (39,054) 79,296 --
Dividends declared ($0.31
per share).................. -- -- (9,623) -- (9,623)
------- -------- -------- -------- --------
BALANCES, FISCAL YEAR-END,
1996........................ 30,646 -- 437,263 -- 467,909
Net earnings for the year... -- -- 115,560 -- 115,560
Issuance of stock under
omnibus stock, stock option,
and employee stock purchase
plans (including tax benefit
of $8,299).................. 1,221 45,261 -- -- 46,482
Purchase of common stock.... -- -- -- (94,730) (94,730)
Retirement of treasury
stock....................... (1,759) (45,261) (47,710) 94,730 --
Dividends declared ($0.35
per share).................. -- -- (10,644) -- (10,644)
------- -------- -------- -------- --------
BALANCES, FISCAL YEAR-END,
1997........................ 30,108 -- 494,469 -- 524,577
Net earnings for the year... -- -- 73,840 -- 73,840
Issuance of stock under
omnibus stock, stock option,
and employee stock purchase
plans (including tax benefit
of $5,321).................. 646 24,407 -- -- 25,053
Purchase of common stock.... -- -- -- (54,276) (54,276)
Retirement of treasury
stock....................... (1,011) (24,407) (28,858) 54,276 --
Dividends declared ($0.39
per share).................. -- -- (11,649) -- (11,649)
------- -------- -------- -------- --------
BALANCES, FISCAL YEAR-END,
1998........................ $29,743 $ -- $527,802 $ -- $557,545
======= ======== ======== ======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-5
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS
----------------------------
(Dollars in thousands) 1998 1997 1996
- ---------------------- -------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Cash Provided by Operating Activities.... $127,753 $ 44,939 $ 87,437
-------- -------- --------
INVESTING ACTIVITIES
Proceeds from sale of property, plant, and
equipment...................................... 2,321 2,220 4,781
Proceeds from sale of Thin Film Systems
Business....................................... -- 145,500 --
Purchase of property, plant, and equipment...... (46,954) (55,087) (67,736)
Purchase of businesses, net of cash acquired.... (105,470) (34,272) (4,396)
Other........................................... 7,035 (8,685) (5,999)
-------- -------- --------
Net Cash (Used)/Provided by Investing
Activities.................................. (143,068) 49,676 (73,350)
-------- -------- --------
</TABLE>
FINANCING ACTIVITIES
<TABLE>
<S> <C> <C> <C>
Net borrowings (payments) on short-term
obligations.................................... 27,624 2,305 2,607
Proceeds from long-term borrowings.............. 38,000 25,000 --
Principal payments on long-term debt............ (96) (71) (71)
Proceeds from common stock issued to employees.. 19,732 38,183 29,752
Purchase of common stock........................ (54,276) (94,730) (79,296)
Dividends paid.................................. (14,348) (10,399) (9,341)
Other........................................... 2,692 (245) (282)
-------- -------- --------
Net Cash Provided/(Used) by Financing
Activities.................................. 19,328 (39,957) (56,631)
-------- -------- --------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH......... 3,356 4,965 2,491
-------- -------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents................................. 7,369 59,623 (40,053)
Cash and Cash Equivalents at Beginning of
Fiscal Year................................. 142,298 82,675 122,728
-------- -------- --------
Cash and Cash Equivalents at End of Fiscal
Year........................................ $149,667 $142,298 $ 82,675
======== ======== ========
DETAIL OF NET CASH PROVIDED BY OPERATING ACTIVI-
TIES
Net Earnings.................................... $ 73,840 $115,560 $122,063
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation................................. 42,663 45,649 42,918
Gain on sale of Thin Film Systems business... -- (51,039) --
Deferred taxes............................... (5,166) (9,703) 1,113
Changes in assets and liabilities:
Accounts receivable......................... 33,790 (61,312) (38,677)
Inventories................................. (18,098) (5,586) (17,415)
Other current assets........................ (2,458) 3,770 17,847
Accounts payable--trade..................... (16,728) 10,479 (6,516)
Accrued expenses............................ 1,650 (24,859) (40,658)
Product warranty............................ 2,061 (2,666) 1,137
Advance payments from customers............. 186 3,633 5,411
Long-term accrued expenses.................. 9,019 11,251 (19)
Other........................................ 6,994 9,762 233
-------- -------- --------
Net Cash Provided by Operating Activities.... $127,753 $ 44,939 $ 87,437
======== ======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-6
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal years reported are the 52- or 53-week periods which
ended on the Friday nearest September 30. Fiscal year 1998 comprises the 53-
week period ended on October 2, 1998. Fiscal years 1997 and 1996 comprise the
52-week periods ended on September 26, 1997 and September 27, 1996,
respectively.
Principles of Consolidation
The consolidated financial statements include those of the Company and its
subsidiaries. Significant intercompany balances, transactions, and stock
holdings have been eliminated in consolidation. Investments in affiliated
companies over whose operations the Company has significant influence but not
control are accounted for under the equity method.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Legal Expenses
The Company accrues estimated amounts for legal fees expected to be incurred
in connection with loss contingencies.
Foreign Currency Translation
For non-U.S. operations, the U.S. dollar is the functional currency. Monetary
assets and liabilities of foreign subsidiaries are translated into U.S. dollars
at current exchange rates. Nonmonetary assets such as inventories and property,
plant, and equipment are translated at historical rates. Income and expense
items are translated at effective rates of exchange prevailing during each
year, except that inventories and depreciation charged to operations are
translated at historical rates. The aggregate exchange loss included in general
and administrative expenses for 1998, 1997, and 1996 was $5.6 million, $4.4
million, and $1.1 million, respectively.
Revenue Recognition
Sales and related cost of sales are generally recognized upon shipment of
products. The Company's products are generally subject to installation and
warranty, and the Company provides for the estimated future costs of
installation, repair, replacement, or customer accommodation in cost of sales
when sales are recognized. Service revenue is recognized ratably over the
period of the related contract. Sales and related cost of sales under long-term
contracts to commercial customers and the U.S. Government are recognized as
units are delivered.
Statements of Cash Flows
The Company considers currency on hand, demand deposits, and all highly
liquid investments with an original maturity of three months or less to be cash
and cash equivalents. The carrying amounts of cash and cash equivalents
approximate estimated fair value because of the short maturities of those
financial instruments.
Accounts Receivable
Accounts receivable are stated net of allowances for doubtful accounts of
$2.6 million at the end of fiscal year 1998 and $2.7 million at the end of
fiscal year 1997.
F-7
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Financial instruments that potentially expose the Company to concentrations
of credit risk consist principally of trade accounts receivable. Concentrations
of credit risk with respect to trade accounts receivable are limited due to the
large number of customers comprising the Company's customer base and their
dispersion across many different industries and geographies. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral from its customers.
Inventories
Inventories are valued at the lower of cost or market (realizable value)
using last-in, first-out (LIFO) cost for the U.S. inventories of the Health
Care Systems (except X-ray Tube Products), Instruments, and Semiconductor
Equipment segments. All other inventories are valued principally at average
cost. If the first-in, first-out (FIFO) method had been used for those
operations valuing inventories on a LIFO basis, inventories would have been
higher than reported by $44.7 million in fiscal 1998, $48.4 million in fiscal
1997, and $46.8 million in fiscal 1996. The main components of inventories are
as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997
--------------------- ------ ------
<S> <C> <C>
Raw materials and parts..................................... $132.4 $ 97.2
Work in process............................................. 43.2 37.4
Finished goods.............................................. 28.9 25.0
------ ------
Total Inventories........................................... $204.5 $159.6
====== ======
</TABLE>
The Company's inventories include high technology parts and components that
may be specialized in nature or subject to rapid technological obsolescence.
While the Company has programs to minimize the required inventories on hand and
considers technological obsolescence in estimating the required allowance to
reduce recorded amounts to market values, such estimates could change in the
future.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Major improvements are
capitalized, while maintenance and repairs are expensed currently. Plant and
equipment are depreciated over their estimated useful lives, ranging from one
to forty years, using the straight-line method for financial reporting purposes
and accelerated methods for tax purposes. Leasehold improvements are amortized
using the straight-line method over their estimated useful lives, or the
remaining term of the lease, whichever is less. When assets are retired or
otherwise disposed of, the assets and related accumulated depreciation are
removed from the accounts. Gains or losses resulting from retirements or
disposals are included in earnings from continuing operations.
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997
--------------------- ------ ------
<S> <C> <C>
Land and land improvements.................................. $ 14.2 $ 12.0
Buildings................................................... 179.8 159.1
Machinery and equipment..................................... 306.4 277.9
Construction in progress.................................... 8.7 11.3
------ ------
Total Property, Plant, and Equipment........................ $509.1 $460.3
====== ======
</TABLE>
Goodwill and Other Long-Lived Assets
Goodwill, which is the excess of the cost of acquired businesses over the sum
of the amounts assigned to identifiable assets acquired less liabilities
assumed, is amortized on a straight-line basis over periods ranging from 3 to
40 years. Included in other assets at October 2, 1998 and September 26, 1997 is
goodwill of $132.5 million and $45.9 million, respectively (net of accumulated
amortization of $9.8 million and $6.5 million, respectively).
F-8
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Whenever events or changes in circumstances indicate that the carrying
amounts of long-lived assets and goodwill related to those assets may not be
recoverable, the Company estimates the future cash flows, undiscounted and
without interest charges, expected to result from the use of those assets and
their eventual disposition. If the sum of the future cash flows is less than
the carrying amount of those assets, the Company recognizes an impairment loss
based on the excess of the carrying amount over the fair value of the assets.
Environmental Liabilities
Liabilities are recorded when environmental assessments and/or remedial
efforts are probable, and the costs can be reasonably estimated. Generally, the
timing of these accruals coincides with completion of a feasibility study or
the Company's commitment to a formal plan of action.
During fiscal 1997, the Company adopted the AICPA's SOP 96-1, "Environmental
Remediation Liabilities." As a result of the adoption of SOP 96-1, the Company
increased the reserve for environmental liabilities by $8.8 million.
Taxes on Earnings
The Company's provision for income taxes comprises its estimated tax
liability currently payable and the change in its deferred income taxes.
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.
Research and Development
Company-sponsored research and development costs related to both present and
future products are expensed currently. Costs related to research and
development contracts are included in inventory and charged to cost of sales
upon recognition of related revenue. Total expenditures on research and
development for fiscal 1998, 1997, and 1996, were $110.3 million, $115.5
million, and $116.5 million, respectively, of which $3.3 million, $4.7 million,
and $6.4 million, respectively, were funded by customers.
Computation of Net Earnings Per Share (Shares in thousands)
The Company adopted SFAS 128, "Earnings per Share," during the first quarter
of fiscal year 1998. Accordingly, net earnings per share are computed under two
methods, basic and diluted, and prior periods were restated to conform to the
new presentation and calculation. The impact of restatement was not
significant. Basic net earnings per share is computed by dividing earnings
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share is computed by
dividing earnings available to common stockholders by the sum of the weighted
average number of common shares outstanding and potential common shares (when
dilutive). A reconciliation of the numerator and denominator used in the
earnings per share calculations is presented as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 1998 FISCAL YEAR 1997 FISCAL YEAR 1996
-------------------------------- -------------------------------- --------------------------------
(Dollars in PER PER PER
thousands except INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
per share amounts) (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ------------------ ----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS.......... $73,840 29,910 $ 2.47 $115,560 30,451 $3.79 $122,063 31,024 $ 3.93
Effect of Dilutive
Securities
Employee Stock
Options.......... 509 (0.04) 995 (0.12) 1,051 (0.12)
------- ------ ------ -------- ------ ----- -------- ------ ------
Diluted EPS........ $73,840 30,419 $ 2.43 $115,560 31,446 $3.67 $122,063 32,075 $ 3.81
======= ====== ====== ======== ====== ===== ======== ====== ======
</TABLE>
F-9
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options to purchase 1,741,459 shares, 47,937 shares and 59,399 shares at
average exercise prices of $48.59, $59.84, and $54.20, respectively, were
outstanding during fiscal 1998, 1997, and 1996, respectively, but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of the shares.
RECENT ACCOUNTING PRONOUNCEMENTS
Reporting Comprehensive Income
In June 1997, the Financial Accounting and Standards Board issued SFAS 130,
"Reporting Comprehensive Income." SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. It is effective for the Company's
fiscal year 1999. The Company has not yet determined the impact of its
implementation on the Company's consolidated financial statements.
Disclosures About Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting and Standards Board issued SFAS 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS 131
changes current practice under SFAS 14 by establishing a new framework on which
to base segment reporting (referred to as the "management" approach) and also
requires interim reporting of segment information. SFAS 131 is effective for
the Company's fiscal year 1999. The Company has not yet determined the impact
of its implementation on the reporting of the Company's segment information.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting and Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
requires derivatives to be measured at fair value and to be recorded as assets
or liabilities on the balance sheet. The accounting for gains or losses
resulting from changes in the fair values of those derivatives would be
dependent upon the use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 is effective for the Company's fiscal year 2000. The
Company has not yet determined the impact of its implementation on the
Company's consolidated financial statements.
ACCRUED EXPENSES
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997
--------------------- ------ ------
<S> <C> <C>
Taxes, including taxes on earnings............................ $ 46.2 $ 33.5
Payroll and employee benefits................................. 84.9 90.3
Environmental................................................. 5.8 4.4
Estimated loss contingencies.................................. 54.6 59.2
Deferred income............................................... 27.3 22.6
Other......................................................... 63.8 59.1
------ ------
Total Accrued Expenses........................................ $282.6 $269.1
====== ======
</TABLE>
SHORT-TERM DEBT
Short-term notes payable and the current portion of long-term debt amounted
to $46.8 million and $18.7 million at the end of fiscal years 1998 and 1997,
respectively. The weighted average interest rates on short-term borrowings were
3.6% and 5.6% at the end of fiscal years 1998 and 1997, respectively. Total
debt is subject to limitations included in long-term debt agreements.
F-10
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At fiscal year-end 1998, the Company had total unused committed lines of
credit amounting to $50 million.
LONG-TERM ACCRUED EXPENSES
Long-term accrued expenses are comprised of accruals for environmental costs
not expected to be expended within the next year. The current portion is
recorded within Accrued Expenses.
LONG-TERM DEBT
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997
--------------------- ------ -----
<S> <C> <C>
Unsecured term loan, 6.70% due in installments of $12.5
payable fiscal years 2012, 2014, 2016, and 2018.............. $ 50.0 $ 0.0
Unsecured term loan, 7.29% due in semiannual installments of
$6.0 payable fiscal years 1999-2002.......................... 48.0 60.0
Unsecured term loan, 7.21% due in semiannual installments of
$2.5 payable fiscal years 2003-2007.......................... 25.0 25.0
Other debt.................................................... 0.2 0.3
------ -----
Long-term borrowings.......................................... 123.2 85.3
Less current portion.......................................... 12.1 12.1
------ -----
Long-term Debt................................................ $111.1 $73.2
====== =====
</TABLE>
The unsecured term loans contain covenants that limit future borrowings and
require the Company to maintain certain levels of working capital and operating
results. For fiscal year 1998, the Company was in compliance with all
restrictive covenants of the loan agreements, including a restriction on
payment of cash dividends. Under the provisions of the unsecured term loans, at
October 2, 1998, approximately $108 million of retained earnings were
unrestricted for payment of cash dividends.
The annual maturities of long-term debt (in millions) for fiscal years 1999
through 2003, are as follows: $12.1, $12.1, $12.0, $12.0 and $5.0.
Interest paid (in millions) on short and long-term debt was $8.2, $7.6, and
$6.4, in fiscal years 1998, 1997, and 1996, respectively.
Based on rates currently available to the Company for debt with similar terms
and remaining maturities, the carrying amounts of long-term debt and notes
payable approximate estimated fair value.
FORWARD EXCHANGE CONTRACTS
The Company enters into forward exchange contracts to mitigate the effects of
operational (sales orders and purchase commitments) and balance sheet exposures
to fluctuations in foreign currency exchange rates. When the Company's foreign
exchange contracts hedge operational exposure, the effects of movements in
currency exchange rates on these instruments are recognized in income when the
related revenues and expenses are recognized. All forward exchange contracts
hedging operational exposure are designated and effective as hedges and are
highly inversely correlated to the hedged item as required by generally
accepted accounting principles. When foreign exchange contracts hedge balance
sheet exposure, such effects are recognized in income when the exchange rate
changes in accordance with the requirements for other foreign currency
transactions. Because the impact of movements in currency exchange rates on
foreign exchange contracts generally offsets the related impact on the
underlying items being hedged, these instruments do not subject the
F-11
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company to risk that would otherwise result from changes in currency exchange
rates. Gains and losses on hedges of existing assets or liabilities are
included in the carrying amounts of those assets or liabilities and are
ultimately recognized in income as part of those carrying amounts. Gains and
losses related to qualifying hedges of firm commitments also are deferred and
are recognized in income or as adjustments of carrying amounts when the hedged
transaction occurs. Any deferred gains or losses are included in Accrued
Expenses in the balance sheet. If a hedging instrument is sold or terminated
prior to maturity, gains and losses continue to be deferred until the hedged
item is recognized in income. If a hedging instrument ceases to qualify as a
hedge, any subsequent gains and losses are recognized currently in income. The
Company's forward exchange contracts generally range from one to three months
in original maturity, and no forward exchange contract has an original maturity
greater than one year. Forward exchange contracts outstanding and their
unrealized gains or losses as of fiscal year-end 1998 are summarized as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR-END 1998
------------------------------------
NOTIONAL NOTIONAL
VALUE VALUE UNREALIZED FAIR
(Dollars in millions) SOLD PURCHASED GAIN/(LOSS) VALUE
- --------------------- -------- --------- ----------- -----
<S> <C> <C> <C> <C>
Italian lira.............................. $ 23.5 $ 1.0 $(0.4) $(1.1)
French franc.............................. 21.5 2.0 (0.6) (1.2)
Canadian dollar........................... 15.6 0.2 0.6 0.7
British pound............................. 8.3 14.0 0.3 0.3
German mark............................... 13.5 1.0 (0.2) (0.7)
Spanish peseta............................ 10.5 0.8 (0.6) (0.7)
Australian dollar......................... 2.1 7.7 -- --
Korean won................................ 7.5 -- -- --
Swiss franc............................... 1.3 6.0 (0.1) 0.2
Belgian franc............................. 4.5 2.2 (0.1) (0.1)
Japanese yen.............................. 4.0 -- 0.1 0.1
Portugese escudo.......................... 3.7 0.4 (0.3) (0.3)
Swedish krona............................. 0.2 3.1 -- --
Irish punt................................ 2.3 0.2 (0.2) (0.2)
Finnish mark.............................. 2.1 -- (0.1) (0.1)
Dutch guilder............................. 1.7 0.9 (0.1) (0.1)
Brazilian real............................ -- 1.2 -- --
Taiwan dollar............................. 0.9 -- -- --
------ ----- ----- -----
Totals.................................... $123.2 $40.7 $(1.7) $(3.2)
====== ===== ===== =====
</TABLE>
The fair value of forward exchange contracts generally reflects the estimated
amounts that the Company would receive or pay to terminate the contracts at the
reporting date, thereby taking into account and approximating the current
unrealized and realized gains or losses of open contracts. The notional amounts
of forward exchange contracts are not a measure of the Company's exposure.
OMNIBUS STOCK AND EMPLOYEE STOCK PURCHASE PLANS (SHARES IN THOUSANDS)
Prior to fiscal 1991, the Company had in place the 1982 Non-Qualified Stock
Option Plan (the 1982 Plan) under which options are still exercisable. During
fiscal 1991, the Company adopted the Omnibus Stock Plan (the Plan) under which
shares of common stock can be issued to officers, directors, and key employees.
The maximum number of shares of common stock available for awards under the
Plan during each fiscal year (including incentive stock options) is 5% of the
total outstanding shares of the Company on the last business
F-12
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
day of the preceding fiscal year. The maximum number of shares of the common
stock available for incentive stock option grants under the Plan is 6,000. The
exercise price for incentive and nonqualified stock options granted under the
Plan may not be less than 100% of the fair market value at the date of the
grant. Options granted will be exercisable at such times and be subject to such
restrictions and conditions as determined by the Organization and Compensation
Committee of the Company's Board of Directors, but no option shall be
exercisable later than ten years from the date of grant. Options granted are
generally exercisable in cumulative installments of one-third each year,
commencing one year following date of grant, and expire if not exercised within
seven or ten years from date of grant. Restricted stock grants may be awarded
at prices ranging from 0% to 50% of the fair market value of the stock and may
be subject to restrictions on transferability and continued employment as
determined by the Organization and Compensation Committee.
Option activity under the 1982 Plan and the Plan is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning of fiscal
year.................... 3,742 $36.43 3,877 $31.08 3,809 $23.36
Granted.................. 1,041 56.68 1,089 48.89 1,159 48.57
Terminated or expired.... (116) 49.21 (224) 45.75 (62) 40.24
Exercised................ (416) 23.21 (1,000) 28.58 (1,029) 21.78
----- ------ ------ ------ ------ ------
End of fiscal year....... 4,251 $42.33 3,742 $36.43 3,877 $31.08
===== ====== ====== ====== ====== ======
Shares exercisable....... 2,406 $34.29 1,935 $26.58 1,869 $20.12
Available shares
remaining............... 580 667 456
</TABLE>
During fiscal years 1998, 1997, and 1996, 52, 55, and 69 shares,
respectively, were awarded under restricted stock grants at no cost to the
employees. The restricted stock grants vest generally over a three year period.
Compensation expense from restricted stock was $3.0 million, $2.7 million, and
$2.6 million, in fiscal years 1998, 1997, and 1996, respectively.
The Employee Stock Purchase Plan (the ESPP) covers substantially all
employees in the United States and Canada. The participants' purchase price is
the lower of 85% of the closing market price on the first trading day of the
fiscal quarter or the first trading day of the next fiscal quarter. The
discount is treated as equivalent to the cost of issuing stock for financial
reporting purposes. During fiscal 1998, 1997, and 1996, 176 shares, 163 shares,
and 111 shares were issued under the ESPP for $7.2 million, $6.9 million, and
$4.7 million, respectively. At fiscal year-end 1998, the Company had a balance
of 2,675 shares reserved for the ESPP. The Company intends to suspend the ESPP
during fiscal 1999.
F-13
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following tables summarize information concerning outstanding and
exercisable options under the 1982 Plan, the Plan and the ESPP at the end of
fiscal 1998.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) PRICE
--------------- ----------- -------------- --------
<S> <C> <C> <C>
$10.91-10.91.......................... 294 1.4 $10.91
15.16-25.35.......................... 644 1.8 22.69
32.81-47.75.......................... 668 4.2 36.58
47.84-48.38.......................... 800 7.2 48.31
48.63-48.63.......................... 830 8.1 48.63
48.94-65.81.......................... 1,015 9.0 57.83
----- --- ------
Total............................... 4,251 6.1 $42.33
----- --- ------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
--------------------
WEIGHTED
AVERAGE
RANGE OF NUMBER EXERCISE
EXERCISE PRICES EXERCISABLE PRICE
--------------- ----------- --------
<S> <C> <C>
$10.91-10.91.......................................... 294 $10.91
15.16-25.35.......................................... 644 22.69
32.81-47.75.......................................... 602 36.75
47.84-48.38.......................................... 505 48.31
48.63-48.63.......................................... 277 48.63
48.94-65.81.......................................... 84 55.74
----- ------
Total............................................... 2,406 $34.29
----- ------
</TABLE>
The Company has adopted the pro forma disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, the Company applies APB
Opinion 25 and related Interpretations in accounting for its stock compensation
plans. If the Company had elected, beginning in fiscal 1996, to recognize
compensation cost based on the fair value of the options granted at grant date
under the Plan and the ESPP as prescribed by SFAS No. 123, net earnings and net
earnings per share would have been reduced to the pro forma amounts shown below
for fiscal years 1998, 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in thousands except per share
amounts) 1998 1997 1996
-------------------------------------- ------- -------- --------
<S> <C> <C> <C>
Net Earnings--as reported..................... $73,840 $115,560 $122,063
Net Earnings--pro forma....................... $69,638 $108,241 $118,362
Net Earnings per share--diluted, as reported.. $ 2.43 $ 3.67 $ 3.81
Net Earnings per share--diluted, pro forma.... $ 2.29 $ 3.44 $ 3.69
</TABLE>
F-14
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
EMPLOYEE STOCK EMPLOYEE STOCK
OPTIONS PURCHASE PLAN
---------------- ----------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected dividend yield................. 0.8% 0.8% 0.8% 0.8% 0.8% 0.8%
Risk-free interest rate................. 5.6% 6.4% 6.0% 5.0% 5.3% 5.1%
Expected volatility..................... 24.0% 21.0% 21.0% 24.0% 21.0% 21.0%
Expected life (in years):
Employees............................. 4 4 4 .25 .25 .25
Executive Officers.................... 7 7 7 .25 .25 .25
</TABLE>
The weighted average estimated fair values of employee stock options granted
during fiscal 1998, 1997, and 1996 were $18.06, $14.65, and $13.93 per share,
respectively. The weighted average estimated fair values of the ESPP awards
issued during fiscal 1998, 1997 and 1996 were $7.76, $11.77, and $9.06 per
share, respectively.
The above pro forma disclosures are not likely to be representative of the
effects on net earnings and net earnings per share in future years, because
they do not take into consideration pro forma compensation expense related to
grants made prior to the Company's fiscal year 1996.
RETIREMENT PLANS
The Company has defined contribution retirement plans covering substantially
all of its United States and Canadian employees. The Company's major obligation
is to contribute an amount based on a percentage of each participant's base
pay. The Company also contributes 5% of its consolidated earnings from
continuing operations before taxes, as adjusted for discretionary items, as
retirement plan profit sharing. Participants are entitled, upon termination or
retirement, to their portion of the retirement fund assets, which are held by a
third-party custodian. In addition, a number of the Company's foreign
subsidiaries have defined benefit retirement plans for regular full-time
employees. Total pension expense for all plans amounted to $20.0 million,
$20.6 million, and $23.6 million, for fiscal 1998, 1997, and 1996,
respectively.
TAXES ON EARNINGS
Taxes on earnings from continuing operations are as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
--------------------- ----- ----- -----
<S> <C> <C> <C>
Current
U.S. federal........................................... $13.6 $48.4 $42.3
Non-U.S................................................ 26.2 16.0 13.8
State and local........................................ 4.1 7.5 9.9
----- ----- -----
Total current........................................ 43.9 71.9 66.0
----- ----- -----
Deferred
U.S. federal........................................... (5.6) (10.4) 0.6
Non-U.S................................................ .6 .7 0.6
----- ----- -----
Total deferred....................................... (5.0) (9.7) 1.2
----- ----- -----
Taxes on Earnings........................................ $38.9 $62.2 $67.2
===== ===== =====
</TABLE>
F-15
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant items making up deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997
--------------------- ----- -----
<S> <C> <C>
Assets:
Product warranty.............................................. $12.2 $11.9
Deferred compensation......................................... 2.9 7.0
Special provisions............................................ 34.8 34.8
Inventory adjustments......................................... 25.5 20.3
Deferred income............................................... 5.7 5.6
Other......................................................... 6.8 9.3
----- -----
87.9 88.9
----- -----
Liabilities:
Accelerated depreciation...................................... 9.7 10.5
Other......................................................... 3.0 8.4
----- -----
12.7 18.9
----- -----
Net Deferred Tax Asset.......................................... $75.2 $70.0
===== =====
</TABLE>
The classification of the net deferred tax asset on the Consolidated Balance
Sheet is as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997
--------------------- ----- -----
<S> <C> <C>
Net current deferred tax asset (included in Other Current
Assets)...................................................... $73.8 $76.5
Net long-term deferred tax asset (included in Other Assets)... 1.4 --
Net long-term deferred tax liability.......................... -- (6.5)
----- -----
Net Deferred Tax Asset........................................ $75.2 $70.0
===== =====
</TABLE>
The effective tax rate on continuing operations differs from the U.S. federal
statutory tax rate as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Federal statutory income tax rate....................... 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit....... 2.4 2.7 3.4
Foreign taxes, net...................................... -- 2.0 0.4
Foreign Sales Corporation............................... (1.8) (2.3) (2.8)
Other................................................... (1.1) (2.4) (0.5)
----- ----- -----
Effective Tax Rate...................................... 34.5% 35.0% 35.5%
===== ===== =====
Income taxes paid are as follows:
<CAPTION>
(Dollars in millions) 1998 1997 1996
--------------------- ----- ----- -----
<S> <C> <C> <C>
Federal income taxes paid, net.......................... $ 8.0 $41.9 $63.6
State income taxes paid, net............................ 7.0 4.0 9.8
Foreign income taxes paid, net.......................... 12.8 18.3 21.2
----- ----- -----
Total Paid.............................................. $27.8 $64.2 $94.6
===== ===== =====
</TABLE>
F-16
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LEASE COMMITMENTS
At fiscal year-end 1998, the Company was committed to minimum rentals under
noncancellable operating leases for fiscal years 1999 through 2003 and
thereafter, as follows, in millions: $11.8, $8.9, $5.8, $4.4, $3.5, and $23.4.
Rental expense for fiscal years 1998, 1997, and 1996, in millions, was $17.9,
$17.1, and $18.4, respectively.
CONTINGENCIES
The Company is currently a defendant in a number of legal actions and could
incur an uninsured liability in one or more of them. In the opinion of
management, the outcome of such litigation will not have a material adverse
effect on the consolidated financial position, results of operations or cash
flows of the Company.
The Company has been named by the U.S. Environmental Protection Agency or
third parties as a potentially responsible party under the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended, at
eight sites where the Company is alleged to have shipped manufacturing waste
for recycling or disposal. The Company is also involved in various stages of
environmental investigation and/or remediation under the direction of, or in
consultation with, foreign, federal, state and/or local agencies at certain
current or former Company facilities (including facilities disposed of in
connection with the Company's sale of its Electron Devices business during
1995, and the sale of its Thin Film Systems business during 1997). Expenditures
for environmental investigation and remediation amounted to $4.9 million in
1998 compared with $2.3 million in 1997, and $5.2 million in 1996.
For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. As of October 2, 1998, the Company nonetheless estimated that the
Company's future exposure for environmental related investigation and
remediation costs for these sites ranged in the aggregate from $21.6 million to
$48.9 million. The time frame over which the Company expects to incur such
costs varies with each site and facility, ranging up to approximately 30 years
as of October 2, 1998. Management believes that no amount in the foregoing
range of estimated future costs is more probable of being incurred than any
other amount in such range and therefore accrued $21.6 million in estimated
environmental costs as of October 2, 1998. The amount accrued has not been
discounted to present value.
As to other sites and facilities, the Company has gained sufficient knowledge
to be able to better estimate the scope and costs of future environmental
activities. As of October 2, 1998, the Company estimated that the Company's
future exposure for environmental related investigation and remediation costs
for these sites and facilities ranged in the aggregate from $39.7 million to
$73.7 million. The time frame over which the Company expects to incur these
costs varies with each site and facility, ranging up to approximately 30 years
as of October 2, 1998. As to each of these sites and facilities, management
determined that a particular amount within the range of estimated costs was a
better estimate of the future environmental liability than any other amount
within the range, and that the amount and timing of these future costs were
reliably determinable. Together, these amounts totaled $51.1 million at October
2, 1998. The Company accordingly accrued $22.3 million, at October 2, 1998,
which represents its best estimate of the future costs discounted at 4%, net of
inflation. This accrual is in addition to the $21.6 million described above.
F-17
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At October 2, 1998, the Company's reserve for environmental liabilities,
based upon future environmental related costs estimated by the Company as of
that date, was calculated as follows:
(Dollars in millions)
<TABLE>
<CAPTION>
NON- TOTAL
RECURRING RECURRING ANTICIPATED
YEAR COSTS COSTS FUTURE COSTS
---- --------- --------- ------------
<S> <C> <C> <C>
1999........................................ $ 2.3 $3.5 $ 5.8
2000........................................ 2.6 1.0 3.6
2001........................................ 2.6 0.2 2.8
2002........................................ 2.5 0.0 2.5
2003........................................ 2.4 0.0 2.4
Thereafter.................................. 52.0 3.6 55.6
----- ---- -----
Total costs................................. $64.4 $8.3 72.7
Less imputed interest....................... (28.8)
-----
Reserve amount.............................. $43.9
=====
</TABLE>
The amounts set forth in the foregoing table are only estimates of
anticipated future environmental related costs, and the amounts actually spent
in the years indicated may be greater or less than such estimates. The
aggregate range of cost estimates reflects various uncertainties inherent in
many environmental investigation and remediation activities and the large
number of sites where the Company is undertaking such investigation and
remediation activities. The Company believes that most of these cost ranges
will narrow as investigation and remediation activities progress. The Company
believes that its reserves are adequate, but as the scope of its obligations
becomes more clearly defined, these reserves may be modified and related
charges against earnings may be made.
Although any ultimate liability arising from environmental related matters
described herein could result in significant expenditures that, if aggregated
and assumed to occur within a single fiscal year, would be material to the
Company's financial statements, the likelihood of such occurrence is considered
remote. Based on information currently available to management and its best
assessment of the ultimate amount and timing of environmental related events,
the Company's management believes that the costs of these environmental related
matters are not reasonably likely to have a material adverse effect on the
consolidated financial statements of the Company.
The Company evaluates its liability for environmental related investigation
and remediation in light of the liability and financial wherewithal of
potentially responsible parties and insurance companies where the Company
believes that it has rights to contribution, indemnity and/or reimbursement.
Claims for recovery of environmental investigation and remediation costs
already incurred, and to be incurred in the future, have been asserted against
various insurance companies and other third parties. In 1992, the Company filed
a lawsuit against 36 insurance companies with respect to most of the above-
referenced sites and facilities. The Company received certain cash settlements
during fiscal years 1995, 1996, 1997 and 1998 from defendants in that lawsuit,
and has a $0.5 million receivable in Other Current Assets at October 2, 1998.
The Company has also reached an agreement with another insurance company under
which the insurance company has agreed to pay a portion of the Company's past
and future environmental related expenditures, and the Company therefore has a
$5.5 million receivable in Other Assets at October 2, 1998. Although the
Company intends to aggressively pursue additional insurance recoveries, the
Company has not reduced any liability in anticipation of recovery with respect
to claims made against third parties.
F-18
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SALE OF BUSINESS
In June 1997, the Company completed the sale of its Thin Film Systems
business (a product line of the Semiconductor Equipment segment). Total
proceeds received from the sale were $145.5 million in cash. A $51.5 million
reserve was recorded to cover, among other items, purchase price disputes,
retained liabilities, transaction costs, employee terminations, facilities
separation costs, indemnification obligations, litigation expense and other
contingencies. During the remainder of fiscal 1997, $10.3 million of this
reserve was utilized (primarily for the cash settlement of transaction and
legal indemnification and defense costs). During fiscal 1998, an additional
$7.2 million of this reserve was utilized (primarily for the cash settlement of
transaction, employee termination, facilities separation, and legal
indemnification and defense costs). The gain on the sale was $33.2 million (net
of income taxes of $17.8 million).
REORGANIZATION
On August 21, 1998, the Company's Board of Directors approved the development
of a detailed plan to reorganize the Company's core businesses in Health Care
Systems ("HCS"), Semiconductor Equipment ("SEB") and Instruments ("IB") into
three separate public companies by spinning off through a tax-free distribution
two of its businesses, SEB and IB, to stockholders. The final plan is subject
to stockholder approval as well as a favorable ruling from the U.S. Internal
Revenue Service confirming the tax-free nature of the proposed spin-offs for
the Company and its stockholders. The Company expects to complete the
reorganization by the end of fiscal 1999. Management estimates that one-time
net cash outlays of approximately $50 million will be required to complete this
reorganization.
While the capital structures of the three separate companies have not been
determined, it is expected that, upon consummation of the spin-off, each of HCS
and IB will have between $50 and $100 million of outstanding indebtedness under
the Company's term loans and notes payable, and that the Company will
contribute cash to SEB so that SEB will have approximately $100 million in cash
and cash equivalents and consolidated debt not exceeding $5 million.
PURCHASE BUSINESS COMBINATIONS
During fiscal years 1998, 1997, and 1996, the Company acquired a number of
businesses and certain assets and liabilities of other businesses. The
consolidated financial statements include the operating results of each
acquired business from the date of acquisition. Pro forma results of operations
have not been presented, because the effects of these acquisitions were not
material on either an individual or an aggregated basis.
Amounts allocated to goodwill are amortized on a straight-line basis over
periods ranging from 3 to 40 years.
Summary of purchase transactions (dollars in millions):
<TABLE>
<CAPTION>
ENTITY NAME CONSIDERATION CLOSING DATE
----------- ------------- ------------
<S> <C> <C>
Genus, Inc. .................................... $25.2 July 1998
Chrompack International, B.V. .................. $28.9 July 1998
Varian Iberica, S.L. ........................... $ 6.7 June 1998
Varian Korea, Ltd. ............................. $ 7.8 January 1998
GE Medical Systems--Radiotherapy and Parts...... $45.0 December 1997
Otsuka Electronics (USA) Inc. .................. $ 7.0 May 1997
Rainin Instruments Company, Inc. ............... $25.5 October 1996
Dynatech Precision Sampling Corporation......... $ 4.4 June 1996
</TABLE>
F-19
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INDUSTRY SEGMENTS
The Company's operations are grouped into three business segments: Health
Care Systems, Instruments and Semiconductor Equipment. Indirect and common
costs have been allocated through the use of estimates. Accordingly, the
following information is provided for purposes of achieving an understanding of
operations, but may not be indicative of the financial results of the reported
segments were they independent organizations. In addition, comparisons of the
Company's operations to similar operations of other companies may not be
meaningful.
The Health Care Systems business manufactures and sells healthcare systems,
including linear accelerators, simulators, brachytherapy systems, and related
data management systems and x-ray components. The Instruments business
manufactures and sells analytical and research instruments and vacuum products.
The Semiconductor Equipment business manufactures and sells ion implantation
processing systems used in the manufacture of integrated circuits. Included in
Eliminations and Other are certain insignificant support operations.
The Company operates various manufacturing and marketing operations outside
the United States. For fiscal 1998 and 1997, no single country outside the
United States accounted for more than 10% of total sales. Sales to customers
located in Korea were $177.9 million in fiscal 1996. For fiscal 1998, 1997 and
1996, no single country outside the United States accounted for more than 10%
of total assets. Sales between geographic areas are accounted for at cost plus
prevailing markups arrived at through negotiations between independent profit
centers. Related profits are eliminated in consolidation.
Included in the total of United States sales are export sales of $240 million
in fiscal 1998, $313 million in fiscal 1997, and $496 million in fiscal 1996.
Sales under prime contracts from the U.S. Government were approximately $13
million in fiscal 1998, $14 million in fiscal 1997, and $15 million in fiscal
1996.
F-20
<PAGE>
INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
SALES PRETAX EARNINGS IDENTIFIABLE ASSETS CAPITAL EXPENDITURES
----------------------- ---------------------- ---------------------- ----------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Health Care
Systems........... $ 540 $ 472 $ 464 $ 67 $ 64 $ 68 $ 369 $ 326 $ 282 $ 13 $ 11 $ 13
Instruments....... 543 527 481 55 43 33 366 307 248 19 19 19
Semiconductor
Equipment......... 338 424 650 31 70 135 198 175 262 10 12 24
Eliminations &
Other............. 1 3 4 (9) (12) (12) 7 10 10 1 2 1
------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Industry
Segments........ 1,422 1,426 1,599 144 165 224 940 818 802 43 44 57
General
Corporate......... -- -- -- (29) 16 (34) 278 286 217 6 12 12
Interest, Net..... -- -- -- (2) (3) (1) -- -- -- -- -- --
------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Continuing
Operations...... $ 1,422 $ 1,426 $ 1,599 $ 113 $ 178 $ 189 $1,218 $1,104 $1,019 $ 49 $ 56 $ 69
======= ======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
DEPRECIATION
-------------------
1998 1997 1996
------ ----- ------
<S> <C> <C> <C>
Health Care
Systems........... $ 13 $ 13 $ 12
Instruments....... 14 14 13
Semiconductor
Equipment......... 8 11 11
Eliminations &
Other............. 1 1 1
------ ----- ------
Total Industry
Segments........ 36 39 37
General
Corporate......... 7 7 6
Interest, Net..... -- -- --
------ ----- ------
Continuing
Operations...... $ 43 $ 46 $ 43
====== ===== ======
General Corporate Pretax Earnings for 1997 include the gain on the sale of
Thin Film Systems of $51 million.
GEOGRAPHIC SEGMENTS
<CAPTION>
SALES TO INTERGEOGRAPHIC
UNAFFILIATED CUSTOMERS SALES TO AFFILIATES TOTAL SALES PRETAX EARNINGS
----------------------- ---------------------- ---------------------- ----------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States..... $ 870 $ 995 $ 1,152 $ 304 $ 246 $ 256 $1,174 $1,241 $1,408 $ 92 $ 157 $ 200
International..... 550 429 444 72 60 61 622 489 505 61 20 36
Eliminations &
Other............. 2 2 3 (376) (306) (317) (374) (304) (314) (9) (12) (12)
------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Geographic
Segments........ 1,422 1,426 1,599 -- -- -- 1,422 1,426 1,599 144 165 224
General
Corporate......... -- -- -- -- -- -- -- -- -- (29) 16 (34)
Interest, Net..... -- -- -- -- -- -- -- -- -- (2) (3) (1)
------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Continuing
Operations...... $ 1,422 $ 1,426 $ 1,599 $ -- $ -- $ -- $1,422 $1,426 $1,599 $ 113 $ 178 $ 189
======= ======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
IDENTIFIABLE ASSETS
-------------------
1998 1997 1996
------ ----- ------
<S> <C> <C> <C>
United States..... $ 577 $ 565 $ 514
International..... 356 243 278
Eliminations &
Other............. 7 10 10
------ ----- ------
Total Geographic
Segments........ 940 818 802
General
Corporate......... 278 286 217
Interest, Net..... -- -- --
------ ----- ------
Continuing
Operations...... $1,218 1,104 $1,019
====== ===== ======
</TABLE>
Total sales is based on the location of the operation furnishing goods and
services. International sales based on final destination of products sold are
$767 million, $720 million, and $918 million, in 1998, 1997, and 1996,
respectively.
General Corporate Pretax Earnings for 1997 include the gain on the sale of
Thin Film Systems of $51 million.
F-21
<PAGE>
EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
ACCOUNTANTS
In November 1998, the Company's Board of Directors adopted a stockholder
rights plan. The plan provides for a dividend distribution of one preferred
stock purchase right (a "Right") for each outstanding share of common stock,
distributed to stockholders of record on December 4, 1998. The Rights will be
exercisable only if a person or group acquires 15% or more of the Company's
common stock (an "Acquiring Person") or announces a tender offer for 15% or
more of the common stock. Each Right will entitle stockholders to buy one one-
thousandth of a share of newly created Participating Preferred Stock, par value
$.01 per share, of the Company at an initial exercise price of $180 per Right,
subject to adjustment from time to time. However, if any person becomes an
Acquiring Person, each Right will then entitle its holder (other than the
Acquiring Person) to purchase at the exercise price common stock (or, in
certain circumstances, Participating Preferred Stock) of the Company having a
market value at that time of twice the Right's exercise price. These
Rightsholders would also be entitled to purchase an equivalent number of shares
at the exercise price if the Acquiring Person were to control the Company's
Board of Directors and cause the Company to enter into certain mergers or other
transactions. In addition, if an Acquiring Person acquired between 15% and 50%
of the Company's voting stock, the Company's Board of Directors may, at its
option, exchange one share of the Company's common stock for each Right held
(other than Rights held by the Acquiring Person). Rights held by the Acquiring
Person will become void. The Rights will expire on December 4, 2008, unless
earlier redeemed by the Board at $0.001 per Right.
F-22
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
--------------------------------------- ---------------------------------------
FIRST SECOND THIRD FOURTH TOTAL FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................... $344.8 372.8 340.0 364.5 1,422.1 $322.0 338.1 359.9 405.8 1,425.8
------ ----- ----- ----- ------- ------ ----- ----- ----- -------
Gross Profit............ $131.4 135.0 123.7 135.7 525.8 $111.9 123.9 132.4 154.9 523.1
------ ----- ----- ----- ------- ------ ----- ----- ----- -------
Net Earnings............ $ 19.7 23.0 18.5 12.6 73.8 $ 12.8 17.4 52.4 33.0 115.6
====== ===== ===== ===== ======= ====== ===== ===== ===== =======
Net Earnings Per Share--
Basic................. $ 0.66 0.77 0.62 0.43 2.47 $ 0.42 0.57 1.73 1.09 3.79
====== ===== ===== ===== ======= ====== ===== ===== ===== =======
Diluted............... $ 0.64 0.75 0.61 0.42 2.43 $ 0.41 0.55 1.68 1.06 3.67
====== ===== ===== ===== ======= ====== ===== ===== ===== =======
</TABLE>
The four quarters for net earnings per share may not add for the year
because of the different number of shares outstanding during the year.
Third quarter 1997 net earnings includes a $33.2 million ($1.06 per share)
after tax gain on the sale of the Thin Film Systems operations.
COMMON STOCK PRICES (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---------------------------------------- --------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock
High.................. $ 66 3/4 58 3/8 53 15/16 43 $ 51 7/8 59 1/2 56 1/4 62 1/8
Low................... $ 47 3/4 47 1/2 38 3/16 31 13/16 $ 44 1/8 49 47 1/8 52 5/8
Dividends Declared Per
Share................. $0.09 0.10 0.10 0.10 $0.08 0.09 0.09 0.09
</TABLE>
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Varian Associates, Inc.:
Our report on the consolidated financial statements of Varian Associates,
Inc. and Subsidiaries is included on page F-2 of this Form 10-K. In connection
with our audits of such financial statements, we have also audited the related
Financial Statement Schedule listed in Item 14(a) of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information required to
be included therein.
/s/ PricewaterhouseCoopers LLP
_____________________________________
PricewaterhouseCoopers LLP
San Jose, California
October 21, 1998
F-24
<PAGE>
SCHEDULE II
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS(/1/)
FOR THE FISCAL YEARS ENDED 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DEDUCTIONS
---------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIPTION AMOUNT PERIOD
- ----------- ---------- ---------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
NOTES & ACCOUNTS
RECEIVABLE:
Write-offs &
Fiscal Year Ended 1998.. $ 2,715 $ 3,020 Adjustments........ $ 3,091 $ 2,644
======= ======= ======= =======
Write-offs &
Fiscal Year Ended 1997.. $ 2,309 $ 1,468 Adjustments........ $ 1,062 $ 2,715
======= ======= ======= =======
Write-offs &
Fiscal Year Ended 1996.. $ 2,316 $ 876 Adjustments........ $ 883 $ 2,309
======= ======= ======= =======
ESTIMATED LIABILITY FOR
PRODUCT WARRANTY:
Actual Warranty
Fiscal Year Ended 1998.. $37,620 $59,433 Expenditures....... $52,806 $44,247
======= ======= ======= =======
Actual Warranty
Fiscal Year Ended 1997.. $49,251 $42,994 Expenditures....... $54,625(/2/) $37,620
======= ======= ======= =======
Actual Warranty
Fiscal Year Ended 1996.. $48,076 $52,680 Expenditures....... $51,505 $49,251
======= ======= ======= =======
</TABLE>
- --------
(1) As to column omitted the answer is "none."
(2) Includes a $5,226 deduction due to the sale of Thin Film Systems.
F-25
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
3-A Registrant's Restated Certificate of Incorporation (incorporated
herein by reference to the Registrant's Form 10-K for the year ended
September 27, 1996).
3-B Registrant's Bylaws.
4.1 Specimen Common Stock Certificate.
4.2 Rights Agreement dated as of November 20, 1998 between Registrant and
First Chicago Trust Company of New York, as Rights Agent, including
the Form of Rights Certificate (together with Election to Exercise)
attached thereto as Exhibit A, and the form of Certificate of
Designation of Registrant attached thereto as Exhibit B (incorporated
herein by reference to Registrant's Registration Statement on Form 8-A
filed on November 23, 1998 with respect to the NYSE).
10.1* Registrant's Omnibus Stock Plan, (incorporated herein by reference to
the Registrant's Form 10-K for the year ended September 26, 1997).
10.2* Registrant's 1982 Non-Qualified Stock Option Plan (incorporated herein
by reference to Exhibit 4.6 to the Registration Statement on Form S-8;
File No. 33-33660).
10.4* Registrant's Management Incentive Plan (incorporated herein by
reference to Registrant's Form 10-Q for the quarter ended March 31,
1995).
10.5* Registrant's Supplemental Retirement Plan (incorporated herein by
reference to Registrant's Form 10-Q for the quarter ended June 30,
1995).
10.6* Registrant's form of Indemnity Agreement with Directors and Executive
Officer (incorporated herein by reference to Registrant's Form 10-K
for the year ended October 1, 1993).
10.7* Registrant's form of Change in Control Agreement with certain
Executive Officers other than the Chief Executive Officer
(incorporated herein by reference to Registrant's Form 10-K for the
year ended October 1, 1993).
10.8* Registrant's Change in Control Agreement with J. Tracy O'Rourke
(incorporated herein by reference to Registrant's Form 10-K for the
year ended October 1, 1993).
10.9* Description of Certain Compensatory Arrangements between Registrant
and Directors (incorporated herein by reference to Registrant's Form
10-Q for the quarter ended December 31, 1993).
10.10* Description of Certain Compensatory Arrangements between Registrant
and Executive Officers (incorporated herein by reference to
Registrant's Form 10-K for the year ended September 30, 1994).
10.11* Description of Certain Relocation Arrangements between Registrant and
Executive Officers (incorporated herein by reference to Registrant's
Form 10-Q for the quarter ended December 30, 1994).
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
24 Power of Attorney by directors of the Company authorizing certain
persons to sign this Annual Report on Form 10-K on their behalf.
Financial Data Schedule for the fiscal year ended October 2, 1998
27 (EDGAR filing only).
</TABLE>
- --------
*Management contract or compensatory agreement.
<PAGE>
EXHIBIT 3-B
VARIAN ASSOCIATES, INC.
BYLAWS
MAY 15, 1992
REGISTERED OFFICE
1. REGISTERED OFFICE. The registered office shall be in the City of
Wilmington, County of New Castle, State of Delaware.
STOCKHOLDERS' MEETINGS
2. PLACE. All meetings of stockholders shall be held at the Office of the
corporation in Palo Alto, California, or at such other place as may be
designated from time to time by the Board of Directors.
3. ANNUAL MEETING. The annual meeting of stockholders for election of
directors shall be held each year in the month of February on a date and at a
time designated by the Board of Directors, at which the stockholders shall elect
the successors to the directors whose terms are expiring and transact any other
business properly brought before the meeting.
4. NOTIFICATION OF NOMINATIONS. Nominations for the election of directors
may be made by the Board of Directors or by any stockholder entitled to vote for
the election of directors. Any stockholder entitled to vote for the election of
directors at a meeting may nominate persons for election as directors only if
written notice of such stockholder's intent to make such nomination is given,
either by personal delivery or by United States mail, postage prepaid, to the
Secretary of the corporation not later than (i) with respect to the election to
be held at the 1987 Annual Meeting of stockholders, 10 days in advance of such
meeting, (ii) with respect to the election to be held at an annual meeting of
stockholders other than the 1987 Annual Meeting of stockholders, 60 days in
advance of such meeting, and (iii) with respect to the election to be held at a
special meeting of stockholders for the election of directors, the close of
business on the seventh day following the date on which notice of such meeting
is first given to stockholders. Each such notice shall set forth (a) the name
and address of the stockholder who intends to make the nomination and of the
person or persons to be nominated, (b) a representation that such stockholder is
a holder of record of stock of the corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice, (c) a description of all arrangements
or understandings between such stockholder and each nominee and any other person
or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by such stockholder, (d) such other information
regarding each nominee proposed by such stockholder as
1 of 7
<PAGE>
would have been required to be included in a proxy statement filed pursuant to
the proxy rules of the Securities and Exchange Commission had each nominee been
nominated, or intended to be nominated by the Board of Directors, and (e) the
consent of each nominee to serve as a director of the corporation if so elected.
The chairman of a stockholder meeting may refuse to acknowledge the nomination
of any person not made in compliance with the foregoing procedure.
5. SPECIAL MEETINGS. Special meetings of stockholders may be called at
any time by the Chairman of the Board, the President, or by the Board of
Directors.
6. NOTICE OF MEETINGS. A written notice of meeting stating the date,
place and hour, and in the case of a special meeting, the purpose or purposes,
shall be given not less than ten nor more than sixty days before the date of the
meeting of stockholders to each stockholder entitled to vote at the meeting.
Persons entitled to notice of or to vote at any meeting of
stockholders shall be those of record as stockholders on the record date fixed
by the Board of Directors.
7. QUORUM. The presence in person or by proxy of the persons entitled to
vote a majority of the shares having voting power at any meeting of stockholders
constitutes a quorum for the transaction of business, except as may otherwise be
provided by Delaware law or by the Certificate of Incorporation. For purposes
of the foregoing sentence, if the corporation shall at any time have outstanding
shares of any class entitling the holder to more or less than one full vote per
share, such shares shall be deemed to be that number of shares equal to the
aggregate number of votes to which the holders thereof are entitled.
If such quorum is not present or represented, the stockholders
entitled to vote thereat present in person or represented by proxy shall have
power to adjourn the meeting from time to time until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted which might have been transacted at
the meeting as originally called. If any meeting is adjourned for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, notice of the adjourned meeting shall be given as in the case
of an original meeting. Otherwise, no further notice of the time and place of
the adjourned meeting need be given other than by announcement at the meeting at
which such adjournment is taken.
8. VOTE REQUIRED. When a quorum is present at any meeting, the vote of a
majority of shares having voting power whose holders are present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the General
Corporation Law of Delaware or the Certificate of Incorporation a different vote
is required, in which case such express provisions shall govern the vote
required by the decision of such question.
9. PROXIES. Stockholders may vote at all meetings either in person or by
proxy. All proxies shall be in writing, executed by the person entitled to vote
or by his duly authorized attorney, and delivered to the Secretary of the
corporation.
2 of 7
<PAGE>
10. PREPARATION OF STOCK LEDGER. The Treasurer shall prepare and make, at
least ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
11. ORGANIZATION. At each meeting of stockholders, the Chairman of the
Board, or in his absence a Chairman chosen by the vote of a majority in interest
of the stockholders present in person or represented by proxy and entitled to
vote thereat, shall act as chairman. The Secretary, or in his absence an
Assistant Secretary or in the absence of the Secretary and all Assistant
Secretaries a person whom the chairman of the meeting shall appoint, shall act
as secretary of the meeting and keep a record of the proceedings thereof. The
Board of Directors of the corporation shall be entitled to make such rules or
regulations for the conduct of meetings of stockholders as it shall deem
necessary, appropriate or convenient. Subject to such rules and regulations of
the Board of Directors, if any, the chairman of the meeting shall have the right
and authority to prescribe such rules, regulations and procedures and to do all
such acts as, in the judgment of such chairman, are necessary, appropriate or
convenient for the proper conduct of the meeting, including, without limitation,
establishing an agenda or order of business for the meeting, rules and
procedures for maintaining order at the meeting and the safety of those present,
limitations on participation in such meeting to stockholders of record of the
corporation and their duly authorized and constituted proxies, and such other
persons as the chairman shall permit, restrictions on entry to the meeting after
the time fixed for the commencement thereof, limitations on the time allotted to
questions or comments by participants and regulation of the opening and closing
of the polls for balloting on matters which are to be voted on by ballot.
Unless, and to the extent, determined by the Board of Directors or the chairman
of the meeting, meeting of stockholders shall not be required to be held in
accordance with rules of parliamentary procedures.
DIRECTORS' MEETINGS
12. REGULAR MEETINGS. Regular meetings of the Board of Directors may be
held without notice at such times and places as shall be determined by the Board
of Directors, provided if a change is made in the time or place of any such
meeting, prior notice shall be given of the time and place of such meeting as in
the case of a special meeting of the Board of Directors.
13. SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called by the Chairman of the Board, the President or a majority of the Board of
Directors. Prior notice of the time and place of special meetings shall be given
to each director personally, or by telephone
3 of 7
<PAGE>
to such telephone number or numbers of which the director from time to time
shall advise the Secretary for receiving such notice.
If given by telephone call, notice shall be deemed given to a director
when a message stating the time, place and purpose of the meeting is left with a
person answering the telephone at any such number with a request that the
director be so informed, or if no such telephone number is answered, then when
at least two attempts have been made to reach each telephone number designated
by the director for receiving telephonic notice, with an interval of not less
than one hour. A certification shall be prepared and filed with the minutes
stating the date, time and results of telephonic notice given to any director
not present at a meeting with respect to which his waiver of notice of meeting
is not filed with the minutes.
Alternatively, notice of special meetings may be given by mail,
telegram, telex, or other form of written communication, charges prepaid,
addressed to him at his address as it is shown upon the records of the
corporation, deposited at least 96 hours in advance of the meeting if by mail,
or dispatched at least 24 hours in advance of the meeting if by telegram, telex
or similar communication.
14. VALIDATION. The transactions of any meeting of the Board of
Directors, however called and noticed and wherever held, are as valid as though
had at a meeting duly held after regular call and notice, if a quorum is present
and if, either before or after the meeting, each of the directors not present
signs a written waiver of notice, a consent to holding the meeting, or an
approval of the minutes thereof, which waiver, consent, or approval shall be
filed with the corporate records or made a part of the minutes of the meeting.
15. ADJOURNED MEETINGS. In the absence of a quorum, a majority of the
directors present may adjourn from time to time. Notice of the time and place
of holding an adjourned meeting need not be given to directors absent at the
meeting which was adjourned, if the time and place of the adjourned meeting are
fixed at the meeting which was adjourned.
16. ACTION WITHOUT MEETING. Any action required or permitted to be taken
at any meeting by the Board of Directors or of any committee thereof may be
taken without meeting, if all members of the Board or committee consent thereto
in writing, and the writing or writings are filed with the minutes of the Board
or committee.
17. COMMITTEES. The Board of Directors may, by resolution or resolutions
passed by a majority of the whole Board of Directors, designate an executive
committee and such other committees as it shall determine, each committee to
consist of one or more directors, and may delegate to such committees any of the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, except power or authority with reference to
amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders, the sale, lease or exchange of
all or substantially all of the corporation's property and assets, recommending
to the stockholders a dissolution of the corporation or a revocation of a
dissolution, or amending the By-laws of the corporation. The Board may
designate one or more directors as alternate members of any
4 of 7
<PAGE>
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of a member of a committee and
all alternates, the member or member thereof present at a meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of Board of Directors to act at the meeting
in the place of any such absent or disqualified member or alternate member. The
Chairman of the Board may appoint pro tempore as chairman of any committee of
the Board any other member or alternate member of the committee in the event of
the absence of the chairman of the committee.
Each committee shall keep regular minutes of its meeting and report
the same to the Board of Directors when required.
OFFICERS
18 OFFICERS. The officers of the corporation shall be a Chairman of the
Board, a President, one or more Executive Vice Presidents or Vice Presidents, a
Secretary, a Treasurer, a Controller, and such other officers with such titles
and duties as the Board of Directors may from time to time determine. These
officers shall be chosen annually by the Board of Directors, and each shall hold
his office until he shall resign or be removed, become otherwise disqualified to
serve, or his successor shall be selected and qualify. One person may hold two
or more offices.
19. SUBORDINATE OFFICERS. The corporation may also have, at the
discretion of the Board of Directors, assistant secretaries, assistant
treasurers, assistant controllers, and such other subordinate officers as the
business of the corporation may require. They shall hold office for such
period, have such authority and perform such duties as the Board of Directors,
or subject to the control of the Board of Directors, the Chief Executive
Officer, may from time to time determine. Each such assistant officer, in the
order determined by his superior officer or by the Chief Executive Officer,
shall perform the duties and exercise the powers of the superior officer in the
absence or disability of his superior officer.
20. REMOVAL. Any officer may be removed by the Board of Directors at any
time, either with or without cause.
21. CHAIRMAN OF THE BOARD. The Chairman of the Board shall be the Chief
Executive Officer of the corporation, shall have general supervision, direction
and control of the business and officers of the corporation and shall possess
such powers and perform such duties as usually appertain to this office in
business corporations, shall if present preside at all meetings of the
stockholders and of the Board of Directors, and shall exercise such additional
powers and perform such additional duties as are assigned to him by the Board of
Directors.
22. PRESIDENT. The President shall possess such powers and perform such
duties as assigned by the Chief Executive Officer.
23. EXECUTIVE VICE PRESIDENTS AND VICE PRESIDENTS. The Executive Vice
Presidents and Vice Presidents shall have such powers and perform such other
duties as from time to time
5 of 7
<PAGE>
may be prescribed for them respectively by the Board of Directors, or subject to
the control of the Board of Directors, by the Chief Executive Officer.
In the event of the disability of both the Chief Executive Officer and
the President, or such absence or unavailability of both of them so that neither
is able to exercise the duties and powers of the chief executive officer of the
corporation, the Executive Vice Presidents shall perform such duties and have
such powers of the President, and be subject to such restrictions, as designated
by the Board of Directors, or by the Chief Executive Officer if the board of
Directors shall not have made such determination.
24. SECRETARY. The Secretary shall have the duty to record the
proceedings of the stockholders and Board of Directors and shall perform the
usual duties of a corporate secretary.
25. TREASURER. The Treasurer shall have custody of the corporate funds,
securities and other properties, and shall deposit all monies and other valuable
effects in the name of and to the credit of the corporation in such depositories
as may be designated by the Board of Directors. He shall disburse the funds of
the corporation in accordance with the general policies and rules established
from time to time by the Board of Directors. He shall also have custody of the
stockholder ledger of the corporation.
26. CONTROLLER. The Controller shall be the principal officer in charge
of the accounts of the corporation and shall be responsible for the adequacy,
custody and operation of all accounting books and records of the corporation
under the general policies and rules established by the Board of Directors. He
shall establish and direct all accounting policies and procedures throughout the
corporation, and shall be responsible for the approval of the auditing and
accounting provisions of all contracts, leases, and agreements of the
corporation and the maintenance of adequate records relating thereto.
He shall prepare, or cause to be prepared, and shall interpret all
financial statements and statistical reports of the corporation, shall transmit
such statements and reports to such persons as the Board of Directors may
designate, and at all times he shall have direct access to the Board of
Directors on any matter.
MISCELLANEOUS
27. RECORD DATE. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which shall not be more than sixty nor less than ten days before the date
of such meeting, nor more than sixty says prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
6 of 7
<PAGE>
28. REGISTERED STOCKHOLDERS. The corporation shall be entitled to
recognize the exclusive right of a person registered on its book as the owner of
shares to receive dividends, and to vote as such owner, and shall not be bound
to recognize any equitable or other claim to or interest in such share or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of Delaware.
29. INDEMNIFICATION. The corporation shall indemnify its officers,
directors, employees and agents to the fullest extent permitted by the General
Corporation Law of Delaware.
30. FISCAL YEAR. The corporation's fiscal year is the 51 to 53-week
period which ends on the Friday nearest September 30.
THE UNDERSIGNED, the duly elected, and qualified Secretary of VARIAN
ASSOCIATES, INC., a Delaware corporation, does hereby certify the foregoing to
be the bylaws of said corporation.
Date:___________________ ____________________________
7 of 7
<PAGE>
EXHIBIT 4.1 (page 1 of 2)
- -------- -----------
NUMBER SHARES
BU410470
- -------- -----------
COMMON VARIAN LOGO COMMON
STOCK STOCK
par value $1.00 THIS CERTIFICATE IS TRANSFERABLE
per share IN NEW YORK, NY
see reverse for
certain definitions
VARIAN ASSOCIATES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT CUSIP 922204 10 2
IS THE RECORD HOLDER OF
fully paid and non-assessable shares of the common stock of
Varian Associates, Inc., transferable on the books of this Corporation upon
surrender of this certificate properly endorsed. This certificate is not valid
until countersigned by a transfer agent and registered by a registrar.
In Witness Whereof, the duly authorized officers of the Corporation
have hereunto subscribed their names in facsimile on behalf of the
Corporation.
Dated:
/s/ J. Tracy O'Rourke
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
Countersigned and Registered:
First Chicago Trust Company of New York
Transfer Agent and Registrar
/s/ Andrew J. Lynch /s/ Joseph B. Phair
Authorized Signature SECRETARY
- -------------- --------------------------
American Bank Note Company
- -------------- --------------------------
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT--.......Custodian.........
TEN ENT--as tenants by the (Cust) (Minor)
entireties under Uniform Gifts to
JT TEN --as joint tenants with Minors Act...............
right of survivorship (State)
and not as tenants in
common
Additional abbreviations may also be used though not in the above list.
VARIAN ASSOCIATES, INC.
The corporation is authorized to issue shares of Common Stock, par value $1
per share, and Preferred Stock, par value $1 per share. Shares of Preferred
Stock may be issued from time to time in one or more series. The Board of
Directors is authorized to fix the designations and the powers, preferences
and relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof (including, without
limitation, the voting powers, if any, the dividend rate, conversion rights,
redemption price, or liquidation preference of any series of Preferred Stock),
to fix the number of shares constituting any such series, and to increase or
decrease the number of shares of any such series (but not below the number of
shares thereof then outstanding).
A statement (which may include a summary with proper references to the
provisions of the Restated Certificate of Incorporation of the corporation or
the resolution or resolutions of the Board of Directors fixing preferences) of
the designations and the powers, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof, granted to or imposed upon the respective classes or
series of shares of the corporation and upon the holders thereof as
established by the Restated Certificate of Incorporation or by the resolution
or resolutions of the Board of Directors determining preferences, and the
number of shares constituting each series of preferred stock and the
designation thereof, is available upon request and without charge at the
principal office of the corporation, 3050 Hansen Way, Palo Alto, California
94304-1000.
For value received, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAXPAYER IDENTIFICATION NUMBER OF ASSIGNEE
[ ]
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- shares
of the capital stock represented by the within Certificate and do hereby
irrevocably constitute and appoint ______________________________ Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated __________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Until the Separation Time (as defined in the Rights Agreement referred to
below), this certificate also evidences and entitles the holder hereof to
certain Rights as set forth in a Rights Agreement, dated as of November 20,
1998 (as such may be amended from time to time, the "Rights Agreement"),
between Varian Associates, Inc. (the "Company") and First Chicago Trust
Company of New York, as Rights Agent, the terms of which are hereby
incorporated herein by reference and a copy of which is on file at the
principal executive offices of the Company. Under certain circumstances, as
set forth in the Rights Agreement, such Rights may be redeemed, may be
exchanged for shares of Common Stock or other securities or assets of the
Company or a Subsidiary of the Company, may expire, may become void (if they
are "Beneficially Owned" by an "Acquiring Person" or an Affiliate or Associate
thereof, as such terms are defined in the Rights Agreement, or by any
transferee of any of the foregoing) or may be evidenced by separate
certificates and may no longer be evidenced by this certificate. The Company
will mail or arrange for the mailing of a copy of the Rights Agreement to the
holder of this certificate without charge within five days after the receipt
of a written request therefor.
Signature(s) Guaranteed:
By
THE SIGNATURE SHOULD BE GUARANTEED BY A
BROKERAGE FIRM OR A FINANCIAL INSTITUTION
THAT IS A MEMBER OF A SECURITIES APPROVED
MEDALLION PROGRAM, SUCH AS SECURITIES
TRANSFER AGENTS MEDALLION PROGRAM (STAMP),
STOCK EXCHANGES MEDALLION PROGRAM (SEMP) OR
NEW YORK STOCK EXCHANGE, INC. MEDALLION
SIGNATURE PROGRAM (MSP).
<PAGE>
EXHIBIT 21
-----------
VARIAN ASSOCIATES, INC.
SUBSIDIARIES OF THE REGISTRANT
FISCAL 1998
-----------
ORGANIZED UNDER PERCENTAGE OF VOTING
LAWS OF SECURITIES OWNED
--------------- --------------------
VARIAN ASSOCIATES, INC. (REGISTRANT):
Varian Associates Limited California 100%
Varian Inter-American Corp. California 100%
Varian Investment Corporation California 100%
Varian Realty Inc. California 100%
Varian Asia, Ltd. Delaware 100%
Varian China, Ltd. Delaware 100%
Varian Biosynergy, Inc. Delaware 100%
Varian Technologies, Inc. Delaware 100%
Varian Japan Holdings, Ltd. Delaware 100%
Varian Pacific, Inc. Delaware 100%
Varian Instruments of Puerto Rico, Inc. Delaware 100%
Varian Ltd. Delaware 100%
Varian Argentina, Ltd. Delaware 100%
Varian India Pvt., Ltd. Delaware 100%
Chrompack Inc. New Jersey 100%
Mansfield Insurance Company Vermont 100%
Varian Australia Pty., Ltd. Australia 100%
Varian Holdings (Australia) Pty. Limited Australia 100%
Varian Gesellschaft m.b.H Austria 100%
Varian Belgium, N.V. Belgium 100%
Chrompack Belgium B.V. Belgium 100%
Varian Industria E Comercia Limitada Brazil 100%
Intralab Instrumentacao Analytica Ltda. Brazil 100%
Varian Canada Inc. Canada 100%
Varian AS Denmark 100%
Varian - TEM Limited England 100%
Chrompack UK Ltd. England 100%
Varian S.A. France 100%
Varian Medical France S.A.S France 100%
Varian Oncology Services Generale, SARL France 100%
Chrompack France S.a.r.l. France 100%
Varian - Dosetek OY Finland 100%
Varian GmbH Germany 100%
Chrompack GmbH Germany 100%
Varian S.p.A. Italy 100%
Chrompack Italia s.r.l. Italy 100%
Varian Japan K.K. Japan 100%
Varian Technologies Korea, Ltd. Korea 100%
All of the above subsidiaries are included in the Company's consolidated
financial statements. The names of certain consolidated subsidiaries have been
omitted because, considered in the aggregate as a single subsidiary, they would
not consitute a significant subsidiary.
1 of 2
<PAGE>
EXHIBIT 21 (CONTINUED)
---------------------
VARIAN ASSOCIATES, INC.
SUBSIDIARIES OF THE REGISTRANT
FISCAL 1998
-----------
ORGANIZED UNDER PERCENTAGE OF VOTING
LAWS OF SECURITIES OWNED
--------------- --------------------
VARIAN ASSOCIATES, INC. (REGISTRANT):
Varian, S.A. Mexico 100%
Chrompack Norge AS Norway 100%
Varian AB Sweden 100%
Chrompack Swerige AB Sweden 100%
Varian International AG Switzerland 100%
Varian Nederland B.V. The Netherlands 100%
Varian FSC B.V. The Netherlands 100%
Chrompack International B.V. The Netherlands 100%
Chrompack B.V. The Netherlands 100%
Chrompack Nederland B.V. The Netherlands 100%
Chrompack Onroerend Goerd B.V. The Netherlands 100%
Chrompack Holding B.V. The Netherlands 100%
Chrompack Lease B.V. The Netherlands 100%
Europe Chemical Services Beheer B.V. The Netherlands 100%
Caribbean Charter Company The Netherlands 100%
Varian Technologies, C.A. Venezuela 100%
Varian Iberica, S.L. Spain 100%
Varian Korea, Ltd. Korea 100%
Nippon Oncology Systems, Ltd. Japan 49%
All of the above subsidiaries are included in the Company's consolidated
financial statements. The names of certain consolidated subsidiaries have been
omitted because, considered in the aggregate as a single subsidiary, they would
not consitute a significant subsidiary.
2 of 2
<PAGE>
EXHIBIT 23
-----------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Varian Associates, Inc. on Forms S-8 (Nos. 33-46000, 33-33661, 33-33660, 2-
95139, and 33-1425) and Forms S-8 and S-3 (No. 33-40460) of our reports dated
October 21, 1998, on our audits of the consolidated financial statements and
financial statement schedule of Varian Associates, Inc. as of October 2, 1998
and September 26, 1997 and for each of the three fiscal years in the period
ended October 2, 1998, which reports are included or incorporated by reference
in this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
------------------------------
PricewaterhouseCoopers LLP
San Jose, California
December 29, 1998
<PAGE>
Exhibit 24
POWER OF ATTORNEY
The undersigned directors of Varian Associates, Inc., a Delaware
corporation ("Company"), hereby constitute and appoint Robert A. Lemos and
Joseph B. Phair, and each of them with full power to act without the other, the
undersigned's true and lawful attorney-in-fact, with full power of substitution
and resubstitution, for the undersigned and in the undersigned's name, place and
stead in the undersigned's capacity as a director of the Company, to execute in
the name and on behalf of the undersigned of the Company's Annual Report on Form
10-K for the fiscal year ended October 2, 1998 ("Report"), under the Securities
Exchange Act of 1934, as amended, and to file such Report, with exhibits thereto
and other documents in connection therewith and any and all amendments thereto,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact, and each of them, full power and authority to do and perform each and
every act and thing necessary or desirable to be done and to take any other
action of any type whatsoever in connection with the foregoing which, in the
opinion of such attorney-in-fact, may be of benefit to, in the best interest of,
or legally required of, the undersigned, it being understood that the documents
executed by such attorney-in-fact on behalf of the undersigned pursuant to this
Power of Attorney shall be in such form and shall contain such terms and
conditions as such attorney-in-fact may approve in such attorney-in-fact's
discretion. This Power of Attorney may be executed in any number of
counterparts, all of which together shall constitute one and the same Power of
Attorney.
IN WITNESS WHEREOF, I have hereunto set my hand this ____ day of __________,
1998.
/s/ John Seely Brown /s/ Ruth M. Davis
- -------------------------------- -----------------------------------
John Seely Brown Ruth M. Davis
/s/ Robert W. Dutton /s/ Samuel Hellman
- -------------------------------- -----------------------------------
Robert W. Dutton Samuel Hellman
/s/ Terry R. Lautenbach /s/ Angus A. MacNaughton
- -------------------------------- -----------------------------------
Terry R. Lautenbach Angus A. MacNaughton
/s/ David W. Martin, Jr. /s/ John G. McDonald
- -------------------------------- -----------------------------------
David W. Martin, Jr. John G. McDonald
/s/ Wayne R. Moon /s/ David E. Mundell
- -------------------------------- -----------------------------------
Wayne R. Moon David E. Mundell
/s/ Burton Richter /s/ Elizabeth E. Tallett
- -------------------------------- -----------------------------------
Burton Richter Elizabeth E. Tallett
/s/ Jon D. Tompkins /s/ Richard W. Vieser
- -------------------------------- -----------------------------------
Jon D. Tompkins Richard W. Vieser
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-02-1998
<PERIOD-START> SEP-27-1998
<PERIOD-END> OCT-02-1998
<CASH> 149,667
<SECURITIES> 0
<RECEIVABLES> 392,596
<ALLOWANCES> 0
<INVENTORY> 204,464
<CURRENT-ASSETS> 839,781
<PP&E> 509,089
<DEPRECIATION> 294,867
<TOTAL-ASSETS> 1,218,295
<CURRENT-LIABILITIES> 504,889
<BONDS> 0
0
0
<COMMON> 29,743
<OTHER-SE> 527,802
<TOTAL-LIABILITY-AND-EQUITY> 1,218,295
<SALES> 1,422,125
<TOTAL-REVENUES> 1,422,125
<CGS> 896,285
<TOTAL-COSTS> 1,306,968
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,835
<INCOME-PRETAX> 112,740
<INCOME-TAX> 38,900
<INCOME-CONTINUING> 73,840
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 73,840
<EPS-PRIMARY> 2.47
<EPS-DILUTED> 2.43
</TABLE>
