<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 8-K
Current Report
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
March 8, 1999
---------------
Varian Associates, Inc.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
Delaware 1-7598 94-2359345
<S> <C> <C>
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
</TABLE>
3050 Hansen Way, Palo Alto, CA 94304-1000
(Address of Principal Executive Offices) (Zip Code)
---------------
Registrant's telephone number, including area code:
(650) 493-4000
Inapplicable
(Former Name or Former Address, if Changed Since Last Report)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Item 5. Other Events.
In connection with the distribution by Varian Associates, Inc., a Delaware
corporation (the "Registrant"), to holders of record of the common stock of the
Registrant at the close of business on March 24, 1999 (the "Distribution Record
Date") of one share of common stock of Varian, Inc., a Delaware corporation,
and one share of common stock of Varian Semiconductor Equipment Associates,
Inc., a Delaware corporation, for each share of the Registrant's common stock
owned on the Distribution Record Date, the Registrant, to be renamed Varian
Medical Systems, Inc., is furnishing an Information Statement in the form
attached hereto as Exhibit 99 and incorporated herein by reference.
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
99 Information Statement of Varian Medical Systems, Inc.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
VARIAN ASSOCIATES, INC.
(Registrant)
Date: March 8, 1999 By: /s/ Joseph B. Phair
--------------------------------------
Joseph B. Phair
Vice President, General Counsel and
Secretary
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
99 Information Statement of Varian Medical Systems, Inc.
</TABLE>
<PAGE>
EXHIBIT 99
Information Statement
Varian Medical Systems, Inc.
Common Stock
(par value $1 per share)
This Information Statement is being furnished in connection with the
distribution (the "Distribution") by Varian Associates, Inc., a Delaware
corporation ("Varian"), to holders of record of the common stock of Varian, par
value $1 per share ("Varian Common Stock"), at the close of business on March
24, 1999 (the "Distribution Record Date") of one share of common stock, par
value $0.01 per share (the "IB Common Stock"), of Varian, Inc., a Delaware
corporation ("IB"), and one share of common stock, par value $0.01 per share
(the "VSEA Common Stock"), of Varian Semiconductor Equipment Associates, Inc.,
a Delaware corporation ("VSEA"), for each share of Varian Common Stock owned on
the Distribution Record Date. See "The Distribution - Manner of Effecting the
Distribution."
IB and VSEA are wholly-owned subsidiaries of Varian. On or prior to the
Distribution, Varian will effectuate certain transactions (the "Internal
Transfers") intended to allocate assets and liabilities relating to (i) the
manufacture and sale of health care systems, including linear accelerators,
simulators, brachytherapy systems and related data management systems and x-ray
components (the "Health Care Systems Business") to Varian; (ii) the manufacture
and sale of analytical and research instruments and vacuum products (the
"Instruments Business") to IB and (iii) the manufacture and sale of ion
implantation processing systems used in the manufacture of integrated circuits
(the "Semiconductor Equipment Business") to VSEA. As of the Distribution,
Varian will change its name to "Varian Medical Systems, Inc." (Varian after the
Distribution being referred to herein as "VMS").
The Distribution is payable April 2, 1999 (the "Distribution Date"). Stock
distribution statements reflecting ownership of IB Common Stock and VSEA Common
Stock will be mailed as soon as practicable after the Distribution. No
consideration will be paid by Varian's stockholders for shares of IB Common
Stock and VSEA Common Stock received by them in the Distribution, nor will they
be requested to surrender or exchange Varian Common Stock in order to receive
IB Common Stock and VSEA Common Stock.
Varian Common Stock is expected to continue to be listed on the New York Stock
Exchange (the "NYSE") under the symbol "VAR" after the Distribution.
No proxies are being solicited in connection with this Information Statement
and you are requested not to send us a proxy.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission nor has the Securities
and Exchange Commission or any state securities commission passed upon the
accuracy or adequacy of this information. Any representation to the contrary is
a criminal offense.
See "Risk Factors" beginning on page 10 for a discussion of certain factors
that should be considered by holders of VMS Common Stock.
This Information Statement does not constitute an offer to sell or the
solicitation of an offer to buy any securities.
Stockholders of Varian with inquiries related to the Distribution should
contact First Chicago Trust Company of New York, the Distribution Agent for the
Distribution, at 1-800-756-8200 or the Secretary of Varian at 650-493-4000.
The date of this Information Statement is March 8, 1999.
<PAGE>
Cautionary Statement for Purposes of "Safe Harbor" Provisions of The Private
Securities Litigation Reform Act of 1995.
This Information Statement contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 concerning,
among other things, VMS's prospects, developments and business strategies for
its operations, all of which are subject to risks and uncertainties. These
forward-looking statements are identified by their use of such terms and
phrases as "intend," "intends," "intended," "goal," "estimate," "estimates,"
"estimated," "expect," "expects," "expected," "project," "projects,"
"projected," "projections," "plans," "anticipate," "anticipates,"
"anticipated," "should," "designed to," "foreseeable future," "believe,"
"believes," "believed" and "scheduled" and in many cases are followed by a
cross-reference to "Risk Factors."
When a forward-looking statement includes a statement of the assumptions or
bases underlying the forward-looking statement, the management of VMS cautions
that, while it believes such assumptions or bases to be reasonable and makes
them in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. Where, in any forward-
looking statement, VMS or its management expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The actual results of VMS may differ significantly from the results discussed
in the forward-looking statements. Factors that might cause such a difference
include (i) factors discussed under "Risk Factors" and particularly, in cases
where the forward-looking statement is followed by a cross reference to "Risk
Factors," the factors discussed in the section or sections under "Risk Factors"
that are referred to in the cross reference, (ii) the factors discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Forecasted Capitalization," and "Business" and (iii) the
following factors: 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 impact of managed care initiatives in the United States
on capital expenditures and resulting pricing pressures on medical equipment;
the ability to increase operating margins on higher sales; the impact of
economic conditions in Asian markets on sales in those areas; successful
implementation by VMS and certain third parties of corrective actions to
address the impact of the Year 2000; completion of the Distribution on the
current schedule within current budgets; the ability to sell certain surplus
assets in connection with the Distribution; the ability of VMS to realize
anticipated cost savings resulting from the Distribution; and other risks
detailed from time to time in the filings of VMS with the Securities and
Exchange Commission (the "Commission"). VMS undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary............................... 3
Introduction.......................... 9
Risk Factors.......................... 10
The Distribution...................... 22
Forecasted Capitalization............. 32
Pro Forma Consolidated Financial
Statements........................... 33
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... 39
Business.............................. 48
Management............................ 59
Amendment and Restatement of the
Varian Omnibus Stock Plan............ 67
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Amendment and Restatement of the Varian Management Incentive Plan..... 71
Ownership of VMS Common Stock......................................... 73
Financing............................................................. 75
Description of the Capital Stock...................................... 76
Limitation of Liability and Indemnification Matters................... 78
Delaware Law and Certain Charter and By-Law Provisions................ 78
Available Information................................................. 82
Incorporation of Certain Documents by Reference....................... 83
Index to Financial Statements......................................... F-1
</TABLE>
2
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Information Statement. Reference is made to, and this summary is qualified by,
the more detailed information set forth in this Information Statement, which
should be read in its entirety. Unless the context otherwise requires, (i)
references in this Information Statement to "VMS" refer to Varian and its
subsidiaries after giving effect to the Internal Transfers and the Distribution
and (ii) references in this Information Statement to the "Health Care Systems
Business" refer to the historical business and operations of the Health Care
Systems Business conducted by Varian prior to the Distribution.
VMS
Following the Internal Transfers and the Distribution, Varian will be renamed
Varian Medical Systems, Inc. and will continue to conduct the Health Care
Systems Business currently conducted by Varian. VMS will be a leading worldwide
supplier of integrated cancer-care systems, including CLINAC(TM) medical linear
accelerators and brachytherapy systems for treatment; simulators for therapy
planning and verification; and ancillary equipment, software and networking
systems to improve both therapeutic efficacy and administrative efficiency. VMS
will also be a premier supplier of x-ray tubes for the world's diagnostic
imaging industry, including tubes expressly designed for the most advanced
mammography and CT scanning applications.
The principal executive offices of VMS will be located at 3100 Hansen Way, Palo
Alto, California 94304-1030. Its telephone number at that address is (650) 493-
4000.
THE DISTRIBUTION
Distributing Company...... Varian Associates, Inc., a Delaware corporation.
Concurrently with the Distribution, Varian will
change its name to "Varian Medical Systems, Inc."
(Varian after the Distribution being referred to
herein as "VMS").
Distributed Companies..... Varian, Inc. and Varian Semiconductor Equipment
Associates, Inc., each a Delaware corporation and
each currently a wholly-owned subsidiary of Varian.
Distribution Ratio........ Each stockholder of record of Varian as of the
close of business on the Distribution Record Date
will receive one share of IB Common Stock and one
share of VSEA Common Stock for each share of Varian
Common Stock held on the Distribution Record Date
and will retain the shares of Varian Common Stock
held by such stockholder immediately prior to the
distribution (Varian Common Stock after the
Distribution being referred to herein as "VMS
Common Stock"). No consideration will be paid by
Varian stockholders for shares of IB Common Stock
and VSEA Common Stock to be received in the
Distribution. See "The Distribution - Manner of
Effecting the Distribution."
Shares to be
Distributed............... Approximately 30 million shares of IB Common Stock
and VSEA Common Stock (based on 29,985,829 shares
of Varian Common Stock outstanding on February 1,
1999). The shares to be distributed will constitute
100% of the outstanding shares of IB Common Stock
and VSEA Common Stock.
Distribution Record
Date...................... Close of business on March 24, 1999.
3
<PAGE>
Distribution Date......... April 2, 1999. On or prior to the Distribution
Date, the shares of IB Common Stock and VSEA Common
Stock to be distributed in the Distribution will be
delivered to First Chicago Trust Company of New
York, as Distribution Agent (the "Distribution
Agent"). The Distribution Agent will mail stock
distribution statements reflecting ownership of
shares of IB Common Stock and VSEA Common Stock as
soon as practicable after the Distribution. See
"The Distribution - Manner of Effecting the
Distribution."
Reasons for the
Distribution.............. The Distribution is designed to separate three
types of businesses that have different dynamics
and business cycles, serve different markets and
customers, are subject to different competitive
forces and must be managed with different long-term
and short-term strategies and goals. The
Distribution will allow the management of VMS to
focus on its own business, organize its capital
structure, evaluate its growth opportunities,
achieve market recognition, rationalize its
organizational structure and design equity-based
compensation programs targeted to its own
performance.
Internal Transfers........ On or prior to the Distribution Date, Varian
intends to consummate certain internal mergers and
stock and asset transfers intended to allocate
assets and liabilities relating to (i) the Health
Care Systems Business to VMS, (ii) the
Semiconductor Equipment Business to VSEA and (iii)
the Instruments Business to IB (the "Internal
Transfers"). See "The Distribution - Internal
Mergers and Transfers" and "Pro Forma Consolidated
Financial Statements."
Relationship Among VMS,
IB and VSEA After the
Distribution.............. For purposes of governing certain ongoing
relationships among VMS, VSEA and IB after the
Distribution and to provide mechanisms for an
orderly transition, Varian, IB and VSEA have
entered into a Distribution Agreement dated as of
January 14, 1999 providing for, among other things,
the Internal Transfers, the Distribution and cross-
indemnification provisions. Before the
Distribution, VMS, IB and VSEA will enter into
additional agreements, including (i) the Tax
Sharing Agreement (as defined), (ii) the Employee
Benefits Allocation Agreement (as defined), (iii)
the Transition Services Agreement (as defined) and
(iv) the Intellectual Property Agreement (as
defined) (such agreements other than the
Distribution Agreement are referred to herein
collectively as the "Ancillary Agreements"). See
"The Distribution - Relationship Among VMS, VSEA
and IB After the Distribution."
Financing................. Varian is required to renegotiate the terms of its
outstanding unsecured term loans (the "Term Loans")
to permit 50% of these loans to be assumed by IB in
connection with the Distribution. The Term Loans
contain covenants that limit future borrowings and
the payment of cash dividends and require the
maintenance of certain levels of working capital
and operating results of the borrower. In addition,
certain short-term notes payable of Varian and its
subsidiaries (the "Notes Payable") will, as a
result of the Internal Transfers and the debt
allocation provisions of the
4
<PAGE>
Distribution Agreement, remain outstanding as
direct and indirect obligations of VMS as of the
Distribution Date. Based on the outstanding
indebtedness of Varian under the Term Loans and
Notes Payable as of January 1, 1999 and Varian's
projected operating results and certain other
transactions through the Distribution Date, it is
anticipated that at the Distribution Date, VMS will
have between $50 million and $100 million of
outstanding indebtedness under the Term Loans and
Notes Payable. In connection with the Distribution,
Varian will contribute cash to VSEA so that at the
Distribution Date, VSEA will have approximately
$100 million in cash and cash equivalents and its
consolidated debt, expected to be comprised of
Notes Payable, will not exceed $5 million. Based on
the assumptions stated in such section, the
allocation of indebtedness to VMS at the
Distribution Date should approximate the amounts
reflected in "Forecasted Capitalization." See "The
Distribution" and "Financing."
Varian will enter into a new credit facility for
working capital and other general corporate
purposes. The credit facility may contain certain
representations and warranties; conditions;
affirmative, negative and financial covenants; and
events of default customary for such facilities. It
is anticipated that Varian will borrow amounts
under the new credit facility or under its existing
credit facility on or prior to the Distribution in
order to fund a portion of the cash contribution to
be made to VSEA and IB, pay transaction expenses
and for general corporate purposes. See
"Financing."
Tax Consequences.......... Varian has received a private letter ruling from
the Internal Revenue Service to the effect, among
other things, that receipt of shares of IB Common
Stock and VSEA Common Stock by stockholders of
Varian will be tax-free (the "Tax Ruling"). For a
description of the consequences to VMS and the
holders of Varian Common Stock if the Distribution
were not to qualify as tax-free, see "Risk
Factors - Federal Income Tax Considerations."
Distribution Agent........ First Chicago Trust Company of New York (the
"Distribution Agent").
VMS AFTER THE DISTRIBUTION
Board of Directors........ Effective as of the Distribution Date, following
the resignations of nine of Varian's directors (all
but one of whom are also currently directors of IB
or VSEA) and the appointment of one new director,
the Board of Directors of VMS is expected to
consist of the following seven persons: John Seely
Brown, Samuel Hellman, Terry R. Lautenbach, Richard
M. Levy, David W. Martin, Jr., Burton Richter and
Richard W. Vieser. See "Management - Board of
Directors."
Trading Market............ The VMS Common Stock is expected to continue to be
listed on the NYSE following the Distribution under
the ticker symbol "VAR." The trading price of the
VMS Common Stock will be substantially affected by
the Distribution. See "Risk Factors - Changes in
Trading Prices" and "The Distribution - Listing and
Trading of VMS Common Stock."
5
<PAGE>
Certain Provisions of
Certificate of
Incorporation, By-Laws
and Rights Plan........... Certain provisions of the Certificate of
Incorporation and By-Laws of VMS may have the
effect of making more difficult an acquisition of
control of VMS in a transaction not approved by
VMS's Board of Directors. In addition, Varian has
adopted a stockholder rights plan (the "Rights
Plan"), which, under certain circumstances, would
significantly dilute the interest in VMS of persons
seeking to acquire control of VMS without the prior
approval of VMS's Board of Directors. See "Risk
Factors - Certain Anti-takeover Features,"
"Description of the Capital Stock - Rights Plan"
and "Delaware Law and Certain Charter and By-Law
Provisions."
RISK FACTORS
Stockholders should consider carefully the specific investment considerations
set forth under "Risk Factors," as well as the other information set forth in
this Information Statement.
6
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents summary historical financial data of Varian. The
information set forth below should be read in conjunction with the historical
consolidated financial statements and notes thereto of Varian incorporated
herein by reference and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Varian's Annual Report to
Stockholders for the fiscal year ended October 2, 1998 and in Varian's
Quarterly Report on Form 10-Q for the quarter ended January 1, 1999, each of
which are incorporated herein by reference. The consolidated statement of
earnings data set forth below for the fiscal years ended October 2, 1998,
September 26, 1997 and September 27, 1996, and the consolidated balance sheet
data at October 2, 1998 and September 26, 1997 are derived from, and are
qualified by reference to, the audited consolidated financial statements of
Varian incorporated herein by reference. The consolidated statement of earnings
data for the quarters ended January 1, 1999 and January 2, 1998 and the balance
sheet data at January 1, 1999 are derived from the unaudited consolidated
financial statements of Varian incorporated herein by reference. The
consolidated statement of earnings data for fiscal years 1995 and 1994 and the
consolidated balance sheet data at fiscal year end 1996, 1995 and 1994 are
derived from audited consolidated financial statements of Varian not included
in this Information Statement.
<TABLE>
<CAPTION>
Quarters Ended Fiscal Years
---------------- --------------------------------------------
January January
1, 1999 2, 1998 1998 1997(1) 1996 1995 1994
------- ------- -------- -------- -------- -------- --------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Earnings
Data
Sales................... $282.3 $344.8 $1,422.1 $1,425.8 $1,599.4 $1,575.7 $1,313.4
Earnings (Loss) from
Continuing Operations
before Taxes.......... $ (3.7) $ 30.1 $ 112.7 $ 177.8 $ 189.2 $ 165.3 $ 109.1
Taxes on (loss)
earnings.............. (1.3) 10.4 38.9 62.2 67.1 59.5 41.5
------ ------ -------- -------- -------- -------- --------
Earnings (Loss) from
Continuing Operations.. (2.4) 19.7 73.8 115.6 122.1 105.8 67.6
Earnings from
Discontinued
Operations, Net of
Taxes.................. -- -- -- -- -- 33.5 11.8
------ ------ -------- -------- -------- -------- --------
Net Earnings (Loss)..... $ (2.4) $ 19.7 $ 73.8 $ 115.6 $ 122.1 $ 139.3 $ 79.4
====== ====== ======== ======== ======== ======== ========
Net Earnings (Loss) Per
Share - Basic
Net Earnings (Loss)
from Continuing
Operations............ $(0.08) $ 0.66 $ 2.47 $ 3.79 $ 3.93 $ 3.14 $ 1.97
Net Earnings from
Discontinued
Operations............ -- -- -- -- -- 1.00 0.34
------ ------ -------- -------- -------- -------- --------
Net Earnings (Loss) Per
Share.................. $(0.08) $ 0.66 $ 2.47 $ 3.79 $ 3.93 $ 4.14 $ 2.31
====== ====== ======== ======== ======== ======== ========
Net Earnings (Loss) Per
Share - Diluted
Net Earnings (Loss)
from Continuing
Operations............ $(0.08) $ 0.64 $ 2.43 $ 3.67 $ 3.81 $ 3.02 $ 1.90
Net Earnings from
Discontinued
Operations............ -- -- -- -- -- 0.95 0.33
------ ------ -------- -------- -------- -------- --------
Net Earnings (Loss) Per
Share.................. $(0.08) $ 0.64 $ 2.43 $ 3.67 $ 3.81 $ 3.97 $ 2.23
====== ====== ======== ======== ======== ======== ========
Dividends Declared Per
Share.................. $ 0.10 $ 0.09 $ 0.39 $ 0.35 $ 0.31 $ 0.27 $ 0.23
====== ====== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year End
At January 1, ------------------------------------------
1999 1998 1997 1996 1995 1994
------------- -------- -------- -------- -------- ------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets............ $1,173.9 $1,218.3 $1,104.3 $1,018.9 $1,003.8 $962.4
Long-term debt
(excluding current
portion)............... $ 106.2 $ 111.1 $ 73.2 $ 60.3 $ 60.3 $ 60.4
</TABLE>
- -------
(1) Fiscal year 1997 results include a $51.0 million pre-tax gain ($33.2
million after-tax or $1.06 per share) on the sale of the Thin Film Systems
business.
7
<PAGE>
PRO FORMA SUMMARY FINANCIAL DATA
The following table presents unaudited pro forma summary financial data of VMS
prepared to give effect to the Distribution. The unaudited pro forma summary
financial data should be read in conjunction with "Pro Forma Consolidated
Financial Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" herein and the historical consolidated
financial statements of Varian and the notes thereto incorporated herein by
reference. The unaudited pro forma statement of earnings data set forth below
was prepared to give effect to the Distribution for the quarter ended January
1, 1999 and for each of the most recent three fiscal years as if the
Distribution had occurred on the first day of the earliest period presented,
and does not purport to represent what the operations actually would have been,
or to project VMS's operating results for any future period. The unaudited pro
forma balance sheet data set forth below was prepared to give effect to the
Distribution as if it had occurred at January 1, 1999, and does not purport to
represent what the financial position actually would have been, or to project
VMS's financial position for any future date.
<TABLE>
<CAPTION>
Pro Forma
for the
Quarter
Ended Pro Forma for the Fiscal Years
January 1, --------------------------------
1999 1998 1997 1996
---------- ---------- ---------- ----------
(Dollars in millions,
except per share amounts)
<S> <C> <C> <C> <C>
Statement of Earnings Data
Sales............................ $105.0 $ 541.5 $ 476.3 $ 467.5
Operating Earnings (Loss) before
Taxes........................... $ (1.5) $ 55.4 $ 44.8 $ 54.2
Taxes on (loss) earnings......... $ (0.8) $ 17.4 $ 14.7 $ 18.3
Net Earnings (Loss) ............. $ (0.7) $ 38.0 $ 30.1 $ 35.9
Pro Forma Net Earnings (Loss) Per
Share - Basic(1)................ $(0.02) $ 1.27 $ 0.99 $ 1.16
Pro Forma Net Earnings (Loss) Per
Share - Diluted(2).............. $(0.02) $ 1.25 $ 0.96 $ 1.12
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
at January 1,
1999
-------------
(Dollars in
millions)
<S> <C>
Balance Sheet Data
Total assets..................................................... $466.5
Long-term debt (excluding current portion)....................... $ 53.6
</TABLE>
- -------
(1) The computation of pro forma net earnings per share - basic is based on the
weighted average number of shares of Varian Common Stock outstanding during
the respective periods.
(2) The computation of pro forma net earnings per share - diluted is based on
the sum of the weighted average number of shares of Varian Common Stock
outstanding and Varian's dilutive potential Common Stock during the
respective periods.
8
<PAGE>
INTRODUCTION
On February 19, 1999, the Varian Board of Directors declared a dividend payable
to each stockholder of record at the close of business on the Distribution
Record Date of one share of IB Common Stock and one share of VSEA Common Stock
for each share of Varian Common Stock held by such stockholder at the close of
business on the Distribution Record Date. As a result of the Distribution, 100%
of the outstanding shares of IB Common Stock and VSEA Common Stock will be
distributed to Varian stockholders on a pro rata basis. The Distribution will
be made on April 2, 1999.
Stockholders of Varian with questions concerning the Distribution should
contact the Distribution Agent at 1-800-756-8200 or Varian Associates, Inc.,
Corporate Secretary, 3050 Hansen Way, Palo Alto, California 94304, telephone
number (650) 493-4000. After the Distribution Date, stockholders of VMS with
inquiries related to their investment in VMS should contact Varian Medical
Systems, Inc., 3100 Hansen Way, Palo Alto, California 94304-1030, telephone
(650) 493-4000.
No person is authorized to give any information or to make any representations
other than those contained in this Information Statement and, if given or made,
such information or representations must not be relied upon as having been
authorized.
9
<PAGE>
RISK FACTORS
The following factors, in conjunction with the other information included in
this Information Statement (including the documents incorporated by reference
herein), should be carefully considered.
Lack of Recent Operating History as Separate Entities
Upon consummation of the Distribution, VMS will own and operate the Health Care
Systems Business, which does not have a recent operating history as a separate
entity.
After the Distribution, VMS will be a smaller and less diversified company than
Varian was prior to the Distribution. The ability of VMS to satisfy its
obligations and maintain profitability will be solely dependent upon its own
future performance, and VMS will not be able to rely on the capital resources
and cash flows of the other two businesses. The future performance and cash
flows of VMS will be subject to prevailing economic conditions and to
financial, business and other factors affecting its business operations,
including factors beyond its control.
The division of Varian may result in some temporary dislocation and
inefficiencies to the business operations, as well as the organization and
personnel structure, of VMS, and will also result in the duplication of certain
personnel, administrative and other expenses required for the operation of
independent companies. In addition, although after the Distribution VMS will
continue to be managed by its current operating management, the management of
VMS has not previously operated its business as a separate public company.
Accordingly, there can be no assurance that the transition will not alter or
disrupt the management and/or operations of VMS.
Potential Responsibility for Liabilities Not Expressly Assumed
The Distribution Agreement and the Ancillary Agreements allocate among VMS,
VSEA and IB responsibility for various indebtedness, liabilities and
obligations. See "The Distribution - Relationship Among VMS, VSEA and IB after
the Distribution." It is possible that a court would disregard this contractual
allocation of indebtedness, liabilities and obligations among the parties and
require VMS, VSEA or IB or their respective subsidiaries to assume
responsibility for obligations allocated to another party, particularly if such
other party were to refuse or was unable to pay or perform any of its allocated
obligations.
Potential Indemnification Liabilities
Under the terms of the Distribution Agreement and certain of the Ancillary
Agreements, each of VMS, VSEA and IB has agreed to indemnify the other parties
(and certain related persons) from and after consummation of the Distribution
with respect to certain indebtedness, liabilities and obligations, which
indemnification obligations could be significant. The availability of such
indemnities will depend upon the future financial strength of the companies. No
assurance can be given that the relevant company will be in a position to fund
such indemnities. In addition, the Distribution Agreement generally provides
that if a court prohibits a company from satisfying its indemnification
obligations, then such indemnification obligations will be shared equally
between the two other companies. See "The Distribution - Relationship Among
VMS, VSEA and IB after the Distribution."
Debt Leverage after the Distribution
Immediately following the Distribution, VMS will have somewhat greater debt
leverage than Varian had prior to the Distribution. As of January 1, 1999,
Varian had total long and short-term debt of approximately $152 million and
total stockholders' equity of approximately $556 million. Based on Varian's
outstanding indebtedness as of January 1, 1999 and projected operating results
and certain other transactions through the Distribution Date, on a pro forma
basis giving effect to the Distribution, VMS would have total long- and short-
term debt of approximately $72 million and total stockholders' equity of
approximately $153 million. The allocation of indebtedness to VMS reflects, in
substantial part, its expected capital requirements and cash flows. See
"Forecasted Capitalization."
The degree to which VMS is leveraged could have important consequences,
including the following: (i) VMS's ability to obtain additional financing in
the future for working capital, capital expenditures, product development,
acquisitions,
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general corporate purposes or other purposes may be impaired; (ii) a portion of
VMS's and its subsidiaries' cash flow from operations must be dedicated to the
payment of the principal of and interest on its indebtedness; (iii) the Term
Loans of Varian contain, and any credit agreement of VMS following the
Distribution may contain, certain restrictive financial and operating
covenants, including, among others, requirements that VMS satisfy certain
financial ratios; (iv) a portion of VMS's borrowings may be at floating rates
of interest, causing VMS to be vulnerable to increases in interest rates; (v)
VMS's degree of leverage may make it more vulnerable in a downturn in general
economic conditions and (vi) VMS's degree of leverage may limit its flexibility
in responding to changing business and economic conditions. In addition, in a
lawsuit by an unpaid creditor or representative of creditors, such as a trustee
in bankruptcy, a court may be asked to void the Distribution (in whole or in
part) as a fraudulent conveyance and to require that the stockholders return
some or all of the shares of VSEA Common Stock and/or IB Common Stock to VMS or
require each of VMS, VSEA or IB to fund certain liabilities of the other
companies for the benefit of creditors. See " - Fraudulent Transfer
Considerations; Legal Dividend Requirements."
Federal Income Tax Considerations
Varian has received the Tax Ruling from the Internal Revenue Service (the
"IRS") to the effect that, among other things, no gain or loss will be
recognized by the holders of Varian Common Stock as a result of the
Distribution and no gain or loss will be recognized by Varian upon the
Distribution. See "The Distribution - Federal Income Tax Aspects of the
Distribution." Such rulings, while generally binding upon the IRS, are subject
to certain factual representations and assumptions. If such factual
representations and assumptions were incorrect in any material respect, such
ruling would be jeopardized. Varian is not aware of any facts or circumstances
that would cause such representations and assumptions to be untrue. Varian, IB
and VSEA have agreed to certain restrictions on their future actions to provide
further assurances that the Distribution will qualify as tax-free. See "The
Distribution - Relationship Among VMS, VSEA and IB After the Distribution - Tax
Sharing Agreement."
If one or both of the distributions comprising the Distribution fail to qualify
as a tax-free spin-off under Section 355 of the Internal Revenue Code of 1986,
as amended (the "Code"), then VMS will recognize gain equal to the difference
between the fair market value of the stock of the nonqualifying company or
companies and Varian's adjusted tax basis in such stock. If VMS were to
recognize gain on one or both of the distributions, such gain and the resulting
tax liability likely would be very substantial.
Furthermore, if either distribution were not to qualify as a tax-free spin-off
under Section 355 of the Code, each holder of Varian Common Stock who receives
shares of IB Common Stock and VSEA Common Stock in the Distribution would be
treated as if such stockholder received a taxable distribution in an amount
equal to the fair market value of the IB Common Stock or VSEA Common Stock
received, which would result in (i) a dividend to the extent of such
stockholder's pro rata share of Varian's current and accumulated earnings and
profits, (ii) a reduction in such stockholder's basis in Varian Common Stock to
the extent the amount received exceeds such stockholder's share of earnings and
profits and (iii) gain from the exchange of Varian Common Stock to the extent
the amount received exceeds both such stockholder's share of earnings and
profits and such stockholder's basis in such common stock.
Section 355(e), which was added to the Code in 1997, generally provides that a
company that distributes shares of a subsidiary in a spin-off that is otherwise
tax-free will incur federal income tax liability if 50% or more, by vote or
value, of the capital stock of either the company making the distribution or
the spun-off subsidiary is acquired (a "50% Ownership Shift") by one or more
persons acting pursuant to a plan or series of related transactions that
includes the spin-off. There is a presumption that any acquisition of 50% or
more, by vote or value, of the capital stock of the company or the subsidiary
that occurs within two years before or after the spin-off is pursuant to a plan
that includes the spin-off. However, the presumption may be rebutted by
establishing that the spin-off and the acquisition are not part of a plan or
series of related transactions. Among the factual representations made by
Varian to the IRS in connection with the Tax Ruling is the representation that
each of the distributions is not part of such a plan or series of related
transactions. If VMS, IB or VSEA were to undergo a 50% Ownership Shift,
particularly if such 50% Ownership Shift occurred within two years after the
Distribution Date, there can be no assurance that the IRS will not assert that
such ownership shift occurred pursuant to a plan or series of related
transactions and therefore that the Distribution is taxable under Section
355(e).
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If a distribution is taxable solely under Section 355(e), VMS will recognize
gain equal to the difference between the fair market value of the VSEA Common
Stock and IB Common Stock and Varian's adjusted tax basis in such stock.
However, holders of Varian Common Stock would not recognize gain or loss as a
result of the Distribution. If VMS were to recognize gain on the distributions,
such gain and the resulting tax liability likely would be very substantial.
The Tax Sharing Agreement will allocate responsibility for the possible
corporate tax burden resulting from the Distribution. Each of VMS, IB and VSEA
will be responsible for any corporate taxes resulting from the Distribution
attributable to action taken or permitted by that entity or its affiliates
after the Distribution. If the Distribution is found to be taxable but none of
VMS, IB and VSEA has done anything to cause the Distribution to be taxable,
each company generally will be liable for one-third of those taxes. See "The
Distribution - Relationship Among VMS, VSEA and IB after the Distribution - Tax
Sharing Agreement."
Changes in Trading Prices
It is expected that the VMS Common Stock will continue to be listed and traded
on the NYSE after the Distribution. The trading price of the VMS Common Stock
will be substantially affected by the Distribution. The combined trading prices
of the VMS Common Stock, the VSEA Common Stock and the IB Common Stock held by
stockholders after the Distribution may be less than, equal to or greater than
the trading price of the Varian Common Stock prior to the Distribution. See
"The Distribution - Listing and Trading of VMS Common Stock."
No Dividends Anticipated
Varian historically paid dividends on the Varian Common Stock at the current
annualized rate of $0.40 per share. Following the Distribution, VMS does not
anticipate paying dividends on the VMS Common Stock. The Term Loans of VMS
contain, and any credit agreement entered into by VMS may contain, provisions
that limit the ability of VMS (and/or its subsidiaries) to pay cash dividends.
Any determination to pay cash dividends in the future will be at the discretion
of the Board of Directors of VMS and will be dependent upon VMS's results of
operations, financial condition, contractual restrictions and other factors
deemed relevant at that time by VMS's Board of Directors. See "Financing."
Certain Anti-takeover Features
Varian has adopted a stockholder rights plan which, under certain
circumstances, would significantly dilute the equity interest in Varian, or VMS
following the Distribution, of persons seeking to acquire control of Varian, or
VMS following the Distribution, without the prior approval of the Board of
Directors. See "Description of the Capital Stock -Rights Plan." Certain
provisions of Varian's Certificate of Incorporation may make more difficult an
acquisition of control of VMS following the Distribution, without the approval
of the Board of Directors. See "Delaware Law and Certain Charter and By-Law
Provisions."
Certain Consent Requirements
Consummation of the Distribution and related transactions could result in a
violation of Varian's existing debt and other contractual arrangements or
require the consent of a third party to effect the necessary transfers of such
arrangements. In a substantial number of situations, an amendment, consent or
waiver from third parties will be required. Although Varian believes that no
single agreement for which an amendment, consent or waiver is being sought is
material, the failure of Varian to receive a significant number of such
amendments, waivers or consents could have a material adverse effect on VMS's
business, financial condition and results of operations.
Fraudulent Transfer Considerations; Legal Dividend Requirements
If a court in a lawsuit by an unpaid creditor or representative of creditors,
such as a trustee in bankruptcy, were to find that at the time Varian effected
the Distribution, Varian, VMS, VSEA or IB, as the case may be, (i) was
insolvent, (ii) was rendered insolvent by reason of the Distribution, (iii) was
engaged in a business or transaction for which Varian's, VMS's, VSEA's or IB's,
as the case may be, remaining assets constituted unreasonably small capital or
(iv) intended to
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incur, or believed it would incur, debts beyond its ability to pay such debts
as they matured, such court may be asked to void the Distribution (in whole or
in part) as a fraudulent conveyance and require that the stockholders return
some or all of the shares of VSEA Common Stock and IB Common Stock to VMS, or
require VMS, VSEA or IB, as the case may be, to fund certain liabilities of the
other companies for the benefit of creditors. The measure of insolvency for
purposes of the foregoing will vary depending upon the jurisdiction whose law
is being applied. Generally, however, each of Varian, VMS, VSEA and IB, as the
case may be, would be considered insolvent if the fair value of its assets were
less than the amount of its liabilities or if it incurred debt beyond its
ability to repay such debt as it matures. In addition, under Section 170 of the
Delaware General Corporation Law (the "DGCL") (which is applicable to Varian in
the Distribution), a corporation generally may make distributions to its
stockholders only out of its surplus (net assets minus capital) and not out of
capital.
Varian's Board of Directors and management believe that (i) Varian, and each of
VMS, VSEA and IB, will be solvent before and after the Distribution (in
accordance with the foregoing definitions), will be able to repay its debts as
they mature following the Distribution and will have sufficient capital to
carry on its businesses and (ii) the Distribution will be made entirely out of
surplus, as provided under Section 170 of the DGCL.
Transitioning to New Information Technology Infrastructures
VMS, IB and VSEA currently share a common information technology ("IT")
infrastructure. This IT infrastructure is essential to the daily operation of
the companies' marketing, manufacturing, distribution, billing and collections
and financial reporting processes.
After the Distribution, each of VMS will establish a separate IT infrastructure
as appropriate for its separate business and will transition to these new IT
infrastructure from the currently shared IT infrastructure. During this
transition, VMS will provide certain IT services to each of VSEA and IB
pursuant to the Transition Services Agreement described herein. These
transitions are not unlike transitions carried out previously by Varian in the
process of divesting discontinued operations and/or integrating the operations
of newly acquired companies. Consequently, management of VMS believes that it
possesses the skills and resources to design, implement and transition to VMS's
new IT infrastructure, while at the same time assisting each of VSEA and IB in
transitioning to their new IT infrastructures. However, these activities are
inherently complex and because of their significance to VMS's business,
unforeseen problems or errors in VMS's transition to its new IT infrastructure
could adversely affect the business and results of operations of VMS.
Assessment and correction of Year 2000 problems could complicate transition to
these new infrastructures. See "- Potential Impact of the Year 2000 Issue."
Uncertain Market Acceptance of Products; Product Obsolescence
There can be no assurance that VMS's future products will gain any significant
market acceptance and market share among physicians, patients and health care
payors, even if required regulatory approvals are obtained. Market acceptance
may depend on a variety of factors, including educating physicians regarding
the use of a new procedure, overcoming physician objections to certain effects
of the product or its related treatment regimen and convincing health care
payors that the benefits of the product and its related treatment regimen
outweigh its costs. Market acceptance and market share are also affected by the
timing of market introduction of competitive products. Accordingly, the
relative speed with which VMS can develop products, gain regulatory approval
and reimbursement acceptance and supply commercial quantities of the product to
the market are expected to be important factors in market acceptance and market
share.
In addition, the marketplace for medical products is characterized by rapid
change and technological innovation. As a result, VMS is subject to the risk of
product obsolescence, whether from long development or government approval
cycles or the development of improved products or processes by competitors. In
addition, the marketplace could conclude that the task for which VMS's product
was designed is no longer an element of a generally accepted diagnostic or
treatment regimen. Any development adversely affecting the market for equipment
manufactured by VMS would result in its having to reduce production volumes or
to discontinue manufacturing, which could have an adverse effect
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on VMS's business, results of operations and financial condition. There can be
no assurance that VMS's products or proprietary technologies will not become
uncompetitive or obsolete.
Technological Change and New Products
The market for VMS's products is characterized by rapid and significant
technological change, evolving industry standards and new product
introductions. Many of VMS's products are technologically innovative and
require significant planning, design, development and testing at the
technological, product and manufacturing process levels. These activities
require significant capital commitments and investment by VMS.
New product developments and new business opportunities in the health care
industry have inherent risks and unpredictability. These include proof of
feasibility; time required from proof of feasibility to routine production;
timing and cost of regulatory approvals; inventory overruns caused by phase-in
of new products and phase-out of old products; manufacturing, installation,
warranty and maintenance cost overruns; customer acceptance and payment;
customer demands for retrofits of both new and old products; and reaction of
competitors. There can be no assurance that VMS will successfully develop,
manufacture and phase in new products or that quarterly or yearly financial
performance dependent upon new product introductions will not be materially
adversely affected. See "Business - Research and Development."
The high cost of technological innovation is matched by the rapid and
significant change in the technologies governing the products that are
competitive in VMS's market, by industry standards that may change on short
notice and by the introduction of new products and technologies which may
render existing products and technologies uncompetitive. If VMS does not
successfully introduce new products, VMS's results of operations will be
materially adversely affected.
Government Regulation
VMS's products and manufacturing activities are subject to extensive and
rigorous government regulation, including the provisions of the U.S. Food, Drug
and Cosmetic Act. Commercial distribution in certain foreign countries is also
subject to government regulation. The process of obtaining required regulatory
approvals can be lengthy, expensive and uncertain. Moreover, regulatory
approvals, if granted, may include significant limitations on the indicated
uses for which a product may be marketed. The U.S. Food and Drug Administration
(the "FDA") actively enforces regulations prohibiting marketing of medical
devices without compliance with certain pre-market approval provisions. A
Section 510(k) application is required in order to market a new or modified
medical device, and if specifically required by the FDA, a pre-market approval
application, which is often more costly to obtain, may be necessary. The FDA
review process typically requires extended proceedings pertaining to the safety
and efficacy of new products, which may delay or hinder a product's timely
entry into the marketplace. The FDA and the FTC also regulate the content of
advertising and marketing materials relating to medical devices. There can be
no assurance that VMS's advertising and marketing materials regarding its
products are and will be in compliance with such regulations.
VMS is also subject to other federal, state, local and foreign laws,
regulations and recommendations relating to medical devices, safe working
conditions and laboratory and manufacturing practices. Failure to comply with
applicable regulatory requirements can result in, among other things, fines,
suspensions of approvals, seizures or recalls of products, operating
restrictions and criminal prosecutions. Furthermore, changes in existing
regulations or adoption of new regulations could affect the timing of, or
prevent VMS from obtaining, future regulatory approvals. The effect of
government regulation may be to delay for a considerable period of time or to
prevent the marketing and full commercialization of future products or services
that VMS may develop, and/or to impose costly requirements on VMS. There can
also be no assurance that additional regulations will not be adopted or current
regulations amended in such a manner as will materially adversely affect VMS.
See "Business - Government Regulation."
Uncertainty of Health Care Reform
The U.S. government has in the past, and may in the future, consider (and
certain state and local as well as a number of foreign governments are
considering or have adopted) health care policies intended to curb rising
health care costs. Such
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policies include rationing of government-funded reimbursement for health care
services and imposing price controls on providers of medical products and
services. VMS cannot predict what health care reform legislation or regulation,
if any, will be enacted in the United States or elsewhere. Significant changes
in the health care systems in the United States or elsewhere would likely have
a significant impact on the demand for VMS's products and services and the
manner in which VMS conducts its business. VMS is unable to predict whether
such proposals will be enacted, whether other health care legislation or
regulation affecting VMS's business, financial condition and results of
operations may be proposed or enacted in the future, or what effect any such
legislation or regulation would have on VMS's business, financial condition and
results of operations. See "Business - Government Regulation."
Uncertainty of Third-Party Reimbursement
Sales of certain products manufactured by VMS are indirectly dependent in part
on the availability to VMS's customers of adequate reimbursement for the
treatment provided by those products from third-party health care payors, such
as government and private insurance plans, health maintenance organizations and
preferred provider organizations, in that the availability of such
reimbursement affects VMS's customers' capital equipment purchasing decisions.
Third-party payors are increasingly challenging the pricing of medical products
and services. There can be no assurance that adequate levels of reimbursement
to VMS's customers will be available to enable VMS to achieve or maintain
market acceptance of its products. Without adequate support from third-party
payors, the market for the products of VMS may be limited. There is no uniform
policy on reimbursement among third-party payors, nor are there any assurances
that any of VMS's products will qualify for reimbursement from third-party
payors. Foreign countries also have their own health care reimbursement
systems, and there can be no assurance that third-party reimbursement will be
made available with respect to VMS's products under any foreign reimbursement
system. See "Business - Government Regulation - Medicare and Medicaid
Reimbursement."
In addition, VMS's business, financial condition and results of operations
could be adversely affected by the continuing efforts of many third-party
payors to reduce the costs of health care by decreasing reimbursement rates, or
limiting or prohibiting reimbursement for certain services or devices or
through other means. Furthermore, legislative proposals to reform government
health care insurance programs, including the Medicare and Medicaid programs,
could significantly impact the purchase of health care services and products
and could result in lower prices and reduced demand for VMS's products. VMS is
unable to predict whether such proposals will be enacted, whether other health
care legislation or regulation affecting VMS's business, financial condition
and results of operations may be proposed or enacted in the future, or what
effect any such legislation or regulation would have on VMS's business,
financial condition and results of operations.
Product Recalls, Product Liability and Insurance
The tolerance for error in the design, manufacture or use of VMS's systems may
be small or nonexistent. If a system designed or manufactured by VMS is found
to be defective, whether due to design or manufacturing defects, to improper
use of the system or to other reasons, the system may need to be recalled,
possibly at VMS's expense. Furthermore, the adverse effect of a product recall
on VMS might not be limited to the cost of the recall. For example, a product
recall could cause a general investigation of VMS by applicable regulatory
authorities as well as cause other customers to review and potentially
terminate their relationships with VMS. Recalls, especially if accompanied by
unfavorable publicity or termination of customer contracts, could result in
substantial costs, loss of revenues and a diminution of VMS's reputation, each
of which would have a material adverse effect on VMS's business, results of
operations and financial condition.
The manufacture and sale of medical products manufactured by VMS involve the
risk of product liability claims and expose VMS to substantial liability to
patients for damages resulting from the faulty design or manufacture of
products. Because these medical 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. Therefore, the design,
manufacture, sale and service of medical products manufactured by VMS involve
the risk of product liability claims and expose VMS to substantial liability to
patients for damages resulting from the faulty design, manufacture or servicing
of such products. See "Business - Product Liability."
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Varian has historically maintained limited product liability insurance coverage
in an amount it deems sufficient for each of its businesses. Such insurance is
subject to deductibles and self-insured retentions. Product liability insurance
is expensive and in the future may not be available on acceptable terms, in
sufficient amounts or may be unavailable. Although VMS will obtain (or modify
existing) insurance coverage after the Distribution, the amount of such
insurance coverage has not yet been determined and no assurance can be given as
to its adequacy. A successful claim brought against VMS in excess of its
insurance coverage or any material claim for which insurance coverage is denied
or limited and for which indemnification is not available could have a material
adverse effect on VMS's business, results of operations and financial
condition. There can be no assurance that VMS would have sufficient resources
to satisfy any liability resulting from these claims.
On December 5, 1997, VMS purchased General Electric's Radiotherapy Service
Business (the "RS Business"). In connection with that transaction, VMS agreed
to assume liability for certain product defects and personal injury matters
that might arise with respect to RS Business products, and obtained insurance
for these matters. The insurance provides that in each annual period VMS is
responsible for the first $5,000,000 of expenses or liabilities related to any
such claims. VMS has been notified of three potential claims related to these
RS Business products for which VMS may have an indemnity obligation. See
"Business - Product Liability."
Customer Concentration; Customer Financing
Historically, VMS has sold a significant proportion of its systems in any
particular period to a limited number of customers. Sales to VMS's ten largest
customers in fiscal years 1998, 1997 and 1996 accounted for approximately 24%,
28% and 30% of sales, respectively. The composition of the group comprising
VMS's largest customers has varied from year to year. VMS expects that sales of
its products to relatively few customers will continue to account for a similar
percentage of its net sales in the foreseeable future. Similarly, VMS has
significant strategic relationships with a number of key distributors. The
termination of these strategic relationships or 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 health care industry could adversely
affect VMS's business, financial condition and results of operations. In
addition, the ongoing consolidation of customers who purchase x-ray tube
products from VMS, including the consolidation of such customers into companies
that already manufacture x-ray tubes, may adversely affect VMS's business. See
"Business - Marketing and Sales."
VMS is experiencing increased demands for customer financing and leasing
arrangements. As of October 2, 1998, VMS had approximately $12 million of
outstanding receivables that VMS has financed, with approximately 96% from
customers outside the United States. The average amount financed for each
customer was approximately $500,000. In order to meet this demand, VMS has
recently entered into a vendor leasing partnership with a finance company to
provide various financing arrangements to these customers. While this
arrangement does in some cases allow the finance company to seek recourse from
VMS in the event of customer default, VMS has mitigated this risk by purchasing
a comprehensive credit and political risk insurance policy for customers in
certain countries. VMS continues to monitor its increased credit exposure
because of the weakened financial conditions in Asia and the impact that such
conditions may have on the worldwide economy. Although VMS has not to date
experienced significant losses as a result of customers failing to meet their
obligations, such losses, if incurred, could have a material adverse effect on
VMS's business, results of operations and financial condition.
Variability of Operating Results
VMS has experienced and expects to continue to experience fluctuations in its
quarterly operating results. The timing and amount of revenues are subject to a
number of factors that make estimation of revenues and operational results
prior to the end of any quarter very uncertain. Many of VMS's products are
products that require significant capital expenditures, and the timing of sales
of these products could affect VMS's quarterly earnings. A delay in a shipment
in any quarter due, for example, to an unanticipated shipment rescheduling, to
cancellations by customers or to unexpected manufacturing difficulties
experienced by VMS, may cause sales in such quarter to fall significantly below
VMS's expectations and may thus adversely affect VMS's operating results for
such quarter. Due to the significant size of certain of VMS's product sales,
VMS's operating results may also be affected by an unexpected change in a
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customer's financial solvency or ability to obtain financing for capital
expenditures. Further, VMS's quarterly operating results may also vary
significantly depending on a number of other factors, including changes in
pricing by VMS or its competitors, discount levels, seasonality of revenue,
foreign currency exchange rates, the mix of products sold, the timing of the
announcement, introduction and delivery of new product enhancements by VMS and
its competitors, and general economic conditions. Because certain operating
expenses of VMS are based on anticipated capacity levels and a high percentage
of VMS's expenses are fixed for the short term, a small variation in the timing
of recognition of revenue can cause significant variations in operating results
from quarter to quarter. There can be no assurance that any of these factors
will not have a material adverse effect on VMS's business or results of
operations. In addition, VMS's orders and backlog cannot necessarily be relied
upon as an accurate predictor of future revenues as the timing of such revenues
is dependent upon completion of customer site preparation and construction,
installation scheduling, customer capital budgeting and financing, receipt of
applicable regulatory approvals and other factors. Accordingly, there can be no
assurance that the orders will mature into revenue. See "Business -
Competition."
Competition
The markets served by VMS are characterized by rapidly evolving technology,
intense competition and pricing pressure. There are a number of companies that
currently offer, or are in the process of developing, products that compete
with products offered by VMS. VMS's products and services compete with those of
a substantial number of foreign and domestic companies, some with greater
resources, financial or otherwise, than VMS, and the rapid technological
changes occurring in VMS's markets are expected to lead to the entry of new
competitors. VMS's ability to anticipate technological changes and introduce
enhanced products on a timely basis will be a significant factor in VMS's
ability to expand and remain competitive. Existing competitors' actions and new
entrants may have an adverse impact on VMS's sales and profitability. These
competitors could develop technologies and products that are more effective
than those currently used or marketed by VMS or that could render VMS's
products obsolete or noncompetitive. See "Business - Competition."
International Sales and Manufacturing
The markets in which VMS competes are becoming increasingly globalized.
International sales accounted for approximately 55%, 52% and 53% of VMS's sales
in fiscal years 1998, 1997 and 1996, respectively. In the first quarter of
fiscal year 1999, international sales accounted for 56% of revenue as compared
to 40% in the first quarter of fiscal year 1998. As a result, VMS's customers
increasingly require service and support on a worldwide basis. VMS has
manufacturing and research operations in England, Switzerland, Finland and
France as well as sales and service offices located throughout Europe, Asia,
Latin America and Australia. VMS has invested substantial financial and
management resources to develop an international infrastructure to meet the
needs of its customers worldwide. VMS intends to continue to expand its
presence in international markets. There can be no assurance that VMS will able
to compete successfully in the international market or to meet the service and
support needs of such customers. International sales are subject to a number of
risks, including the following: agreements may be difficult to enforce and
receivables difficult to collect through a foreign country's legal system;
foreign customers may have longer payment cycles; foreign countries may impose
additional withholding taxes or otherwise tax VMS's foreign income, impose
tariffs or adopt other restrictions on foreign trade; fluctuations in exchange
rates may affect product demand and adversely affect the profitability in U.S.
dollars of products and services provided by VMS in foreign markets where
payment for VMS's products and services is made in the local currency; U.S.
export licenses may be difficult to obtain; and the protection of intellectual
property in foreign countries may be more difficult to enforce.
The economic conditions in certain Asian countries began to deteriorate in the
third quarter of 1997 and, in certain countries, including Japan, such
conditions continue to worsen. VMS derived approximately 17% of its total sales
in fiscal 1998 and approximately 23% of its total sales in fiscal 1997 from
sales to customers in Asia, including Japan. In the first quarter of fiscal
year 1999, VMS derived approximately 19% of its total sales from sales to
customers in Asia, including Japan, as compared to 15% in the first quarter of
fiscal year 1998. Until the Asian economic uncertainty is resolved, VMS could
suffer material reductions in revenue. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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On January 1, 1999, the Euro was adopted as the national currency of certain
members of the European Monetary Union. The existing national currencies of the
participating countries will continue to be acceptable until January 1, 2002,
after which the Euro will be the sole legal tender for the participating
countries. Because Varian sells its products in Europe, the Euro conversion
raises several economic and operational issues, such as the modification of
information systems to accommodate Euro-denominated transactions, the
recalculation of currency risk, the competitive impact of cross-border price
transparency, the continuity of material contracts and potential tax and
accounting consequences. Varian has chartered a multi-discipline, multi-
national committee that has been evaluating each of these economic and
operational issues. Varian has made changes in its information systems to be
able to conduct Euro-denominated transactions (although full information system
capability for financial reporting in Euro will not be accomplished until
October 2001). VMS does not expect any change in currency risk, due to its
existing hedging practices. VMS does not expect any significant competitive
impact of price transparency with respect to its systems, due to the fact that
most of those systems are sold in customized configurations. Based on VMS's
evaluation to date, VMS does not expect the Euro conversion to have a material
adverse effect on its business, results of operations or financial condition.
Foreign Currency Risks
Varian has historically entered into forward exchange contracts in respect of
the Health Care Systems Business to mitigate the effects of operational (sales
orders and purchase commitments) and balance sheet exposures to fluctuations in
foreign currency exchange rates. Varian'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. At October 2, 1998,
VMS had forward exchange contracts to sell foreign currencies totaling $78.0
million and to buy foreign currencies totaling $17.1 million.
Uncertain Protection of Patent and Other Proprietary Rights
VMS places considerable importance on obtaining and maintaining patent,
copyright and trade secret protection for significant new technologies,
products and processes because of the length of time and expense associated
with bringing new products through the development process and to the
marketplace.
VMS intends to continue to file applications as appropriate for patents
covering new products and manufacturing processes. No assurance can be given
that patents now owned or that will issue from any pending or future patent
applications owned by, or licensed to, VMS, or that the claims allowed under
any issued patents, will be sufficiently broad to protect its technology
position against competitors. In addition, no assurance can be given that any
issued patents owned by, or licensed to, VMS will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to it. VMS could incur substantial costs and diversion
of management resources in defending itself in suits brought against it or in
suits in which it may assert its patent rights against others. If the outcome
of any such litigation is unfavorable to VMS, its business and results of
operations could be materially adversely affected. In addition, the laws of
some foreign countries do not protect proprietary rights to the same extent as
do the laws of the United States.
There may also be pending or issued patents of which VMS is not aware held by
parties not affiliated with it that relate to its products or technologies. In
the event that a claim relating to proprietary technology or information is
asserted against VMS, it may need to acquire licenses to, or contest the
validity of, a competitor's proprietary technology. There can be no assurance
that any license required under any such competitor's proprietary technology
would be made available on acceptable terms or that VMS would prevail in any
such contest. If the outcome of any such contest is unfavorable to VMS, its
business and results of operations could be materially adversely affected. From
time to time, VMS has received notices from, and has issued notices to, third
parties alleging infringement of patent or other intellectual property rights
relating to their products. Such claims are often, but not always, settled by
mutual agreement on a satisfactory basis without litigation.
VMS relies on a combination of copyright, trade secret and other laws, and
contractual restrictions on disclosure, copying and transferring title,
including confidentiality agreements with their vendors, strategic partners,
co-developers, employees, consultants and other third parties, to protect its
proprietary rights. There can be no assurance that such
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protections will prove adequate and that contractual agreements will not be
breached, that VMS will have adequate remedies for any such breaches, or that
its trade secrets will not otherwise become known to or independently developed
by others. VMS has trademarks, both registered and unregistered, that are
maintained and enforced to provide customer recognition for its products in the
marketplace. There can be no assurance that its trademarks will not be used by
unauthorized third parties. VMS 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. See "Business -
Patent and Other Proprietary Rights."
Environmental Liabilities
Varian's operations are, and after the Distribution, VMS will be, 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 a product's useful life. These laws have the effect of increasing
costs and potential liabilities associated with the conduct of such operations.
Varian 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
("CERCLA"), at eight sites where Varian is alleged to have shipped
manufacturing waste for recycling or disposal. Varian 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 Varian facilities (including facilities
disposed of in connection with Varian's sale of its Electron Devices business
during fiscal year 1995, and the sale of its TFS business during fiscal year
1997). Expenditures by Varian 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 January 1, 1999, Varian nonetheless estimated that the future
exposure for environmental investigation and remediation costs for these sites
and facilities ranged in the aggregate from $21 million to $48 million. The
time frame over which these costs are expected to be incurred varies with each
site or facility, ranging up to approximately 30 years as of January 1, 1999.
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 Varian accrued $21 million in estimated environmental costs as of
January 1, 1999. The amount accrued has not been discounted to present value.
As to other sites and facilities, Varian has gained sufficient knowledge to be
able to better estimate the scope and costs of future environmental activities.
As of January 1, 1999, Varian estimated that the future exposure for
environmental investigation and remediation costs for these sites and
facilities ranged in the aggregate from $40 million to $74 million. The time
frame over which Varian expects to incur these costs varies with each site and
facility, ranging up to approximately 30 years as of January 1, 1999. 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 January 1, 1999. Varian accordingly
accrued $22 million, which represents its best estimate of the future costs
discounted at 4%, net of inflation. This reserve is in addition to the $21
million described in the preceding paragraph.
The Distribution Agreement provides that each of VMS, IB and VSEA will
indemnify the others for one-third of these environmental investigation and
remediation costs, as adjusted for any insurance proceeds and tax benefits
expected to be realized upon payment of these costs. For a discussion of VMS's
environmental liabilities, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Environmental Matters."
The foregoing amounts are only estimates of anticipated future environmental
related costs, and the amounts actually spent may be greater or less than such
estimates. The aggregate range of cost estimates reflects various uncertainties
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inherent in many environmental investigation and remediation activities and the
large number of sites and facilities where Varian is undertaking such
investigation and remediation activities. Varian believes that most of these
cost ranges will narrow as investigation and remediation activities progress.
Varian's present and past facilities have been in operation for many years, and
over that time in the course of those operations, such facilities have used
substances which are or might be considered hazardous, and Varian has generated
and disposed of wastes which are or might be considered hazardous. Therefore,
it is possible that additional environmental issues may arise in the future
that VMS cannot now predict.
Reliance on Suppliers
Certain of the components and subassemblies included in VMS's products are
obtained from a limited group of suppliers, or in some cases a single-source
supplier, including the source wires for high dose afterloaders, klystrons for
linear accelerators, solid state imaging panels and specialized integrated
circuits for imaging subassemblies. The loss of any of these suppliers,
including any single-source supplier, would require obtaining one or more
replacement suppliers as well as potentially requiring a significant level of
product development to incorporate new parts into VMS's products. VMS believes
that alternative sources for such components may generally be obtained when
necessary, although the need to change suppliers or to alternate between
suppliers might cause material delays in delivery or significantly increase its
costs. Although Varian has historically obtained and VMS expects to obtain
limited insurance to protect against loss due to business interruption from
these and other sources, there can be no assurance that such coverage will be
adequate or that such coverage will continue to remain available on acceptable
terms, if at all. Although VMS seeks to reduce its dependence on these limited
source suppliers, disruptions or loss of certain of these sources, including
the ones referenced above, could have a material adverse effect on VMS's
business and results of operations and could result in damage to customer
relationships. See "Business - Manufacturing and Supplies."
Dependence on Key Personnel
VMS's future success depends to a significant extent on the continued service
of certain of its key managerial, technical and engineering personnel, and its
continuing ability to attract, train and retain highly qualified engineering,
technical and managerial personnel. Competition for such personnel is intense,
particularly in the labor markets around the VMS facilities in Palo Alto,
California. The available pool of qualified candidates is limited and there can
be no assurance that VMS can retain its key engineering, technical and
managerial personnel or that it can attract, train, assimilate or retain other
highly qualified engineering, technical and managerial personnel in the future.
The loss of any of VMS's key personnel or the inability of VMS to hire, train
or retain qualified personnel could have a material adverse effect on VMS's
business, results of operations and financial condition.
Risk of Business Interruption
VMS conducts a portion of its activities at facilities located in seismically
active areas that have experienced major earthquakes in the past. Varian
currently maintains limited earthquake insurance on these facilities. Depending
on its cost and availability, after the Distribution, VMS may carry limited
earthquake insurance on its facilities. In the event of a major earthquake or
other disaster affecting VMS's facilities, the operations and operating results
of VMS could be adversely affected.
Potential Impact of the Year 2000 Issue
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 VMS relies
heavily on computer programs and non-IT systems, and on third parties which
themselves rely on computer programs and non-IT systems, the Year 2000 problem
if not addressed could adversely affect VMS's business, results of operations
and financial condition.
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Failure to accurately assess and correct VMS's Year 2000 problems and/or those
of its key suppliers would likely result in interruption of certain of VMS's
normal business operations, which could have a material adverse effect on VMS's
business, results of operations and financial condition. If VMS does not
adequately identify and correct Year 2000 problems in its information systems
it could experience interruptions 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 VMS does not adequately
identify and correct Year 2000 problems in its non-IT systems it could
experience interruptions in its manufacturing and related operations, such that
there would be delays in product shipments and a consequential impact on
revenues. If VMS 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 VMS does not
adequately identify and correct Year 2000 problems of the significant third
parties with which it does business it could experience interruptions 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. VMS does not expect to be 100% Year 2000 compliant by the end of 1999
and 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 problems is not identified and corrected; ability to
retain and hire qualified personnel to perform assessments and corrective
actions; the willingness and ability of critical suppliers to access and
correct their own Year 2000 problems, including the products they supply to
VMS; 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 Distribution.
Because of uncertainties as to the extent of Year 2000 problems with VMS's
previously-sold products and the extent of any legal obligation of VMS to
correct Year 2000 problems in those products, VMS cannot yet assess each of
their risks with respect to those products. Because VMS's assessments are not
yet complete, VMS 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 VMS's results of operations. For a discussion
regarding VMS's state of readiness, costs associated with becoming Year 2000
compliant and contingency plans relating to Year 2000, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Year
2000."
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THE DISTRIBUTION
General
The Board of Directors of Varian has declared a special dividend, payable on
the Distribution Date, of one share of IB Common Stock and one share of VSEA
Common Stock for each share of Varian Common Stock held on the Distribution
Record Date. Each holder also would retain the shares of Varian Common Stock
held by such holder immediately prior to the Distribution.
Background and Reasons for the Distribution
The Board of Directors of Varian approved the Distribution for the following
principal reasons:
Management Focus. Varian's three businesses have different dynamics and
business cycles, serve different marketplaces and customer bases, are
subject to different competitive forces and must be managed with different
long-term and short-term strategies and goals. Varian believes that
separating its businesses into independent public companies, each with its
own management team and board of directors, is necessary to address current
and future management issues and considerations that result from operating
these diverse businesses within a single company. The separation will
enable the management of each business to manage that business, and to
adopt and implement strategies for that business, solely with regard to the
needs and objectives of that business. In addition, as a result of the
separation, the management of each business will be able to devote its full
attention to managing that business.
Capital Structure. Varian believes that the Distribution will allow each of
the companies to organize its capital structure and allocate its resources
to support the very different needs and goals of the particular business.
The stock buy-back program can be discontinued, or dividends eliminated,
freeing cash for acquisition and growth opportunities for IB and VMS and
permitting VSEA to conserve cash for use in the cyclical downturns in its
industry. Capital borrowings can be tailored to the specific needs of the
various business units. Each business will be able to allocate its
resources without considering the needs of the other businesses.
Attracting and Retaining Key Employees. Varian's management believes that
the ability to attract and retain key personnel is fundamental to its
ability to further the technology required to maintain a leadership
position in its business. In particular, under the existing corporate
structure, Varian has been unable to offer equity-based compensation linked
specifically to the performance of each separate business. The Distribution
would enable each company to establish focused equity-based compensation
programs that should enable each of them to better attract and retain key
personnel.
Acquisition Activities. Varian believes that growth through acquisition is
an important ingredient of the future success of IB and VMS. Such
acquisitions and growth would be financed in part through the issuance of
capital stock. It is expected that the Distribution will increase the
availability and decrease the cost of raising equity capital. Varian's
management believes that, as a result of the Distribution, each company
will have a more attractive currency, its stock, through which to make
acquisitions.
Investor Understanding. Debt and equity investors and securities analysts
should be able to better evaluate the financial performance of each company
and their respective strategies, thereby enhancing the likelihood that each
will achieve appropriate market recognition. The stock of each of the three
companies will also appeal to investors with differing investment
objectives and risk tolerance, and will allow potential investors to focus
their investments more directly to the areas of their primary interest.
Cost Savings. Each company should be able to rationalize better its
organizational structure after the Distribution. Accordingly, the
administrative and organizational costs of each company, taken together,
should be reduced from the aggregate levels experienced by Varian prior to
the Distribution.
Manner of Effecting the Distribution
The distribution of IB Common Stock and VSEA Common Stock will be made on the
Distribution Date to stockholders of record as of the Distribution Record Date.
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On or prior to the Distribution Date, all outstanding shares of IB Common Stock
and VSEA Common Stock will be delivered to the Distribution Agent. As soon as
practicable after the IB Common Stock and VSEA Common Stock have been
distributed, stock distribution statements reflecting ownership of shares of IB
Common Stock and VSEA Common Stock will be mailed by the Distribution Agent to
holders of record as of the Distribution Record Date to reflect the
distribution of one share of IB Common Stock and one share of VSEA Common Stock
for each share of Varian Common Stock held on the Distribution Record Date. All
such shares will be fully paid and nonassessable and the holders thereof will
not be entitled to preemptive rights. The shares of IB Common Stock and VSEA
Common Stock to be transferred to Varian's stockholders in the Distribution
will be initially issued to Varian as consideration for the transfer of the
Instruments Business and the Semiconductor Equipment Business, respectively.
No holder of Varian Common Stock will be required to pay any cash or other
consideration for the shares of IB Common Stock and VSEA Common Stock received
in the Distribution or to surrender or exchange shares of Varian Common Stock
in order to receive shares of IB Common Stock or VSEA Common Stock.
After the Distribution, stock distribution statements evidencing shares of VMS
Common Stock will continue to include the same number of VMS Rights (as defined
below) issued under the VMS Rights Plan. See "Description of the Capital
Stock - Rights Plan."
Federal Income Tax Aspects of the Distribution
Varian has received a Tax Ruling from the IRS substantially to the following
effect:
(1) No gain or loss will be recognized by (and no amount will otherwise be
included in the income of) any holder of Varian Common Stock as a
result of the Distribution.
(2) The aggregate basis of Varian Common Stock, the IB Common Stock and the
VSEA Common Stock in the hands of each holder of Varian Common Stock
will be the same as the basis of Varian Common Stock held by the holder
immediately before the Distribution, allocated in proportion to the
fair market value of each.
(3) The holding period of the VSEA Common Stock and IB Common Stock
received in the Distribution by each holder of Varian Common Stock will
include the period during which such holder held Varian Common Stock
with respect to which the Distribution is made, provided that such
common stock is held as a capital asset by such holder on the
Distribution Date.
(4) No gain or loss will be recognized by Varian upon the Distribution.
The Tax Ruling, while generally binding upon the IRS, is based on certain
factual representations and assumptions. If such factual representations and
assumptions were incorrect in any material respect, the holdings of such ruling
would be jeopardized. Varian is not aware of any facts or circumstances that
would cause such representations and assumptions to be incorrect in any
material respect. Each of Varian, IB and VSEA has agreed to certain
restrictions on their future actions to provide further assurances that Section
355 of the Code will apply to the Distribution. See " - Relationship Among VMS,
VSEA and IB After the Distribution - Tax Sharing Agreement."
If one or both of the distributions comprising the Distribution fail to qualify
as a tax-free spin-off under Section 355 of the Code, then VMS will recognize
gain equal to the difference between the fair market value of the stock of the
nonqualifying company or companies and Varian's adjusted tax basis in such
stock. If VMS were to recognize gain on one or more of the distributions, such
gain and the resulting tax liability likely would be very substantial.
Furthermore, if either distribution were not to qualify as a tax-free spin- off
under Section 355 of the Code, each holder of Varian Common Stock who receives
shares of IB Common Stock and VSEA Common Stock in the Distribution would be
treated as if such stockholder received a taxable distribution in an amount
equal to the fair market value of the IB Common Stock or VSEA Common Stock
received, which would result in (i) a dividend to the extent of such
stockholder's pro rata share of Varian's current and accumulated earnings and
profits, (ii) a reduction in such stockholder's basis in Varian Common Stock to
the extent the amount received exceeds such stockholder's share of earnings and
profits and (iii) gain from the exchange of Varian Common Stock to the extent
the amount received exceeds both such stockholder's share of earnings and
profits and such stockholder's basis in such common stock.
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Section 355(e), which was added to the Code in 1997, generally provides that a
company that distributes shares of a subsidiary in a spin-off that is otherwise
tax-free will incur federal income tax liability if 50% or more, by vote or
value, of the capital stock of either the company making the distribution or
the spun-off subsidiary is acquired (a "50% Ownership Shift") by one or more
persons acting pursuant to a plan or series of related transactions that
includes the spin-off. Stock acquired by certain related persons is aggregated
in determining whether the 50% test is met. There is a presumption that any
acquisition of 50% or more, by vote or value, of the capital stock of the
company or the subsidiary that occurs within two years before or after the
spin-off is pursuant to a plan that includes the spin-off. However, the
presumption may be rebutted by establishing that the spin-off and the
acquisition are not part of a plan or series of related transactions. Among the
factual representations made by Varian to the IRS in connection with the Tax
Ruling is the representation that each of the distributions is not part of such
a plan or series of related transactions. If VMS, IB or VSEA were to undergo a
50% Ownership Shift, particularly if such 50% Ownership Shift occurred within
two years after the Distribution Date, there can be no assurance that the IRS
will not assert that such ownership shift occurred pursuant to a plan or series
of related transactions and therefore that the Distribution is taxable under
Section 355(e).
If a distribution is taxable solely under Section 355(e), VMS will recognize
gain equal to the difference between the fair market value of the VSEA Common
Stock and the IB Common Stock and Varian's adjusted tax basis in such stock.
However, holders of Varian Common Stock would not recognize gain or loss as a
result of the distributions. If VMS were to recognize gain on the
distributions, such gain and the resulting tax liability likely would be very
substantial.
VMS, IB and VSEA will enter into the Tax Sharing Agreement to allocate
responsibility for the possible corporate tax burden resulting from the
Distribution. Neither VMS, IB, nor VSEA has agreed to indemnify holders of
Varian Common Stock for any taxes or other losses should either or both of the
distributions fail to qualify under Section 355 of the Code. The Tax Sharing
Agreement will provide that each of VMS, IB and VSEA will be responsible for
any such corporate taxes to the extent that such taxes are attributable to
action taken or permitted by that entity or its affiliates after the
Distribution that is inconsistent with the tax treatment contemplated in the
Tax Ruling. Under the Tax Sharing Agreement, if either distribution is found to
be taxable but none of VMS, IB and VSEA has done anything to cause the
distribution to be taxable, each company generally will be liable for one-third
of those taxes. See " - Relationship Among VMS, VSEA and IB After the
Distribution - Tax Sharing Agreement."
Current Treasury regulations require each holder of Varian Common Stock who
receives IB Common Stock or VSEA Common Stock pursuant to the Distribution to
attach to his or her federal income tax return for the year in which the
Distribution occurs a detailed statement setting forth such data as may be
appropriate in order to show the applicability of Section 355 of the Code to
the Distribution. Varian will convey the appropriate information to each holder
of record of Varian Common Stock as of the Distribution Record Date.
The foregoing summary of federal income tax consequences does not purport to
cover all federal income tax consequences of the Distribution. The tax
consequences may differ for stockholders that are not U.S. citizens or
residents or that are otherwise subject to special treatment under the Code.
Each stockholder should consult its own tax advisor regarding the federal,
foreign, state and local tax consequences of the Distribution in its particular
circumstances, including the application of state, local and foreign tax laws.
Listing and Trading of VMS Common Stock
It is expected that the VMS Common Stock will continue to be listed and traded
on the NYSE after the Distribution under the ticker symbol "VAR." Following the
Distribution, VMS's financial results will no longer be consolidated with those
of VSEA and IB, and VMS's revenues, income and other results of operations will
be substantially lower than those of Varian prior to the Distribution.
Accordingly, as a result of the Distribution, the trading price range of the
VMS Common Stock immediately after the Distribution is expected to be
significantly lower than the trading price range of Varian Common Stock prior
to the Distribution. The combined trading prices of the IB Common Stock, VMS
Common Stock and VSEA Common Stock held by stockholders after the Distribution
may be less than, equal to or greater than the trading price of Varian Common
Stock prior to the Distribution. The prices at which the VMS Common Stock
trades after the Distribution will be determined by the marketplace and may be
influenced by many factors, including, among others, the continuing depth and
liquidity of the market for VMS Common Stock, investor perception of VMS's
development, dividend policy and general economic and market conditions. Such
prices may also
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be affected by certain provisions of the Certificate of Incorporation and By-
Laws of VMS, as will be in effect at the time of the Distribution, which will
have an anti-takeover effect. See "Delaware Law and Certain Charter and By-Law
Provisions."
Future Management
Following the Distribution it is intended that VMS will continue to conduct the
Health Care Systems Business in substantially the same manner in which it is
currently operated. Richard M. Levy, who is currently Executive Vice President
of Varian, will serve as President and Chief Executive Officer of VMS following
the Distribution. The other executive officers of VMS will be drawn from the
current management of Varian. See "Management - Executive Officers."
Internal Mergers and Transfers
On or prior to the Distribution Date, Varian will effectuate certain
transactions intended to allocate assets and liabilities relating to the Health
Care Systems Business to VMS, assets and liabilities relating to the
Semiconductor Equipment Business to VSEA and assets and liabilities relating to
the Instruments Business to IB. See " - Distribution Agreement." On the
Distribution Date, following the completion of the foregoing transactions,
Varian will distribute the IB Common Stock and VSEA Common Stock to the holders
of Varian Common Stock on the Distribution Record Date.
Relationship Among VMS, VSEA and IB After the Distribution
For the purpose of governing certain of the ongoing relationships among VMS,
VSEA and IB after the Distribution and to provide mechanisms for an orderly
transition, Varian, IB and VSEA have entered or will enter into various
agreements, and will adopt policies, as described in this section. Varian, IB
and VSEA believe that the agreements are fair to each of the parties. The
services to be provided by each of the companies pursuant to the various
agreements described below will be billed at their fully burdened cost to the
provider and in each case the terms of these agreements have been reviewed by
individuals who will have senior management positions at IB, VMS or VSEA after
the Distribution.
The Distribution Agreement and the forms of the Ancillary Agreements will be
filed as exhibits to VMS's Current Report on Form 8-K in connection with the
Distribution, or will be included in a later filing by VMS under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). See "Available
Information." The following descriptions include a summary of all material
terms of these agreements, but do not purport to be complete and are qualified
by reference to the texts of such agreements, which are incorporated herein by
reference.
Distribution Agreement
The Distribution Agreement provides for the terms and conditions of the
Distribution, the various actions to be taken prior to the Distribution (see
" - Internal Mergers and Transfers") and the relationship among the parties
subsequent to the Distribution. The Distribution Agreement provides that, from
and after the Distribution Date, (i) IB shall assume, pay, perform and
discharge all Instruments Liabilities (as defined in the Distribution
Agreement) in accordance with their terms, (ii) VMS shall assume, pay, perform
and discharge all Health Care Systems Liabilities (as defined in the
Distribution Agreement) in accordance with their terms and (iii) VSEA shall
assume, pay, perform and discharge all Semiconductor Equipment Liabilities (as
defined in the Distribution Agreement) in accordance with their terms.
In addition, the Distribution Agreement provides for cross-indemnities that
require (i) IB to indemnify VMS and VSEA (and their respective subsidiaries,
directors, officers, employees and agents and certain other related parties)
against all losses arising out of or in connection with Instruments Liabilities
or the breach of the Distribution Agreement or any Ancillary Agreement by IB,
(ii) VMS to indemnify IB and VSEA (and their respective subsidiaries,
directors, officers, employees and agents and certain other related parties)
against all losses arising out of or in connection with the Health Care Systems
Liabilities or the breach of the Distribution Agreement or any Ancillary
Agreement by Varian and
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(iii) VSEA to indemnify IB and VMS (and their respective subsidiaries,
directors, officers, employees and agents and certain other related parties)
against all losses arising out of or in connection with the Semiconductor
Equipment Liabilities or the breach of the Distribution Agreement or any
Ancillary Agreement by VSEA, and, in each case, for contribution in certain
circumstances. Each of IB, VMS and VSEA also agrees to indemnify each other for
one-third of the costs and expenses associated with liabilities that are
unrelated to their businesses, including certain discontinued operations and
environmental liabilities associated with Varian's Palo Alto facilities.
Pursuant to the Distribution Agreement, each of the parties has agreed to use
commercially reasonable efforts to take or cause to be taken all action, and do
or cause to be done all things, reasonably necessary or appropriate to
consummate the transactions contemplated by the Distribution Agreement. As
such, the Distribution Agreement provides that if any contemplated pre-
Distribution transfers have not been effected on or prior to the Distribution
Date, the parties will cooperate to effect such transfers as promptly
thereafter as practicable. The entity retaining any asset or liability which
should have been transferred prior to the Distribution Date will continue to
hold that asset for the benefit of the party entitled thereto or that liability
for the account of the party required to assume it, and must take such other
action as may be reasonably requested by the party to whom such asset was to be
transferred or by whom such liability was to be assumed in order to place such
party, insofar as reasonably possible, in the same position as would have
existed had such asset or liability been transferred or assumed as contemplated
by the Distribution Agreement.
The Distribution Agreement (i) requires that Varian renegotiate the Term Loans,
(ii) requires that Varian contribute cash to VSEA so that at the time of the
Distribution VSEA will have $100 million in cash and cash equivalents and a Net
Worth (as defined in the Distribution Agreement) of at least $150 million, and
its Consolidated Debt (as defined in the Distribution Agreement) will not
exceed $5 million, (iii) requires that IB assume 50% of the outstanding
indebtedness under the Term Loans and have transferred to it such portion of
the indebtedness under the Notes Payable and such amount of cash and cash
equivalents, so that as of the time of the Distribution IB and VMS will each
have Net Debt (as defined in the Distribution Agreement) equal to approximately
50% of the aggregate Net Debt of IB and VMS, subject to such adjustments as may
be necessary to provide VMS with a Net Worth of between 40% and 50% of the
aggregate Net Worth of VMS and IB, (iv) governs the conduct of the post-
Distribution audit to be undertaken to ascertain the Net Worth of VMS, IB and
VSEA upon consummation of the Distribution, (v) requires that post-Distribution
payments be made between the parties if, and to the extent that, as of the time
of the Distribution (a) VMS has a Net Worth that is less than 40% or more than
50% of the aggregate Net Worth of VMS and IB, (b) VSEA has Consolidated Debt
exceeding $5 million, or less than $100 million of cash and cash equivalents or
a Net Worth of less than $150 million or (c) VSEA has more than $100 million of
cash and cash equivalents and a Net Worth of at least $150 million or VSEA has
a Net Worth in excess of $225 million and (vi) entitles IB to receive
approximately 50% of the estimated proceeds, if any, to be received by VMS
after the Distribution from the sale of Varian's long-term leasehold interest
at certain of its Palo Alto facilities, together with certain related buildings
and other corporate assets and requires IB to pay approximately 50% of any
estimated transaction expenses to be paid by VMS after the Distribution (in
each case reduced for estimated taxes payable or tax benefits received from all
sales and transaction expenses).
The Distribution Agreement also provides for the execution and delivery of
certain other agreements governing the relationship among IB, VMS and VSEA at
and following the Distribution. See " - Employee Benefits Allocation
Agreement," " - Tax Sharing Agreement," " - Transition Services Agreement," and
" - Intellectual Property Agreement."
Employee Benefits Allocation Agreement
On or prior to the Distribution Date, Varian, IB and VSEA will enter into an
employee benefits allocation agreement (the "Employee Benefits Allocation
Agreement") providing for the allocation of certain liabilities and
responsibilities with respect to employee compensation, benefits and labor
matters. The allocation of responsibility and adjustments to be made pursuant
to the Employee Benefits Allocation Agreement are substantially consistent with
the existing rights of Varian's employees under Varian's various compensation
plans, with the understanding that each party will have sole responsibility for
determining the benefits it will provide its employees following the
Distribution. The Employee Benefits
26
<PAGE>
Allocation Agreement will generally provide that, effective as of the
Distribution Date, each of IB and VSEA will, or will cause one or more of its
subsidiaries to, assume or retain, as the case may be, all liabilities of
Varian, to the extent unpaid as of the Distribution Date, under Varian's
employee benefit plans, policies, arrangements, contracts and agreements,
including collective bargaining agreements, with respect to employees who on or
after the Distribution Date will be employees of IB or its subsidiaries or VSEA
or its subsidiaries. The Employee Benefits Allocation Agreement will also
provide that VMS generally will, or will cause one of its subsidiaries to,
assume or retain, as the case may be, all liabilities under Varian's employee
benefit plans, policies, arrangements, contracts and agreements, including
collective bargaining agreements, with respect to employees who on or after the
Distribution Date will be employees of VMS or its subsidiaries. The Employee
Benefits Allocation Agreement will also provide that each of IB, VSEA and VMS
will generally indemnify the others for one-third of the administrative costs
associated with liabilities to individuals who were former Varian employees as
of the Distribution Date.
Defined Contribution Plans
Active participation in the Varian Associates, Inc. Retirement and Profit-
Sharing Program (the "Varian Profit-Sharing Plan") by IB and VSEA employees
will terminate on the Distribution.
Effective as of the Distribution Date, each of VSEA and IB will establish a
defined contribution plan for the benefit of its employees. As promptly as
practicable after the Distribution, VMS will cause to be transferred to the
VSEA defined contribution plan or the IB defined contribution plan the account
balances in, and the liabilities of, the Varian Profit-Sharing Plan to each
employee of VSEA or IB, respectively, who elects to so transfer. IB and VSEA
will each assume the administrative costs associated with the Varian Profit-
Sharing Plan accounts of IB and VSEA employees who do not elect a transfer. IB,
VSEA and VMS will also each indemnify the others for one-third of the
administrative costs associated with the accounts of individuals who were
former Varian employees as of the Distribution Date or whose employment will
terminate pursuant to severance agreements in connection with the Distribution.
Non-U.S. Employee Benefits
Non-U.S. employee benefits will be subject to the general principles of the
Employee Benefits Allocation Agreement. To the extent practicable, VMS or its
subsidiaries will assume or retain, as the case may be, any and all pension
liabilities and attendant plans and their assets related to the employees of
VMS or its subsidiaries post-Distribution. If a person is employed by a non-
U.S. subsidiary of VMS but the associated liabilities are held by IB or VSEA,
VMS will indemnify the entity holding the liabilities. IB, VSEA and VMS will
also each indemnify the others for one-third of the employee benefit
liabilities associated with former employees of non- U.S. subsidiaries.
Stock Options and Other Awards
Stock options and restricted stock awards (collectively, "stock awards") of
Varian are currently outstanding under Varian's 1982 Non-Qualified Stock Option
Plan and Varian Omnibus Stock Plan (collectively, the "Plans"). The treatment
after the Distribution of stock awards that are outstanding prior to the
Distribution is designed to preserve, as a general matter, the economic value
of each stock award. In addition, the treatment of outstanding stock awards of
individuals who will continue their employment with VMS is designed to provide
an incentive for such employees to remain employed with VMS and to benefit by
their efforts to increase the market value of VMS Common Stock.
Adjustments to Awards Held by Employees of VMS and Former Varian Employees
In general, it is expected that the number of shares of VMS Common Stock
underlying each stock option held by employees of VMS and certain others
(including former employees of Varian not terminated in connection with the
Distribution and any employees of IB or VSEA who do not surrender their Varian
stock options as contemplated below (collectively, "Former Varian Employees"))
and the exercise price thereof, and the number of shares provided in restricted
stock awards, will be adjusted as necessary to reflect the Distribution. The
Plans and related option agreements provide that, in the event the number of
outstanding shares of Varian Common Stock is changed by reason of a split-up
27
<PAGE>
or combination of shares or recapitalization or by reason of a stock dividend,
the number of shares and option price shall be appropriately adjusted so as to
maintain the proportionate number of shares without changing the aggregate
option exercise price.
Unexercised Varian stock options held by employees of VMS and Former Varian
Employees will be adjusted as soon as practicable following the Distribution
Date, to preserve as closely as possible their respective economic value
immediately prior to the Distribution (defined as the difference between the
fair market value of the shares underlying the option and the option exercise
price, multiplied by the number of shares subject to the option). Those
individuals who will be employees of IB and VSEA after the Distribution who do
not surrender their Varian stock options as contemplated below will have their
Varian stock options adjusted in the same manner as individuals who will be
employees of VMS.
The option exercise price of adjusted VMS stock options will be determined by
multiplying the exercise price of Varian stock option by a fraction, the
numerator of which will be the closing price of the VMS Common Stock on the
Distribution Date and the denominator of which will be the closing price of
Varian Common Stock on the Distribution Date. The number of shares of VMS
Common Stock subject to options will be determined by multiplying the number of
shares of Varian Common Stock covered by Varian stock option by a fraction, the
numerator of which will be the closing price of Varian Common Stock on the
Distribution Date and the denominator of which will be the closing price of the
VMS Common Stock on the Distribution Date. If the Distribution Date is not a
trading day for the New York Stock Exchange or the Nasdaq National Market, the
foregoing prices will be calculated based on the closing price for the trading
day immediately preceding the Distribution Date.
Unvested Varian restricted stock held by Former Varian Employees or continuing
employees of VMS will vest prior to the Distribution.
As of February 1, 1999, there were approximately 1,813,135 shares of Varian
Common Stock subject to outstanding stock options held by Former Varian
Employees or individuals who will be employees of VMS. It is impossible to
predict with certainty how many shares of VMS Common Stock will be subject to
adjusted VMS stock options after the Distribution Date, since it is expected
that some Varian stock options held by such individuals will be exercised prior
to the Distribution Date. The balance of unexercised Varian stock options will
be adjusted according to the formula described above, but the stock prices upon
which the adjustment will be based will not be known until the Distribution
Date. Stockholders of VMS are, however, likely to experience some dilutive
impact from the above-described adjustments.
For Former Varian Employees or those employees who will continue their
employment with VMS, all of the other original terms and conditions of Varian
stock options, including the vesting and expiration dates, will remain in
effect after the adjustments as to price and number of shares.
Treatment of Awards Held by Employees Whose Employment will Terminate in
Connection with the Distribution
Employees of Varian whose employment will terminate in connection with the
Distribution (other than seven employees whose employment will terminate
pursuant to severance agreements) will be permitted to elect to exchange their
Varian stock options for stock options with respect to VMS Common Stock, VSEA
Common Stock and IB Common Stock. Individuals who so elect will have one-third
of the unexercised portion of Varian stock options exchanged for each of VMS
stock options, VSEA stock options and IB stock options. The seven employees
whose employment will terminate pursuant to severance agreements will receive
this exchange on a mandatory basis. Employees whose options are exchanged in
this manner will have the unvested portion of their Varian options as of the
Distribution Date vested immediately prior to the Distribution or, if later,
immediately prior to termination of the employment of such employees.
Unvested Varian restricted stock held by employees whose employment will
terminate in connection with the Distribution will vest prior to the
Distribution or, if later, immediately prior to such termination.
28
<PAGE>
As of February 1, 1999, there were approximately 570,596 shares of Varian
Common Stock subject to outstanding stock options held by employees whose
employment will terminate in connection with the Distribution (excluding stock
options held by Mr. O'Rourke, a current director of Varian who is expected to
serve as a director of VSEA following the Distribution). It is impossible to
predict with certainty how many shares of VMS Common Stock will be subject to
these stock options after the Distribution Date, since it is expected that some
Varian stock options held by these individuals will be exercised prior to the
Distribution Date. In addition, the balance of unexercised Varian stock options
will be adjusted according to the formula described above, but the stock prices
upon which the adjustment will be based will not be known until the
Distribution Date. Stockholders of VMS are, however, likely to experience some
dilutive impact from the above-described adjustments.
Treatment of Awards Held by Directors
Varian stock options held by directors of Varian will be adjusted in the same
manner as Varian stock options held by employees whose employment will
terminate in connection with the Distribution; provided that the unvested
portion of their Varian options will not vest immediately prior to the
Distribution. Accordingly, these individuals will exchange their Varian stock
options for stock options with respect to VMS Common Stock, VSEA Common Stock
and IB Common Stock.
As of February 1, 1999, there were approximately 791,000 shares of Varian
Common Stock subject to outstanding stock options held by current directors
(including Mr. O'Rourke). It is impossible to predict with certainty how many
shares of VMS Common Stock will be subject to these stock options after the
Distribution Date, since it is expected that some Varian stock options held by
these individuals will be exercised prior to the Distribution Date. In
addition, the balance of unexercised Varian stock options will be adjusted
pursuant to the formula described above, but the stock prices upon which the
adjustment will be based will not be known until the Distribution Date.
Stockholders of VMS are, however, likely to experience some dilutive impact
from the above-described adjustments.
Tax Sharing Agreement
Varian, IB and VSEA will enter into a tax sharing agreement (the "Tax Sharing
Agreement") that defines the parties' rights and obligations with respect to
federal, state, foreign and other income or franchise taxes relating to
Varian's businesses for tax periods prior to, including and following the
Distribution and with respect to certain other tax matters. In general, VMS
will be responsible for consolidated federal income taxes, consolidated or
combined state income taxes and separate state income taxes of Varian and its
subsidiaries through the Distribution Date. Liability through the Distribution
Date will be determined based on a closing of the books. Liability for foreign
income taxes and non-income taxes will generally be allocated to the legal
entity on which such taxes are imposed, except for taxes transferred on the
closing balance sheets. Adjustments to the reported tax liability for tax
periods through the Distribution Date will be shared equally by the three
companies.
In general, and except as provided below, taxes resulting from the Distribution
will be the responsibility of the legal entity on which such taxes are imposed.
However, each of VSEA and IB will be responsible for any such taxes resulting
from income or gain from the Distribution to the extent that such taxes are
attributable to action taken or permitted by that entity or its affiliates
after the Distribution that is inconsistent with the tax treatment contemplated
in the Tax Ruling requested from the IRS. Each of VMS, IB and VSEA will
covenant and agree not to take or permit certain actions inconsistent or
potentially inconsistent with the Tax Ruling before January 1, 2002, unless
such action has been consented to by the other companies or approved by a
supplemental ruling from the IRS or an unqualified opinion of independent
nationally recognized tax counsel acceptable to each of the companies. These
agreements could restrict the ability of VMS, IB or VSEA to engage in certain
corporate transactions, redeem stock, dispose of assets except in the ordinary
course of business, or be the target of an acquisition transaction, during that
period. Adjustments to the anticipated income taxes resulting from the
Distribution that are not attributable to action inconsistent with the Tax
Ruling will be shared equally by the three companies. Furthermore, if with
respect to VMS, IB or VSEA, the aggregate taxes shown on the initial tax
returns filed after the Distribution (or the amounts paid with respect to such
taxes) relating to periods prior to the Distribution Date exceed the aggregate
amounts accrued with respect thereto on the closing
29
<PAGE>
balance sheets, by more than $1,000,000, the company with the unanticipated tax
burden may propose a sharing of such amounts among the three companies. If the
three companies cannot agree to a fair and equitable sharing of the excess
taxes, the matter will be submitted to a mutually acceptable nationally
recognized accounting firm for resolution. See " - Federal Income Tax Aspects
of the Distribution."
Transition Services Agreement
On or prior to the Distribution Date, Varian, IB and VSEA will enter into a
Transition Services Agreement providing for (i) the sharing of facilities and
equipment for a temporary period not to exceed one year, (ii) the provision of
employees and sharing of certain third party services to provide treasury, tax,
accounting, payroll, human resources and similar and related functions for a
temporary period not to exceed one year and (iii) the provision of information
services personnel for a period extending until June 30, 2000. Compensation for
all services and facilities provided under the Transition Services Agreement
will be on a fully burdened cost reimbursement basis. The management of each of
VMS, VSEA and IB presently expects that its company will be able to provide
these services for itself after the applicable transition period without
additional material expense, although no assurance can be given that this will
be the case. Each party has the right to terminate certain transition services
arrangements upon a material breach by the other party thereto.
Intellectual Property Agreement
On or prior to the Distribution Date, Varian, IB and VSEA will enter into an
Intellectual Property Agreement providing for allocation among these companies
and their respective subsidiaries and associated companies of rights in the
Intellectual Property (as defined in the Distribution Agreement), including
patents, copyrights, trademarks, software and trade secrets, owned by Varian
prior to the Distribution and for the licensing of certain of such Intellectual
Property thereafter. The Intellectual Property Agreement is to provide VMS, IB
and VSEA, and their respective subsidiaries and associated companies, with
those continuing rights and licenses in such Intellectual Property following
the Distribution Date necessary for the continued conduct of their respective
businesses.
Under the terms of the Intellectual Property Agreement, the Intellectual
Property that relates primarily to the Instruments Business and the
Semiconductor Equipment Business will be transferred to IB and VSEA,
respectively, with VMS retaining the Intellectual Property that relates
primarily to the Health Care Systems Business. Each company will grant a non-
exclusive, perpetual, royalty-free license under the Intellectual Property that
it owns to the other two companies for use in their respective fields. More
specifically, as of the Distribution Date, each of VMS, IB and VSEA will hold
certain rights in the mark "VARIAN," the "VA" logo and other rights to various
trademarks, service marks, and trade names containing the word "VARIAN."
30
<PAGE>
SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS
The following financial forecast of the capitalization of VMS is based on
forecasts and assumptions by Varian's management concerning events and
circumstances that are expected to occur subsequent to the latest historical
balance sheet date but prior to and including April 2, 1999 (the Distribution
Date), including future results of operations and other events. For purposes of
the forecasted capitalization at April 2, 1999, net earnings in the second
quarter of fiscal year 1999 are assumed to approximate the sum of the net
earnings of IB for the second quarter of fiscal year 1998, the VMS as adjusted
historical net earnings for the second quarter of fiscal year 1998 and the net
earnings of VSEA for the first quarter of fiscal year 1999. In addition,
restructuring plans associated with the Distribution are currently being
developed and may result in additional charges to VMS's equity. Assumptions
with respect to events that will occur between January 2 and April 2, 1999,
include the following:
. Payment of cash contributions to VSEA and IB of $100 million and $20
million, respectively.
. The assumption by IB of $58.5 million of long-term debt (including
current portion) from Varian and the transfer to VSEA and IB of $5
million and $17 million of Notes Payable, respectively, from Varian.
. The exercise of 362,000 stock options at an average exercise price of
$13.69 per share resulting in net proceeds of approximately $5 million
and the issuance of 73,000 shares of Varian Common Stock under the
Employee Stock Purchase Plan. Varian has suspended the Employee Stock
Purchase Plan effective as of January 4, 1999.
. The dividend to existing Varian stockholders of all of the outstanding IB
Common Stock and VSEA Common Stock at their respective book values in
connection with the Distribution.
. The sale, in connection with the Distribution, of Varian's long-term
leasehold interest in certain of its Palo Alto facilities, together with
the related buildings and other corporate assets, resulting in estimated
cash proceeds of approximately $45 million. Additional real estate sales,
resulting in estimated cash proceeds of an additional $10 million, are
expected subsequent to the Distribution Date, and have not been included
in the forecasted capitalization of VMS.
. Payment of net transaction costs related to the Distribution estimated to
be $50 million. Approximately $25 million of such transaction costs are
assumed to have been accrued for but unpaid at the Distribution Date.
. The receipt of approximately $5 million of insurance proceeds and
experience dividends.
In Varian's management's judgment, the listed assumptions and forecasts reflect
those material events or transactions that occurred since January 2, 1999 or
are expected to occur prior to the Distribution Date, other than the potential
restructuring charges discussed in the first paragraph above. There have been
no changes in accounting principles anticipated in this capitalization forecast
nor are any such changes currently contemplated.
Limitations on Projections and Forecasts
The assumptions and estimates underlying the projected and forecasted data and
information in this Information Statement are inherently uncertain and,
although considered reasonable by management of Varian, are subject to
significant business, economic and competitive uncertainties, many of which are
beyond the control of Varian and its subsidiaries. Accordingly, there can be no
assurance that the projected and forecasted financial results will be realized.
In fact, actual results in the future usually will differ from the forecasted
financial results and the differences may be material.
Neither Varian nor any of its subsidiaries intends after the date of this
Information Statement to update any forecasted or projected financial data or
information contained in this Information Statement and the absence of such an
update should not be construed as any indication regarding the views or beliefs
of management of Varian (or of VMS after the Distribution) concerning the
forecasted or projected data or information contained in this Information
Statement.
31
<PAGE>
FORECASTED CAPITALIZATION
The following table sets forth the combined capitalization of VMS as of January
1, 1999 on a historical basis, forecasted at April 2, 1999 (the Distribution
Date), and as adjusted to give effect to the Distribution and the other
transactions contemplated by the Distribution Agreement. The significant
assumptions used below have been described in "Summary of Significant
Capitalization Forecast Assumptions" on the preceding page. The following data
is qualified in its entirety by the financial statements of Varian,
incorporated by reference in this Information Statement, the VMS unaudited pro
forma consolidated financial statements appearing elsewhere in this Information
Statement and other information contained elsewhere in this Information
Statement.
<TABLE>
<CAPTION>
Forecasted
January 1, At Pro Forma
1999 April 2, After
Historical 1999(1) Distribution(1)
---------- ---------- ---------------
(Dollars in millions)
<S> <C> <C> <C>
Cash and cash equivalents................ $131.5 $149.0 $ 29.0
====== ====== ======
Notes payable............................ $ 35.4 $ 35.4 $ 13.4
====== ====== ======
Long-Term Debt, including current
portion................................. $117.0 $117.0 $ 58.5
------ ------ ------
Stockholders' Equity:
Common stock, par value $1 per share:
authorized - 99,000,000 shares
issued and outstanding - 29,909,000
historical and 30,344,000 pro forma... 29.9 30.3 30.3
Preferred stock, par value $1 per
share:
authorized - 1,000,000 shares
issued and outstanding - none
historical or pro forma.............. -- -- --
Retained earnings...................... 526.0 508.6 122.3
------ ------ ------
Total Stockholders' Equity......... 555.9 538.9 152.6
------ ------ ------
Total Capitalization............. $672.9 $655.9 $211.1
====== ====== ======
</TABLE>
- -------
(1) See "Summary of Significant Capitalization Forecast Assumptions" on the
preceding page.
32
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial statements of VMS set forth
below consist of a pro forma balance sheet as of January 1, 1999 and pro forma
statements of earnings for the quarter ended January 1, 1999 and for each of
the most recent three fiscal years. The pro forma balance sheet was prepared to
give effect to the Distribution as if it had occurred on January 1, 1999 and
the pro forma statements of earnings were prepared to give effect to the
Distribution as if it had occurred on the first day of the earliest period
presented. The unaudited pro forma balance sheet presented below does not
purport to represent what VMS's financial position actually would have been had
the Distribution occurred on the date indicated or to project VMS's financial
position for any future date. The unaudited pro forma statements of earnings
set forth below do not purport to represent what VMS's operations actually
would have been or to project VMS's operating results for any future period.
The unaudited pro forma adjustments are based upon currently available
information and certain assumptions that Varian believes are reasonable. The
unaudited pro forma statements should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical consolidated financial statements of Varian and the notes
thereto incorporated herein by reference.
33
<PAGE>
Unaudited Pro Forma Consolidated Balance Sheet
January 1, 1999
<TABLE>
<CAPTION>
Adjustments As
Varian For Adjusted Pro Forma VMS
Historical Distribution(/1/) Historical Adjustments(/2/) Pro Forma
---------- ----------------- ---------- ---------------- ---------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash
equivalents.......... $ 131.5 $ -- $131.5 $(120.0) $ 11.5
Accounts receivable... 352.5 201.9 150.6 -- 150.6
Inventories........... 221.4 132.2 89.2 -- 89.2
Other current assets.. 97.2 62.3 34.9 -- 34.9
-------- ------ ------ ------- ------
Total current
assets............. 802.6 396.4 406.2 (120.0) 286.2
Property, Plant and
Equipment, net......... 210.8 124.4 86.4 -- 86.4
Other Assets............ 160.5 66.6 93.9 -- 93.9
-------- ------ ------ ------- ------
Total Assets............ $1,173.9 $587.4 $586.5 $(120.0) $466.5
======== ====== ====== ======= ======
Liabilities and Equity
Current Liabilities
Notes payable and
current portion of
long-term debt....... $ 46.2 $ -- $ 46.2 $ (27.9) $ 18.3
Accounts payable -
trade............... 43.1 23.0 20.1 -- 20.1
Accrued expenses...... 275.2 175.0 100.2 -- 100.2
Product warranty...... 39.0 24.2 14.8 -- 14.8
Advance payments from
customers............ 64.5 17.0 47.5 -- 47.5
-------- ------ ------ ------- ------
Total Current
Liabilities........ 468.0 239.2 228.8 (27.9) 200.9
Long-Term Accrued
Expenses............... 43.8 -- 43.8 -- 43.8
Long-Term Debt.......... 106.2 -- 106.2 (52.6) 53.6
-------- ------ ------ ------- ------
Total Liabilities... 618.0 239.2 378.8 (80.5) 298.3
Equity.................. 555.9 348.2 207.7 (39.5) 168.2
-------- ------ ------ ------- ------
Total Liabilities and
Equity................. $1,173.9 $587.4 $586.5 $(120.0) $466.5
======== ====== ====== ======= ======
</TABLE>
Notes To Unaudited Pro Forma Consolidated Balance Sheet
(1) To adjust the historical financial statements of Varian for the impact of
the Distribution of IB Common Stock and VSEA Common Stock to Varian
stockholders. The Distribution of IB Common Stock and VSEA Common Stock is
reflected at book value.
(2) Assumes a cash contribution by Varian to IB of $20.0 million, the
assumption by IB of $58.5 million in long-term debt (including current
portion) from Varian, the transfer to IB of $17.0 million in Notes Payable
from Varian, the cash contribution by Varian to VSEA of $100.0 million, and
the transfer to VSEA of $5.0 million in Notes Payable from Varian in
connection with the Distribution. See "Forecasted Capitalization."
34
<PAGE>
Unaudited Pro Forma Consolidated Statement of Earnings
Quarter Ended January 1, 1999
<TABLE>
<CAPTION>
Adjustments As
Varian For Adjusted Pro Forma VMS
Historical Distribution(/1/) Historical Adjustments(/2/) Pro Forma
---------- ----------------- ---------- ---------------- ---------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Sales................... $ 282.3 $177.3 $105.0 $ -- $105.0
------- ------ ------ ----- ------
Operating Costs and
Expenses
Cost of sales........... 184.5 112.5 72.0 -- 72.0
Research and
development............ 24.3 14.9 9.4 -- 9.4
Marketing............... 52.3 38.0 14.3 -- 14.3
General and
administrative......... 20.2 14.5 5.7 -- 5.7
Reorganization costs.... 3.5 -- 3.5 3.5
------- ------ ------ ----- ------
Total operating costs
and expenses........... 284.8 179.9 104.9 -- 104.9
------- ------ ------ ----- ------
Operating Earnings
(Loss)................. (2.5) (2.6) 0.1 -- 0.1
Interest expense........ (2.7) -- (2.7) 1.1 (/2/) (1.6)
Interest income......... 1.5 -- 1.5 (1.5)(/3/) --
------- ------ ------ ----- ------
Operating Earnings
(Loss) before Taxes.... (3.7) (2.6) (1.1) (0.4) (1.5)
Taxes on (loss)
earnings............... (1.3) (0.7) (0.6) (0.2)(/4/) (0.8)
------- ------ ------ ----- ------
Net Earnings (Loss)..... $ (2.4) $ (1.9) $ (0.5) $(0.2) $ (0.7)
======= ====== ====== ===== ======
Net Earnings (Loss) Per
Share - Basic.......... $ (0.08)
=======
Net Earnings (Loss) Per
Share - Diluted........ $ (0.08)
=======
Pro Forma Net Earnings
(Loss) Per Share -
Basic(/5/)............ $(0.02)
======
Pro Forma Net Earnings
(Loss) Per Share -
Diluted(/5/).......... $(0.02)
======
</TABLE>
Notes to Unaudited Pro Forma Consolidated Statement of Earnings
(1) To adjust the historical financial statements of Varian for the impact of
the Distribution of IB Common Stock and VSEA Common Stock to Varian
stockholders. The Distribution of IB Common Stock and VSEA Common Stock is
reflected at book value.
(2) Reflects the reduction of interest expense on $58.5 million of long-term
debt at an estimated annual rate of interest of 7.02% and on $22.0 million
of Notes Payable at an estimated annual rate of interest of 1.93%. A change
of 25 basis points on these estimated annual rates of interest would impact
pro forma interest expense by $50,000.
(3) Reflects the reduction of interest income on $120.0 million of cash and
cash equivalents at an estimated annual rate of interest of 5.2%. This pro
forma adjustment is limited to the amount of actual interest income earned
by Varian during the period.
(4) The pro forma adjustment for income taxes is based upon statutory income
tax rates.
(5) The computation of pro forma net earnings (loss) per share - basic and pro
forma net earnings (loss) per share - diluted is based on the weighted
average number of shares of Varian Common Stock outstanding during the
quarter ended January 1, 1999.
35
<PAGE>
Unaudited Pro Forma Consolidated Statement of Earnings
Fiscal Year 1998
<TABLE>
<CAPTION>
Adjustments As
Varian For Adjusted Pro Forma VMS
Historical Distribution(/1/) Historical Adjustments(/2/) Pro Forma
---------- ----------------- ---------- ---------------- ---------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Sales................... $1,422.1 $880.6 $541.5 $ -- $541.5
-------- ------ ------ ----- ------
Operating Costs and
Expenses
Cost of sales........... 896.3 548.7 347.6 -- 347.6
Research and
development............ 107.0 67.5 39.5 -- 39.5
Marketing............... 199.1 148.3 50.8 -- 50.8
General and
administrative......... 104.5 60.1 44.4 -- 44.4
-------- ------ ------ ----- ------
Total operating costs
and expenses........... 1,306.9 824.6 482.3 -- 482.3
-------- ------ ------ ----- ------
Operating Earnings...... 115.2 56.0 59.2 -- 59.2
Interest expense........ (8.9) -- (8.9) 4.5 (/2/) (4.4)
Interest income......... 6.4 -- 6.4 (6.2)(/3/) 0.2
-------- ------ ------ ----- ------
Operating Earnings
before Taxes........... 112.7 56.0 56.7 (1.7) 55.0
Taxes on earnings....... 38.9 21.0 17.9 (0.7)(/4/) 17.2
-------- ------ ------ ----- ------
Net Earnings............ $ 73.8 $ 35.0 $ 38.8 $(1.0) $ 37.8
======== ====== ====== ===== ======
Net Earnings Per Share -
Basic................. $ 2.47
========
Net Earnings Per Share -
Diluted............... $ 2.43
========
Pro Forma Net Earnings
Per Share -Basic(/5/).. $ 1.26
======
Pro Forma Net Earnings
Per Share -
Diluted(/6/)........... $ 1.24
======
</TABLE>
Notes to Unaudited Pro Forma Consolidated Statement of Earnings
(1) To adjust the historical financial statements of Varian for the impact of
the Distribution of IB Common Stock and VSEA Common Stock to Varian
stockholders. The Distribution of IB Common Stock and VSEA Common Stock is
reflected at book value.
(2) Reflects the reduction of interest expense on $58.5 million of long-term
debt at an estimated annual rate of interest of 7.02% and on $22.0 million
of Notes Payable at an estimated annual rate of interest of 1.93%. A change
of 25 basis points on these estimated annual rates of interest would impact
pro forma interest expense by $201,000.
(3) Reflects the reduction of interest income on $120.0 million of cash and
cash equivalents at an estimated annual rate of interest of 5.2%.
(4) The pro forma adjustment for income taxes is based upon statutory income
tax rates.
(5) The computation of pro forma net earnings per share - basic is based on the
weighted average number of shares of Varian Common Stock outstanding during
fiscal year 1998.
(6) The computation of pro forma net earnings per share - diluted is based on
the sum of the weighted average number of shares of Varian Common Stock
outstanding and Varian's dilutive potential Common Stock during fiscal year
1998.
36
<PAGE>
Unaudited Pro Forma Consolidated Statement of Earnings
Fiscal Year 1997
<TABLE>
<CAPTION>
Adjustments As
Varian For Adjusted Pro Forma VMS
Historical Distribution(/1/) Historical Adjustments Pro Forma
---------- ----------------- ---------- ----------- ---------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Sales................... $1,425.9 $949.6 $476.3 $ -- $476.3
-------- ------ ------ ----- ------
Operational Costs and
Expenses
Cost of sales........... 902.7 579.4 323.3 -- 323.3
Research and
development............ 110.8 79.6 31.2 -- 31.2
Market.................. 199.2 156.8 42.4 -- 42.4
General and
administrative......... 83.2 52.1 31.1 -- 31.1
-------- ------ ------ ----- ------
Total operating costs
and expenses........... 1,295.9 867.9 428.0 -- 428.0
-------- ------ ------ ----- ------
Operating Earnings...... 130.0 81.7 48.3 -- 48.3
Interest expense........ (7.8) -- (7.8) 4.5 (/2/) (3.3)
Interest income......... 4.6 -- 4.6 (4.6)(/3/) --
Gain on sale of Thin
Film Systems........... 51.0 51.0 -- -- --
-------- ------ ------ ----- ------
Operating Earnings
before Taxes........... 177.8 132.7 45.1 (0.1) 45.0
Taxes on earnings....... 62.2 47.4 14.8 -- (/4/) 14.8
-------- ------ ------ ----- ------
Net Earnings............ $ 115.6 $ 85.3 $ 30.3 $(0.1) $ 30.2
======== ====== ====== ===== ======
Net Earnings Per Share -
Basic................. $ 3.79
========
Net Earnings Per Share -
Diluted............... $ 3.67
========
Pro Forma Net Earnings
Per Share -Basic(/5/).. $ 0.99
======
Pro Forma Net Earnings
Per Share -
Diluted(/6/)........... $ 0.96
======
</TABLE>
Notes to Unaudited Pro Forma Consolidated Statement of Earnings
(1) To adjust the historical financial statements of Varian for the impact of
the Distribution of IB Common Stock and VSEA Common Stock to Varian
stockholders. The Distribution of IB Common Stock and VSEA Common Stock is
reflected at book value.
(2) Reflects the reduction of interest expense on $58.5 million of long-term
debt at an estimated annual rate of interest of 7.02% and on $22.0 million
of Notes Payable at an estimated annual rate of interest of 1.93%. A change
of 25 basis points on these estimated annual rates of interest would impact
pro forma interest expense by $201,000.
(3) Reflects the reduction of interest income on $120.0 million of cash and
cash equivalents at an estimated annual rate of interest of 5.2%. This pro
forma adjustment is limited to the amount of actual interest income earned
by Varian during the period.
(4) The pro forma adjustment for income taxes is based upon statutory income
tax rates.
(5) The computation of pro forma net earnings per share - basic is based on the
weighted average number of shares of Varian Common Stock outstanding during
fiscal year 1997.
(6) The computation of pro forma net earnings per share - diluted is based on
the sum of the weighted average number of shares of Varian Common Stock
outstanding and Varian's dilutive potential Common Stock during fiscal year
1997.
37
<PAGE>
Unaudited Pro Forma Consolidated Statement of Earnings
Fiscal Year 1996
<TABLE>
<CAPTION>
Adjustments As
Varian For Adjusted Pro Forma VMS
Historical Distribution(/1/) Historical Adjustments Pro Forma
---------- ----------------- ---------- ----------- ---------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Sales................... $1,599.4 $1,131.9 $467.5 $ -- $467.5
-------- -------- ------ ----- ------
Operational Costs and
Expenses
Cost of sales........... 995.7 687.5 308.2 -- 308.2
Research and
development............ 110.2 86.0 24.2 -- 24.2
Market.................. 200.3 159.1 41.2 -- 41.2
General and
administrative......... 103.1 65.5 37.6 -- 37.6
-------- -------- ------ ----- ------
Total operating costs
and expenses........... 1,409.3 998.1 411.2 -- 411.2
-------- -------- ------ ----- ------
Operating Earnings...... 190.1 133.8 56.3 -- 56.3
Interest expense........ (6.4) -- (6.4) 4.5 (/2/) (1.9)
Interest income......... 5.5 -- 5.5 (5.5)(/3/) --
-------- -------- ------ ----- ------
Operating Earnings
before Taxes........... 189.2 133.8 55.4 (1.0) 54.4
Taxes on earnings....... 67.1 48.4 18.7 (0.4)(/4/) 18.3
-------- -------- ------ ----- ------
Net Earnings............ $ 122.1 $ 85.4 $ 36.7 $(0.6) $ 36.1
======== ======== ====== ===== ======
Net Earnings Per Share -
Basic................. $ 3.93
========
Net Earnings Per Share -
Diluted............... $ 3.81
========
Pro Forma Net Earnings
Per Share -Basic(/5/).. $ 1.16
======
Pro Forma Net Earnings
Per Share -
Diluted(/6/)........... $ 1.12
======
</TABLE>
Notes to Unaudited Pro Forma Consolidated Statement of Earnings
(1) To adjust the historical financial statements of Varian for the impact of
the Distribution of IB Common Stock and VSEA Common Stock to Varian
stockholders. The Distribution of IB Common Stock and VSEA Common Stock is
reflected at book value.
(2) Reflects the reduction of interest expense on $58.5 million of long-term
debt at an estimated annual rate of interest of 7.02% and on $22.0 million
of Notes Payable at an estimated annual rate of interest of 1.93%. A change
of 25 basis points on these estimated annual rates of interest would impact
pro forma interest expense by $201,000.
(3) Reflects the reduction of interest income on $120.0 million of cash and
cash equivalents at an estimated annual rate of interest of 5.2%. This pro
forma adjustment is limited to the amount of actual interest income earned
by Varian during the period.
(4) The pro forma adjustment for income taxes is based upon statutory income
tax rates.
(5) The computation of pro forma net earnings per share - basic is based on the
weighted average number of shares of Varian Common Stock outstanding during
fiscal year 1996.
(6) The computation of pro forma net earnings per share - diluted is based on
the sum of the weighted average number of shares of Varian Common Stock
outstanding and Varian's dilutive potential Common Stock during fiscal year
1996.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of financial condition and results of operations
is based upon and should be read in conjunction with "Pro Forma Consolidated
Financial Statements" included elsewhere in this Information Statement, as well
as the information contained under "Business" "Risk Factors."
The unaudited pro forma consolidated financial statements of VMS generally
reflect the results of operations, financial position and cash flows of the
operations expected to be retained by VMS after the Internal Transfers and
Distribution. The unaudited pro forma balance sheet does not, however, purport
to represent what VMS's financial position actually would have been had the
Distribution occurred on the date indicated, or to project VMS's financial
position for any future date. The unaudited pro forma statements of earnings
similarly do not purport to represent what VMS's operating results actually
would have been had the Distribution occurred on the date indicated, or to
project VMS's operating results for any future period. The unaudited pro forma
consolidated financial statements include, among other things, allocations of
certain Varian corporate assets (including pension assets), liabilities
(including profit sharing and pension benefits) and expenses (including legal,
accounting, employee benefits, insurance services, information technology
services, treasury and other Varian corporate overhead) to VMS using the
allocation methodology described in the notes to the VMS pro forma consolidated
financial statements during the periods presented. These allocations are not
necessarily indicative of the amounts that would have been recorded by VMS had
it operated on a stand-alone basis during the periods presented or will be
recorded by VMS in the future. The pro forma consolidated financial statements
do not reflect any changes that may occur in the financing and operations of
VMS as a result of the Distribution.
Results of Operations
Fiscal Year
VMS'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.
First Quarter Fiscal Year 1999 Compared to First Quarter Fiscal Year 1998
Sales. VMS's sales of $105 million in the first quarter of fiscal year 1999
were 6% higher than its sales of $99 million in the first quarter of fiscal
year 1998, and consisted of sales and service of oncology systems, and the
sales of x-ray tubes and imaging subsystems.
Oncology systems sales were $78 million, or 74% of VMS's sales, in the first
quarter of fiscal year 1999, compared to $67 million, or 68% of sales in the
first quarter of fiscal year 1998. X-ray tubes and imaging subsystems sales
were $27 million, or 26% of VMS's sales, in the first quarter of fiscal year
1999, compared to $32 million, or 32% of sales, in the first quarter of fiscal
year 1998. Oncology systems sales accounted for all of the increase in sales
between the first quarter of fiscal year 1998 and the first quarter of fiscal
year 1999. First quarter of fiscal year 1999 oncology systems sales increased
16% from the first quarter of fiscal year 1998, while x-ray tubes and imaging
subsystems sales decreased 16% between the first quarter of fiscal year 1998
and the first quarter of fiscal year 1999. X-ray tubes and imaging subsystem
sales weakness was due to lower x-ray sales to most major original equipment
manufacturers and aftermarket customers and slightly lower prices.
International sales were $58 million, or 55% of VMS's total sales, in the first
quarter of fiscal year 1999, compared to $40 million, or 40% of sales, in the
first quarter of fiscal year 1998. By product line, oncology systems sales in
North America, Europe, Asia and the rest of the world amounted to $37 million,
$26 million, $9 million and $6 million
39
<PAGE>
in the first quarter of fiscal year 1999, and $50 million, $14 million, $1
million and $2 million in the first quarter of fiscal year 1998, respectively,
while sales of x-ray tubes and imaging subsystems in North America, Europe,
Asia and the rest of the world amounted to $9 million, $5 million, $11 million
and $2 million in the first quarter of fiscal year 1999 and $10 million, $8
million, $13 million and $1 million in the first quarter of fiscal year 1998,
respectively. The decrease in oncology systems sales in North America was due
to customer requested delivery delays, while the growth in international sales
was partially due to the acquisition of the General Electric RS Business in
December 1997.
Gross Profit. VMS recorded gross profit of $33 million in the first quarter of
both fiscal year 1999 and fiscal year 1998. As a percentage of sales, gross
profit was 31% of sales in the first quarter of fiscal year 1999, compared to
33% of sales in the first quarter of fiscal year 1998. The decrease in gross
profit as a percentage of sales from the first quarter of fiscal year 1998 to
the first quarter of fiscal year 1999 was attributable to higher international
sales and service sales with lower margins for oncology systems and volume
shortfall for x-ray tubes and imaging subsystems. Gross profit as a percentage
of sales of oncology systems amounted to 31% in the first quarter of fiscal
year 1999, compared to 34% in the first quarter of fiscal year 1998. Gross
profit as a percentage of sales of x-ray tubes and imaging subsystems was 32%
in the first quarter of fiscal year 1999, compared to 33% in the first quarter
of fiscal year 1998.
Research and Development. VMS's research and development expenses were $9
million in the first quarter of fiscal year 1999, compared to $10 million for
the first quarter of fiscal year 1998, amounting to 9% of sales in both the
first quarter of fiscal year 1998 and 1999.
Marketing. Marketing expenses were $14 million in the first quarter of fiscal
year 1999, compared to $12 million in the first quarter of fiscal year 1998,
representing 13% and 12% of sales, respectively. The growth in marketing
expense is primarily attributable to the acquisitions of distribution systems
in Japan and Spain and increased commission expenses due to higher overseas
sales.
General and Administrative. VMS's general and administrative expenses of $6
million were 6% of sales in the first quarter of fiscal year 1999, compared to
$12 million, or 12% of sales, in the first quarter of fiscal year 1998. The
decrease in general and administrative expenses in the first quarter of fiscal
year 1999 was due to lower profit-sharing and management incentive compensation
costs in the first quarter of fiscal year 1999 than in the first quarter of
fiscal year 1998.
Reorganization Costs. In the first quarter of fiscal year 1999, VMS incurred $4
million of costs related to the reorganization of Varian in connection with the
Distribution. Without such reorganization costs, VMS's operating earnings
before taxes would have been $2 million in the first quarter of fiscal year
1999.
Taxes on Earnings. VMS's effective tax rate was 50.9% in the first quarter of
fiscal year 1999, compared to 31.6% in the first quarter of fiscal year 1998.
The fiscal year 1999 rate is significantly higher than the fiscal year 1998
rate principally due to reorganization costs to be incurred in fiscal year 1999
which are not deductible for tax reporting purposes.
Net Loss. VMS's net loss was $0.5 million in both the first quarter of fiscal
year 1998 and 1999.
Fiscal Year 1998 Compared to Fiscal Year 1997
Sales. VMS's sales of $542 million in fiscal year 1998 were 14% higher than its
sales of $476 million in fiscal year 1997. Fourth fiscal quarter sales were
significant in both years, accounting for $179 million of sales in fiscal year
1998 and $158 million of sales in fiscal year 1997, amounting to 33% of sales
in each fiscal year.
Oncology systems sales were $408 million, or 75% of VMS's sales, in fiscal year
1998, compared to $347 million, or 73% of sales, in fiscal year 1997. X-ray
tubes and imaging subsystems sales were $133 million, or 25% of VMS's sales, in
fiscal year 1998, compared to $129 million, or 27% of sales, in fiscal year
1997. Oncology systems sales accounted for almost all of the increase in sales
in fiscal year 1998. The 18% 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 of the RS Business in December
1997. X-ray tubes and imaging subsystem sales also increased 3% between fiscal
year 1997 and fiscal year 1998.
40
<PAGE>
By product line, oncology systems sales in North America, Europe, Asia and the
rest of the world amounted to $204 million, $145 million, $35 million and $24
million in fiscal year 1998, and $192 million, $91 million, $48 million and $16
million of sales in fiscal year 1997, respectively, while sales of x-ray tubes
and imaging subsystems in North America, Europe, Asia and the rest of the world
amounted to $39 million, $34 million, $56 million and $4 million in fiscal year
1998, and $34 million, $30 million, $63 million and $2 million in fiscal year
1997, respectively. The economic difficulties in Asia were responsible for the
reduction in Asian sales between fiscal year 1997 and 1998.
Gross Profit. VMS's gross profit of $194 million in fiscal year 1998 was 36% of
sales, compared to $153 million, or 32% of sales, in fiscal year 1997. The
increase in gross profit as a percentage of sales from fiscal year 1997 to
fiscal year 1998 was primarily attributable to 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 bear
a higher margin. Gross profit as a percentage of sales of oncology systems
amounted to 37% in fiscal year 1998, compared to 34% in fiscal year 1997. Gross
profit as a percentage of sales of x-ray tubes and imaging subsystems was flat
at 33% in fiscal year 1998 and fiscal year 1997, despite production start-up
costs for new digital imaging products.
Research and Development. Research and development expenses of $40 million in
fiscal year 1998, were 27% higher than the $31 million of such expenses in
fiscal year 1997, representing approximately 7% of sales in both fiscal years
1998 and 1997. The increase on an absolute basis was primarily attributable to
VMS's 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.
Marketing. Marketing expenses were $51 million in fiscal year 1998, compared to
$42 million, in fiscal year 1997, representing 9% of sales in both years. The
increase in marketing expenses, in absolute terms, was a result of VMS's
acquisition of Cyber-Nisty Company, a Japanese distributor, higher
international commission expenses and the expansion of VMS's sales and
marketing forces.
General and Administrative. General and administrative expenses of $44 million
were 8% of sales in fiscal year 1998, compared to $31 million, or 7% of sales,
in fiscal year 1997. The increase resulted from amortization of goodwill and
trade receivables write-offs.
Taxes on Earnings. VMS's effective tax rate was 31.6% in fiscal year 1998,
compared to 32.8% in fiscal year 1997. The fiscal year 1998 and fiscal year
1997 rates were lower than the U.S. federal statutory rate due to the tax
benefits arising from the use of a foreign sales corporation. In addition, the
fiscal year 1998 rate was lower than the fiscal year 1997 rate due to the
impact of higher earnings in low-tax foreign countries.
Net Earnings. VMS's net earnings in fiscal year 1998 were $39 million, or 7% of
sales, an increase of 28% over the $30 million of net earnings, or 6% of sales,
in fiscal year 1997. The increase in net earnings was primarily the result of
increased sales volume.
Fiscal Year 1997 Compared to Fiscal Year 1996
Sales. VMS's sales of $476 million in fiscal year 1997 were 2% higher than its
sales of $468 million in fiscal year 1996. Oncology systems sales were $347
million, or 73% of VMS's sales in fiscal year 1997, compared to $325 million,
or 69% of sales, in fiscal year 1996. X-ray tubes and imaging subsystems sales
were $129 million, or 27% of VMS's sales, in fiscal year 1997, compared to $143
million, or 31% of sales, in fiscal year 1996. Oncology systems sales accounted
for the entire increase in sales. The 7% increase in sales of oncology systems
between fiscal year 1996 and fiscal year 1997 reflected the increasing demand
for ancillary products. The increase in oncology systems sales was partially
offset by a 9% decrease in x-ray tube and imaging subsystem sales between
fiscal year 1996 and fiscal year 1997. The decrease resulted from lower levels
of demand in fiscal year 1997 than in fiscal year 1996 from original equipment
manufacturers who purchased x-ray tube products from VMS.
By product line, oncology systems sales in North America, Europe, Asia, and the
rest of the world amounted to $192 million, $91 million, $48 million and $16
million in fiscal year 1997, and $177 million, $93 million, $42 million and $13
million in fiscal year 1996, respectively, while sales of x-ray tubes and
imaging subsystems in North America,
41
<PAGE>
Europe, Asia and the rest of the world amounted to $34 million, $30 million,
$63 million and $2 million in fiscal year 1997, and $43 million, $32 million,
$65 million and $3 million in fiscal year 1996, respectively.
Gross Profit. VMS's gross profit of $153 million in fiscal year 1997 was 32% of
sales, compared to $159 million, or 34% of sales, in fiscal year 1996. The
decrease in gross profit as a percentage of 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, which affected both oncology
systems and x-ray tubes and imaging subsystems. Gross profit as a percentage of
sales of x-ray tubes and imaging subsystems amounted to 33% in fiscal year
1997, compared to 35% in fiscal year 1996. Gross profit as a percentage of
sales of oncology systems amounted to 34% in fiscal year 1997, compared to 36%
in fiscal year 1996.
Research and Development. Research and development expenses of $31 million in
fiscal year 1997, were 29% higher than the $24 million of such expenses in
fiscal year 1996. Research and development expenses represented 6.6% of sales
in fiscal year 1997 compared to 5.2% of sales in fiscal year 1996. VMS
increased research and development expenditures as a percentage of sales for
both oncology systems and x-ray tubes and imaging subsystems in fiscal year
1997. In 1997, oncology systems research and development effort was focused on
new product releases in the software products, particularly its imaging
products. X-ray tubes completed eight of 28 ongoing new tube developments,
proved feasibility of a new air-cooled "integral housing" tube, and initiated
several high end tube developments. The imaging business continued addressing
technical and manufacturability issues for amorphous silicon solid state
detectors.
Marketing. Marketing expenses were $42 million in fiscal year 1997, compared to
$41 million in fiscal year 1996, or 9% of sales in both fiscal years. The
increase, on an absolute basis, was mainly in oncology systems where the
product marketing and sales organizations were expanded.
General and Administrative. General and administrative expenses of $31 million
were 7% of sales in fiscal year 1997, compared to $38 million, or 8% of sales,
in fiscal year 1996. The decrease was primarily due to a reduction in corporate
overhead expenses.
Taxes on Earnings. VMS's effective tax rate was 32.8% in fiscal year 1997,
compared to 33.8% in fiscal year 1996. The fiscal year 1997 and fiscal year
1996 rates were lower than the U.S. federal statutory rate principally due to
the tax benefits arising from the use of a foreign sales corporation. The
fiscal year 1997 rate was lower than the fiscal year 1996 rate due to the
impact of tax credits.
Net Earnings. VMS's net earnings in fiscal year 1997 were $30 million, or 6% of
sales, a decrease of 17% from the $37 million of earnings, or 8% of sales, in
fiscal year 1996. The decrease in net earnings was the result of increased
investment in research and development and lower export prices due to the
strengthening of the U.S. dollar.
Recent Accounting Pronouncements
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 VMS's 1999 fiscal year.
The impact of the implementation of SFAS No. 131 on the reporting of VMS'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 establishes a new model for
accounting for derivatives and hedging activities and is effective for VMS's
2000 fiscal year. The impact of the implementation of SFAS No. 133 on the
consolidated financial statements of VMS has not yet been determined.
Liquidity and Capital Resources
Varian has historically incurred or managed debt at the parent level, and a
portion of this debt will be retained by VMS as of the Distribution Date. VMS
will not be able to rely on the earnings, assets or cash flows of VSEA or IB
after the Distribution to service this debt, nor, however, will its earnings,
assets or cash flows be used to contribute to the capital requirements of those
entities.
42
<PAGE>
The debt to be retained by VMS at the time of the Distribution will consist of
between $50 million and $100 million of Term Loans and Notes Payable, based on
Varian's outstanding indebtedness as of January 1, 1999 and projected operating
results and certain other transactions through the Distribution Date. See
"Forecasted Capitalization." As of January 1, 1999, interest rates on Varian's
outstanding Term Loans ranged from 6.70% to 7.29%, and the weighted average
interest rate on these Term Loans was 7.02%. As of January 1, 1999, interest
rates on Varian's outstanding Notes Payable ranged from 1.50% to 9.75%, and the
weighted average interest rate on these Notes Payable was 1.93%. While IB will
assume 50% of Varian's Term Loans, the specific Term Loans and Notes Payable
that VMS will retain in connection with the Distribution will be determined in
accordance with the Distribution Agreement. See "The Distribution -
Distribution Agreement." The Term Loans currently contain covenants that limit
future borrowings and the payment of cash dividends and require the maintenance
of certain levels of working capital and operating results. In connection with
the renegotiation of the Term Loans, the lender may revise existing or impose
additional restrictive covenants. Varian also will enter into a new credit
facility for working capital and other general corporate purposes. Any such
credit facility may contain certain representations and warranties; conditions;
affirmative, negative and financial covenants; and events of default customary
for such facilities.
At January 1, 1999, VMS had $132 million in cash and cash equivalents, compared
to $86 million at the end of the first quarter of fiscal year 1998, $150
million at October 2, 1998 and $142 million at September 27, 1997. Under the
terms of the Distribution Agreement, Varian will make a cash contribution to
VSEA such that VSEA's cash and cash equivalents equal $100 million at the time
of the Distribution. In addition, Varian will be required to contribute cash to
IB so that as of the time of the Distribution IB and VMS will each have Net
Debt equal to approximately 50% of the aggregate Net Debt of IB and VMS,
subject to such adjustments as may be necessary to provide VMS with a Net Worth
of between 40% and 50% of the aggregate Net Worths of IB and VMS. See "The
Distribution - Distribution Agreement." In connection with the Distribution,
Varian intends to sell its long-term leasehold interest in certain of its Palo
Alto facilities, together with the related buildings and other corporate
assets, from which it expects to receive proceeds of $55 million in the
aggregate. In addition, Varian will be required to pay the net expenses
associated with the Internal Transfers and Distribution, estimated at
approximately $50 million. To the extent that Varian does not sell all such
facilities and assets and pay all such expenses before the Distribution, the
amount of cash paid and Notes Payable transferred to IB at the time of the
Distribution will assume that IB receives 50% of any post-Distribution proceeds
and pays for 50% of any post-Distribution expenses (in each case reduced for
estimated taxes payable or tax benefits received from all sales and transaction
expenses). Varian anticipates that it will be required to borrow amounts under
the new credit facility or under its existing credit facility to make such cash
contributions, pay such expenses and for general corporate purposes.
In December 1997, VMS purchased the RS Business from the General Electric
Company for approximately $45 million. This acquisition has been accounted for
under the purchase method of accounting. VMS is amortizing acquired goodwill of
$37 million over 40 years.
VMS expects that its future capital expenditures will continue to approximate
2.5% of sales in each fiscal year. In addition, it expects to incur up to $5
million in additional capital expenditures related to relocations effected in
connection with the Distribution. Additional restructuring plans associated
with the Distribution are currently being developed and may result in
additional costs. The Distribution Agreement provides that VMS will remain
liable for certain litigation described under "Business - Legal Proceedings"
and will indemnify IB and VSEA for one-third of the costs, expenses and other
liabilities of Varian relating to certain discontinued operations, including
certain environmental liabilities. See "Environmental Matters."
VMS's liquidity is affected by many factors, some based on the normal ongoing
operations of the business and others related to the uncertainties of the
industry and global economies. Although VMS's cash requirements will fluctuate
based on the timing and extent of these factors, management believes that
existing cash, cash generated from operations and VMS's borrowing capability
will be sufficient to satisfy anticipated commitments for capital expenditures
and other cash requirements for the current fiscal year and fiscal year 2000.
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Environmental Matters
VMS'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 a product's useful life. These laws have the
effect of increasing costs and potential liabilities associated with the
conduct of such operations.
Varian has been named by the U.S. Environmental Protection Agency or third
parties as a potentially responsible party under the CERCLA, as amended, at
eight sites where Varian is alleged to have shipped manufacturing waste for
recycling or disposal. Varian 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 Varian facilities (including facilities disposed of in
connection with Varian's sale of its Electron Devices business during fiscal
year l995 and the sale of its TFS business during fiscal year 1997).
Expenditures by Varian 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 January 1, 1999, Varian nonetheless estimated that the future
exposure for environmental-related investigation and remediation costs for
these sites and facilities ranged in the aggregate from $21 million to $48
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
January 1, 1999. 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 Varian has accrued $21 million in estimated
environmental costs as January 1, 1999. The amount accrued has not been
discounted to present value.
As to other sites and facilities, Varian has gained sufficient knowledge to be
able to better estimate the scope and costs of future environmental activities.
As of January 1, 1999, Varian estimated 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 January 1, 1999. 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 futures costs were reliably determinable. Together,
these amounts totaled $51 million at January 1, 1999. Accordingly, Varian has
accrued $22 million as of January 1, 1999, which represents its best estimate
of the future costs discounted at 4%, net of inflation. This accrual is in
addition to the $21 million described in the preceding paragraph.
Varian 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 Varian
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, Varian filed a
lawsuit against 36 insurance companies with respect to most of the above-
referenced sites and facilities. Varian 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 January 1, 1999.
Varian has also reached an agreement with another insurance company under which
the insurance company has agreed to pay a portion of Varian's past and future
environmental related expenditures, and Varian therefore has a $5.5 million
receivable in Other Assets at January 1, 1999. Varian believes that this
receivable is recoverable because it is based on a binding, written settlement
agreement with a solvent and financially viable insurance company. Although
Varian intends to aggressively pursue additional insurance recoveries, Varian
has not reduced any liability in anticipation of recovery with respect to
claims made against third parties.
Under the Distribution Agreement, VMS has agreed to indemnify IB and VSEA for
one-third of these environmental investigation and remediation costs, and IB
and VSEA have each agreed to indemnify Varian for one-third of these
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costs, as adjusted for any insurance proceeds and tax benefits expected to be
realized upon the payment of these costs. Accordingly, as of January 1, 1999,
VMS has recorded a $15 million receivable from IB and VSEA relating to their
obligations to indemnify VMS for their respective portions of these costs.
The foregoing amounts 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.
VMS believes that most of these cost ranges will narrow as investigation and
remediation activities progress.
VMS believes that its reserves are adequate, but as the scope of its obligation
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 VMS'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 VMS.
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 VMS 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 VMS's
business, results of operations or financial condition.
State of Readiness. VMS 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 VMS does business.
VMS 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, VMS 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 35% complete, with 90% completion expected by July 1999 and full
completion expected by the end of 1999. Upgrade of enterprise information
systems is approximately 35% complete, with 94% completion expected by July
1999 and 100% completion expected by December 1999; upgrade of networking and
telecommunications systems is complete; upgrade of factory-specific information
systems is approximately 58% complete, with 87% completion expected by December
1999; upgrade of non-IT systems, computers and packaged software and facilities
systems is approximately 30% complete, with 85% completion expected by July
1999 and 100% completion expected by December 1999.
VMS 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 VMS 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 VMS's
current products.
With respect to previously-sold products, VMS does not intend to assess Year
2000 preparedness of every product it has ever sold, but rather is focusing its
assessments on products that are subject to regulatory requirements with
respect to
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Year 2000, including FDA requirements for medical devices. VMS is also focusing
its assessments on products that will be under written warranties or are still
relatively early in their useful life, are more likely to be dependent on non-
IT systems that are not Year 2000 capable and cannot be easily upgraded with
readily available externally-utilized computers and packaged software and/or
could pose a safety hazard. These assessments are expected to be substantially
completed by January 1999. Where VMS identifies previously-sold products that
are not Year 2000 capable, VMS 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 VMS will be required to repair
and/or upgrade such products at its own expense. Schedules for completing those
corrective actions vary considerably among VMS's businesses and products, but
are generally expected to be substantially completed by July 1999.
VMS is still assessing the potential Year 2000 problems of third parties with
which VMS 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 July 1999.
Costs. As of January 1, 1999, VMS estimates that it had incurred approximately
$700,000 to assess and correct Year 2000 problems. Although difficult to
assess, based on its assessments to date VMS estimates that it will incur
approximately $2,800,000 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, VMS expects that
certain costs may 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 VMS's actual costs to assess and
correct Year 2000 problems will not be higher than the foregoing estimate.
Risks. Failure by VMS and its key suppliers to accurately assess and correct
Year 2000 problems, would likely result in interruption of certain of VMS's
normal business operations, which could have a material adverse effect on VMS's
business, results of operations or financial condition. If VMS 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 VMS does not adequately
identity 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 VMS does not adequately identify and correct Year 2000 problems in
previously-sold products, it could experience warranty or product liability
claims by users of products which do not function correctly. If VMS 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 services 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 VMS does
not expect to be 100% Year 2000 compliant by the end of 1999, VMS does not
currently believe that any Year 2000 non-compliance in VMS's information
systems would have a material adverse effect on VMS'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
assessments and corrective actions; the willingness and ability of critical
suppliers to assess and correct their own Year
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2000 problems, including in products they supply to VMS; 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 Distribution. See "Risk Factors - Transitioning to
New Information Technology Infrastructures."
Because of uncertainties as to the extent of Year 2000 problems with VMS's
previously-sold products and the extent of any legal obligation of VMS to
correct Year 2000 problems in those products, VMS cannot yet assess risks to
VMS with respect to those products. Because its assessments are not yet
complete, VMS 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 VMS's results of operations.
Contingency Plans. With respect to VMS's enterprise information systems, VMS
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, VMS 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 be corrected before
December 31, 1999. It is currently anticipated that the focus of these
contingency plans will be the possible interruption of the supply of key
components or services from third parties.
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BUSINESS
General
Varian, which will be renamed Varian Medical Systems, Inc., will conduct the
Health Care Systems Business currently conducted by Varian. Varian has been
engaged in the Health Care Systems Business since 1959. References in this
section to "VMS" refer to VMS and its subsidiaries after giving effect to the
Internal Transfers and the Distribution. References to the "Health Care Systems
Business" refer to the historical business and operations of the Health Care
Systems Business conducted by Varian prior to the Distribution.
Overview
VMS 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),
VMS 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, VMS 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, VMS provides a broad selection of diagnostic tubes
capable of delivering more scans with excellent resolution and imaging more
patients than its competitors. VMS 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.
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
VMS's products can be broadly classified into two principal categories:
oncology systems, and x-ray tubes and imaging subsystems.
Oncology Systems
VMS 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
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brachytherapy systems and data management systems for radiation oncology
centers. VMS 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. VMS's CLINAC(TM)
series of medical linear accelerators, marketed to hospitals and clinics
worldwide, generates therapeutic x-rays and radiation beams for cancer
treatment. VariSource(TM), VMS'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.
VMS'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.
VMS also manufactures and markets related radiotherapy products such as imaging
systems, information management systems, multi-leaf collimators, simulators and
radiosurgery products. VMS 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.
VMS continually works with physicians and technicians to develop the latest
technology and treatments.
In addition to pursuing growth opportunities in existing markets, VMS is
pursuing the vast potential in combining advances in focused energy with the
latest breakthroughs in biotechnology. VMS 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 VMS to take
full advantage of its reputation for technology innovation leadership in the
health care field.
X-Ray Tubes and Imaging Subsystems
VMS 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. VMS conducts an
active research and development program to address new technology and
applications in both the medical and industrial x-ray tube markets. VMS's
extensive scientific and engineering expertise in glass and metal center
section tubes is considered to be state-of-the-art.
VMS manufactures tubes for four primary medical x-ray imaging applications: CT
scanner; radiographic/fluoroscopic; special procedures; and mammography. VMS 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 VMS's current tubes last twice as long as tubes did 5 years
ago, resulting in significant savings for customers.
VMS 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 VMS tubes. VMS 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.
VMS also designs, manufactures and markets imaging products. A new imaging
product line was launched in September 1996. Amorphous silicon imaging
technologies developed by VMS 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.
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Marketing and Sales
Historically, VMS has sold a significant proportion of its systems in any
particular period to a limited number of customers. Sales to VMS's ten largest
customers in fiscal years 1998, 1997 and 1996 accounted for approximately 24%,
28% and 30% of sales, respectively. VMS expects that sales of its products to
relatively few customers will continue to account for a high percentage of its
sales in the foreseeable future. No single customer accounted for 10% of more
of VMS's sales in fiscal year 1998. See "Risk Factors - Customer Concentration;
Customer Financing."
VMS sells its products throughout the world through a direct sales force in
North America, Asia, Europe and Latin America. VMS has 19 field sales offices
in the United States and 15 sales offices in other countries. Sales and service
in other countries are generally handled by distributors.
VMS 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, $347 million
and $327 million for fiscal years 1998, 1997 and 1996, respectively. VMS
divides its markets for oncology systems, components and accessories by region
into North America, Europe, Asia and rest of the world, and these regions
constituted 50%, 36%, 8% and 6% of VMS's sales during the 1998 fiscal year and
55%, 26%, 14% and 5% during the 1997 fiscal year, respectively.
VMS sells approximately 80% of its x-ray tube products to original equipment
manufacturers and 20% to replacement tube distributors. VMS has supplied tubes
to such industry leaders as Toshiba, Elscint, Hitachi and Shimadzu, each of
which accounted for 5% or more of x-ray tube product sales in fiscal year 1998.
Total sales for x-ray tube products were $130 million, $129 million and $141
million for fiscal years 1998, 1997 and 1996, respectively. VMS divides its
markets for its x-ray tube products, components and accessories by region into
Asia, North America, Europe and rest of the world, and these regions
constituted 43%, 28%, 26% and 3% of VMS's sales during the 1998 fiscal year and
49%, 26%, 23% and 2% during the 1997 fiscal year, respectively.
VMS 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. VMS also believes there will be continuous growth in the markets for
information technology.
VMS'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. VMS'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. VMS's growth strategy is to add products in its
existing markets and expand its international market share.
Customer Support and Services
VMS 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. VMS's network of service engineers and customer support
specialists provide installation, warranty, repair, training and support
services. VMS generates service revenue by providing service to customers on a
time and materials basis and through comprehensive service contracts and sale
of parts.
VMS 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. VMS
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. VMS offers a variety of post-warranty service
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agreements that permit customers to contract for the level of equipment
maintenance they require. In addition, VMS has begun to offer specific software
support agreements, reflecting the growing use in VMS's products of software
that can be updated. Service is provided at rates competitive with those
offered by VMS's competitors.
Systems under warranty or service contract receive periodic maintenance by VMS
service engineers, who also install new system capabilities or software
upgrades and respond to customer service requests. These services may be
purchased from VMS's service organization by customers who do not have a
service contract with VMS.
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 VMS's customer requirements. Most of these engineers are employees of
VMS, but many are also employees of dealers and/or agents of VMS. Customers can
access VMS's extensive service network by calling any of VMS's service centers
located throughout North America, Europe, Asia and Latin America.
VMS 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, VMS 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 VMS.
VMS 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. VMS applications specialists and engineers make
recommendations to meet the customer's technical requirements within the
customer's budgetary constraints. VMS often develops specifications for a
unique product, which will be designed and manufactured to meet a specific
customer's requirements. VMS also maintains a technical customer support group
in Charleston, South Carolina to meet the technical support requirements of
independent tube installers using VMS's x-ray tube products.
Research and Development
Developing products, systems and services based on advanced technological
concepts is essential to VMS's ability to compete effectively. VMS currently
maintains a product development and engineering staff responsible for product
design and engineering. There can be no assurance that VMS's product
development efforts will result in the development or commercialization of
successful products or product enhancements. Research and development
expenditures (net of customer funding) totaled $40 million, $31 million and $24
million in fiscal years 1998, 1997 and 1996, respectively.
VMS's Health Care Technology Laboratory maintains technical competencies in
accelerator physics, image processing, electronic design, materials science,
for the purpose of proving feasibility of new product concepts and to improve
current products. Present research topics include new accelerator concepts for
cancer treatment, imaging-based radiotherapy treatment planning, targeting and
verification tools, systems for combined modality therapy, manufacturing
process improvements, and improved x-ray sources.
Although VMS intends to continue to conduct extensive research and development
activities, there can be no assurance that it will be able to develop and
market new products on a cost-effective and timely basis, that such products
will compete favorably with products developed by others or that VMS's existing
technology will not be superseded by new discoveries or developments. See "Risk
Factors - Technological Change and New Products."
Competition
The health care equipment markets are characterized by rapidly evolving
technology, intense competition and pricing pressure. VMS competes with
companies worldwide, some of which have greater financial, marketing and
management resources than VMS. These competitors could develop technologies and
products that are more effective than those
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currently used or produced by VMS or that could render VMS's products obsolete
or noncompetitive. Smaller competitors of VMS could be acquired by companies
with greater financial strength enabling them to compete more aggressively.
Certain distributors of VMS could also be acquired by competitors thereby
disrupting certain distribution arrangements of VMS. Management believes,
however, VMS 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. VMS
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. VMS's
ability to compete successfully depends on its ability to commercialize new
products ahead of its competitors. In its sales of oncology systems, VMS
competes with Siemens, Nucletron, Elekta, Mitsubishi, and certain government
facilities. In addition, VMS 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
VMS's x-ray tube business, manufacture x-ray tubes for use in their own
products. VMS must compete with these in-house x-ray tube manufacturing
operations that are naturally favored by their parent company. As a result, VMS
must have a competitive advantage in one or more significant areas which may
include lower product cost, better product quality, or technological
superiority. VMS 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, VMS
competes against other stand-alone x-ray tube manufacturers such as Comet,
located in Switzerland and IAE, located in Italy. These companies compete with
VMS for both the OEM business of major diagnostic imaging equipment
manufacturers as well as independent servicers of x-ray tube equipment. See
"Risk Factors - Competition."
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 VMS'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. See "Risk Factors - International Sales and
Manufacturing."
Production processes at VMS facilities include machining, fabrication,
subassembly, system assembly and final testing. VMS has invested in various
automated and semi-automated equipment for the fabrication and machining of
parts and assemblies incorporated in its products. VMS may from time to time
further invest in such equipment when cost justified. VMS's quality assurance
program includes various quality control measures from inspection of raw
material, purchased parts and assemblies through on-line inspection.
VMS'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 VMS. VMS utilizes an outsourcing
strategy for the manufacture of major subassemblies and performs system design,
assembly and testing in-house. VMS believes outsourcing enables it to minimize
its fixed costs and capital expenditures while also providing it with the
flexibility to increase production capacity. VMS purchases material and
components from various suppliers that are either standard products or built to
VMS specifications. Certain components used in existing products of VMS, as
well as products under development, are frequently purchased from single
sources.
Backlog
Backlog for VMS amounted to $375 million, $352 million and $344 million at
January 1, 1999, the end of fiscal year 1998 and the end of fiscal year 1997,
respectively. VMS includes in backlog only orders for products scheduled to be
shipped
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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.
Product Liability
VMS's business exposes it to potential product liability claims which are
inherent in the manufacture and sale of medical devices, and as such VMS 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 VMS's products. Therefore, the design, manufacture, sale or service of the
medical products manufactured by VMS involve the risk of product liability
claims and expose VMS to substantial liability to patients for damages
resulting from the faulty design, manufacture or servicing of such products.
Although VMS 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, VMS purchased General Electric's Radiotherapy Service
Business (the "RS Business"). In connection with that transaction, VMS 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 VMS is
responsible for the first $5,000,000 of expenses or liabilities related to any
such claims. VMS has been notified of three potential claims related to these
RS Business products for which VMS may have an indemnity obligation. See "Risk
Factors - Product Recalls, Product Liability and Insurance."
Government Regulation
Domestic Regulation
VMS'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 VMS 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 warning letters, civil penalties,
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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, VMS has not been required to resort to the PMAA process for approval
of its products.
Software deemed to be a medical device, such as VMS'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 VMS.
VMS 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 VMS 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 VMS'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 VMS.
VMS believes that its products substantially comply with all applicable
electrical safety and environmental standards, such as those of Underwriters
Laboratories and IEC 601.
VMS 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 VMS. See "Risk Factors - Government
Regulation."
The manufacture and sale of medical products manufactured by VMS involve the
risk of product liability claims and exposes VMS 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 VMS's products.
Therefore, the design, manufacture, sale or service of the medical products
manufactured by VMS involve the risk of product liability claims and exposes
VMS to substantial liability to patients for damages resulting from the faulty
design, manufacture or servicing of such products. See "Risk Factors - Product
Recalls, Product Liability and Insurance."
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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 VMS of this greater state control on Medicaid
payment for diagnostic services is uncertain.
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
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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
VMS'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 VMS's products. See "Risk Factors --
Uncertainty of Third-Party Reimbursement."
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. VMS 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
VMS 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 VMS'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,
VMS 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 VMS's products or that fall within its fields of interest. As
of February 1, 1999, VMS 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. VMS intends
to file additional patent applications as appropriate.
VMS 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. VMS has trademarks, both registered and
unregistered, that are maintained and enforced to provide customer recognition
for its products in the marketplace. VMS also has agreements with third parties
that provide for licensing of patented or proprietary technology. These
agreements include
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royalty-bearing licenses and technology cross- licenses. While VMS places
considerable importance on its licensed technology, VMS does not believe that
the loss of any license would have a material adverse effect on VMS's business.
VMS's competitors, like companies in many high technology businesses, routinely
review the products of others for possible conflict with their own patent
rights. Although VMS has from time to time received notices of claims from
others alleging patent infringement, VMS believes that there are no pending
patent infringement claims that might have a material adverse effect on the
business of VMS. See "Risk Factors - Uncertain Protection of Patent and Other
Proprietary Rights."
Environmental Matters
For a discussion of environmental matters, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Environmental
Matters."
Employees
At January 1, 1999, VMS had a total of approximately 2,237 full-time and
temporary employees worldwide, 1,674 in the United States and 563 elsewhere.
These numbers include approximately 140 corporate employees who are expected to
continue as VMS employees after the Distribution.
None of VMS's employees based in the United States are unionized or subject to
collective bargaining agreements. Employees based in certain foreign countries
may, from time to time, be subject to collective bargaining agreements. VMS
currently considers its employee relations to be good.
VMS's success depends to a significant extent upon a limited number of key
employees and other members of senior management of VMS. The loss of the
service of one or more of these key employees could have a material adverse
effect on VMS. The success of VMS's future operations depends in large part on
VMS'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. VMS's inability to attract and retain the personnel it requires
could have a material adverse effect on VMS's results of operations.
Properties
VMS's manufacturing, warehouse, research and development, sales, service and
administrative facilities have an aggregate floor space of 696,000 and 130,000
square feet, located in the United States and abroad, respectively, for a total
of 826,000 square feet worldwide. Of these facilities, aggregate floor space of
approximately 291,000 square feet is leased and the remainder is owned by VMS.
The management of VMS does not believe that there is any material long-term
excess capacity in its facilities, although utilization is subject to change
based on customer demand. The management of VMS believes that its facilities
and equipment, generally are well maintained, in good operating condition and
suitable for VMS's purposes and adequate for present operations.
VMS has facilities located throughout the world, including facilities located
in Palo Alto, California; Salt Lake City, Utah; Charleston, South Carolina;
Arlington Heights, Illinois; Crawley, England; Baden, Switzerland; and
Helsinki, Finland. VMS has 34 service and sales facilities located throughout
the world, 19 of which are located outside of the United States, including
Australia, Brazil, China, Denmark, Finland, France, Germany, Hong Kong, Italy,
Japan, The Netherlands, Spain, Switzerland, Thailand and the United Kingdom.
Legal Proceedings
Varian is a party to three related federal antitrust claims involving claims by
independent service organizations ("ISOs") that Varian's policies and business
practices relating to replacement parts violate the antitrust laws (the "ISOs
Litigation"). The ISOs purchase replacement parts from Varian and compete with
it for the servicing of linear accelerators made by Varian. In response to
several threats of litigation regarding the legality of Varian's parts policy,
Varian filed a declaratory judgment action in a U. S. District Court in 1996
seeking a determination that its new policies
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are legal and enforceable and damages against two of the ISOs for
misappropriation of Varian's trade secrets, unfair competition, copyright
infringement and related claims. Subsequently, four of the defendants filed
separate claims in other jurisdictions raising issues allegedly related to
those in the declaratory relief action and seeking injunctive relief against
Varian and damages against Varian in the amount of $10 million for each
plaintiff. The defendants' motion for a preliminary injunction in U. S.
District Court in Texas with respect to Varian's policies was defeated. The
ISOs defendants amended the complaint to include class action allegations and
allege a variety of other anti- competitive business practices and filed a
motion for class certification, which is scheduled to be heard by the U. S.
District Court in Texas in June 1999.
After the Distribution, VMS will retain responsibility for the liabilities of
the Health Care Systems Business, including the ISOs Litigation. In addition,
in accordance with the Distribution Agreement VMS has agreed to pay for one-
third of the costs, liabilities and expenses of certain legal proceedings
relating to discontinued operations of Varian. See "The Distribution -
Distribution Agreement."
VMS is also involved in certain other legal proceedings arising in the ordinary
course of its business. While there can be no assurances as to the ultimate
outcome of any litigation involving VMS, management does not believe any
pending legal proceeding will result in a judgment or settlement that will have
a material adverse effect on VMS's financial position, results of operations or
cash flows.
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MANAGEMENT
Board of Directors
Prior to the Distribution Date, nine current members of the board of directors
of Varian (other than John Seely Brown, Samuel Hellman, Terry R. Lautenbach,
David W. Martin, Jr., Burton Richter and Richard W. Vieser) are expected to
resign, and Richard M. Levy is expected to be added as a new director. The
board of directors of VMS (the "VMS Board") is expected to consist of seven
directors after the Distribution. The VMS Board will continue to be divided
into three classes. Directors for each class will be elected at the annual
meeting of stockholders held in the year in which the term for such class
expires and will serve thereafter for three years.
The following table sets forth names, in alphabetical order, and information
about the persons who are expected to serve as directors of VMS after the
Distribution.
<TABLE>
<CAPTION>
Initial
Name, Age and Current Term
Principal Occupation Expires Information
- --------------------- ------- -----------
<S> <C> <C>
John Seely Brown, 58.... 2001 Dr. Brown is Vice President, Director of the
Vice President, Xerox Palo Alto Research Center and Chief
Director of the Xerox Scientist of Xerox Corporation, positions he has
Palo Alto Research held since 1986, 1990 and 1992, respectively. He
Center and Chief is a director of Corning Incorporated and
Scientist of Xerox General Instrument Corporation. Dr. Brown has
Corporation been a director of Varian since 1998.
Samuel Hellman, 64...... 2001 Dr. Hellman is the A. N. Pritzker Distinguished
A. N. Pritzker Service Professor in the Department of Radiation
Distinguished Service and Cellular Oncology at the University of
Professor in the Chicago, a position he has held since 1993. From
Department of Radiation 1988 to 1993, he was Dean of that University's
and Cellular Oncology Division of Biological Sciences and its Pritzker
at the University of School of Medicine, Vice President of the
Chicago University's Medical Center and the A. N.
Pritzker Professor in the Department of
Radiation and Cellular Oncology. Dr. Hellman has
been a director of Varian since 1992.
Terry R. Lautenbach, 2001 Mr. Lautenbach is a former Senior Vice President
60..................... of International Business Machines Corporation
Senior Vice President ("IBM"), a position he held from 1988 to 1992.
(Retired) of He was responsible for IBM's worldwide
International Business manufacturing and development, and North
Machines Corporation American marketing and services from 1990 to
1992, and served on IBM's Management Committee
in 1991 and 1992. Mr. Lautenbach is a director
of Air Products and Chemicals, Inc., CVS
Corporation and Footstar, Inc. He has been a
director of Varian since 1993.
Richard M. Levy, 60 .... 2002 Dr. Levy is the Executive Vice President of
Executive Vice Varian responsible for the Health Care Systems
President of Varian Business. Dr. Levy also oversees Varian's Edward
L. Ginzton Research Center in Palo Alto. He
joined Varian in 1968, and was elevated to
Executive Vice President in 1990.
</TABLE>
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<TABLE>
<CAPTION>
Initial
Name, Age and Current Term
Principal Occupation Expires Information
- --------------------- ------- -----------
<S> <C> <C>
David W. Martin, Jr., 58 2000 Dr. Martin is President and Chief Executive
....................... Officer of EOS Biotechnology, Inc. (a
President and Chief biotechnology company), positions he has held
Executive Officer of since 1997. From 1995 to 1996, he was President,
EOS Biotechnology, Inc. Chief Operating Officer and a director of LYNX
Therapeutics, Inc. (a biotechnology company),
and from 1994 to 1995, he was Senior Vice
President of Chiron Corporation and President of
Chiron Therapeutics (a biotechnology company).
From 1990 through 1993, Dr. Martin was Executive
Vice President for Research and Development at
The Du Pont Merck Pharmaceutical Company. Dr.
Martin is a director of Cubist Pharmaceuticals,
Inc. Dr. Martin has been a director of Varian
since 1994.
Burton Richter, 67 ..... 2002 Dr. Richter is Director of the Stanford Linear
Director of the Accelerator Center and Paul Pigott Professor in
Stanford Linear Physical Sciences at Stanford University,
Accelerator Center and positions he has held since 1984 and 1980,
Paul Pigott Professor respectively. He has been a director of Varian
in Physical Sciences at since 1990.
Stanford University
Richard W. Vieser, 71 .. 2000 Mr. Vieser is former Chairman of the Board,
Chairman, Chief Chief Executive Officer and President of Lear
Executive Officer and Siegler, Inc. (a diversified manufacturing
President (Retired) of company), positions he held from 1987 to 1989.
Lear Siegler, Inc. He is a director of Ceridian Corporation, Global
Industrial Technologies, Inc., International
Wire Group, Inc. and Sybron International
Corporation. Mr. Vieser has been a director of
Varian since 1991.
</TABLE>
Compensation of Directors
Each director who is not an employee of VMS will receive an annual retainer fee
of $30,000 plus $1,000 for each VMS Board and committee meeting attended. The
non-employee Chairman of the Board will receive an annual retainer fee of
$70,000. Under the proposed VMS Omnibus Stock Plan, the non-employee Chairman
of the Board will receive an initial non-qualified stock option grant to
acquire 100,000 shares of VMS Common Stock, each of the other directors who are
not VMS employees will also receive at the Distribution Date, or thereafter
upon appointment or election to the VMS Board, a non-qualified stock option to
acquire 10,000 shares of VMS Common Stock. All directors will receive annually
thereafter a non-qualified stock option to acquire 5,000 shares of VMS Common
Stock. Any non-employee director's annual retainer fee may, at the director's
election, be converted to stock options, at the rate of $1 deferred cash
converting to $4 of stock options at the fair market value of VMS Common Stock
on the grant date. Such stock options will be granted with an exercise price
equal to the fair market value of VMS Common Stock on the date of grant,
becoming exercisable immediately on the date of grant and having a ten-year
term. Directors who are VMS employees will receive no compensation for their
services as directors.
Committees of the Board of Directors
The business of VMS will be managed under the direction of the VMS Board.
Varian's Board of Directors currently has six standing committees. After the
Distribution, VMS will have an Executive Committee, a Stock Grant Committee, an
Audit Committee and an Organization and Compensation Committee of the VMS
Board. Members of the latter two Committees will not be employees of VMS.
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Executive Committee
The Executive Committee's principal function will be to act on matters when
convening a meeting of the full Board of Directors is impracticable. It will be
delegated all powers of the Board of Directors except certain powers reserved
by law to the full Board. The members of the Executive Committee are the
following directors: Richard M. Levy and Richard W. Vieser (Chairman).
Stock Grant Committee
The Stock Grant Committee is delegated with authority to grant and administer
stock options, restricted stock and other awards, subject to certain
limitations, to non-officers of VMS. The members of the Stock Grant Committee
are Richard M. Levy and Richard W. Vieser (Chairman).
Audit Committee
The Audit Committee's principal functions will be to review the scope of the
annual audit of VMS by its independent auditors, review the annual financial
statements of VMS and the related audit report as prepared by the independent
auditors, recommend to the VMS Board selection of the independent auditors each
year and review any non-audit fees paid to the independent auditors. The
members of the Audit Committee are the following non-employee directors: John
Seely Brown, Samuel Hellman, Terry R. Lautenbach, David W. Martin, Jr., Burton
Richter and Richard W. Vieser (Chairman).
Organization and Compensation Committee
The Organization and Compensation Committee of VMS (the "Compensation
Committee") will administer the stock and cash incentive plans of VMS, and in
this capacity it will make option grants or awards under these plans. In
addition, the Compensation Committee will determine the compensation of the
President and Chief Executive Officer and the other senior executives. The
Compensation Committee will also recommend the establishment of policies
dealing with various compensation and employee benefit plans for VMS. The
members of the Compensation Committee are the following non-employee directors:
John Seely Brown, Samuel Hellman, Terry R. Lautenbach, David W. Martin, Jr.,
Burton Richter and Richard W. Vieser (Chairman).
61
<PAGE>
Executive Officers
Set forth below is certain information with respect to the persons who are
expected to serve as executive officers of VMS immediately following the
Distribution.
<TABLE>
<CAPTION>
Business Experience Prior to Becoming
Name and Title Age an Executive Officer of VMS
- -------------- --- -------------------------------------
<S> <C> <C>
Richard M. Levy........... 60 Dr. Levy is the Executive Vice President of
President and Chief Varian responsible for the Health Care Systems
Executive Officer Business. Dr. Levy also oversees Varian's Edward
L. Ginzton Research Center in Palo Alto. He
joined Varian in 1968, and was elevated to
Executive Vice President in 1990.
Timothy E. Guertin........ 49 Mr. Guertin is Corporate Vice President and
Corporate Vice President President of Varian's Oncology Systems business,
positions he has held since 1992 and 1990,
respectively. Mr. Guertin has held various other
positions in the Health Care Systems Business
during his 23 years with Varian.
John C. Ford.............. 54 Dr. Ford is Senior Vice President, Business
Corporate Vice President Development, for the Health Care Systems
Business, a position he has held since 1992. Dr.
Ford has held various other positions in the
Health Care Systems Business during his 26 years
with Varian.
Robert H. Kluge........... 52 Mr. Kluge is Vice President and General Manager
Corporate Vice President of Varian's X-Ray Tube Products business,
positions he has held since 1993. Before joining
Varian in 1993, he held various positions with
Picker International (an x-ray systems
manufacturer).
Elisha W. Finney.......... 37 Ms. Finney is Varian's Treasurer, a position she
Corporate Vice President, has held since January 1998. From 1988 to 1998,
Chief Financial Officer she was Varian's Risk Manager, and from 1995 to
and Treasurer 1998 Ms. Finney also served as Assistant
Treasurer. Ms. Finney has held various other
positions during her 10 years with Varian.
Duane A. Walstrom......... 48 Mr. Walstrom is Director, Accounting of Varian,
Corporate Controller a position he has held since 1985. Mr. Walstrom
has held various other accounting and finance
positions during his 16 years with Varian.
</TABLE>
62
<PAGE>
Executive Officer Compensation
Summary of Compensation
Table I below sets forth a summary of the compensation paid by Varian for the
last three fiscal years to the chief executive officer of VMS and the four
additional most highly compensated individuals (based on their fiscal year 1998
compensation from Varian) who are expected to be executive officers of VMS
immediately after the Distribution.
Table I
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
------------------------------
Awards Payouts
--------------------- --------
Securities
Annual Compensation Restricted Underlying
-------------------------------- Stock Options/ LTIP All Other
Name and Bonus Other Annual Award(s) SARs Payouts Compensation
Principal Position Year Salary ($) ($)(/1/) Compensation ($)(/3/) (#)(/4/) ($)(/5/) ($)(/6/)
- ------------------ ---- ---------- -------- ------------ ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard M. Levy 1998 338,910 250,607 21,620 0 36,000 195,763 85,676
President and Chief 1997 323,148 206,984 18,249 244,388 36,000 391,810 108,374
Executive Officer 1996 310,990 432,879 43,736 204,225 36,000 628,056 99,753
Timothy E. Guertin 1998 216,680 112,526 8,288 0 15,000 93,988 45,434
Corporate Vice
President 1997 205,858 125,253 30,117 139,650 15,000 124,800 50,384
1996 198,084 165,969 16,754 116,700 15,000 300,066 49,260
John C. Ford 1998 203,138 101,013 1,448 0 8,500 0 36,068
Corporate Vice
President 1997 192,984 84,940 14,712 0 8,000 0 28,247
1996 184,936 107,226 0 0 10,000 0 35,803
Robert H. Kluge 1998 176,382 50,216 8,455 0 8,500 34,128 21,526
Corporate Vice
President 1997 165,514 45,935 7,458 52,369 7,500 67,018 23,043
1996 155,874 109,338 8,240 43,763 9,000 160,004 15,678
Duane A. Walstrom 1998 137,364 36,897 4,982 0 4,000 0 15,379
Corporate Controller 1997 130,083 52,905 12,460 21,881 4,000 0 17,071
1996 125,252 57,821 2,434 0 4,000 0 14,241
</TABLE>
- -------
(1) Consists of Varian Management Incentive Plan awards, Cash Profit-Sharing
Plan allocations and (in some cases) special cash bonuses.
(2) Consists of amounts reimbursed for the payment of taxes on certain
perquisites and personal benefits and (in some cases) cash payments for
unused accrued vacation time.
(3) Consists of restricted shares of Varian Common Stock (valued at the closing
market price on the date of grant), which shares are released from
restrictions in three equal installments over a three-year period (the
principal restriction being continued employment until the respective
release dates), during which dividends, if any, are paid on such shares.
The number and value (at $34.375 per share) of aggregate restricted stock
holdings at the end of fiscal year 1998 were as follows: Dr. Levy, 8,400
shares, $288,750; Mr. Guertin, 4,800 shares, $165,000; Dr. Ford, 0 shares,
$0; Mr. Kluge, 1,800 shares, $61,875; and Mr. Walstrom, 0 shares, $0.
Shares of restricted stock awarded for fiscal years 1998, 1997 and 1996,
respectively, which partially vest in under three years were as follows:
Dr. Levy 0 shares, 4,200 shares and 4,200 shares; Mr. Guertin, 0 shares,
2,400 shares and 2,400 shares; Dr. Ford, 0 shares, 0 shares and 0 shares;
Mr. Kluge, 0 shares, 900 shares and 900 shares; and Mr. Walstrom, 0 shares,
450 shares and 0 shares.
(4) Consists of shares of Varian Common Stock that may be acquired under stock
options granted pursuant to Varian Omnibus Stock Plan (no stock
appreciation rights have been granted).
(5) Consists of cash payouts in fiscal years 1999, 1998, 1997 under the long-
term incentive feature of Varian Omnibus Stock Plan for three-year cycles
ended with fiscal years 1998, 1997 and 1996, respectively.
(6) Consists of (a) Varian contributions (including interest) to Retirement and
Profit-Sharing Program and Supplemental Retirement Plan accounts for fiscal
years 1998, 1997 and 1996, respectively (Dr. Levy, $83,521, $106,573 and
$98,313; Mr. Guertin, $44,053, $49,224 and $48,330; Dr. Ford, $34,770,
$27,158 and $34,932; Mr. Kluge, $20,397, $22,101 and $14,942; and Mr.
Walstrom, $15,074, $16,815 and $14,034; and (b) Varian-paid premiums for
group term life insurance in fiscal years 1998, 1997 and 1996, respectively
(Dr. Levy, $2,155, $1,801 and $1,440; Mr. Guertin, $1,381, $1,160 and $930;
Dr. Ford, $1,298, $1,089 and $871; Mr. Kluge, $1,129, $942 and $737; and
Mr. Walstrom, $305, $256 and $207).
63
<PAGE>
Stock Options
Grant of Options
Table II below sets forth information with respect to grants of options to
purchase Varian Common Stock during the year ended October 2, 1998 to the
individuals listed in Table I. These grants were made pursuant to Varian
Omnibus Stock Plan and are reflected in Table I.
Table II
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------
Percen Potential Realizable
Number of of Total Value at Assumed
Securities Options/ SARs Annual Rate of Stock
Underlying Granted to Price Appreciation For
Options/ Employees Exercise or Option Term(/2/)
Granted in Fiscal Base Price Expiration -----------------------
Name (#)(/1/) Year(/2/) ($/Sh) Date 5%($) 10%($)
- ---- ---------- ------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Levy......... 36,000 3.55 58.163 11/20/07 1,316,671 3,336,702
Timothy E. Guertin...... 15,000 1.48 58.163 11/20/07 548,613 1,390,292
John C. Ford............ 8,500 0.84 58.163 11/20/07 310,881 787,832
Robert H. Kluge......... 8,500 0.84 58.163 11/20/07 310,881 787,832
Duane A. Walstrom....... 4,000 0.39 58.163 11/20/07 109,723 278,058
</TABLE>
- -------
(1) Consists of stock options, which were granted at an exercise price of 100%
of the market price of the underlying shares on the date of grant, become
exercisable over three years at the rate of approximately one-third each
year and expire ten years from the date of grant. Payment of the exercise
price may be made under a promissory note or by delivery of already-owned
shares.
(2) The 5% and 10% assumed annual rates of stock price appreciation would
result from per share prices of $94.73 and $150.84, respectively. Such
assumed rates are not intended to represent a forecast of possible future
appreciation of Varian Common Stock or total stockholder return.
64
<PAGE>
Aggregated Option Exercises And Year-End Values
The following table sets forth as of October 2, 1998, for each of the
individuals listed in Table I (i) the total number of shares received upon
exercise of options during 1998, (ii) the value realized upon such exercise
(based on the fair market value of the underlying shares on the exercise date),
(iii) the total number of unexercised options to purchase Varian Common Stock
(exercisable and unexercisable) and (iv) the value of such options which were
in-the-money at October 2, 1998 (based on the closing price of Varian Common
Stock at October 2, 1998, $34.375).
Table III
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Options/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs at Fiscal
Shares Value Fiscal Year-End (#) Year-End ($)
Acquired on Realized ------------------------- -------------------------
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Levy......... 0 0 96,000 72,000 270,900 0
Timothy E. Guertin...... 8,334 249,581 19,000 30,000 0 0
John C. Ford............ 5,000 240,637 37,332 17,168 267,015 0
Robert H. Kluge......... 0 0 20,500 16,500 54,180 0
Duane A. Walstrom....... 3,000 90,090 6,999 8,001 0 0
</TABLE>
Long-Term Incentive Plans--Awards in Last Fiscal Year(/1/)
<TABLE>
<CAPTION>
Estimated Future Payouts under
Number of Performance or Non-Stock Price-Based Plans
Shares, Units Other Period ------------------------------------
or Other Rights Until Maturation Threshold Target Maximum
Name (#) or Payout ($)(/2/) $(/3/) $(/4/)
- ---- --------------- ---------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Richard M. Levy......... N/A 1998-2000 25,604 47,793 --
Timothy E. Guertin...... N/A 1998-2000 12,940 24,155 --
John C. Ford............ N/A N/A N/A N/A --
Robert H. Kluge......... N/A 1998-2000 5,408 15,144 --
Duane A. Walstrom....... N/A N/A N/A N/A --
</TABLE>
- -------
(1) Determinations by the Committee that a named executive officer may
participate in the long-term incentive feature of Varian Omnibus Stock Plan
("LTI") and might receive a payout for a specified period is an award for
purposes of this table. Awards (i.e., the determination of participation in
the LTI) for the 1998-2000 cycle were made in fiscal year 1998. Under the
LTI, each named executive officer is eligible to receive compensation
payable in cash or in Varian Common Stock, or a combination thereof, based
upon Varian's achievement of objectives for average annual return on net
assets ("RONA") and revenue growth ("RG") over a three-year cycle. No
estimate or assumption made in connection with this table is intended to
represent a forecast of possible future performance of Varian.
(2) If the minimum level of RONA or RG established by the Committee at the
beginning of the three-year cycle is achieved, the minimum amount payable
ranges from 3% to 7. 5% of annual base salary as of the end of the last
fiscal year of the cycle. If neither RONA nor RG for the three-year cycle
equals the applicable minimum level, no amount will be paid. The minimum
amount payable, if any amount is paid at all, depends on each named
executive's base salary in the last year of the cycle, and the amounts set
forth above assume that each named executive officer's annual base salary
at the end of fiscal year 2000 will be identical to the executive officer's
1999 annual base salary.
(3) A "Target" award is not determinable under the LTI. The amounts shown are
estimates of the payout for the three-year cycle assuming (a) that RONA and
revenues for the remaining years of the cycle are the same as the RONA and
revenues for fiscal year 1998 and (b) that each named executive officer's
annual base salary at the end of fiscal year 2000 will be identical to his
1999 annual base salary. The actual payment for the three-year cycle may be
greater or less than the estimates shown in this column, depending upon the
actual RONA and revenues for fiscal years 1998, 1999 and 2000, the actual
base salary of the named executive officer at the end of fiscal year 2000,
and the aggregate payout to all participants (see footnote 4 below).
(4) The maximum amount payable is not determinable or estimable prior to the
end of the three-year cycle for the following reason: If the maximum levels
of RONA and RG established by the Committee at the beginning of the three-
year cycle are achieved or exceeded, the maximum amount payable ranges from
100% to 200% of annual base salary as of the end of the last fiscal year of
the cycle. The maximum amount payable is reduced, however, if the aggregate
LTI payout to all participants (including the named executive officers)
would exceed 5% (before such payouts) of Varian's pre-tax operating
earnings in the last fiscal year of the three-year cycle. This variable
makes the maximum amount not determinable or estimable.
65
<PAGE>
Change in Control Agreements
Certain VMS executive officers are already parties to change in control
agreements with Varian which provide for the payment of specified compensation
and benefits upon certain terminations of their employment following a change
in control of Varian. These change in control agreements, which will continue
to be binding obligations of VMS after the Distribution, will be amended and
restated as of the Distribution Date (the "Agreements") to reflect the
executive officers' new and increased responsibilities with VMS. In addition,
VMS executive officers not already parties to change in control agreements with
Varian will be offered similar change in control agreements with VMS effective
as of the Distribution Date.
Under the Agreements, a change in control will be defined to occur (a) if any
individual or group becomes the beneficial owner of 30% or more of the combined
voting power of VMS's outstanding securities, (b) if "continuing directors"
(defined as the directors of VMS as of the date of the Agreement and any
successor to any such director who was nominated or selected by a majority of
the directors in office at the time of his nomination or selection and who is
not affiliated or associated in any way with an individual or group who is a
beneficial owner of more than 10% of the combined voting power of VMS's
outstanding securities) cease to constitute at least a majority of the board of
directors, or (c) if there occurs a reorganization, merger, consolidation or
other corporate transaction involving VMS in which the stockholders of VMS do
not own more than 50% of the combined voting power of VMS or other corporation
resulting from such transaction, or (d) if all or substantially all of VMS's
assets are sold, liquidated or distributed. In the Agreements, the affected
executive officers will agree not to voluntarily leave VMS's employ during a
tender or exchange offer, proxy solicitation in opposition to the board of
directors or other effort by any party to effect a change in control of VMS.
This is intended to assure that management will continue to act in the interest
of the stockholders rather than be affected by personal uncertainties during
any attempts to effect a change in control of VMS, and to enhance VMS's ability
to attract and to retain executives.
Each Agreement will provide that if within 18 months of a change in control (i)
VMS terminates the employee's employment other than by reason of his death,
disability, retirement or for cause (as defined in the Agreement) or (ii) the
employee terminates his employment for "good reason," the employee will receive
a lump sum severance payment equal to 3.0 (in the case of the Chief Executive
Officer) or 2.50 (in the case of the other senior executives) times the sum of
the employee's annual base salary plus the highest annual and multi-year
bonuses paid to the employee in any of the three years ending prior to the date
of termination. "Good reason" is defined as the following after a change in
control of VMS: certain material changes in assignment of duties; certain
reductions in compensation; certain material changes in employee benefits and
perquisites; a change in the site of employment; VMS's failure to obtain the
written assumption by its successor of the obligations contained in the
Agreement; attempted termination of employment for cause on grounds
insufficient to constitute a basis of termination for cause under the terms of
the Agreement; or VMS's failure to promptly make any payment required under the
terms of the Agreement in the event of a dispute relating to employment
termination. In addition, in the case of the Chief Executive Officer, "good
reason" is defined to exist if he is not made the chief executive officer of
the combined or acquiring entity; and in the case of the Chief Financial
Officer, "good reason" is defined to exist if she is not given an "equivalent
position" as defined in her Agreement.
Each Agreement will provide that upon termination or resignation occurring
under the circumstances described above, the employee will receive a
continuation of all insurance and other benefits on the same terms as if he
remained an employee or equivalent benefits will be provided until the earlier
to occur of commencement of substantially equivalent full-time employment with
a new employer or 24 months after the date of termination of employment with
the company. Each Agreement will also provide that all stock options granted
will become exercisable in full according to their terms, and that any
unreleased restricted stock will be released from restrictions. Each Agreement
will further provide that in the event that any payments and benefits received
by the employee from the company would subject that person to the excise tax
contained in Section 280G of the Code the employee will be entitled to receive
an additional payment that will place the employee in the same after-tax
economic position that the employee would have enjoyed if such excise tax had
not applied.
66
<PAGE>
AMENDMENT AND RESTATEMENT OF THE VARIAN OMNIBUS STOCK PLAN
The Varian Omnibus Stock Plan has been amended and restated by Varian's Board
of Directors, effective as of the Distribution (as so amended and restated, the
"VMS Omnibus Stock Plan").
Purpose of the VMS Omnibus Stock Plan
The VMS Omnibus Stock Plan is intended to promote the success of VMS by
providing a vehicle under which a variety of stock-based incentive and other
awards can be granted to employees and consultants and to directors of VMS who
are employees of neither VMS nor any affiliate ("non-employee directors").
Description of the VMS Omnibus Stock Plan
The following paragraphs provide a summary of the principal features of the VMS
Omnibus Stock Plan and its operation. The VMS Omnibus Stock Plan is set forth
in its entirety as Annex G to Varian's Proxy Statement in connection with its
1999 Combined Annual and Special Meeting of Stockholders. The following summary
is qualified in its entirety by reference to the full text of the VMS Omnibus
Stock Plan.
General
The VMS Omnibus Stock Plan provides for the granting of stock options, stock
appreciation rights ("SARs"), restricted stock, performance units and
performance shares (collectively, "VMS Awards") to eligible VMS Omnibus Stock
Plan participants. The maximum number of shares of VMS Common Stock available
for VMS Awards under the VMS Omnibus Stock Plan will be 5,000,000, plus such
number of shares as may be granted in substitution of other options in
connection with the Distribution.
Administration of the VMS Omnibus Stock Plan
The VMS Omnibus Stock Plan will be administered by the Committee. The members
of the Committee must qualify as "non-employee directors" under Rule 16b-3
under the Exchange Act, and as "outside directors" under Section 162(m) (for
purposes of qualifying the VMS Omnibus Stock Plan as performance-based
compensation under Section 162(m)).
Subject to the terms of the VMS Omnibus Stock Plan, the Committee has the sole
discretion to determine the employees and consultants who shall be granted VMS
Awards, the size and types of such VMS Awards, and the terms and conditions of
such VMS Awards. The Committee may delegate its authority to grant and
administer awards to one or more officers or directors appointed by the
Committee, but only the Committee can make awards to participants who are
subject to Section 16 of the Exchange Act.
Eligibility to Receive Awards
Employees and consultants of VMS and its affiliates are eligible to be selected
to receive one or more VMS Awards. The actual number of individuals who will
receive VMS Awards under the VMS Omnibus Stock Plan cannot be determined
because eligibility for participation in the VMS Omnibus Stock Plan is in the
discretion of the Committee. The VMS Omnibus Stock Plan also provides for the
grant of non-qualified stock options to VMS's non-employee directors. Such
options will be granted pursuant to an automatic, non-discretionary formula.
Options
The Committee may grant non-qualified stock options, incentive stock options
(which are entitled to favorable tax treatment), or a combination thereof. The
number of shares covered by each option will be determined by the Committee,
but during any fiscal year of VMS, no participant may be granted options for
more than 1,000,000 shares.
The price of the shares of VMS Common Stock subject to each stock option is set
by the Committee but cannot be less than 100% of the fair market value (on the
date of grant) of the shares covered by the option. In addition, the exercise
price of an incentive stock option must be at least 110% of fair market value
if (on the grant date) the participant owns
67
<PAGE>
stock possessing more than 10% of the total combined voting power of all
classes of stock of VMS or any of its subsidiaries. Nevertheless, substitute
options may be granted at less than fair market value to employees or
consultants who receive such options in connection with a corporate
reorganization. Also, the aggregate fair market value of the shares (determined
on the grant date) covered by incentive stock options which first become
exercisable by any participant during any calendar year may not exceed
$100,000.
The exercise price of each option must be paid in full at the time of exercise.
The Committee also may permit payment through the tender of shares of VMS
Common Stock that are already owned by the participant, or by any other means
which the Committee determines to be consistent with the VMS Omnibus Stock
Plan's purpose. Any taxes required to be withheld must be paid by the
participant at the time of exercise.
Options become exercisable at the times and on the terms established by the
Committee. Options expire at the times established by the Committee but not
later than 10 years after the date of grant (except in certain cases involving
the death of the optionee). The Committee may extend the maximum term of any
option granted under the VMS Omnibus Stock Plan, subject to the preceding
limits.
Non-Employee Director Options
Under the VMS Omnibus Stock Plan, each non-employee director, other than the
Chairman of the Board, automatically will receive, as of the later of (a) the
Distribution Date for current non-employee directors or, for future directors,
the non-employee director's appointment or election to the VMS Board or (b) the
effective date of the VMS Omnibus Stock Plan, a non-qualified stock option to
purchase 10,000 shares. Each non-employee director will also automatically
receive a non-qualified stock option to purchase 5,000 shares coincident with
each subsequent annual meeting of VMS, provided the non-employee director
serves continuously as a director through the next grant date.
In lieu of the above initial grant, any non-employee Chairman of the VMS Board
automatically will receive, as of the later of (a) the date he or she becomes
Chairman or (b) the effective date of the VMS Omnibus Stock Plan, a non-
qualified stock option to purchase 100,000 shares. The Chairman will also
automatically receive a non-qualified stock option to purchase 5,000 shares
coincident with each subsequent annual meeting of VMS, provided he or she
serves continuously as Chairman through the next grant date.
The exercise price of each non-employee director and Chairman option will be
100% of the fair market value (on the date of grant) of the shares covered by
the option. Nevertheless, substitute options may be granted at less than fair
market value to non-employee directors who receive such options in connection
with a corporate reorganization. Each option will become exercisable on the
grant date. All options granted to non-employee directors generally will have a
term of ten years from the date of grant. If a director terminates service on
the Board prior to an option's normal expiration date, the period of
exercisability of the option may be shorter, depending upon the reason for the
termination.
In addition, non-employee directors may elect to receive options for shares of
VMS Common Stock in lieu of cash compensation. Such options will be granted at
fair market value on the election date, with a net exercise price of four times
the value of the compensation deferred.
Stock Appreciation Rights
The Committee determines the terms and conditions of each SAR. SARs may be
granted in conjunction with an option, or may be granted on an independent
basis. The number of shares covered by each SAR will be determined by the
Committee, but during any fiscal year of VMS, no participant may be granted
SARs for more than 1,000,000 shares. Upon exercise of a SAR, the participant
will receive payment from VMS in an amount determined by multiplying: (1) the
difference between the fair market value of a share on the date of exercise
over the grant price (fair market value of a share on the grant date), times
(2) the number of shares with respect to which the SAR is exercised. SARs may
be paid in cash or shares of VMS Common Stock, as determined by the Committee.
SARs are exercisable at the times and on the terms established by the
Committee.
68
<PAGE>
Restricted Stock Awards
Restricted stock awards are shares of VMS Common Stock that vest in accordance
with terms and conditions established by the Committee. The number of shares of
restricted stock granted to a participant (if any) will be determined by the
Committee, but during any fiscal year of VMS, no participant may be granted
more than 100,000 shares.
In determining whether an award of restricted stock should be made, and/or the
vesting schedule for an award, the Committee may impose whatever conditions to
vesting as it determines to be appropriate. For example, the Committee may
determine to grant restricted stock only if performance goals established by
the Committee are satisfied. Any performance goals may be applied on a company-
wide or an individual business unit basis, as determined by the Committee. See
" - Performance Goals."
Performance Units and Performance Shares
Performance Units and Performance Shares are VMS Awards that will result in a
payment to a participant only if performance goals established by the Committee
are satisfied. The initial value of each Performance Unit and each Performance
Share shall not exceed the fair market value (on the date of grant) of a share
of VMS Common Stock. The applicable performance goals will be determined by the
Committee, and may be applied on a company-wide or an individual business unit
basis, as deemed appropriate in light of the participant's specific
responsibilities. See " -Performance Goals."
In addition to the performance requirements discussed above, Performance Units
and Performance Shares are subject to additional limits set forth in the VMS
Omnibus Stock Plan. During any fiscal year of VMS, no participant shall receive
more than 100,000 Performance Units or Performance Shares.
Performance Goals
The Committee in its discretion may make performance goals applicable to a
participant with respect to an VMS Award. At the Committee's discretion, one or
more of the following performance goals may apply: EBIT, EBITDA, earnings per
share, net income, operating cash flow, return on assets, return on equity,
return on sales, revenue and stockholder return. The Committee may also use
other performance goals.
EBIT means VMS's or a business unit's income before reductions for interest and
taxes. EBITDA means VMS's or a business unit's income before reductions for
interest, taxes, depreciation and amortization. Earnings per share means VMS's
or a business unit's net income, divided by a weighted average number of common
shares outstanding and dilutive common equivalent shares deemed outstanding.
Net income means VMS's or a business unit's income after taxes. Operating cash
flow means VMS's or a business unit's sum of net income plus depreciation and
amortization less capital expenditures plus certain specified changes in
working capital. Return on assets means the percentage equal to VMS's or a
business unit's EBIT (before incentive compensation), divided by VMS's or a
business unit's, as applicable, average net assets. Return on equity means the
percentage equal to VMS's net income, divided by average stockholders' equity.
Return on sales means the percentage equal to VMS's or a business unit's EBIT
(before incentive compensation), divided by VMS's or the business unit's, as
applicable, revenue. Revenue means VMS's or a business unit's sales.
Stockholder return means the total return (change in share price plus
reinvestment of any dividends) of a share.
Nontransferability of Varian Awards
VMS Awards granted under the VMS Omnibus Stock Plan may not be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the applicable laws of descent and distribution.
Tax Aspects
A recipient of a stock option or SAR will not have taxable income upon the
grant of the option. For options and SARs other than incentive stock options,
the participant will recognize ordinary income upon exercise in an amount equal
to
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the excess of the fair market value of the shares over the exercise price (the
"appreciation value") on the date of exercise. Any gain or loss recognized upon
any later disposition of the shares generally will be capital gain or loss.
Purchase of shares upon exercise of an incentive stock option will not result
in any taxable income to the participant, except for purposes of the
alternative minimum tax. Gain or loss recognized by the participant on a later
sale or other disposition will either be long-term capital gain or loss or
ordinary income depending upon whether the participant holds the shares
transferred upon the exercise for a specified period. Any ordinary income
recognized will be in the amount, if any, by which the lesser of the fair
market value of such shares on the date of exercise or the amount realized from
the sale exceeds the option price.
Unless the participant elects to be taxed at the time of receipt of restricted
stock, Performance Units or Performance Shares, the participant will not have
taxable income upon the receipt of the VMS Award, but upon vesting will
recognize ordinary income equal to the fair market value of the shares or cash
at the time of vesting.
At the discretion of the Committee, the VMS Omnibus Stock Plan allows a
participant to satisfy tax withholding requirements under federal and state tax
laws in connection with the exercise or receipt of an VMS Award by electing to
have shares of common stock withheld, or by delivering to VMS already-owned
shares, having a value equal to the amount required to be withheld.
VMS will be entitled to a tax deduction in connection with an VMS Award under
the VMS Omnibus Stock Plan only in an amount equal to the ordinary income
realized by the participant and at the time the participant recognizes such
income. In addition, Section 162(m) contains special rules regarding the
federal income tax deductibility of compensation paid to VMS's Chief Executive
Officer and to each of the other four most highly compensated executive
officers. The general rule is that annual compensation paid to any of these
specified executives will be deductible only to the extent that it does not
exceed $1,000,000. However, VMS can preserve the deductibility of certain
compensation in excess of $1,000,000 if it complies with conditions imposed by
Section 162(m), including the establishment of a maximum number of shares with
respect to which VMS Awards may be granted to any one employee during one year,
and if for VMS Awards other than options and SARs, the VMS Omnibus Stock Plan
sets forth performance goals which must be achieved prior to payment of the VMS
Awards. The VMS Omnibus Stock Plan has been designed to permit the Committee to
grant VMS Awards which satisfy the requirements of Section 162(m), thereby
permitting VMS to continue to receive a federal income tax deduction in
connection with such VMS Awards.
Amendment and Termination of the VMS Omnibus Stock Plan
The VMS Board of Directors generally may amend or terminate the VMS Omnibus
Stock Plan at any time and for any reason.
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AMENDMENT AND RESTATEMENT OF THE VARIAN MANAGEMENT INCENTIVE PLAN
The Varian Management Incentive Plan has been amended and restated by the
Varian Board of Directors, effective as of the Distribution (as so amended and
restated, the "VMS Management Incentive Plan").
Background and Reasons for Amendment
Under Section 162(m) the federal income tax deductibility of compensation paid
to VMS's Chief Executive Officer and to each of its next four most highly
compensated executive officers may be limited to the extent that it exceeds $1
million in any one year. VMS can deduct compensation in excess of that amount
if it qualifies as "performance-based compensation" under Section 162(m). The
VMS Management Incentive Plan is intended to permit VMS to pay incentive
compensation that qualifies as performance-based compensation, thereby
permitting VMS to receive a federal income tax deduction for the payment of
such incentive compensation.
Description of the VMS Management Incentive Plan
The following paragraphs provide a summary of the principal features of the VMS
Management Incentive Plan (as amended and restated) and its operation. The VMS
Management Incentive Plan is set forth in its entirety as Annex H to Varian's
Proxy Statement in connection with its 1999 Annual and Special Meeting of
Stockholders. The following summary is qualified in its entirety by reference
to the full text of the VMS Management Incentive Plan.
Purpose of the VMS Management Incentive Plan
The VMS Management Incentive Plan is intended to motivate VMS's key employees
to increase stockholder value by (1) linking a portion of their cash
compensation to VMS's financial performance, (2) providing rewards for
improving VMS's financial performance and (3) helping to attract and retain key
employees.
Administration of the VMS Management Incentive Plan
The VMS Management Incentive Plan will be administered by the Compensation
Committee of the VMS Board of Directors (the "Committee"). The members of the
Committee must qualify as "outside directors" under Section 162(m) (for
purposes of qualifying the VMS Management Incentive Plan as performance-based
compensation under such section). Subject to the terms of the VMS Management
Incentive Plan, the Committee has the sole discretion to determine the key
employees who shall be granted awards, and the amounts, terms and conditions of
each award. The Committee may delegate its authority to grant and administer
awards to one or more officers or directors appointed by the Committee, but
only with respect to awards that are not intended to qualify as performance-
based compensation under Section 162(m).
Eligibility to Receive Awards
Eligibility for the VMS Management Incentive Plan is determined in the
discretion of the Committee. In selecting participants for the VMS Management
Incentive Plan, the Committee will choose key employees of VMS and its
affiliates who are likely to have a significant impact on VMS's performance.
Awards and Performance Goals
Under the VMS Management Incentive Plan, the Committee will establish (1) the
performance goals which must be achieved in order for the participant to
actually be paid an award and (2) a formula or table for calculating a
participant's award, depending upon how actual performance compares to the
preestablished performance goals. A participant's award will increase or
decrease as actual performance increases or decreases.
The Committee also will determine the periods for measuring actual performance
(the "performance period"). Performance periods may last as long as three
fiscal years of VMS.
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The Committee may set performance periods and performance goals that differ
from participant to participant. For example, the Committee may choose
performance goals based on either company-wide or business unit results, as
deemed appropriate in light of the participant's specific responsibilities. For
purposes of qualifying awards as performance based compensation under Section
162(m), the Committee will specify performance goals from the following list:
EBIT, EBITDA, earnings per share, net income, operating cash flow, return on
assets, return on equity, return on sales, revenue and stockholder return.
EBIT means VMS's or a business unit's income before reductions for interest and
taxes. EBITDA means VMS's or a business unit's income before reductions for
interest, taxes, depreciation and amortization. Earnings per share means VMS's
or a business unit's net income, divided by a weighted average number of common
shares outstanding and dilutive common equivalent shares deemed outstanding.
Net income means VMS's or a business unit's income after taxes. Operating cash
flow means VMS's or a business unit's sum of net income plus depreciation and
amortization less capital expenditures plus certain specified changes in
working capital. Return on assets means the percentage equal to VMS's or a
business unit's EBIT (before incentive compensation), divided by VMS's or a
business unit's, as applicable, average net assets. Return on equity means the
percentage equal to VMS's net income, divided by average stockholders' equity.
Return on sales means the percentage equal to VMS's or a business unit's EBIT
(before incentive compensation), divided by VMS's or the business unit's, as
applicable, revenue. Revenue means VMS's or a business unit's sales.
Stockholder return means the total return (change in share price plus
reinvestment of any dividends) of a share of VMS Common Stock.
For any performance period, no participant may receive an award of more than
the lesser of (1) 200% of the Participant's annualized salary rate on the last
day of the performance period or (2) $2 million. Also, the total of all awards
for any performance period cannot exceed 8% of VMS's EBIT before incentive
compensation for the most recent completed fiscal year of VMS. Awards that
exceed this overall limit will be pro-rated so that the total does not exceed
such limit.
Determination of Actual Awards
After the end of each performance period, a determination will be made as to
the extent to which the performance goals applicable to each participant were
achieved or exceeded. The actual award (if any) for each participant will be
determined by applying the formula to the level of actual performance that was
achieved. However, the Committee retains discretion to eliminate or reduce the
actual award payable to any participant below that which otherwise would be
payable under the applicable formula. Awards under the VMS Management Incentive
Plan generally will be payable in cash or VMS Common Stock within 120 days
after the performance period during which the award was earned.
Amendment and Termination of the VMS Management Incentive Plan
The VMS Board of Directors may amend or terminate the VMS Management Incentive
Plan at any time and for any reason.
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OWNERSHIP OF VMS COMMON STOCK
After the Distribution, the VMS Common Stock will remain outstanding. Table IV
sets forth information as to the beneficial ownership of VMS Common Stock as of
the Distribution Date (and following the Distribution) as if the Distribution
took place on February 1, 1999, by (a) each officer named in Table I, (b) each
director of VMS, (c) all directors and executive officers of VMS as a group and
(d) each person who to VMS's knowledge, beneficially owned more than 5% of the
outstanding shares. The information in Table IV is based on the ownership of
Varian Common Stock as of February 1, 1999 and the number of shares of VMS
Common Stock expected to be distributed to each existing stockholder of Varian
in the Distribution.
Table IV
<TABLE>
<CAPTION>
Shares of VMS Percent of
Common Stock Outstanding
Expected to be Shares Expected
Beneficially to be Beneficially
Directors and Officers Owned(/1/)(/2/) Owned(/1/)
Name --------------- ------------------
<S> <C> <C>
John Seely Brown..................... 200 *
Samuel Hellman....................... 16,400(/3/) *
Terry R. Lautenbach.................. 15,200(/4/) *
David W. Martin, Jr.................. 9,000(/5/) *
Burton Richter....................... 18,600(/6/) *
Richard W. Vieser.................... 19,600(/7/) *
Richard M. Levy...................... 145,655(/8/) *
Timothy E. Guertin................... 38,800(/9/) *
John C. Ford......................... 39,516(/10/) *
Robert H. Kluge...................... 32,433(/11/) *
Duane A. Walstrom.................... 11,118(/12/) *
All expected Directors and Executive
Officers of VMS as a Group (12
persons)............................ 360,660(/13/) 1.2
Principal Stockholders
<CAPTION>
Name and Address of Beneficial Owner
- ------------------------------------
<S> <C> <C>
FMR Corp./Edward C. Johnson
3d/Abigail P. Johnson............... 3,305,860(/14/) 11.0
82 Devonshire Street
Boston, Massachusetts 02109
State Treasurer...................... 2,075,760(/15/) 6.9
State of Michigan
c/o Director of Investments
P.O. Box 1128
Lansing, Michigan 48901
Merrill Lynch & Co., Inc. (Merrill
Lynch Asset Management Group)....... 1,756,000(/16/) 5.9
Merrill Lynch Capital Fund, Inc...... 1,750,000(/16/) 5.8
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Sound Shore Management, Inc.......... 1,506,500(/17/) 5.0
8 Sound Shore Drive
Greenwich, Connecticut 06836
</TABLE>
- -------
* The percentage of shares of VMS Common Stock expected to be beneficially
owned does not exceed one percent of the shares of VMS Common Stock expected
to be outstanding.
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares of VMS Common Stock which such person
has the right to acquire within 60 days following February 1, 1999. For
purposes of computing the percentage of outstanding shares of VMS Common
Stock held by each person or group of persons named above, any security
which such person or persons has or have the right to acquire within 60
days following February 1, 1999 is deemed to be outstanding, but is not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
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(2) To Varian's knowledge, unless otherwise indicated, the person named in the
table has sole voting and investment power with respect to the shares or
shares such voting and investment power with such person's spouse or
children.
(3) Includes (a) 10,000 shares which may be acquired under exercisable stock
options granted pursuant to the Varian Omnibus Stock Plan and (b) 2,500
shares held by Dr. Hellman's wife.
(4) Includes 10,000 shares which may be acquired under exercisable stock
options granted pursuant to the Varian Omnibus Stock Plan.
(5) Includes 8,000 shares which may be acquired under exercisable stock
options granted pursuant to the Varian Omnibus Stock Plan.
(6) Includes (a) 14,000 shares which may be acquired under exercisable stock
options granted pursuant to the Varian Omnibus Stock Plan and (b) 3,800
shares held in a trust of which Dr. Richter is co-trustee with his wife.
(7) Includes 14,000 shares which may be acquired under exercisable stock
options granted pursuant to the Varian Omnibus Stock Plan.
(8) Includes (a) 4,200 shares of restricted stock granted pursuant to the
Varian Omnibus Stock Plan (b) 132,000 shares which may be acquired on or
within 60 days of February 1, 1999 under stock options granted pursuant to
the 1982 Non-Qualified Stock Option Plan and Varian Omnibus Stock Plan and
(c) 5,105 shares held in a trust of which Dr. Levy is co-trustee with his
wife.
(9) Includes (a) 2,400 shares of restricted stock granted pursuant to the
Varian Omnibus Stock Plan and (b) 34,000 shares which may be acquired on
or within 60 days of February 1, 1999 under stock options granted pursuant
to the Varian Omnibus Stock Plan.
(10) Includes 33,166 shares which may be acquired on or within 60 days of
February 1, 1999 under stock options granted pursuant to Varian Omnibus
Stock Plan.
(11) Includes (a) 900 shares of restricted stock granted pursuant to the Varian
Omnibus Stock Plan and (b) 28,833 shares which may be acquired on or
within 60 days of February 1, 1999 under stock options granted pursuant to
the Varian Omnibus Stock Plan.
(12) Includes 10,999 shares which may be acquired on or within 60 days of
February 1, 1999 by executive officers and directors under stock options
granted pursuant to the Varian Omnibus Stock Plan.
(13) Includes (a) 8,600 shares of restricted stock granted to executive
officers pursuant to Varian Omnibus Stock Plan (b) 305,764 shares which
may be acquired on or within 60 days of February 1, 1999 by executive
officers and directors under stock options granted pursuant to the 1982
Non-Qualified Stock Option Plan and Varian Omnibus Stock Plan, (c) 11,405
shares as to which voting and/or investment power is shared (see certain
of the foregoing footnotes) and (d) 1,100 shares of restricted stock
granted to Elisha W. Finney (expected to be an executive officer of VMS)
pursuant to the Varian Omnibus Stock Plan and 10,766 shares which may be
acquired by Ms. Finney on or within 60 days of February 1, 1999 under
stock options granted pursuant to the Varian Omnibus Stock Plan.
(14) According to an amendment to a Schedule 13G dated February 1, 1999, FMR
Corp. has sole voting power over 113,900 of these shares and sole
dispositive power over all 3,305,860 shares. Fidelity Management &
Research, a wholly owned subsidiary of FMR, is the beneficial owner of
3,143,860 of these shares as a result of acting as investment adviser to
certain investment companies. Edward C. Johnson 3d and Abigail P. Johnson
own 12.0% and 24.5%, respectively, of the voting stock of FMR Corp. and
therefore may be deemed to have beneficial ownership of the shares
referenced.
(15) Based on a Schedule 13D dated August 12, 1997.
(16) According to an amendment to a Schedule 13G dated January 29, 1999,
Merrill Lynch & Co., Inc (through Merrill Lynch Asset Management, L.P.)
has shared voting power and shared dispositive power over all 1,756,000
shares. Also according to that Schedule 13G, Merrill Lynch Capital Fund,
Inc. has shared voting power and shared dispositive power over 1,750,000
of such shares.
(17) According to an amendment to a Schedule 13G dated January 22, 1999, Sound
Shore Management, Inc. has sole voting power over 1,378,800 of such
shares, shared voting power over 24,200 of such shares and sole
dispositive power over all 1,506,500 shares.
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FINANCING
On an historical basis, Varian incurred or managed indebtedness at the parent
level, and VMS was not allocated any of Varian's debt as Varian used a
centralized approach to cash management and the financing of its operations.
The amount of debt to be retained by VMS and assumed by or transferred to IB
and VSEA and the determination of the initial capital structures of IB, VSEA
and VMS as of the Distribution Date are based upon the goals of maximizing
combined stockholder value for Varian's present stockholders while enabling
VSEA to maintain sufficient cash flow to cover anticipated operating deficits
caused by the current downturn in the semiconductor equipment market.
Varian is required to renegotiate the terms of the Term Loans to permit 50% of
the outstanding indebtedness under the Term Loans to be assumed by IB in
connection with the Distribution. The Term Loans contain covenants that limit
future borrowings and the payment of cash dividends and require the maintenance
of certain levels of working capital and operating results of the borrower. In
addition, certain Notes Payable will, as a result of the Internal Transfers and
debt allocation provisions of the Distribution Agreement, remain outstanding as
direct and indirect obligations of VMS as of the Distribution Date.
Based on the outstanding indebtedness of Varian under the Term Loans and Notes
Payable as of January 1, 1999 and Varian's projected operating results and
certain other transactions through the Distribution Date, it is anticipated
that at the Distribution Date, VMS will have between $50 million and $100
million of outstanding indebtedness under the Term Loans and Notes Payable. In
connection with the Distribution, Varian will contribute cash to VSEA so that
at the time of the Distribution, VSEA will have approximately $100 million in
cash and cash equivalents and its Consolidated Debt, expected to be comprised
of Notes Payable, will not exceed $5 million. In connection with the
Distribution, IB will be entitled to a cash contribution from Varian so that IB
would have Net Debt equal to approximately 50% of the aggregate Net Debt of IB
and VMS, subject to such adjustments as may be necessary to provide VMS with a
Net Worth of between 40% and 50% of the aggregate Net Worths of IB and VMS.
In connection with the Distribution, Varian intends to sell its long-term
leasehold interest in certain of its Palo Alto facilities, together with the
related buildings and other corporate assets, from which it expects to receive
proceeds of $55 million in the aggregate. In addition, Varian will be required
to pay the net expenses associated with the Internal Transfers and
Distribution, estimated at approximately $50 million. To the extent that Varian
does not sell all such facilities and assets and pay all such expenses before
the Distribution, the amount of cash paid and Notes Payable transferred to IB
at the time of the Distribution also will assume that IB receives 50% of any
post-Distribution proceeds and pays for 50% of any post-Distribution expenses
(in each case reduced for estimated taxes payable or tax benefits received from
all sales and transaction expenses).
Based on the assumptions stated under "Forecasted Capitalization," the
allocation of indebtedness to VMS at the Distribution Date should approximate
the amounts reflected in such section. Management of Varian believes that there
is sufficient financing capability in respect of VMS to accomplish the
contemplated allocation of indebtedness. See "Forecasted Capitalization."
Varian will enter into a new credit facility for working capital and other
general corporate purposes. The credit facility may contain certain customary
financial and operating covenants, including restrictions upon incurring
indebtedness and liens, making certain fundamental changes, selling assets and
paying dividends. Varian anticipates that it will borrow amounts under the new
credit facility or under its existing credit facility on or prior to the
Distribution in order to fund a portion of the cash contribution to be made to
VSEA and IB, to pay transaction expenses and for general corporate purposes.
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DESCRIPTION OF THE CAPITAL STOCK
General
After the Distribution, VMS's authorized capital stock will be the same as
Varian's authorized capital stock prior to the Distribution. Pursuant to its
Restated Certificate of Incorporation, Varian's authorized capital stock
currently consists of (i) 99,000,000 shares of VMS Common Stock and (ii)
1,000,000 shares of preferred stock, par value $1 per share ("Preferred
Stock"). As of February 1, 1999, approximately 29,985,829 million shares of VMS
Common Stock were issued and outstanding. All outstanding shares of VMS Common
Stock are fully paid and nonassessable. No shares of VMS Preferred Stock are
issued and outstanding.
Common Stock
Each holder of VMS Common Stock is entitled to one vote for each share owned of
record on all matters submitted to a vote of stockholders, except that
cumulative voting applies with respect to the election of directors. Subject to
the preferential rights of any outstanding series of Preferred Stock and to the
restrictions on payment of dividends imposed by the Term Loans and any credit
facilities that may be entered into by VMS, the holders of VMS Common Stock
will be entitled to such dividends as may be declared from time to time by the
VMS Board from funds legally available therefor, and will be entitled, after
payment of all prior claims, to receive pro rata all assets of VMS upon the
liquidation, dissolution or winding up of VMS. Holders of VMS Common Stock have
no redemption, conversion rights or preemptive rights to purchase or subscribe
for securities of VMS.
The Varian Common Stock is currently listed on the NYSE and PE under the symbol
"VAR." The VMS Common Stock is expected to continue to be listed on the NYSE
and PE under the symbol "VAR" following the Distribution. The trading price of
the VMS Common Stock will be substantially affected by the Distribution.
Preferred Stock
The authorized capital stock of VMS includes shares of Preferred Stock, none of
which are currently issued or outstanding. The VMS Board is authorized to
divide VMS's Preferred Stock into series and, with respect to each series, to
determine the preferences and rights and the qualifications, limitations or
restrictions thereof, including the dividend rights, conversion rights, voting
rights, redemption rights and terms, liquidation preferences, sinking fund
provisions, the number of shares constituting the series and the designation of
such series. The VMS Board could, without stockholder approval, issue VMS's
Preferred Stock with voting and other rights that could adversely affect the
voting power of the holders of VMS Common Stock and which could have certain
anti-takeover effects.
In connection with the VMS Rights Plan (as defined), the Board of Directors of
Varian has authorized 50,000 shares of Participating Preferred Stock (the "VMS
Participating Preferred"). For a description of the rights, powers and
preferences of the VMS Participating Preferred, see "--Rights Plan."
Rights Plan
Varian has entered into a Rights Agreement (the "VMS Rights Plan") with First
Chicago Trust Company of New York, as Rights Agent. Under the VMS Rights Plan,
the VMS Board has declared and distributed a dividend of one right
(collectively, the "VMS Rights") for each outstanding share of VMS Common
Stock. Each VMS Right entitles a registered holder to purchase one one-
thousandth of a share of VMS Participating Preferred at a purchase price of
$180 ($110 after the Distribution) per one one-thousandth of a share of VMS
Participating Preferred, subject to adjustment. The VMS Rights will expire no
later than December 4, 2008. The VMS Rights will be exercisable on the earlier
to occur of (i) the first date of public announcement (or such earlier or later
date as the VMS Board may determine) that a person or "group" has acquired
beneficial ownership of 15% or more of the outstanding VMS Common Stock (an
"Acquiring Person") and (ii) ten business days (or such later date as the VMS
Board may determine) following the commencement of a tender or exchange offer
the consummation of which would result in a person or group becoming an
Acquiring Person.
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If any person or group becomes an Acquiring Person or commences a tender offer
upon consummation of which such person or group would become an Acquiring
Person, each VMS Right not owned by such Acquiring Person or certain related
parties would entitle its holder to purchase, at the VMS Right's then current
exercise price, shares of VMS Common Stock, or, in the discretion of the VMS
Board, shares of VMS Participating Preferred having a value equal to twice the
VMS Right's exercise price. The effect would be to significantly dilute the
equity interest of the VMS Acquiring Person. In addition, if, after a person or
group becomes an Acquiring Person, VMS is involved in a merger or other
business combination transaction in which (i) the holders of all of the
outstanding VMS Common Stock immediately prior to the consummation of the
transaction are not the holders of the surviving corporation's voting power or
(ii) more than 50% of VMS's assets or earning power is sold or transferred,
each VMS Right will entitle its holder to purchase, at the VMS Right's then
current exercise price, common shares of the acquiring company having a value
equal to twice the VMS Right's then current exercise price.
The purchase price payable, and the shares issuable, upon exercise of the VMS
Rights Plan are subject to adjustment from time to time as specified in the VMS
Rights Plan. VMS is generally entitled to redeem the VMS Rights in whole, but
not in part, at $0.001 per VMS Right at any time prior to the earlier to occur
of (i) a person becoming an Acquiring Person or (ii) expiration of the VMS
Rights.
Shares of VMS Participating Preferred purchasable upon exercise of the VMS
Rights will not be redeemable and will be designed so that each one one-
thousandth of a share has economic and voting terms similar to one share of VMS
Common Stock. Each share of VMS Participating Preferred will be entitled to a
minimum preferential quarterly dividend payment of $2.50 per share but, if
greater, will be entitled to an aggregate dividend per share of 1,000 times the
dividend declared per share of VMS Common Stock. In the event of liquidation of
VMS, the holders of VMS Participating Preferred will be entitled to a minimum
preferential liquidation payment of $100.00, provided that they will be
entitled to an aggregate payment per share of at least 1,000 times the
aggregate payment made per VMS Common Stock. Each share of VMS Participating
Preferred will have one thousand votes, voting together with the VMS Common
Stock. These rights are protected by customary anti-dilution provisions.
Transfer Agent and Rights Agent
The transfer agent for the VMS Common Stock and the Rights Agent under the VMS
Rights Plan is First Chicago Trust Company of New York.
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LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Certificate of Incorporation of VMS that will be in effect following the
Distribution (the "VMS Charter") will provide that a director will not be
personally liable to VMS or its stockholders for monetary damages for any
breach of fiduciary duty as a director, except in certain cases where liability
is mandated by the Delaware General Corporation Law (the "DGCL"). The VMS
Charter and/or By-Laws of VMS that will be in effect following the Distribution
(the "VMS By-Laws") also provide for indemnification, to the fullest extent
permitted by law, of any person who is or was involved in any manner in any
pending, threatened or completed investigation, claim or other proceeding by
reason of the fact that such person is or was a director, officer employee or
agent of VMS, or, at the request of VMS, is or was serving as a director,
officer, employee or agent of another entity, against all expenses,
liabilities, losses and claims incurred or suffered by such person in
connection with the investigation, claim or other proceeding. VMS has entered
into, and intends in the future to enter into, agreements to provide
indemnification for directors and officers in addition to the indemnification
provided for in the VMS Charter and By-Laws. These agreements, among other
things, will indemnify directors and officers to the fullest extent permitted
by law for certain expenses (including attorneys' fees) and all losses, claims,
liabilities, judgments, fines and settlement amounts incurred by such person
arising out of or in connection with such person's service as a director or
officer of VMS or another entity for which such person was serving as an
officer or director at the request of VMS and will provide for advancement of
such expenses to such persons. Other than as described herein, there is no
pending litigation or proceeding involving a director, officer, employee or
other agent of VMS or any other entity as to which indemnification is being
sought under these provisions from VMS, and VMS is not aware of any pending or
threatened litigation that may result in claims for indemnification under these
provisions by a director, officer, employee or other agent.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Delaware Law
VMS is subject to the provisions of Section 203 of the DGCL ("Section 203"). In
general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. A "business combination" includes a merger, asset sale
or other transaction resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or, in certain cases, within three years
prior, did own) 15% or more of the corporation's voting stock. Under Section
203, a business combination between the corporation and an interested
stockholder is prohibited unless it satisfies one of the following conditions:
(i) the board of directors must have previously approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; or (ii) on consummation of the transaction that
resulted in the stockholders becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation,
outstanding at the time the transaction commenced (excluding, for purposes of
determining the number of shares outstanding, shares owned by (a) persons who
are directors and also officers and (b) employee stock plans, in certain
instances); or (iii) the business combination is approved by the board of
directors and authorized at an annual or special meeting of the stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder.
Certain Charter and By-Law Provisions
The VMS Charter contains provisions that will make more difficult the
acquisition of control of VMS by means of a tender offer, open market
purchases, a proxy fight or otherwise that are not approved by the VMS Board.
The VMS By-Laws also contain provisions that could have an anti-takeover
effect.
The purposes of such provisions of the VMS Charter and By-Laws are to
discourage certain types of transactions, which may involve an actual or
threatened change of control of VMS and to encourage persons seeking to acquire
control of VMS to negotiate the terms of any proposed business combination or
offer with the VMS Board. These provisions will help ensure that the VMS Board,
if confronted by a surprise proposal from a third party, will have sufficient
time to
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review the proposal and appropriate alternatives to the proposal and to act in
what it believes to be the best interests of the stockholders.
These provisions, individually and collectively, may impede or discourage a
merger, tender offer or proxy fight, even if such transaction or occurrence may
be favorable to the interests of the stockholders, and may delay or frustrate
the assumption of control by a holder of a large block of VMS Common Stock and
the removal of incumbent management, even if such removal might be beneficial
to stockholders. By discouraging takeover attempts these provisions might have
the incidental effect of inhibiting certain changes in management (some or all
of the members of which might be replaced in the course of a change of control)
and also the temporary fluctuations in the market price of the stock which
often result from actual and rumored takeover attempts.
Set forth below is a description of such provisions in the Charter and By-Laws
for VMS. Such description is intended as a summary only and is qualified in its
entirety by reference to the full text of the VMS Charter and By-Laws to be
filed as an exhibit to VMS's next Quarterly Report on Form 10-Q under the
Exchange Act. Capitalized terms used and not defined herein are defined in the
VMS Charter or By-Laws.
Classified Boards of Directors
The VMS Charter provides for the VMS Board to be divided into three classes
serving staggered terms. The classification of directors will have the effect
of making it more difficult for stockholders to change the composition of the
board of directors in a relatively short period of time. At least two annual
meetings of stockholders, instead of one, will generally be required to effect
a change in a majority of the board of directors. Such a delay may help ensure
that the VMS Board, if confronted by a stockholder's attempt to force a stock
repurchase at a premium above market price, a proxy contest or an extraordinary
corporate transaction, will have sufficient time to review the proposal and
appropriate alternatives to the proposal and to act in what they believe are
the best interests of the stockholders. VMS also believes that a classified
board of directors will help to assure the continuity and stability of the VMS
Board and the business strategies and policies of VMS as determined by the VMS
Board, because generally a majority of the directors at any given time will
have had prior experience as directors of VMS.
The classified board provision could have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
VMS even though such an attempt might be beneficial to VMS and its
stockholders. The classified board provision could thus increase the likelihood
that incumbent directors will retain their positions.
Number of Directors
The VMS Charter provides that the specific number of directors (which must be
at least three) shall be fixed by resolution of the board of directors.
Accordingly, the existing board members could limit the ability of a
stockholder to obtain majority representation on the VMS Board by enlarging
such board of directors and filling the new directorships with its own
nominees.
Special Meetings
The VMS By-Laws provide that, subject to the rights of holders of any series of
the relevant preferred stock, special meetings of stockholders can be called
only by the Chairman of the Board, the Chief Executive Officer, the Vice-
Chairman of the Board (if any) or the VMS Board. Stockholders are not permitted
to call a special meeting or to require that the VMS Board call a special
meeting of stockholders. Moreover, the business permitted to be conducted at
any special meeting of stockholders will be limited to the purpose or purposes
of the meeting as stated in the notice of the meeting. A stockholder could not
force stockholder consideration of a proposal over the opposition of the VMS
Board by calling a special meeting of stockholders prior to the time the VMS
Board believed such consideration to be appropriate.
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Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals
The VMS By-Laws establish an advance notice procedure with regard to the
nomination, other than by or at the direction of the VMS Board, of candidates
for election as directors (the "Nomination Procedure") and with regard to
certain matters to be brought before an annual meeting of stockholders (the
"Business Procedure").
Pursuant to the VMS By-Laws, the Nomination Procedure provides that only
persons who are nominated by, or at the direction of, the VMS Board or by a
stockholder of record who has given timely prior written notice to the
Secretary prior to the meeting at which directors are to be elected will be
eligible for election as directors. The Business Procedure provides that at an
annual meeting only such business can be conducted as has been brought before
the meeting pursuant to the notice of the meeting, by, or at the direction of,
the VMS Board or by a stockholder of record who has given timely prior written
notice to the Secretary of such stockholder's intention to bring such business
before the meeting. To be timely, notice must generally be received by not less
than 60 days nor more than 90 days prior to the first anniversary of the
mailing of the proxy statement in connection with the previous year's annual
meeting. For notice of a stockholder nomination to be made at a special meeting
at which directors are to be elected to be timely, such notice must be received
not earlier than the 90th day before such meeting and not later than the later
of (1) the 60th day prior to such meeting and (2) the tenth day after public
announcement of the date of such meeting is first made.
Under the Nomination Procedure, notice from a stockholder who proposes to
nominate a person at a meeting for election as director must contain certain
information about that person, including such person's consent to be nominated
and such information as would be required to be included in a proxy statement
soliciting proxies for the election of the proposed nominee, and certain
information about the stockholder proposing to nominate that person or the
beneficial owner, if any, on whose behalf the nomination is made. Under the
Business Procedure, notice relating to the conduct of business must contain
certain information about such business and about the stockholder who proposes
to bring the business before the meeting including a brief description of the
business the stockholder proposes to bring before the meeting, the reasons for
conducting such business at such meeting, the class and number of shares of
stock beneficially owned by such stockholder, and by the beneficial owner, if
any, on whose behalf the proposal is made, and any material interest of such
stockholder, and such beneficial owner in the business so proposed. If the
Chairman or other officer presiding at a meeting determines that a person was
not nominated in accordance with the Nomination Procedure, such person will not
be eligible for election as a director, or if he or she determines that other
business was not properly brought before such meeting in accordance with the
Business Procedure, such business will not be conducted at such meeting.
The purpose of the Nomination Procedure is, by requiring advance notice of
nominations by stockholders, to afford the VMS Board a meaningful opportunity
to consider the qualifications of the proposed nominees and, to the extent
deemed necessary or desirable by the VMS Board, to inform stockholders about
such qualifications. The purpose of the Business Procedure is, by requiring
advance notice of proposed business, to provide a more orderly procedure for
conducting annual meetings of stockholders and, to the extent deemed necessary
or desirable by the VMS Board to provide the VMS Board with a meaningful
opportunity to inform stockholders, prior to such meeting, of any business
proposed to be conducted at such meetings, together with any recommendation as
to the VMS Board's position or belief as to action to be taken with respect to
such business, so as to enable stockholders better to determine whether they
desire to attend such meeting or grant a proxy to the VMS Board as to the
disposition of any such business. Although the VMS By-Laws will not give the
VMS Board any power to approve or disapprove stockholder nominations for the
election of directors or of any other business desired by a stockholder to be
conducted at an annual meeting, the By-Laws may have the effect of precluding a
nomination for the election of directors or precluding the conducting of
business at a particular annual meeting if the proper procedures are not
followed, and may discourage or deter a third party from conducting a
solicitation of proxies to elect its own slate of directors or otherwise
attempting to obtain control of VMS even if the conduct of such solicitation or
such attempt might be beneficial to VMS and its stockholders.
Preferred Stock
The VMS Charter authorizes and the VMS Board to establish series of Preferred
Stock and to determine, with respect to any series of Preferred Stock, the
voting powers, full or limited, or no voting powers, and such designations,
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preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof as are stated in the
board resolutions providing for such series. The number of authorized shares of
VMS Preferred Stock is 1,000,000.
VMS believes that the availability of such preferred stock will provide VMS
with increased flexibility in structuring possible future financing and
acquisitions, and in meeting other corporate needs which might arise. Having
such authorized shares available for issuance will allow VMS to issue shares of
Preferred Stock without the expense and delay of a special stockholders'
meeting. The authorized shares of Preferred Stock, as well as shares of VMS
Common Stock, will be available for issuance without further action by
stockholders, unless such action is required by applicable law or the rules of
any stock exchange on which the securities may be listed. Although the VMS
Board has no intention at the present time of doing so, it could issue a series
of Preferred Stock that could, subject to certain limitations imposed by the
securities laws and stock exchange rules, depending on the terms of such
series, impede the completion of a merger, tender offer or other takeover
attempt. For instance, such series of Preferred Stock might impede a business
combination by including class-voting rights that would enable the holder to
block such a transaction. The VMS Board will make any determination to issue
such shares based on its judgment as to the best interests of VMS and its then
existing stockholders. The VMS Board, in so acting, could issue Preferred Stock
having terms which could discourage an acquisition attempt or other transaction
that some, or a majority, of the stockholders might believe to be in their best
interests or in which stockholders might receive a premium for their stock over
the then market price of such stock. The authorized and unissued Preferred
Stock of VMS, as well as the authorized and unissued VMS Common Stock would be
available, and the VMS Charter explicitly authorizes use of capital stock, for
the above purposes.
In connection with the Rights Plan, the VMS Board has authorized 50,000 shares
of VMS Participating Preferred Stock. No such shares of VMS Participating
Preferred Stock are outstanding. For a description of the rights, powers and
preferences of the VMS Participating Preferred Stock, see "Description of the
Capital Stock - Rights Plans."
Common Stock
The VMS Charter authorizes the issuance of 99,000,000 shares of VMS Common
Stock.
The authorized but unissued VMS Common Stock will provide VMS with the ability
to meet future capital needs and to provide shares for possible acquisitions
and stock dividends or stock splits. The VMS Board would have the ability, in
the event of a proposed merger, tender offer or other attempt to gain control
of VMS that was not approved by the VMS Board, to issue additional VMS Common
Stock that would dilute the stock ownership of the acquiror.
Rights Plan
Varian has entered into the Rights Plan. The Rights to be distributed in
accordance with this Rights Plan will have certain anti-takeover effects. The
Rights will cause substantial dilution to a person or group that attempts to
acquire VMS and thereby effect a change in the composition of the VMS Board on
terms not approved by the VMS Board, including by means of a tender offer at a
premium to the market price. The Rights should not interfere with any merger or
business combination approved by the VMS Board, since the Rights may be
redeemed by VMS at the applicable redemption price prior to the time that a
person or group has become an Acquiring Person. See "Description of the Capital
Stock - Rights Plan."
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AVAILABLE INFORMATION
Varian is (and, after the Distribution, VMS will be) subject to the
informational requirements of the Exchange Act, and, in accordance therewith,
files (and, after the Distribution, VMS will file) reports and other
information with the Commission. The reports and other information filed by
Varian (and, after the Distribution, to be filed by VMS) with the Commission in
accordance with the Exchange Act may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N. W., Washington, DC 20549, and at the following
regional offices of the Commission: Seven World Trade Center, Suite 1300, New
York, New York 10048, and Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material or any part
thereof may also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, DC 20549, at prescribed rates
or may be accessed electronically on the Commission's Web site at
http://www.sec.gov. The Varian Common Stock is listed on the New York Stock
Exchange, Inc. (the "NYSE") and the Pacific Exchange (the "PE") and the VMS
Common Stock will be listed on the NYSE and the PE, and reports and other
information concerning Varian can be inspected at the offices of the NYSE, 20
Broad Street, New York, New York, 10005, and of the PE, 301 Pine Street, San
Francisco, California, 94104.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Information Statement incorporates documents by reference with respect to
Varian that are not presented herein or delivered herewith. These documents
(excluding exhibits thereto, unless such exhibits are specifically incorporated
by reference into such documents) are available without charge to any person,
including any holder of Varian Common Stock, to whom this Information Statement
is delivered, upon written or oral request to the Secretary, Varian Associates,
Inc., 3050 Hansen Way, Palo Alto, California 94304-1000, telephone (650) 493-
4000. In addition, documents incorporated herein are made available by the
Commission to any person through (i) the public reference facilities maintained
by the Commission by calling the Commission at (800) SEC-0330 and (ii) the
Commission's Internet site at http://www.sec.gov.
The following documents filed by Varian with the Commission pursuant to Section
13 of the Exchange Act are incorporated herein by reference: (i) the Annual
Report on Form 10-K for the fiscal year ended October 2, 1998, (ii) the
Quarterly Report on Form 10-Q for the first quarter ended January 1, 1999 and
(iii) the Current Reports on Form 8-K filed with the Commission on November 24,
1998 and January 26, 1999.
All reports and other documents filed by Varian pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Information Statement shall be deemed to be incorporated by reference herein
and to be a part hereof from the date of filing of such reports and other
documents. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Information Statement, to the extent that a
statement contained herein or in any other subsequently filed document which
also is incorporated or deemed to be incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Information Statement.
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