-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PdRdrQka1crtC+rvAYxTUeOv1vpuI7pgvpZm2KkX+QSqBYmmbI0CAk+Cdi9turEX Gql+bCP1ecrEYvulSnzE4w== 0000898430-01-501707.txt : 20010813 0000898430-01-501707.hdr.sgml : 20010813 ACCESSION NUMBER: 0000898430-01-501707 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010629 FILED AS OF DATE: 20010810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARIAN INC CENTRAL INDEX KEY: 0001079028 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 770501995 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25393 FILM NUMBER: 1703896 BUSINESS ADDRESS: STREET 1: 3050 HANSEN WAY CITY: PALO ALTO STATE: CA ZIP: 94304-1000 BUSINESS PHONE: 6504245352 10-Q 1 d10q.txt FORM 10-Q FOR PERIOD ENDED JUNE 29, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 29, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number 000-25393 ---------------- VARIAN, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 77-0501995 (State or Other Jurisdiction (IRS Employer of Incorporation or Organization) Identification Number)
3120 Hansen Way, Palo Alto, California 94304-1030 (Address of Principal Executive Offices) (Zip Code)
(650) 213-8000 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No[_] The number of shares of the Registrant's common stock outstanding as of July 27, 2001 was 33,190,772. TABLE OF CONTENTS Part I. Financial Information.......................................... 3 Item 1. Financial Statements........................................... 3 Consolidated Statements of Earnings............................ 3 Consolidated Balance Sheets.................................... 4 Consolidated Statements of Cash Flows.......................... 5 Notes to the Consolidated Financial Statements................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 12 Item 3. Quantitative and Qualitative Disclosure about Market Risk...... 19 Part II. Other Information.............................................. 21 Item 6. Exhibits and Reports on Form 8-K............................... 21
RISK FACTORS RELATING TO FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results of Varian, Inc. (the "Company") to differ materially from management's current expectations. Those risks and uncertainties include, without limitation: new product development and commercialization; growth in life science, health care and industrial sales continuing to be sufficient to offset the decline in demand from semiconductor and telecommunications customers; demand and acceptance for the Company's products; competitive products and pricing; economic conditions in the Company's product and geographic markets; foreign currency fluctuations if they adversely impact revenue growth and earnings; market investment in capital equipment, particularly equipment requiring vacuum products; the impact of SAB 101, "Revenue Recognition," on the timing of the Company's recognition of revenue and results reported for prior and future periods; and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Varian, Inc. and Subsidiary Companies Consolidated Statements of Earnings (In thousands, except per share amounts) (Unaudited)
Quarter Ended Nine Months Ended ----------------- ----------------- Jun. 29, Jun. 30, Jun. 29, Jun. 30, 2001 2000 2001 2000 -------- -------- -------- -------- Sales...................................... $191,499 $181,996 $576,943 $519,258 Cost of sales.............................. 118,985 114,690 358,077 322,321 -------- -------- -------- -------- Gross profit............................... 72,514 67,306 218,866 196,937 -------- -------- -------- -------- Operating expenses Sales and marketing...................... 32,491 31,302 96,946 92,408 Research and development................. 9,345 8,265 26,445 23,796 General and administrative............... 9,592 8,303 31,692 29,319 -------- -------- -------- -------- Total operating expenses................. 51,428 47,870 155,083 145,523 -------- -------- -------- -------- Operating earnings......................... 21,086 19,436 63,783 51,414 Interest expense, net...................... 244 353 821 1,597 -------- -------- -------- -------- Earnings before income taxes............... 20,842 19,083 62,962 49,817 Income tax expense......................... 8,128 7,442 24,555 19,429 -------- -------- -------- -------- Net earnings............................... $ 12,714 $ 11,641 $ 38,407 $ 30,388 ======== ======== ======== ======== Net earnings per share: Basic.................................... $ 0.38 $ 0.36 $ 1.17 $ 0.97 ======== ======== ======== ======== Diluted.................................. $ 0.37 $ 0.34 $ 1.11 $ 0.91 ======== ======== ======== ======== Shares used in per share calculations: Basic.................................... 33,055 32,159 32,956 31,456 ======== ======== ======== ======== Diluted.................................. 34,459 34,136 34,469 33,533 ======== ======== ======== ========
See accompanying Notes to the Consolidated Financial Statements. 3 Varian, Inc. and Subsidiary Companies Consolidated Balance Sheets (In thousands, except share and par value amounts)
Jun. 29, Sept. 29, 2001 2000 ----------- --------- (Unaudited) ASSETS Current assets Cash and cash equivalents.............................. $ 46,998 $ 39,708 Accounts receivable, net............................... 156,857 168,513 Inventories............................................ 123,799 105,450 Deferred taxes......................................... 19,304 21,044 Other current assets................................... 12,956 10,734 -------- -------- Total current assets................................... 359,914 345,449 Property, plant, and equipment, net...................... 87,118 80,632 Other assets............................................. 94,402 86,238 -------- -------- Total assets............................................. $541,434 $512,319 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt...................... $ 6,379 $ 6,384 Accounts payable....................................... 50,099 52,193 Accrued liabilities.................................... 136,741 133,825 -------- -------- Total current liabilities.............................. 193,219 192,402 Long-term debt........................................... 39,882 45,516 Deferred taxes........................................... -- 6,669 Other liabilities........................................ 9,898 11,626 -------- -------- Total liabilities........................................ 242,999 256,213 -------- -------- Contingencies (Note 8) Stockholders' equity Preferred stock--par value $.01, authorized--1,000,000 shares; issued--none.................................. -- -- Common stock--par value $.01, authorized--99,000,000 shares; issued and outstanding--33,144,899 shares at Jun. 29, 2001 and 32,834,000 shares at Sept. 29, 2000.................................................. 231,089 222,838 Retained earnings...................................... 94,351 55,944 Other comprehensive loss............................... (27,005) (22,676) -------- -------- Total stockholders' equity............................. 298,435 256,106 -------- -------- Total liabilities and stockholders' equity............... $541,434 $512,319 ======== ========
See accompanying Notes to the Consolidated Financial Statements. 4 Varian, Inc. and Subsidiary Companies Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Nine Months Ended ------------------ Jun. 29, Jun. 30, 2001 2000 -------- -------- Cash flows from operating activities Net earnings.............................................. $ 38,407 $ 30,388 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization........................... 15,627 13,695 (Gain) loss on disposition of property, plant, and equipment.............................................. (21) (78) Tax benefit from stock option deductions................ 3,986 8,200 Deferred taxes.......................................... (5,015) -- Changes in assets and liabilities: Accounts receivable, net.............................. 12,908 (7,318) Inventories........................................... (14,544) (28,709) Other current assets.................................. (2,797) (515) Accounts payable...................................... (8,113) 9,335 Accrued liabilities................................... 4,793 12,027 Other liabilities..................................... (1,262) 3,412 Other assets.......................................... 886 (870) -------- -------- Net cash provided by operating activities................. 44,855 39,567 -------- -------- Cash flows from investing activities Proceeds from sale of property, plant, and equipment...... 589 428 Purchase of property, plant, and equipment................ (19,789) (14,430) Purchase of businesses, net of cash acquired.............. (16,061) (7,095) -------- -------- Net cash used in investing activities..................... (35,261) (21,097) -------- -------- Cash flows from financing activities Issuance of debt.......................................... 11,691 -- Repayment of debt......................................... (16,184) (5,534) Issuance of common stock.................................. 4,265 22,084 Purchase of common stock.................................. -- (9,696) Transfers (to) from Varian Medical Systems, Inc........... (1,392) 1,095 -------- -------- Net cash provided by financing activities................. (1,620) 7,949 -------- -------- Effects of exchange rate changes on cash.................. (684) (1,288) -------- -------- Net increase in cash and cash equivalents................. 7,290 25,131 Cash and cash equivalents at beginning of period.......... 39,708 23,348 -------- -------- Cash and cash equivalents at end of period................ $ 46,998 $ 48,479 ======== ======== Supplemental cash flow information Income taxes paid......................................... $ 20,779 $ 5,251 Interest paid............................................. $ 2,583 $ 2,844
See accompanying Notes to the Consolidated Financial Statements. 5 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Interim Consolidated Financial Statements These interim consolidated financial statements of Varian, Inc. and its subsidiary companies (collectively, the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The year ended September 29, 2000 balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. These interim consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Form 10-K for the year ended September 29, 2000 filed with the Securities and Exchange Commission. In the opinion of the Company's management, the interim consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. The results of operations for the fiscal quarter and nine months ended June 29, 2001 are not necessarily indicative of the results to be expected for a full year or for any other periods. During the fiscal quarter ended December 29, 2000, the Company acquired substantially all of the assets of Imagine Manufacturing Solutions, Inc. and R&S Technology, Inc. During the fiscal quarter ended March 30, 2001, the Company acquired all of the outstanding capital stock of Bear Instruments, Inc. These acquisitions, which did not have a material effect on the Company's operations or financial position, were accounted for using the purchase method of accounting. Certain amounts in the prior year's financial statements have been reclassified to conform to the current presentation of the financial statements. Note 2. Description of Business and Basis of Presentation The Company is a major supplier of scientific instruments and consumable laboratory supplies, vacuum technology products and services, and electronics manufacturing services. These businesses primarily serve life science, health care, semiconductor processing, communications, industrial, and academic customers. Until April 2, 1999, the business of the Company was operated as the Instrument Business ("IB") of Varian Associates, Inc. ("VAI"). On that date, VAI distributed to the holders of its common stock one share of common stock of the Company for each share of VAI (the "Distribution"). The Company's fiscal years reported are the 52-week periods ending on the Friday nearest September 30. Fiscal year 2001 will comprise the 52-week period ending September 28, 2001, and fiscal year 2000 was comprised of the 52-week period ended September 29, 2000. The fiscal quarters ended June 29, 2001 and June 30, 2000 each comprise 13 weeks, and the nine-month periods ended June 29, 2001 and June 30, 2000 each comprise 39 weeks. Note 3. Balance Sheet Detail
Jun. 29, Sept. 29, 2001 2000 --------- --------- (In thousands) INVENTORIES Raw materials and parts..................................... $ 67,473 $ 55,649 Work in process............................................. 13,162 10,912 Finished goods.............................................. 43,164 38,889 --------- -------- $ 123,799 $105,450 ========= ========
6 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 4. Forward Exchange Contracts Effective September 30, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," which was amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS 133 and 138 require derivatives to be measured at fair value and to be recorded as assets or liabilities on the balance sheet. The accounting for gains or losses resulting from changes in the fair values of those derivatives would be dependent upon the use of the derivative and whether it qualifies for hedge accounting. The adoption of SFAS 133 and 138 did not have a material effect on the Company's financial statements for the fiscal quarter or the nine months ended June 29, 2001. The Company's forward exchange contracts generally range from one to 12 months in original maturity. Forward exchange contracts outstanding as of June 29, 2001 that hedge the balance sheet were effective June 29, 2001, and accordingly there were no significant unrealized gains or losses associated with such contracts and the fair value of these contracts approximates their notional values. Forward exchange contracts that were outstanding as of June 29, 2001 are summarized as follows:
Notional Notional Value Value Sold Purchased -------- --------- (In thousands) Australian Dollar............................................ $ -- $30,131 Euro......................................................... -- 23,350 Canadian Dollar.............................................. 2,368 -- British Pound................................................ 2,145 -- Japanese Yen................................................. 3,058 -- ------ ------- Total...................................................... $7,571 $53,481 ====== =======
Note 5. Net Earnings Per Share Basic earnings per share are calculated based on net earnings and the weighted-average number of shares outstanding during the reported period. Diluted earnings per share include dilution from potential common stock shares issuable pursuant to the exercise of outstanding stock options determined using the treasury stock method. For the fiscal quarter and nine months ended June 29, 2001, options to purchase 682,898 and 536,911, respectively, potential common stock shares with exercise prices greater than the weighted-average market value of such common stock were excluded from the calculation of diluted earnings per share. For the fiscal quarter and nine months ended June 30, 2000, options to purchase 36,182 and 17,052, respectively, potential common stock shares with exercise prices greater than the weighted-average market value of such common stock were excluded from the calculation of diluted earnings per share. 7 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A reconciliation follows: (In thousands except per share amounts)
Nine Months Quarter Ended Ended --------------- --------------- Jun. Jun. Jun. Jun. 29, 30, 29, 30, 2001 2000 2001 2000 ------- ------- ------- ------- Basic Net earnings................................... $12,714 $11,641 $38,407 $30,388 Weighted average shares outstanding............ 33,055 32,159 32,956 31,456 Net earnings per share......................... $ 0.38 $ 0.36 $ 1.17 $ 0.97 ======= ======= ======= ======= Diluted Net earnings................................... $12,714 $11,641 $38,407 $30,388 Weighted average shares outstanding............ 33,055 32,159 32,956 31,456 Net effect of dilutive stock options........... 1,404 1,977 1,513 2,077 ------- ------- ------- ------- Total shares................................... 34,459 34,136 34,469 33,533 Net earnings per share......................... $ 0.37 $ 0.34 $ 1.11 $ 0.91 ======= ======= ======= =======
Note 6. Comprehensive Income Comprehensive income is comprised of net income and the currency translation adjustment. Comprehensive income was $12.2 million and $10.4 million for the fiscal quarters ended June 29, 2001 and June 30, 2000, respectively, and $34.1 million and $14.9 million for the nine months ended June 29, 2001 and June 30, 2000, respectively. Note 7. Debt and Credit Facilities In December 2000, the Company established a 364-day bank credit facility in Japan in the amount of 1.2 billion yen (approximately $9.8 million). The credit facility is for working capital purposes for its wholly-owned Japan subsidiary. As of June 29, 2001, no amount was outstanding under this credit facility. This credit facility contains certain covenants that limit future borrowings of the Company and requires the maintenance by the Company of certain levels of working capital and operating results. Note 8. Contingencies Environmental Matters. The Company's operations are subject to various foreign, federal, state, and local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These regulations increase the costs and potential liabilities of the Company's operations. However, the Company does not currently anticipate that its compliance with these regulations will have a material effect upon the Company's capital expenditures, earnings, or competitive position. Under the terms of the Distribution, the Company and Varian Semiconductor Equipment Associates, Inc. ("VSEA") each agreed to indemnify Varian Medical Systems, Inc. ("VMS") for one-third of certain environmental investigation and remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs), as further described below. VMS has been named by the U.S. Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, 8 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) as amended, at eight sites where VAI is alleged to have shipped manufacturing waste for recycling, treatment, or disposal. VMS is also involved in various stages of environmental investigation, monitoring, and/or remediation under the direction of, or in consultation with, foreign, federal, state, and/or local agencies at certain current VMS or former VAI facilities, or is reimbursing third parties which are undertaking such investigation, monitoring, and/or remediation activities. 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 June 29, 2001, it was nonetheless estimated that the Company's share of the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $1.5 million to $5.0 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of June 29, 2001. No amount in the foregoing range of estimated future costs is believed to be more probable of being incurred than any other amount in such range, and the Company therefore accrued $1.5 million as of June 29, 2001. As to other sites and facilities, sufficient knowledge has been gained to be able to better estimate the scope and costs of future environmental activities. As of June 29, 2001, it was estimated that the Company's share of the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $7.8 million to $18.1 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of June 29, 2001. As to each of these sites and facilities, it was determined that a particular amount within the range of estimated costs was a better estimate of the future environmental liability than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $13.8 million at June 29, 2001. The Company therefore accrued $6.1 million as of June 29, 2001, which represents the best estimate of its share of these future costs discounted at 4%, net of inflation. This accrual is in addition to the $1.5 million described in the preceding paragraph. Lawsuits for recovery of environmental investigation and remediation costs already incurred, and to be incurred in the future, were filed by VAI against various insurance companies and other third parties. Following settlements with or judgments against those insurance companies, VMS is still pursuing a lawsuit against a third party for the benefit of itself, VSEA, and the Company. One insurance company has agreed to pay a portion of certain of VAI's (now VMS') future environmental-related expenditures for which the Company has an indemnity obligation, and the Company therefore has a $1.4 million receivable in Other Assets as of June 29, 2001 for the Company's share of such recovery. The Company has not reduced any environmental-related liability in anticipation of recovery on claims made against third parties. The Company's management believes that its reserves for the foregoing and certain other environmental-related matters are adequate, but as the scope of its obligation becomes more clearly defined, these reserves may be modified, and related charges or credits against earnings may be made. Although any ultimate liability arising from environmental-related matters described herein could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, would be material to the Company's financial statements, the likelihood of such occurrence is considered remote. Based on information currently available and its best assessment of the ultimate amount and timing of environmental-related events, the Company's management believes that the costs of these environmental-related matters are not reasonably likely to have a material adverse effect on the Company's financial position or results of operations. Legal Proceedings. Under the terms of the Distribution, the Company agreed to defend and indemnify VSEA and VMS for costs, liabilities, and expenses with respect to legal proceedings related to the Instruments 9 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Business of VAI, and agreed to reimburse VMS for one-third of certain costs and expenses (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs and expenses) that are paid after April 2, 1999 and arise from actual or potential claims or legal proceedings relating to discontinued, former, or corporate operations of VAI. From time to time, the Company is involved in a number of its own legal actions and could incur an uninsured liability in one or more of them. While the ultimate outcome of all of the foregoing legal matters is not determinable, management believes that these matters are not reasonably likely to have a material adverse effect on the Company's financial position or results of operations. Note 9. Industry Segments The Company's operations are grouped into three business segments: Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing. Scientific Instruments is a supplier of instruments, consumable laboratory supplies, and after sales support used in studying the chemical composition and structure of myriad substances and for imaging. These products are tools for scientists engaged in drug discovery, life sciences, genetic engineering, health care, environmental analysis, quality control, and academic research. Vacuum Technologies provides products and solutions to create, maintain, contain, and measure an ultra-clean or high-vacuum environment for industrial and scientific applications. Vacuum Technologies products are used in semiconductor manufacturing equipment, life science and other analytical instruments, industrial manufacturing, and quality control. Electronics Manufacturing provides contract manufacturing services for technology companies with low-volume and high-mix requirements. Transactions between segments are accounted for at cost and are not included in sales. Accordingly, the following information is provided for purposes of achieving an understanding of operations, but may not be indicative of the financial results of the reported segments were they independent organizations. In addition, comparisons of the Company's operations to similar operations of other companies may not be meaningful. Industry Segments (In millions)
Quarter Ended Quarter Ended ----------------- ----------------- Jun. 29, Jun. 30, Jun. 29, Jun. 30, 2001 2000 2001 2000 -------- -------- -------- -------- Pretax Pretax Sales Sales Earnings Earnings Scientific Instruments...................... $111.7 $100.4 $13.4 $10.9 Vacuum Technologies ........................ 32.9 35.4 5.7 6.2 Electronics Manufacturing................... 46.9 46.2 3.0 3.6 ------ ------ ----- ----- Total industry segments..................... 191.5 182.0 22.1 20.7 General corporate........................... -- -- (1.0) (1.2) Interest expense, net....................... -- -- (0.2) (0.4) ------ ------ ----- ----- Total....................................... $191.5 $182.0 $20.9 $19.1 ====== ====== ===== =====
10 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Industry Segments (In millions)
Nine Months Ended Nine Months Ended ----------------- ----------------- Jun. 29, Jun. 30, Jun. 29, Jun. 30, 2001 2000 2001 2000 -------- -------- -------- -------- Pretax Pretax Sales Sales Earnings Earnings Scientific Instruments...................... $ 328.4 $ 296.7 $38.3 $33.5 Vacuum Technologies ........................ 115.4 102.1 23.4 16.5 Electronics Manufacturing................... 133.1 120.5 7.9 9.3 -------- -------- ----- ----- Total industry segments..................... 576.9 519.3 69.6 59.3 General corporate........................... -- -- (5.8) (7.9) Interest expense, net....................... -- -- (0.8) (1.6) -------- -------- ----- ----- Total....................................... $ 576.9 $ 519.3 $63.0 $49.8 ======== ======== ===== =====
Note 10. Recent Accounting Pronouncements In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition," which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. The Company will be required to adopt SAB 101 in its fiscal fourth quarter ending September 28, 2001. While SAB 101 will not affect the fundamental aspects of the Company's operations as measured by shipments and cash flows, the adoption of SAB 101 will result in a deferral in the recognition of revenue in certain situations, primarily for the NMR product line of the Scientific Instruments segment because customer acceptance often occurs subsequent to shipment of NMR systems. The Company is still assessing the impact of SAB 101 on its consolidated financial statements, but believes adoption of SAB 101 will result in some changes to historically reported revenues, operating results, and net income. Accordingly, any shipments previously recorded as revenue, including revenue reported for the first, second, and third quarters of fiscal 2001 that do not meet the requirements of SAB 101, will be recorded as revenue in periods subsequent to that in which they were originally recorded as required by SFAS No. 3 "Reporting Accounting Changes in Interim Financial Statements." The Company will report the impact of revenues recognized prior to fiscal year 2001 that did not meet SAB 101 recognition criteria as a cumulative effect of accounting change on the first day of fiscal year 2001 (September 30, 2000) as required by SAB 101; that cumulative effect is still being determined but will likely be significant. In July 2001, the Financial Accounting Standards Board ("FASB") issued FASB Statements Nos. 141 and 142 ("FAS 141" and "FAS 142"), "Business Combinations" and "Goodwill and Other Intangible Assets." FAS 141 eliminates pooling-of- interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under FAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. FAS 141 and FAS 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of FAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the new criteria for recognition as intangibles under FAS 141 will be reclassified to goodwill. Companies are required to adopt FAS 142 for fiscal years beginning after December 15, 2001, but early adoption is permitted in certain circumstances. The Company plans to adopt FAS 142 on the first day of fiscal year 2002 (September 29, 2001). In connection with the adoption of FAS 142, the Company will be required to perform a transitional goodwill impairment assessment. The Company has not yet determined the impact that implementation of these standards will have on its results of operations and financial position. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Until April 2, 1999, the business of Varian, Inc. (the "Company") was operated as the Instruments Business ("IB") of Varian Associates, Inc. ("VAI"). IB included the business units that designed, manufactured, sold, and serviced scientific instruments and vacuum technologies, and a business unit that provided contract electronics manufacturing. VAI contributed IB to the Company; then on April 2, 1999, VAI distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of the Company for each share of VAI common stock outstanding on April 2, 1999 (the "Distribution"). At the same time, VAI contributed its Semiconductor Equipment business to Varian Semiconductor Equipment Associates, Inc. ("VSEA") and distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of VSEA for each share of VAI common stock outstanding on April 2, 1999. VAI retained its Health Care Systems business and changed its name to Varian Medical Systems, Inc., ("VMS") effective as of April 3, 1999. These transactions were accomplished under the terms of an Amended and Restated Distribution Agreement dated as of January 14, 1999 by and among the Company, VAI, and VSEA (the "Distribution Agreement"). The Company's fiscal years reported are the 52-week periods ending on the Friday nearest September 30. Fiscal year 2001 will comprise the 52-week period ending September 28, 2001, and fiscal year 2000 was comprised of the 52-week period ended September 29, 2000. The fiscal quarters ended June 29, 2001 and June 30, 2000 each comprise 13 weeks, and the nine-month periods ended June 29, 2001 and June 30, 2000 each comprise 39 weeks. Results of Operations Third Quarter of Fiscal Year 2001 Compared to Third Quarter of Fiscal Year 2000 Sales. Sales were $191.5 million in the third quarter of fiscal year 2001, an increase of 5.2% from sales of $182.0 million in the third quarter of fiscal year 2000. Sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased (decreased) by 11.3%, (7.3%) and 1.6%, respectively. Geographically, sales in North America of $122.7 million, Europe of $42.2 million and the rest of the world of $26.6 million in the third quarter of fiscal year 2001 represented increases (decreases) of 10.1%, 4.2%, and (11.6%), respectively, as compared to the third quarter of fiscal year 2000. The increase in North America was due to the sales growth in Scientific Instruments and Electronics Manufacturing partially offset by a decline in Vacuum Technologies; Scientific Instruments grew 32.3%, Vacuum Technologies decreased (11.0%) and Electronics Manufacturing grew 1.6%. The increase in Europe was primarily driven by Scientific Instrument sales growth partially offset by the decline in the European currencies compared to the third quarter of fiscal year 2000. The decrease in the rest of the world was primarily due to the timing of sales of large dollar NMR systems in Japan in the year ago period. Gross Profit. Gross profit was $72.5 million (representing 37.9% of sales) in the third quarter of fiscal year 2001, compared to $67.3 million (representing 37.0% of sales) in the third quarter of fiscal year 2000. The $5.2 million increase in gross profit resulted primarily from the increase in sales in the third quarter of fiscal year 2001 compared to the third quarter of fiscal year 2000. The increase in gross profit as a percent of sales primarily reflects the revenue shift to Scientific Instruments, which has higher gross profit margins than the Company's other segments, and higher gross profit margins in Vacuum Technologies due primarily to the favorable effect of the weaker Euro and certain improvements in product costs. Sales and Marketing. Sales and marketing expenses were $32.5 million (representing 17.0% of sales) in the third quarter of fiscal year 2001, compared to $31.3 million (representing 17.2% of sales) in the third quarter of fiscal year 2000. The $1.2 million increase was primarily to support the sales growth. The decrease in sales and marketing expenses as a percent of sales resulted primarily from the Company's ability to leverage these expenses as sales increased and from the favorable effect on these expenses of the weaker Euro and Australian dollar. 12 Research and Development. Research and development expenses were $9.3 million (representing 4.9% of sales) in the third quarter of fiscal year 2001, compared to research and development expenses of $8.3 million (representing 4.5% of sales) in the third quarter of fiscal year 2000. Research and development expenses increased from the year ago quarter primarily because the Company continued to increase its focus on new product development for life science and health care applications. General and Administrative. General and administrative expenses were $9.6 million (representing 5.0% of sales) in the third quarter of fiscal year 2001, compared to $8.3 million (representing 4.6% of sales) in the third quarter of fiscal year 2000. The increases resulted primarily from increased goodwill amortization and other general and administrative costs of acquired businesses since the third quarter of fiscal year 2000. Net Interest Expense. Net interest expense was $0.2 million (representing 0.1% of sales) for the third quarter of fiscal year 2001, compared to $0.4 million (representing 0.2% of sales) for the third quarter of fiscal year 2000. The reduction in net interest expense resulted mainly from reduced debt levels. Taxes on Earnings. The effective income tax rate was 39.0% for both the third quarter of fiscal year 2001 and the third quarter of fiscal year 2000. Net Earnings. Net earnings were $12.7 million ($0.37 diluted net earnings per share) in the third quarter of fiscal year 2001, compared to net earnings of $11.6 million ($0.34 diluted net earnings per share) in the third quarter of fiscal year 2000. The net earnings improvement resulted primarily from higher sales and gross profit margins. Segments. Scientific Instruments sales of $111.7 million in the third quarter of fiscal year 2001 increased 11.3% over the third quarter of fiscal year 2000 sales of $100.4 million. The revenue growth was primarily driven by demand for life science products in NMR, liquid chromatography, molecular spectroscopy, and tablet dissolution, as well as for certain chemical analysis products, but was negatively impacted by the strong U.S. dollar. Earnings from operations in the third quarter of fiscal year 2001 of $13.4 million (12.0% of sales) increased from $10.9 million (10.9% of sales) in the third quarter of fiscal year 2000. The increase in earnings and percent of sales primarily reflects the product mix shift to higher margin products for life science applications in addition to controlling expenses as revenues increased. Vacuum Technologies sales of $32.9 million in the third quarter of fiscal year 2001 decreased (7.3%) from third quarter of fiscal year 2000 sales of $35.4 million. The revenue decrease was caused primarily by continued slow demand for semiconductor applications, partially offset by higher revenues for life science applications. The Company expects Vacuum Technologies' revenues to fall sequentially in the fourth quarter of fiscal year 2001 by $2-$3 million but then to show a gradual recovery as early as the first half of fiscal year 2002. Earnings from operations in the third quarter of fiscal year 2001 of $5.7 million (17.1% of sales) were down from the $6.2 million (17.4% of sales) in the third quarter of fiscal year 2000. The decreased earnings resulted from the decreased sales, offset by tight cost controls, improved product mix, and favorable impact of the stronger U.S. dollar on the segment's Torino, Italy factory, which sold approximately 55% of its output into the U.S. Electronics Manufacturing sales in the third quarter of fiscal year 2001 of $46.9 million increased 1.6% from third quarter of fiscal year 2000 sales of $46.2 million. Electronics Manufacturing continued to experience a slowing of demand, which began in the first quarter of fiscal 2001, from some of its communications customers. This slowing in demand was offset by strong demand from new medical device customers and customers brought to the business by the acquisition in October 2000 of the operations of Imagine Manufacturing Solutions, Inc. Earnings from operations in the third quarter of fiscal year 2001 of $3.0 million (6.6% of sales) decreased from $3.6 million (7.7% of sales) in the third quarter of fiscal year 2000. The decrease in earnings was primarily the result of the costs of integrating an acquisition and start-up costs for new customers. 13 First Nine Months of Fiscal Year 2001 Compared to First Nine Months of Fiscal Year 2000 Sales. Sales were $576.9 million in the first nine months of fiscal year 2001, an increase of 11.1% from sales of $519.3 million in the first nine months of fiscal year 2000. Sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased by 10.7%, 13.0%, and 10.5%, respectively. Geographically, sales in North America of $355.9 million, Europe of $134.1 million and the rest of the world of $86.9 million in the first nine months of fiscal year 2001 represented increases of 16.5%, 0.4%, and 8.3%, respectively, as compared to the first nine months of fiscal year 2000. The significant increase in North America was due to the sales growth in all three segments; Scientific Instruments grew 23.4%, Vacuum Technologies grew 15.1%, and Electronics Manufacturing grew 10.5%. The almost flat sales in Europe resulted mainly from the sharp decline in the European currencies compared to the first nine months of fiscal year 2000. The increase in the rest of the world was primarily due to strong sales growth in Scientific Instruments. Gross Profit. Gross profit was $218.9 million (representing 37.9% of sales) in the first nine months of fiscal year 2001, compared to $196.9 million (representing 37.9% of sales) in the first nine months of fiscal year 2000. The $21.9 million increase in gross profit resulted primarily from the higher sales compared to the same period last year. Currency fluctuations contributed to lower gross margins for Scientific Instruments but contributed to higher gross margins for Vacuum Technologies compared to the same period last year. Electronics Manufacturing had lower gross margins primarily as a result of the costs of integrating an acquisition and start-up costs for new customers. Sales and Marketing. Sales and marketing expenses were $96.9 million (representing 16.8% of sales) in the first nine months of fiscal year 2001, compared to $92.4 million (representing 17.8% of sales) in the first nine months of fiscal year 2000. The $4.5 million increase was primarily to support the higher sales volume. The decrease in sales and marketing expenses as a percent of sales resulted primarily from the Company's ability to leverage these expenses as sales increased and from the favorable effect on these expenses of the weaker Euro and Australian dollar. Research and Development. Research and development expenses were $26.4 million (representing 4.6% of sales) in the first nine months of fiscal year 2001, compared to research and development expenses of $23.8 million (representing 4.6% of sales) in the first nine months of fiscal year 2000. Both Scientific Instruments and Vacuum Technologies increased research and development expenses in line with their revenue growth. General and Administrative. General and administrative expenses were $31.7 million (representing 5.5% of sales) in the first nine months of fiscal year 2001, compared to $29.3 million (representing 5.6% of sales) in the first nine months of fiscal year 2000. The decrease as a percent of sales resulted primarily from growth in the revenues while controlling the growth in these costs. Net Interest Expense. Net interest expense was $0.8 million (representing 0.1% of sales) for the first nine months of fiscal year 2001 compared to $1.6 million (representing 0.3% of sales) for the first nine months of fiscal year 2000. The reduction in net interest expense resulted mainly from income on invested cash and reduced expenses from decreased debt levels. Taxes on Earnings. The effective income tax rate was 39.0% for the first nine months of fiscal year 2001 and for the first nine months of fiscal year 2000. Net Earnings. Net earnings were $38.4 million ($1.11 diluted net earnings per share) in the first nine months of fiscal year 2001, compared to net earnings of $30.4 million ($0.91 diluted net earnings per share) in the first nine months of fiscal year 2000. The net earnings improvement resulted primarily from higher sales and from operating expenses growing at a lower rate than sales. Segments. Scientific Instruments sales of $328.4 million in the first nine months of fiscal year 2001 increased 10.7% over the first nine months of fiscal year 2000 sales of $296.7 million. The revenue growth was primarily driven by demand for life science products in NMR, liquid chromatography, molecular spectroscopy, 14 and tablet dissolution, as well as for certain chemical analysis products, but was negatively impacted by the strong U.S. dollar. Earnings from operations in the first nine months of fiscal year 2001 of $38.3 million (11.7% of sales) increased from $33.5 million (11.3% of sales) in the first nine months of fiscal year 2000. The increase in earnings resulted primarily from higher sales, with the leverage of operating expenses offsetting the negative impact of the strong U.S. dollar on profitability. Vacuum Technologies sales of $115.4 million in the first nine months of fiscal year 2001 increased 13.0% above the first nine months of fiscal year 2000 sales of $102.1 million. The revenue growth was primarily driven by broad demand for industrial, research, and life science applications partially offset by a slowing in demand for semiconductor applications. The Company expects Vacuum Technologies' revenues to decrease further in the fourth quarter of fiscal year 2001, but then to show a gradual recovery as early as the first half of fiscal year 2002. Earnings from operations in the first nine months of fiscal year 2001 of $23.4 million (20.2% of sales) were up from the $16.5 million (16.1% of sales) in the first nine months of fiscal year 2000. The improved earnings resulted from the increased sales, improved product mix, and favorable impact of the stronger U.S. dollar on the segment's Torino, Italy factory, which sold approximately 55% of its output into the U.S. Electronics Manufacturing sales in the first nine months of fiscal year 2001 of $133.1 million increased 10.5% from the first nine months of fiscal year 2000 sales of $120.5 million. Electronics Manufacturing experienced a slowing of demand from some of its communications customers, which was offset by strong demand from new medical device customers and customers brought to the business by the acquisition in October 2000 of the operations of Imagine Manufacturing Solutions, Inc. Earnings from operations in the first nine months of fiscal year 2001 of $7.9 million (6.0% of sales) decreased from $9.3 million (7.7% of sales) in the first nine months of fiscal year 2000. The decrease in earnings was primarily the result of the cost of integrating an acquisition and start-up costs for new customers. Liquidity and Capital Resources The Company generated $44.9 million of cash from operating activities in the first nine months of fiscal year 2001, which compares to $39.6 million in the first nine months of fiscal year 2000. The increase in cash from operating activities resulted primarily from improved net earnings. The Company used $35.3 million of cash for investing activities in the first nine months of fiscal year 2001, which compares to $21.1 million in the first nine months of fiscal year 2000. This increase in cash used for investing activities in the first nine months of fiscal year 2001 was primarily due to a higher level of business acquisition activity. The Company used $1.6 million of cash for financing activities in the first nine months of fiscal year 2001, which compares to $7.9 million generated in the first nine months of fiscal year 2000. This decrease resulted primarily from a decline in proceeds from issuance of common stock under stock option plans partially offset by a decline in purchases of common stock. In December 2000, the Company established a 364-day bank credit facility in Japan in the amount of 1.2 billion yen (approximately $9.8 million). The credit facility is for working capital purposes for its wholly-owned Japan subsidiary. As of June 29, 2001, no amount was outstanding under this credit facility. This credit facility contains certain covenants that limit future borrowings of the Company and requires the maintenance by the Company of certain levels of working capital and operating results. The Distribution Agreement provides that the Company is responsible for certain litigation to which VAI was a party, and further provides that the Company will indemnify VMS and VSEA for one-third of the costs, expenses, and other liabilities relating to certain discontinued, former, and corporate operations of VAI, including certain environmental liabilities (see "Environmental Matters" below). The Distribution Agreement also provided for the division among the Company, VSEA, and VMS of VAI's cash and debt as of April 2, 1999. Under the Distribution Agreement, the Company was to assume 50% of VAI's term loans and receive an amount 15 of cash from VAI such that it would have net debt (defined in the Distribution Agreement as the amount outstanding under the term loans and notes payable, less cash and cash equivalents) equal to approximately 50% of the net debt of the Company and VMS, subject to such adjustment as was necessary to provide VMS with a net worth (as defined in the Distribution Agreement) of between 40% and 50% of the aggregate net worth of the Company and VMS, and subject to further adjustment to reflect the Company's approximately 50% share of the estimated proceeds, if any, to be received by VMS after the Distribution from the sale of VAI's long-term leasehold interest at certain of its Palo Alto facilities, together with certain related buildings and other corporate assets, and the Company's obligation for approximately 50% of any estimated transaction expenses to be paid by VMS after the Distribution (in each case reduced for estimated taxes payable or tax benefits received from all sales and transaction expenses). Since the amounts transferred immediately prior to the Distribution were based on estimates, these and other adjustments were required following the Distribution. As a result of these final adjustments, the Company recorded an increase in stockholders' equity of $1.1 million in the second quarter of fiscal year 2000. Management believes that no further adjustments are necessary, and that if any are required, they will not have a material effect on the Company's financial condition. The Company's liquidity is affected by many other factors, some based on the normal ongoing operations of the business and others related to the uncertainties of the industry and global economies. The Company's current business strategy contemplates possible acquisitions, further stock repurchases, and/or facility expansions. Any of these activities could utilize cash currently being generated by the Company. Although the Company's cash requirements will fluctuate based on the timing and extent of these factors and activities, management believes that cash generated from operations, together with the Company's borrowing capability, will be sufficient to satisfy commitments for capital expenditures and other cash requirements for the next 12 months. Environmental Matters The Company's operations are subject to various foreign, federal, state, and local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These regulations increase the costs and potential liabilities of the Company's operations. However, the Company does not currently anticipate that its compliance with these regulations will have a material effect upon the Company's capital expenditures, earnings, or competitive position. Under the terms of the Distribution, the Company and VSEA each agreed to indemnify VMS for one-third of certain environmental investigation and remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs), as further described below. VMS has been named by the U.S. Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at eight sites where VAI is alleged to have shipped manufacturing waste for recycling, treatment, or disposal. VMS is also involved in various stages of environmental investigation, monitoring, and/or remediation under the direction of, or in consultation with, foreign, federal, state, and/or local agencies at certain current VMS or former VAI facilities, or is reimbursing third parties which are undertaking such investigation, monitoring, and/or remediation activities. 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 June 29, 2001, it was nonetheless estimated that the Company's share of the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $1.5 million to $5.0 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of June 29, 2001. No amount in the foregoing range of estimated future costs is believed to be more probable of being incurred than any other amount in such range, and the Company therefore accrued $1.5 million as of June 29, 2001. 16 As to other sites and facilities, sufficient knowledge has been gained to be able to better estimate the scope and costs of future environmental activities. As of June 29, 2001, it was estimated that the Company's share of the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $7.8 million to $18.1 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of June 29, 2001. As to each of these sites and facilities, it was determined that a particular amount within the range of estimated costs was a better estimate of the future environmental liability than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $13.8 million at June 29, 2001. The Company therefore accrued $6.1 million as of June 29, 2001, which represents the best estimate of its share of these future costs discounted at 4%, net of inflation. This accrual is in addition to the $1.5 million described in the preceding paragraph. Lawsuits for recovery of environmental investigation and remediation costs already incurred, and to be incurred in the future, were filed by VAI against various insurance companies and other third parties. Following settlements with or judgments against those insurance companies, VMS is still pursuing a lawsuit against a third party for the benefit of itself, VSEA, and the Company. One insurance company has agreed to pay a portion of certain of VAI's (now VMS') future environmental-related expenditures for which the Company has an indemnity obligation, and the Company therefore has a $1.4 million receivable in Other Assets as of June 29, 2001 for the Company's share of such recovery. The Company has not reduced any environmental-related liability in anticipation of recovery on claims made against third parties. The Company's management believes that its reserves for the foregoing and certain other environmental-related matters are adequate, but as the scope of its obligation becomes more clearly defined, these reserves may be modified, and related charges or credits against earnings may be made. Although any ultimate liability arising from environmental-related matters described herein could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, would be material to the Company's financial statements, the likelihood of such occurrence is considered remote. Based on information currently available and its best assessment of the ultimate amount and timing of environmental-related events, the Company's management believes that the costs of these environmental-related matters are not reasonably likely to have a material adverse effect on the Company's financial position or results of operations. Legal proceedings Under the terms of the Distribution, the Company agreed to defend and indemnify VSEA and VMS for costs, liabilities, and expenses with respect to legal proceedings related to the Instruments Business of VAI, and agreed to reimburse VMS for one-third of certain costs and expenses (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs and expenses) that are paid after April 2, 1999 and arise from actual or potential claims or legal proceedings relating to discontinued, former, or corporate operations of VAI. From time to time, the Company is involved in a number of its own legal actions and could incur an uninsured liability in one or more of them. While the ultimate outcome of all of the foregoing legal matters is not determinable, management believes that these matters are not reasonably likely to have a material adverse effect on the Company's financial position or results of operations. Euro Conversion On January 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their existing currencies (legal currencies) and one new common currency--the Euro. The Euro then began trading on currency exchanges and began to be used in certain business transactions. The transition period for the introduction of the Euro occurs through June 2002. Beginning January 1, 2002, new Euro-denominated bills and coins will be issued. Simultaneously, legacy currencies will begin to be withdrawn from circulation with the completion of the withdrawal scheduled for no later than July 1, 2002. Because of the Company's significant sales and operating profits generated in the European Union, the Company has initiated a program to identify and address risks arising from the conversion to the Euro currency. These risks include, but 17 are not limited to, converting information technology systems to handle the new currency, evaluating the competitive impact of one common currency due to, among other things, increased cross-border price transparency, evaluating the Company's exposure to currency exchange risks during and following the transition period to the Euro, and determining the impact on the Company's processes for preparing and maintaining accounting and taxation records. The Company believes that it is taking appropriate steps to prepare for the Euro conversion and to mitigate its effects on the Company's business, and that the Euro conversion is not likely to have a material adverse effect on the Company's business or financial condition. However, the Company is still preparing for the Euro conversion and therefore cannot assure that the Euro conversion will not have a material adverse effect on the Company's business or financial condition. Recent Accounting Pronouncements In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition," which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. The Company will be required to adopt SAB 101 in its fiscal fourth quarter ending September 28, 2001. While SAB 101 will not affect the fundamental aspects of the Company's operations as measured by shipments and cash flows, the adoption of SAB 101 will result in a deferral in the recognition of revenue in certain situations, primarily for the NMR product line of the Scientific Instruments segment because customer acceptance often occurs subsequent to shipment of NMR systems. The Company is still assessing the impact of SAB 101 on its consolidated financial statements, but believes adoption of SAB 101 will result in some changes to historically reported revenues, operating results, and net income. Accordingly, any shipments previously recorded as revenue, including revenue reported for the first, second, and third quarters of fiscal 2001 that do not meet the requirements of SAB 101, will be recorded as revenue in periods subsequent to that in which they were originally recorded as required by SFAS No. 3 "Reporting Accounting Changes in Interim Financial Statements." The Company will report the impact of revenues recognized prior to fiscal year 2001 that did not meet SAB 101 recognition criteria as a cumulative effect of accounting change on the first day of fiscal year 2001 (September 30, 2000) as required by SAB 101; that cumulative effect is still being determined but will likely be significant. In July 2001, the Financial Accounting Standards Board ("FASB") issued FASB Statements Nos. 141 and 142 ("FAS 141" and "FAS 142"), "Business Combinations" and "Goodwill and Other Intangible Assets." FAS 141 eliminates pooling-of- interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under FAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. FAS 141 and FAS 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of FAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the new criteria for recognition as intangibles under FAS 141 will be reclassified to goodwill. Companies are required to adopt FAS 142 for fiscal years beginning after December 15, 2001, but early adoption is permitted in certain circumstances. The Company plans to adopt FAS 142 on the first day of fiscal year 2002 (September 29, 2001). In connection with the adoption of FAS 142, the Company will be required to perform a transitional goodwill impairment assessment. The Company has not yet determined the impact that implementation of these standards will have on its results of operations and financial position. 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Effective September 30, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," which was amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS 133 and 138 require derivatives to be measured at fair value and to be recorded as assets or liabilities on the balance sheet. The accounting for gains or losses resulting from changes in the fair values of those derivatives would be dependent upon the use of the derivative and whether it qualifies for hedge accounting. The adoption of SFAS 133 and SFAS 138 did not have a material effect on the Company's financial statements for the fiscal quarter or the nine months ended June 29, 2001. Foreign Currency Exchange Risk. The Company typically hedges its currency exposures associated with certain assets and liabilities denominated in non-functional currencies and with anticipated foreign currency cash flows. As a result, the effect of an immediate 10% change in exchange rates would not be material to the Company's financial condition or results of operations. The Company's forward exchange contracts have generally ranged from one to 12 months in original maturity, and no forward exchange contract has had an original maturity greater than one year. Forward exchange contracts outstanding as of June 29, 2001 that hedge the balance sheet were effective on June 29, 2001, and accordingly there were no significant unrealized gains or losses associated with such contracts and the fair value of these contracts approximates their notional values. Forward Exchange Contracts Outstanding as of June 29, 2001
Notional Notional Value Value Sold Purchased -------- --------- (In thousands) Australian Dollar............................................ $ -- $30,131 Euro......................................................... -- 23,350 Canadian Dollar.............................................. 2,368 -- British Pound................................................ 2,145 -- Japanese Yen................................................. 3,058 -- ------ ------- Total...................................................... $7,571 $53,481 ====== =======
Interest Rate Risk The Company has no material exposure to market risk for changes in interest rates. The Company invests primarily in short-term U.S. Treasury securities and money market funds, and changes in interest rates would not be material to the Company's financial condition or results of operations. The Company primarily enters into debt obligations to support general corporate purposes, including working capital requirements, capital expenditures, and acquisitions. At June 29, 2001, most of the Company's debt obligations had fixed interest rates. The estimated fair value of the Company's debt obligations approximates the principal amounts reflected below on rates currently available to the Company for debt with similar terms and remaining maturities. Although payments under certain of the Company's operating leases for its facilities are tied to market indices, the Company is not exposed to material interest rate risk associated with its operating leases. 19 Debt Obligations Principal Amounts and Related Weighted Average Interest Rates By Year of Maturity
Three Months Ending Fiscal Years -------------- ---------------------------------------------------------- Sept. 28, 2001 2002 2003 2004 2005 2006 Thereafter Total -------------- ------ ------ ------ ------ ------ ---------- ------- (dollars in thousands) Long-term debt (including current portion)............... $180 $6,399 $3,690 $3,492 $2,500 $2,500 $27,500 $46,261 Average interest rate... 1.5% 6.9% 5.1% 5.3% 7.2% 7.2% 6.7% 6.6%
20 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required to be filed by Item 601 of Regulation S-K: 10.22* Amended and Restated Change in Control Agreement, dated as of April 9, 2001, between Varian, Inc. and Garry W. Rogerson. * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K filed during the fiscal quarter ended June 29, 2001: None. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VARIAN, INC. (Registrant) /s/ G. Edward McClammy By __________________________________ G. Edward McClammy Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer) Dated: August 10, 2001 22 EX-10.22 3 dex1022.txt AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT EXHIBIT 10.22 AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT ------------------------------------------------ THIS AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT ("Agreement") is entered into effective as of April 9, 2001, by and between VARIAN, INC., a Delaware corporation (the "Company")/1/, and Garry W. Rogerson, an employee of the Company ("Employee"). The Company's Board of Directors (the "Board") has determined that it is in the best interest of the Company and its stockholders for the Company to agree to pay Employee termination compensation in the event Employee should leave the employ of the Company under the circumstances described below. The Board recognizes that the possibility of a proposal from a third person, whether or not solicited by the Company, concerning a possible "Change in Control" of the Company (as such language is defined in Section 3(d)) will be unsettling to Employee. Therefore, the arrangements set forth in this Agreement are being made to help assure a continuing dedication by Employee to Employee's duties to the Company notwithstanding the proposal or occurrence of a Change in Control. The Board believes it imperative, should the Company receive any proposal from a third party, that Employee, without being influenced by the uncertainties of Employee's own situation, be able to assess and advise the Board whether such proposals are in the best interest of the Company and its stockholders, and to enable Employee to take action regarding such proposals as the Board might determine to be appropriate. The Board also wishes to demonstrate to key personnel that the Company desires to enhance management relations and its ability to retain and, if needed, to attract new management, and intends to ensure that loyal and dedicated management personnel are treated fairly. In view of the foregoing, the Company and Employee agree as follows: 1. EFFECTIVE DATE AND TERM OF AGREEMENT. ------------------------------------ This Agreement is effective and binding on the Company and Employee as of the date hereof; provided, however, that, subject to Section 2(d), the provisions of Sections 3 and 4 shall become operative only upon the Change in Control Date. 2. EMPLOYMENT OF EMPLOYEE. ---------------------- (a) Except as provided in Sections 2(b), 2(c) and 2(d), nothing in this Agreement shall affect any right which Employee may otherwise have to terminate Employee's employment, nor shall anything in this Agreement affect any right which the Company may have to terminate - --------------------- /1/ "Company" shall include the Company, any successor to the Company's business and/or assets, and any party which executes and delivers the agreement required by Section 6(e) or which otherwise becomes bound by the terms and conditions of this Agreement by operation of law or otherwise. Employee's employment at any time in any lawful manner. (b) In the event of a Potential Change in Control, to be entitled to receive the benefits provided by this Agreement, Employee will not voluntarily leave the employ of the Company, and will continue to perform Employee's regular duties and the services specified in the recitals of this Agreement until the Change in Control Date. Should Employee voluntarily terminate employment prior to the Change in Control Date, this Agreement shall lapse upon such termination and be of no further force or effect. (c) If Employee's employment terminates on or after the Change in Control Date, the Company will provide to Employee the payments and benefits as provided in Sections 3 and 4. (d) If Employee's employment is terminated by the Company prior to the Change in Control Date but on or after a Potential Change in Control Date, then the Company will provide to Employee the payments and benefits as provided in Sections 3 and 4 unless the Company reasonably demonstrates that Employee's termination of employment neither (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control nor (ii) arose in connection with or in anticipation of a Change in Control. Solely for purposes of determining the timing of payments and the provision of benefits in Sections 3 and 4 under the circumstances described in this Section 2(d), Employee's date of termination shall be deemed to be the Change in Control Date. 3. TERMINATION FOLLOWING CHANGE IN CONTROL. --------------------------------------- (a) If a Change in Control shall have occurred, Employee shall be entitled to the benefits provided in Section 4 upon the subsequent termination of Employee's employment within the applicable period set forth in Section 4 unless such termination is due to Employee's death, Retirement or Disability or is for Cause or is effected by Employee other than for Good Reason (as such terms are defined in Section 3(d)). (b) If following a Change in Control, Employee's employment is terminated by reason of Employee's death or Disability, Employee shall be entitled to death or long-term disability benefits from the Company no less favorable than the most favorable benefits to which Employee would have been entitled had the death or Disability occurred at any time during the period commencing one (1) year prior to the Change in Control. (c) If Employee's employment shall be terminated by the Company for Cause or by Employee other than for Good Reason during the term of this Agreement, the Company shall pay Employee's Base Salary through the date of termination at the rate in effect at the time notice of termination is given, and the Company shall have no further obligations to Employee under this Agreement. (d) For purposes of this Agreement: "Base Salary" shall mean the annual base salary paid to Employee immediately prior to a 2 Change in Control, provided that such amount shall in no event be less than the annual base salary paid to Employee during the one (1) year period immediately prior to the Change in Control. A "Change in Control" shall be deemed to have occurred if: (i) Any individual or group constituting a "person", as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act (other than (A) the Company or any of its subsidiaries or (B) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or of any of its subsidiaries), is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's outstanding securities then entitled ordinarily (and apart from rights accruing under special circumstances) to vote for the election of directors; or (ii) Continuing Directors cease to constitute at least a majority of the Board; or (iii) there occurs a reorganization, merger, consolidation or other corporate transaction involving the Company (a "Transaction"), in each case with respect to which the stockholders of the Company immediately prior to such Transaction do not, immediately after the Transaction, own more than 50% of the combined voting power of the Company or other corporation resulting from such Transaction; or (iv) all or substantially all of the assets of the Company are sold, liquidated or distributed; provided, however, that a "Change in Control" shall not be deemed to have occurred under this Agreement if, prior to the occurrence of a specified event that would otherwise constitute a Change in Control hereunder, the disinterested Continuing Directors then in office, by a majority vote thereof, determine that the occurrence of such specified event shall not be deemed to be a Change in Control with respect to Employee hereunder if the Change in Control results from actions or events in which Employee is a participant in a capacity other than solely as an officer, employee or director of the Company. "Change in Control Date" shall mean the date on which a Change in Control occurs. "Cause" shall mean: (i) The continued willful failure of Employee to perform Employee's duties to the Company (other than any such failure resulting from Employee's incapacity due to physical or mental illness) after written notice thereof (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such failure are given to Employee by the Board or a committee thereof; or (ii) The willful commission by Employee of a wrongful act that caused or was reasonably likely to cause substantial damage to the Company, or an act of fraud in the 3 performance of Employee's duties on behalf of the Company; or (iii) The conviction of Employee for commission of a felony in connection with the performance of Employee's duties on behalf of the Company; or (iv) The order of a federal or state regulatory authority having jurisdiction over the Company or its operations or by a court of competent jurisdiction requiring the termination of Employee's employment by the Company. "Continuing Directors" shall mean the directors of the Company in office on the date hereof and any successor to any such director who was nominated or selected by a majority of the Continuing Directors in office at the time of the director's nomination or selection and who is not an "affiliate" or "associate" (as defined in Regulation 12B under the Exchange Act) of any person who is the beneficial owner, directly or indirectly, of securities representing ten percent (10%) or more of the combined voting power of the Company's outstanding securities then entitled ordinarily to vote for the election of directors. "Disability" shall mean Employee's incapacity due to physical or mental illness such that Employee shall have become qualified to receive benefits under the Company's long-term disability plan as in effect on the date of the Change in Control. "Dispute" shall mean, in the case of termination of Employee's employment for Disability or Cause, that Employee challenges the existence of Disability or Cause, and in the case of termination of Employee's employment for Good Reason, that the Company challenges the existence of Good Reason for termination of Employee's employment. "Equivalent Position" shall mean an employment position that: (i) is in a substantive area of competence (e.g., finance, accounting, legal, operations management or human resources) that is consistent with Employee's experience and not materially different from the substantive area of competence of Employee's position with the Company prior to the Change in Control; (ii) requires that Employee serve in a role and perform duties that are functionally equivalent to the role and duties performed by Employee for the Company prior to the Change in Control; (iii) carries a title that does not connote a lesser rank or corporate role than is connoted by Employee's title with the Company prior to the Change in Control; (iv) does not constitute a material, adverse change in Employee's responsibilities or duties, when compare to Employee's responsibilities or duties with the Company prior to the Change in Control; 4 (v) requires that Employee be deemed an executive officer (for purposes of the rules promulgated under Section 16 of the Securities Exchange Act of 1934) of a publicly-traded successor entity having net assets or annual revenues that are no less than those of the Company prior to the Change in Control; and (vi) has Employee reporting directly to the Chief Executive Officer of the combined or acquiring company. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Good Reason" shall mean: (i) The assignment to Employee of a position, title, responsibilities or duties such that he no longer holds an Equivalent Position; or (ii) A reduction of Employee's total compensation as the same may have been increased from time to time after the Change in Control Date other than (A) a reduction implemented with the consent of Employee or (B) a reduction that is generally comparable (proportionately) to compensation reductions imposed on senior executives of the Company generally; or (iii) The failure to provide to Employee the benefits and perquisites, including participation on a comparable basis in the Company's stock option, incentive, and other similar plans in which employees of the Company of comparable title and salary grade participate, as were provided to Employee immediately prior to a Change in Control, or with a package of benefits and perquisites that are substantially comparable in all material respects to such benefits and perquisites provided prior to the Change in Control; or (iv) The relocation of the office of the Company where Employee is employed immediately prior to the Change in Control Date (the "CIC Location") to a location which is more than 50 miles away from the CIC Location or the Company's requiring Employee to be based more than 50 miles away from the CIC Location (except for required travel on the Company's business to an extent substantially consistent with Employee's customary business travel obligations in the ordinary course of business prior to the Change in Control Date); (v) The failure of the Company to obtain promptly upon any Change in Control the express written assumption of an agreement to perform this Agreement by any successor as contemplated in Section 6(e); or (vi) The attempted termination of Employee's employment for Cause on grounds insufficient to constitute a basis of termination for Cause under this Agreement; or (vii) The failure of the Company to promptly make any payment into escrow when so required by Section 3(f). 5 "Potential Change in Control" shall mean the earliest to occur of (a) the execution of an agreement or letter of intent, the consummation of the transactions described in which would result in a Change in Control, (b) the approval by the Board of a transaction or series of transactions, the consummation of which would result in a Change in Control, or (c) the public announcement of a tender offer for the Company's voting stock, the completion of which would result in a Change in Control; provided, that no such event shall be a "Potential Change in Control" unless (i) in the case of any agreement or letter of intent described in clause (a), the transaction described therein is subsequently consummated by the Company and the other party or parties to such agreement or letter of intent and thereupon constitutes a "Change in Control", (ii) in the case of any Board-approved transaction described in clause (b), the transaction so approved is subsequently consummated and thereupon constitutes a "Change in Control" or (iii) in the case of any tender offer described in clause (c), such tender offer is subsequently completed and such completion thereupon constitutes a "Change in Control". "Potential Change in Control Date" shall mean the date on which a Potential Change in Control occurs. "Retirement" shall mean Employee's actual retirement after reaching the normal or early retirement date provided for in the Company's Retirement and Profit-Sharing Program as in effect on the date of Employee's termination of employment. (e) Any termination of employment by the Company or by Employee shall be communicated by written notice, specify the date of termination, state the specific basis for termination and set forth in reasonable detail the facts and circumstances of the termination in order to provide a basis for determining the entitlement to any payments under this Agreement. (f) If within thirty (30) days after notice of termination is given, the party to whom the notice was given notifies the other party that a Dispute exists, the parties will promptly pursue resolution of such Dispute with reasonable diligence; provided, however, that pending resolution of any such Dispute, the Company shall pay 75% of any amounts which would otherwise be due Employee pursuant to Section 4 if such Dispute did not exist into escrow pending resolution of such Dispute and pay 25% of such amounts to Employee. Employee agrees to return to the Company any such amounts to which it is ultimately determined that he is not entitled. 4. PAYMENTS AND BENEFITS UPON TERMINATION. -------------------------------------- (a) If within eighteen (18) months after a Change in Control, the Company terminates Employee's employment other than by reason of Employee's death, Disability, Retirement or for Cause, or if Employee terminates Employee's employment for Good Reason, then the Employee shall be entitled to the following payments and benefits: (i) The Company shall pay to Employee as compensation for services rendered, no later than five (5) business days following the date of termination, a lump sum 6 severance payment equal to 2.50 multiplied by the sum of (A) Employee's Base Salary, (B) the highest annual bonus that was paid to Employee in any of the three fiscal years ending prior to the date of termination under the Company's Management Incentive Plan (the "MIP") or Varian Associates, Inc.'s Management Incentive Plan, and (C) the highest cash bonus for a performance period of more than one fiscal year that was paid to Employee in any of the three fiscal years ending prior to the date of termination under the MIP. (ii) The Company shall pay to Employee as compensation for services rendered, no later than five (5) business days following the date of termination, a lump sum payment equal to a pro rata portion (based on the number of days elapsed during the fiscal year and/or other bonus performance period in which the termination occurs) of Employee's target bonus under the MIP for the fiscal year and for any other partially completed bonus performance period in which the termination occurs. (iii) All waiting periods for the exercise of any stock options granted to Employee and all conditions or restrictions of any restricted stock granted to Employee shall terminate, and all such options shall be exercisable in full according to their terms, and the restricted stock shall be transferred to Employee as soon as reasonably practicable thereafter. (iv) Employee's participation as of the date of termination in the life, medical/dental/vision and disability insurance plans and financial/tax counseling plan of the Company shall be continued on the same terms (including any cost sharing) as if Employee were an employee of the Company (or equivalent benefits provided) until the earlier of Employee's commencement of substantially equivalent full-time employment with a new employer or twenty-four (24) months after the date of termination; provided, however, that after the date of termination, Employee shall no longer be entitled to receive Company-paid executive physicals or, upon expiration of the applicable memberships, Company- paid airline memberships. In the event Employee shall die before the expiration of the period during which the Company is required to continue Employee's participation in such insurance plans, the participation of Employee's surviving spouse and family in the Company's insurance plans shall continue throughout such period. (v) Employee may elect upon termination to purchase any automobile then in the possession of Employee and subject to a lease of which the Company is the lessor by payment to the Company of the residual value set forth in the lease, without any increase for remaining lease payments during the term or other lease breakage costs. Employee may elect to have any such payment deducted from any payments due the Employee hereunder. (vi) All payments and benefits provided under this Agreement shall be subject to applicable tax withholding. (b) Following Employee's termination of employment for any reason, the Company shall have the unconditional right to reduce any payments owed to Employee hereunder by the amount of any due and unpaid principal and interest on any loans by the Company to Employee 7 and Employee hereby agrees and consents to such right on the part of the Company. 5. GROSS-UP PAYMENT. ---------------- (a) Notwithstanding anything herein to the contrary, if it is determined that any Payment would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties with respect to such excise tax (such excise tax, together with any interest or penalties thereon, is herein referred to as an "Excise Tax"), then Employee shall be entitled to an additional payment (a "Gross-Up Payment") in an amount that will place Employee in the same after-tax economic position that Employee would have enjoyed if the Excise Tax had not applied to the Payment. The amount of the Gross-Up Payment shall be determined by a nationally- recognized independent public accounting firm designated by agreement between Employee and the Company (the "Accounting Firm"). No Gross-Up Payments shall be payable hereunder if the Accounting Firm determines that the Payments are not subject to an Excise Tax. "Payment" means (i) any amount due or paid to Employee under this Agreement, (ii) any amount that is due or paid to Employee under any plan, program or arrangement of the Company and its subsidiaries and (iii) any amount or benefit that is due or payable to Employee under this Agreement or under any plan, program or arrangement of the Company and its subsidiaries not otherwise covered under clause (i) or (ii) hereof which must reasonably be taken into account under Section 280G of the Code in determining the amount the "parachute payments" received by Employee, including, without limitation, any amounts which must be taken into account under Section 280G of the Code as a result of (A) the acceleration of the vesting of any option, restricted stock or other equity award, (B) the acceleration of the time at which any payment or benefit is receivable by Employee or (C) any contingent severance or other amounts that are payable to Employee. (b) Subject to the provisions of Section 5(c), all determinations required under this Section 5, including whether a Gross-Up Payment is required, the amount of the Payments constituting excess parachute payments, and the amount of the Gross-Up Payment, shall be made by the Accounting Firm, which shall provide detailed supporting calculations both to Employee and the Company within fifteen days of the date reasonably requested by Employee or the Company on which a determination under this Section 5 is necessary or advisable. The Company shall pay to Employee the initial Gross-Up Payment within 5 days of the receipt by Employee and the Company of the determination of the Accounting Firm. If the Accounting Firm determines that no Excise Tax is payable by Employee, the Company shall cause its accountants to provide Employee with an opinion that the Accounting Firm has substantial authority under the Code not to report an Excise Tax on Employee's federal income tax return. Any determination by the Accounting Firm shall be binding upon Employee and the Company. If the initial Gross-Up Payment is insufficient to cover the amount of the Excise Tax that is ultimately determined to be owing by Employee with respect to any Payment (hereinafter an "Underpayment"), the Company, after exhausting its remedies under Section 5(c) below, shall promptly pay to Employee an additional Gross-Up Payment in respect of the Underpayment. 8 (c) Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notice shall be given as soon as practicable after Employee knows of such claim and shall apprise the Company of the nature of the claim and the date on which the claim is requested to be paid. Employee agrees not to pay the claim until the expiration of the thirty (30) day period following the date on which Employee notifies the Company, or such shorter period ending on the date the Taxes with respect to such claim are due (the "Notice Period"). If the Company notifies Employee in writing prior to the expiration of the Notice Period that it desires to contest the claim, Employee shall: (i) give the Company any information reasonably requested by the Company relating to the claim; (ii) take such action in connection with the claim as the Company may reasonably request, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and reasonably acceptable to Employee; (iii) cooperate with the Company in good faith in contesting the claim; and (iv) permit the Company to participate in any proceedings relating to the claim. Employee shall permit the Company to control all proceedings related to the claim and, at its option, permit the Company to pursue or forgo any and all administrative appeals, proceedings, hearings, and conferences with the taxing authority in respect of such claim. If requested by the Company, Employee agrees either to pay the tax claimed and sue for a refund or contest the claim in any permissible manner and to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts as the Company shall determine; provided, however, that, if the Company directs Employee to pay such claim and pursue a refund, the Company shall advance the amount of such payment to Employee on an after-tax and interest-free basis (an "Advance"). The Company's control of the contest related to the claim shall be limited to the issues related to the Gross-Up Payment and Employee shall be entitled to settle or contest, as the case may be, any other issues raised by the Internal Revenue Service or other taxing authority. If the Company does not notify Employee in writing prior to the end of the Notice Period of its desire to contest the claim, the Company shall pay to Employee an additional Gross-Up Payment in respect of the excess parachute payments that are the subject of the claim, and Employee agrees to pay the amount of the Excise Tax that is the subject of the claim to the applicable taxing authority in accordance with applicable law. (d) If, after receipt by Employee of an Advance, Employee becomes entitled to a refund with respect to the claim to which such Advance relates, Employee shall pay the Company the amount of the refund (together with any interest paid or credited thereon after Taxes applicable thereto). If, after receipt by Employee of an Advance, a determination is made that Employee shall not be entitled to any refund with respect to the claim and the Company does not promptly notify Employee of its intent to contest the denial of refund, then the amount of the Advance shall not be required to be repaid by Employee and the amount thereof shall offset the amount of the additional Gross-Up Payment then owing to Employee. (e) The Company shall indemnify Employee and hold Employee harmless, on an after-tax basis, from any costs, expenses, penalties, fines, interest or other liabilities ("Losses") incurred by Employee with respect to the exercise by the Company of any of its rights under this 9 Section 5, including, without limitation, any Losses related to the Company's decision to contest a claim or any imputed income to Employee resulting from any Advance or action taken on Employee's behalf by the Company hereunder. The Company shall pay all legal fees and expenses incurred under this Section 5, and shall promptly reimburse Employee for the reasonable expenses incurred by Employee in connection with any actions taken by the Company or required to be taken by Employee hereunder. The Company shall also pay all of the fees and expenses of the Accounting Firm, including, without limitation, the fees and expenses related to the opinion referred to in Section 5(b). 6. GENERAL. ------- (a) Employee shall retain in confidence under the conditions of the Company's confidentiality agreement with Employee any proprietary or other confidential information known to Employee concerning the Company and its business so long as such information is not publicly disclosed and disclosure is not required by an order of any governmental body or court. If required, Employee shall return to the Company any memoranda, documents or other materials proprietary to the Company. (b) While employed by the Company and following the termination of such employment (other than a termination of employment by Employee for Good Reason or by the Company other than for Cause) for a period of two (2) years, Employee shall not, whether for Employee's own account or for the account of any other individual, partnership, firm, corporation or other business organization, intentionally solicit, endeavor to entice away from the Company or a subsidiary of the Company (each, a "Protected Party"), or otherwise interfere with the relationship of a Protected Party with, any person who is employed by a Protected Party or any person or entity who is, or was within the then most recent twelve (12) month period, a customer or client of a Protected Party. Employee acknowledges that a breach of any of the covenants contained in this Section 6(b) may result in material irreparable injury to the Company for which there is no adequate remedy at law, that it may not be possible to measure damages for such injuries precisely and that, in the event of such a breach, any payments remaining under the terms of this Agreement shall cease and the Company may be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining Employee from engaging in activities prohibited by this Section 6(b) or such other relief as may be required to specifically enforce any of the covenants in this Section 6(b). Employee agrees to and hereby does submit to in personam jurisdiction before each and every such court in the State of California, County of Santa Clara, for that purpose. This Section 6(b) shall survive any termination of this Agreement. (c) If litigation is brought by Employee to enforce or interpret any provision contained in this Agreement, the Company shall indemnify Employee for Employee's reasonable attorney's fees and disbursements incurred in such litigation and pay prejudgment interest on any money judgment obtained by Employee calculated at the prime rate of interest in effect from time to time at the Bank of America, San Francisco, from the date that payment should have been made under 10 the Agreement, provided that Employee shall not have been found by the court in which such litigation is pending to have had no cause in bringing the action, or to have acted in bad faith, which finding must be final with the time to appeal therefrom having expired and no appeal having been taken. (d) Except as provided in Section 4, the Company's obligation to pay to Employee the compensation and to make the arrangements provided in this Agreement shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, any setoff, counterclaim, recoupment, defense or other right which the Company may have against Employee or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment. (e) The Company shall require any successor, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all of the business and/or assets of the Company, by written agreement to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (f) This Agreement shall inure to the benefit of and be enforceable by Employee's heirs, successors and assigns. If Employee should die while any amounts would still be payable to Employee hereunder if Employee had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to Employee's heirs, successors and assigns. (g) For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to Employee: If to the Company: 107 Fancher Court Varian, Inc. Los Gatos, CA 95030 3120 Hansen Way Palo Alto, CA 94304-1030 Attn: Vice President, Human Resources or to such other address as either party furnishes to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. (h) This Agreement shall constitute the entire agreement between Employee and the Company concerning the subject matter of this Agreement. (i) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without giving effect to the provisions, 11 principles or policies thereof relating to choice or conflict of laws. The invalidity or unenforceability of any provision of this Agreement in any circumstance shall not affect the validity or enforceability of such provision in any other circumstance or the validity or enforceability of any other provision of this Agreement, and, except to the extent such provision is invalid or unenforceable, this Agreement shall remain in full force and effect. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof in such jurisdiction, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. This Section 6(i) shall survive any termination of this Agreement. (j) This Agreement may be terminated by the Company pursuant to a resolution adopted by the Board at any time prior to a Potential Change in Control Date. After a Change in Control Date or a Potential Change in Control Date, this Agreement may only be terminated with the consent of Employee. (k) No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement and this Agreement shall supersede all prior agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, with respect to the subject matter hereof including, without limitation, the Amended and Restated Change in Control Agreement between Employee and the Company dated as of April 2, 1999. (l) In the event that the Company becomes party to a transaction that is intended to qualify for "pooling of interests" accounting treatment and, but for one or more of the provisions of this Agreement would so qualify, then this Agreement shall be interpreted so as to preserve such accounting treatment, and to the extent that any provision of this Agreement would disqualify the transaction from pooling of interests accounting treatment, then such provision shall be null and void. All determinations to be made in connection with the preceding sentence shall be made by the independent accounting firm whose opinion with respect to "pooling of interests" treatment is required as a condition to the Company's consummation of such transaction. 12 IN WITNESS WHEREOF, the parties acknowledge that they have read and understand the terms of this Agreement and have executed this Agreement to be effective as of April 9, 2001. VARIAN, INC. EMPLOYEE /s/ Arthur W. Homan /s/ Garry W. Rogerson - --------------------- ---------------------- By: Arthur W. Homan Garry W. Rogerson Title: Vice President, General Counsel and Secretary 13 -----END PRIVACY-ENHANCED MESSAGE-----